10-K

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 October 31, 2002

OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-15131

QUIKSILVER, INC.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization) 33-0199426
(I.R.S. Employer
Identification Number)

15202 Graham Street
Huntington Beach, California
(Address of principal executive offices) 92649
(Zip Code)

(714) 889-2200
Registrant’s telephone number, including area code

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

Title of each class	Name of each exchange on which registered
Common Stock	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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 Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [   ]

     Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b.2). Yes X   No

     The aggregate market value of the Registrant’s Common Stock held by non-affiliates of the Registrant as of January 21, 2003 was approximately $730 million.

     As of January 21, 2003, there were 27,129,763 shares of the Registrant’s Common Stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held March 28, 2003 are incorporated by reference into Part III of this Form 10-K.

TABLE OF CONTENTS

PART I
Item 1. BUSINESS
	Introduction
	Recent Developments
	Segment Information
	Products and Brands
	Product Categories
	Product Design
	Promotion and Advertising
	Customers and Sales
	Retail Concepts
	Seasonality
	Production and Raw Materials
	Imports and Imports Restrictions
	Trademarks and Licensing Agreements
	Competition
	Future Season Orders
	Employees
	Environmental Matters
	Forward-Looking Statements
	Risk Factors
Item 2. PROPERTIES
Item 3. LEGAL PROCEEDINGS
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
Item 5.  MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Item 6. SELECTED FINANCIAL DATA
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
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 AND RELATED STOCKHOLDER MATTERS
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 14. CONTROLS AND PROCEDURES
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
	INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SIGNATURES
EXHIBIT 3.2
EXHIBIT 10.13
EXHIBIT 10.19
EXHIBIT 21.1
EXHIBIT 23.1
EXHIBIT 99.1
EXHIBIT 99.2

TABLE OF CONTENTS

		Page
PART I
Item 1.	BUSINESS
	Introduction	1
	Recent Developments	1
	Segment Information	2
	Products and Brands	2
	Product Categories	3
	Product Design	3
	Promotion and Advertising	4
	Customers and Sales	4
	Retail Concepts	6
	Seasonality	7
	Production and Raw Materials	7
	Imports and Import Restrictions	7
	Trademarks and Licensing Agreements	8
	Competition	9
	Future Season Orders	9
	Employees	9
	Environmental Matters	9
	Forward-Looking Statements	10
	Risk Factors	10
Item 2.	PROPERTIES	13
Item 3.	LEGAL PROCEEDINGS	13
Item 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	13
PART II
Item 5.	MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS	14
Item 6.	SELECTED FINANCIAL DATA	15
Item 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	16
Item 7a.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS	26
Item 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	27
Item 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	27
PART III
Item 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT	28
Item 11.	EXECUTIVE COMPENSATION	28
Item 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	28
Item 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	28
Item 14.	CONTROLS AND PROCEDURES	28
PART IV
Item 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K	29
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS		30
SIGNATURES		51

PART I

Item 1.   BUSINESS

Unless the context indicates otherwise, when we refer to “Quiksilver”, “we”, “us”, “our”, or the “Company” in this Form 10-K, we are referring to Quiksilver, Inc. and its subsidiaries on a consolidated basis. Quiksilver, Inc. was incorporated in 1976 and was reincorporated in Delaware in 1986. Our fiscal year ends on October 31, and references to fiscal 2002, fiscal 2001 or fiscal 2000 refer to the years ended October 31, 2002, 2001 or 2000, respectively.

Introduction

We are a globally integrated company that designs, produces and distributes branded clothing, accessories and related products for young-minded people. Our brands represent a casual lifestyle—driven from our authentic boardriding heritage. Our primary focus is apparel for young men and young women under the Quiksilver, Roxy, Raisins, Radio Fiji and Gotcha (Europe) labels. We also manufacture apparel for boys (Quiksilver Boys and Hawk Clothing), girls (Roxy Girl, Teenie Wahine and Raisins Girls), men (Quiksilveredition and Fidra, our golf line) and women (Leilani swimwear), as well as snowboards, snowboard boots and bindings under the Lib Technologies, Gnu, Supernatural Mfg. and Bent Metal labels.

We generate revenues primarily in the United States, Europe and, since our acquisition of Ug Manufacturing Co. Pty Ltd. (Australia) and Quiksilver Japan KK, the Asia/Pacific markets. Our products are sold primarily in surf shops, specialty stores, and our proprietary retail concept Boardriders Club stores where we can best carry our authentic brand message to the consumer.

We believe our 34-year history of continuing commitment to board sports and our development of innovative products that relate to and reflect this fast growing global lifestyle give our company and our brands a credibility and authenticity that is truly unique in our industry. Our boardriding lifestyle generates products and images that are recognized around the world as symbols of fun, freedom and individual expression. As the unquestioned leader of the boardriding outdoor active lifestyle, we are now poised to carry our products and brand message to a diversity of markets worldwide.

Recent Developments

Since acquiring Quiksilver International Pty Ltd., an Australian company (“Quiksilver International”), in July 2000, we have owned all international rights to use the Quiksilver and Roxy trademarks. Before then, we owned these intellectual property rights in the United States and Mexico only, and operated under license agreements with Quiksilver International to use the Quiksilver and Roxy trademarks in other countries and territories.

In December 2002, we took the next step in consolidating global control of the Quiksilver and Roxy brands by acquiring Ug Manufacturing Co. Pty Ltd., and Quiksilver Japan KK, our licensees (through Quiksilver International) in Australia, Japan, New Zealand and other Southeast Asian territories. By acquiring this group of companies, which we refer to as Quiksilver Asia/Pacific, we have created a global operating platform consisting of our domestic U.S., European and Asia/Pacific operations.

In addition, in September 2002, we acquired Beach Street, Inc., the owner and operator of 26 Quiksilver outlet stores in the U.S. The operations of these outlet stores will be integrated into our existing retail stores division.

1

Segment Information

We operate exclusively in the consumer products industry segment. For fiscal 2002, we had two geographic segments, domestic and Europe. As a result of our recent acquisition, we will have a third geographic segment beginning in fiscal 2003, Asia/Pacific. The domestic segment includes revenues from the U.S., Canada and other exports from the U.S., as well as royalties earned from various trademark licenses. The European segment includes primarily Western Europe. The Asia/Pacific segment includes Australia, Japan, New Zealand and other Southeast Asian territories.

Products and Brands

Our first product was the famous Quiksilver boardshort developed by two Australian surfers who founded Quiksilver Australia in the late 1960’s. The Quiksilver boardshort, identified by its distinctive mountain and wave logo, became known in the core surfing world as a technically innovative and stylish product. The reputation and popularity of the Quiksilver boardshort grew, having been brought to the beaches of California and Southwest France in the 1970’s by the founders of the Company and Quiksilver Europe. Since the first boardshort, our product lines have been greatly expanded, but our brands continue to represent innovation and quality. In the 1990’s we called on the Quiksilver heritage to reach out to the girls market by creating the Roxy brand for Juniors, which has become our fastest growing brand. In addition to Quiksilver and Roxy, we have developed a stable of other brands to address a wide variety of consumers and markets. We believe that this multi-brand strategy will allow us to continue to grow across a diverse range of products and distribution with broad appeal across gender, age groups and geographies.

Quiksilver

Our Quiksilver product line now includes shirts, walkshorts, t-shirts, fleece, pants, jackets, snowboard-wear, footwear, hats, backpacks, footwear, wetsuits, watches, eyewear and other accessories. Quiksilver has also expanded demographically and currently includes Young Men’s, Boys and Toddlers. Quiksilveredition is our brand targeted at men. In 2002, the Quiksilver line of products represented approximately 56% of our revenues.

Roxy

Our Roxy brand for young women is a surf-inspired collection that we introduced in fiscal 1991. The Roxy line is branded with a heart logo composed of back-to-back images of the Quiksilver mountain and wave logo and includes a full range of sportswear, swimwear, footwear, backpacks, fragrance, beauty care, bedroom furnishings and other accessories for young women. Through fiscal 1997, Roxy included Juniors sizes only, but was then expanded as Teenie Wahine and in 2001 as Roxy Girl into the Girls categories. In 2002, the Roxy product line accounted for approximately 31% of our revenues.

Other Brands

In 2002, our other brands were 13% of our revenues.

• Raisins, Radio Fiji, Leilani - We added swimwear labels Raisins, Radio Fiji and Leilani in fiscal 1994 when we acquired the Raisin Company, Inc. Raisins and Radio Fiji are labels in the Juniors category while Leilani is a contemporary label. We also produce private label swimwear.

• Hawk - Tony Hawk, the world-famous skateboarder, is the inspiration for our Hawk Clothing brand which we added to our portfolio in fiscal 2000. Our target audience for the Hawk product line is boys who recognize Tony from his broad media and video game exposure.

• Gotcha - We have added Gotcha to our European labels to give us product to address European street fashion for young men.

• Fidra - We entered the golf apparel business in fiscal 2000 with a new brand, Fidra, conceived and developed by golf industry pioneer, John Ashworth, and endorsed by world famous golfer, Ernie Els.

2

• Lib Tech, Gnu, Supernatural Mfg., Bent Metal - We address the core snowboard market through our Lib Technologies, Gnu and Supernatural Mfg. brands of snowboards and accessories, including Bent Metal snowboard bindings.

Product Categories

The following table shows the approximate percentage of revenues attributable to each of our major product categories during the last three fiscal years:

	Percentage of Revenues
	2002			2001			2000
T-Shirts		20	%		23	%		21	%
Accessories		12			11			12
Pants		12			10			9
Shirts		11			10			12
Jackets, sweaters and snowboardwear		9			11			9
Swimwear, excluding boardshorts		9			9			9
Fleece		7			7			7
Shorts		6			6			6
Footwear		4			3			2
Boardshorts		4			4			6
Tops and dresses		4			4			4
Snowboards, snowboard boots, bindings and accessories		2			2			3
		100	%		100	%		100	%

Although our products are generally available throughout the year, demand for different categories of product changes in the different seasons of the year. Sales of shorts, short-sleeve shirts, t-shirts and swimwear are higher during the spring and summer seasons, and sales of pants, long-sleeve shirts, fleece, jackets, sweaters, snowboardwear and snowboards are higher during the fall and holiday seasons.

We believe that the domestic retail prices for our apparel products range from approximately $18 for a t-shirt and $40 to $50 for a typical short to $250 for a typical, mid-range snowboard jacket. For European products, retail prices range from approximately $29 for a t-shirt and about $49 for a typical short to $180 for a basic snowboard jacket. Asia/Pacific t-shirts sell for approximately $24, while shorts range from approximately $29 to $54, and a typical snowboard jacket sells for approximately $240.

Product Design

Our products are designed for active-minded people who live a casual lifestyle. Innovative design, active fabrics and quality of workmanship are emphasized. Our design and merchandising teams create seasonal product ranges for each of our brands. These design groups constantly monitor local and global fashion trends. We believe our most valuable input comes from our own managers, employees, sponsored athletes and independent sales representatives who are actively involved in surfing, snowboarding, skateboarding and other sports in our core market. This connection with our core market continues to be the inspiration for our product and is key to our reputation for distinct and authentic design.

Our design centers in California, Europe, Australia and Japan develop and share designs and merchandising themes and concepts that are globally consistent while reflecting local adaptations for differences in geography, culture and taste.

Our longtime informal global process of sharing and cross-pollinating Quiksilver and Roxy designs, art, fabrics, samples and patterns has now been formalized by our purchase of Quiksilver International and the integration of Quiksilver Asia/Pacific into our operations.

3

Promotion and Advertising

Our three-decade commitment to core marketing at the grass-roots level in the sport of surfing and other youth boardriding activities is the foundation of the promotion and advertising of our brands and products.

An important marketing vehicle for us is our sponsorship of high profile athletes in outdoor, individual sports, including surfing, snowboarding, skateboarding, windsurfing and now golf. Many of these athletes such as Kelly Slater, Lisa Anderson, Tony Hawk, Danny Kass and Ernie Els have achieved world champion status in their respective sports and are featured in our promotional content. We also operate a promotional fund that is used to sponsor our international team of leading athletes, produce promotional movies and videos featuring athletes wearing and/or using Quiksilver and Roxy products, and organize surfing contests and other events that have international significance.

Our core marketing is based on our sponsorship and support of surf, snowboard and skateboard contests in markets where we distribute product. These events reinforce our reputation as an authentic, core brand among surfers and nonsurfers alike. The Quiksilver in Memory of Eddie Aikau Big Wave Invitational is held at Waimea Bay in Hawaii, the Quiksilver Pro is held in the Fijian Islands, and the Roxy Pro is held annually at Sunset Beach in Hawaii. In Europe, we produce the Quiksilver Masters surfing event, the Bowlriders skateboarding event in France, and are one of the sponsors of the Air & Style snowboard event in Austria. We also sponsor other regional and local events such as surf camps and skate park tours.

We sponsor the Quiksilver Crossing, a continuing voyage of the Indies Trader, a surf exploration vessel whose mission is to explore new surfing regions around the world and document the state of the environment under a team of marine biologists. The Quiksilver Crossing, now in its fourth year, began its voyage in the South Pacific, continued on to Europe in 2002 and plans to visit the Americas in 2003.

As we have gained an international reputation for the authenticity and compelling content of our boardriding lifestyle, we have entered into co-branding arrangements used to promote our brands. For example, Peugeot and Toyota have produced cars branded with Quiksilver and Roxy, and the Tony Hawk Pro Skater 3 video game is cross-promoted by both the Company and Activision.

We have also created Quiksilver Entertainment, a new division that will transmit our boardriding lifestyle through television, movies, events, music and publishing. For example, we developed 54321, a daily action sports news magazine for Fox Sports, and with MTV we are producing a series about competitive girls surfing.

Customers and Sales

Our distribution strategy is premised on our longstanding belief that the integrity and success of our brands is dependent on responsible growth and careful selection of the retail accounts where our products are merchandised and sold.

Our policy is to sell to retailers who provide an outstanding in-store experience for their customers and who merchandise our products in a manner consistent with the image of our brands and the quality of our products. Our customer base has for many years reflected our goal of diversification of distribution to include surf shops, specialty stores, national specialty chains and select department stores.

The foundation of our business is distribution of product through surf shops, Boardriders Clubs and specialty stores where in-store shops, fixturing and point-of-sale materials carry our brand message. (We refer to our in-store shops as “Quiksvilles”.) This core distribution channel serves as a base of legitimacy and long-term loyalty to us and our brands. Most of these stores stand-alone or are part of small chains.

We also sell to independent specialty or active lifestyle stores and specialty chains not specifically characterized as surf shops or Quiksvilles. This category includes chains such as Pacific Sunwear, Nordstrom, Duty Free Shops, Zumiez, Chicks Sporting Goods and the Buckle, as well as many independent active lifestyle stores, snowboard shops and sports shops. We also sell to a limited number

4

of department stores, including Macy’s, Robinson’s/May, Dillards, The Bon Marche and Burdines in the U.S.; Le Printemps and Galeries Lafayette in France; and Harrods and Lillywhites in Great Britain.

Many of our brands are sold through the same retail accounts, however, distribution can be different depending on the brand and demographic group. Our Quiksilver products are sold domestically to customers that have approximately 6,900 store locations combined. Likewise, Roxy products are sold domestically to customers with approximately 6,600 store locations. Many of these Roxy locations also carry Quiksilver product. Our swimwear brands (Raisins, Leilani and Radio Fiji) are found in 9,600 stores, including many small, specialty swim locations, while our wintersports hardgoods products are found in approximately 600 stores, including primarily snowboard shops in the U.S. and Canada. Fidra is carried in approximately 850 green grass stores primarily in the U.S. In Europe, our products are found in approximately 5,900 store locations. We added 1,900 more retail locations when we acquired Quiksilver Asia/Pacific.

Our European segment accounted for approximately 40% of our consolidated revenues during fiscal 2002, which is up from 36% in fiscal 2001. Fiscal 2002 foreign sales from the U.S. (primarily to Canada, Central and South America) were approximately 6% of consolidated net sales.

The following table summarizes the approximate percentages of our fiscal 2002 revenues by distribution channel:

		Percentage of Revenues
Distribution Channel		Domestic			Europe			Consolidated
Boardriders Clubs, surf shops and Quiksvilles			25	%		39	%		31	%
Specialty stores			50			44			48
Department stores			15			8			12
Domestic exports			10			–			6
European distributors			–			9			3
	Total		100	%		100	%		100	%
Geographic segment			60	%		40	%		100	%

Our revenues are spread over a large wholesale customer base. During fiscal 2002, approximately 22% of our consolidated revenues were from our ten largest customers. No single customer accounted for more than 6% of our consolidated net sales during fiscal 2002.

Our products are sold by approximately 230 independent sales representatives in the U.S. and Europe and approximately 80 distributors in Europe. Our sales representatives are generally compensated on a commission basis. We employ retail merchandise coordinators who travel between specified retail locations of our wholesale customers to further improve the presentation of our product and build our image at the retail level.

Our sales are geographically diversified. The following table summarizes the approximate percentages of our fiscal 2002 revenues by geographic region (excluding licensees):

		Percentage of Revenues
Geographic Region		Domestic			Europe			Consolidated
United States West Coast			51	%		–	%		30	%
United States East Coast			20			–			12
Hawaii			3			–			2
Other United States			16			–			10
France			–			41			17
United Kingdom and Spain			–			36			14
Other European countries			–			23			9
Other International			10			–			6
	Total		100	%		100	%		100	%

5

We generally sell our products to domestic customers on a net-30 to net-60 day basis in the United States, and in Europe on a net-30 to net-90 day basis depending on the country and whether we sell directly to retailers in the country or to a distributor. We have a limited number of cooperative advertising programs with our customers and generally do not reimburse our customers for marketing expenses. We generally do not participate in markdown programs with our customers nor do we offer goods on consignment.

For additional information regarding our revenues, operating profits and identifiable assets attributable to our domestic and European geographic segments, see Note 14 of the “Notes to Consolidated Financial Statements”.

Retail Concepts

Quiksilver concept stores (Boardriders Clubs) are a crucial part of our retail strategy. These stores are stocked primarily with Quiksilver product, and their proprietary design demonstrates the Company’s history, authenticity and commitment to surfing and other boardriding sports. We also have Roxy stores, which are dedicated to the Juniors customer, Quiksilver Youth stores, Hawk Clothing stores, Gotcha stores in Europe and multibrand stores in Europe.

The majority of our full-price stores are owned by independent retailers, while our own stores are located in selected markets that provide enhanced brand-building opportunities. In territories where we operated our wholesale businesses during fiscal 2002, we had 116 stores with independent retailers under license. We do not receive royalty income from these stores. Rather, we provide the independent retailer with our retail expertise and store design concepts in exchange for the independent retailer agreeing to maintain our brands at a minimum of 80% of the store’s inventory. Certain minimum purchase obligations are also required. In addition to these independent stores, we own 95 stores that operate in these territories. In our newly added Asia/Pacific segment and other licensed territories, such as Turkey and South Africa, our licensees operate 129 Boardriders Clubs. We receive royalty income from sales in these stores based on wholesale volume. The total number of stores open at October 31, 2002 was 340.

We also distribute our products through outlet stores generally located in outlet malls in geographically diverse, non-urban locations.

The unit count of both Company-owned and licensed stores at October 31, 2002 is summarized in the following table:

	Number of Stores
	Domestic				Europe				Combined
	Company-				Company-				Company-
Store Concept	Owned		Licensed		Owned		Licensed		Owned		Licensed
Boardriders Clubs		20		14		31		87		51		101
Roxy stores		3		2		2		8		5		10
Youth stores		2		2		–		–		2		2
Hawk stores		3		–		–		–		3		–
Multibrand stores		–		–		–		2		–		2
Gotcha stores		–		–		2		1		2		1
Outlet stores		28		–		4		–		32		–
		56		18		39		98		95		116
Boardriders Clubs in licensed territories		–		129		–		–		–		129
Total		56		147		39		98		95		245

6

Seasonality

Our sales fluctuate from quarter to quarter primarily due to seasonal consumer demand patterns for different categories of our products, and due to the effect that the Christmas season has on the buying patterns of our customers.

		Consolidated Revenues
		2002					2001					2000
Dollar amounts in thousands		Amount		Percent			Amount		Percent			Amount		Percent
Quarter ended January 31		$	146,959		21	%	$	122,959		20	%	$	100,542		19	%
Quarter ended April 30			187,423		26			169,546		27			142,648		27
Quarter ended July 31			175,044		25			156,656		25			122,899		24
Quarter ended October 31			196,058		28			171,460		28			153,281		30
	Total	$	705,484		100	%	$	620,621		100	%	$	519,370		100	%

Production and Raw Materials

Our apparel and accessories are generally sourced separately for domestic, European and, now, Asia/Pacific operations. When cost-effective, categories are sourced together. Approximately 85% of our apparel and accessories are purchased or imported as finished goods from suppliers principally in Hong Kong, China and the Far East, but also in Mexico, India, North Africa, Portugal and other foreign countries. After being imported, many of these products require embellishment such as screenprinting, dying, washing or embroidery. The rest of our apparel is manufactured by domestic independent contractors from raw materials we provide. Approximately 56% of this manufacturing is done in the U.S. with the balance in Mexico. We manufacture our snowboards and skateboards in company-owned factories in the U.S.

All products are manufactured based upon design specifications provided by us, whether they are purchased or imported as finished goods or produced from raw materials provided by us.

The majority of finished goods as well as raw materials must be committed to and purchased prior to the receipt of customer orders. If we overestimate the demand for a particular product, we use this excess for distribution in our outlet stores or through secondary distribution channels. If we overestimate a particular raw material, it can be used in garments for subsequent seasons in or garments for distribution through our outlet stores or secondary distribution channels.

During fiscal 2002, no single contractor of finished goods production accounted for more than 5% of our consolidated production. No single raw material supplier of fabric and trims accounted for more than 18% of our expenditures for raw materials during fiscal 2002. We believe that numerous qualified contractors and finished goods and raw materials suppliers are available to provide additional capacity on an as-needed basis and that we enjoy favorable on-going relationships with these contractors and suppliers.

Although we continue to explore new sourcing opportunities for finished goods and raw materials, we have established solid working relationships over many years with vendors who are financially stable and reputable, and who understand our product quality and delivery standards. As part of our efforts to reduce costs and enhance our sourcing efficiency, we have shifted increasingly to foreign suppliers. We research, test and add, as needed, alternate and/or back-up suppliers. However, in the event of any unanticipated substantial disruption of our relationship with, or performance by, key existing suppliers and/or contractors, there could be a short-term adverse effect on our operations.

Imports and Import Restrictions

We have for some time imported finished goods and raw materials for our domestic operations under multilateral and bilateral trade agreements between the U.S. and a number of foreign countries, including Hong Kong, India, China and Japan. These agreements impose quotas on the amount and type of textile and apparel products that can be imported into the U.S. from the affected countries. We do not anticipate

7

that these restrictions will materially or adversely affect our operations since we would be able to meet our needs domestically or from countries not affected by the restrictions on an annual basis.

In Europe we operate in the European Union (“EU”), within which there are few trade barriers. We sell to six other countries outside of France belonging to a trade union, which has some restrictions on imports of textile products and their sources. We also operate under constraints imposed on imports of finished goods and raw materials from outside the EU, including quotas and duty charges. We do not anticipate that these restrictions will materially or adversely impact our operations since we have always operated under such constraints, and the trend in Europe is continuing toward unification.

We retain independent buying agents, primarily in China, Hong Kong, India and other foreign countries to assist us in selecting and overseeing independent third party manufacturing and sourcing of finished goods, fabrics, and blanks and other products. These agents also monitor quota and other trade regulations and perform some quality control functions. With the addition of Quiksilver Asia/Pacific to our operations, we will have approximately 50 employees involved in sourcing and quality control functions to assist in monitoring and coordinating our overseas shipments from Asia.

By having employees in regions where we source our products, we enhance our ability to monitor factories to ensure their compliance with our standards of manufacturing practices. Our policies require every factory to comply with a code of conduct relating to factory working conditions and the treatment of workers involved in the manufacture of products.

Trademarks and Licensing Agreements

Trademarks

We own the “Quiksilver,” “Roxy” and famous mountain and wave and heart logos in virtually every country in the world. Other trademarks we own include “Raisins”, “Radio Fiji”, “Leilani”, “Hawk”, “Fidra”, “Lib Tech”, “Gnu”, “Supernatural Mfg.” and “Bent Metal”.

We apply for and register our trademarks throughout the world mainly for use on apparel and related accessories and for retail services. We believe our trademarks and our other intellectual property are crucial to the successful marketing and sale of our products, and we attempt to vigorously prosecute and defend our rights throughout the world. Because of the success of our trademarks, we are required to maintain global anti-counterfeiting programs to protect our brands.

Licensing Agreements

Since acquiring Quiksilver International in July 2000, we have owned the international rights to use the Quiksilver and Roxy trademarks in substantially all apparel and related accessory product classifications. With the acquisition of the Asia/Pacific licensees (see “Recent Developments”) we now directly operate all of the global Quiksilver and Roxy licensed territories with the exception of Korea and certain countries in the Mideast, Africa and South America.

We have a license agreement with Gotcha International, LP, which provides that we can sell products primarily in Western Europe under the Gotcha trademark. We have licensed the use of the Quiksilver and Roxy trademarks in Mexico, and we have also entered into licensing agreements in certain foreign territories with respect to several other of our non-Quiksilver and Roxy brands where we believe operating efficiencies and brand protection may best be achieved. In fiscal 2002, we terminated our domestic licensing agreement for Quiksilver and Roxy watches (see “Legal Proceedings”). We expect to enter into a long-term licensing agreement for watches or add watches to our technical accessory line during the current fiscal year.

8

Competition

Competition is strong in the global beachwear, snowboardwear, skate apparel, casual sportswear and snowboard markets in which we operate, and each territory can have different competitors. Our direct competitors in the United States differ depending on distribution channel. Our principal competitors in our core channel of surf shops, Boardriders Clubs and Quiksvilles in the United States include Billabong, Hurley, O’Neill and Volcom. Our competitors in the department store and specialty store channels in the United States include Tommy Hilfiger, Abercrombie and Fitch, Nautica and Calvin Klein. In Europe, our principal competitors in the core channel include O’Neill, Billabong, Rip Curl, Oxbow and Chimsee. In Australia our primary competitors are Billabong and Rip Curl. In broader European distribution, and in Asia/Pacific, our competitors also include brands such as Nike, Adidas and Levis. Our principal competitors both in the United States and Europe in the snowboardwear and snowboard market are Burton, K2 and Morrow, along with a host of smaller manufacturers. Some of our competitors may be significantly larger and have substantially greater resources than us.

We compete primarily on the basis of successful brand management and product design and quality born out of our ability to:

• maintain our reputation for authenticity in the core boardriding lifestyle demographic,

• continue to develop and respond to global fashion and lifestyle trends in our core markets,

• create innovative, high quality and stylish product at appropriate price points, and

• convey our boardriding lifestyle message to young-minded consumers worldwide (see “Risk Factors – Relating to Apparel Industry”).

Future Season Orders

We generally receive wholesale orders for apparel products approximately two to four months prior to the time the products are delivered to stores. All such orders are subject to cancellation for late delivery. We generally sell our products on a season-by-season basis. Our product ranges are separated into four delivery seasons, Spring, Summer, Fall and Holiday. At the end of November 2002, our Spring 2003 orders totaled $263.7 million and were up 16% over the previous year’s level of $227.3 million. Out of that combined increase, domestic orders were up 16% and European orders were up 15%. Our forward orders depend upon a number of factors and can fluctuate based on the timing of trade shows, sales meetings and market weeks. The timing of shipments also fluctuates from year to year and varies based on the production of goods. As a consequence, a comparison of forward orders from season to season is not necessarily meaningful and may not be indicative of eventual shipments.

Employees

At October 31, 2002, we had approximately 2,700 employees, consisting of approximately 1,800 in the United States and approximately 900 in foreign countries. Approximately 1,200 of these individuals were employed in production, operations and shipping functions, approximately 1,460 in sales, administrative or clerical capacities, and approximately 40 in executive capacities. None of our domestic employees are represented by a union, and less than ten of our foreign employees are represented by a union. We have never experienced a work stoppage and consider our working relationships with our employees to be good.

Environmental Matters

Compliance with environmental laws and regulations did not have a significant impact on our capital expenditures, earnings or competitive position during the last three fiscal years.

9

Forward-Looking Statements

Various statements in this Form 10-K or incorporated by reference into this Form 10-K, in future filings by us with the SEC, in our press releases and in oral statements made by or with the approval of authorized personnel constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations and are indicated by words or phrases such as “anticipate”, “estimate”, “expect”, “project”, “we believe”, “currently envisions” and similar words or phrases and involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Some of the factors that could affect our financial performance or cause actual results to differ from our estimates in, or underlying, such forward-looking statements are set forth under the heading of “Risk Factors”. Forward-looking statements include statements regarding, among other items:

• our anticipated growth strategies,

• our plans to expand internationally,

• our intention to introduce new products and enter into new joint ventures,

• our plans to open new retail stores,

• future renewals of our credit facilities,

• anticipated effective tax rates in future periods,

• future expenditures for capital projects, and

• our ability to continue to maintain our brand image and reputation.

These forward-looking statements are based largely on our expectations and are subject to a number of risks and uncertainties, many of which are beyond our control. Actual results could differ materially from these forward-looking statements as a result of the facts described in “Risk Factors” including, among others, changes in the competitive marketplace, including the introduction of new products or pricing changes by our competitors, changes in the economy, and other events leading to a reduction in discretionary consumer spending. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, we cannot assure you that the forward-looking information contained in this Form 10-K will, in fact, transpire.

Risk Factors

Competition

The apparel industry is highly competitive. We compete with numerous domestic and foreign designers, brands and manufacturers of apparel, accessories and other products, some of which are significantly larger and have greater resources than us. We believe that our ability to compete effectively depends upon our continued ability to maintain our reputation for authenticity in our core boardriding market, our flexibility in responding to market demand and our ability to manage our brands and offer fashion conscious consumers a wide variety of high quality apparel at competitive prices. See “Business – Competition.”

Changes in Fashion Trends

We believe that our success depends in substantial part on our ability to anticipate, gauge and respond to changing consumer demand and fashion trends in a timely manner. We attempt to minimize the risk of changing fashion trends and product acceptance by closely monitoring retail sales trends. However, if fashion trends shift away from our products, or if we otherwise misjudge the market for our product lines, we may be faced with a significant amount of unsold finished goods inventory or other conditions which could have a material adverse effect on us.

10

Uncertainties in Apparel Retailing

The apparel industry historically has been subject to substantial cyclical variations, and a recession in the general economy or uncertainties regarding future economic prospects that affect consumer spending habits could have a material adverse effect on our results of operations. While various retailers, including some of our customers, experienced financial difficulties in the past three years which increased the risk of extending credit to such retailers, our bad debt experience has been limited. Under our current credit and collection arrangements, the bankruptcy of a customer which continued to operate and carry our products should not have a material adverse effect on us.

Our Business is Subject to Seasonal Trends

Historically, our operating results have been subject to seasonal trends when measured on a quarterly basis. Our first fiscal quarter is traditionally weaker compared with our other fiscal quarters. This trend is dependent on numerous factors, including the markets in which we operate, holiday seasons, consumer demand, climate, economic conditions and numerous other factors beyond our control. There can be no assurance that our historic operating patterns will continue in future periods as we cannot influence or forecast many of these factors.

Sourcing

We are dependent upon third parties for the manufacture of substantially all of our products. The inability of a manufacturer to ship orders of our products in a timely manner, including as a result of local financial market disruption which could impair the ability of such suppliers to finance their operations, or to meet quality standards, could cause us to miss the delivery date requirements of our customers for those items, which could result in cancellation of orders, refusal to accept deliveries or a reduction in purchase prices, any of which could have a material adverse effect on our financial condition and results of operations. We have no long-term formal arrangements with any of our suppliers of raw materials, and to date we have experienced only limited difficulty in satisfying our raw materials requirements. Although we believe we could replace such suppliers without a material adverse effect on us, there can be no assurance that such suppliers could be replaced in a timely manner, and the loss of such suppliers could have a material adverse effect on our short-term operating results.

Impact of Potential Future Acquisitions

From time to time, we have pursued, and may continue to pursue, acquisitions. For example, during the first quarter ending January 31, 2003, we completed the acquisition of the licensees of our trademarks in Australia, Japan, New Zealand and several other countries and territories in Southeast Asia for a purchase price of approximately $94.4 million, funded using available lines of credit and common stock. If one or more acquisitions results in us becoming substantially more leveraged on a consolidated basis, our flexibility in responding to adverse changes in economic, business or market conditions may be adversely affected.

Risks Relating to International Operations

We conduct a significant portion of our business outside of the United States and, particularly in light of our recent acquisitions, we anticipate that revenue from foreign operations will account for an increasingly larger portion of our future revenue. Our international operations are directly related to and dependent on the volume of international trade and local market conditions. Our international operations and international commerce are influenced by many factors, including:

• changes in economic and political conditions and in governmental policies,

• changes in international and domestic customs regulations,

• wars, civil unrest, acts of terrorism and other conflicts,

• natural disasters,

• changes in tariffs, trade restrictions, trade agreements and taxation,

• difficulties in managing or overseeing foreign operations,

• limitations on the repatriation of funds because of foreign exchange controls,

11

• different liability standards, and

• difficulties in enforcing intellectual property laws of other countries.

The occurrence or consequences of any of these factors may restrict our ability to operate in the affected region and/or decrease the profitability of our operations in that region.

Foreign Currency and Derivatives

We are exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to certain sales, royalty income, and product purchases of our international subsidiaries that are denominated in currencies other than their functional currencies. We are also exposed to foreign currency gains and losses resulting from domestic transactions that are not denominated in U.S. dollars, and to fluctuations in interest rates related to our variable rate debt. Furthermore, we are exposed to gains and losses resulting from the effect that fluctuations in foreign currency exchange rates have on the reported results in our consolidated financial statements due to the translation of the operating results and financial position of our international subsidiaries. As part of our overall strategy to limit the level of exposure to the risk of fluctuations in foreign currency exchange rates, we use various foreign currency exchange contracts and intercompany loans. In addition, interest rate swaps are used to manage our exposure to the risk of fluctuations in interest rates.

Loss or Infringement of Our Trademarks

We believe that our trademarks are important to our success and competitive position. Accordingly, we devote substantial resources to the establishment and protection of our trademarks on a worldwide basis. We cannot assure that our actions taken to establish and protect our trademarks will be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as violative of their trademarks and proprietary rights. Moreover, we cannot assure that others will not assert rights in, or ownership of, our trademarks or that we will be able to successfully resolve such conflicts. In addition, the laws of certain foreign countries may not protect trademarks to the same extent as do the laws of the U.S. The loss of such trademarks, or the loss of the exclusive use of our trademarks, could have a material adverse effect on our business, financial condition and results of operations.

12

Item 2.  PROPERTIES

Certain information concerning our principal facilities in excess of 40,000 rentable square feet, all of which are leased, is as follows:

		Approximate		Current Lease
Location	Use	Sq. Ft.		Expiration
Huntington Beach, California	Headquarters		120,000	2023 *
Huntington Beach, California	Distribution center		225,000	2016 *
Huntington Beach, California	Distribution center		75,000	2019 *
Huntington Beach, California	Distribution center		110,000	2018 *
St. Jean de Luz, France	European headquarters		45,000	2009
St. Jean de Luz, France	Distribution center		100,000	2007
Hendaye, France	Distribution center		90,000	2008

* Includes extension periods exercisable at our option.

As of October 31, 2002, we operated 56 domestic retail stores and 39 European retail stores on leased premises. The leases for our facilities required aggregate annual rentals of approximately $14.9 million in fiscal 2002. We anticipate that we will be able to extend those leases that expire in the near future on terms satisfactory to us or, if necessary, locate substitute facilities on acceptable terms.

Item 3.  LEGAL PROCEEDINGS

On March 28, 2002, we filed a lawsuit against GMT Corporation, our then licensee for watches in the U.S., and simultaneously terminated our license agreement with GMT, based on our allegations that GMT was in material breach of the agreement. GMT has disputed our right to terminate and has brought claims against us for wrongful termination and other alleged breaches by us of the license agreement.

This lawsuit, which was removed from the United States District Court for the Southern District of New York to the United States District Court for the Southern District of California, continues to proceed to trial as the court hears various motions. We believe that GMT’s claims are substantially without merit and intend to vigorously pursue our claims and defend against those of GMT.

We are otherwise involved from time to time in legal claims involving trademark and intellectual property, licensing, employee relations and other matters incidental to our business. We believe that the resolution of any such matter currently pending will not have a material adverse effect on our financial condition or results of operations.

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

No matters were submitted for a vote of our stockholders during the fourth quarter of the fiscal year ended October 31, 2002.

13

PART II

Item 5.  MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock trades on the New York Stock Exchange (“NYSE”) under the symbol “ZQK.” The high and low sales prices of our common stock, as reported by the NYSE for the two most recent fiscal years, are set forth below.

		High		Low
Fiscal 2002
	4thquarter ended October 31, 2002	$	24.90	$	17.26
	3rdquarter ended July 31, 2002		27.58		18.42
	2ndquarter ended April 30, 2002		25.69		16.90
	1stquarter ended January 31, 2002		19.49		12.42
Fiscal 2001
	4thquarter ended October 31, 2001	$	23.20	$	11.60
	3rdquarter ended July 31, 2001		28.20		20.70
	2ndquarter ended April 30, 2001		28.15		22.69
	1stquarter ended January 31, 2001		24.91		16.13

We have historically reinvested our earnings in our business and have never paid a cash dividend. No change in this practice is currently being considered. Our payment of cash dividends in the future will be determined by the Board of Directors, considering conditions existing at that time, including our earnings, financial requirements and condition, opportunities for reinvesting earnings, business conditions and other factors. In addition, under our principal credit agreement with a bank group, we must obtain the bank group’s prior consent to pay dividends.

On January 21, 2003, there were approximately 400 holders of record of our common stock and an estimated 6,000 beneficial stockholders.

14

Item 6.  SELECTED FINANCIAL DATA

The statement of income and balance sheet data shown below were derived from our consolidated financial statements. Our consolidated financial statements as of October 31, 2002 and 2001 and for each of the three years in the period ended October 31, 2002, included herein, have been audited by Deloitte & Touche LLP, our independent auditors. You should read this selected financial data together with our consolidated financial statements and related notes, as well as the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

	Years Ended October 31,
Amounts in thousands, except per share data and ratios	2002		2001		2000		1999		1998
Statement of Income Data
Revenues	$	705,484	$	620,621	$	519,370	$	445,857	$	317,629
Income before provision for income taxes		59,986		45,412		51,862		44,867		30,768
Net income		37,591		28,021		31,836		26,584		17,963
Net income per share (1)		1.60		1.22		1.42		1.20		0.85
Net income per share, assuming dilution (1)		1.54		1.17		1.37		1.14		0.82
Weighted average common shares outstanding (1)		23,459		22,952		22,406		22,096		21,144
Weighted average common shares outstanding, assuming dilution (1)		24,472		24,049		23,232		23,284		21,820
Balance Sheet Data
Total assets	$	450,589	$	418,738	$	358,742	$	259,673	$	213,071
Working capital		160,518		132,416		119,529		109,823		92,321
Lines of credit		32,498		66,228		49,203		28,619		17,465
Long-term debt		54,085		70,464		66,712		28,184		30,962
Stockholders’ equity		272,873		216,594		177,614		151,753		117,659
Current ratio		2.2		1.8		2.0		2.3		2.4
Return on average stockholders’ equity(2)		15.4		14.2		19.3		19.7		16.9

(1)	Per share amounts and shares outstanding have been adjusted to reflect a three-for-two stock split effected on April 23, 1999 and a two-for-one stock split effected on April 24, 1998.
(2)	Computed based on net income divided by the average of beginning and ending stockholders’ equity.

15

Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion below should be read together with our consolidated financial statements and related notes, which are included in this report, and the “Risk Factors” information in the “Business” section of this report.

Overview

We began our domestic operations in 1976 as a designer and manufacturer of Quiksilver branded boardshorts designed for the sport of surfing. We grew our business through the late 1980’s by expanding our Quiksilver products into a full range of sportswear, and we bought our U.S. trademark from the Quiksilver brand’s Australian founders in 1988. The distribution of our products was primarily through surf shops. Since the early 1990’s, we have diversified and grown our business by increased sales of our Quiksilver product line, the creation of new brands such as Roxy, the introduction of new products, the development of our retail operations, and acquisitions. We acquired the Quiksilver licensee in Europe in 1991 to expand geographically, we purchased Quiksilver International in 2000 to gain global ownership of the Quiksilver brand, and we acquired Quiksilver Asia/Pacific at the end of 2002 to unify our global operating platform. We also acquired various other smaller businesses and brands. Brand building has been a key to our growth, and we have always maintained our roots in the boardriding lifestyle. Today our products are sold throughout the world, primarily in surf shops and specialty stores that provide an authentic retail experience for our customers.

Over the last five years, our revenues have grown from approximately $300 million in fiscal 1998 to approximately $700 million in fiscal 2002. We design, produce and distribute clothing, accessories and related products exclusively in the consumer products industry. For fiscal 2002, we had two geographic segments, domestic and Europe. As a result of our recent acquisition, we will have a third geographic segment beginning in fiscal 2003, Asia/Pacific. The domestic segment includes revenues from the U.S., Canada and other exports from the U.S., as well as royalties earned from various licenses in international territories and from licenses for the design and distribution of certain products such as eyewear. The European segment includes revenues primarily from Western Europe.

	Years Ended October 31,
In thousands	2002		2001		2000		1999		1998
Domestic revenues	$	422,800	$	396,744	$	336,756	$	292,486	$	204,321
European revenues		282,684		223,877		182,614		153,371		113,308
Total revenues	$	705,484	$	620,621	$	519,370	$	445,857	$	317,629

We operate in markets that are highly competitive, and our ability to evaluate and respond to changing consumer demands and tastes is critical to our success. Shifts in consumer preferences could have a negative effect on companies that misjudge these preferences. We believe that our historical success is due to the development of an experienced team of designers, artists, sponsored athletes, merchandisers, pattern makers, and cutting and sewing contractors. It’s this team and the heritage and current strength of our brands that has helped us remain in the forefront of design in our markets. Our success in the future will depend on our ability to continue to design products that are acceptable to the marketplace. There can be no assurance that we can do this. The consumer products industry is fragmented, and in order to retain and/or grow our market share, we must continue to be competitive in the areas of quality, brand image, distribution methods, price, customer service, and intellectual property protection.

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. To prepare these financial statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities. These estimates also affect our reported revenues and expenses. Judgments must also be made about the disclosure of contingent liabilities. Actual results could be significantly different from these estimates. We

16

believe that the following discussion addresses the significant accounting policies that are the most critical to help fully understand and evaluate our reported financial results.

Revenue Recognition

Revenues are recognized when the risk of ownership and title passes to our customers. Generally, we extend credit to our customers and do not require collateral. Our payment terms range from net-30 to net-90, depending on the country or whether we sell directly to retailers in the country or to a distributor. None of our sales agreements with any of our customers provide for any rights of return. However, we do approve returns on a case-by-case basis at our sole discretion to protect our brands and our image. We provide allowances for estimated returns when revenues are recorded, and related losses have historically been within our expectations. If returns are higher than our estimates, our earnings would be adversely affected.

Accounts Receivable

It is not uncommon for some of our customers to have financial difficulties from time to time. This is normal given the wide variety of our account base, which includes small surf shops, medium-sized retail chains, and some large department store chains. Throughout the year, we perform credit evaluations of our customers, and we adjust credit limits based on payment history and the customer’s current creditworthiness. We continuously monitor our collections and maintain a reserve for estimated credit losses based on our historical experience and any specific customer collection issues that have been identified. Historically, our losses have been consistent with our estimates, but there can be no assurance that we will continue to experience the same credit loss rates that we have experienced in the past. Unforeseen, material financial difficulties of our customers could have an adverse impact on our profits.

Inventories

We value inventories at the cost to purchase and/or manufacture the product or the current estimated market value of the inventory, whichever is lower. We regularly review our inventory quantities on hand, and we record a provision for excess and obsolete inventory based primarily on estimated forecasts of product demand and market value. Demand for our products could fluctuate significantly, which was evident in the aftermath of September 11^th. The demand for our products could be negatively affected by many factors, including the following:

• weakening economic conditions,

• further terrorist acts or threats,

• unanticipated changes in consumer preferences,

• reduced customer confidence in the retail market,and

• unseasonable weather.

Some of these factors could also interrupt the production and/or importation of our products or otherwise increase the cost of our products. As a result, our operations and financial performance could be negatively affected. Additionally, our estimates of product demand and/or market value could be inaccurate, which could result in an understated or overstated provision required for excess and obsolete inventory.

Long-Lived Assets

We acquire tangible and intangible assets in the normal course of our business. We evaluate the recoverability of the carrying amount of these long-lived assets (including fixed assets, trademarks and goodwill) at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. An impairment is assessed when the undiscounted expected future cash flows derived from an asset are less than its carrying amount. Impairments, if any, would be recognized in operating earnings. We continually use judgment when applying these impairment rules to determine the timing of the impairment tests, the undiscounted cash flows used to assess impairments, and the fair value of a potentially impaired asset. The reasonableness of our judgment could significantly affect the carrying value of our long-lived assets.

17

Income Taxes

Current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax asset or liability is established for the expected future consequences of temporary differences in the financial reporting and tax bases of assets and liabilities. We consider future taxable income and ongoing prudent and feasible tax planning strategies in assessing the value of our deferred tax assets. If we determine that it is more likely than not that these assets will not be realized, we would reduce the value of these assets to their expected realizable value, thereby decreasing net income. Evaluating the value of these assets is necessarily based on our judgment. If we subsequently determined that the deferred tax assets, which had been written down would, in our judgment, be realized in the future, the value of the deferred tax assets would be increased, thereby increasing net income in the period when that determination was made.

Foreign Currency Translation

A significant portion of our revenues are generated in Europe, where we operate with the euro as our functional currency. Our European revenues in the United Kingdom are denominated in British pounds and some European product is sourced in U.S. dollars, both of which result in exposure to gains and losses that could occur from fluctuations in foreign exchange rates. We also have other foreign currency obligations related to our acquisition of Quiksilver International. Our assets and liabilities that are denominated in foreign currencies are translated at the rate of exchange on the balance sheet date. Revenues and expenses are translated using the average exchange rate for the period. Gains and losses from translation of foreign subsidiary financial statements are included in accumulated other comprehensive income or loss.

As part of our overall strategy to manage our level of exposure to the risk of fluctuations in foreign currency exchange rates, we enter into various foreign exchange contracts generally in the form of forward contracts. For all contracts that qualify as cash flow hedges, we record the changes in the fair value of the derivatives in other comprehensive income. We also use other derivatives that do not qualify for hedge accounting to mitigate our exposure to currency risks. These derivatives are marked to fair value with corresponding gains or losses recorded in earnings.

Results of Operations

The table below shows the components in our statements of income as a percentage of revenues:

	Years Ended October 31,
	2002			2001			2000
Revenues		100.0	%		100.0	%		100.0	%
Gross profit		40.6			38.3			39.2
Selling, general and administrative expense		30.7			29.2			28.2
Operating income		9.9			9.1			11.0
Interest expense		1.2			1.8			1.2
Foreign currency and other expense		0.2			—			(0.2	)
Income before provision for income taxes		8.5	%		7.3	%		10.0	%

Fiscal 2002 Compared to Fiscal 2001

Revenues

Revenues increased 14% to $705.5 million in fiscal 2002 from $620.6 million in fiscal 2001 primarily as a result of increased unit sales and new products. Of those totals, domestic revenues increased 7% to $422.8 million from $396.7 million, and European revenues increased 26% to $282.7 million from $223.9 million.

18

Domestic revenues in our men’s category, which includes Quiksilver Young Men’s, Boys, Toddlers, Wintersports, Quiksilveredition, Hawk Clothing and Fidra, increased 7% to $229.2 million in fiscal 2002 from $214.3 million the year before. Domestic revenues in our women’s category, which includes Roxy, Roxy Girl, Teenie Wahine, Raisins, Leilani and Radio Fiji, increased 8% to $178.4 million from $165.9 million for those same periods. Wintersports hardgoods are sold under the Lib Technologies, Gnu, Supernatural Mfg. and Bent Metal brands and totaled $10.4 million in fiscal 2002 compared to $11.3 million in the previous year. Royalty income decreased to $4.8 million in fiscal 2002 from $5.2 million in fiscal 2001. Revenues in the domestic men’s category increased generally across all divisions. The women’s increase came from both the Roxy and Raisins divisions. We believe that our product design and marketing efforts are resulting in increased consumer demand for our products in the domestic market. Royalty income decreased because we acquired our domestic outlet store licensee during the fourth quarter of the fiscal year and terminated our domestic watch licensee. Also, we acquired the business of our Australian and Japanese licensees in the first quarter of fiscal 2003, which eliminates the related royalty income stream going forward. Accordingly, we expect royalty income to decline in fiscal 2003 compared to fiscal 2002. However, this decline would be more than offset in fiscal 2003 by the increased product shipment revenues from the acquired business.

European revenues were approximately 40% of the consolidated total in fiscal 2002. In U.S. dollars, revenues in the men’s category increased 19% to $208.3 million in fiscal 2002 from $175.2 million in the previous year. Women’s revenues increased 53% to $74.4 million from $48.7 million for those same periods. Revenue growth was the largest in the United Kingdom, France and Spain. We believe that our product design and marketing efforts are resulting in increased consumer demand for our products in the European market. For consolidated financial statement reporting, euro results must be translated into U.S. dollar amounts at average exchange rates, but this can distort performance when exchange rates change from year to year. To understand our European fiscal 2002 growth and better assess competitive performance and market share gains, it is important to look at revenues in euros as well, which is our operational currency in Europe. In euros, revenues grew 22% in fiscal 2002. This is lower than the 26% growth rate in U.S. dollars because the U.S. dollar was worth fewer euros on average in fiscal 2002 compared to fiscal 2001.

Gross Profit

Our consolidated gross profit margin increased to 40.6% in fiscal 2002 from 38.3% in the previous year. The domestic gross profit margin increased to 37.5% from 35.6%, while our European gross profit margin increased to 45.3% from 43.2%. The majority of the domestic gross profit margin improvement was related to events in the prior year. We recorded a $6.0 million writedown in the carrying value of our domestic inventory in the fourth quarter of fiscal 2001. In the aftermath of September 11, 2001, the market for consumer products, including casual lifestyle apparel, experienced a dramatic falloff in demand and resulted in a substantial amount of customer order cancellations. This phenomenon created an industry wide glut of excess product available to the traditional off-price channel thereby driving the price of certain seasonal product below cost. Accordingly, a reduction in the carrying value of our domestic inventories was required. We had no such reduction in fiscal 2002. The domestic gross profit margin improved in the second half fiscal 2002 because we lowered inventory levels toward the end of the year. Consequently, our end-of season clearance business was down compared to the year before, and our gross margins on those sales were up. This offset lower domestic gross margins on sales of end-of-season inventories in the first half of the year. We anticipate that our domestic gross margins will be higher for the first part of fiscal 2003 compared to the prior year periods. Our European gross profit margin increased primarily due to lower production costs. Additionally, both the domestic and European gross profit margins improved because we had a higher percentage of our sales through company-owned retail stores. We earn higher gross margins on sales in company-owned stores, but these higher gross margins are offset by store operating costs.

Selling, General and Administrative Expense

Selling, general and administrative expense increased 20% to $216.6 million in fiscal 2002 from $181.2 million in the previous year. Domestically, it increased 12% to $130.0 million from $116.4 million and in Europe it increased 34% to $86.6 million from $64.8 million for those same periods. Higher personnel costs and other costs related to increased sales volume were the primary reasons for these increases. As a percentage of revenues, selling general and administrative expense increased to 30.7% in fiscal 2002 from

19

29.2% in fiscal 2001. Selling, general and administrative expense increased as a percentage of revenues primarily due to the incremental operating costs of new company-owned retail stores.

Interest Expense and Income Taxes

Interest expense in fiscal 2002 decreased 21% to $8.6 million from $10.9 million in the previous year. This decrease was due primarily to lower average balances on the Company’s domestic debt and lower domestic interest rates compared to the previous year.

The Company’s income tax rate decreased to 37.3% in fiscal 2002 from 38.3% in fiscal 2001. This improvement resulted primarily because a higher percentage of our fiscal 2002 profits were generated in countries with lower tax rates. Our rate also decreased because we adopted SFAS No. 142 during fiscal 2002 and discontinued the amortization of certain intangible assets, which was not tax deductible.

Net Income

Net income in fiscal 2002 totaled $37.6 million or $1.54 per share on a diluted basis. In the previous year, net income was $28.0 million or $1.17 per share on a diluted basis. Basic earnings per share amounted to $1.60 for fiscal 2002 compared to $1.22 for fiscal 2001.

Results of Operations — Fiscal 2001 Compared to Fiscal 2000

Revenues

Revenues increased 19% to $620.6 million in fiscal 2001 from $519.4 million in fiscal 2000. Domestic revenues increased 18% to $396.7 million from $336.8 million, and European revenues increased 23% to $223.9 million from $182.6 million.

Domestic revenues in our men’s category increased 8% to $214.3 million in fiscal 2001 from $197.8 million the year before. Domestic revenues in our women’s category increased 34% to $165.9 million from $123.5 million for those same periods. Wintersports hardgoods totaled $11.3 million in fiscal 2001 compared to $11.8 million in the previous year. Revenues in our domestic men’s category increased generally across all divisions. The increase in our women’s category was the result of increases in both the Roxy and Raisins divisions. We believe that our product design and marketing efforts resulted in increased consumer demand for our products. Royalty income totaled $5.2 million in fiscal 2001 compared to $3.7 million in fiscal 2000. This increase reflects our ownership of Quiksilver International for the full fiscal year in 2001.

European revenues represented approximately 36% of our total net sales in fiscal 2001. Revenue growth was the largest in France, the United Kingdom and Spain. In U.S. dollars, revenues in our men’s category increased 15% to $175.2 million in fiscal 2001 from $152.5 million in the previous year. Revenues in our women’s category increased 62% to $48.7 million from $30.1 million for those same periods. In euros, revenues grew 29% in fiscal 2001. This is higher than the 23% growth rate in U.S. dollars because the U.S. dollar was worth more euros in fiscal 2001 compared to fiscal 2000.

Gross Profit

Our consolidated gross profit margin decreased to 38.3% in fiscal 2001 from 39.2% in the previous year. Our domestic gross profit margin decreased to 35.6% from 36.9%, while our European gross profit margin decreased slightly to 43.2% from 43.3%. The domestic gross profit margin decreased primarily as a result of a $6.0 million writedown in the carrying value of our inventory. In the aftermath of September 11, 2001, the market for consumer products, including casual lifestyle apparel, experienced a dramatic falloff in demand and resulted in a substantial amount of customer order cancellations. This phenomenon created an industry wide glut of excess product available to the traditional off-price channel thereby driving the price of certain seasonal product below cost. Accordingly, a reduction in the carrying value of our domestic inventories was required.

20

Selling, General and Administrative Expense

Selling, general and administrative expense increased 24% in fiscal 2001 to $181.2 million from $146.3 million in the previous year. Domestically, it increased 24% to $116.4 million from $93.6 million, and in Europe it increased 23% to $64.8 million from $52.7 million in those same periods. Higher personnel and other costs related to increased sales volume were the primary reasons for these increases. As a percentage of revenues, selling, general and administrative expense increased to 29.2% in fiscal 2001 from 28.2% in fiscal 2000. This increase as a percentage of revenues was primarily due to the incremental operating costs of new company-owned retail stores and to the operating costs of Quiksilver International, which was acquired in the third quarter of fiscal 2000.

Interest Expense and Income Taxes

Interest expense increased 69% to $10.9 million in fiscal 2001 from $6.4 million in the previous year. Approximately $2.2 million was related to debt arising from our acquisition of Quiksilver International. The remainder of the increase was primarily from additional borrowings to provide working capital to support our growth and continued investment in retail stores.

Our income tax rate for fiscal 2001 decreased to 38.3% from 38.6% in fiscal 2000. This reduction resulted primarily because a higher percentage of our profits were generated in countries with lower tax rates.

Net Income

Net income in fiscal 2001 totaled $28.0 million or $1.17 per share on a diluted basis. In the previous year, net income was $31.8 million or $1.37 per share on a diluted basis. Basic earnings per share amounted to $1.22 for fiscal 2001 compared to $1.42 for fiscal 2000.

Financial Position, Capital Resources and Liquidity

We finance our working capital needs and capital investments with operating cash flows and bank revolving lines of credit. Multiple banks in the U.S., Europe and, now, Australia, make these lines of credit available. Term loans are also used to supplement these lines of credit and are typically used to finance long-term assets.

Cash and cash equivalents totaled $2.6 million at October 31, 2002 versus $5.0 million at October 31, 2001. Working capital amounted to $160.5 million at October 31, 2002, compared to $132.4 million at October 31, 2001, an increase of 21%. Our strategy is to keep cash balances low and maintain adequate liquidity in our credit facilities to supplement operating cash flows as needed. We believe that our current cash flows and credit facilities are adequate to cover our cash needs at least for the next twelve months. Furthermore, we believe that increases in our credit facilities can be obtained if needed to fund future growth.

Operating Cash Flows

We generated $76.8 million from operations in fiscal 2002 compared to $5.8 million in fiscal 2001. This $71.0 million improvement resulted from several factors. The largest factor was the decrease in inventories. We used $17.7 million in fiscal 2001 as inventories increased and accounts payable decreased. By contrast, we generated $21.1 million in fiscal 2002 as inventories decreased and trade accounts payable increased, an improvement of $38.8 million. Cash flows increased by $10.1 million from higher net income adjusted for noncash expenses, and accounts receivable increased at a slower rate, resulting in an $8.0 million improvement. The increases in accrued liabilities and income taxes payable resulted in an additional $18.9 million of positive cash flows compared to the year before.

We generated $5.8 million from operations in fiscal 2001 compared to using $4.1 million of cash in fiscal 2000. The amount of net income plus noncash expenses was comparable in fiscal 2001 and fiscal 2000. And although cash invested in inventories exceeded the prior year by $7.5 million (net of the accounts payable decrease), the increase in trade accounts receivable was $18.3 million less in fiscal 2001. These factors resulted in a $9.9 million improvement in operating cash flows in fiscal 2001 over the previous year.

21

Capital Expenditures

We have avoided high levels of capital expenditures for our manufacturing functions by using independent contractors for sewing and other processes such as washing, dyeing and embroidery. We perform the cutting process in-house domestically to enhance control and efficiency, and we screenprint a portion of our product in-house both domestically and in Europe.

Fiscal 2002 capital expenditures were $22.2 million, which was comparable to the $22.6 million we spent in fiscal 2001 and $5.8 million higher than the $16.4 million spent in fiscal 2000. In fiscal 2002 and 2001, we increased our investment in company-owned retail stores. We also expanded our facilities in Europe in fiscal 2001. Investments in warehouse equipment, computer equipment and fixtures also continued in fiscal 2002.

New company-owned retail stores are again part of our plans in fiscal 2003. Computer hardware and software will also be added to continuously improve systems. Capital spending for these and other projects in fiscal 2003 is expected to range between $35.0 million and $40.0 million.

Acquisitions

Shortly after the end of fiscal 2002, we acquired our licensees in Australia and Japan to unify our global operating platform. The transaction date was December 1, 2002. We refer to the operations of this group of companies, which constitutes a new geographic segment for us, as “Quiksilver Asia/Pacific”. The group includes two Australian companies, Ug Manufacturing Co. Pty Ltd. and QSJ Holdings Pty Ltd., and one Japanese company, Quiksilver Japan KK. Ug Manufacturing Co. Pty Ltd. was still owned by the founders of the Quiksilver brand and was the original Quiksilver operating company that has been producing Quiksilver products in Australia and surrounding countries and territories for over 30 years. Along with a Japanese partner, the founders also started Quiksilver Japan KK, which has been the Quiksilver licensee in Japan for approximately 20 years. We also acquired a 25% interest in our Turkish licensee as part of the transaction. The Asia/Pacific operations will be included in our results beginning with the effective date of the acquisition in the first quarter of our fiscal year ending October 31, 2003.

The initial purchase price includes cash of $23.1 million and 2.8 million shares of our common stock valued at $71.3 million. The initial purchase price is subject to adjustment based on the acquired entities’ closing balance sheets, which are expected to be finalized in the second quarter of fiscal 2003. The sellers are entitled to future payments ranging from zero to $18.6 million if certain sales and earnings targets are achieved during the three years ending October 31, 2005. The amount of goodwill we initially recorded for the transaction will increase if such contingent payments are made.

Effective September 15, 2002, we acquired Beach Street, Inc., a company that operates 26 Quiksilver outlet stores. The acquisition of Beach Street is expected to increase our control over our brands and distribution and is expected to enable us to capture some incremental gross margin. We issued 298,092 shares of common stock valued at $6.9 million as consideration for the acquisition.

Effective July 1, 2000, we acquired Quiksilver International, an Australian company that owns the worldwide trademark rights to the Quiksilver brand name (other than in the United States and Mexico where those rights were already owned by us). The initial acquisition payment was $23.6 million, which included cash consideration of $23.1 million and transaction costs, net of imputed interest, of $0.5 million. Under the terms of the purchase agreement, two additional payments were to be made. One was made at the end of fiscal 2002, and another is to be made at the end of fiscal 2005. These additional payments, which are denominated in Australian dollars, are contingent on the computed earnings of Quiksilver International through June 20, 2005, subject to specified minimums. The deferred minimum purchase price payments, which were discounted to present value, totaled $17.3 million at the date of the acquisition and were included as a component of the purchase price recorded at July 1, 2000. The payment made at the end of fiscal 2002 was increased by $9.6 million, with a corresponding increase to Trademarks, as a result of Quiksilver International’s operations for the two years ended June 30, 2002, resulting in a total payment of $20.7 million. The obligation related to the remaining deferred purchase price payment is reflected in our consolidated balance sheet as a component of debt.

We believe that we have benefited and will continue to benefit from unified ownership of the Quiksilver brand worldwide. Global product decisions can be controlled by us, and the opportunities for coordinated global sourcing and marketing programs are enhanced.

22

Debt Structure

A syndication of U.S. banks finances our domestic business, and European banks finance our European business. Australian banks finance our new Asia/Pacific business. Our debt structure includes short-term lines of credit and long-term loans as follows:

	October 31,
In thousands	2002
Domestic syndicated line of credit	$	20,388
European short-term credit arrangements		12,110
Domestic syndicated term loan		12,500
Domestic term loan		9,225
European long-term debt		23,752
Deferred purchase price obligation		8,608
Total debt	$	86,583

The domestic credit facility includes a term loan and a revolving line of credit facility that totals $125.0 million. The line of credit expires on June 28, 2003, and it bears interest based on the agent bank’s reference rate or LIBOR. The weighted average interest rate at October 31, 2002 was 6.3%. The term loan is repayable in equal quarterly installments through October 2004 and amounted to $12.5 million at October 31, 2002. The term loan bears interest contractually based on LIBOR. However, we entered into an interest rate swap agreement to fix the interest rate at 7.2% per year. This swap agreement is effective through October 2004 and is an effective hedge of the related interest rate exposure. The line of credit and the term loan are secured and are subject to generally the same restrictive covenants. The most significant covenants relate to maintaining certain leverage and fixed charge coverage ratios. The payment of dividends is restricted, among other things, and our assets, other than trademarks and other intellectual property, generally have been pledged as collateral. At October 31, 2002, we were in compliance with such covenants. We believe that the line of credit will be renewed with substantially similar terms.

We also have another domestic term loan with a single bank that amounted to $9.2 million on October 31, 2002 and is repayable in installments of $0.1 million per month with a final balloon payment due on October 29, 2004. We anticipate that these monthly payments and final balloon payment will be paid from borrowings on our revolving line of credit facility. This term loan was established in April 2000 and is secured by the leasehold improvements at our headquarters in Huntington Beach, California. The interest rate structure and restrictive covenants are substantially the same as those under the syndicated credit facility. However, we entered into an interest rate swap agreement to fix the interest rate at 8.4% per year. This swap agreement is effective through April 2007 and is an effective hedge of the related interest rate exposure.

In Europe, we have arrangements with several banks that provide approximately $60.0 million for cash borrowings and approximately $38.0 million for letters of credit. At October 31, 2002, related interest rates ranged from 3.9% to 4.2%. These lines of credit expire on various dates through April 2003, and we believe that the banks will continue to make these facilities available with substantially similar terms. The amount outstanding on these lines of credit at October 31, 2002 was $12.1 million at an average interest rate of 4.0%.

In Europe, we also have $23.8 million of long-term debt, most of which is collateralized by fixed assets. This debt bears interest at rates ranging generally from 3.9% to 6.0%. Required principal and interest payments are either monthly, quarterly or annually, and the loans are due at various dates through 2011.

Our financing activities used $35.7 million of cash in fiscal 2002 as debt was reduced. This compares to $19.9 million provided in the previous year and $45.6 million in fiscal 2000 as funds were borrowed. We used these borrowings to fund the business acquisitions, capital expenditures and the inventory investments discussed above.

23

Contractual Obligations and Commitments

We lease certain land and buildings under non-cancelable operating leases. The leases expire at various dates through 2014, excluding extensions at our option, and contain various provisions for rental adjustments including, in certain cases, adjustments based on increases in the Consumer Price Index. The leases generally contain renewal provisions for varying periods of time. We also have long-term debt and obligations related to business acquisitions. Additional payments to the sellers, ranging from zero to $18.6 million, could be required for our acquisition of Quiksilver Asia/Pacific if certain sales and earnings targets are achieved. Our deferred purchase price obligation related to our acquisition of Quiksilver International could increase based on the computed earnings of Quiksilver International through June 2005. Our significant contractual obligations and commitments as of October 31, 2002 are summarized in the following table:

	Payments Due by Period
			Two to		Four to		After
	One		Three		Five		Five
In thousands	Year		Years		Years		Years		Total
Minimum lease payments	$	17,383	$	30,208	$	26,753	$	32,653	$	106,997
Domestic syndicated term loan		6,250		6,250		—		—		12,500
Domestic term loan		1,230		7,995		—		—		9,225
European long-term debt		3,200		10,984		6,869		2,699		23,752
Deferred purchase price obligation		—		8,608		—		—		8,608
	$	28,063	$	64,045	$	33,622	$	35,352	$	161,082

We have domestic and European short-term line of credit commitments that allow for maximum cash borrowings and letters of credit of $223.0 million. These commitments expire in fiscal 2003. We had $32.5 million of borrowings drawn on these lines of credit as of October 31, 2002, and letters of credit issued at that time totaled $47.5 million.

Trade Accounts Receivable and Inventories

Our trade accounts receivable were $168.2 million at October 31, 2002 versus $155.9 million the previous year, an increase of 8%. Of those totals, domestic receivables decreased 8% to $80.8 million compared to $87.4 million, and European receivables increased 28% to $87.4 million from $68.5 million. The growth in European receivables was generally consistent with the increase in European revenues. However, domestic receivables decreased even though revenues increased primarily because of improved collections and the elimination of certain trade accounts receivable when we acquired our domestic outlet store licensee, Beach Street, Inc., in September 2002.

Inventories decreased 11% to $95.9 million at October 31, 2002 from $107.6 million the year before. The domestic component decreased 18% to $69.0 million from $83.9 million, and the European piece increased 14% to $26.9 million from $23.7 million. Our average inventory turnover was 5.0 times at the end of fiscal 2002 based on a rolling average computation compared to average turnover of 3.8 times at the end of the previous year.

Inflation

Inflation has been modest during the years covered by this report. Accordingly, inflation has had an insignificant impact on our sales and profits.

New Accounting Pronouncements

Effective November 1, 2001, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations”. This standard eliminates the pooling method of accounting for business combinations initiated after June 30, 2001. In addition, SFAS No. 141 addresses the accounting for intangible assets and goodwill acquired in a business combination. This portion of SFAS No. 141 is effective for business combinations completed after June 30, 2001. The adoption of SFAS No. 141 did not have a material effect on our financial position or results of operations.

24

Effective November 1, 2001, we adopted SFAS No. 142, “Goodwill and Intangible Assets”, which revises the accounting for purchased goodwill and intangible assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized but are tested for impairment annually and also in the event of an impairment indicator. An impairment is assessed when the undiscounted expected future cash flows derived from an asset are less than its carrying amount. Impairments, if any, would be recognized in operating earnings. We completed the required transitional impairment test and the annual impairment test and determined that no impairment loss was necessary. Any subsequent impairment losses will be reflected in operating income. With the adoption of SFAS No. 142 we discontinued amortization of goodwill and certain trademarks that were determined to have an indefinite life. Had amortization of goodwill and these trademarks not been recorded in year ended October 31, 2001, net income would have increased by $2.6 million, net of taxes, and diluted earnings per share would have increased by $0.10. Likewise, net income would have increased by $1.3 million, net of taxes, in fiscal 2000, and diluted earnings per share would have increased by $0.06.

In August 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which supersedes previous guidance on financial accounting and reporting for the impairment or disposal of long-lived assets and for segments of a business to be disposed of. SFAS No. 144 is effective for fiscal 2003. We do not expect the adoption of SFAS No. 144 to have a significant impact on our financial position or results of operations. However, future impairment reviews may result in charges against earnings to write down the value of long-lived assets.

In August 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, which requires that costs associated with exit or disposal activities be recognized when they are incurred rather than at the date of a commitment to an exit or disposal plan. We must apply SFAS No. 146 prospectively to exit or disposal activities initiated after December 31, 2002. If we initiate exit or disposal activities after that date, SFAS No. 146 will affect the timing of the recognition of the related costs. We do not expect the adoption of this standard to have a significant impact on our financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We are required to follow the prescribed format and provide the additional disclosures required by SFAS No. 148 in our financial statements for fiscal 2003 and must also provide the disclosures in our quarterly reports containing condensed financial statements for interim periods beginning with our quarterly period ending April 30, 2003.

Forward-Looking Statements

Certain words in this report like “believes”, “anticipates”, “expects”, “estimates” and similar expressions are intended to identify, in certain cases, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from the predicted results. Such factors include, among others, the following:

25

• General economic and business conditions

• The acceptance in the marketplace of new products

• The availability of outside contractors at prices favorable to us

• The ability to source raw materials at prices favorable to us

• Currency fluctuations

• Changes in business strategy or development plans

• Availability of qualified personnel

• Changes in political, social and economic conditions and local regulations, particularly in Europe and Asia

• Other factors outlined in our previously filed public documents, copies of which may be obtained without cost from us.

Given these uncertainties, investors are cautioned not to place too much weight on such statements. We are not obligated to update these forward-looking statements.

Item 7a.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

We are exposed to a variety of risks. Two of these risks are foreign currency fluctuations and changes in interest rates that affect interest expense. (See also Note 15 to our financial statements.)

Foreign Currency and Derivatives

We are exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to certain sales, royalty income, and product purchases of our international subsidiaries that are denominated in currencies other than their functional currencies. We are also exposed to foreign currency gains and losses resulting from domestic transactions that are not denominated in U.S. dollars, and to fluctuations in interest rates related to our variable rate debt. Furthermore, we are exposed to gains and losses resulting from the effect that fluctuations in foreign currency exchange rates have on the reported results in our consolidated financial statements due to the translation of the operating results and financial position of our international subsidiaries. We use various foreign currency exchange contracts and intercompany loans as part of our overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates. In addition, we use interest rate swaps to manage our exposure to the risk of fluctuations in interest rates.

Changes in the fair value of the derivatives for all qualifying cash flow hedges are recorded in other comprehensive income. Other derivatives not qualifying for hedge accounting but used to mitigate exposure to currency risks are marked to fair value with corresponding gains or losses recorded in earnings. As of October 31, 2002, we were hedging forecasted transactions expected to occur in the following eight months. Assuming exchange rates at October 31, 2002 remain constant, we expect $2.0 million of losses related to hedges of these transactions to be reclassed into earnings over the next eight months. Also included in accumulated other comprehensive income at October 31, 2002 is a $0.4 million net charge related to cash flow hedges of our long-term debt, which is denominated in Australian dollars and matures through fiscal 2005, and the fair value of interest rate swaps, totaling $1.1 million that is related to our U.S. dollar denominated long-term debt and matures through fiscal 2007.

On the date we enter into a derivative contract, we designate the derivative as a hedge of the identified exposure. We formally document all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for entering into various hedge transactions. We identify in this documentation the asset, liability, firm commitment, or forecasted transaction that has been designated as a hedged item and indicate how the hedging instrument is expected to hedge the risks related to the hedged item. We formally measure effectiveness of our hedging relationships both at the hedge inception and on an ongoing basis in accordance with our risk management policy. We will discontinue hedge accounting prospectively:

• if we determine that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item,

• when the derivative expires or is sold, terminated or exercised,

26

• if it becomes probable that the forecasted transaction being hedged by the derivative will not occur,

• because a hedged firm commitment no longer meets the definition of a firm commitment, or

• if we determine that designation of the derivative as a hedge instrument is no longer appropriate.

During the fiscal year ended October 31, 2002, we reclassified into earnings a net loss of $0.3 million resulting from the expiration, sale, termination or exercise of derivative contracts. Additionally, we recognized a loss of $0.5 million during the fiscal year ended October 31, 2002 for changes in the value of derivatives that were marked to fair value.

We enter into forward exchange and other derivative contracts with major banks and are exposed to credit losses in the event of nonperformance by these banks. We anticipate, however, that these banks will be able to fully satisfy their obligations under the contracts. Accordingly, we do not obtain collateral or other security to support the contracts.

Translation of Results of International Subsidiaries

As discussed above, we are exposed to financial statement gains and losses as a result of translating the operating results and financial position of our international subsidiaries. We translate the local currency statements of income of our foreign subsidiaries into U.S. dollars using the average exchange rate during the reporting period. Changes in foreign exchange rates affect our reported profits and distort comparisons from year to year. We use various foreign currency exchange contracts and intercompany loans to hedge the profit and loss effects of such exposure, but accounting rules do not allow us to hedge the actual translation of sales and expenses.

By way of example, when the U.S. dollar strengthens compared to the euro, there is a negative effect on our reported results for Europe. It takes more profits in euros to generate the same amount of profits in stronger U.S. dollars. The opposite is also true. That is, when the U.S. dollar weakens there is a positive effect.

In fiscal 2002, the U.S. dollar weakened compared to the euro. As a result, our European sales increased 22% in euros compared to the year before, but increased 26% in U.S. dollars.

The Euro

The primary countries where our European subsidiary operates, with the exception of the United Kingdom, adopted the euro as legal currency effective January 1, 1999. At that time, exchange rates between the French franc and certain other European currencies were fixed versus the euro. Euro denominated currency began circulating as of January 1, 2002. Our European subsidiary began processing transactions in euros as of November 1, 2001.

Interest Rates

Most of our lines of credit and long-term debt bear interest based on LIBOR. Interest rates, therefore, can move up or down depending on market conditions. As discussed above, we have entered into interest rate swap agreements to hedge a portion of our exposure to such fluctuations. The approximate amount of our remaining variable rate debt was $12.0 million at October 31, 2002, and the average interest rate at that time was 4.0%. If interest rates were to increase by 10%, our net income would be reduced by approximately $30,000 based on these fiscal 2002 levels.

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item appears beginning on page 30.

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

Not Applicable.

27

PART III

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required to be included by this item will be included in our proxy statement for the 2003 Annual Meeting of Stockholders. That information is incorporated herein by reference to that proxy statement, which will be filed with the Securities and Exchange Commission within 120 days of our fiscal year ended October 31, 2002.

Item 11.  EXECUTIVE COMPENSATION

The information required to be included by this item will be included in our proxy statement for the 2003 Annual Meeting of Stockholders. That information is incorporated herein by reference to that proxy statement, which will be filed with the Securities and Exchange Commission within 120 days of our fiscal year ended October 31, 2002.

Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required to be included by this item will be included in our proxy statement for the 2003 Annual Meeting of Stockholders. That information is incorporated herein by reference to that proxy statement, which will be filed with the Securities and Exchange Commission within 120 days of our fiscal year ended October 31, 2002.

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required to be included by this item will be included in our proxy statement for the 2003 Annual Meeting of Stockholders. That information is incorporated herein by reference to that proxy statement, which will be filed with the Securities and Exchange Commission within 120 days of our fiscal year ended October 31, 2002.

Item 14.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

Our chief executive officer and chief financial officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)) as of a date (the “Evaluation Date”) within 90 days before the filing date of this annual report on Form 10-K, have concluded that, as of the Evaluation Date, our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities.

Changes in Internal Controls.

There were no significant changes in our internal controls or in other factors that could significantly affect such controls subsequent to the Evaluation Date, including any corrective actions with regard to significant deficiencies and material weaknesses.

28

PART IV

Item 15.  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
	See “Index to Consolidated Financial Statements” on page 30
2.	Exhibits
	See “Exhibit Index” on page 55

(b) Reports on Form 8-K.

1. We filed a report on Form 8-K to report our merger with our Australian and Japanese licensees on January 2, 2003.

29

QUIKSILVER, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page
INDEPENDENT AUDITORS’ REPORT			31
CONSOLIDATED FINANCIAL STATEMENTS
	Consolidated Balance Sheets      October 31, 2002 and 2001		32
	Consolidated Statements of Income      Years Ended October 31, 2002, 2001 and 2000		33
	Consolidated Statements of Comprehensive Income      Years Ended October 31, 2002, 2001 and 2000		33
	Consolidated Statements of Stockholders’ Equity      Years Ended October 31, 2002, 2001 and 2000		34
	Consolidated Statements of Cash Flows      Years Ended October 31, 2002, 2001 and 2000		35
	Notes to Consolidated Financial Statements		36

30

INDEPENDENT AUDITORS’ REPORT

To The Board of Directors and Stockholders of
Quiksilver, Inc.:

We have audited the accompanying consolidated balance sheets of Quiksilver, Inc. and subsidiaries as of October 31, 2002 and 2001, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended October 31, 2002. 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 in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Quiksilver, Inc. and subsidiaries as of October 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the financial statements, in 2002 the Company changed its method of accounting for goodwill and intangible assets.

DELOITTE & TOUCHE LLP

December 17, 2002
Costa Mesa, California

31

QUIKSILVER, INC.

CONSOLIDATED BALANCE SHEETS

October 31, 2002 and 2001

In thousands, except share amounts			2002			2001
ASSETS
Current assets:
	Cash and cash equivalents		$	2,597		$	5,002
	Trade accounts receivable, net - Note 3			168,237			155,879
	Other receivables			7,415			6,427
	Inventories - Note 4			95,872			107,562
	Deferred income taxes - Note 12			14,070			8,548
	Prepaid expenses and other current assets			6,638			4,831
		Total current assets		294,829			288,249
Fixed assets, net - Notes 5 and 7				73,182			61,453
Trademarks, net - Notes 6 and 11				51,134			45,911
Goodwill - Note 2				26,978			18,929
Deferred income taxes - Note 12				1,411			1,837
Other assets				3,055			2,359
		Total assets	$	450,589		$	418,738
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Lines of credit - Note 7		$	32,498		$	66,228
	Accounts payable			47,279			40,554
	Accrued liabilities - Note 8			40,137			24,898
	Current portion of long-term debt - Note 7			10,680			24,153
	Income taxes payable - Note 12			3,717			—
		Total current liabilities		134,311			155,833
Long-term debt - Note 7				43,405			46,311
		Total liabilities		177,716			202,144
Commitments and contingencies - Note 9
Stockholders ’ equity - Note 10:
	Preferred stock, $.01 par value, authorized shares - 5,000,000; issued and outstanding shares - none			—			—
	Common stock, $.01 par value, authorized shares - 45,000,000; issued and outstanding shares - 24,680,147 (2002) and 23,890,283 (2001)			247			239
	Additional paid-in capital			66,769			52,706
	Treasury stock, 721,300 shares			(6,778	)		(6,778	)
	Retained earnings			219,038			181,447
	Accumulated other comprehensive loss			(6,403	)		(11,020	)
		Total stockholders’ equity		272,873			216,594
		Total liabilities and stockholders’ equity	$	450,589		$	418,738

See notes to consolidated financial statements.

32

QUIKSILVER, INC.

CONSOLIDATED STATEMENTS OF INCOME

Years Ended October 31, 2002, 2001 and 2000

In thousands, except per share amounts		2002		2001			2000
Revenues		$	705,484	$	620,621		$	519,370
Cost of goods sold			419,155		382,762			315,900
	Gross profit		286,329		237,859			203,470
Selling, general and administrative expense			216,625		181,220			146,337
	Operating income		69,704		56,639			57,133
Interest expense			8,640		10,873			6,435
Foreign currency loss (gain)			729		(95	)		(1,650	)
Other expense			349		449			486
Income before provision for income taxes			59,986		45,412			51,862
Provision for income taxes - Note 12			22,395		17,391			20,026
Net income		$	37,591	$	28,021		$	31,836
Net income per share - Note 1		$	1.60	$	1.22		$	1.42
Net income per share, assuming dilution - Note 1		$	1.54	$	1.17		$	1.37
Weighted average common shares outstanding - Note 1			23,459		22,952			22,406
Weighted average common shares outstanding, assuming dilution - Note 1			24,472		24,049			23,232

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended October 31, 2002, 2001 and 2000

In thousands			2002			2001			2000
Net income			$	37,591		$	28,021		$	31,836
Other comprehensive gain (loss):
	Foreign currency translation adjustment			6,896			2,274			(8,309	)
	Net unrealized loss on derivative instruments, net of tax of
		$1,274 (2002) and $839 (2001)		(2,279	)		(1,195	)		—
Comprehensive income			$	42,208		$	29,100		$	23,527

See notes to consolidated financial statements.

33

QUIKSILVER, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Years Ended October 31, 2002, 2001 and 2000

													Accumulated
						Additional							Other			Total
		Common Stock				Paid-in		Treasury			Retained		Comprehensive			Stockholders'
In thousands, except share amounts		Shares		Amount		Capital		Stock			Earnings		Income (Loss)			Equity
Balance, November 1, 1999			22,731,220	$	227	$	36,780	$	(3,054	)	$	121,590	$	(3,790	)	$	151,753
	Exercise of stock options		502,816		5		4,302		—			—		—			4,307
	Tax benefit from exercise of stock options		—		—		1,751		—			—		—			1,751
	Repurchase of common stock		—		—		—		(3,724	)		—		—			(3,724	)
	Net income and other comprehensive loss		—		—		—		—			31,836		(8,309	)		23,527
Balance, October 31, 2000			23,234,036		232		42,833		(6,778	)		153,426		(12,099	)		177,614
	Exercise of stock options		641,000		6		5,859		—			—		—			5,865
	Tax benefit from exercise of stock options		—		—		3,778		—			—		—			3,778
	Employee stock purchase plan		15,247		1		236		—			—		—			237
	Net income and other comprehensive income		—		—		—		—			28,021		1,079			29,100
Balance, October 31, 2001			23,890,283		239		52,706		(6,778	)		181,447		(11,020	)		216,594
	Exercise of stock options		459,346		4		4,144		—			—		—			4,148
	Tax benefit from exercise of stock options		—		—		2,543		—			—		—			2,543
	Employee stock purchase plan		32,426		1		471		—			—		—			472
	Beach Street acquisition		298,092		3		6,905		—			—		—			6,908
	Net income and other comprehensive income		—		—		—		—			37,591		4,617			42,208
Balance, October 31, 2002			24,680,147	$	247	$	66,769	$	(6,778	)	$	219,038	$	(6,403	)	$	272,873

See notes to consolidated financial statements.

34

QUIKSILVER, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended October 31, 2002, 2001 and 2000

In thousands					2002			2001			2000
Cash flows from operating activities:
	Net income				$	37,591		$	28,021		$	31,836
	Adjustments to reconcile net income to net cash    provided by (used in) operating activities:
			Depreciation and amortization			14,349			13,877			10,023
			Provision for doubtful accounts			5,771			5,042			3,135
			Loss on sale of fixed assets			27			39			183
			Foreign currency loss (gain)			75			140			(2,002	)
			Interest accretion			1,713			1,667			518
			Deferred income taxes			(4,038	)		(3,364	)		1,392
			Changes in operating assets and liabilities, net of effects   from business acquisitions:
				Trade accounts receivable		(13,663	)		(21,699	)		(40,004	)
				Other receivables		922			301			(1,091	)
				Inventories		16,444			(16,492	)		(21,481	)
				Prepaid expenses and other current assets		(2,811	)		2,190			(2,315	)
				Other assets		437			871			(275	)
				Accounts payable		4,661			(1,224	)		11,275
				Accrued liabilities		9,291			(1,484	)		659
				Income taxes payable		6,061			(2,038	)		4,047
				Net cash provided by (used in) operating activities		76,830			5,847			(4,100	)
Cash flows from investing activities:
	Proceeds from sales of fixed assets					—			82			2
	Capital expenditures					(22,216	)		(22,622	)		(16,420	)
	Business acquisitions, net of acquired cash - Note 2					(20,676	)		(250	)		(24,409	)
				Net cash used in investing activities		(42,892	)		(22,790	)		(40,827	)
Cash flows from financing activities:
	Borrowings on lines of credit					4,585			70,363			71,127
	Payments on lines of credit					(39,584	)		(53,630	)		(50,872	)
	Borrowings on long-term debt					6,000			7,872			41,822
	Payments on long-term debt					(11,309	)		(10,824	)		(17,038	)
	Purchase of treasury stock					—			—			(3,724	)
	Stock option exercises and employee stock purchases					4,620			6,102			4,307
				Net cash (used in) provided by financing activities		(35,688	)		19,883			45,622
Effect of exchange rate changes on cash						(655	)		(236	)		154
Net (decrease) increase  in cash and cash equivalents						(2,405	)		2,704			849
Cash and cash equivalents, beginning of year						5,002			2,298			1,449
Cash and cash equivalents, end of year					$	2,597		$	5,002		$	2,298
Supplementary cash flow information:
	Cash paid during the year for:
		Interest			$	6,297		$	8,984		$	5,526
		Income taxes			$	18,914		$	17,821		$	15,284
	Non-cash investing and financing activities:
		Deferred purchase price obligation - Note 2			$	5,310		$	4,267		$	19,384
		Common stock issued for business acquisitions - Note 2			$	6,908		$	—		$	—

See notes to consolidated financial statements.

35

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended October 31, 2002, 2001 and 2000

Note 1 — Significant Accounting Policies

Company Business

The Company designs, produces and distributes clothing, accessories and related products for young-minded people and develops brands that represent a casual lifestyle—driven from a boardriding heritage. The Company’s primary focus is apparel for young men and young women under the Quiksilver, Roxy, Raisins, Radio Fiji and Gotcha (Europe) labels. The Company also manufactures apparel for boys (Quiksilver Boys and Hawk Clothing), girls (Roxy Girl, Teenie Wahine and Raisins Girls), men (Quiksilveredition and Fidra) and women (Leilani swimwear), as well as snowboards, snowboard boots and bindings under the Lib Technologies, Gnu, Supernatural Mfg. and Bent Metal labels. Distribution is primarily in the United States and Europe and is primarily based in surf shops and specialty stores that provide an outstanding retail experience for the customer. The Company performs ongoing credit evaluations of its customers and generally does not require collateral.

The Company competes in markets that are highly competitive. The Company’s ability to evaluate and respond to changing consumer demands and tastes is critical to its success. The Company believes that consumer acceptance depends on product, image, design, fit and quality. Consequently, the Company has developed an experienced team of designers, artists, merchandisers, pattern makers, and cutting and sewing contractors that it believes has helped it remain in the forefront of design in the areas in which it competes. The Company believes, however, that its continued success will depend on its ability to promote its image and to design products acceptable to the marketplace.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Quiksilver, Inc. and subsidiaries, including Na Pali, SAS and subsidiaries (“Quiksilver Europe”) and Quiksilver Australia Pty Ltd. and subsidiaries (“Quiksilver International”). Intercompany accounts and transactions have been eliminated in consolidation.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

Cash Equivalents

Certificates of deposit and highly liquid short-term investments purchased with original maturities of three months or less are considered cash equivalents.

Inventories

Inventories are valued at the lower of cost (first-in, first-out) or market.

Fixed Assets

Furniture, equipment and buildings are recorded at cost and depreciated on a straight-line basis over their estimated useful lives, which generally range from two to ten years. Leasehold improvements are recorded at cost and amortized over their estimated useful lives or related lease term, whichever is shorter. The cost of land use rights for certain leased retail locations (totaling approximately $7.2 million at October 31, 2002) is included in, and accounted for, as land in the accompanying consolidated financial statements and is reviewed periodically for impairment.

36

Long-Lived Assets

The Company accounts for the impairment and disposition of long-lived assets in accordance with 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”. In accordance with SFAS No. 121, long-lived assets are reviewed for events or changes in circumstances which indicate that their carrying value may not be recoverable.

Goodwill and Intangible Assets

Effective November 1, 2001, the Company adopted SFAS No. 142, “Goodwill and Intangible Assets”, which revises the accounting for purchased goodwill and intangible assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized but are tested for impairment annually and also in the event of an impairment indicator. The Company completed the required transitional impairment test and the annual test and determined that no impairment loss was necessary. Any subsequent impairment losses will be reflected in operating income. With the adoption of SFAS No. 142, the Company discontinued amortization of goodwill and certain trademarks that were determined to have an indefinite life. Had amortization of goodwill and these trademarks not been recorded in the fiscal years ended October 31, 2001 and 2000, net income would have increased by $2.6 million and $1.3 million, respectively, net of taxes, and diluted earnings per share would have increased by $0.10 and $0.06, respectively. Goodwill arose primarily from the acquisitions of Quiksilver Europe, The Raisin Company, Inc., Mervin, Freestyle SA and Beach Street. Changes to goodwill from October 31, 2001 reflect the acquisition of Beach Street and foreign exchange fluctuations.

Revenue Recognition

Revenues are recognized upon the transfer of title and risk of ownership to customers. Allowances for estimated returns and doubtful accounts are provided when revenues are recorded. Revenues in the Consolidated Statements of Income includes the following:

	Years Ended October 31,
In thousands	2002		2001		2000
Product shipments	$	700,692	$	615,452	$	515,689
Royalty income		4,792		5,169		3,681
	$	705,484	$	620,621	$	519,370

Stock-Based Compensation

The Company applies Accounting Principles Board Opinion 25 and related interpretations in accounting for its stock option plans. Included in Note 10 — Stockholders’ Equity to these consolidated financial statements are the pro forma disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation”.

Income Taxes

The Company accounts for income taxes using the asset and liability approach as promulgated by SFAS No. 109, “Accounting for Income Taxes”. Deferred income tax assets and liabilities are established for temporary differences between the financial reporting bases and the tax bases of the Company’s assets and liabilities at tax rates expected to be in effect when such assets or liabilities are realized or settled. Deferred income tax assets are reduced by a valuation allowance if, in the judgment of the Company’s management, it is more likely than not that such assets will not be realized.

Net Income Per Share

The Company reports basic and diluted earnings per share (“EPS”). Basic EPS is based on the weighted average number of shares outstanding during the periods, while diluted EPS additionally includes the dilutive effect of the Company’s outstanding stock options computed using the treasury stock method. For the years ended October 31, 2002, 2001 and 2000, the weighted average common shares outstanding, assuming dilution, includes 1,013,000, 1,097,000 and 826,000, respectively, of dilutive stock options.

37

Foreign Currency and Derivatives

The Company’s primary functional currency is the U.S. dollar, while the functional currency of Quiksilver Europe is the euro. Assets and liabilities of the Company denominated in foreign currencies are translated at the rate of exchange on the balance sheet date. Revenues and expenses are translated using the average exchange rate for the period.

The Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” on November 1, 2000. SFAS No. 133 affected the Company’s financial statements beginning with the first quarter of fiscal 2001 by requiring that the Company recognize all derivatives as either assets or liabilities measured at fair value. The accounting for changes in the fair value of a derivative depends on the use of the derivative. The adoption of SFAS No. 133 resulted in a transition adjustment of $0.8 million in the year ended October 31, 2001 (net of tax effects of $0.5 million) that was recorded as a cumulative-effect type adjustment in other comprehensive income to recognize the fair value of derivatives that are designated as cash-flow hedges.

Comprehensive Income

Comprehensive income includes all changes in stockholders’ equity except those resulting from investments by, and distributions to, stockholders. Accordingly, the Company’s Consolidated Statements of Comprehensive Income include net income and foreign currency adjustments that arise from the translation of the financial statements of Quiksilver Europe and Quiksilver International into U.S. dollars and unrealized gains and losses on certain derivative instruments.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities and the 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.

Fair Value of Financial Instruments

The carrying value of the Company’s trade accounts receivable and accounts payable approximates their fair value due to their short-term nature. The carrying value of the Company’s lines of credit and long-term debt approximates its fair value as these borrowings include a series of short-term notes at floating interest rates.

New Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which supersedes previous guidance on financial accounting and reporting for the impairment or disposal of long-lived assets and for segments of a business to be disposed of. SFAS No. 144 is effective for the Company’s fiscal year ending October 31, 2003. The Company does not expect the adoption of SFAS No. 144 to have a significant impact on the Company’s financial position or results of operations. However, future impairment reviews may result in charges against earnings to write down the value of long-lived assets.

In August 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, which requires that costs associated with exit or disposal activities be recognized when they are incurred rather than at the date of a commitment to an exit or disposal plan. The Company must apply SFAS No. 146 prospectively to exit or disposal activities initiated after December 31, 2002. If the Company initiates exit or disposal activities after that date, SFAS No.146 will affect the timing of the recognition of the related costs. Management does not expect the adoption of this standard to have a significant impact on the Company’s financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transistion for a

38

voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company is required to follow the prescribed format and provide the additional disclosures required by SFAS No. 148 in its annual financial statements for the year ending October 31, 2003 and must also provide the disclosures in its quarterly reports containing condensed financial statements for interim periods beginning with the quarterly period ending April 30, 2003.

Reclassifications

Certain reclassifications were made in the Consolidated Statements of Income for the years ended October 31, 2001 and 2000 to conform to the current year’s presentation.

Note 2 — Business Acquisitions

Effective December 1, 2002, the Company acquired its licensees in Australia and Japan to unify its global operating platform. This group of companies is referred to herein as “Quiksilver Asia/Pacific” and comprises two Australian companies, Ug Manufacturing Co. Pty Ltd. and QSJ Holdings Pty Ltd., and one Japanese company, Quiksilver Japan KK. Ug Manufacturing Co. Pty Ltd. was still owned by the founders of the Quiksilver brand and was the original Quiksilver operating company that has been producing Quiksilver products in Australia and surrounding countries and territories for over 30 years. Along with a Japanese partner, the founders also started Quiksilver Japan KK, which has been the Quiksilver licensee in Japan for approximately 20 years. In conjunction with its acquisition of Quiksilver Asia/Pacific, the Company also acquired a 25% interest in its Turkish licensee. The operations of Quiksilver Asia/Pacific will be included in the Company’s results beginning with the effective date of the acquisition in the first quarter of the fiscal year ending October 31, 2003.

The initial purchase price, excluding transaction costs, includes cash of $23.1 million and 2.8 million shares of the Company’s common stock valued at $71.3 million. The valuation of the common stock issued in connection with the acquisition was based on the quoted market price for 5 days before and after the announcement date. The initial purchase price is subject to adjustment based on the closing balance sheet, which is expected to be finalized in the second quarter of the Company’s fiscal year ending October 31, 2003. The sellers are entitled to future payments ranging from zero to $18.6 million if certain sales and earnings targets are achieved during the three years ending October 31, 2005. The amount of goodwill initially recorded for the transaction would increase if such contingent payments are made.

Quiksilver Asia/Pacific is in the process of finalizing its closing balance sheet, and third-party valuations of goodwill and certain intangible assets are being completed; accordingly, the allocation of the purchase price is preliminary and subject to refinement. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

	November 30, 2002
In thousands
Current assets	$	40,000
Fixed assets		5,000
Intangible assets and goodwill		69,000
Total assets acquired		114,000
Current liabilities		15,000
Net assets acquired	$	99,000

Intangible assets includes license agreements that will be amortized over their remaining lives through June 2012, trademark values and goodwill. Trademark values and goodwill are not subject to amortization and are generally not expected to be deductible for tax purposes, and any allocation other than to the Asia/Pacific segment will be made when the third-party valuations of goodwill and certain intangible assets are completed.

39

Effective September 15, 2002, the Company acquired Beach Street, Inc. (“Beach Street”), a company that operates 26 Quiksilver outlet stores. The results of Beach Street’s operations have been included in the consolidated financial statements since that date. As consideration for the acquisition, the Company issued 298,092 shares of common stock valued at $6.9 million. The acquisition has been recorded using the purchase method of accounting. As a result of the acquisition, the Company recorded goodwill of $8.1 million, which is not expected to be tax deductible.

Effective July 1, 2000, the Company acquired Quiksilver International, an Australian company that owns the worldwide trademark rights to the Quiksilver brand name (other than in the United States and Mexico where those rights were already owned by the Company.) The initial acquisition payment was $23.6 million, which includes cash consideration of $23.1 million and transaction costs, net of imputed interest, of $0.5 million. Under the terms of the purchase agreement, two additional payments were to be made. One was made at the end of fiscal 2002, and another is to be made at the end of fiscal 2005. Such deferred purchase price payments, which are denominated in Australian dollars, are contingent on the computed earnings of Quiksilver International through June 20, 2005, subject to specified minimums. The deferred minimum purchase price payments, which were discounted to present value, totaled $17.3 million at the date of the acquisition and are included as a component of the purchase price recorded at July 1, 2000. The deferred purchase price payment made at the end of fiscal 2002 was increased by $5.3 million and $4.3 million, with a corresponding increase to Trademarks, as a result of Quiksilver International’s operations for the 12 months ended June 30, 2002 and 2001, respectively, resulting in a total payment of $20.7 million. The obligation related to these deferred purchase price payments is reflected in the Consolidated Balance Sheet as a component of debt. The acquisition has been recorded using the purchase method of accounting.

Effective May 1, 2000, the Company acquired the operations of Freestyle, SA, a French company that is the European licensee of Gotcha International (“Gotcha Europe”). The initial purchase price was $2.2 million, which includes a cash payment of $0.9 million and assumed debt of $1.3 million. The acquisition has been recorded using the purchase method of accounting and resulted in goodwill of $3.0 million at the acquisition date.

Effective March 1, 2000, the Company acquired the operations of Hawk Designs, Inc., the owner of the intellectual property rights to the name Tony Hawk for apparel and related accessories. The initial purchase price was $1.3 million, which includes cash payments of $1.0 million paid in installments, and assumed bank debt of $0.3 million. Under the terms of the purchase agreement and for additional compensation, Tony Hawk also agreed to promote Quiksilver products through December 31, 2005, renewable through 2015 at the Company’s option. The acquisition has been recorded using the purchase method of accounting and resulted in a trademark valuation of $1.2 million, which is being amortized over 25 years.

The results of operations for all acquisitions consummated through October 31, 2002 are included in the consolidated statements of income from their respective acquisition dates.

Note 3 — Allowance for Doubtful Accounts

The allowance for doubtful accounts includes the following:

		Years Ended October 31,
In thousands		2002			2001			2000
Balance, beginning of year		$	6,280		$	5,090		$	5,738
	Provision for doubtful accounts		5,771			5,042			3,135
	Deductions		(5,384	)		(3,852	)		(3,783	)
Balance, end of year		$	6,667		$	6,280		$	5,090

40

Note 4 — Inventories

During the fiscal year ended October 31, 2001, the Company recorded a $6.0 million writedown of its domestic inventories. This writedown was required primarily as a result of the aftermath of September 11, 2001, when the market for consumer products, including casual lifestyle apparel, experienced a dramatic falloff in demand and resulted in a substantial amount of customer order cancellations. This phenomenon created an industry wide glut of excess product available to the traditional off price channel thereby driving the price of certain seasonal product below cost. Inventories consist of the following:

	October 31,
In thousands	2002		2001
Raw materials	$	14,232	$	21,325
Work in process		6,826		8,138
Finished goods		74,814		78,099
	$	95,872	$	107,562

Note 5 — Fixed Assets

Fixed assets consist of the following:

	October 31,
In thousands	2002			2001
Furniture and equipment	$	83,366		$	64,791
Leasehold improvements		24,727			17,898
Land and buildings		13,813			13,233
		121,906			95,922
Accumulated depreciation and amortization		(48,724	)		(34,469	)
	$	73,182		$	61,453

Note 6 — Trademarks

A summary of trademarks is as follows:

	October 31,
	2002							2001
	Gross								Gross
	Carrying		Accumulated			Net Book			Carrying		Accumulated			Net Book
In thousands	Amount		Amortization			Value			Amount		Amortization			Value
Non-amortizable trademarks	$	54,139	$	(4,670	)	$	49,469		$	48,821	$	(4,619	)	$	44,202
Amortizable trademarks		2,002		(337	)		1,665			1,920		(211	)		1,709
	$	56,141	$	(5,007	)	$	51,134		$	50,741	$	(4,830	)	$	45,911

The change in non-amortizable trademarks is due primarily to an increase in the deferred purchase price payment for the Quiksilver International acquisition. Certain intangible assets will continue to be amortized by the Company using estimated useful lives of 10 to 25 years with no residual values. Intangible amortization expense for the fiscal year ended October 31, 2002 was $0.1 million. Annual amortization expense, based on the Company’s amortizable intangible assets at October 31, 2002, is estimated to be approximately $0.1 million in each of the fiscal years ending October 31, 2003 through 2007.

41

Note 7 — Lines of Credit and Long-term Debt

A summary of lines of credit and long-term debt is as follows:

	October 31,
In thousands	2002		2001
Domestic syndicated line of credit	$	20,388	$	47,000
Quiksilver Europe arrangements		12,110		19,228
Domestic syndicated term loan		12,500		18,750
Domestic term loan		9,225		10,353
Quiksilver Europe long-term debt		23,752		19,706
Deferred purchase price obligation		8,608		21,655
	$	86,583	$	136,692

The Company has a syndicated bank facility that was amended in May 2002 (the “Credit Agreement”). The Credit Agreement provides for (i) a revolving line of credit of up to $125.0 million, including a $60.0 million sublimit for letters of credit and (ii) a term loan initially totaling $25.0 million. The revolving line of credit expires on June 28, 2003. Borrowings under the revolving line of credit bear interest based on the bank’s reference rate or based on LIBOR for borrowings committed to be outstanding for 30 days or longer. The weighted average interest rate at October 31, 2002 was 6.3%. The term loan is repayable in equal quarterly installments through October 2004 and bears interest contractually based on LIBOR. However, the Company entered into an interest rate swap agreement to fix the interest rate at 7.2% per year. This swap agreement is effective through October 2004 and is an effective hedge of the related interest rate exposure. The fair value of the interest rate swap at October 31, 2002 was a loss of $0.5 million. As of October 31, 2002, the Company had $20.4 million of cash borrowings outstanding under the revolving line of credit and $12.5 million outstanding under the term loan.

The Credit Agreement contains restrictive covenants. The most significant covenants relate to maintaining certain leverage and fixed charge coverage ratios. The payment of dividends is restricted, among other things, and the Company’s assets, other than trademarks and other intellectual property, generally have been pledged as collateral. At October 31, 2002, the Company was in compliance with such covenants. The Company believes that the line of credit will be renewed with substantially similar terms.

The Company also has a term loan with a U.S. bank that initially totaled $12.3 million in April 2000. This term loan is repayable in installments of $0.1 million per month with a final maturity in October 2004. The Company anticipates that these monthly payments and final balloon payment will be paid from borrowings on the Company’s revolving credit facility. This term loan is secured by the leasehold improvements at the Company’s Huntington Beach headquarters and bears interest contractually based on LIBOR. However, in January 2000, the Company entered into an interest rate swap agreement with a notional amount equal to the term loan, effective through April 2007, to fix the interest rate at 8.4% per annum. The fair value of the interest rate swap at October 31, 2002 was a loss of $1.1 million. The restrictive covenants under this term loan are substantially the same as those under the Credit Agreement. The outstanding balance of this term loan at October 31, 2002 was $9.2 million.

Quiksilver Europe has arrangements with banks that provide for maximum cash borrowings of approximately $60.0 million in addition to approximately $38.0 million available for the issuance of letters of credit. At October 31, 2002, these lines of credit bore interest at rates ranging from 3.9% to 4.2%. The lines of credit expire on various dates through April 2003, and the Company believes that these lines of credit will continue to be available with substantially similar terms. As of October 31, 2002, $12.1 million was outstanding under these lines of credit.

Quiksilver Europe also has $23.8 million of long-term debt, the majority of which is collateralized by land and buildings. This long-term debt bears interest at rates ranging generally from 3.9% to 6.0%, requires monthly, quarterly or annual principal and interest payments and is due at various dates through 2011.

42

As part of the acquisition of Quiksilver International, the Company is obligated to make an additional purchase price payment, which is denominated in Australian dollars, and is contingent on the computed earnings of Quiksilver International through June 20, 2005. While this obligation was discounted to present value as of the acquisition date, the carrying amount of the obligation fluctuates based on changes in the exchange rate between Australian dollars and U.S. dollars. As of October 31, 2002, this obligation totaled $8.6 million.

Principal payments on long-term debt are due approximately as follows (in thousands):

2003	$	10,680
2004		20,610
2005		13,227
2006		3,569
2007		3,300
Thereafter		2,699
	$	54,085

Note 8 — Accrued Liabilities

Accrued liabilities consist of the following:

	October 31,
In thousands	2002		2001
Accrued employee compensation and benefits	$	18,767	$	11,411
Accrued sales and payroll taxes		1,840		2,428
Derivative liability		4,437		2,646
Other liabilities		15,093		8,413
	$	40,137	$	24,898

Note 9 — Commitments and Contingencies

Operating Leases

The Company leases certain land and buildings under long-term operating lease agreements. The following is a schedule of future minimum lease payments required under such leases as of October 31, 2002 (in thousands):

2003	$	17,383
2004		15,513
2005		14,695
2006		13,930
2007		12,823
Thereafter		32,653
	$	106,997

Total rent expense was $14.9 million, $11.1 million and $6.7 million for the years ended October 31, 2002, 2001 and 2000, respectively.

43

Litigation

On March 28, 2002, the Company filed a lawsuit against GMT Corporation (“GMT”), its then licensee for watches in the U.S., and simultaneously terminated its license agreement with GMT based on allegations that GMT was in material breach of the agreement. GMT has disputed the Company’s right to terminate and has brought claims against the Company for wrongful termination and other alleged breaches of the license agreement. Management believes that GMT’s claims are substantially without merit and intends to vigorously pursue the Company’s claims and defend against those of GMT. Other legal claims against the Company consist of matters incidental to the Company’s business. In the opinion of management, the outcome of these claims will not materially affect the Company’s consolidated financial position or results of operations.

Note 10 — Stockholders’ Equity

In March 2000, the Company’s stockholders approved the Company’s 2000 Stock Incentive Plan (the “2000 Plan”), which generally replaced the Company’s previous stock option plans. Under the 2000 Plan, 5,036,209 shares are reserved for issuance over its term, consisting of 3,236,209 shares authorized under predecessor plans plus an additional 1,800,000 shares. Nonqualified and incentive options may be granted to officers and employees selected by the plan’s administrative committee at an exercise price not less than the fair market value of the underlying shares on the date of grant. Payment by option holders upon exercise of an option may be made in cash or, with the consent of the committee, by delivering previously outstanding shares of the Company’s Common Stock. Options vest over a period of time, generally three to five years, as designated by the committee and are subject to such other terms and conditions as the committee determines. Certain stock options have also been granted to employees of acquired businesses.

Changes in shares under option are summarized as follows:

	Years Ended October 31,
	2002					2001					2000
				Weighted					Weighted					Weighted
				Average					Average					Average
	Shares			Price		Shares			Price		Shares			Price
Outstanding, beginning of year		3,572,682		$	11.42		3,616,301		$	10.01		3,410,531		$	9.22
Granted		733,000			14.59		642,100			17.30		784,790			13.00
Exercised		(459,346	)		9.31		(641,000	)		9.16		(502,818	)		8.59
Canceled		(10,997	)		12.56		(44,719	)		14.30		(76,202	)		14.71
Outstanding, end of year		3,835,339		$	12.28		3,572,682		$	11.42		3,616,301		$	10.01
Options exercisable, end of year		2,326,491		$	10.72		2,340,242		$	9.52		2,168,831		$	8.30
Weighted average fair value of options granted during the year				$	10.79				$	10.70				$	6.55

44

Outstanding stock options at October 31, 2002 consist of the following:

	Options Outstanding						Options Exercisable
			Weighted
Range of			Average		Weighted				Weighted
Exercise			Remaining		Average				Average
Prices	Shares		Life		Price		Shares		Price
				(Years)
$2.66 – 5.31		166,500		1.0	$	3.35		166,500	$	3.35
5.32 – 7.96		607,156		3.1		6.94		607,156		6.94
7.97 – 10.62		480,205		4.4		9.02		453,205		9.06
10.63 – 13.28		836,871		6.7		11.98		540,009		11.98
13.29 – 15.93		1,152,101		8.0		14.54		317,147		15.20
15.94 – 21.24		527,506		8.0		18.25		177,474		18.03
21.25 – 26.55		65,000		9.1		24.35		65,000		24.35
		3,835,339		6.2	$	12.28		2,326,491	$	10.72

The fair value of each option grant was estimated as of the grant date using the Black-Scholes option-pricing model for the years ended October 31, 2002, 2001 and 2000 assuming risk-free interest rates of 3.9%, 4.9% and 5.8%, respectively, volatility of 63.4%, 64.8% and 58.6%, respectively, zero dividend yield, and expected lives of 4.9, 4.6 and 3.7 years, respectively. If compensation expense was determined based on the fair value method beginning with grants in the year ended October 31, 1996, the Company’s net income and net income per share, assuming dilution would have been reduced to the pro forma amounts indicated below:

	Years Ended October 31,
In thousands, except per share amounts	2002		2001		2000
Actual net income	$	37,591	$	28,021	$	31,836
Pro forma net income		33,905		24,832		29,658
Actual net income per share, assuming dilution		1.54		1.17		1.37
Pro forma net income per share, assuming dilution		1.39		1.04		1.28

The impact of outstanding nonvested stock options granted prior to the year ended October 31, 1996 has been excluded from the pro forma calculation. Accordingly, the pro forma adjustments are not indicative of future period pro forma adjustments.

As of October 31, 2002, there were 666,946 shares of common stock that were available for future grant.

The Company began the Quiksilver Employee Stock Purchase Plan (the “ESPP”) in fiscal 2001, which provides a method for employees of the Company to purchase common stock at a 15% discount from fair market value as of the beginning or end of each purchasing period of six months, whichever is lower. The ESPP covers substantially all full-time domestic employees who have at least five months of service with the Company. The ESPP is intended to constitute an “employee stock purchase plan” within the meaning of section 423 of the Internal Revenue Code of 1986, as amended, and therefore the Company does not recognize compensation expense related to the ESPP. During the years ended October 31, 2002 and 2001, 32,426 and 15,247 shares of stock were issued under the plan with proceeds to the Company of $0.5 million and $0.2 million, respectively.

Note 11 — Licensing

Since acquiring Quiksilver International Pty Ltd, an Australian company, in July 2000 (See Note 2—Acquisitions), the Company owns all international rights to use the Quiksilver trademark. Prior to this acquisition, the Company owned these intellectual property rights in the United States and Mexico only, and operated under license agreements with Quiksilver International Pty Ltd. to use the Quiksilver trademark in other countries and territories.

Quiksilver Europe has a license agreement with Gotcha International, LP that resulted from the Company’s acquisition of Freestyle, SA, the European licensee of Gotcha International, LP. The license agreement provides that Quiksilver Europe can sell products under the Gotcha trademark and tradename through 2015 in the territories covered by the license agreement (primarily Western Europe.) Royalties range from 2.8% to 4.0% of net sales, based on sales volume, with certain minimum requirements. Promotional contributions are also required based on sales volume and range from 1.0% to 1.5%.

45

The Company licensed the use of the Quiksilver and Roxy trademarks in Mexico in exchange for royalties of 4.5% of net sales after Mexican taxes, and the use of the Quiksilver and Roxy trademarks on sunglasses in exchange for royalties of 10% of sales. These license agreements expire through 2010. The Company also licensed a chain of domestic outlet stores that paid the Company royalties of 4% of product purchases from the Company. This outlet store chain was acquired in September 2002, and accordingly, the license agreement was eliminated. The Company’s license with its domestic watch licensee was terminated during the year ended October 31, 2002.

Effective with the acquisition of Quiksilver International during fiscal 2000, the Company acquired licenses for the use of theQuiksilver trademark in various countries and territories around the world. The licensees are headquartered in Australia, Japan, Turkey, South Africa, Brazil, Indonesia, Korea, Argentina, Chile and Mauritius. These licensees pay the Company royalties ranging from 3% to 5% of the licensees’ sales. The licensees headquartered in Australia and Japan were acquired in December 2002. See Note 2—Acquisitions.

Note 12 — Income Taxes

A summary of the provision for income taxes is as follows:

		Years Ended October 31,
In thousands		2002			2001			2000
Current:
	Federal	$	10,874		$	8,038		$	8,820
	State		2,545			2,023			2,103
	Foreign		13,014			10,694			7,711
			26,433			20,755			18,634
Deferred:
	Federal		(2,435	)		(2,506	)		1,158
	State		(530	)		(640	)		209
	Foreign		(1,073	)		(218	)		25
			(4,038	)		(3,364	)		1,392
Provision for income taxes		$	22,395		$	17,391		$	20,026

A reconciliation of the effective income tax rate to a computed “expected” statutory federal income tax rate is as follows:

	Years Ended October 31,
	2002			2001			2000
Computed “expected” statutory federal income tax rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal income tax benefit		2.2			2.0			2.9
Foreign		0.1			1.3			0.3
Other		—			—			0.4
Effective income tax rate		37.3	%		38.3	%		38.6	%

46

The components of net deferred income taxes are as follows:

		October 31,
In thousands		2002			2001
Deferred income tax assets:
	Allowance for doubtful accounts	$	5,718		$	4,835
	Trademark amortization		993			981
	State taxes		113			46
	Other comprehensive income		2,090			961
	Nondeductible accruals and other		9,011			5,401
			17,925			12,224
Deferred income tax liabilities:
	Goodwill amortization		(903	)		(622	)
	Depreciation		(1,106	)		(737	)
	Other		(435	)		(480	)
			(2,444	)		(1,839	)
Net deferred income taxes		$	15,481		$	10,385

The tax benefits from the exercise of certain stock options are reflected as additions to paid-in capital.

Income before provision for income taxes includes $34.0 million, $23.6 million and $22.9 million from foreign jurisdictions for the years ended October 31, 2002, 2001 and 2000, respectively. The Company does not provide for the U.S. federal, state or additional foreign income tax effects on foreign earnings that management intends to permanently reinvest. For the fiscal year ended October 31, 2002, foreign earnings earmarked for permanent reinvestment totaled approximately $87.0 million. The earnings associated with operations in Australia through Quiksilver International have been, and are expected to be, repatriated. The U.S. federal, state and foreign residual tax effects of those repatriations have been included in the provision for income taxes and related deferred tax assets and/or liabilities as appropriate.

Note 13 — Employee Plans

The Company maintains the Quiksilver 401(k) Employee Savings Plan and Trust (the “401(k) Plan”). This plan is generally available to all domestic employees with six months of service and is funded by employee contributions and periodic discretionary contributions from the Company which are approved by the Company’s Board of Directors. The Company made contributions of $0.4 million, $0.4 million and $0.3 million to the 401(k) Plan for the years ended October 31, 2002, 2001 and 2000, respectively.

Employees of the Company’s French subsidiary, Na Pali, SAS, with three months of service are covered under the French Profit Sharing Plan (the “French Profit Sharing Plan”), which is mandated by law. Compensation is earned under the French Profit Sharing Plan based on statutory computations with an additional discretionary component. Funds are maintained by the Company and vest with the employees after five years, although earlier disbursement is optional if certain personal events occur or upon the termination of employment. Compensation expense of $1.6 million, $1.0 million and $1.0 million was recognized related to the French Profit Sharing Plan for the fiscal years ended October 31, 2002, 2001 and 2000, respectively.

47

Note 14 — Segment and Geographic Information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Company’s management in deciding how to allocate resources and in assessing performance. The Company operates exclusively in the consumer products industry in which the Company designs, produces and distributes clothing, accessories and related products. Operating results of the Company’s various product lines have been aggregated because of their common characteristics and their reliance on shared operating functions. Within the consumer products industry, the Company operates primarily in the U.S. (referred to herein as “domestic”) and in Europe, and no single customer accounts for more than 10% of the Company’s net sales.

Although the Company operates in one industry segment, it produces different product lines within the segment. The percentages of revenues attributable to each product line are as follows:

	Percentage of Revenues
	2002			2001			2000
T-Shirts		20	%		23	%		21	%
Accessories		12			11			12
Pants		12			10			9
Shirts		11			10			12
Jackets, sweaters and snowboardwear		9			11			9
Swimwear, excluding boardshorts		9			9			9
Fleece		7			7			7
Shorts		6			6			6
Footwear		4			3			2
Boardshorts		4			4			6
Tops and dresses		4			4			4
Snowboards, snowboard boots, bindings and accessories		2			2			3
		100	%		100	%		100	%

Information related to domestic and European operations is as follows:

			Years Ended October 31,
In thousands			2002		2001		2000
Revenues:
	Domestic		$	422,800	$	396,744	$	336,756
	Europe			282,684		223,877		182,614
		Consolidated	$	705,484	$	620,621	$	519,370
Gross profit:
	Domestic		$	158,353	$	141,241	$	124,366
	Europe			127,976		96,618		79,104
		Consolidated	$	286,329	$	237,859	$	203,470
Operating income:
	Domestic		$	36,301	$	31,294	$	36,110
	Europe			33,403		25,345		21,023
		Consolidated	$	69,704	$	56,639	$	57,133
Identifiable assets:
	Domestic		$	283,370	$	282,108	$	265,000
	Europe			167,219		136,630		93,742
		Consolidated	$	450,589	$	418,738	$	358,742

France accounted for 41.1%, 45.9% and 50.5% of European net sales to unaffiliated customers for the years ended October 31, 2002, 2001 and 2000, respectively, while the United Kingdom accounted for 20.6%, 18.0% and 12.8%, respectively, and Spain accounted for 15.2%, 14.3% and 12.5%, respectively.

48

Note 15 — Derivative Financial Instruments

The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to certain sales, royalty income, and product purchases of its international subsidiaries that are denominated in currencies other than their functional currencies. The Company is also exposed to foreign currency gains and losses resulting from domestic transactions that are not denominated in U.S. dollars, and to fluctuations in interest rates related to its variable rate debt. Furthermore, the Company is exposed to gains and losses resulting from the effect that fluctuations in foreign currency exchange rates have on the reported results in the Company’s consolidated financial statements due to the translation of the operating results and financial position of the Company’s international subsidiaries. As part of its overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, the Company uses various foreign currency exchange contracts and intercompany loans. In addition, interest rate swaps are used to manage the Company’s exposure to the risk of fluctuations in interest rates.

For all qualifying cash flow hedges, the changes in the fair value of the derivatives are recorded in other comprehensive income. Other derivatives, which do not qualify for hedge accounting but are used by management to mitigate exposure to currency risks, are marked to fair value with corresponding gains or losses recorded in earnings. As of October 31, 2002, the Company was hedging forecasted transactions expected to occur in the following eight months. Assuming exchange rates at October 31, 2002 remain constant, $2.0 million of losses related to hedges of these transactions are expected to be reclassified into earnings over the next eight months. Also included in accumulated other comprehensive income at October 31, 2002 is a $0.4 million net charge related to cash flow hedges of the Company’s long-term debt, which is denominated in Australian dollars and matures through fiscal 2005, and the fair value of interest rate swaps, totaling $1.1 million that is related to the Company’s U.S. dollar denominated long-term debt and matures through fiscal 2007.

On the date the Company enters into a derivative contract, management designates the derivative as a hedge of the identified exposure. The Company formally documents all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for entering into various hedge transactions. In this documentation, the Company identifies the asset, liability, firm commitment, or forecasted transaction that has been designated as a hedged item and indicates how the hedging instrument is expected to hedge the risks related to the hedged item. The Company formally measures effectiveness of its hedging relationships both at the hedge inception and on an ongoing basis in accordance with its risk management policy. The Company would discontinue hedge accounting prospectively (i) if it is determined that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item, (ii) when the derivative expires or is sold, terminated, or exercised, (iii) if it becomes probable that the forecasted transaction being hedged by the derivative will not occur, (iv) because a hedged firm commitment no longer meets the definition of a firm commitment, or (v) if management determines that designation of the derivative as a hedge instrument is no longer appropriate. During the fiscal year ended October 31, 2002, the Company reclassified into earnings a net loss of $0.3 million resulting from the expiration, sale, termination, or exercise of derivative contracts. Additionally, a loss of $0.5 million was recognized in earnings during the fiscal year ended October 31, 2002 for changes in the value of derivatives that were marked to fair value.

The Company enters into forward exchange and other derivative contracts with major banks and is exposed to credit losses in the event of nonperformance by these banks. The Company anticipates, however, that these banks will be able to fully satisfy their obligations under the contracts. Accordingly, the Company does not obtain collateral or other security to support the contracts.

A summary of derivative contracts at October 31, 2002 is as follows:

	Notional			Fair
In thousands	Amount		Maturity	Value
British pounds	$	32,679	Nov 2002-July 2003	$	(595	)
U.S. dollars		34,000	Nov 2002-June 2003		(1,647	)
Australian dollars		10,627	Sept 2005		(287	)
Interest rate swap		20,000	Nov 2003		(314	)
Interest rate swap		12,500	Oct 2004		(515	)
Interest rate swap		9,225	Jan 2007		(1,071	)
	$	119,031		$	(4,429	)

49

Note 16 — Quarterly Financial Data (Unaudited)

A summary of quarterly financial data (unaudited) is as follows:

		Quarter		Quarter		Quarter		Quarter
In thousands,		Ended		Ended		Ended		Ended
except per share amounts		January 31		April 30		July 31		October 31
Year ended October 31, 2002
	Revenues	$	146,959	$	187,423	$	175,044	$	196,058
	Gross profit		54,780		75,739		70,353		85,457
	Net income		3,086		13,463		8,845		12,197
	Net income per share, assuming dilution		0.13		0.55		0.36		0.49
	Trade accounts receivable		145,021		171,669		165,675		168,237
	Inventories		116,364		76,313		93,316		95,872
Year ended October 31, 2001
	Revenues	$	122,959	$	169,546	$	156,656	$	171,460
	Gross profit		48,561		68,810		60,275		60,213
	Net income		3,706		13,981		7,955		2,379
	Net income per share, assuming dilution		0.16		0.58		0.33		0.10
	Trade accounts receivable		120,969		149,442		149,221		155,879
	Inventories		113,281		98,241		125,508		107,562

50

SIGNATURES

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.

Date: January 28, 2003

QUIKSILVER, INC.
(Registrant)

By:	/s/ Robert B. McKnight, Jr.	By:	/s/ Steven L. Brink
	Robert B. McKnight, Jr. Chairman of the Board and Chief Executive Officer		Steven L. Brink Chief Financial Officer and Treasurer

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 dates indicated.

Signatures	Title	Date Sign
/s/ Robert B. McKnight,Jr. Robert B. McKnight,Jr.	Chairman of the Board and Chief Executive Officer (Principal Executive Officer)	January 28, 2003
/s/ Steven L. Brink Steven L. Brink	Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)	January 28, 2003
/s/ William M. Barnum, Jr. William M. Barnum, Jr.	Director	January 28, 2003
/s/Charles E. Crowe Charles E. Crowe	Director	January 28, 2003
Michael H. Gray	Director
/s/ Harry Hodge Harry Hodge	Director	January 28, 2003
/s/ Robert G. Kirby Robert G. Kirby	Director	January 28, 2003
/s/ Bernard Mariette Bernard Mariette	Director	January 28, 2003
/s/Franck Riboud Franck Riboud	Director	January 28, 2003
/s/ Tom Roach Tom Roach	Director	January 28, 2003

51

§ 302 CERTIFICATION

     I, Robert B. McKnight, certify that:

     1.     I have reviewed this annual report on Form 10-K of Quiksilver, Inc.;

     2.     Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

     3.     Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

     4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

            (a)   designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

            (b)   evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

            (c)     presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

     5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

            (a)     all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

            (b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

     6.     The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:     January 28,  2003	/s/ Robert B. McKnight, Jr.
	Robert B. McKnight, Jr. Chief Executive Officer

52

§ 302 CERTIFICATION

          I, Steven L. Brink, certify that:

          1. I have reviewed this annual report on Form 10-K of Quiksilver, Inc.;

          2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

          3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

          4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

               (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

               (b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

               (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

          5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

               (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

               (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

          6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:    January 28, 2003 /s/ Steven L. Brink
Steven L. Brink
Chief Financial Officer and Treasurer

53

EXHIBIT INDEX

Exhibit
Number		Description
	3.1	Certificate of Incorporation as presently in effect (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the three months ended July 31, 2002).
	3.2	Bylaws as presently in effect.
	10.1	Revolving Credit and Term Loan Agreement dated as of October 6, 2000 (incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2000).
	10.2	First Amendment to Revolving Credit and Term Loan Agreement dated October 9, 2001 (Incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2001).
	10.3	Second Amendment to Revolving Credit and Term Loan Agreement and Consent thereunder dated June 28, 2002 (incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the three months ended July 31, 2002).
	10.4	Term Loan Agreement dated as of April 25, 2000 (incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended April 30, 2000).
	10.5	Second Amendment to term Loan Agreement dated October 12, 2000 (incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2000).
	10.6	Share Purchase Agreement, dated July 27, 2000, by and among Quiksilver, Inc., Quiksilver Australia Pty Ltd, Quiksilver International Pty Ltd and Shareholders of Quiksilver International Pty Ltd. (incorporated by reference from the Company’s report on Form 8-K dated July 27, 2000).
	10.7	Minority Shareholder Purchase Agreement, dated July 27, 2000, by and among Quiksilver, Inc., Quiksilver Australia Pty Ltd and Shareholders of Quiksilver International Pty Ltd. (incorporated by reference from the Company’s report on Form 8-K dated July 27, 2000).
	10.8	Form of Indemnity Agreement between the Registrant and individual Directors and officers of the Registrant (incorporated by reference to Exhibit 10.5 of the Registrant’s Annual Report on Form 10-K for the fiscal year ended October 31, 1996). (1)
	10.9	Quiksilver, Inc. Stock Option Plan dated March 24, 1995 (incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 30, 1995). (1)
	10.10	Quiksilver, Inc. 1995 Nonemployee Directors’ Stock Option Plan dated March 24, 1995 (incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended April 30, 1996). (1)
	10.11	Quiksilver, Inc. 1996 Stock Option Plan dated January 26, 1996 (incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended April 30, 1996. (1)
	10.12	Quiksilver, Inc. 2000 Stock Incentive Plan (incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2000).
	10.13	Employment Agreement between Robert B. McKnight, Jr. and Registrant dated 2002 (1)
	10.14	Employment Agreement between Harry Hodge and Registrant dated April 1, 1996 (incorporated by reference to Exhibit 10.11 of the Registrant’s Annual Report on Form 10-K for the fiscal year ended October 31, 1996). (1)

54

10.15	Employment Agreement between Steven L. Brink and Registrant dated October 24, 1996 (incorporated by reference to Exhibit 10.12 of the Registrant’s Annual Report on Form 10-K for the fiscal year ended October 31, 1996). (1)
10.16	Services Agreement between Bernard Mariette and Registrant dated November 1, 1998 (incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2000).
10.17	Employment Agreement between Charles Exon and Registrant dated August 1, 2000 (incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2001).
10.18	Merger Agreement, dated November 18, 2002, by and among Quiksilver, Inc., Quiksilver Australia Pty Ltd., QSJ Holdings Pty Ltd., Ug Manufacturing Co. Pty Ltd., Quiksilver Japan K.K., and certain shareholders of Ug Manufacturing Co. Pty Ltd. and Quiksilver Japan K.K. (incorporated by reference from the Company’s report on Form 8-K dated January 2, 2003).
10.19	Agreement and Plan of Merger and Reorganization by and among Quiksilver, Inc., QS Retail, Inc., Beach Street, Inc. and John Thompson and Diana Thompson dated as of September 17, 2002.
21.1	Names and Jurisdictions of Subsidiaries.
23.1	Independent Auditors’ Consent.
99.1	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
99.2	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
(1)     Management contract or compensatory plan.

55 EX-3.2 3 a87194exv3w2.txt EXHIBIT 3.2 EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF QUIKSILVER, INC. (As of December 17, 2002) AMENDED AND RESTATED TABLE OF CONTENTS

Page ---- ARTICLE I - OFFICES........................................................ 1 ARTICLE II - MEETINGS OF STOCKHOLDERS...................................... 1 ARTICLE III - DIRECTORS.................................................... 4 MEETINGS OF THE BOARD OF DIRECTORS...................................... 5 COMMITTEES OF DIRECTORS................................................. 6 COMPENSATION OF DIRECTORS............................................... 6 INDEMNIFICATION......................................................... 7 ARTICLE IV - OFFICERS...................................................... 9 CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER....................... 9 PRESIDENT.............................................................. 10 VICE PRESIDENTS........................................................ 10 SECRETARY AND ASSISTANT SECRETARY...................................... 10 TREASURER AND ASSISTANT TREASURER...................................... 10 ARTICLE V - CERTIFICATES OF STOCK......................................... 11 LOST, STOLEN OR DESTROYED CERTIFICATES................................. 11 TRANSFERS OF STOCK..................................................... 12 FIXING RECORD DATE..................................................... 12 REGISTERED STOCKHOLDERS................................................ 13 ARTICLE VI - GENERAL PROVISIONS DIVIDENDS ................................ 13 CHECKS................................................................. 14 FISCAL YEAR............................................................ 14 SEAL................................................................... 14 NOTICES................................................................ 14 ANNUAL STATEMENT....................................................... 14 ARTICLE VII AMENDMENTS.................................................... 15

i BYLAWS OF QUIKSILVER, INC. ARTICLE I OFFICES Section 1. The registered office shall be in the City of Dover, County of Kent, State o Delaware. Section 2. The corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. Meetings of stockholders shall be held at any place within our outside the State of Delaware designated by the Board of Directors. In the absence of any such designation, stockholders' meetings shall be held at the principal executive office of the corporation. Section 2. The annual meeting of stockholders shall be held each year on a date and at a time designated by the Board of Directors. At each annual meeting directors shall be elected and any other proper business may be transacted. Section 3. A majority of the stock issued and outstanding and entitled to vote at any meeting of stockholders, the holders of which are present in person or represented by proxy, shall constitute a quorum for the transaction of business except as otherwise provided by law, by the Certificate of Incorporation, or by these Bylaws. A quorum, once established, shall not be broken by the withdrawal of enough votes to leave less than a quorum and the votes present may continue to transact business until adjournment. If, however, such quorum shall not be present or represented at any meeting of the stockholders, a majority of the voting stock represented in person or by proxy may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote thereat. Section 4. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes, or the Certificate of Incorporation, or these Bylaws a different vote is required in which case such express provision shall govern and control the decision of such question. Section 5. At each meeting of the stockholders, each stockholder having the right to vote may vote in person or may authorize another person or persons to act for him by proxy appointed by an instrument in writing subscribed by such stockholder and bearing a date not more than three years prior to said meeting, unless said instrument provides for a longer period. All proxies must be filed with the Secretary of the corporation at the beginning of each meeting in order to be counted in any vote at the meeting. Each stockholder shall have one vote for each share of stock having voting power registered in his name on the books of the corporation on the record date set by the Board of Directors as provided in Article V Section 6 hereof. All elections shall be had and all questions decided by a plurality vote. Section 6. Special meetings of the stockholders for any purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by the Chairman of the Board or President and shall be called by the Chairman of the Board, President or the Secretary at the request in writing of a majority of the Board of Directors, or at the request in writing of stockholders owning a majority in amount of the entire capital stock of the corporation issued and outstanding, and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 7. Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which notice shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. The written notice of any meeting shall be given to each stockholder entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days before the date of the meeting. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. Section 8. (a) Nominations of persons for election to the Board of Directors shall be made only at a meeting of stockholders and only (1) by or at the direction of the Board or (2) by any stockholder of the corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 8. Such nominations, other than those made by or at the direction of the Board, shall be made pursuant to timely notice in writing to the Secretary. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation not less than thirty (30) days or more than sixty (60) days prior to the meeting; provided, however, that in the event that less than forty (40) days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be received not later than the close of business on the l0th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made and provided further, that notwithstanding the above, a stockholder's notice will be deemed timely if such notice is included in the corporation's proxy 2 statement for the annual meeting of stockholders. For purposes of this Section 8, any adjournment(s) or postponement(s) of the original meeting whereby the meeting will reconvene within thirty (30) days from the original date shall be deemed for purposes of notice to be a continuation of the original meeting and no nominations by a stockholder of person(s) to be elected director(s) of the corporation may be made at any such reconvened meeting unless pursuant to a notice which was timely for the meeting on the date originally scheduled. Such stockholder's notice shall set forth: (1) as to each person whom the stockholder proposes to nominate for election or re-election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to the Securities Exchange Act of 1934, as amended, (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (2) as to the stockholder giving the notice (A) the name and address, as they appear on the corporation's books, of such stockholder, and (B) the class and number of shares of the corporation which are beneficially owned by such stockholder. Notwithstanding the foregoing, nothing in this Section 8 shall be interpreted or construed to require the inclusion of information about any such nominee in any proxy statement distributed by, at the direction of, or on behalf of the Board. (b) The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by this Section 8, and if the chairman should so determine, the chairman shall so declare to the meeting and the defective nomination shall be disregarded. Section 9. (a) Business may be properly brought before an annual meeting by a stockholder only upon the stockholder's timely notice thereof in writing to the Secretary. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than thirty (30) days or more than sixty (60) days prior to the meeting as originally scheduled; provided, however, that in the event that less than forty (40) day's notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made and provided further, that notwithstanding the above, a stockholder's notice will be deemed timely if such notice is included in the corporation's proxy statement for the annual meeting of stockholders. For purposes of this Section 9, any adjournment(s) or postponement(s) of the original meeting whereby the meeting will reconvene within thirty (30) days from the original date shall be deemed for purposes of notice to be a continuation of the original meeting and no business may be brought before any reconvened meeting unless such timely notice of such business was given to the Secretary for the meeting as originally scheduled. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting, (ii) the name and record address of the stockholder proposing such business, (iii) the class and number of shares of the corporation which are beneficially owned by the stockholder, and (iv) any material interest of the stockholder in such business. Notwithstanding the foregoing, nothing in this Section 9 shall be interpreted or construed to require the inclusion of information about any such proposal in any proxy statement distributed by, at the direction of, or on behalf of the Board. 3 (b) The chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 9, and if the chairman should so determine, the chairman shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Section 10. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 11. In advance of any meeting of the stockholders at which a vote shall be taken on any matter, the corporation shall appoint an inspector or inspectors of election to act with respect to such vote. Each inspector of election so appointed shall take and sign an oath to faithfully execute his duties with strict impartiality and according to the best of his ability. Such inspector or inspectors of election shall have such duties as are prescribed by applicable law. Reports of inspectors of election shall be in writing and subscribed and delivered by them to the Secretary. The inspectors of election need not be stockholders of the corporation, and any officer of the corporation may be an inspector of election. Section 12. Unless otherwise provided in the Certificate of Incorporation, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE III DIRECTORS Section 1. The number of directors of this corporation that shall constitute the whole Board shall be determined by resolution of the Board of Directors; provided, however, that no decrease in the number of directors shall have the effect of shortening the term of an incumbent director. The directors need not be stockholders. The directors shall be elected at the annual meeting of the stockholders, except as provided in Section 2 of this Article, and each director elected shall hold office until his successor is elected and qualified; provided however, that unless other restricted by the Certificate of Incorporation or by law, any director or the entire 4 Board of Directors may be removed, either with or without cause, from the Board of Directors at any meeting of stockholders by a majority of the stock represented and entitled to vote thereat. Section 2. Vacancies on the Board of Directors by reason of death, resignation, retirement, disqualification, removal from office or otherwise, and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. The directors so chosen shall hold office until the next annual election of directors and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by statute. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole Board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships or to replace the directors chosen by the directors then in office. Section 3. The property and business of the corporation shall be managed by or under the direction of its Board of Directors. In addition to the powers and authorities by these Bylaws expressly conferred upon them, the Board may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these Bylaws directed or required to be exercised or done by the stockholders. MEETINGS OF THE BOARD OF DIRECTORS Section 4. The directors may hold their meetings and have one or more offices, and keep the books of the corporation outside of the State of Delaware. Section 5. Regular meetings of the Board of Directors may be held without notice at such time and place as shall from time to time be determined by the Board. Section 6. Special meetings of the Board of Directors may be called by the Chairman of the Board or President on forty-eight (48) hours' notice to each director, either personally or by mail, overnight courier, facsimile, telephone or by telegram; special meetings shall be called by the Chairman of the Board, President or the Secretary in like manner and on like notice on the written request of two directors unless the Board consists of only one director in which case special meetings shall be called by the Chairman of the Board, President or Secretary in like manner or on like notice on the written request of the sole director. Section 7. At all meetings of the Board of Directors a majority of the authorized number of directors shall be necessary and sufficient to constitute a quorum for the transaction of business, and the vote of a majority of the directors present at any meeting at which there is a quorum, shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute, by the Certificate of Incorporation or by these Bylaws. If a quorum shall not be present at any meeting of the Board of Directors the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a 5 quorum shall be present. If only one director is authorized, such sole director shall constitute a quorum. Section 8. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. Section 9. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting. COMMITTEES OF DIRECTORS Section 10. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each such committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of the Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority in reference to approving or adopting, or recommending to the stockholders, any action or matter expressly required by the General Corporation Law of Delaware to be submitted to stockholders for approval, or adopting, amending or repealing any bylaw of the corporation. Section 11. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. COMPENSATION OF DIRECTORS Section 12. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. 6 INDEMNIFICATION Section 13. (a) The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no such indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such Court of Chancery or such other court shall deem proper. (c) To the extent that a director, officer, employee or agent of the corporation shall be successful on the merits or otherwise in defense of any action, suit or proceeding referred to in paragraphs (a) and (b), or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (d) Any indemnification under Paragraphs (a) and (b) (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in paragraphs (a) and (b). Such determination shall be made (1) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if 7 such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion or (3) by the stockholders. (e) Expenses (including attorneys' fees) incurred in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this Section 13. (f) The indemnification and advancement of expenses provided by, or granted pursuant to, the other sub-sections of this Section 13 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. (g) The Board of Directors may authorize, by a vote of a majority of a quorum of the Board of Directors, the corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Section 13. (h) For the purposes of this Section 13, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Section with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (i) For purposes of this section references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this section. 8 (j) The indemnification and advancement of expenses provided by, or granted pursuant to, this section shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. ARTICLE IV OFFICERS Section 1. The officers of this corporation shall be chosen by the Board of Directors and shall include a President, a Secretary, and a Treasurer. The corporation may also have at the discretion of the Board of Directors such other officers as are desired, including a Chairman of the Board, one or more Vice Presidents, one or more Assistant Secretaries and Assistant Treasurers, and such other officers as may be appointed in accordance with the provisions of Section 3 hereof. In the event there are two or more Vice Presidents, then one or more may be designated as Executive Vice President, Senior Vice President, or other similar or dissimilar title. At the time of the election of officers, the directors may by resolution determine the order of their rank. Any number of offices may be held by the same person unless the Certificate of Incorporation or these Bylaws otherwise provide. Section 2. The Board of Directors, at its first meeting after each annual meeting of stockholders, shall choose the officers of the corporation. Section 3. The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board. Section 4. The salaries of all officers and agents of the corporation shall be fixed by the Board of Directors. Section 5. The officers of the corporation shall hold office until their successors are chosen and qualify in their stead. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. If the office of any officer or officers becomes vacant for any reason, the vacancy shall be filled by the Board of Directors. CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER Section 6. The Chairman of the Board and Chief Executive Officer shall be the chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. He shall preside at all meetings of the Board of Directors and stockholders, and shall have the general powers and duties of management usually vested in the office of chief executive officer of corporations and such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. 9 PRESIDENT Section 7. The President shall exercise and perform such powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by these Bylaws. In the absence or disability of the Chairman of the Board and Chief Executive Officer, the President shall have all the powers and duties of the Chairman of the Board and Chief Executive Officer prescribed herein. VICE PRESIDENTS Section 8. In the absence or disability of the President, the Vice Presidents in order of their rank as fixed by the Board of Directors, or if not ranked, the Vice President designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have all the powers of and be subject to all the restrictions upon the President. The Vice Presidents shall have such other duties as from time to time may be prescribed for them, respectively, by the Board of Directors. SECRETARY AND ASSISTANT SECRETARY Section 9. The Secretary shall attend all sessions of the Board of Directors and all meetings of the stockholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose and shall perform like duties for the standing committees when required by the Board of Directors. He shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or these Bylaws. He shall keep in safe custody the seal of the corporation, and when authorized by the Board, affix the same to any instrument requiring it, and when so affixed it shall be attested by his signature or by the signature of an Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature. Section 10. The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order determined by the Board of Directors, or if there be no such determination, the Assistant Secretary designated by the Board of Directors, shall, in the absence or disability of the secretary, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. TREASURER AND ASSISTANT TREASURER Section 11. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys, and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Treasurer and of the financial condition of the corporation. If required by the Board of Directors, he shall give the corporation a bond, in such sum and with such surety or sureties as shall be 10 satisfactory to the Board of Directors, for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. Section 12. The Assistant Treasurer or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors, or if there be no such determination, the Assistant Treasurer designated by the Board of Directors, shall, in the absence or disability of the Treasurer, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. ARTICLE V CERTIFICATES OF STOCK Section 1. Every holder of stock of the corporation shall be entitled to have a certificate signed by, or in the name of the corporation by, the Chairman or Vice Chairman of the Board of Directors or the President or a Vice President, and by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer of the corporation certifying the number of shares represented by the certificate owned by such stockholder in the corporation. Section 2. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Section 3. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. LOST, STOLEN OR DESTROYED CERTIFICATES Section 4. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a 11 new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. TRANSFERS OF STOCK Section 5. Upon surrender to the corporation, or the transfer agent of the corporation, of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. FIXING RECORD DATE Section 6. (a) In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of the stockholders, or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. (b) In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any Stockholder of record seeking to have the Stockholders authorize or take corporate action by written consent shall, by written notice to the secretary, request the Board of Directors to fix a record date. The Board of Directors shall promptly, but in all events within ten (10) days after the date on which such a request is received, adopt a resolution fixing the record date. If no record date has been fixed by the Board of Directors within ten (10) days of the date on which such a request is received, the record date for determining Stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business, or any officer or agent of the Corporation having custody of the book in which proceedings of meetings of Stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by applicable law, 12 the record date for determining Stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the Board of Directors adopts the resolution taking such prior action. (c) In the event of the delivery to the Corporation of a written consent or consents purporting to authorize or take corporate action and/or related revocations (each such written consent or related revocation is referred to in this Section 6 as a "Consent"), the secretary of the Corporation shall provide for the safekeeping of such Consent and shall immediately appoint duly qualified and objective inspectors to conduct, as promptly as practical, such reasonable ministerial review as they deem necessary or appropriate for the purpose of ascertaining the sufficiency and validity of such Consent and all matters incident thereto, including, without limitation, whether holders of shares having the requisite voting power to authorize or take the action specified in the Consent have given consent. If after such investigation the secretary shall determine that the Consent is valid, that fact shall be certified on the records of the Corporation kept for the purpose of recording the proceedings of meetings of Stockholders, and the Consent shall be filed in such records, at which time the Consent shall become effective as Stockholder action. REGISTERED STOCKHOLDERS Section 7. The corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and accordingly shall not be bound to recognize any equitable or other claim or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by the laws of the State of Delaware. ARTICLE VI GENERAL PROVISIONS DIVIDENDS Section 1. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. Section 2. Before payment of any dividend there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interests of the corporation, and the directors may abolish any such reserve. 13 CHECKS Section 3. All checks or demands for money and notes of the corporation shall be signed by such officer or officers as the Board of Directors may from time to time designate. FISCAL YEAR Section 4. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. SEAL Section 5. The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Delaware". Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. NOTICES Section 6. Whenever, under the provisions of the statutes or of the Certificate of Incorporation or of these Bylaws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by overnight courier, facsimile, telephone or telegram and such notice shall be deemed to be given at the time it is sent. Section 7. Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation or of these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Attendance of a person at a meeting (whether in person or by proxy in the case of a meeting of stockholders) shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of any regular or special meeting of the stockholders, directors or members of a committee of directors need be specified in any written waiver of notice. ANNUAL STATEMENT Section 8. The Board of Directors shall present at each annual meeting and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. 14 ARTICLE VII AMENDMENTS Section 1. Except as otherwise provided herein or by law, these Bylaws may be altered, amended or repealed, and new Bylaws may be adopted, (i) by the Board of Directors, by vote of a majority of the number of directors then in office as directors, acting at any meeting of the Board, or (ii) by the stockholders, at any special meeting of stockholders, provided that notice of such proposed amendment, modification, repeal or adoption is given in the notice of special meeting. Any Bylaws altered, amended, or adopted by the stockholders may be altered, amended, or repealed by either the Board or the stockholders. 15 CERTIFICATE OF SECRETARY I, the undersigned, do hereby certify: (1) That I am the duly elected and acting Secretary of QUIKSILVER, INC., a Delaware corporation; and (2) That the foregoing Amended and Restated Bylaws, comprising fifteen (15) pages, constitute the Amended and Restated Bylaws of said corporation as duly adopted by the Board of Directors of said corporation as of December 17, 2002. IN WITNESS WHEREOF, I have hereunto subscribed my name this 17(th) day of December, 2002. ___________________________________ Charles S. Exon Secretary 16 EX-10.13 4 a87194exv10w13.txt EXHIBIT 10.13 [QUIKSILVER LOGO] , 2002 -------------------- PERSONAL AND CONFIDENTIAL Robert McKnight, Jr. Quiksilver, Inc. 15202 Graham Street Huntington Beach, CA 92649 Re: Employment at Quiksilver Dear Bob: This letter ("Agreement") will confirm our understanding and agreement regarding your continued employment at Quiksilver, Inc. ("Quiksilver" or the "Company"), and completely supersedes and replaces any existing or previous oral or written understandings or agreements, express or implied, we have had. The terms contained in this letter are effective on and after November 1, 2001. 1. The Company hereby agrees to employ you as its Chief Executive Officer for a term commencing November 1, 2001 and ending on the third anniversary of such date, unless sooner terminated in accordance with Paragraph 8. 2. Your base salary while employed hereunder, retroactive to January 1, 2002, will be $62,500 per month, less applicable withholdings and deductions, paid on the Company's regular payroll dates. Your salary will be reviewed at the time management salaries are reviewed periodically and may be adjusted (but not below $62,500 per month) at the Company's discretion in light of the Company's performance, your performance, market conditions and other factors deemed relevant by the Company. 3. For the fiscal year ending October 31, 2002 and each fiscal year thereafter, you shall be eligible to receive a bonus under the Company's stockholder approved Executive Officer Bonus Plan based on the criteria set forth on Addendum "A" attached hereto. In addition, you shall also be eligible to receive an annual bonus of up to 25% of your base salary based on the achievement of other goals or objectives established by the Compensation Committee for each fiscal year that you are employed hereunder. Any bonus earned pursuant to this Paragraph 3 shall be paid within ten (10) days following the date the Company publicly releases its annual audited financial statements (the "Bonus Payment Date"). Any bonus payment shall be less applicable withholdings and deductions. In the event that your employment with the Company is terminated prior to the -1- Robert McKnight June __, 2002 end of any fiscal year (for any reason), you shall be entitled to receive a pro rata portion of the bonus otherwise payable to you based upon the actual number of days which you were employed by the Company during the applicable fiscal year, which shall be paid on the Bonus Payment Date. 4. Since Quiksilver does not have a vacation policy for executives of your level, no vacation days will be treated as earned or accrued. 5. While you are employed hereunder, Quiksilver will pay the premium on a term life insurance policy on your life with a company of our choice in the face amount determined by the Company of not less than $2,000,000 payable to the beneficiary or beneficiaries of your choice. Quiksilver's obligation to obtain and maintain this insurance is contingent upon your establishing and maintaining insurability, and it is not required to pay premiums for such a policy in excess of $5,000 annually. 6. Provided you are then serving as the Company's Chief Executive Officer hereunder and that a sufficient number of authorized but unissued shares are available under the Company's stockholder approved plan, the Company will grant you options to acquire 100,000 shares of the Company's Common Stock (subject to appropriate adjustment for any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change effecting the outstanding Common Stock as a class without the Company's receipt of consideration) annually on the date the Company grants options to its employees generally. The options shall be granted pursuant to the Company's stock incentive plan with an exercise price equal to the fair market value on the date of grant, a maximum term of 10 years and vesting in equal annual installments over three years. The remaining terms of such options shall be consistent with those of options generally granted to other employees and shall be set forth in separate agreements. 7. (a) Notwithstanding anything to the contrary in this Agreement or in your prior employment relationship with the Company, express or implied, either you or Quiksilver may terminate your employment at will and with or without Cause (as defined below) at any time for any reason. This aspect of your employment relationship can only be changed by an individualized written agreement signed by both you and the Company. -2- Robert McKnight June __, 2002 (b) The Company may terminate your employment immediately, without notice, for Cause, which shall be defined as (i) your death, (ii) your permanent disability which renders you unable to perform your duties and responsibilities for a period in excess of three consecutive months, (iii) willful misconduct in the performance of your duties, (iv) violation of law, (v) self-dealing, (vi) willful breach of duty, or (vii) habitual neglect of duty, (viii) a material breach by you of your obligations under Paragraphs 8 or 10 of this Agreement. If the Company terminates your employment for Cause, or you terminate your employment other than for Good Reason (as defined below), you (or your estate or beneficiaries in the case of your death) shall receive your base salary and other benefits earned and accrued prior to the termination of your employment as well as a pro rata portion of your bonus, if any, as provided in Paragraph 3 for the fiscal year in which such termination occurs, and you shall have no further rights to any other compensation or benefits hereunder on or after the termination of your employment. (c) The Company may terminate your employment without Cause and you may terminate your employment with the Company for Good Reason, upon thirty (30) days' advance written notice. If Quiksilver elects to terminate your employment without Cause, or if you terminate your employment with the Company for Good Reason within six (6) months of the action constituting Good Reason, the Company will (i) continue to pay your base salary (but not any employment benefits) on its regular payroll dates for a period equal to the greater of eighteen (18) months or the remaining term of this Agreement, and (ii) pay you a pro rata portion of your bonus, if any, as provided by Paragraph 3 for the year in which such termination occurs, less applicable withholdings and deductions. Notwithstanding the foregoing, if such termination without Cause or for Good Reason occurs within six (6) months immediately following a Change of Control (as defined in Addendum "B") the Company will instead (i) continue to pay your base salary (but not any employment benefits) on it's regular payroll date for a period of thirty-six (36) months, (ii) pay you a pro rata portion of your bonus, if any, as provided by Paragraph 3 for the year in which such termination occurs, and (iii) pay you an amount equal to three (3) times the average annual bonus earned by you pursuant to Paragraph 3 during the two (2) most recently completed fiscal years of the Company (or such shorter period that this Agreement has been in effect) payable over a three year period following termination in equal installments on the Company's regular payroll dates, less applicable withholdings and deductions. In order for you to be eligible to receive the benefits specified in this Paragraph 7(c), you must execute a general release of claims in a form reasonably acceptable to the Company. You shall have no further rights to any other compensation or benefits hereunder on or after the termination of your -3- Robert McKnight June __, 2002 employment. You shall not have a duty to seek substitute employment and the Company shall not have the right to offset any compensation due you against any compensation or income received by you after the date of such termination. "Good Reason" for you to terminate employment means a voluntary termination as a result of (i) the assignment to you of duties materially inconsistent with your position as set forth above without your consent, (ii) a material change in your reporting level from that set forth in this Agreement without your consent, (iii) a material diminution of your authority without your consent, (iv) a material breach by the Company of its obligations under this agreement, (v) a failure by the Company to obtain from any successor, before the succession takes place, an agreement to assume and perform the obligations contained in this Agreement, or (vi) the Company requiring you to be based (other than temporarily) at any office or location outside the Orange County, California area. Notwithstanding the foregoing, Good Reason shall not exist unless you provide the Company notice of termination on account thereof and, if such event or condition is curable, the Company fails to cure such event or condition within thirty (30) days of such notice. (d) In the event that any payment or benefit received or to be received by you (collectively, the "Payments") would constitute a parachute payment within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), then the following limitation shall apply: The aggregate present value of those Payments shall be limited in amount to the greater of the following dollar amounts (the "Benefit Limit"): (i) 2.99 times your Average Compensation (as defined below), or (ii) the amount which yields you the greatest after-tax amount of Payments under this Agreement after taking into account any excise tax imposed under Code Section 4999 on those Payments. The present value of the Payments will be measured as of the date of the Change in Control and determined in accordance with the provisions of Code Section 280G(d)(4). Average Compensation means the average of your W-2 wages from the Company for the five (5) calendar years completed immediately prior to the calendar year in which the Change in Control is effected. Any W-2 wages for a partial year of employment will be annualized, in accordance with the frequency which such wages are paid during such partial year, before inclusion in Average Compensation. -4- Robert McKnight June __, 2002 8. Quiksilver owns certain trade secrets and other confidential and/or proprietary information which constitute valuable property rights, which it has developed through a substantial expenditure of time and money, which are and will continue to be utilized in the Company's business and which are not generally known in the trade. This proprietary information includes the list of names of the customers and suppliers of Quiksilver, and other particularized information concerning the products, finances, processes, material preferences, fabrics, designs, material sources, pricing information, production schedules, marketing strategies, merchandising strategies, order forms and other types of proprietary information relating to our products, customers and suppliers. You agree that you will not disclose and will keep strictly secret and confidential all trade secrets and proprietary information of Quiksilver, including, but not limited to, those items specifically mentioned above. 9. The Company will reimburse you for documented reasonable and necessary business expenses incurred by you while engaged in business activities for the Company's benefit on such terms and conditions as shall be generally available to other executives of the Company. 10. You will be required to observe the Company's personnel and business policies and procedures as they are in effect from time to time. In the event of any conflicts, the terms of this Agreement will control. 11. This Agreement, its addenda, and any stock option agreements Quiksilver may enter into with you contain the entire integrated agreement between us regarding these issues, and no modification to this letter will be valid unless set forth in writing and signed by both you and the Company. To the fullest extent allowed by law, any dispute, controversy or claim arising out of or relating to this Agreement, the breach thereof, or any aspect of your employment or the cessation thereof must be settled exclusively by final and binding arbitration before a single arbitrator administered by JAMS/Endispute in Orange County, California, whose fees and costs shall be evenly divided by the parties. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The Company reserves the right, however, to seek judicial provisional remedies and equitable relief regarding any breach or threatened breach of your obligations regarding trade secrets and proprietary information. 12. This Agreement will be assignable by the Company to any successor or to any other company owned or controlled by the Company, and will be binding upon any successor to the business of the Company, whether direct or indirect, by purchase of securities, merger, consolidation, purchase of all or substantially all of the assets of the Company or otherwise. -5- Robert McKnight June __, 2002 Please sign, date and return the enclosed copy of this letter to me for our files to acknowledge your agreement with the above. Very truly yours, --------------------------- --------------------------- Enclosures ACKNOWLEDGED AND AGREED: - ------------------------------- Robert McKnight, Jr. Date Effective: , 2003 ------------- -6- ADDENDUM A EXECUTIVE OFFICER BONUS PLAN In the event that the Company achieves percentage growth in its "Earnings Before Taxes" (as defined below) in the amounts set forth in the table below, then each participant in the Executive Officer Bonus Plan (the "Plan") shall be entitled to receive a cash bonus in an amount equal to 75% of the percentage of such participant's base salary earned during the applicable fiscal year set forth in the table below opposite the respective Earnings Before Taxes Growth percentage.

Earnings Before Taxes Growth Percentage of Base Salary ---------------------------- ------------------------- Below 10% 0% 10% 25% 12% 75% 16% 100% 20% 150% 24% 200% 28% 250% 32% or more 300%

In the event that Earnings Before Taxes Growth is in an amount between any of the benchmarks set forth above (but above ten percent (10 %)), then the amount of any bonus payable to a participant shall be calculated on the basis of a straight line interpolation between the two closest points. -7- For purposes of the foregoing table, "Earnings Before Taxes" shall mean the Company's income before provision for income taxes for each fiscal year of the Company as reflected in the Company's audited financial statements for such fiscal year determined in accordance with generally accepted accounting principles consistently applied. In addition, income before income taxes shall exclude all non-recurring or extraordinary items (whether constituting loss or gain) which, in the sole and absolute discretion of the Board of Directors or the Compensation Committee of the Company, did not arise in the ordinary course of business. The computation of income before income taxes and of the dollar amount of the bonus, if any, payable to any participant under this Plan shall be approved by the Company's Compensation Committee and shall be final and conclusive on the Company and each participant. -8- ADDENDUM B DEFINITION OF CHANGE IN CONTROL "Change in Control" means the occurrence of one or more of the following events: (i) any corporation, partnership, person, other entity, or group (as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) (collectively, a "Person") acquires shares of capital stock of the Company representing more than 50% of the total number of shares of capital stock that may be voted for the election of directors of the Company, (ii) a merger, consolidation, or other business combination of the Company with or into another Person is consummated, or all or substantially all of the assets of the Company are acquired by another Person, as a result of which the stockholders of the Company immediately prior to the consummation of such transaction own, immediately after consummation of such transaction equity securities possessing less than 50% of the voting power of the surviving or acquiring Person (or any Person in control of the surviving or acquiring Person, the equity securities of which are issued or transferred in such transaction), or (iii) the stockholders of the Company approve a plan of complete liquidation, dissolution or winding up of the Company. -9- EX-10.19 5 a87194exv10w19.txt EXHIBIT 10.19 EXHIBIT 10.19 AGREEMENT AND PLAN OF MERGER AND REORGANIZATION By and Among QUIKSILVER, INC. QS RETAIL, INC., BEACH STREET, INC. and JOHN THOMPSON and DIANA THOMPSON Dated as of September 17, 2002 TABLE OF CONTENTS

Page ---- ARTICLE I - THE MERGER............................................................................................ 1 1.1 The Merger...................................................................................... 1 1.2 Closing......................................................................................... 2 1.3 Effective Time.................................................................................. 2 1.4 Effects of the Merger........................................................................... 2 1.5 Articles of Incorporation; Bylaws............................................................... 2 1.6 Directors and Officers.......................................................................... 2 1.7 Merger Consideration; Conversion and Cancellation of Company Common Stock....................... 2 1.8 No Fractional Shares of Parent Common Stock...................................................... 3 1.9 Exchange of Shares.............................................................................. 4 1.10 Tax Consequences................................................................................ 4 ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SHAREHOLDERS................................... 5 2.1 Corporate Organization.......................................................................... 5 2.2 Capitalization.................................................................................. 5 2.3 Authority; No Violation......................................................................... 5 2.4 Consents and Approvals.......................................................................... 6 2.5 Financial Statements............................................................................ 6 2.6 Absence of Undisclosed Liabilities.............................................................. 7 2.7 Absence of Certain Changes or Events............................................................ 7 2.8 Legal Proceedings............................................................................... 8 2.9 Restrictions on Business Activities............................................................. 8 2.10 Governmental Authorization...................................................................... 8 2.11 Title and Condition of Personal Property........................................................ 8 2.12 Real and Leased Property........................................................................ 9 2.13 Intellectual Property.......................................................................... 10 2.14 Taxes.......................................................................................... 10 2.15 Environmental Matters.......................................................................... 11 2.16 Customers and Suppliers; Supplies.............................................................. 12 2.17 List of Accounts............................................................................... 12 2.18 Employment Agreements.......................................................................... 12 2.19 Employee Benefit Plans......................................................................... 12 2.20 Labor Matters.................................................................................. 15 2.21 Contracts and Commitments...................................................................... 16 2.22 Absence of Breaches or Defaults................................................................ 17 2.23 Interested Party Transactions.................................................................. 18 2.24 Compliance with Applicable Law................................................................. 18 2.25 Insurance...................................................................................... 18 2.26 Brokers........................................................................................ 18 2.27 Minute Books................................................................................... 18 2.28 Accounts and Notes Receivable.................................................................. 18 2.29 Certain Payments............................................................................... 19 2.30 Accredited Investor Status..................................................................... 19 2.31 Representations Complete....................................................................... 19

i TABLE OF CONTENTS

Page ---- ARTICLE III - REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB............................................ 19 3.1 Corporate Organization......................................................................... 19 3.2 Authority; No Violation........................................................................ 19 3.3 Consents and Approvals......................................................................... 20 3.4 Financial Statements and Reports............................................................... 20 3.5 Parent Common Stock............................................................................ 21 3.6 Compliance with Securities Laws............................................................... 21 3.7 Consents and Approvals......................................................................... 21 3.8 Brokers........................................................................................ 21 3.9 Compliance..................................................................................... 21 3.10 Representations Complete........................................................................ 22 3.11 Taxes.......................................................................................... 22 ARTICLE IV - ADDITIONAL AGREEMENTS............................................................................... 22 4.1 Covenants of the Company....................................................................... 22 4.2 Access to Information.......................................................................... 24 4.3 Public Disclosure.............................................................................. 24 4.4 Consents; Cooperation.......................................................................... 24 4.5 Legal Requirements............................................................................. 24 4.6 Tax Treatment.................................................................................. 24 4.7 Certifications, Agreements, and Covenants of the Company....................................... 24 4.8 Certifications, Agreements, and Covenants of Parent and Merger Sub............................. 27 4.9 Shareholder Vote............................................................................... 29 4.10 Registration Rights; NYSE Listing.............................................................. 29 4.11 Consulting Agreement........................................................................... 29 4.12 Blue Sky Laws.................................................................................. 29 4.13 Control of Operations.......................................................................... 29 4.14 Employee Matters............................................................................... 30 4.15 Covenant Not to Compete........................................................................ 30 4.16 Best Efforts and Further Assurances............................................................ 30 4.17 Landlord Consents................................................................................ 30 ARTICLE V - CONDITIONS PRECEDENT................................................................................. 31 5.1 Conditions to Each Party's Obligation to Effect the Merger..................................... 31 5.2 Conditions to Obligations of Parent and Merger Sub............................................. 31 5.3 Conditions to the Obligations of Company and Shareholders...................................... 32 ARTICLE VI - TERMINATION AND AMENDMENT........................................................................... 33 6.1 Termination.................................................................................... 33 6.2 Effect of Termination.......................................................................... 34 6.3 Amendment...................................................................................... 34 6.4 Extension; Waiver.............................................................................. 34 ARTICLE VII - GENERAL PROVISIONS................................................................................. 34 7.1 Expenses....................................................................................... 34 7.2 Notices........................................................................................ 34 7.3 Governing Law.................................................................................. 35 7.4 Severability................................................................................... 35 7.5 Assignment; Binding Effect; Benefit............................................................ 35 7.6 Headings....................................................................................... 35 7.7 Entire Agreement............................................................................... 35 7.8 Counterparts................................................................................... 36

ii EXHIBITS AND SCHEDULES EXHIBIT A Registration Rights Agreement EXHIBIT B Consulting Agreement iii AGREEMENT AND PLAN OF MERGER AND REORGANIZATION THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (this "Agreement") is made and entered into as of September 17, 2002, by and among QUIKSILVER, INC., a Delaware corporation ("Parent"), QS RETAIL, INC., a California corporation and wholly-owned subsidiary of Parent ("Merger Sub"), BEACH STREET, INC., a Utah corporation (the "Company"), and JOHN THOMPSON and DIANA THOMPSON (individually, a "Shareholder" and collectively, the "Shareholders"). Merger Sub and the Company are sometimes collectively referred to herein as the "Constituent Corporations." WHEREAS, the Boards of Directors of Parent, Merger Sub and the Company have each determined that it is in the best interest of their respective companies and in the best interest of their respective stockholders to consummate the business combination transaction provided for herein in which the Company will, subject to the terms and conditions set forth herein, merge with and into Merger Sub (the "Merger"); and WHEREAS, pursuant to the Merger, among other things, all of the outstanding shares of Common Stock of the Company ("Company Common Stock") shall be converted into shares of Common Stock of the Parent ("Parent Common Stock"). WHEREAS, for federal income tax purposes, it is intended that the Merger will qualify as a tax-free reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and that this Agreement shall be, and is hereby, adopted as a plan of reorganization for purposes of Section 368(a) of the Code; and WHEREAS, the parties desire to make certain representations, warranties and agreements in connection with the Merger and also to prescribe certain conditions to the Merger. NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and agreements contained herein, and intending to be legally bound hereby, the parties agree as follows: ARTICLE I THE MERGER 1.1 The Merger. Subject to the terms and conditions of this Agreement, in accordance with the applicable provisions of the General Corporation Law of the State of California (the "CGCL") and the Utah Revised Business Corporation Act of the State of Utah ("URBCA"), at the Effective Time (as defined in Section 1.3 hereof), the Company shall merge with and into Merger Sub. Merger Sub shall be the surviving company (hereinafter sometimes called the "Surviving Corporation") in the Merger and shall continue its corporate existence under the laws of the State of California. Upon consummation of the Merger, the separate corporate existence of the Company shall terminate, and the Surviving Corporation shall be a wholly-owned subsidiary of Parent. 1.2 Closing. The closing of the transactions contemplated hereby (the "Closing") shall take place as soon as practicable after the satisfaction or waiver of each of the conditions set forth in Article V hereof or at such other time as the parties hereto agree (the "Closing Date"), provided, however, that the parties shall use reasonable commercial efforts to effect the Closing on or prior to September 17, 2002. The Closing shall take place at the offices of Hewitt & O'Neil LLP, 19900 MacArthur Blvd., Suite 1050, Irvine, California or at such other location as the parties hereto agree. 1.3 Effective Time. Subject to the terms and conditions of this Agreement, Parent, Merger Sub, the Company, and the Shareholders shall cause the Merger to be consummated by filing (i) a Certificate of Merger (the "Certificate of Merger") with the Secretary of State of the State of California (the "California Secretary of State") in such form as is required by, and executed in accordance with the relevant provisions of, the CGCL and (ii) Articles of Merger (the "Articles of Merger") with the State of Utah Division of Corporations and Commercial Code (the "Division") in such form as is required by, and executed in accordance with the relevant provisions of the URBCA. The term "Effective Time" shall be the later of the filing of such Certificate of Merger with the California Secretary of State and the filing of the Articles of Merger with the Division, or at such later time as agreed in writing by Parent, Merger Sub, and the Company and specified in the Certificate of Merger and the Articles of Merger. 1.4 Effects of the Merger. At and after the Effective Time, the Merger shall have the effects set forth in this Agreement, the Certificate of Merger, the Articles of Merger, and the applicable provisions of the CGCL and the URBCA. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the property, rights, privileges, powers and franchises of the Company and Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Merger Sub shall become the debts, liabilities and duties of the Surviving Corporation. 1.5 Articles of Incorporation; Bylaws. At the Effective Time, the Articles of Incorporation of Merger Sub, as in effect at the Effective Time, shall be the Articles of Incorporation of the Surviving Corporation until thereafter amended in accordance with applicable law. At the Effective Time, the Bylaws of Merger Sub, as in effect immediately prior to the Effective Time, shall be the Bylaws of the Surviving Corporation until thereafter amended in accordance with applicable law. 1.6 Directors and Officers. The directors and officers of Merger Sub immediately prior to the Effective Time shall be the directors and officers of the Surviving Corporation, each to hold office in accordance with the Articles of Incorporation and Bylaws of the Surviving Corporation until their respective successors are duly elected or appointed and qualified. 1.7 Merger Consideration; Conversion and Cancellation of Company Common Stock. By virtue of the Merger without any action on the part of Parent, Merger Sub, the Company or the Shareholders: (a) Conversion of Company Common Stock. Subject to the terms and conditions of this Agreement, at the Effective Time, each share of Company Common Stock issued and outstanding immediately prior to the Effective Time and all rights in respect thereof 2 shall be converted into the right to receive (i) 29.8092 shares of Parent Common Stock (the "Stock Consideration") and (ii) cash from Parent as set forth in Section 1.7(b) below (the "Cash Consideration"). The Stock Consideration and Cash Consideration are hereinafter collectively referred to as the "Merger Consideration. Total stock consideration shall equal 298,092 shares of Parent Company common stock. (b) Cash Consideration Calculation. The total Cash Consideration paid to the Shareholders shall equal the sum of (i) the Company's cash balance, as determined consistent with the Company's past practices, as of the Effective Time, and (ii) increased or decreased by the difference (+ of -) between the Company's accounts payable and inventory as of the Effective Time, all as determined and valued consistent with the Company's past practices. For example, (i) as of the Effective Time if the Company's cash balance was $100,000, accounts payable balance was $80,000, and the inventory balance was $70,000, the total Cash Consideration would equal $90,000 or (i) as of the Effective Time if the Company's cash balance was $100,000, accounts payable balance was $70,000, and the inventory balance was $80,000, the Total Cash Consideration would equal $110,000. The Cash Consideration shall be paid on or before September 24, 2002. The Cash Consideration shall be divided between the two Shareholders in accordance with their respective ownership percentages of the Company. (c) Right to Accounting. Subsequent to the Effective Time, Parent and the Surviving Corporation shall allow the Shareholders, and their agents, full access to the books and records of the Company and the Surviving Corporation to verify the calculation and determination of the Cash Consideration. (d) Cancellation of Company Common Stock. At the Effective Time, all shares of Company Common Stock converted into the right to receive the Merger Consideration pursuant to this Article I shall no longer be outstanding and shall automatically be canceled and shall cease to exist, and each certificate (each a "Certificate") previously representing any such shares of Company Common Stock shall thereafter only represent the right to receive the Merger Consideration. Certificates previously representing shares of Company Common Stock shall be exchanged for shares of Parent Common Stock upon surrender of such Certificates in accordance with Section 1.9 hereof, without any interest. 1.8 No Fractional Shares of Parent Common Stock. (a) No certificates or scrip of shares of Parent Common Stock representing fractional shares of Parent Common Stock or book-entry credit of the same shall be issued upon the surrender for exchange of certificates and such fractional share interests will not entitle the owner thereof to vote or to have any rights of a stockholder of Parent or a holder of shares of Parent Common Stock. (b) Notwithstanding any other provision of this Agreement, each holder of Company Common Stock exchanged pursuant to the Merger who would otherwise have been entitled to receive a fraction of a share of Parent Common Stock (after taking into account all Certificates delivered by such holder) shall receive, in lieu thereof, cash (without interest) in an amount equal to the product of (i) such fractional part of a share of Parent Common Stock multiplied by (ii) the closing price on the New York Stock Exchange for a share of Parent 3 Common Stock on the date of the Effective Time. As promptly as practicable after the determination of the aggregate amount of cash to be paid to holders of fractional interests, Parent shall cause the Surviving Corporation to forward payments to such holders of fractional interests subject to and in accordance with the terms hereof. 1.9 Exchange of Shares. (a) Delivery of Merger Consideration. Immediately following the Merger, upon surrender by the Shareholders of the certificates representing the Company Common Stock, Parent shall cause to be issued to each Shareholder certificates representing the number of shares of Parent Common Stock to which such Shareholder is entitled pursuant to Section 1.7(a) above. (b) Transfer Restrictions; Legends. The shares of Parent Common Stock issued in the Merger shall not be transferable in the absence of an effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), or an exemption therefrom. In the absence of an effective registration statement under the Securities Act, neither such shares of Parent Common Stock nor any interest therein shall be sold, transferred, assigned or otherwise disposed of, unless Parent shall have previously received an opinion of counsel knowledgeable in Federal securities law, in form and substance reasonably satisfactory to Parent, to the effect that registration under the Securities Act is not required in connection with such disposition. Parent shall be entitled to give stop transfer instructions to its transfer agent with respect to such shares of Parent Common Stock in order to enforce the foregoing restrictions. The certificate or certificates representing the shares of Parent Common Stock issued in the Merger shall bear the following legend restricting the transfer thereof, in addition to any other legend required by applicable law: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS IN EFFECT UNDER SUCH ACT, (2) SUCH TRANSFER IS PURSUANT TO RULE 144 UNDER SUCH ACT OR (3) THE HOLDER HEREOF FURNISHES TO THE ISSUER AN OPINION OF COUNSEL, WHICH COUNSEL AND WHICH OPINION SHALL BE REASONABLY SATISFACTORY TO THE ISSUER THAT REGISTRATION UNDER SUCH ACT IS NOT REQUIRED." 1.10 Tax Consequences. It is intended by the parties hereto that the Merger shall constitute a reorganization within the meaning of Section 368(a) of the Code. 4 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SHAREHOLDERS The Company and each of the Shareholders, jointly and severally, represent and warrant to Parent and Merger Sub that, except as disclosed in the disclosure schedule attached hereto (the "Company Disclosure Schedule"): 2.1 Corporate Organization. (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Utah. The Company has the corporate power and authority to own or lease its properties and assets and to carry on its business as it is now being conducted, and is qualified to do business in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such qualification necessary. The copies of the Articles of Incorporation and Bylaws of the Company which have previously been delivered to Parent are true and correct copies of such documents as in effect as of the date of this Agreement. (b) The Company owns no equity interests in any corporation, partnership or other entity. 2.2 Capitalization. The authorized capital stock of the Company consists of 50,000 shares of Company Common Stock, no par value per share. As of the date hereof, there are (i) 10,000 shares of Company Common Stock outstanding, all of which are held by the Shareholders, and (ii) no shares of Preferred Stock outstanding. All \of the issued and outstanding shares of Company Common Stock were duly authorized and validly issued and are fully paid and nonassessable and are free of any liens or encumbrances created by or resulting from the actions of the Company, and are not subject to preemptive rights or rights of first refusal created by statute, the Articles of Incorporation or Bylaws of the Company or any agreement to which the Company or any Shareholder is a party or by which it is bound. All outstanding shares of Company Common Stock were issued in compliance with all applicable federal and state securities laws. The Company does not have and is not bound by any outstanding subscriptions, options, warrants, convertible securities, calls, commitments, agreements or obligations of any character calling for the purchase, redemption or issuance of any shares of Company Common Stock or any other equity security of the Company or any securities representing the right to purchase or otherwise receive any shares of Company Common Stock or any other equity security of the Company. 2.3 Authority; No Violation. (a) The Company has full corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly approved by the Board of Directors and shareholders of the Company. No other corporate proceedings on the part of the 5 Company are necessary to approve this Agreement and to consummate the transactions contemplated hereby. This Agreement and all other agreements and documents to be entered into in connection herewith have been duly and validly executed and delivered by the Company and each of the Shareholders and (assuming due authorization, execution and delivery by Parent and Merger Sub) constitute valid and binding obligations of the Company and each of the Shareholders, enforceable against the Company and each of the Shareholders, in accordance with their respective terms, except as enforcement may be limited by general principles of equity whether applied in a court of law or a court of equity and by bankruptcy, insolvency and similar laws affecting creditors' rights and remedies generally. (b) Neither the execution and delivery of this Agreement by the Company and each of the Shareholders, nor the consummation by the Company and each of the Shareholders of the transactions contemplated hereby, nor compliance by the Company and each of the Shareholders with any of the terms or provisions hereof, will (i) violate any provision of the Articles of Incorporation or Bylaws of the Company or (ii) assuming that the consents and approvals referred to in Section 2.4 hereof are duly obtained, (x) violate any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to the Company or any of the Shareholders or any of their respective properties or assets, or (y) materially violate, materially conflict with, result in a material breach of any provision of or the loss of any material benefit under, constitute a material default (or an event which, with notice or lapse of time, or both, would constitute a material default) under, result in the termination of or a right of termination or cancellation under, accelerate the performance required by, or result in the creation of any lien, pledge, security interest, charge or other encumbrance upon any of the properties or assets of the Company or any of the Shareholders under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, material license, material sublicense, material lease, material agreement or other material instrument or obligation to which the Company or any of the Shareholders is a party, or by which the Company or any of the Shareholders or any of their respective properties or assets may be bound or affected. 2.4 Consents and Approvals. Except for (a) the filing of the Certificate of Merger with the California Secretary of State and the Articles of Merger with the Division pursuant to the CGCL and Section 1107 of the URBCA, (b) any filings to be made by Parent or Merger Sub, including but not limited to, any federal or state securities filings to perfect the private placement exemption of the Merger Consideration, or (c) such filings, authorizations or approvals as may be set forth in Section 2.4 of the Company Disclosure Schedule, no consents or approvals orders or authorizations of or filings or registrations with any court, administrative agency or commission or other governmental or quasi-governmental authority or instrumentality, whether in the United States of America or otherwise (each a "Governmental Entity") or with any third party are necessary with respect to the Company or any of the Shareholders in connection with (1) the execution and delivery of this Agreement and (2) the consummation of the Merger and the other transactions contemplated hereby. All such qualifications and filings required to be made by the Company will, in the case of qualifications, be effective as of the Effective Time and will, in the case of filings, be made within the time prescribed by law. 2.5 Financial Statements. The Company has previously provided to Parent true and correct copies of the Company's (a) unaudited consolidated balance sheets of the Company at March 31, 2000, 2001 and 2002, together with related unaudited consolidated statements of 6 operations and cash flows for the fiscal years then ended, and (b) the Company's unaudited consolidated balance sheet as of July 31, 2002 (the "Reference Balance Sheet") and an unaudited statement of operations for the five months ended July 31, 2002 (collectively, the "Financial Statements"). Such Financial Statements have been prepared substantially in accordance with generally accepted accounting principles ("GAAP") except for immaterial items noted in the Company Disclosure Schedule. The Financial Statements fairly present the financial condition and operating results of the Company in all material respects as of the dates, and for the periods indicated therein, subject to normal year end adjustments. 2.6 Absence of Undisclosed Liabilities. The Company has no material obligations or liabilities of any nature (matured or unmatured, fixed or contingent, including without limitation any obligations or liabilities as guarantor or indemnitor of any other person, firm, partnership or corporation ("Person")) other than (i) those set forth or adequately provided for in the Reference Balance Sheet, (ii) those incurred in the ordinary course of business and not required to be set forth in the Reference Balance Sheet, (iii) those incurred in the ordinary course of business since the Reference Balance Sheet Date and consistent with past practice, and (iv) those set forth in Section 2.6 of the Company Disclosure Schedule. 2.7 Absence of Certain Changes or Events. Except as disclosed in Section 2.7 of the Company Disclosure Schedule, since the Reference Balance Sheet Date, the Company has conducted its business in the ordinary course consistent with past practice, and except as contemplated by this Agreement, there has not occurred (i) any purchase or other acquisition of, sale, lease, disposition, or other transfer of, or mortgage, pledge or subjection to any material encumbrance or lien on, any material asset, tangible or intangible, of the Company, other than in the ordinary course of business; (ii) any change in accounting methods or practices (including any change in depreciation or amortization policies or rates) by the Company or any revaluation by the Company of any of its assets; (iii) any declaration, setting aside, or payment of a dividend or other distribution with respect to the shares of the Company Common Stock, or any split-up or other recapitalization in respect of the Company Common Stock, or any direct or indirect redemption, purchase or other acquisition by the Company of any shares of Company Common Stock; (iv) any material contract entered into by the Company or any amendment or termination of, or default under, any material contract to which the Company is a party or by which it is bound; (v) any amendment or change to the Articles of Incorporation or Bylaws of the Company; (vi) any material increase in or modification of the compensation or benefits payable or to become payable by the Company to any of their respective officers, directors or employees; (vii) any issuance, transfer, sale or pledge by the Company or any Shareholder of any shares of Company Common Stock or other securities or of any commitment, option, right or privilege under which the Company is or may become obligated to issue any shares of Company Common Stock or other securities; (viii) any indebtedness for borrowed money incurred by the Company; (ix) any loan made or agreed to be made by the Company, nor has the Company become liable or agreed to become liable as a guarantor with respect to any loan; (x) any waiver or compromise by the Company of any right or rights or any payment, direct or indirect, of any material debt, liability or other obligation, other than in the ordinary course of business; (xi) any sale, assignment, or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets, other than in the ordinary course of business; (xii) any actual or, to the knowledge of the Company or either of the Shareholders, threatened termination or loss of (a) any material contract, lease, license or other agreement to which the Company was or is a party; or (b) any 7 certificate, license or other authorization required for the continued operation by the Company of any portion of any of its business; (xiii) any resignation of employment of any key officer or employee of the Company, or to the knowledge of the Company, any impending resignation of employment of any such officer or employee; (xiv) any negotiation by any executive officer of the Company or any agreement by the Company to do any of the things described in the preceding clauses (i) through (xiii) (other than negotiations with Parent and its representatives regarding the transactions contemplated by this Agreement); or (xv) any other event or circumstance that could reasonably be expected to have a material adverse effect on the Company. 2.8 Legal Proceedings. Except as provided in Section 2.8 of the Company Disclosure Schedule, there are no legal actions, suits, arbitrations or other legal, administrative or governmental proceedings or investigations pending or, to the knowledge of the Company or either of the Shareholders, threatened against the Company or any of its properties, assets or business and to the knowledge of the Company and the Shareholders there exist no facts which could reasonably be expected to result in any such action, suit or other proceeding or which would challenge the validity or propriety of the transactions contemplated by this Agreement. The Company is not in default with respect to any judgment, order or decree of any court or any governmental agency or instrumentality. The foregoing includes, without limiting the generality thereof, pending or threatened actions involving the Company's use in connection with the Company's business of any information or techniques allegedly proprietary to a former employee. 2.9 Restrictions on Business Activities. There is no agreement, judgment, injunction, order or decree binding upon the Company which has or could reasonably be expected to have the effect of prohibiting or materially impairing any current business practice of the Company, any acquisition of property by the Company, the ability of the Company to compete with any other person or the conduct of business by the Company as currently conducted by the Company. 2.10 Governmental Authorization. Except as would not have a materially adverse effect on the operations or financial conditions of the Company, the Company has obtained each federal, state, county, local or foreign governmental consent, license, permit, grant, or other authorization of a Governmental Entity (i) pursuant to which the Company currently operates or holds any interest in any of its properties or (ii) that is required for the operation of the Company's business or the holding of any such interest ((i) and (ii) herein collectively called the "Company Authorizations"), and all of such Company Authorizations are in full force and effect. 2.11 Title and Condition of Personal Property. The Company has good and marketable title to all personal property owned by it that is material to its business and reflected in the Reference Balance Sheet or acquired after the Reference Balance Sheet Date (other than property sold or otherwise disposed of since the Reference Balance Sheet Date in the ordinary course of business), free and clear of all mortgages, liens, pledges, charges or encumbrances of any kind or character or claims thereto, except (i) the lien of current taxes not yet due and payable, (ii) such imperfections of title, liens and easements as do not and will not materially detract from or interfere with the use of the properties subject thereto or affected thereby, or otherwise materially impair business operations involving such properties, (iii) liens securing debt which is reflected on the Reference Balance Sheet, and (iv) as set forth in Section 2.11 of the Company Disclosure 8 Schedule. The material property and equipment of the Company that is used in the operations of its business are in all material respects in good operating condition and repair. All material properties used in the operations of the Company are reflected in the Reference Balance Sheet. 2.12 Real and Leased Property. (a) The Company does not own any fee simple interest in real property. The Company does not lease or sublease any real property other than as set forth on Section 2.12 of the Company Disclosure Schedule. Section 2.12 of the Company Disclosure Schedule sets forth the street address of each parcel of real property leased or subleased by the Company (the "Leased Property"). The Company has previously delivered to Parent a true and complete copy of all of the lease and sublease agreements, as amended to date (the "Leases") relating to the Leased Property. The Company enjoys a peaceful and undisturbed possession of the Leased Property held by it. All improvements located on the Leased Property are in a state of good maintenance and repair and in a condition adequate and suitable for the effective conduct therein of the business conducted and proposed to be conducted by the Company. No person other than the Company has any right to use or occupy any part of the Leased Property, whether pursuant to sublease, license or otherwise. The Leases are valid, binding and in full force and effect, all rent and other sums and charges payable thereunder are current, no notice of default or termination under any of the Leases is outstanding, no termination event or condition or uncured default on the part of the Company or, to the knowledge of the Company or either of the Shareholders, on the part of the landlord or sublandlord, as the case may be, thereunder, exists under the Leases, and to the knowledge of the Company or either of the Shareholders, no event has occurred and no condition exists which, with the giving of notice or the lapse of time or both, would constitute such a default or termination event or condition. In the event that any of the Leases is a sublease, the Company, as sublessee or sublessor, as the case may be, has obtained the required consent of the prime landlord to such sublease, and such prime lease is in full force and effect, there are no outstanding uncured notices of default or termination, and no right of the Company in any such sublease conflicts with such prime lease. All of the Leased Property is used in the conduct of the Company's business. (b) The heating, ventilation, air conditioning, plumbing, electrical systems and telephone systems at the Leased Property are in a condition reasonably adequate and suitable for the effective conduct therein of the business conducted by the Company and will be so adequate and suitable on the Closing Date. The Company has not experienced any material interruption in the services provided to any of the Leased Property within the last twelve (12) months. To the knowledge of the Company or either of the Shareholders, but without any inquiry of the applicable landlord, no landlord under the Leases has any plans to make any material alterations to any of the Leased Property, the construction of which would interfere with the use of any portion of the Leased Property. To the knowledge of the Company or either of the Shareholders, but without any inquiry of the applicable landlord, no landlord under the Leases has any plans to make any material alterations to any of the buildings in which Leased Property is located, the costs of which alterations would be borne in any part by a tenant under the applicable Lease. (c) The Company has all material permits, licenses, franchises, approvals and authorizations (collectively, the "Real Property Permits") of all Governmental Entities having jurisdiction over each Leased Property and from all insurance companies and fire rating and 9 other similar boards and organizations (collectively, the "Insurance Organizations") necessary to conduct its business as presently conducted. To the knowledge of the Company and the Shareholders, all such Real Property Permits required or appropriate have been lawfully issued to the Company to enable each Leased Property to be lawfully occupied and used for all of the purposes for which they are currently occupied and useful and are, as of the date hereof, in full force and effect. The Company has not received or been informed by a third party of the receipt by it of any notice from any Governmental Entity having jurisdiction over any Leased Property or from any Insurance Organization threatening a suspension, revocation, modification or cancellation of any Real Property Permit or of any insurance policies and, to the knowledge of the Company or either of the Shareholders, there is currently no basis for the issuance of any such notice or the taking of any such action. (d) To the knowledge of the Company or either of the Shareholders, there are no liabilities (other than rent and other sums and charges regularly payable) associated with any of the Leases including, without limitation, any liability under any Environmental and Safety Law, which is or which may become payable by the Surviving Corporation. 2.13 Intellectual Property. (a) Section 2.13(a) of the Company Disclosure Schedule sets forth an accurate and complete description of (i) all trademarks, service marks, trade names, brands and copyrights of the Company; and (ii) substantially all franchises, licenses, sublicenses, contracts, options and agreements, other than shrink-wrap software licenses, pursuant to which the Company is authorized to use any intellectual property not owned by the Company. The Company does not own or use any patents. (b) Except as set forth in Section 2.13(b) of the Company Disclosure Schedule, the Company owns or has the right to use all intellectual property necessary for the conduct of its business as currently conducted by it, including, without limitation, all network operating system and database softwares or other intellectual property used by the Company. (c) Except for third party licenses listed in Section 2.13(c) of the Company Disclosure Schedule, the Company is the sole and exclusive owner of its Intellectual Property including, but not limited to, those listed or described on the Company Disclosure Schedule, or has the right to the use thereof for the material covered thereby in connection with the services or products in respect to which they have been or are now being used. (d) To the knowledge of the Company or either of the Shareholders, except as set forth in Section 2.13(d) of the Company Disclosure Schedule, there has been no unauthorized use, disclosure, infringement or misappropriation of any material intellectual property rights of the Company, any trade secret material to the Company, or any material intellectual property right of any third party to the extent licensed by or through the Company, by any third party, including any employee of the Company. 2.14 Taxes. (a) The Company has duly and timely filed (including applicable extensions granted without penalty) all material Tax Returns (as hereinafter defined) required to be filed at 10 or prior to the Effective Time, and such Tax Returns are true and correct in all material respects, and the Company has paid in full or made adequate provision in the Financial Statements for all material Taxes (as hereinafter defined) shown to be due on such Tax Returns. As of the date hereof (i) the Company has not requested any extension of time within which to file any Tax Returns in respect of any fiscal year which have not since been filed and no request for waivers of the time to assess any Taxes are pending or outstanding, (ii) no claim for Taxes has become a lien against the property of the Company or is being asserted against the Company other than liens for Taxes not yet due and payable, (iii) no audit of any Tax Return of the Company is being conducted by a Tax authority, (iv) no extension of the statute of limitations on the assessment of any Taxes has been granted to the Company and is currently in effect, and (v) there is no agreement, contract or arrangement to which the Company is a party that may result in the payment of any amount that would not be deductible by reason of Sections 280G, 162 or 404 of the Code. The Company has not been or will be required to include any adjustment in taxable income for any Tax period (or portion thereof) pursuant to Section 481 or 263A of the Code or any comparable provision under state or foreign Tax laws as a result of transactions, events or accounting methods employed prior to the Merger. (b) For the purposes of this Agreement, "Taxes" shall mean all taxes, charges, fees, levies, penalties or other assessments imposed by any United States federal, state, local or foreign taxing authority, including, but not limited to income, excise, property, sales, transfer, franchise, payroll, withholding, social security or other taxes, including any interest, penalties or additions attributable thereto. For purposes of this Agreement, "Tax Return" shall mean any return, report, information return or other document (including any related or supporting information) filed or required to be filed with a Governmental Entity with respect to Taxes. 2.15 Environmental Matters. (a) The following terms shall be defined as follows: (i) "Environmental and Safety Laws" shall mean any federal, state, local or foreign laws, ordinances, codes, regulations, rules, policies and orders that are intended to assure the protection of the environment, or that classify, regulate, call for the remediation of, require reporting with respect to, or list or define air, water, groundwater, solid waste, hazardous or toxic substances, materials, wastes, pollutants or contaminants, or which are intended to assure the safety of employees, workers or other persons, including the public. (ii) "Property" shall mean all real property leased or owned by the Company either currently or in the past. (iii) "Facilities" shall mean all buildings and improvements on the Property of the Company. 11 (b) (i) the Company has not received notice (oral or written) of any noncompliance of the Facilities or its past or present operations with Environmental and Safety Laws; (ii) no notices, administrative actions or suits are pending or, to the knowledge of the Company or either of the Shareholders, threatened relating to a violation of any Environmental and Safety Laws; (iii) to the Company's and Shareholders' knowledge, the Company's uses of and activities within the Facilities currently comply with all Environmental and Safety Laws; and (iv) the Company has all the permits and licenses required to be issued and are in full compliance with the terms and conditions of those permits. 2.16 Customers and Suppliers; Supplies. Except as indicated in Section 2.16 of the Company Disclosure Schedule, all supplies and services necessary for the conduct of the business of the Company as presently conducted, may be obtained from alternate sources on terms and conditions comparable to those presently available to the Company, and no facts, circumstances or conditions exist which create a reasonable basis for believing that the Company will be unable to continue to procure the supplies and services necessary to conduct its business on substantially the same terms and conditions as such supplies and services are currently procured. 2.17 List of Accounts. Set forth in Section 2.17 of the Company Disclosure Schedule is: (a) the name of each bank or other institution in which the Company maintains an account (cash, securities or other) or safe deposit box; (b) the name, phone number and telefax number of the contact person at such bank or institution and (c) the account number of the relevant account, a description of the type of account and a list of the authorized signatories on such account. 2.18 Employment Agreements. Section 2.18 of the Company Disclosure Schedule contains the names, start dates, contracts dates, job descriptions, annual salary rates and other compensation of all officers, directors and employees of the Company or consultants being paid more than $20,000 a year by the Company (including compensation paid or payable by the Company under the Company Employee Plans). Section 2.18 of the Company Disclosure Schedule contains a list of all employee policies, employee manuals or other written statements of rules or policies as to hiring practices and procedures, working conditions, vacation and sick leave, a complete copy of each of which has been made available to Parent. Except as set forth in Section 2.18 of the Company Disclosure Schedule, there are no employment, consulting, severance or indemnification arrangements, agreements or understandings between the Company and any officer, director, consultant or employee including, without limitation, any contracts to employ executive officers, any severance, change in control or similar arrangements with any officers, employees or agents of the Company that will result in any obligation (absolute or contingent) of the Company to make any payment to any officer, employee or agent of the Company following either the consummation of the transactions contemplated hereby, termination of employment, or both ("Company Employment Agreements"). 2.19 Employee Benefit Plans. (a) Section 2.19(a) of the Company Disclosure Schedule lists, with respect to the Company (i) all material employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) maintained, sponsored or 12 contributed to or required to be contributed to by the Company, (ii) each loan to a non-officer employee, loans to officers and directors and any stock option, stock purchase, phantom stock, stock appreciation right, supplemental retirement, severance, sabbatical, medical, dental, vision care, disability, employee relocation, cafeteria benefit (Code section 125) or dependent care (Code Section 129), life insurance or accident insurance plans, programs or arrangements, (iii) all bonus, pension, profit sharing, savings, deferred compensation or incentive plans, programs or arrangements, (iv) other fringe or employee benefit plans, programs or arrangements that apply to senior management of the Company and that do not generally apply to all employees, and (v) any current or former employment or executive compensation or severance agreements, written or otherwise, as to which unsatisfied obligations of the Company of greater than $10,000 remain for the benefit of, or relating to, any present or former employee, consultant or director of the Company (together, the "Company Employee Plans"). There is no trade or business (whether or not incorporated) which is treated as a single employer with the Company within the meaning of Section 414(b), (c), (m) or (o) of the Code. (b) The Company has furnished to Parent a copy of the Company Employee Plans and related plan documents, to the extent reduced to writing (including trust documents, insurance policies or contracts, employee booklets, summary plan descriptions and other authorizing documents, and, to the extent still in its possession, any material employee communications relating thereto) and has, with respect to each Company Employee Plan which is subject to ERISA reporting requirements, provided copies of the Form 5500 reports filed for the last three plan years. The Company has, with respect to any Company Employee Plan intended to be qualified under Section 401(a) of the Code, either obtained from the Internal Revenue Service a favorable determination letter as to its qualified status under the Code, including all amendments to the Code effected by the Tax Reform Act of 1986 and subsequent legislation, or applied to the Internal Revenue Service for such a determination letter prior to the expiration of the requisite period under applicable Treasury Regulations or Internal Revenue Service pronouncements in which to apply for such determination letter and to make any amendments necessary to obtain a favorable determination. The Company has also furnished Parent with the most recent Internal Revenue Service determination letter issued with respect to each such Company Employee Plan, and nothing has occurred since the issuance of each such letter which could reasonably be expected to cause the loss of the tax-qualified status of any Company Employee Plan subject to Code Section 401(a). (c) Except as disclosed in Section 2.19(c) of the Company Disclosure Schedule, to the Company's and either of the Shareholder's knowledge, (i) none of the Company Employee Plans promises or provides retiree medical or other retiree welfare benefits to any person; (ii) there has been no "prohibited transaction," as such term is defined in Section 406 of ERISA and Section 4975 of the Code, with respect to any Company Employee Plan, for which no exemption exists; (iii) each Company Employee Plan has been administered substantially in accordance with its terms and in substantial compliance with the requirements prescribed by any applicable statutes, rules and regulations (including applicable provisions of ERISA and the Code); (iv) the Company has performed substantially all obligations required to be performed by them under, are not in any material respect in default under or violation of, and have no knowledge of any material default or violation by any other party to, any of the Company Employee Plans; (v) the Company is not subject to any liability or penalty under Sections 4976 through 4980 of the Code or Title I of ERISA with respect to any of the Company Employee 13 Plans, other than obligations for the payment of benefits in the normal operation of the Plan; (vi) all material contributions required to be made by the Company to any Company Employee Plan have been made on a timely basis and any accruals required by GAAP for contributions to each Company Employee Plan for the current plan years are reflected on the financial statements of the Company; (vii) with respect to each Company Employee Plan, no "reportable event" within the meaning of Section 4043 of ERISA (excluding any such event for which the thirty (30) day notice requirement has been waived under the regulations to Section 4043 of ERISA) nor any event described in Section 4062, 4063 or 4041 of ERISA has occurred with respect to any Company Employee Plan subject to Title IV of ERISA; (viii) the Company has not incurred any liability under Title IV of ERISA or Section 412 of the Code and (ix) no Company Employee Plan which is subject to Title IV or ERISA has an "unfunded benefit liability" within the meaning of Section 4001(a)(18) of ERISA. With respect to each Company Employee Plan subject to ERISA as either an employee pension plan within the meaning of Section 3(2) of ERISA or an employee welfare benefit plan within the meaning of Section 3(1) of ERISA, the Company has prepared in good faith and timely filed all requisite governmental reports (which were true and correct as of the date filed) and has properly and timely filed and distributed or posted all notices and reports to employees required to be filed, distributed or posted with respect to each such Company Employee Plan. No suit, administrative proceeding, action or other litigation has been brought, or to the knowledge of the Company or either of the Shareholders is threatened, against or with respect to any such Company Employee Plan, including any audit or inquiry by the IRS or United States Department of Labor. The Company has no liability (including current or potential withdrawal liability) with respect to any "multiemployer plan" as such term is defined in Section 3(37) of ERISA. Each Company Employee Plan can be amended, terminated or otherwise discontinued after Closing in accordance with its terms without material liability (other than expenses typically incurred in a termination event). The consummation of the transactions contemplated by this Agreement will not entitle any current or former employee or other service provider of the Company to severance benefits or any other payment, except as provided by this Agreement or the schedules attached hereto. (d) With respect to each Company Employee Plan, the Company has substantially complied with (i) the applicable health care continuation and notice provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") and the proposed regulations thereunder, (ii) the applicable requirements of the Family Leave Act of 1993 and the regulations thereunder and (iii) the applicable requirements of the Health Insurance Portability and Accountability Act of 1996. (e) Consummation of the transactions contemplated by this Agreement will not (i) entitle any current or former employee or other service provider of the Company to severance benefits or any other payment, or (ii) increase the amount of compensation due any such employee or service provider. (f) There has been no amendment to, written interpretation or announcement (whether or not written) by the Company relating to, or change in participation or coverage under, any Company Employee Plan which would increase the expense of maintaining such Plan above the level of expense incurred with respect to that Plan for the most recent fiscal year included in the Company's financial statements, other than increases resulting from premium 14 increases or the employment of additional employees, in each case in the ordinary course of business. 2.20 Labor Matters. Except as set forth in Section 2.20 of the Company Disclosure Schedule, (a) the Company is not, and has not been, a party to or otherwise bound by or to the Company's or either of the Shareholder's knowledge threatened with any collective bargaining agreement or other labor union contract and to the knowledge of the Company or either of the Shareholders currently there are no organizational campaigns, petitions or other unionization activities seeking recognition of a collective bargaining unit which could affect the Company; (b) there are no controversies, strikes, slowdowns, work stoppages or labor disturbances pending or to the knowledge of the Company or either of the Shareholders threatened between the Company and any of its employees, and the Company has not experienced any such controversy, strike, slowdown, work stoppage or labor disturbances within the past three years; (c) there are no unfair labor practice complaints pending against the Company before the National Labor Relations Board or any other Governmental Entity or any current union representation questions involving employees of the Company; (d) there are no pending claims against the Company under any workers' compensation plan or policy or for long-term disability; (e) to the knowledge of the Company or either of the Shareholders, the Company has no obligations under COBRA with respect to any former employees or qualifying beneficiaries thereunder; (f) the Company is currently in compliance with all applicable Laws relating to the employment of labor, including those related to wages, hours, collective bargaining and the payment and withholding of taxes and other sums as required by the appropriate Governmental Entity and has withheld and paid to the appropriate Governmental Entity or is holding for payment not yet due to such Governmental Entity all amounts required to be withheld from employees of the Company and is not liable for any arrears of wages, taxes, penalties or other sums for failure to comply with any of the foregoing; (g) the Company has paid in full to all its employees or adequately accrued for in accordance with GAAP all wages, salaries, commissions, bonuses, benefits and other compensation due to or on behalf of such employees, including all compensation owing and due for over-time work; (h) the Company has provided its employees with all relocation benefits, stock options, bonuses and incentives, and all other compensation that such employee has earned up through the date of this Agreement or that such employee was otherwise promised in their employment agreements with the Company; (i) there is no pending claim with respect to payment of wages, salary or overtime pay that has been asserted or is now pending or to the knowledge of the Company or either of the Shareholders threatened before any Governmental Entity with respect to any Persons currently or formerly employed by the Company; (j) the Company is not a party to, or otherwise bound by, any consent decree with, or citation by, any Governmental Entity relating to employees or employment practices; (k) there is no charge or proceeding with respect to a violation of any occupational safety or health standards that to the Company's or either of the Shareholder's knowledge has been asserted or is now pending or to the knowledge of the Company or either of the Shareholders threatened with respect to the Company; (l) there is no charge of discrimination in employment or employment practices, for any reason, including, without limitation, age, gender, race, religion or other legally protected category, which has been asserted or is now pending or to the knowledge or the company or either of the Shareholders threatened before the United States Equal Employment Opportunity Commission, or any other Governmental Entity in any jurisdiction in which the Company has employed or currently employs any Person; (m) the Company is in compliance in all material respects with the requirements of the Americans With Disabilities Act and any similar law of any 15 Government Entity; and (n) the Company is in compliance with the requirements of the Workers Adjustment and Retraining Notification Act ("WARN") and each has no liabilities pursuant to WARN. Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (i) result in any severance benefits or any other payment (including, without limitation, severance, unemployment compensation, golden parachute, bonus or otherwise) becoming due to any current or former director, employee or other service provider of the Company or any other ERISA Affiliate, (ii) increase any benefits otherwise payable by the Company or (iii) result in the acceleration of the time of payment or vesting of any such benefits, or any options or warrants to purchase Company capital stock, or any increase in the amount of compensation of benefits due any such person. 2.21 Contracts and Commitments. Section 2.21 of the Company Disclosure Schedule contains a complete and accurate list of all contracts and agreements (including, without limitation, oral and informal arrangements) of the following categories to which the Company is a party or by which it is bound as of the date of this Agreement: (a) labor contracts; (b) manufacturing, distribution, franchise, license, sales, agency or advertising contracts; (c) contracts which require the payment in excess of $10,000 per year for (i) the purchase of inventory, materials, supplies or equipment which are not cancelable (without material penalty, cost or other liability) within one (1) year, (ii) management, consulting, service or other similar contracts, (iii) advertising or marketing agreements or arrangements, and (iv) other contracts made in the ordinary course of business involving annual expenditures or liabilities in excess of $10,000 which are not cancelable (without material penalty, cost or other liability) within ninety (90) days, other than purchase orders made in the ordinary course of business consistent with past practice; (d) promissory notes, loans, agreements, indentures, evidences of indebtedness or other instruments proving for the lending of money, whether as borrower, lender or guarantor; (e) contracts (other than Leases) containing covenants limiting the freedom of the Company to engage in any line of business or compete with any Person or operate at any location; (f) joint venture or partnership agreements or joint development or similar agreements; (g) agreement, contract or other arrangement with (i) the Company or any affiliate of the Company or (ii) any current or former officer, director or employee of the Company or any affiliate of the Company (other than non-compete or intellectual property agreements); 16 (h) material lease or similar agreement with any person under which (i) the Company is lessee of, or holds or uses, any machinery, equipment, vehicle or other tangible property owned by any person or (ii) the Company is a lessor or sublessor of, or makes available for use by any person, any tangible personal property owned or leased by the Company, in any such case which has an aggregate future liability or receivable, as the case may be, and is not terminable by the Company by notice of not more than sixty (60) days; (i) contracts or other instruments (including so-called take-or-pay or keepwell agreements) under which (i) any person has directly or indirectly guaranteed indebtedness, liabilities or obligations of the Company or (ii) the Company has directly or indirectly guaranteed indebtedness, liabilities or obligations of any person (in each case other than endorsements for the purpose of collection in the ordinary course of business); (j) contracts or other instruments under which the Company has, directly or indirectly, made any advance, loan, extension of credit or capital contribution to, or other investment in, any person involving aggregate payments in excess of $25,000; (k) mortgage, pledge, security agreement, deed of trust or other instrument granting a lien or other encumbrance upon any property of the Company; (l) agreement or instrument providing for indemnification of any person with respect to liabilities relating to any current or former business of the Company, or any predecessor person; and (m) any exclusive retainer agreement or arrangement with attorneys, accountants, actuaries, appraisers, investment bankers or other professional advisors. True copies of the written contracts identified in Section 2.21 of the Company Disclosure Schedule have been made available to Parent. 2.22 Absence of Breaches or Defaults. The Company is not, and, to the knowledge of the Company or either of the Shareholders, no other party is, in material default under, or in material breach or violation of, any contract to which the Company is a party, including, without limitation, those identified on Section 2.21 of the Company Disclosure Schedule and, to the knowledge of the Company or either of the Shareholders, no event has occurred which, with the giving of notice or passage of time or both would constitute a material default under any contract identified on Section 2.21 of the Company Disclosure Schedule. Other than contracts which have terminated or expired in accordance with their terms, each of the contracts identified on Section 2.21 of the Company Disclosure Schedule is valid, binding and enforceable in accordance with its terms (subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered on a proceeding in equity or at law)) and is in full force and effect, and assuming all consents required by the terms thereof or applicable law have been obtained, such contracts will continue to be valid, binding and enforceable in accordance with their respective terms and in full force and effect immediately following the consummation of the transactions contemplated hereby. No event has occurred which either entitles, or would, on notice or lapse of time or both, entitle the holder of any 17 indebtedness for borrowed money affecting the Company (except for the execution or consummation of this Agreement) to accelerate, or which does accelerate, the maturity of any indebtedness affecting the Company, except as set forth in Section 2.22 of the Company Disclosure Schedule. 2.23 Interested Party Transactions. Except as set forth in Section 2.23 of the Company Disclosure Schedule, the Company is not indebted to any director, officer, employee or agent of the Company (except for amounts due as normal salaries and bonuses and in reimbursement of ordinary expenses), and no such person is indebted to the Company. Except as set forth in Section 2.23 of the Company Disclosure Schedule, no affiliate of the Company or any Shareholder has, or has had, any interest in any material property (whether real, personal, or mixed and whether tangible or intangible), used in or pertaining to the Company. 2.24 Compliance with Applicable Law. The Company holds all material licenses, franchises, permits and authorizations which are necessary for it to engage in the business currently conducted by it. The Company has complied with and is not in default in any respect under any, applicable law, statute, order, rule, regulation, policy and/or guideline of any Governmental Entity relating to the Company except where the failure to do so would not have a material adverse effect on the Company and the Company has not received notice of any violations of any of the above. 2.25 Insurance. Section 2.25 of the Company Disclosure Schedule sets forth a true and complete list of all insurance policies providing insurance coverage of any nature to the Company. To the knowledge of the Company and the Shareholders, such policies are sufficient for compliance by the Company with all requirements of law and all material agreements to which the Company is a party or by which any of its assets are bound. To the knowledge of the Company and the Shareholders, all of such policies are in full force and effect and are valid and enforceable, and the Company has complied with all material terms and conditions of such policies, including premium payments. Except as set forth on the Company Disclosure Schedule, none of the insurance carriers has indicated to the Company an intention to cancel any such policy. The Company has no claim pending against any of the insurance carriers under any of such policies and neither the Company nor either Shareholder has knowledge of any actual or alleged occurrence of any kind which may give rise to any such claim. 2.26 Brokers. Neither the Company nor any of its officers or directors has employed any broker or finder or incurred any liability for any broker's fees, commissions or finder's fees in connection with any of the transactions contemplated by this Agreement. 2.27 Minute Books. The minute books of the Company made available to Parent contain a complete and accurate summary of all meetings of directors and shareholders or actions by written consent since the time of incorporation of the Company through the date of this Agreement, and reflect all transactions referred to in such minutes accurately. 2.28 Accounts and Notes Receivable. Subject to any reserves set forth on the Reference Balance Sheet, the accounts receivable and the notes receivable shown on the Reference Balance Sheet represent and will represent bona fide claims arising in the ordinary course of business against debtors for sales and other charges, and are not subject to discount 18 except for normal cash and immaterial trade discounts. To the knowledge of the Company or either of the Shareholders, and subject to any reserves set forth on the Reference Balance Sheet, such accounts receivable and notes receivable are collectible by the Company in the ordinary course of business. The amount carried for doubtful accounts and allowances disclosed in the Reference Balance Sheet is sufficient to provide for any losses which may be sustained on realization of the accounts receivable and notes receivable. 2.29 Certain Payments. Since January 1, 1997, to the knowledge of the Company or either of the Shareholders, neither the Company nor any officer, agent or employee of the Company or, to the knowledge of the Company or either of the Shareholders, any other person affiliated with or acting on behalf of the Company has directly or indirectly (a) made any contribution, gift, bribe, rebate, payoff, influence payment, kickback, or other payment in violation of any applicable law, rule or regulation to any person, private or public, regardless of form, whether in money, property, or services, or (b) established or maintained any fund or material asset that has not been recorded in the books and records of the Company. 2.30 Accredited Investor Status. Each of the Shareholders is an "accredited investor" within the meaning of Regulation D promulgated under the Securities Act of 1933, as amended. 2.31 Representations Complete. None of the representations or warranties made by the Company or Shareholders herein or in any Schedule hereto, including the Company Disclosure Schedule, or certificate furnished by the Company pursuant to this Agreement, contains any untrue statement of a material fact. ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB Parent and Merger Sub hereby jointly and severally represent and warrant to the Company that, except as set forth in the disclosure schedule attached hereto (the "Parent Disclosure Schedule"): 3.1 Corporate Organization. Each of Parent and its subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation. Parent and each of its subsidiaries have the corporate power and authority to own or lease their respective properties and assets and to carry on their respective businesses as they are now being conducted, and are duly qualified to do business in each jurisdiction in which the nature of the business conducted by them or the character or location of the properties and assets owned or leased by them makes such qualification necessary. 3.2 Authority; No Violation. (a) Each of Parent and Merger Sub has the requisite corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The Board of Directors of Parent has unanimously approved this Agreement and the Merger and all transactions contemplated hereby. The Board of Directors and the stockholder of Merger Sub have approved this Agreement and 19 the Merger and all transactions contemplated hereby. No other corporate proceedings on the part of Parent or Merger Sub are necessary to approve this Agreement and to consummate the transactions contemplated hereby. This Agreement and all other agreements and documents to be entered into in connection herewith have been duly and validly executed and delivered by Parent and Merger Sub and (assuming due authorization, execution and delivery by the Company and Shareholders) constitute valid and binding obligations of Parent and Merger Sub, enforceable against each of them, in accordance with their terms, except as enforcement may be limited by general principles of equity whether applied in a court of law or a court of equity and by bankruptcy, insolvency and similar laws affecting creditors' rights and remedies generally. (b) Neither the execution and delivery of this Agreement by Parent and Merger Sub, nor the consummation by Parent and Merger Sub of the transactions contemplated hereby, nor compliance by Parent and Merger Sub with any of the terms or provisions hereof, will (i) violate any provision of the Certificate or Articles of Incorporation or Bylaws of Parent or Merger Sub, or (ii) assuming that the consents and approvals referred to in Section 3.3 hereof are duly obtained, (x) violate any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to Parent or Merger Sub or any of their respective properties or assets, or (y) violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of or a right of termination or cancellation under, accelerate the performance required by, or result in the creation of any lien, pledge, security interest, charge or other encumbrance upon any of the properties or assets of Parent or Merger Sub under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Parent or Merger Sub is a party, or by which either of them or any of their respective properties or assets may be bound or affected. 3.3 Consents and Approvals. Except for (a) the filing of the Certificate of Merger with the California Secretary of State and the Articles of Merger with the Division pursuant to the CGCL and Section 1107 of the URBCA, (b) any federal or state securities filings to be made by Parent or Merger Sub to perfect the private placement exemption of the Merger Consideration, which shall be timely made, (c) the listing of the Parent Common Stock on the New York Stock Exchange, (d) such filings, authorizations or approvals as may be set forth in Section 3.4 of the Parent Disclosure Schedule, no consents or approvals orders or authorizations of or filings or registrations with any Governmental Entity or with any third party are necessary with respect to the Parent or Merger Sub in connection with (1) the execution and delivery of this Agreement and (2) the consummation of the Merger and the other transactions contemplated hereby. All such qualifications and filings required to be made by Parent or Merger Sub will, in the case of qualifications, be effective as of the Effective Time and will, in the case of filings, be made within the time prescribed by law. 3.4 Financial Statements and Reports. Parent has timely filed all required forms, reports, statements and documents with the Securities and Exchange Commission (the "Commission") all of which have complied in all material respects with all applicable requirements of the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Parent has delivered or made available to Company and the Shareholders true and complete copies of (i) Parent's Annual Report on Form 10-K for the fiscal year ended 20 October 31, 2001, (ii) its proxy statement relating to Parent's annual stockholders meeting held March 26, 2002, and (iii) all other forms, reports, statements and documents filed by Parent with the Commission since October 31, 2001 (collectively, the "Parent Reports"). As of their respective dates, the Parent Reports did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. The consolidated financial statements of Parent included or incorporated by reference in the Parent Reports were prepared in accordance with GAAP applied on a consistent basis (except as otherwise stated in such financial statements or, in the case of audited statements, the related report thereon of independent certified public accounts), and present fairly the financial position and results of operations, cash flows and of changes in stockholders' equity of Parent and its consolidated subsidiaries as of the dates and for the periods indicated, subject, in the case of unaudited interim financial statements, to normal year-end audit adjustments, none of which either singly or in the aggregate are or will be material, and except that the unaudited interim financial statements do not contain all of the disclosures required by GAAP. 3.5 Parent Common Stock. The shares of Parent Common Stock to be issued to the holders of Company Common Stock as contemplated hereunder are duly authorized, and when issued pursuant to the terms of this Agreement, will be validly issued, fully paid, non-assessable and not subject to any preemptive rights. 3.6 Compliance with Securities Laws. Based upon the representation that Shareholders are "accredited investors" as that term is defined within the meaning of Regulation D promulgated under the Securities Act of 1933, as amended, the Stock Consideration will be issued to the Shareholders in compliance with the applicable exemptions from (i) the registration and prospectus delivery requirements of the Securities Act of 1933, as amended, and (ii) the registration and qualification requirements of all applicable securities laws of the states of the United States. 3.7 Consents and Approvals. Neither the execution and delivery of this Agreement by Parent or Merger Sub nor the consummation of the transactions contemplated hereby will require any action or consent or approval of, or review by, or registration or filing by Parent or any of its affiliates with, any third party or any Governmental Entity, other than (i) registrations or other actions required under federal and state securities laws as are contemplated by this Agreement or (ii) consents or approvals of any Governmental Entity set forth in Section 3.5 to the Parent Disclosure Schedule. 3.8 Brokers. Neither Parent, Merger Sub, nor any of their respective officers or directors has employed any broker or finder or incurred any liability for any broker's fees, commissions or finder's fees in connection with any of the transactions contemplated by this Agreement. 3.9 Compliance. Parent is, or will timely be in all material respects, in compliance with all current and proposed listing and corporate governance requirements of the New York Stock Exchange, and is in compliance in all material respects, and will continue to remain in compliance following the Effective Time, with all rules, regulations, and requirements of the Sarbanes-Oxley Act of 2002 and the Securities and Exchange Commission. 21 3.10 Representations Complete. None of the representations or warranties made by Parent or Merger Sub herein or in any Schedule hereto, including the Parent Disclosure Schedule, or certificate furnished by the Parent or Merger Sub pursuant to this Agreement, contains any untrue statement of a material fact. 3.11 Taxes. The Parent has duly and timely filed (including applicable extensions granted without penalty) all material Tax Returns (as hereinafter defined) required to be filed at or prior to the Effective Time, and such Tax Returns are true and correct in all material respects, and the Parent has paid in full or made adequate provision in its financial statements included in the Parent Reports for all material Taxes (as hereinafter defined) shown to be due on such Tax Returns. As of the date hereof (i) the Parent has not requested any extension of time within which to file any Tax Returns in respect of any fiscal year which have not since been filed and no request for waivers of the time to assess any Taxes are pending or outstanding, (ii) no claim for Taxes has become a lien against the property of the Parent or is being asserted against the Parent other than liens for Taxes not yet due and payable, (iii) no known audit of any Tax Return of the Parent is being conducted by a Tax authority, (iv) no extension of the statute of limitations on the assessment of any Taxes has been granted to the Parent and is currently in effect, and (v) there is no agreement, contract or arrangement to which the Parent is a party that may result in the payment of any amount that would not be deductible by reason of Sections 280G, 162 or 404 of the Code. The Parent has not been or will be required to include any adjustment in taxable income for any Tax period (or portion thereof) pursuant to Section 481 or 263A of the Code or any comparable provision under state or foreign Tax laws as a result of transactions, events or accounting methods employed prior to the Merger. ARTICLE IV ADDITIONAL AGREEMENTS 4.1 Covenants of the Company. During the period from the date of this Agreement, and continuing until the Effective Time, except as expressly contemplated or permitted by this Agreement, as identified in Section 4.1 of the Company Disclosure Schedule, or with the prior written consent of Parent, the Company shall carry on its business in the ordinary course consistent with past practice. Without limiting the generality of the foregoing, or as otherwise contemplated by this Agreement, as identified in Section 4.1 of the Company Disclosure Schedule, or consented to in writing by Parent, the Company shall not: (a) declare or pay any dividends on, or make other distributions in respect of, any of the Company Common Stock; (b) (i) repurchase, redeem or otherwise acquire any shares of its capital stock, or any securities convertible into or exercisable for any shares of such capital stock, (ii) split, combine or reclassify any shares of its capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or (iii) issue, deliver or sell, or authorize or propose the issuance, delivery or sale of, any shares of its capital stock or any securities convertible into or exercisable for, or any rights, warrants or options to acquire, any such shares, or enter into any agreement with respect to any of the foregoing; 22 (c) amend its Articles of Incorporation, Bylaws or other similar governing documents; (d) make any capital expenditures other than those which are made in the ordinary course of business or are necessary to maintain existing assets in good repair; (e) enter into any new line of business; (f) acquire or agree to acquire, by merging or consolidating with, or by purchasing a substantial equity interest in or a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof or otherwise acquire any assets, which would be material, individually or in the aggregate, to the Company; (g) take any action that is intended or may reasonably be expected to result in any of its representations and warranties set forth in this Agreement being or becoming untrue, or in any of the conditions to the Merger set forth in this Agreement not being satisfied; (h) change its methods of accounting in effect at March 31, 2002; (i) (i) except as contemplated by Section 5.2(h) or required by applicable law or as required to maintain qualification pursuant to the Code, adopt, amend, or terminate any employee benefit plan (including, without limitation, any Company Employee Plan) or any agreement, arrangement, plan or policy between the Company and one or more of its current or former directors, officers or employees, (ii) except for normal increases in the ordinary course of business consistent with past practice, bonuses to certain employees of the Company to be paid immediately prior to the consummation of the Merger, or as required by applicable law, increase in any manner the compensation or fringe benefits of any director, officer or employee or pay any benefit not required by any Company Employee Plan or agreement as in effect as of the date hereof (including, without limitation, the granting of stock options, stock appreciation rights, restricted stock, restricted stock units or performance units or shares); (j) other than activities in the ordinary course of business consistent with past practice, sell, lease, encumber, assign or otherwise dispose of, or agree to sell, lease, encumber, assign or otherwise dispose of, any of its material assets, properties or other rights or agreements; (k) other than in the ordinary course of business consistent with past practice, incur any indebtedness for borrowed money or assume, guarantee, endorse or otherwise as an accommodation become responsible for the obligations of any other individual, corporation or other entity; (l) create, renew, amend or terminate or give notice of a proposed renewal, amendment or termination of, any material contract, agreement or lease for goods, services or office space to which the Company is a party or by which the Company or any of its properties are bound, other than the renewal in the ordinary course of business of any lease the term of which expires prior to the Closing Date; or (m) agree to do any of the foregoing. 23 4.2 Access to Information. Upon reasonable notice and subject to applicable laws relating to the exchange of information, the Company shall afford to the officers, employees, accountants, counsel and other representatives of Parent, access, during normal business hours during the period prior to the Effective Time, to all its properties, books, contracts, commitments, records, officers, employees, accountants, counsel and other representatives and, during such period, the Company shall make available to Parent all information concerning its business, properties and personnel as Parent may reasonably request. All information furnished to Parent pursuant to this Section 4.2 shall be subject to, and Parent shall hold all such information in confidence in accordance with, the provisions of the confidentiality agreement, dated January 25, 2002 (the "Confidentiality Agreement"), between Parent and the Company. 4.3 Public Disclosure. Unless otherwise permitted by this Agreement, Parent and the Company shall consult with each other before issuing any press release or otherwise making any public statement or making any other public (or non-confidential) disclosure (whether or not in response to an inquiry) regarding the terms of this Agreement and the transactions contemplated hereby, and neither shall issue any such press release or make any such statement or disclosure without the prior approval of the other (which approval shall not be unreasonably withheld), except as may be required by law. 4.4 Consents; Cooperation. Each of Parent, Merger Sub and the Company shall promptly apply for or otherwise seek, and use its best efforts to obtain, all consents and approvals required to be obtained by it for the consummation of the Merger, and shall use commercially reasonable efforts to obtain all necessary consents, waivers and approvals under any of its material contracts in connection with the Merger for the assignment thereof or otherwise. 4.5 Legal Requirements. Each of Parent, Merger Sub and the Company will take all reasonable actions necessary to comply promptly with all legal requirements which have been or which may be imposed on them with respect to the consummation of the transactions contemplated by this Agreement and will promptly cooperate with and furnish information to any party hereto necessary in connection with any such requirements imposed upon such other party in connection with the consummation of the transactions contemplated by this Agreement and will take all reasonable actions necessary to obtain (and will cooperate with the other parties hereto in obtaining) any consent, approval, order or authorization of, or any registration, declaration or filing with, any Governmental Entity or other person, required to be obtained or made in connection with the taking of any action contemplated by this Agreement. 4.6 Tax-Free Reorganization Treatment. The parties hereto intend that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Code. Each of the parties hereto shall, and shall cause its respective subsidiaries to, use its commercially reasonable efforts to cause the Merger to so qualify. The parties hereto shall report the Merger in all Tax Returns and other filings consistent with a reorganization within the meaning of Section 368(a) of the Code. 4.7 Certifications, Agreements, and Covenants of the Company. The Company certifies, agrees, and covenants with Parent and Merger Sub as follows: 24 (a) The Merger will be carried out strictly in accordance with the terms of this Agreement, and none of the material terms and conditions thereof have been or will be waived or modified. (b) The consideration to be received in the Merger by the Shareholders of the Company was the result of arm's length bargaining between the managements of Parent and the Company. The fair market value of the Merger Consideration and any cash received in lieu of fractional shares to be received by each Shareholder of the Company will be approximately equal to the fair market value of the Company Common Stock surrendered in the Merger. (c) In the Merger, the holders of Company Common Stock will receive, in exchange for their Company Common Stock, the Merger Consideration. Except for the consideration described herein, no cash or other property originating with Parent or its affiliates has been or will be paid to the holders of Company Common Stock in exchange for Company Common Stock. As of the Effective Time, the Parent Common Stock issued in the Merger will have a value that is not less than 50% of the aggregate value of the Merger Consideration as of such time. (d) The payment of cash in lieu of fractional shares of Parent Common Stock in the Merger is solely for the purpose of avoiding the expense and inconvenience to Parent of issuing fractional shares, if any, and does not represent separately bargained-for consideration. The total cash consideration that will be paid in the Merger to holders of Company Common Stock instead of issuing fractions of Parent Common Stock will not exceed one percent (1%) of the total consideration that will be issued in the Merger to holders of Company Common Stock in exchange for their Company Common Stock. (e) Prior to and in connection with the Merger, no shares of Company Common Stock have been or will be (i) redeemed by the Company, (ii) acquired by a person related to the Company (within the meaning of Treasury Regulation Section 1.368-1(e)(3) determined without regard to Treasury Regulation Section 1.368-1(e)(3)(i)(A)) for consideration other than Parent Common Stock or Company Common Stock, or (iii) the subject of any extraordinary distribution by the Company. (f) There is no plan or intention on the part of either of the Shareholders to sell, exchange or otherwise dispose of any Parent Common Stock to be received in the Merger by such holder directly or indirectly to Parent or to a person related to Parent (within the meaning of Treasury Regulation Section 1.368-1(e)(3)) for consideration other than Parent Common Stock. (g) No shareholders of the Company will elect appraisal or dissenters' rights. (h) The Company has no outstanding equity interests other than as described in Section 2.2 of the Merger Agreement. At the Effective Time, and following the Merger, the Company will not have outstanding any warrants, options, convertible securities, or any other type of right pursuant to which any person could acquire stock in the Company. (i) The Company has no plan or intention to issue additional shares of its stock. 25 (j) The Company has not agreed to assume, nor will it directly or indirectly assume, any expense or other liability, whether fixed or contingent, of any holder of Company Common Stock. (k) The Company is not an investment company as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code. (l) The Company is not under the jurisdiction of a court in a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code. (m) There is no inter-corporate indebtedness existing between Parent and the Company or between Merger Sub and the Company that was issued, acquired or will be settled at a discount. (n) None of the compensation to be received by any shareholder-employee of the Company in the Merger will be separate consideration for, or allocable to, any of such person's shares of Company Common Stock; none of the Parent Common Stock to be received by any shareholder-employee of the Company will be separate consideration for, or allocable to, any past or future services, and the compensation to be paid to any shareholder-employee after the Merger will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's length for similar services. (o) In connection with the Merger, the Company has not sold, transferred or otherwise disposed of any of its assets as would prevent Parent from either continuing the historic business of the Company or using a significant portion of the Company's historic business assets in a business following the Merger, both within the meaning of Treasury Regulation Section 1.368-1(d). (p) On the date of the Merger, the fair market value of the assets of the Company will exceed the sum of its liabilities, plus the amount of liabilities, if any, to which the assets are subject. (q) In the Merger, Merger Sub will acquire at least 90% of the fair market value of the net assets and at least 70% of the fair market value of the gross assets held by the Company immediately prior to the Merger. For purposes of this representation, amounts paid by the Company to shareholders who receive cash or other property in the Merger, amounts used by the Company to pay its reorganization expenses and those of its shareholders, and all redemptions and distributions (except for regular, normal dividends) made by the Company will be included as assets of the Company immediately prior to the Merger. (r) All options, warrants or rights to acquire shares of Company Common Stock were issued with an exercise price no less than fair market value at the time of issue. (s) The Merger is being affected for bona fide business reasons. (t) None of the Company's preferred stock is issued or outstanding. 26 (u) The liabilities of the Company assumed by Merger Sub and the liabilities to which the transferred assets of the Company are subject were incurred by the Company in the ordinary course of business. (v) The Company will not take any position on any federal, state, or local income or franchise tax return, or take any tax reporting position, that is inconsistent with the treatment of the Merger as a reorganization for federal income tax purposes, unless otherwise required by a "determination" (as defined by Section 1313(a)(1) of the Code) or by a change in law after the date hereof. (w) The Merger Agreement (including all exhibits and attachments thereto) represents the full and complete agreement between Parent, Merger Sub, Company, and the Shareholders regarding the Merger, and there are no other written or oral agreements regarding the Merger. 4.8 Certifications, Agreements, and Covenants of Parent and Merger Sub. Parent and Merger Sub certify, agree, and covenant to the Company as follows: (a) The Merger will be carried out strictly in accordance with the terms of this Agreement, and none of the material terms and conditions thereof have been or will be waived or modified. (b) The consideration to be issued in the Merger to the Shareholders of the Company was the result of arm's length negotiation between the managements of Parent and the Company. The fair market value of the Merger Consideration and any cash in lieu of fractional shares to be received by each of the Shareholders of the Company will be approximately equal to the fair market value of the Company Common Stock surrendered in the Merger. (c) In the Merger, the holders of Company Common Stock will receive, in exchange for their Company Common Stock, the Merger Consideration. Except for the consideration described herein, no cash or other property originating with Parent or its affiliates has been or will be paid to the holders of Company Common Stock in exchange for Company Common Stock. As of the Effective Time, the Parent Common Stock issued in the Merger will have a value that is not less than 50% of the aggregate value of the Merger Consideration as of such time. (d) The payment of cash in lieu of fractional shares of Parent Common Stock in the Merger is solely for the purpose of avoiding the expense and inconvenience to Parent of issuing fractional shares, if any, and does not represent separately bargained-for consideration. (e) No shareholders of the Company will elect appraisal or dissenters rights. (f) In the Merger, Merger Sub will acquire at least 90% of the fair market value of the net assets and at least 70% of the fair market value of the gross assets held by the Company immediately prior to the Merger. For purposes of this representation, amounts paid by the Company to shareholders who receive cash or other property in the Merger, amounts used by the Company to pay its reorganization expenses and those of its shareholders, and all 27 redemptions and distributions (except for regular, normal dividends) made by the Company will be included as assets of the Company immediately prior to the Merger. (g) Following the Merger, Parent will either continue the historic business of the Company or use a significant portion of the Company's historic business assets in a business, both within the meaning of Treasury Regulation Section 1.368-1(d). (h) Parent has no plan or intention to: (a) liquidate Merger Sub; (b) merge Merger Sub with or into another corporation; (c) sell, exchange, transfer or otherwise dispose of any stock of Merger Sub except for transfers described in Revenue Ruling 2001-24, 2001-22 I.R.B. 1290; or (d) cause Merger Sub to sell, exchange, transfer or otherwise dispose of any of the assets of the Company acquired in the Merger, except for dispositions made in the ordinary course of business or transfers described in Section 368(a)(2)(C) of the Code or Treasury Regulations Section 1.368-2(k)(1). (i) In connection with the Merger, neither Parent nor any person related to Parent (within the meaning of Treasury Regulation Section 1.368-1(e)(3)) will purchase, exchange, redeem or otherwise acquire (directly or indirectly) any Parent Common Stock issued to holders of Company Common Stock in the Merger for consideration other than the Merger Consideration, except for (i) cash paid in lieu of fractional shares of Parent Common Stock pursuant to the Merger and (ii) open market purchases pursuant to Parent's stock repurchase program, if any, consistent with Revenue Ruling 99-58, 1999-2 C.B. 701. (j) Parent and Merger Sub will pay their respective expenses, if any, incurred in connection with the Merger, and will not pay any of the expenses of the Company or of the Shareholders of the Company incurred in connection with the Merger. Neither Parent nor Merger Sub has agreed to assume, nor will it directly or indirectly assume, any expense or other liability, whether fixed or contingent, of any holder of Company Common Stock. (k) Neither Parent nor any person related to Parent (within the meaning of Treasury Regulation Section 1.368-1(e)(3)) has owned during the past five (5) years any shares of stock of the Company. (l) Neither Parent nor Merger Sub is an investment company as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code. (m) Before the Merger, Parent will own one hundred percent (100%) of Merger Sub. No stock or securities of Merger Sub will be issued in the Merger. (n) Parent has no plan or intention to cause Merger Sub to issue additional shares of stock of Merger Sub that would result in Parent losing control of Merger Sub within the meaning of Section 368(c) of the Code. Prior to and immediately following the Merger, Merger Sub will not have outstanding any warrants, options, convertible securities, or any other type of right pursuant to which any person could acquire stock in Merger Sub that, if exercised or converted, would affect Parent's ownership or retention of control of Merger Sub within the meaning of Section 368(c) of the Code. 28 (o) There is no inter-corporate indebtedness existing between Parent and the Company or between Merger Sub and the Company that was issued, acquired or will be settled at a discount. (p) None of the compensation to be received by any shareholder-employee of the Company in the Merger will be separate consideration for, or allocable to, any of such person's shares of Company Common Stock; none of the shares of Parent Common Stock to be received by any shareholder-employee of the Company will be separate consideration for, or allocable to, any past or future services; and the compensation to be paid to any shareholder-employee after the Merger will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's length for similar services. (q) The Merger is being affected for bona fide business reasons. (r) Neither Parent nor Merger Sub will take any position on any federal, state, or local income or franchise tax return, or take any tax reporting position, that is inconsistent with the treatment of the Merger as a reorganization for federal income tax purposes, unless otherwise required by a "determination" (as defined by Section 1313(a)(1) of the Code) or by a change in law after the date hereof. (s) The Merger Agreement (including all exhibits and attachments thereto) represents the full and complete agreement between Parent, Merger Sub, the Company, and the Shareholders regarding the Merger, and there are no other written or oral agreements regarding the Merger. 4.9 Shareholder Vote. Until this Agreement has been terminated in accordance with its terms, the Shareholders agree to vote all shares of Company Common Stock held by them in favor of the Merger. 4.10 Registration Rights; NYSE Listing. Parent shall provide to the Shareholders registration rights pursuant to the terms of a registration rights agreement (the "Registration Rights Agreement") substantially in the form of Exhibit A attached hereto. Within 7 days of the Effective Time, Parent shall apply for the listing, and list, the shares of Parent Common Stock to be issued pursuant to this Agreement on the New York Stock Exchange. 4.11 Consulting Agreement. As a condition to the closing of the Merger, John Thompson will enter into a consulting agreement with Parent (the "Consulting Agreement") substantially in the form of Exhibit B attached hereto. 4.12 Blue Sky Laws. Parent shall take such steps as may be necessary to comply with the securities and blue sky laws of all jurisdictions which are applicable to the issuance of the Parent Common Stock in connection with the Merger. The Company shall use its best efforts to assist Parent as may be necessary to comply with the securities and blue sky laws of all jurisdictions which are applicable in connection with the issuance of Parent Common Stock in connection with the Merger. 4.13 Control of Operations. Nothing contained in this Agreement shall give Parent, directly or indirectly, the right to control or direct the operations of the Company prior to the 29 Effective Time. Prior to the Effective Time, each of Parent and the Company shall exercise, consistent with the terms and conditions of this Agreement, complete control and supervision over its respective operations. 4.14 Employee Matters. At the Effective Time, except for Rocky Taylor, Megan Suhadolc, Karen Brooks, and Tabitha Fearn who will only be employed through September 24, 2002, employees of the Company and its subsidiaries immediately prior to the Effective Time as listed on Schedule 4.14 of the Company Disclosure Schedule will become employees of the Surviving Corporation. 4.15 Covenant Not to Compete. Each of the Shareholders, severally and not jointly, agree that for a period of three (3) years from the Effective Date (the "Non-Compete Period"), he or she shall not, directly or indirectly, as principal, agent, employee, employer, consultant, stockholder, partner or in any other individual or representative capacity, engage in any business directly competitive with the business currently conducted by the Company in the United States (the "Competitive Business"). Notwithstanding anything to the contrary contained herein, the Shareholders may, without violating the provisions of this Section 4.15, purchase and hold up to 5% of any entity whose shares are publicly traded on NASDAQ or any U.S. stock exchange, whether or not such entity is engaged in a Competitive Business. Any provision of this Section 4.15 which is deemed invalid or unenforceable in any jurisdiction shall, as to that jurisdiction and subject to this paragraph be ineffective to the extent of such invalidity or unenforceability, without affecting in any way the remaining provisions of this paragraph in such jurisdiction or rendering that or any other provisions of this Agreement invalid or unenforceable in any other jurisdiction. If any covenant should be deemed invalid or unenforceable because of its scope, geographical area or duration, or any combination thereof, such covenant shall be modified and reformed so that the scope, geographic area and duration of the covenant is reduced only to the minimum extent necessary to render the modified covenant valid and enforceable. 4.16 Best Efforts and Further Assurances. Each of the parties to this Agreement shall use its best efforts to effectuate the transactions contemplated hereby and to fulfill and cause to be fulfilled the conditions to Closing under this Agreement. Each party hereto, at the reasonable request of another party hereto, shall execute and deliver such other instruments and do and perform such other acts and things as may be necessary or desirable for effecting completely the consummation of this Agreement and the transactions contemplated hereby. 4.17 Landlord Consents. Parent, Company, and Merger Sub, as may be applicable, shall execute all consents and estoppel certificate, in the form and substance satisfactory to Parent and the Company, from the landlords with respect to each of the leases and subleases set forth on Section 2.12 of the Company Disclosure Schedule as soon as possible following the Effective Time. 30 ARTICLE V CONDITIONS PRECEDENT 5.1 Conditions to Each Party's Obligation to Effect the Merger. The respective obligation of each party to effect the Merger shall be subject to the satisfaction at or prior to the Effective Time of the following conditions: (a) No Injunctions or Restraints; Illegality. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint or prohibition preventing the consummation of the Merger shall be in effect, nor shall any proceeding brought by an administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, seeking any of the foregoing be pending; nor shall there be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Merger, which makes the consummation of the Merger illegal. In the event an injunction or other order shall have been issued, each party agrees to use its reasonable diligent efforts to have such injunction or other order lifted. (b) Governmental Approval. The Company, Parent and Merger Sub shall have timely obtained from each Governmental Entity all approvals, waivers and consents, if any, necessary for consummation of or in connection with the Merger and the several transactions contemplated hereby (each a "Requisite Regulatory Approval"), including such approvals, waivers and consents as may be required under the Securities Act and under state blue sky laws. (c) Consulting Agreement. Parent and John Thompson shall have entered into the Consulting Agreement. (d) Continued Listing. Parent's Common Stock shall continue to be listed and trading on the New York Stock Exchange. (e) Capitalization. No stock split, stock dividend (including any dividend or distribution of securities convertible into Parent Common Stock or Company Common Stock) reorganization, recapitalization, reclassification or other like change with respect to Parent Common Stock or Company Common Stock shall have occurred since the date of this Agreement. 5.2 Conditions to Obligations of Parent and Merger Sub. The obligation of Parent and Merger Sub to effect the Merger is also subject to the satisfaction or waiver by Parent and Merger Sub at or prior to the Effective Time of the following conditions: (a) Representations and Warranties. The representations and warranties of the Company set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and (except to the extent such representations and warranties speak as of an earlier date) as of the Closing Date. Parent shall have received a certificate signed on behalf of the Company by the Chief Executive Officer and the Chief Financial Officer of the Company to the foregoing effect. 31 (b) Performance of Obligations of the Company. The Company shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date, and Parent shall have received a certificate signed on behalf of the Company by the Chief Executive Officer and the Chief Financial Officer of the Company to such effect. (c) Injunctions or Restraints on Conduct of Business. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint provision limiting or restricting Parent's conduct or operation of the business of the Company following the Merger shall be in effect, nor shall any proceeding brought by an administrative agency or commission or other Governmental Entity, domestic or foreign, seeking the foregoing be pending. (d) No Material Adverse Changes. There shall not have occurred any material adverse change in the condition (financial or otherwise), properties, assets (including intangible assets), liabilities, business, operations or results of operations of the Company. (e) Third Party Consents. Parent shall have been furnished with evidence satisfactory to it of the consent or approval of those persons whose consent or approval shall be required in connection with the Merger under the contracts of the Company set forth on Section 2.4 of the Company Disclosure Schedule. (f) Price of Parent Common Stock. The average closing price of shares of Parent's Common Stock, as reported by the New York Stock Exchange, for the fifteen (15) consecutive trading days ending on September 12, 2002 shall be more than $32.71 per share. (g) Landlord Consents. The Company shall have provided Parent a written status report of all consents and estoppel certificates from the landlord with respect to each of the leases and subleases set forth on Section 2.12 of the Company Disclosure Schedule. (h) Termination of 401(k) Plan. The Company shall have terminated its 401(k) Plan in a manner satisfactory to Parent, which shall be effective as of September 30, 2002. 5.3 Conditions to the Obligations of Company and Shareholders. The obligation of the Company to effect the Merger is also subject to the satisfaction or waiver by the Company at or prior to the Effective Time of the following conditions: (a) Representations and Warranties. The representations and warranties of Parent and Merger Sub set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and (except to the extent such representations and warranties speak as of an earlier date) as of the Closing Date. The Company shall have received a certificate signed (i) on behalf of Parent by the Chief Executive Officer and the Vice President of Finance of Parent and (ii) on behalf of Merger Sub by the President of Merger Sub, in each case to the foregoing effect. (b) Performance of Obligations of Parent and Merger Sub. Parent and Merger Sub shall have performed in all material respects all obligations required to be performed by 32 them under this Agreement at or prior to the Closing Date, and the Company shall have received a certificate signed (i) on behalf of Parent by the Chief Executive Officer and the Vice President of Finance of Parent and (ii) on behalf of Merger Sub by the President of Merger Sub, in each case to such effect. (c) Injunctions or Restraints on Conduct of Business. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint provision limiting or restricting Parent's business following the Merger shall be in effect, nor shall any proceeding brought by an administrative agency or commission or other Governmental Entity, domestic or foreign, seeking the foregoing be pending. (d) No Material Adverse Changes. There shall not have occurred any material adverse change in the condition (financial or otherwise), properties, assets (including intangible assets), liabilities, business, operations or results of operations of Parent. (e) Price of Parent Common Stock. The average closing price of Parent Common Stock, as reported by the New York Stock Exchange, for the fifteen (15) consecutive trading days ending on September 12, 2002 shall be less than $22.14 per share. ARTICLE VI TERMINATION AND AMENDMENT 6.1 Termination. This Agreement may be terminated at any time prior to the Effective Time: (a) by mutual consent of the Company, Parent and Merger Sub in a written instrument; (b) by either Parent or the Company upon written notice to the other party if any Governmental Entity of competent jurisdiction shall have issued a final nonappealable order enjoining or otherwise prohibiting the Merger; (c) by either Parent or the Company if the Merger shall not have been consummated on or before October 31, 2002 unless the failure of the Closing to occur by such date shall be due to the failure of the party seeking to terminate this Agreement to perform or observe the covenants and agreements of such party set forth herein; (d) by either Parent or the Company if there shall have been a material breach of any of the representations or warranties set forth in this Agreement on the part of the other party, which breach is not cured within thirty (30) days following written notice to the party committing such breach, or which breach, by its nature, cannot be cured prior to the Closing; or (e) by either Parent or the Company if there shall have been a material breach of any of the covenants or agreements set forth in this Agreement on the part of the other party, which breach shall not have been cured within thirty (30) days following receipt by the 33 breaching party of written notice of such breach from the other party hereto, or which breach, by its nature, cannot be cured prior to the Closing. 6.2 Effect of Termination. In the event of termination of this Agreement by either Parent or the Company as provided in Section 6.1, this Agreement shall forthwith become void and have no effect except that (i) the last sentence of Section 4.2, and each of Sections 4.3, 6.2, 7.1, 7.2, 7.3, 7.4 and 7.7 shall survive any termination of this Agreement and (ii) notwithstanding anything to the contrary contained in this Agreement, no party shall be relieved or released from any liabilities or damages arising out of its willful breach of any provision of this Agreement. 6.3 Amendment. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. 6.4 Extension; Waiver. At any time prior to the Effective Time, each of the parties hereto may, to the extent legally allowed, (a) extend the time for the performance of any of the obligations or other acts of the other party hereto, (b) waive any inaccuracies in the representations and warranties of the other party contained herein or in any document delivered pursuant hereto and (c) waive compliance with any of the agreements or conditions of the other party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party, but such extension or waiver or failure to insist on strict compliance with an obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. ARTICLE VII GENERAL PROVISIONS 7.1 Expenses. All costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such costs and expenses. 7.2 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally, telecopied (with confirmation), mailed by registered or certified mail (return receipt requested) or delivered by an express courier (with confirmation) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): If to Parent, to: Quiksilver, Inc. 15202 Graham Street Huntington Beach, CA 92649 Attention: General Counsel with a copy to: Hewitt & O'Neil LLP 19900 MacArthur Blvd., Suite 1050 Irvine, CA 92612 Attn: Paul A. Rowe, Esq. 34 and If to the Company or Shareholders, to: 2750 Meadow Creek Drive Park City, Utah 84060 Attention: John Thompson with a copy to: Snell & Wilmer L.L.P. 15 West South Temple, Suite 1200 Gateway Tower West Salt Lake City, Utah 84101 Attention: John G. Weston, Esq. 7.3 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA (WITHOUT REFERENCE TO CONFLICT OF LAW PRINCIPLES OTHER THAN THOSE DIRECTING CALIFORNIA LAW) EXCEPT TO THE EXTENT MANDATORILY GOVERNED BY THE LAWS OF THE STATE OF UTAH. 7.4 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the Merger is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner to the fullest extent permitted by applicable law in order that the Merger may be consummated as originally contemplated to the fullest extent possible. 7.5 Assignment; Binding Effect; Benefit. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties hereto; provided, however, that Merger Sub may assign its rights, interests and obligations hereunder to any wholly-owned subsidiary of Parent unless such transfer or assignment would in any way impact the tax-deferred nature of the Merger and transactions contemplated herein. Subject to the preceding sentence, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. Notwithstanding anything contained in this Agreement to the contrary, nothing in this Agreement, expressed or implied, is intended to confer on any person other than the parties hereto or their respective successors and permitted assigns any rights or remedies under or by reason of this Agreement. 7.6 Headings. The descriptive headings contained in this Agreement are included for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. 7.7 Entire Agreement. This Agreement (including the Exhibits, Schedules, the Parent Disclosure Schedule and the Company Disclosure Schedule) constitutes the entire agreement 35 among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings among the parties with respect thereto. No addition to or modification of any provision of this Agreement shall be binding upon any party hereto unless made in writing and signed by all parties hereto. 7.8 Counterparts. This Agreement may be executed in two or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. [Signature page follows] 36 IN WITNESS WHEREOF, the parties have entered into this Agreement as of the date first written above. PARENT: QUIKSILVER, INC. By: _______________________________________ Name: Title: MERGER SUB: QS RETAIL, INC. By: _______________________________________ Name: Title: COMPANY: BEACH STREET, INC. By: _______________________________________ Name: Title: SHAREHOLDERS: ___________________________________________ John Thompson ___________________________________________ Diana Thompson [SIGNATURE PAGE TO MERGER AGREEMENT] 37 REGISTRATION RIGHTS AGREEMENT FORM OF REGISTRATION RIGHTS AGREEMENT This REGISTRATION RIGHTS AGREEMENT (the "AGREEMENT") is entered into as of September 17, 2002, by and between Quiksilver, Inc., a Delaware corporation (the "COMPANY"), and John and Diana Thompson (each an "INVESTOR" and together the "INVESTORS"). RECITALS WHEREAS, the Investors were holders of all of the outstanding shares of the capital stock of Beach Street, Inc., a Utah corporation ("BEACH STREET"); WHEREAS, pursuant to the terms and conditions of that certain Agreement and Plan of Merger and Reorganization, dated as of September 17, 2002 by and among the Company, Beach Street, QS Retail, Inc. ("QS RETAIL") and the Investors (the "MERGER AGREEMENT"), at the Effective Time (as defined in the Merger Agreement) each Investor became a holder of shares of the common stock of the Company ("COMMON STOCK"); and WHEREAS, in connection with entering into the Merger Agreement, the Company agreed to grant the Investors certain registration rights with respect to the shares of Common Stock issued to the Investors at the Effective Time pursuant to the Merger Agreement. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals, the mutual promises hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. DEFINITIONS The following terms, as used herein, shall have the following meanings: "COMMISSION" means the Securities and Exchange Commission. "DEMAND REGISTRATION RIGHTS" means the rights of the Rights Holders to have their Registrable Shares registered on the terms and conditions of this Agreement pursuant to a Registration Statement under the Securities Act that is filed by the Company as contemplated in Section 2.2 of this Agreement. "EFFECTIVE TIME" has the meaning set forth in the Merger Agreement. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder, as they each may, from time to time, be in effect. "MERGER" means the merger of Beach Street with and into QS Retail. A-1 "MERGER SHARES" means the aggregate number of shares of Common Stock received by the Investors in the Merger pursuant to the Merger Agreement in exchange for the shares of Beach Street stock (calculated and allocated as provided in the Merger Agreement) that were outstanding at the Effective Time. "RIGHTS HOLDERS" means the Investors during such time as they hold Registrable Shares, and any persons or entities to whom the rights granted under this Agreement are transferred in accordance with Section 12 hereof. "REGISTRABLE SHARES" means: (a) the Merger Shares; and (b) any other securities issued in respect of the Merger Shares (because of stock splits, stock dividends, reclassifications, recapitalizations, or similar events); PROVIDED, HOWEVER, that shares which are Registrable Shares shall cease to be Registrable Shares: (i) upon any sale or other transfer of such shares pursuant to a Registration Statement or Rules 144 or 145 under the Securities Act or any similar provision then in force; or (ii) if such shares are capable of being distributed pursuant to Rule 144(k) under the Securities Act; or (iii) upon any sale or transfer to a person or entity to which, pursuant to Section 12 of this Agreement, the rights provided by this Agreement are not transferable. "REGISTRATION STATEMENT" means a registration statement filed by the Company with the Commission for a public offering and sale of Common Stock (other than a registration statement covering only securities proposed to be issued in exchange for securities or assets of another person or entity or in connection with an employee benefit plan). "SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder, as they each may, from time to time, be in effect. "PIGGY BACK REGISTRATION RIGHTS" means the rights of the Rights Holders to have their Registrable Shares registered on the terms and conditions of this Agreement pursuant to a Registration Statement under the Securities Act that is filed by the Company as contemplated in Subsection 2.1 of this Agreement. 2. REGISTRATION RIGHTS 2.1 PIGGYBACK REGISTRATION. If the Company proposes to file a Registration Statement for shares of Common Stock to be issued by the Company other than a Registration Statement (i) on Form S-4 or Form S-8 or any successor Form thereto or (ii) filed in connection A-2 with an exchange offer (a "PIGGY BACK REGISTRATION STATEMENT") at any time until the date that such shares cease to be Registrable Shares then, the Company will, within 10 business days prior to such filing, give written notice to all Rights Holders of its intention to do so and, upon the written request of Rights Holders holding in the aggregate at least a majority of the Registrable Shares given within twenty (20) days after the Company provides such notice, the Company shall use its best efforts to cause all Registrable Shares which the Company has been requested by such Rights Holders to register to be registered under such Piggy Back Registration Statement; PROVIDED, HOWEVER, that the Company shall have the right to postpone or withdraw any registration effected pursuant to this Section 2.1 without incurring any liability for doing so to any Rights Holder. Subject to Section 2.4 below, if any Registrable Shares are to be registered pursuant to this Section 2.1, then the Company shall provide notice of such fact to all Rights Holders, and all Rights Holders will then have the right to register their Registrable Shares under such Piggy Back Registration Statement. In the event the Company and its underwriters, if any, permit all eligible Registrable Shares to be registered under Piggy Back Registration Statement without any Cutback (as hereinafter defined), and such Registration Statement (i) is declared effective by the Commission and (ii) remains effective for the Applicable Registration Period (as hereinafter defined), then, the Piggy Back Registration Rights under this Section 2.1 and the Demand Registration Rights under Section 2.2 shall terminate at the end of such time period. 2.2 DEMAND REGISTRATION. Subject to Section 2.1, at any time on or after February 1, 2003, Rights Holders holding in the aggregate at least a majority of the Registrable Shares may request, in writing, that the Company effect the registration under the Securities Act of all or any portion of the Registrable Shares. If the holders initiating the registration intend to distribute the Registrable Shares by means of an underwriting, they shall so advise the Company in their request. Upon receipt of any such request, the Company shall promptly give written notice of such proposed registration to all Rights Holders. All Rights Holders shall have the right, by giving written notice to the Company within twenty (20) days after the Company provides its notice, to elect to participate in such registration. In the event such registration is underwritten, the right of other Rights Holders to participate shall be conditioned on such Rights Holders' participation in such underwriting. Subject to the provisions of Section 2.4, all Rights Holders who have elected to participate in the registration may participate in the registration up to the number of Registrable Shares which they hold. Thereupon, the Company shall, as expeditiously as practicable, use its best efforts to effect the registration of the amount of Registrable Shares so requested to be registered. If a required registration pursuant to this Section 2.2 is an underwritten offering, the Company may select a managing underwriter to administer the offering as long as such underwriter is of recognized standing. 2.3 NUMBER OF DEMANDS. Except as hereinafter set forth in Section 2.5 or Section 3.3, the Company shall not be required to effect more than one (1) registration pursuant to Section 2.2 above; PROVIDED, HOWEVER, that no registration statement filed pursuant to Section 2.2 shall count as a registration statement that satisfies the Company's registration obligations under Section 2.2, and such obligations shall continue in full force and effect, if (i) the Registration Statement is not declared effective by the Commission within 90 days after the date it was originally filed with the Commission, or (ii) the Company fails to maintain the effectiveness of the Registration Statement until the Registrable Shares could be sold pursuant to A-3 Rules 144 or 145 under the Securities Act or any similar provision then in force (subject to the provisions herein regarding Suspension Events). 2.4 UNDERWRITER CUTBACK. In connection with any registration under Section 2.1 or Section 2.2 above involving an underwriting, the Company shall not be required to include any Registrable Shares in such registration unless the holders thereof accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (provided that such terms must be consistent with this Agreement and the terms customarily included in agreements of this nature for underwritten public offerings). If in the opinion of the managing underwriter it is appropriate because of marketing factors to limit the number of Registrable Shares to be included in the offering, then the Company shall be required to include in the registration only that number of Registrable Shares, if any, which the managing underwriter believes should be included therein. If the number of Registrable Shares to be included in the offering in accordance with the foregoing is less than the total number of shares which the holders of Registrable Shares have requested to be included ("CUTBACK"), then the holders of Registrable Shares who have requested registration and other holders of securities entitled to include securities in such registration shall participate in the registration pro rata based upon their total ownership of Common Stock. If any holder would thus be entitled to include more securities than such holder requested to be registered, the excess shall be allocated among other requesting holders pro rata in the manner described in the preceding sentence. 2.5 DELAY OF DEMAND. If at the time of the receipt of a request to register Registrable Shares pursuant to Section 2.2 above, the Company is engaged or plans to file a Registration Statement with the Commission within forty-five (45) days after the time of the request in a registered public offering or is engaged in any other activity which, in the good faith determination of the Company's Board of Directors, would be adversely affected by the requested registration to the material detriment of the Company, then the Company may at its option, within five (5) business days after the receipt of the Registration Request, direct that such request be delayed for a period not in excess of sixty (60) days of the initial request. In the event of any such delay, the time periods within which the Rights Holders are entitled to exercise their registration rights under Sections 2.1 and 2.2 shall be extended for a period of time equal to the duration of such delay. 3. REGISTRATION PROCEDURES 3.1 COMPANY ACTIONS UPON EXERCISE OF REGISTRATION RIGHTS. If and whenever the Company is required by the provisions of this Agreement to use its best efforts to effect the registration under the Securities Act of any of the Registrable Shares, subject to Section 2.5, the Company shall: (a) as expeditiously as reasonably practicable prepare and file with the Commission a Registration Statement with respect to such Registrable Shares and use its best efforts to cause that Registration Statement to become effective as soon as possible thereafter; (b) as expeditiously as reasonably practicable prepare and file with the Commission any amendments and supplements to the Registration Statement and the prospectus included in the Registration Statement as may be necessary to keep the Registration Statement A-4 effective, in the case of a firm commitment underwritten public offering, until each underwriter has completed the distribution of all securities purchased by it and, in the case of any other offering, until the earlier of the sale of all Registrable Shares covered thereby or September 30, 2003 (each, an "APPLICABLE REGISTRATION PERIOD"); (c) as expeditiously as reasonably practicable furnish to each selling Rights Holder such reasonable numbers of copies of the prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents, as the selling Rights Holder may reasonably request in order to facilitate the public sale or other disposition of the Registrable Shares owned by the selling Rights Holder; and (d) as expeditiously as reasonably practicable use its best efforts to register or qualify the Registrable Shares covered by the Registration Statement under the securities or Blue Sky laws of such states as the selling Rights Holders shall reasonably request, and do any and all other acts and things that may be necessary or desirable to enable the selling Rights Holders to consummate the public sale or other disposition in such states of the Registrable Shares owned by the selling Rights Holder; PROVIDED, HOWEVER, that the Company shall not be required in connection with this Section 3.1(d) to qualify as a foreign corporation or execute a general consent to service of process in any jurisdiction. 3.2 SUSPENSION EVENTS. Following the effectiveness of a Registration Statement (and the making of any required filings with any state securities commissions), the Company may direct the selling Rights Holders to suspend sales of the Registrable Securities, as provided herein, if one or more of the following events (each, a "SUSPENSION EVENT") occurs: (a) an underwritten primary offering by the Company where the Company is advised by the underwriters for such offering that sale of Registrable Shares under the Registration Statement would have a material adverse effect on the primary offering (a "PUBLIC OFFERING SUSPENSION EVENT"); (b) (i) pending negotiations relating to, or consummation of, a transaction or the occurrence of an event: (A) that would require additional disclosure of material information by the Company in the Registration Statement (or such filings) not otherwise proposed to be disclosed; or (B) that renders the Company unable to comply with Commission requirements; or (ii) a good faith determination by the Company that the offering of Registrable Securities would: (A) materially impede, delay or interfere with any proposed financing, offer or sale of securities, acquisition, corporate reorganization or other significant transaction involving the Company; or A-5 (B) conflict with material business plans of the Company in a manner not in the best interests of the Company (each, a "MATERIAL EVENT SUSPENSION"); or (iii) if at any time the Company would be required to obtain audited financial statements not being prepared independently of the Registration Statement, unless the Rights Holders undertake to pay the Company's expenses in obtaining the requisite financial statements and an audit is feasible and can be accomplished with minimal disruption to the Company and its business ("REQUIRED FINANCIAL DISCLOSURE SUSPENSION"). PROVIDED, HOWEVER, that (x) in the case of any Public Offering Suspension Event, the period of suspension shall terminate (A) within forty-five (45) days if the Registration Statement therefor is not filed with the Commission prior thereto, (B) if the Registration Statement is filed with the Commission within such 45 day period, but is not declared effective within the succeeding 90 days, on the earlier of the termination of such 90-day period or the withdrawal of such Registration Statement by the Company; (y) in the case of a Material Event Suspension under subsection (ii), the duration of the suspension shall terminate on the earlier of the public announcement of such Suspension Event and the expiration of forty-five (45) days from the commencement of the suspension and, in the case of a Material Event Suspension under subsection (i), the Company shall use its best efforts to cause the duration of the suspension to terminate as soon as reasonably practicable; and (z) in the case of Required Financial Disclosure Suspension, the period of suspension shall terminate when the requisite financial statements are available. In case of any Public Offering Suspension Event, Material Event Suspension or Required Financial Disclosure Suspension, the duration of the Applicable Registration Period of the suspended Registration Statement shall be extended for a period of time equal to the duration of the suspension. 3.3 AGREEMENT OF RIGHTS HOLDERS. In the case of a Suspension Event, the Company shall give written notice (a "SUSPENSION NOTICE") to the selling Rights Holders to suspend sales of the Registrable Shares so that the Company may correct or update the Registration Statement (or such filings); PROVIDED, HOWEVER, that such suspension shall continue no longer than the applicable period of time set forth in Section 3.2 above. The selling Rights Holders agree that they will not effect any sales of the Registrable Shares pursuant to such Registration Statement (or such filings) at any time during the period from the date they received a Suspension Notice from the Company to such date as of which the Suspension Period shall expire as provided in clauses (x), (y) and (z) of Section 3.2 above. If so directed by the Company, selling Rights Holders will deliver to the Company all copies of the prospectus covering the Registrable Shares held by them at the time of receipt of the Suspension Notice. The selling Rights Holders may recommence sales of the Registrable Shares pursuant to the Registration Statement (or such filings) following further written notice to such effect (an "END OF SUSPENSION NOTICE") from the Company, which End of Suspension Notice shall be A-6 accompanied by copies of the supplemented or amended prospectus necessary to resume such sales. 3.4 INTENTIONALLY OMITTED 3.5 CESSATION OF OFFERS. Upon receipt of any notice (including any Suspension Notice) from the Company of: (a) any Suspension Event; (b) any request by the Commission for amendments or supplements to a Registration Statement or for additional information; (c) any amendment or supplement to the Registration Statement to comply with the requirements of the Securities Act; (d) the issuance by the Commission of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose; (e) the representations and warranties of the Company made in any underwriting agreement relating to the registration ceasing to be true and correct in any material respect; (f) the receipt by the Company of any notification with respect to the suspension of the qualification of any Registrable Securities registered in such registration for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose (in which case the cessation of sales shall pertain only to the applicable jurisdiction); (g) the happening of any event which makes any statement made in a Registration Statement or any document incorporated therein by reference untrue in any material respect or which requires the making of any changes in any such Registration Statement so that they will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; or (h) the Company's reasonable determination that a post-effective amendment to a registration statement would be appropriate; the selling Rights Holders shall immediately cease making offers of Registrable Shares (and shall return all prospectuses) until the Company provides such selling Rights Holders any required supplemental or amended materials or of advice in writing that use of the applicable Registration Statement may be resumed. In such event, the Company will use its reasonable efforts promptly to correct or supplement the Registration Statement, to obtain the lifting of any stop order or otherwise to remove the circumstances preventing the continuance of offers and sales under the Registration Statement, subject to the Company's right to delay such actions with respect to any Suspension Event. The Company shall promptly after such correction or supplement provide the selling Rights Holders with revised prospectuses and, following receipt of the revised prospectuses, the selling Rights Holders shall be free to resume making offers of the Registrable Shares. In such event, however, at the time the Rights Holders are permitted to A-7 resume making such offers the Applicable Registration Period shall be extended for a number of days equal to the period during which the Rights Holders were required to cease selling their Registrable Shares pursuant to this Section 3.4. 4. ALLOCATION OF EXPENSES The Company will pay all Registration Expenses of any registration under this Agreement; PROVIDED, HOWEVER, that, except as otherwise provided in Section 3.2, if a registration is withdrawn at the request of the Rights Holders requesting such registration (other than as a result of information concerning material adverse developments in the business or financial condition of the Company which is made known to the Rights Holders after the date on which such registration was requested) and if the requesting Rights Holders elect not to have such registration counted as a registration requested under Section 2, the requesting Rights Holders shall pay the Registration Expenses of such registration pro rata in accordance with the number of their Registrable Shares included in such registration (provided such registration was requested pursuant to Section 2.2 hereof). For purposes of this Section 4, the term "REGISTRATION EXPENSES" shall mean all expenses incurred by the Company in complying with this Agreement, including, without limitation, all registration and filing fees, exchange listing fees, printing expenses, fees and expenses of counsel for the Company and the reasonable fees and expenses of one counsel selected by the selling Rights Holders to represent the selling Rights Holders, state Blue Sky fees and expenses, and the expense of any special audits incidental to or required by any such registration, but excluding underwriting discounts, selling commissions and the fees and expenses of any selling Rights Holder's own counsel, or other out-of-pocket expenses of the Rights Holders or their agents (other than the counsel selected to represent all selling Rights Holders). 5. INDEMNIFICATION AND CONTRIBUTION 5.1 In the event of any registration under the Securities Act of any Registrable Shares pursuant to this Agreement, the Company will indemnify and hold harmless the seller of such Registrable Shares, each underwriter of such Registrable Shares, and each other person, if any, who controls such seller or underwriter within the meaning of the Securities Act or the Exchange Act against any losses, claims, damages or liabilities, joint or several, to which such seller, underwriter or controlling person may become subject under the Securities Act, the Exchange Act, state securities or Blue Sky laws or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement under which such Registrable Shares were registered under the Securities Act, any preliminary prospectus or final prospectus contained in the Registration Statement, or any amendment or supplement to such Registration Statement, or arise out of or are based upon the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and the Company will reimburse such seller, underwriter and each such controlling person for any legal or any other expenses reasonably incurred by such seller, underwriter or controlling person in connection with investigating or defending any such loss, claim, damage, liability or action as and when incurred by them; PROVIDED, HOWEVER, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any untrue statement or omission made in such A-8 Registration Statement, preliminary prospectus or final prospectus, or any such amendment or supplement, in reliance upon and in conformity with information furnished to the Company, in writing, by or on behalf of such seller, underwriter or controlling person specifically for use in the preparation thereof; PROVIDED, FURTHER, HOWEVER, that the foregoing indemnity agreement with respect to any registration statement or prospectus relating to the Registrable Securities shall not inure to the benefit of any seller in such offering, its officers, directors or agents, or controlling persons if: (a) a copy of a prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) for such offering was not sent or given by or on behalf of such selling shareholder to the person ("ASSERTING PERSON") asserting any losses, claims, damages or liabilities as a result of an untrue statement of a material fact contained in any registration statement or prospectus relating to the Registrable Securities (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading and if such prospectus (as so amended or supplemented) would have cured the defect giving rise to such losses, claims, damages or liabilities; or (b) such selling shareholder sold Registrable Securities to the Asserting Person during the period between the date of a Suspension Notice and the date of an End of Suspension Notice. 5.2 In the event of any registration under the Securities Act of any of the Registrable Shares pursuant to this Agreement, each seller of Registrable Shares, severally and not jointly, will indemnify and hold harmless the Company, each of its directors and officers and each underwriter (if any) and each person, if any, who controls the Company or any such underwriter within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages or liabilities, joint or several, to which the Company, such directors and officers, underwriter or controlling person may become subject under the Securities Act, Exchange Act, state securities or Blue Sky laws or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement under which such Registrable Shares were registered under the Securities Act, any preliminary prospectus or final prospectus contained in the Registration Statement, or any amendment or supplement to the Registration Statement, or arise out of or are based upon any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, if the statement or omission was made in reliance upon and in conformity with information relating to such seller furnished in writing to the Company by or on behalf of such seller specifically for use in connection with the preparation of such Registration Statement, prospectus, amendment or supplement; PROVIDED, HOWEVER, that the obligations of such Rights Holders hereunder shall be limited to an amount equal to the proceeds to each Rights Holder of Registrable Shares sold in connection with such registration. The terms of any underwriting agreement entered into by the Company to effect a registration of the Registrable Securities shall require the underwriter to indemnify and hold harmless the Company, its officers, directors, controlling persons and agents and each selling Rights Holder on substantially A-9 the same basis as that of the indemnification of the Company by each selling holder as provided in this Section 5. 5.3 Each party entitled to indemnification under this Section 5 ("INDEMNIFIED PARTY") shall give notice to the party required to provide indemnification ("INDEMNIFYING PARTY") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom; PROVIDED, HOWEVER, that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 5 (except to the extent such failure to give notice has resulted in increased losses, damages or liabilities for the Indemnifying Party). The Indemnified Party may participate in such defense at such party's expense and the Indemnified Party and not the Indemnifying Party shall bear or be responsible for the expenses thereof, unless: (a) the Indemnifying Party and the Indemnified Party shall have mutually agreed to the retention of such counsel, or (b) the named parties to any such proceeding (including any impleaded parties) include both the Indemnified Party and the Indemnifying Party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. No Indemnifying Party, in the defense of any such claim or litigation shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect of such claim or litigation, and no Indemnified Party shall consent to entry of any judgment or settle such claim or litigation without the prior written consent of the Indemnifying Party, which shall not be unreasonably withheld. 5.4 In order to provide for just and equitable contribution to joint liability under the Securities Act in any case in which either: (a) any holder of Registrable Shares exercising rights under this Agreement, or any controlling person of any such holder, makes a claim for indemnification pursuant to this Section 5 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 5 provides for indemnification in such case; or (b) contribution under the Securities Act may be required on the part of any such selling Rights Holder or any such controlling person in circumstances for which indemnification is provided under this Section 5; then, in each such case, the Company and such Rights Holder will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportions as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Parties in connection with the actions which resulted in such losses, claims, A-10 damages, liabilities or expenses, as well as any other relevant equitable considerations; PROVIDED, HOWEVER, that, in any such case: (i) no such holder will be required to contribute any amount in excess of the proceeds to it of all Registrable Shares sold by it pursuant to such Registration Statement; and (ii) no person or entity guilty of fraudulent misrepresentation, within the meaning of Section 11(f) of the Securities Act, shall be entitled to contribution from any person or entity who is not guilty of such fraudulent misrepresentation. 6. INDEMNIFICATION WITH RESPECT TO UNDERWRITTEN OFFERING In the event that Registrable Shares are sold pursuant to a Registration Statement in an underwritten offering, the Company agrees to enter into an underwriting agreement containing customary representations and warranties with respect to the business and operations of an issuer of the securities being registered and customary covenants and agreements to be performed by such issuer, including, without limitation, customary provisions with respect to indemnification by the Company of the underwriters of such offering. 7. INFORMATION BY RIGHTS HOLDER Each Rights Holder including Registrable Shares in any registration shall furnish to the Company such information regarding such Rights Holder and the distribution of such Right Holder's Registrable Shares proposed by such Rights Holder as the Company may reasonably request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Agreement. 8. INTENTIONALLY OMITTED 9. NO LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS Nothing contained in this Agreement shall prohibit the Company from granting to any holder or prospective holder of any securities of the Company registration rights which would allow such holder or prospective holder to include securities of the Company in any Registration Statement filed by the Company. 9. RULE 144 REQUIREMENTS The Company agrees to: (a) comply with the requirements of Rule 144(c) under the Securities Act with respect to current public information about the Company; (b) to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements); and A-11 (c) furnish to any holder of Registrable Shares upon request: (i) a written statement by the Company as to its compliance with the requirements of Rule 144(c) under the Securities Act, and the reporting requirements of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements); (ii) a copy of the most recent annual or quarterly report of the Company; and (iii) such other reports and documents of the Company as such holder may reasonably request to avail itself of any similar rule or regulation of the Commission allowing it to sell any such securities without registration. 11. TERMINATION All of the Company's obligations to register Registrable Shares under this Agreement shall terminate upon the last to occur of (i) the sale of all Registrable Shares by the Rights Holders thereof pursuant to this Agreement or (ii) the earliest date as of which all Registrable Shares have ceased being Registrable Shares. 12. TRANSFERS OF RIGHTS This Agreement, and the rights and obligations of each Rights Holder hereunder, may only be assigned (including assignment by law) by such Rights Holder to: (a) any family member or trust for the benefit of the Rights Holder, if the Rights Holder is an individual; and (i) any entity controlled by, controlling or under common control with the Rights Holder; PROVIDED that the transferee provides written notice of such assignment to the Company and agrees in writing to be bound by the terms and conditions hereof. 13. OTHER PUBLIC OFFERINGS This Agreement is not intended to and shall not preclude the Company from listing its Common Stock on any reputable non-United States exchange. 14. NOTICES Each notice relating to this Agreement shall be in writing and shall be delivered in person, by overnight air carrier, by registered or certified mail, by facsimile transmission or by email, to the parties at the following addresses (or at such other address for a party as shall be specified by like notice, provided that notices of a change of address shall be effective only upon receipt thereof): A-12 (a) IF TO COMPANY: Quiksilver, Inc. 15202 Graham Street Huntington Beach, CA 92649 Attention: General Counsel WITH A COPY TO: Hewitt & O'Neil LLP 19900 MacArthur Blvd., Suite 1050 Irvine, CA 92612 Attn: Paul A. Rowe, Esq. (b) IF TO AN INVESTOR: 2750 Meadow Creek Drive Park City, Utah 84060 Attention: John Thompson Unless otherwise specifically provided in this Agreement, a notice shall be deemed to have been effectively given if mailed by registered or certified mail to the proper address (with such notice to be effective upon the earlier of actual receipt or five days after deposit in the mail), if given in person or by overnight air carrier when delivered in person or by overnight air carrier, if given by email or telecopy upon receipt if confirmed by return telecopy, email or telephonic confirmation or otherwise; PROVIDED, HOWEVER, that no notice shall be deemed received on a day that is not a business day in the jurisdiction in which notices are to be addressed to such party. Any such notice shall not be effective until the next business day in such jurisdiction. 15. ENTIRE AGREEMENT This Agreement contains the entire agreement between the parties hereto with respect to the transactions contemplated herein and supersedes all previous oral and written and all contemporaneous oral negotiations, commitments and understandings. 16. AMENDMENTS AND WAIVERS Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of a majority of the Registrable Shares. No waivers of or exceptions to any term, condition or provision of this Agreement, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, condition or provision. A-13 17. COUNTERPARTS This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which shall be one and the same instrument. 18. SEVERABILITY The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. 19. GOVERNING LAW This Agreement shall be governed by and construed in accordance with the internal laws of the State of California without reference to conflict of laws principles thereof. 20. SECTION HEADINGS The heading of each section, subsection or other subdivision of this Agreement is for reference purposes only and shall not limit or control the meaning thereof. [Signature page follows] A-14 IN WITNESS WHEREOF, each of the parties has caused this Agreement to be duly executed on its behalf as of the day and year first above written. COMPANY: QUIKSILVER, INC. By: _________________________ Name: _________________________ Title: _________________________ RIGHTS HOLDERS: ________________________________ John Thompson ________________________________ Diana Thompson A-15 CONSULTING AGREEMENT CONSULTING AGREEMENT This Consulting Agreement (the "Agreement") is made and entered into as of September 17, 2002, by and between Quiksilver, Inc., a Delaware corporation (the "Company"), and John Thompson ("Consultant"). R E C I T A L S A. The Company, through its wholly-owned subsidiary QS Retail, Inc. ("QS Retail"), is purchasing Beach Street, Inc., a Utah corporation ("Beach Street"), pursuant to an Agreement and Plan of Merger and Reorganization. B. Consultant has been a key employee of Beach Street and the Company believes his services will be of benefit to the Company. C. The Company desires to engage Consultant to obtain the benefit of Consultant's special knowledge, experience, background, skills and abilities, and Consultant desires to accept such engagement, upon the terms and subject to the conditions set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals, and the mutual representations, agreements and promises contained in this Agreement, the Company and Consultant agree as follows: 1. Engagement. The Company hereby engages Consultant as a consultant to render the services and perform the duties described in this Agreement, and Consultant hereby accepts such engagement, upon the terms and subject to the conditions set forth herein. 2. Term. The engagement of Consultant by the Company shall commence on October 1, 2002 and continue for a period of one (1) year (the "Consulting Period"). 3. Services and Duties. During the Consulting Period, Consultant shall make himself reasonably available, consistent with his past work schedule with Beach Street, Inc., on an as-requested basis to the Company's officers, employees and agents, to consult with the Company on issues related to the consummation and performance of the Merger Agreement between Quiksilver, QS Retail and Beach Street. The Company shall provide reasonable notice to Consultant of the services to be performed and the timing of such services. The Company shall also accommodate the schedule of Consultant in performing the services. 4. Consulting Fees. For services rendered under this Agreement during the Consulting Period, Consultant shall receive a consulting fee of $200,000 payable in equal monthly installments of $16,667 during the Consulting Period, with each payment being made on the first business day of each calendar month beginning October 1, 2002. 5. Expenses. The Company will reimburse Consultant for any costs or expenses incurred by Consultant in rendering the Services; provided that any such costs or B-1 expenses have been approved by the Company. Travel and lodging expenses incurred by Consultant for travel at the request of the Company shall be paid by the Company. 5. Independent Contractor. Consultant acknowledges and agrees that Consultant is an independent contractor and nothing contained in this Agreement shall be construed to create the relationship of employer and employee or principal and agent between Consultant and the Company. During the Consulting Period, Consultant shall maintain and pay for all federal, state, and local disability, workers' compensation, payroll taxes, self-employment insurance, and income and other taxes, and the Company will not withhold or pay any such taxes or insurance on behalf of Consultant. During the Consulting Period, Consultant shall not be entitled to participate in any of the medical, dental, insurance, or any other benefits provided by the Company for the benefit of its employees. 6. Non-Disclosure of Confidential Information. Consultant agrees not to divulge, communicate, use to the detriment of the Company or for his own benefit or for the benefit of any other person or persons, or misuse in any way, any confidential information or trade secrets of the Company obtained or acquired subsequent to the date of this Agreement. 7. Authority. Consultant shall not have authority to act as an agent of the Company, and he shall not represent the contrary to any person or entity. Consultant shall not direct the work of any employee of the Company nor make any management decisions or undertake to commit the Company to any course of action in relation to third parties. 8. Miscellaneous Provisions. (a) Notices. Any notice required in connection with this Agreement shall be given in writing and shall be deemed effective upon personal delivery or three business days after deposit in the United States mail, registered or certified, postage prepaid and addressed to the party entitled to such notice at the address indicated below such party's signature line on this Agreement or at such other address as such party may designate by ten (10) days' advance written notice under this Section 8(a) to all other parties to this Agreement. (b) Entire Agreement. This Agreement constitutes the entire agreement of the parties and supersedes all prior written or oral and all contemporaneous oral agreements, understandings, and negotiations between the parties with respect to the subject matter hereof. (c) Change, Modification, Waiver. No change or modification of this Agreement shall be valid unless it is in writing and signed by each of the parties hereto. No waiver of any provision of this Agreement shall be valid unless it is in writing and signed by the party against whom the waiver is sought to be enforced. (d) Assignment and Binding Nature. The services and duties to be performed by Consultant hereunder are personal and may not be assigned. This Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns. B-2 (e) Attorneys' Fees. In the event any party institutes any action or proceeding to enforce this Agreement or any provision hereof, or for damages or equitable relief by reason of any alleged breach of this Agreement or of any provision hereof, or for a declaration of rights hereunder, the prevailing party in any such action or proceeding shall be entitled to receive from the other party all costs and expenses, including reasonable attorneys' fees, incurred by the prevailing party in connection with such action or proceeding. (f) Governing Law and Forum. This Agreement shall be construed in accordance with, and governed by, the laws of the State of Utah, excluding any choice of law principles which direct the application of the laws of another jurisdiction. The exclusive forum for the determination of any action relating to the adjudication of any dispute hereunder shall be either an appropriate court of said State or that court of the United States which includes said State within its territorial jurisdiction. (g) Counterparts. This Agreement may be executed simultaneously in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. "COMPANY" QUIKSILVER, INC., a Delaware corporation By: ____________________________________ Its: ___________________________________ Address:15202 Graham Street Huntington Beach, CA 92649 Attention: Charles S. Exon, Esq. "CONSULTANT" ________________________________________ John Thompson Address: 2750 Meadow Creek Drive Park City, Utah 84060 Attention: John Thompson B-3 EX-21.1 6 a87194exv21w1.txt EXHIBIT 21.1 EXHIBIT 21.1 QUIKSILVER, INC. NAMES AND JURISDICTIONS OF SUBSIDIARIES

Subsidiary Name Jurisdiction - --------------- ------------ QS Retail, Inc. California Mervin Manufacturing, Inc. California Mt. Waimea, Inc. California Quiksilver Wetsuits, Inc. California Hawk Designs, Inc. California Fidra, Inc. California Quiksilver Australia Pty Ltd Australia Quiksilver International Pty Ltd Australia Pavilion Productions Pty Ltd Australia NaPali Europe, SAS France Na Pali, SARL France Gotcha Europe, SA France Kokolo SARL France Emerald Coast Europe, Eurl France Infoborn SARL France Cariboo, Eurl France Andaya, SARL France Lanai Ltd. United Kingdom Gen X Publishing Ltd. United Kingdom Molokai Ltd. United Kingdom Emerald Coast Ltd. United Kingdom Kauai GmbH Germany Makaha GmbH Germany Quiksilver Europa, SL Spain Sumbawa SL Spain Bakio SL Spain Haapiti, SRL Italy Pukalani BV Netherlands Tuvalu BV Netherlands Namotu Ltd. Ireland

56 EX-23.1 7 a87194exv23w1.txt EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-24527, No. 33-65002, No. 33-65004, No. 33-58657, No. 333-04169, No. 333-56593, No. 333-40328, No. 333-64106, No. 33-65724 and No. 333-85204 of Quiksilver, Inc. on Form S-8 of our report, dated December 17, 2002, appearing in this Annual Report on Form 10-K of Quiksilver, Inc. for the year ended October 31, 2002. DELOITTE & TOUCHE LLP Costa Mesa, California January 27, 2003 57 EX-99.1 8 a87194exv99w1.txt EXHIBIT 99.1 EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Quiksilver, Inc. (the "Company") on Form 10-K for the period ending October 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert B. McKnight, Jr., Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Robert B. McKnight, Jr. - --------------------------- Robert B. McKnight, Jr. Chief Executive Officer January 28, 2003 58 EX-99.2 9 a87194exv99w2.txt EXHIBIT 99.2 EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Quiksilver, Inc. (the "Company") on Form 10-K for the period ending October 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Steven L. Brink, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Steven L. Brink - ------------------- Steven L. Brink Chief Financial Officer January 28, 2003 59 -----END PRIVACY-ENHANCED MESSAGE-----

EX-3.2

                                                                     EXHIBIT 3.2

                              AMENDED AND RESTATED

                                     BYLAWS

                                       OF

                                QUIKSILVER, INC.

                            (As of December 17, 2002)

                              AMENDED AND RESTATED

                                TABLE OF CONTENTS



                                                                             Page
                                                                             ----
                                                                          
ARTICLE I - OFFICES........................................................    1

ARTICLE II - MEETINGS OF STOCKHOLDERS......................................    1

ARTICLE III - DIRECTORS....................................................    4

   MEETINGS OF THE BOARD OF DIRECTORS......................................    5
   COMMITTEES OF DIRECTORS.................................................    6
   COMPENSATION OF DIRECTORS...............................................    6
   INDEMNIFICATION.........................................................    7

ARTICLE IV - OFFICERS......................................................    9

   CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER.......................    9
   PRESIDENT..............................................................    10
   VICE PRESIDENTS........................................................    10
   SECRETARY AND ASSISTANT SECRETARY......................................    10
   TREASURER AND ASSISTANT TREASURER......................................    10

ARTICLE V - CERTIFICATES OF STOCK.........................................    11

   LOST, STOLEN OR DESTROYED CERTIFICATES.................................    11
   TRANSFERS OF STOCK.....................................................    12
   FIXING RECORD DATE.....................................................    12
   REGISTERED STOCKHOLDERS................................................    13

ARTICLE VI - GENERAL PROVISIONS DIVIDENDS ................................    13

   CHECKS.................................................................    14
   FISCAL YEAR............................................................    14
   SEAL...................................................................    14
   NOTICES................................................................    14
   ANNUAL STATEMENT.......................................................    14

ARTICLE VII AMENDMENTS....................................................    15


                                       i

                                     BYLAWS

                                       OF

                                QUIKSILVER, INC.

                                   ARTICLE I

                                    OFFICES

         Section 1.    The registered office shall be in the City of Dover,
County of Kent, State o Delaware.

         Section 2.    The  corporation  may also have  offices at such other
places both within and without the State of Delaware as the Board of Directors
may from time to time determine or the business of the corporation may require.

                                   ARTICLE II

                            MEETINGS OF STOCKHOLDERS

         Section 1.    Meetings of stockholders shall be held at any place
within our outside the State of Delaware designated by the Board of Directors.
In the absence of any such designation, stockholders' meetings shall be held at
the principal executive office of the corporation.

         Section 2.    The annual meeting of stockholders shall be held each
year on a date and at a time designated by the Board of Directors. At each
annual meeting directors shall be elected and any other proper business may be
transacted.

         Section 3.    A majority of the stock issued and outstanding and
entitled to vote at any meeting of stockholders, the holders of which are
present in person or represented by proxy, shall constitute a quorum for the
transaction of business except as otherwise provided by law, by the Certificate
of Incorporation, or by these Bylaws. A quorum, once established, shall not be
broken by the withdrawal of enough votes to leave less than a quorum and the
votes present may continue to transact business until adjournment. If, however,
such quorum shall not be present or represented at any meeting of the
stockholders, a majority of the voting stock represented in person or by proxy
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or represented. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. If the adjournment is for more than thirty (30) days, or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote thereat.

         Section 4.    When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes, or
the Certificate of Incorporation, or these Bylaws a different vote is required
in which case such express provision shall govern and control the decision of
such question.

         Section 5.    At each meeting of the stockholders, each stockholder
having the right to vote may vote in person or may authorize another person or
persons to act for him by proxy appointed by an instrument in writing subscribed
by such stockholder and bearing a date not more than three years prior to said
meeting, unless said instrument provides for a longer period. All proxies must
be filed with the Secretary of the corporation at the beginning of each meeting
in order to be counted in any vote at the meeting. Each stockholder shall have
one vote for each share of stock having voting power registered in his name on
the books of the corporation on the record date set by the Board of Directors as
provided in Article V Section 6 hereof. All elections shall be had and all
questions decided by a plurality vote.

         Section 6.    Special meetings of the stockholders for any purpose or
purposes, unless otherwise prescribed by statute or by the Certificate of
Incorporation, may be called by the Chairman of the Board or President and shall
be called by the Chairman of the Board, President or the Secretary at the
request in writing of a majority of the Board of Directors, or at the request in
writing of stockholders owning a majority in amount of the entire capital stock
of the corporation issued and outstanding, and entitled to vote. Such request
shall state the purpose or purposes of the proposed meeting. Business transacted
at any special meeting of stockholders shall be limited to the purposes stated
in the notice.

         Section 7.    Whenever stockholders are required or permitted to take
any action at a meeting, a written notice of the meeting shall be given which
notice shall state the place, date and hour of the meeting, and, in the case of
a special meeting, the purpose or purposes for which the meeting is called. The
written notice of any meeting shall be given to each stockholder entitled to
vote at such meeting not less than ten (10) nor more than sixty (60) days before
the date of the meeting. If mailed, notice is given when deposited in the United
States mail, postage prepaid, directed to the stockholder at his address as it
appears on the records of the corporation.

         Section 8.    (a)   Nominations of persons for election to the Board of
Directors shall be made only at a meeting of stockholders and only (1) by or at
the direction of the Board or (2) by any stockholder of the corporation entitled
to vote for the election of directors at the meeting who complies with the
notice procedures set forth in this Section 8. Such nominations, other than
those made by or at the direction of the Board, shall be made pursuant to timely
notice in writing to the Secretary. To be timely, a stockholder's notice shall
be delivered to or mailed and received at the principal executive offices of the
corporation not less than thirty (30) days or more than sixty (60) days prior to
the meeting; provided, however, that in the event that less than forty (40)
days' notice or prior public disclosure of the date of the meeting is given or
made to stockholders, notice by the stockholder to be timely must be received
not later than the close of business on the l0th day following the day on which
such notice of the date of the meeting was mailed or such public disclosure was
made and provided further, that notwithstanding the above, a stockholder's
notice will be deemed timely if such notice is included in the corporation's
proxy

                                       2

statement for the annual meeting of stockholders. For purposes of this Section
8, any adjournment(s) or postponement(s) of the original meeting whereby the
meeting will reconvene within thirty (30) days from the original date shall be
deemed for purposes of notice to be a continuation of the original meeting and
no nominations by a stockholder of person(s) to be elected director(s) of the
corporation may be made at any such reconvened meeting unless pursuant to a
notice which was timely for the meeting on the date originally scheduled. Such
stockholder's notice shall set forth: (1) as to each person whom the stockholder
proposes to nominate for election or re-election as a director, all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to the Securities Exchange Act of 1934, as amended, (including such
person's written consent to being named in the proxy statement as a nominee and
to serving as a director if elected); and (2) as to the stockholder giving the
notice (A) the name and address, as they appear on the corporation's books, of
such stockholder, and (B) the class and number of shares of the corporation
which are beneficially owned by such stockholder. Notwithstanding the foregoing,
nothing in this Section 8 shall be interpreted or construed to require the
inclusion of information about any such nominee in any proxy statement
distributed by, at the direction of, or on behalf of the Board.

                       (b)   The chairman of the meeting shall, if the facts
warrant, determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by this Section 8, and if the chairman
should so determine, the chairman shall so declare to the meeting and the
defective nomination shall be disregarded.

         Section 9.    (a)   Business may be properly brought before an annual
meeting by a stockholder only upon the stockholder's timely notice thereof in
writing to the Secretary. To be timely, a stockholder's notice must be delivered
to or mailed and received at the principal executive offices of the corporation
not less than thirty (30) days or more than sixty (60) days prior to the meeting
as originally scheduled; provided, however, that in the event that less than
forty (40) day's notice or prior public disclosure of the date of the meeting is
given or made to stockholders, notice by the stockholder to be timely must be so
received not later than the close of business on the 10th day following the day
on which such notice of the date of the annual meeting was mailed or such public
disclosure was made and provided further, that notwithstanding the above, a
stockholder's notice will be deemed timely if such notice is included in the
corporation's proxy statement for the annual meeting of stockholders. For
purposes of this Section 9, any adjournment(s) or postponement(s) of the
original meeting whereby the meeting will reconvene within thirty (30) days from
the original date shall be deemed for purposes of notice to be a continuation of
the original meeting and no business may be brought before any reconvened
meeting unless such timely notice of such business was given to the Secretary
for the meeting as originally scheduled. A stockholder's notice to the Secretary
shall set forth as to each matter the stockholder proposes to bring before the
annual meeting (i) a brief description of the business desired to be brought
before the annual meeting, (ii) the name and record address of the stockholder
proposing such business, (iii) the class and number of shares of the corporation
which are beneficially owned by the stockholder, and (iv) any material interest
of the stockholder in such business. Notwithstanding the foregoing, nothing in
this Section 9 shall be interpreted or construed to require the inclusion of
information about any such proposal in any proxy statement distributed by, at
the direction of, or on behalf of the Board.

                                       3

                       (b)   The chairman of an annual meeting shall, if the
facts warrant, determine and declare to the meeting that business was not
properly brought before the meeting in accordance with the provisions of this
Section 9, and if the chairman should so determine, the chairman shall so
declare to the meeting and any such business not properly brought before the
meeting shall not be transacted.

         Section 10.   The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten (10) days before every meeting
of stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.

         Section 11.   In advance of any meeting of the stockholders at which a
vote shall be taken on any matter, the corporation shall appoint an inspector or
inspectors of election to act with respect to such vote. Each inspector of
election so appointed shall take and sign an oath to faithfully execute his
duties with strict impartiality and according to the best of his ability. Such
inspector or inspectors of election shall have such duties as are prescribed by
applicable law. Reports of inspectors of election shall be in writing and
subscribed and delivered by them to the Secretary. The inspectors of election
need not be stockholders of the corporation, and any officer of the corporation
may be an inspector of election.

         Section 12.   Unless otherwise provided in the Certificate of
Incorporation, any action required to be taken at any annual or special meeting
of stockholders of the corporation, or any action which may be taken at any
annual or special meeting of such stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted. Prompt notice of the taking of the corporate action
without a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.

                                   ARTICLE III

                                    DIRECTORS

         Section 1.    The number of directors of this corporation that shall
constitute the whole Board shall be determined by resolution of the Board of
Directors; provided, however, that no decrease in the number of directors shall
have the effect of shortening the term of an incumbent director. The directors
need not be stockholders. The directors shall be elected at the annual meeting
of the stockholders, except as provided in Section 2 of this Article, and each
director elected shall hold office until his successor is elected and qualified;
provided however, that unless other restricted by the Certificate of
Incorporation or by law, any director or the entire

                                       4

Board of Directors may be removed, either with or without cause, from the Board
of Directors at any meeting of stockholders by a majority of the stock
represented and entitled to vote thereat.

         Section 2.    Vacancies on the Board of Directors by reason of death,
resignation, retirement, disqualification, removal from office or otherwise, and
newly created directorships resulting from any increase in the authorized number
of directors may be filled by a majority of the directors then in office,
although less than a quorum, or by a sole remaining director. The directors so
chosen shall hold office until the next annual election of directors and until
their successors are duly elected and shall qualify, unless sooner displaced. If
there are no directors in office, then an election of directors may be held in
the manner provided by statute. If, at the time of filling any vacancy or any
newly created directorship, the directors then in office shall constitute less
than a majority of the whole Board (as constituted immediately prior to any such
increase), the Court of Chancery may, upon application of any stockholder or
stockholders holding at least ten percent of the total number of the shares at
the time outstanding having the right to vote for such directors, summarily
order an election to be held to fill any such vacancies or newly created
directorships or to replace the directors chosen by the directors then in
office.

         Section 3.    The property and business of the corporation shall be
managed by or under the direction of its Board of Directors. In addition to the
powers and authorities by these Bylaws expressly conferred upon them, the Board
may exercise all such powers of the corporation and do all such lawful acts and
things as are not by statute or by the Certificate of Incorporation or by these
Bylaws directed or required to be exercised or done by the stockholders.

                       MEETINGS OF THE BOARD OF DIRECTORS

         Section 4.    The directors may hold their meetings and have one or
more offices, and keep the books of the corporation outside of the State of
Delaware.

         Section 5.    Regular meetings of the Board of Directors may be held
without notice at such time and place as shall from time to time be determined
by the Board.

         Section 6.    Special meetings of the Board of Directors may be called
by the Chairman of the Board or President on forty-eight (48) hours' notice to
each director, either personally or by mail, overnight courier, facsimile,
telephone or by telegram; special meetings shall be called by the Chairman of
the Board, President or the Secretary in like manner and on like notice on the
written request of two directors unless the Board consists of only one director
in which case special meetings shall be called by the Chairman of the Board,
President or Secretary in like manner or on like notice on the written request
of the sole director.

         Section 7.    At all meetings of the Board of Directors a majority of
the authorized number of directors shall be necessary and sufficient to
constitute a quorum for the transaction of business, and the vote of a majority
of the directors present at any meeting at which there is a quorum, shall be the
act of the Board of Directors, except as may be otherwise specifically provided
by statute, by the Certificate of Incorporation or by these Bylaws. If a quorum
shall not be present at any meeting of the Board of Directors the directors
present thereat may adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a

                                       5

quorum shall be present. If only one director is authorized, such sole director
shall constitute a quorum.

         Section 8.    Unless otherwise restricted by the Certificate of
Incorporation or these Bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the Board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee.

         Section 9.    Unless otherwise restricted by the Certificate of
Incorporation or these Bylaws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at such meeting.

                             COMMITTEES OF DIRECTORS

         Section 10.   The Board of Directors may, by resolution passed by a
majority of the whole Board, designate one or more committees, each such
committee to consist of one or more of the directors of the corporation. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of the Directors to act at the meeting in the place
of any such absent or disqualified member. Any such committee, to the extent
provided in the resolution of the Board of Directors, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers that may require it; but no
such committee shall have the power or authority in reference to approving or
adopting, or recommending to the stockholders, any action or matter expressly
required by the General Corporation Law of Delaware to be submitted to
stockholders for approval, or adopting, amending or repealing any bylaw of the
corporation.

         Section 11.   Each committee shall keep regular minutes of its meetings
and report the same to the Board of Directors when required.

                            COMPENSATION OF DIRECTORS

         Section 12.   Unless otherwise restricted by the Certificate of
Incorporation or these Bylaws, the Board of Directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.

                                       6

                                 INDEMNIFICATION

         Section 13.   (a)   The corporation shall indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.

                       (b)   The corporation shall indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no such indemnification shall
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the extent
that the Court of Chancery of Delaware or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which such Court
of Chancery or such other court shall deem proper.

                       (c)   To the extent that a director, officer, employee or
agent of the corporation shall be successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in paragraphs (a) and (b),
or in defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith.

                       (d)   Any indemnification under Paragraphs (a) and (b)
(unless ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in paragraphs (a) and (b). Such
determination shall be made (1) by the Board of Directors by a majority vote of
a quorum consisting of directors who were not parties to such action, suit or
proceeding, or (2) if

                                       7

such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion or (3) by the stockholders.

                       (e)   Expenses (including attorneys' fees) incurred in
defending any civil, criminal, administrative or investigative action, suit or
proceeding may be paid by the corporation in advance of the final disposition of
such action, suit or proceeding upon receipt of an undertaking by or on behalf
of the director, officer, employee or agent to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by the
corporation as authorized in this Section 13.

                       (f)   The indemnification and advancement of expenses
provided by, or granted pursuant to, the other sub-sections of this Section 13
shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in his official capacity and as to action in another capacity while
holding such office.

                       (g)   The Board of Directors may authorize, by a vote of
a majority of a quorum of the Board of Directors, the corporation to purchase
and maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the corporation would have the
power to indemnify him against such liability under the provisions of this
Section 13.

                       (h)   For the purposes of this Section 13, references to
"the corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and employees
or agents, so that any person who is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under the provisions of this Section with
respect to the resulting or surviving corporation as he would have with respect
to such constituent corporation if its separate existence had continued.

                       (i)   For purposes of this section references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to an employee
benefit plan; and references to "serving at the request of the corporation"
shall include service as a director, officer, employee or agent of the
corporation which imposes duties on, or involves services by, such director,
officer, employee or agent with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the corporation" as referred to in
this section.

                                       8

                       (j)   The indemnification and advancement of expenses
provided by, or granted pursuant to, this section shall, unless otherwise
provided when authorized or ratified, continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.

                                   ARTICLE IV

                                    OFFICERS

         Section 1.    The officers of this corporation shall be chosen by the
Board of Directors and shall include a President, a Secretary, and a Treasurer.
The corporation may also have at the discretion of the Board of Directors such
other officers as are desired, including a Chairman of the Board, one or more
Vice Presidents, one or more Assistant Secretaries and Assistant Treasurers, and
such other officers as may be appointed in accordance with the provisions of
Section 3 hereof. In the event there are two or more Vice Presidents, then one
or more may be designated as Executive Vice President, Senior Vice President, or
other similar or dissimilar title. At the time of the election of officers, the
directors may by resolution determine the order of their rank. Any number of
offices may be held by the same person unless the Certificate of Incorporation
or these Bylaws otherwise provide.

         Section 2.    The Board of Directors, at its first meeting after each
annual meeting of stockholders, shall choose the officers of the corporation.

         Section 3.    The Board of Directors may appoint such other officers
and agents as it shall deem necessary who shall hold their offices for such
terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the Board.

         Section 4.    The salaries of all officers and agents of the
corporation shall be fixed by the Board of Directors.

         Section 5.    The officers of the corporation shall hold office until
their successors are chosen and qualify in their stead. Any officer elected or
appointed by the Board of Directors may be removed at any time by the
affirmative vote of a majority of the Board of Directors. If the office of any
officer or officers becomes vacant for any reason, the vacancy shall be filled
by the Board of Directors.

                CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

         Section 6.    The Chairman of the Board and Chief Executive Officer
shall be the chief executive officer of the corporation and shall, subject to
the control of the Board of Directors, have general supervision, direction and
control of the business and officers of the corporation. He shall preside at all
meetings of the Board of Directors and stockholders, and shall have the general
powers and duties of management usually vested in the office of chief executive
officer of corporations and such other powers and duties as may be prescribed by
the Board of Directors or these Bylaws.

                                       9

                                    PRESIDENT

         Section 7.    The President shall exercise and perform such powers and
duties as may be from time to time assigned to him by the Board of Directors or
prescribed by these Bylaws. In the absence or disability of the Chairman of the
Board and Chief Executive Officer, the President shall have all the powers and
duties of the Chairman of the Board and Chief Executive Officer prescribed
herein.

                                 VICE PRESIDENTS

         Section 8.    In the absence or disability of the President, the Vice
Presidents in order of their rank as fixed by the Board of Directors, or if not
ranked, the Vice President designated by the Board of Directors, shall perform
all the duties of the President, and when so acting shall have all the powers of
and be subject to all the restrictions upon the President. The Vice Presidents
shall have such other duties as from time to time may be prescribed for them,
respectively, by the Board of Directors.

                        SECRETARY AND ASSISTANT SECRETARY

         Section 9.    The Secretary shall attend all sessions of the Board of
Directors and all meetings of the stockholders and record all votes and the
minutes of all proceedings in a book to be kept for that purpose and shall
perform like duties for the standing committees when required by the Board of
Directors. He shall give, or cause to be given, notice of all meetings of the
stockholders and of the Board of Directors, and shall perform such other duties
as may be prescribed by the Board of Directors or these Bylaws. He shall keep in
safe custody the seal of the corporation, and when authorized by the Board,
affix the same to any instrument requiring it, and when so affixed it shall be
attested by his signature or by the signature of an Assistant Secretary. The
Board of Directors may give general authority to any other officer to affix the
seal of the corporation and to attest the affixing by his signature.

         Section 10.   The Assistant Secretary, or if there be more than one,
the Assistant Secretaries in the order determined by the Board of Directors, or
if there be no such determination, the Assistant Secretary designated by the
Board of Directors, shall, in the absence or disability of the secretary,
perform the duties and exercise the powers of the Secretary and shall perform
such other duties and have such other powers as the Board of Directors may from
time to time prescribe.

                        TREASURER AND ASSISTANT TREASURER

         Section 11.   The Treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all
moneys, and other valuable effects in the name and to the credit of the
corporation in such depositories as may be designated by the Board of Directors.
He shall disburse the funds of the corporation as may be ordered by the Board of
Directors, taking proper vouchers for such disbursements, and shall render to
the Board of Directors, at its regular meetings, or when the Board of Directors
so requires, an account of all his transactions as Treasurer and of the
financial condition of the corporation. If required by the Board of Directors,
he shall give the corporation a bond, in such sum and with such surety or
sureties as shall be

                                       10

satisfactory to the Board of Directors, for the faithful performance of the
duties of his office and for the restoration to the corporation, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the corporation.

         Section 12.   The Assistant Treasurer or if there shall be more than
one, the Assistant Treasurers in the order determined by the Board of Directors,
or if there be no such determination, the Assistant Treasurer designated by the
Board of Directors, shall, in the absence or disability of the Treasurer,
perform the duties and exercise the powers of the Treasurer and shall perform
such other duties and have such other powers as the Board of Directors may from
time to time prescribe.

                                    ARTICLE V

                              CERTIFICATES OF STOCK

         Section 1.    Every holder of stock of the corporation shall be
entitled to have a certificate signed by, or in the name of the corporation by,
the Chairman or Vice Chairman of the Board of Directors or the President or a
Vice President, and by the Secretary or an Assistant Secretary, or the Treasurer
or an Assistant Treasurer of the corporation certifying the number of shares
represented by the certificate owned by such stockholder in the corporation.

         Section 2.    Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent, or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if he were
such officer, transfer agent, or registrar at the date of issue.

         Section 3.    If the corporation shall be authorized to issue more than
one class of stock or more than one series of any class, the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualification,
limitations or restrictions of such preferences and/or rights shall be set forth
in full or summarized on the face or back of the certificate which the
corporation shall issue to represent such class or series of stock, provided
that except as otherwise provided in Section 202 of the General Corporation Law
of Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate which the corporation shall issue to represent
such class or series of stock, a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights.

                     LOST, STOLEN OR DESTROYED CERTIFICATES

         Section 4.    The Board of Directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a

                                       11

new certificate or certificates, the Board of Directors may, in its discretion
and as a condition precedent to the issuance thereof, require the owner of such
lost, stolen or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require and/or
to give the corporation a bond in such sum as it may direct as indemnity against
any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.

                               TRANSFERS OF STOCK

         Section 5.    Upon surrender to the corporation, or the transfer agent
of the corporation, of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignation or authority to transfer, it shall be
the duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.

                               FIXING RECORD DATE

         Section 6.    (a)   In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of the
stockholders, or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix a
record date which shall not be more than sixty (60) nor less than ten (10) days
before the date of such meeting, nor more than sixty (60) days prior to any
other action. A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.

                       (b)   In order that the corporation may determine the
stockholders entitled to consent to corporate action in writing without a
meeting, the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is adopted
by the Board of Directors, and which date shall not be more than ten (10) days
after the date upon which the resolution fixing the record date is adopted by
the Board of Directors. Any Stockholder of record seeking to have the
Stockholders authorize or take corporate action by written consent shall, by
written notice to the secretary, request the Board of Directors to fix a record
date. The Board of Directors shall promptly, but in all events within ten (10)
days after the date on which such a request is received, adopt a resolution
fixing the record date. If no record date has been fixed by the Board of
Directors within ten (10) days of the date on which such a request is received,
the record date for determining Stockholders entitled to consent to corporate
action in writing without a meeting, when no prior action by the Board of
Directors is required by applicable law, shall be the first date on which a
signed written consent setting forth the action taken or proposed to be taken is
delivered to the corporation by delivery to its registered office in the State
of Delaware, its principal place of business, or any officer or agent of the
Corporation having custody of the book in which proceedings of meetings of
Stockholders are recorded. Delivery made to the Corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
If no record date has been fixed by the Board of Directors and prior action by
the Board of Directors is required by applicable law,

                                       12

the record date for determining Stockholders entitled to consent to corporate
action in writing without a meeting shall be at the close of business on the
date on which the Board of Directors adopts the resolution taking such prior
action.

                       (c)   In the event of the delivery to the Corporation of
a written consent or consents purporting to authorize or take corporate action
and/or related revocations (each such written consent or related revocation is
referred to in this Section 6 as a "Consent"), the secretary of the Corporation
shall provide for the safekeeping of such Consent and shall immediately appoint
duly qualified and objective inspectors to conduct, as promptly as practical,
such reasonable ministerial review as they deem necessary or appropriate for the
purpose of ascertaining the sufficiency and validity of such Consent and all
matters incident thereto, including, without limitation, whether holders of
shares having the requisite voting power to authorize or take the action
specified in the Consent have given consent. If after such investigation the
secretary shall determine that the Consent is valid, that fact shall be
certified on the records of the Corporation kept for the purpose of recording
the proceedings of meetings of Stockholders, and the Consent shall be filed in
such records, at which time the Consent shall become effective as Stockholder
action.

                             REGISTERED STOCKHOLDERS

         Section 7.    The corporation shall be entitled to treat the holder of
record of any share or shares of stock as the holder in fact thereof and
accordingly shall not be bound to recognize any equitable or other claim or
interest in such share on the part of any other person, whether or not it shall
have express or other notice thereof, save as expressly provided by the laws of
the State of Delaware.

                                   ARTICLE VI

                               GENERAL PROVISIONS

                                    DIVIDENDS

         Section 1.    Dividends upon the capital stock of the corporation,
subject to the provisions of the Certificate of Incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of the capital
stock, subject to the provisions of the Certificate of Incorporation.

         Section 2.    Before payment of any dividend there may be set aside out
of any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve fund to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purpose as the directors shall think conducive to the interests of the
corporation, and the directors may abolish any such reserve.

                                       13

                                     CHECKS

         Section 3.    All checks or demands for money and notes of the
corporation shall be signed by such officer or officers as the Board of
Directors may from time to time designate.

                                   FISCAL YEAR

         Section 4.    The fiscal year of the corporation shall be fixed by
resolution of the Board of Directors.

                                      SEAL

         Section 5.    The corporate seal shall have inscribed thereon the name
of the corporation, the year of its organization and the words "Corporate Seal,
Delaware". Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.

                                     NOTICES

         Section 6.    Whenever, under the provisions of the statutes or of the
Certificate of Incorporation or of these Bylaws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
director or stockholder, at his address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by overnight courier, facsimile, telephone
or telegram and such notice shall be deemed to be given at the time it is sent.

         Section 7.    Whenever any notice is required to be given under the
provisions of the statutes or of the Certificate of Incorporation or of these
Bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto. Attendance of a person at a meeting (whether in person or by
proxy in the case of a meeting of stockholders) shall constitute a waiver of
notice of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of any regular or special meeting
of the stockholders, directors or members of a committee of directors need be
specified in any written waiver of notice.

                                ANNUAL STATEMENT

         Section 8.    The Board of Directors shall present at each annual
meeting and at any special meeting of the stockholders when called for by vote
of the stockholders, a full and clear statement of the business and condition of
the corporation.

                                       14

                                   ARTICLE VII

                                   AMENDMENTS

         Section 1.    Except as otherwise provided herein or by law, these
Bylaws may be altered, amended or repealed, and new Bylaws may be adopted, (i)
by the Board of Directors, by vote of a majority of the number of directors then
in office as directors, acting at any meeting of the Board, or (ii) by the
stockholders, at any special meeting of stockholders, provided that notice of
such proposed amendment, modification, repeal or adoption is given in the notice
of special meeting. Any Bylaws altered, amended, or adopted by the stockholders
may be altered, amended, or repealed by either the Board or the stockholders.

                                       15

                            CERTIFICATE OF SECRETARY

                  I, the undersigned, do hereby certify:

                  (1) That I am the duly elected and acting Secretary of
QUIKSILVER, INC., a Delaware corporation; and

                  (2) That the foregoing Amended and Restated Bylaws, comprising
fifteen (15) pages, constitute the Amended and Restated Bylaws of said
corporation as duly adopted by the Board of Directors of said corporation as of
December 17, 2002.

                  IN WITNESS WHEREOF, I have hereunto subscribed my name this
17(th) day of December, 2002.

                                             ___________________________________
                                             Charles S. Exon
                                             Secretary

                                       16

EX-10.13

                       [QUIKSILVER LOGO]


                                                  , 2002
                              --------------------

PERSONAL AND CONFIDENTIAL

Robert McKnight, Jr.
Quiksilver, Inc.
15202 Graham Street
Huntington Beach, CA  92649

Re:   Employment at Quiksilver

Dear Bob:

      This letter ("Agreement") will confirm our understanding and agreement
regarding your continued employment at Quiksilver, Inc. ("Quiksilver" or the
"Company"), and completely supersedes and replaces any existing or previous oral
or written understandings or agreements, express or implied, we have had. The
terms contained in this letter are effective on and after November 1, 2001.

            1.    The Company hereby agrees to employ you as its Chief Executive
                  Officer for a term commencing November 1, 2001 and ending on
                  the third anniversary of such date, unless sooner terminated
                  in accordance with Paragraph 8.

            2.    Your base salary while employed hereunder, retroactive to
                  January 1, 2002, will be $62,500 per month, less applicable
                  withholdings and deductions, paid on the Company's regular
                  payroll dates. Your salary will be reviewed at the time
                  management salaries are reviewed periodically and may be
                  adjusted (but not below $62,500 per month) at the Company's
                  discretion in light of the Company's performance, your
                  performance, market conditions and other factors deemed
                  relevant by the Company.

            3.    For the fiscal year ending October 31, 2002 and each fiscal
                  year thereafter, you shall be eligible to receive a bonus
                  under the Company's stockholder approved Executive Officer
                  Bonus Plan based on the criteria set forth on Addendum "A"
                  attached hereto. In addition, you shall also be eligible to
                  receive an annual bonus of up to 25% of your base salary based
                  on the achievement of other goals or objectives established by
                  the Compensation Committee for each fiscal year that you are
                  employed hereunder. Any bonus earned pursuant to this
                  Paragraph 3 shall be paid within ten (10) days following the
                  date the Company publicly releases its annual audited
                  financial statements (the "Bonus Payment Date"). Any bonus
                  payment shall be less applicable withholdings and deductions.
                  In the event that your employment with the Company is
                  terminated prior to the


                                      -1-

Robert McKnight
June __, 2002

                  end of any fiscal year (for any reason), you shall be entitled
                  to receive a pro rata portion of the bonus otherwise payable
                  to you based upon the actual number of days which you were
                  employed by the Company during the applicable fiscal year,
                  which shall be paid on the Bonus Payment Date.

            4.    Since Quiksilver does not have a vacation policy for
                  executives of your level, no vacation days will be treated as
                  earned or accrued.

            5.    While you are employed hereunder, Quiksilver will pay the
                  premium on a term life insurance policy on your life with a
                  company of our choice in the face amount determined by the
                  Company of not less than $2,000,000 payable to the beneficiary
                  or beneficiaries of your choice. Quiksilver's obligation to
                  obtain and maintain this insurance is contingent upon your
                  establishing and maintaining insurability, and it is not
                  required to pay premiums for such a policy in excess of $5,000
                  annually.

            6.    Provided you are then serving as the Company's Chief Executive
                  Officer hereunder and that a sufficient number of authorized
                  but unissued shares are available under the Company's
                  stockholder approved plan, the Company will grant you options
                  to acquire 100,000 shares of the Company's Common Stock
                  (subject to appropriate adjustment for any stock split, stock
                  dividend, recapitalization, combination of shares, exchange of
                  shares or other change effecting the outstanding Common Stock
                  as a class without the Company's receipt of consideration)
                  annually on the date the Company grants options to its
                  employees generally. The options shall be granted pursuant to
                  the Company's stock incentive plan with an exercise price
                  equal to the fair market value on the date of grant, a maximum
                  term of 10 years and vesting in equal annual installments over
                  three years. The remaining terms of such options shall be
                  consistent with those of options generally granted to other
                  employees and shall be set forth in separate agreements.

            7.    (a) Notwithstanding anything to the contrary in this Agreement
                  or in your prior employment relationship with the Company,
                  express or implied, either you or Quiksilver may terminate
                  your employment at will and with or without Cause (as defined
                  below) at any time for any reason. This aspect of your
                  employment relationship can only be changed by an
                  individualized written agreement signed by both you and the
                  Company.


                                      -2-

Robert McKnight
June __, 2002

                  (b) The Company may terminate your employment immediately,
                  without notice, for Cause, which shall be defined as (i) your
                  death, (ii) your permanent disability which renders you unable
                  to perform your duties and responsibilities for a period in
                  excess of three consecutive months, (iii) willful misconduct
                  in the performance of your duties, (iv) violation of law, (v)
                  self-dealing, (vi) willful breach of duty, or (vii) habitual
                  neglect of duty, (viii) a material breach by you of your
                  obligations under Paragraphs 8 or 10 of this Agreement. If the
                  Company terminates your employment for Cause, or you terminate
                  your employment other than for Good Reason (as defined below),
                  you (or your estate or beneficiaries in the case of your
                  death) shall receive your base salary and other benefits
                  earned and accrued prior to the termination of your employment
                  as well as a pro rata portion of your bonus, if any, as
                  provided in Paragraph 3 for the fiscal year in which such
                  termination occurs, and you shall have no further rights to
                  any other compensation or benefits hereunder on or after the
                  termination of your employment.

                  (c) The Company may terminate your employment without Cause
                  and you may terminate your employment with the Company for
                  Good Reason, upon thirty (30) days' advance written notice.

                  If Quiksilver elects to terminate your employment without
                  Cause, or if you terminate your employment with the Company
                  for Good Reason within six (6) months of the action
                  constituting Good Reason, the Company will (i) continue to pay
                  your base salary (but not any employment benefits) on its
                  regular payroll dates for a period equal to the greater of
                  eighteen (18) months or the remaining term of this Agreement,
                  and (ii) pay you a pro rata portion of your bonus, if any, as
                  provided by Paragraph 3 for the year in which such termination
                  occurs, less applicable withholdings and deductions.
                  Notwithstanding the foregoing, if such termination without
                  Cause or for Good Reason occurs within six (6) months
                  immediately following a Change of Control (as defined in
                  Addendum "B") the Company will instead (i) continue to pay
                  your base salary (but not any employment benefits) on it's
                  regular payroll date for a period of thirty-six (36) months,
                  (ii) pay you a pro rata portion of your bonus, if any, as
                  provided by Paragraph 3 for the year in which such termination
                  occurs, and (iii) pay you an amount equal to three (3) times
                  the average annual bonus earned by you pursuant to Paragraph 3
                  during the two (2) most recently completed fiscal years of the
                  Company (or such shorter period that this Agreement has been
                  in effect) payable over a three year period following
                  termination in equal installments on the Company's regular
                  payroll dates, less applicable withholdings and deductions. In
                  order for you to be eligible to receive the benefits specified
                  in this Paragraph 7(c), you must execute a general release of
                  claims in a form reasonably acceptable to the Company. You
                  shall have no further rights to any other compensation or
                  benefits hereunder on or after the termination of your


                                      -3-

Robert McKnight
June __, 2002

                  employment. You shall not have a duty to seek substitute
                  employment and the Company shall not have the right to offset
                  any compensation due you against any compensation or income
                  received by you after the date of such termination.

                  "Good Reason" for you to terminate employment means a
                  voluntary termination as a result of (i) the assignment to you
                  of duties materially inconsistent with your position as set
                  forth above without your consent, (ii) a material change in
                  your reporting level from that set forth in this Agreement
                  without your consent, (iii) a material diminution of your
                  authority without your consent, (iv) a material breach by the
                  Company of its obligations under this agreement, (v) a failure
                  by the Company to obtain from any successor, before the
                  succession takes place, an agreement to assume and perform the
                  obligations contained in this Agreement, or (vi) the Company
                  requiring you to be based (other than temporarily) at any
                  office or location outside the Orange County, California area.
                  Notwithstanding the foregoing, Good Reason shall not exist
                  unless you provide the Company notice of termination on
                  account thereof and, if such event or condition is curable,
                  the Company fails to cure such event or condition within
                  thirty (30) days of such notice.

                  (d) In the event that any payment or benefit received or to be
                  received by you (collectively, the "Payments") would
                  constitute a parachute payment within the meaning of Section
                  280G of the Internal Revenue Code of 1986, as amended (the
                  "Code"), then the following limitation shall apply:

                  The aggregate present value of those Payments shall be limited
                  in amount to the greater of the following dollar amounts (the
                  "Benefit Limit"):

                  (i) 2.99 times your Average Compensation (as defined below),
                  or

                  (ii) the amount which yields you the greatest after-tax amount
                  of Payments under this Agreement after taking into account any
                  excise tax imposed under Code Section 4999 on those Payments.

                  The present value of the Payments will be measured as of the
                  date of the Change in Control and determined in accordance
                  with the provisions of Code Section 280G(d)(4).

                  Average Compensation means the average of your W-2 wages from
                  the Company for the five (5) calendar years completed
                  immediately prior to the calendar year in which the Change in
                  Control is effected. Any W-2 wages for a partial year of
                  employment will be annualized, in accordance with the
                  frequency which such wages are paid during such partial year,
                  before inclusion in Average Compensation.


                                      -4-

Robert McKnight
June __, 2002

            8.    Quiksilver owns certain trade secrets and other confidential
                  and/or proprietary information which constitute valuable
                  property rights, which it has developed through a substantial
                  expenditure of time and money, which are and will continue to
                  be utilized in the Company's business and which are not
                  generally known in the trade. This proprietary information
                  includes the list of names of the customers and suppliers of
                  Quiksilver, and other particularized information concerning
                  the products, finances, processes, material preferences,
                  fabrics, designs, material sources, pricing information,
                  production schedules, marketing strategies, merchandising
                  strategies, order forms and other types of proprietary
                  information relating to our products, customers and suppliers.
                  You agree that you will not disclose and will keep strictly
                  secret and confidential all trade secrets and proprietary
                  information of Quiksilver, including, but not limited to,
                  those items specifically mentioned above.

            9.    The Company will reimburse you for documented reasonable and
                  necessary business expenses incurred by you while engaged in
                  business activities for the Company's benefit on such terms
                  and conditions as shall be generally available to other
                  executives of the Company.

            10.   You will be required to observe the Company's personnel and
                  business policies and procedures as they are in effect from
                  time to time. In the event of any conflicts, the terms of this
                  Agreement will control.

            11.   This Agreement, its addenda, and any stock option agreements
                  Quiksilver may enter into with you contain the entire
                  integrated agreement between us regarding these issues, and no
                  modification to this letter will be valid unless set forth in
                  writing and signed by both you and the Company. To the fullest
                  extent allowed by law, any dispute, controversy or claim
                  arising out of or relating to this Agreement, the breach
                  thereof, or any aspect of your employment or the cessation
                  thereof must be settled exclusively by final and binding
                  arbitration before a single arbitrator administered by
                  JAMS/Endispute in Orange County, California, whose fees and
                  costs shall be evenly divided by the parties. Judgment upon
                  the award rendered by the arbitrator may be entered in any
                  court having jurisdiction thereof. The Company reserves the
                  right, however, to seek judicial provisional remedies and
                  equitable relief regarding any breach or threatened breach of
                  your obligations regarding trade secrets and proprietary
                  information.

            12.   This Agreement will be assignable by the Company to any
                  successor or to any other company owned or controlled by the
                  Company, and will be binding upon any successor to the
                  business of the Company, whether direct or indirect, by
                  purchase of securities, merger, consolidation, purchase of all
                  or substantially all of the assets of the Company or
                  otherwise.


                                      -5-

Robert McKnight
June __, 2002


      Please sign, date and return the enclosed copy of this letter to me for
our files to acknowledge your agreement with the above.

                                                     Very truly yours,

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




Enclosures

ACKNOWLEDGED AND AGREED:


- -------------------------------
Robert McKnight, Jr.
Date Effective:               , 2003
                 -------------


                                      -6-

                                   ADDENDUM A

                          EXECUTIVE OFFICER BONUS PLAN

      In the event that the Company achieves percentage growth in its "Earnings
Before Taxes" (as defined below) in the amounts set forth in the table below,
then each participant in the Executive Officer Bonus Plan (the "Plan") shall be
entitled to receive a cash bonus in an amount equal to 75% of the percentage of
such participant's base salary earned during the applicable fiscal year set
forth in the table below opposite the respective Earnings Before Taxes Growth
percentage.



            Earnings Before Taxes Growth         Percentage of Base Salary
            ----------------------------         -------------------------
                                              
            Below       10%                                  0%
                        10%                                 25%
                        12%                                 75%
                        16%                                100%
                        20%                                150%
                        24%                                200%
                        28%                                250%
                        32% or more                        300%


      In the event that Earnings Before Taxes Growth is in an amount between any
of the benchmarks set forth above (but above ten percent (10 %)), then the
amount of any bonus payable to a participant shall be calculated on the basis of
a straight line interpolation between the two closest points.


                                      -7-

      For purposes of the foregoing table, "Earnings Before Taxes" shall mean
the Company's income before provision for income taxes for each fiscal year of
the Company as reflected in the Company's audited financial statements for such
fiscal year determined in accordance with generally accepted accounting
principles consistently applied. In addition, income before income taxes shall
exclude all non-recurring or extraordinary items (whether constituting loss or
gain) which, in the sole and absolute discretion of the Board of Directors or
the Compensation Committee of the Company, did not arise in the ordinary course
of business. The computation of income before income taxes and of the dollar
amount of the bonus, if any, payable to any participant under this Plan shall be
approved by the Company's Compensation Committee and shall be final and
conclusive on the Company and each participant.


                                      -8-

                                   ADDENDUM B

                         DEFINITION OF CHANGE IN CONTROL

      "Change in Control" means the occurrence of one or more of the following
events: (i) any corporation, partnership, person, other entity, or group (as
defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended)
(collectively, a "Person") acquires shares of capital stock of the Company
representing more than 50% of the total number of shares of capital stock that
may be voted for the election of directors of the Company, (ii) a merger,
consolidation, or other business combination of the Company with or into another
Person is consummated, or all or substantially all of the assets of the Company
are acquired by another Person, as a result of which the stockholders of the
Company immediately prior to the consummation of such transaction own,
immediately after consummation of such transaction equity securities possessing
less than 50% of the voting power of the surviving or acquiring Person (or any
Person in control of the surviving or acquiring Person, the equity securities of
which are issued or transferred in such transaction), or (iii) the stockholders
of the Company approve a plan of complete liquidation, dissolution or winding up
of the Company.



                                      -9-

EX-10.19

                                                                   EXHIBIT 10.19

                 AGREEMENT AND PLAN OF MERGER AND REORGANIZATION

                                  By and Among

                                QUIKSILVER, INC.

                                QS RETAIL, INC.,

                               BEACH STREET, INC.

                                       and

                        JOHN THOMPSON and DIANA THOMPSON

                         Dated as of September 17, 2002

                                TABLE OF CONTENTS



                                                                                                                    Page
                                                                                                                    ----
                                                                                                                 
ARTICLE I - THE MERGER............................................................................................    1
         1.1      The Merger......................................................................................    1
         1.2      Closing.........................................................................................    2
         1.3      Effective Time..................................................................................    2
         1.4      Effects of the Merger...........................................................................    2
         1.5      Articles of Incorporation; Bylaws...............................................................    2
         1.6      Directors and Officers..........................................................................    2
         1.7      Merger Consideration; Conversion and Cancellation of Company Common Stock.......................    2
         1.8      No Fractional Shares of Parent Common Stock......................................................   3
         1.9      Exchange of Shares..............................................................................    4
         1.10     Tax Consequences................................................................................    4

ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SHAREHOLDERS...................................    5
         2.1      Corporate Organization..........................................................................    5
         2.2      Capitalization..................................................................................    5
         2.3      Authority; No Violation.........................................................................    5
         2.4      Consents and Approvals..........................................................................    6
         2.5      Financial Statements............................................................................    6
         2.6      Absence of Undisclosed Liabilities..............................................................    7
         2.7      Absence of Certain Changes or Events............................................................    7
         2.8      Legal Proceedings...............................................................................    8
         2.9      Restrictions on Business Activities.............................................................    8
         2.10     Governmental Authorization......................................................................    8
         2.11     Title and Condition of Personal Property........................................................    8
         2.12     Real and Leased Property........................................................................    9
         2.13     Intellectual Property..........................................................................    10
         2.14     Taxes..........................................................................................    10
         2.15     Environmental Matters..........................................................................    11
         2.16     Customers and Suppliers; Supplies..............................................................    12
         2.17     List of Accounts...............................................................................    12
         2.18     Employment Agreements..........................................................................    12
         2.19     Employee Benefit Plans.........................................................................    12
         2.20     Labor Matters..................................................................................    15
         2.21     Contracts and Commitments......................................................................    16
         2.22     Absence of Breaches or Defaults................................................................    17
         2.23     Interested Party Transactions..................................................................    18
         2.24     Compliance with Applicable Law.................................................................    18
         2.25     Insurance......................................................................................    18
         2.26     Brokers........................................................................................    18
         2.27     Minute Books...................................................................................    18
         2.28     Accounts and Notes Receivable..................................................................    18
         2.29     Certain Payments...............................................................................    19
         2.30     Accredited Investor Status.....................................................................    19
         2.31     Representations Complete.......................................................................    19


                                       i

                                TABLE OF CONTENTS



                                                                                                                    Page
                                                                                                                    ----
                                                                                                                 
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB............................................    19
         3.1      Corporate Organization.........................................................................    19
         3.2      Authority; No Violation........................................................................    19
         3.3      Consents and Approvals.........................................................................    20
         3.4      Financial Statements and Reports...............................................................    20
         3.5      Parent Common Stock............................................................................    21
         3.6      Compliance with Securities Laws...............................................................     21
         3.7      Consents and Approvals.........................................................................    21
         3.8      Brokers........................................................................................    21
         3.9      Compliance.....................................................................................    21
         3.10     Representations Complete........................................................................   22
         3.11     Taxes..........................................................................................    22

ARTICLE IV - ADDITIONAL AGREEMENTS...............................................................................    22
         4.1      Covenants of the Company.......................................................................    22
         4.2      Access to Information..........................................................................    24
         4.3      Public Disclosure..............................................................................    24
         4.4      Consents; Cooperation..........................................................................    24
         4.5      Legal Requirements.............................................................................    24
         4.6      Tax Treatment..................................................................................    24
         4.7      Certifications, Agreements, and Covenants of the Company.......................................    24
         4.8      Certifications, Agreements, and Covenants of Parent and Merger Sub.............................    27
         4.9      Shareholder Vote...............................................................................    29
         4.10     Registration Rights; NYSE Listing..............................................................    29
         4.11     Consulting Agreement...........................................................................    29
         4.12     Blue Sky Laws..................................................................................    29
         4.13     Control of Operations..........................................................................    29
         4.14     Employee Matters...............................................................................    30
         4.15     Covenant Not to Compete........................................................................    30
         4.16     Best Efforts and Further Assurances............................................................    30
         4.17     Landlord Consents................................................................................  30

ARTICLE V - CONDITIONS PRECEDENT.................................................................................    31
         5.1      Conditions to Each Party's Obligation to Effect the Merger.....................................    31
         5.2      Conditions to Obligations of Parent and Merger Sub.............................................    31
         5.3      Conditions to the Obligations of Company and Shareholders......................................    32

ARTICLE VI - TERMINATION AND AMENDMENT...........................................................................    33
         6.1      Termination....................................................................................    33
         6.2      Effect of Termination..........................................................................    34
         6.3      Amendment......................................................................................    34
         6.4      Extension; Waiver..............................................................................    34

ARTICLE VII - GENERAL PROVISIONS.................................................................................    34
         7.1      Expenses.......................................................................................    34
         7.2      Notices........................................................................................    34
         7.3      Governing Law..................................................................................    35
         7.4      Severability...................................................................................    35
         7.5      Assignment; Binding Effect; Benefit............................................................    35
         7.6      Headings.......................................................................................    35
         7.7      Entire Agreement...............................................................................    35
         7.8      Counterparts...................................................................................    36


                                       ii

                             EXHIBITS AND SCHEDULES

            
EXHIBIT A      Registration Rights Agreement
EXHIBIT B      Consulting Agreement



                                      iii

                          AGREEMENT AND PLAN OF MERGER
                               AND REORGANIZATION

                  THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (this
"Agreement") is made and entered into as of September 17, 2002, by and among
QUIKSILVER, INC., a Delaware corporation ("Parent"), QS RETAIL, INC., a
California corporation and wholly-owned subsidiary of Parent ("Merger Sub"),
BEACH STREET, INC., a Utah corporation (the "Company"), and JOHN THOMPSON and
DIANA THOMPSON (individually, a "Shareholder" and collectively, the
"Shareholders"). Merger Sub and the Company are sometimes collectively referred
to herein as the "Constituent Corporations."

                  WHEREAS, the Boards of Directors of Parent, Merger Sub and the
Company have each determined that it is in the best interest of their respective
companies and in the best interest of their respective stockholders to
consummate the business combination transaction provided for herein in which the
Company will, subject to the terms and conditions set forth herein, merge with
and into Merger Sub (the "Merger"); and

                  WHEREAS, pursuant to the Merger, among other things, all of
the outstanding shares of Common Stock of the Company ("Company Common Stock")
shall be converted into shares of Common Stock of the Parent ("Parent Common
Stock").

                  WHEREAS, for federal income tax purposes, it is intended that
the Merger will qualify as a tax-free reorganization under the provisions of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
and that this Agreement shall be, and is hereby, adopted as a plan of
reorganization for purposes of Section 368(a) of the Code; and

                  WHEREAS, the parties desire to make certain representations,
warranties and agreements in connection with the Merger and also to prescribe
certain conditions to the Merger.

                  NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties and agreements contained herein, and intending to be
legally bound hereby, the parties agree as follows:

                                   ARTICLE I

                                   THE MERGER

         1.1      The Merger. Subject to the terms and conditions of this
Agreement, in accordance with the applicable provisions of the General
Corporation Law of the State of California (the "CGCL") and the Utah Revised
Business Corporation Act of the State of Utah ("URBCA"), at the Effective Time
(as defined in Section 1.3 hereof), the Company shall merge with and into Merger
Sub. Merger Sub shall be the surviving company (hereinafter sometimes called the
"Surviving Corporation") in the Merger and shall continue its corporate
existence under the laws of the State of California. Upon consummation of the
Merger, the separate corporate existence of the Company shall terminate, and the
Surviving Corporation shall be a wholly-owned subsidiary of Parent.

         1.2      Closing. The closing of the transactions contemplated hereby
(the "Closing") shall take place as soon as practicable after the satisfaction
or waiver of each of the conditions set forth in Article V hereof or at such
other time as the parties hereto agree (the "Closing Date"), provided, however,
that the parties shall use reasonable commercial efforts to effect the Closing
on or prior to September 17, 2002. The Closing shall take place at the offices
of Hewitt & O'Neil LLP, 19900 MacArthur Blvd., Suite 1050, Irvine, California or
at such other location as the parties hereto agree.

         1.3      Effective Time. Subject to the terms and conditions of this
Agreement, Parent, Merger Sub, the Company, and the Shareholders shall cause the
Merger to be consummated by filing (i) a Certificate of Merger (the "Certificate
of Merger") with the Secretary of State of the State of California (the
"California Secretary of State") in such form as is required by, and executed in
accordance with the relevant provisions of, the CGCL and (ii) Articles of Merger
(the "Articles of Merger") with the State of Utah Division of Corporations and
Commercial Code (the "Division") in such form as is required by, and executed in
accordance with the relevant provisions of the URBCA. The term "Effective Time"
shall be the later of the filing of such Certificate of Merger with the
California Secretary of State and the filing of the Articles of Merger with the
Division, or at such later time as agreed in writing by Parent, Merger Sub, and
the Company and specified in the Certificate of Merger and the Articles of
Merger.

         1.4      Effects of the Merger. At and after the Effective Time, the
Merger shall have the effects set forth in this Agreement, the Certificate of
Merger, the Articles of Merger, and the applicable provisions of the CGCL and
the URBCA. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time, all the property, rights, privileges, powers and
franchises of the Company and Merger Sub shall vest in the Surviving
Corporation, and all debts, liabilities and duties of the Company and Merger Sub
shall become the debts, liabilities and duties of the Surviving Corporation.

         1.5      Articles of Incorporation; Bylaws. At the Effective Time, the
Articles of Incorporation of Merger Sub, as in effect at the Effective Time,
shall be the Articles of Incorporation of the Surviving Corporation until
thereafter amended in accordance with applicable law. At the Effective Time, the
Bylaws of Merger Sub, as in effect immediately prior to the Effective Time,
shall be the Bylaws of the Surviving Corporation until thereafter amended in
accordance with applicable law.

         1.6      Directors and Officers. The directors and officers of Merger
Sub immediately prior to the Effective Time shall be the directors and officers
of the Surviving Corporation, each to hold office in accordance with the
Articles of Incorporation and Bylaws of the Surviving Corporation until their
respective successors are duly elected or appointed and qualified.

         1.7      Merger Consideration; Conversion and Cancellation of Company
Common Stock. By virtue of the Merger without any action on the part of Parent,
Merger Sub, the Company or the Shareholders:

                  (a)   Conversion of Company Common Stock. Subject to the terms
and conditions of this Agreement, at the Effective Time, each share of Company
Common Stock issued and outstanding immediately prior to the Effective Time and
all rights in respect thereof

                                       2

shall be converted into the right to receive (i) 29.8092 shares of Parent Common
Stock (the "Stock Consideration") and (ii) cash from Parent as set forth in
Section 1.7(b) below (the "Cash Consideration"). The Stock Consideration and
Cash Consideration are hereinafter collectively referred to as the "Merger
Consideration. Total stock consideration shall equal 298,092 shares of Parent
Company common stock.

                  (b)   Cash Consideration Calculation. The total Cash
Consideration paid to the Shareholders shall equal the sum of (i) the Company's
cash balance, as determined consistent with the Company's past practices, as of
the Effective Time, and (ii) increased or decreased by the difference (+ of -)
between the Company's accounts payable and inventory as of the Effective Time,
all as determined and valued consistent with the Company's past practices. For
example, (i) as of the Effective Time if the Company's cash balance was
$100,000, accounts payable balance was $80,000, and the inventory balance was
$70,000, the total Cash Consideration would equal $90,000 or (i) as of the
Effective Time if the Company's cash balance was $100,000, accounts payable
balance was $70,000, and the inventory balance was $80,000, the Total Cash
Consideration would equal $110,000. The Cash Consideration shall be paid on or
before September 24, 2002. The Cash Consideration shall be divided between the
two Shareholders in accordance with their respective ownership percentages of
the Company.

                  (c)   Right to Accounting. Subsequent to the Effective Time,
Parent and the Surviving Corporation shall allow the Shareholders, and their
agents, full access to the books and records of the Company and the Surviving
Corporation to verify the calculation and determination of the Cash
Consideration.

                  (d)   Cancellation of Company Common Stock. At the Effective
Time, all shares of Company Common Stock converted into the right to receive the
Merger Consideration pursuant to this Article I shall no longer be outstanding
and shall automatically be canceled and shall cease to exist, and each
certificate (each a "Certificate") previously representing any such shares of
Company Common Stock shall thereafter only represent the right to receive the
Merger Consideration. Certificates previously representing shares of Company
Common Stock shall be exchanged for shares of Parent Common Stock upon surrender
of such Certificates in accordance with Section 1.9 hereof, without any
interest.

         1.8      No Fractional Shares of Parent Common Stock.

                  (a) No certificates or scrip of shares of Parent Common Stock
representing fractional shares of Parent Common Stock or book-entry credit of
the same shall be issued upon the surrender for exchange of certificates and
such fractional share interests will not entitle the owner thereof to vote or to
have any rights of a stockholder of Parent or a holder of shares of Parent
Common Stock.

                  (b)   Notwithstanding any other provision of this Agreement,
each holder of Company Common Stock exchanged pursuant to the Merger who would
otherwise have been entitled to receive a fraction of a share of Parent Common
Stock (after taking into account all Certificates delivered by such holder)
shall receive, in lieu thereof, cash (without interest) in an amount equal to
the product of (i) such fractional part of a share of Parent Common Stock
multiplied by (ii) the closing price on the New York Stock Exchange for a share
of Parent

                                       3

Common Stock on the date of the Effective Time. As promptly as practicable after
the determination of the aggregate amount of cash to be paid to holders of
fractional interests, Parent shall cause the Surviving Corporation to forward
payments to such holders of fractional interests subject to and in accordance
with the terms hereof.

         1.9      Exchange of Shares.

                  (a)   Delivery of Merger Consideration. Immediately following
the Merger, upon surrender by the Shareholders of the certificates representing
the Company Common Stock, Parent shall cause to be issued to each Shareholder
certificates representing the number of shares of Parent Common Stock to which
such Shareholder is entitled pursuant to Section 1.7(a) above.

                  (b)   Transfer Restrictions; Legends. The shares of Parent
Common Stock issued in the Merger shall not be transferable in the absence of an
effective registration statement under the Securities Act of 1933, as amended
(the "Securities Act"), or an exemption therefrom. In the absence of an
effective registration statement under the Securities Act, neither such shares
of Parent Common Stock nor any interest therein shall be sold, transferred,
assigned or otherwise disposed of, unless Parent shall have previously received
an opinion of counsel knowledgeable in Federal securities law, in form and
substance reasonably satisfactory to Parent, to the effect that registration
under the Securities Act is not required in connection with such disposition.
Parent shall be entitled to give stop transfer instructions to its transfer
agent with respect to such shares of Parent Common Stock in order to enforce the
foregoing restrictions.

                  The certificate or certificates representing the shares of
Parent Common Stock issued in the Merger shall bear the following legend
restricting the transfer thereof, in addition to any other legend required by
applicable law:

         "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
         UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
         TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS (1) A REGISTRATION
         STATEMENT WITH RESPECT THERETO IS IN EFFECT UNDER SUCH ACT, (2) SUCH
         TRANSFER IS PURSUANT TO RULE 144 UNDER SUCH ACT OR (3) THE HOLDER
         HEREOF FURNISHES TO THE ISSUER AN OPINION OF COUNSEL, WHICH COUNSEL AND
         WHICH OPINION SHALL BE REASONABLY SATISFACTORY TO THE ISSUER THAT
         REGISTRATION UNDER SUCH ACT IS NOT REQUIRED."

         1.10     Tax Consequences. It is intended by the parties hereto that
the Merger shall constitute a reorganization within the meaning of Section
368(a) of the Code.

                                       4

                                   ARTICLE II

                  REPRESENTATIONS AND WARRANTIES OF THE COMPANY
                              AND THE SHAREHOLDERS

                  The Company and each of the Shareholders, jointly and
severally, represent and warrant to Parent and Merger Sub that, except as
disclosed in the disclosure schedule attached hereto (the "Company Disclosure
Schedule"):

         2.1      Corporate Organization.

                  (a)   The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Utah. The Company
has the corporate power and authority to own or lease its properties and assets
and to carry on its business as it is now being conducted, and is qualified to
do business in each jurisdiction in which the nature of the business conducted
by it or the character or location of the properties and assets owned or leased
by it makes such qualification necessary. The copies of the Articles of
Incorporation and Bylaws of the Company which have previously been delivered to
Parent are true and correct copies of such documents as in effect as of the date
of this Agreement.

                  (b)   The Company owns no equity interests in any corporation,
partnership or other entity.

         2.2      Capitalization. The authorized capital stock of the Company
consists of 50,000 shares of Company Common Stock, no par value per share. As of
the date hereof, there are (i) 10,000 shares of Company Common Stock
outstanding, all of which are held by the Shareholders, and (ii) no shares of
Preferred Stock outstanding. All \of the issued and outstanding shares of
Company Common Stock were duly authorized and validly issued and are fully paid
and nonassessable and are free of any liens or encumbrances created by or
resulting from the actions of the Company, and are not subject to preemptive
rights or rights of first refusal created by statute, the Articles of
Incorporation or Bylaws of the Company or any agreement to which the Company or
any Shareholder is a party or by which it is bound. All outstanding shares of
Company Common Stock were issued in compliance with all applicable federal and
state securities laws. The Company does not have and is not bound by any
outstanding subscriptions, options, warrants, convertible securities, calls,
commitments, agreements or obligations of any character calling for the
purchase, redemption or issuance of any shares of Company Common Stock or any
other equity security of the Company or any securities representing the right to
purchase or otherwise receive any shares of Company Common Stock or any other
equity security of the Company.

         2.3      Authority; No Violation.

                  (a)   The Company has full corporate power and authority to
execute and deliver this Agreement, to perform its obligations hereunder and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby have
been duly and validly approved by the Board of Directors and shareholders of the
Company. No other corporate proceedings on the part of the

                                       5

Company are necessary to approve this Agreement and to consummate the
transactions contemplated hereby. This Agreement and all other agreements and
documents to be entered into in connection herewith have been duly and validly
executed and delivered by the Company and each of the Shareholders and (assuming
due authorization, execution and delivery by Parent and Merger Sub) constitute
valid and binding obligations of the Company and each of the Shareholders,
enforceable against the Company and each of the Shareholders, in accordance with
their respective terms, except as enforcement may be limited by general
principles of equity whether applied in a court of law or a court of equity and
by bankruptcy, insolvency and similar laws affecting creditors' rights and
remedies generally.

                  (b)   Neither the execution and delivery of this Agreement by
the Company and each of the Shareholders, nor the consummation by the Company
and each of the Shareholders of the transactions contemplated hereby, nor
compliance by the Company and each of the Shareholders with any of the terms or
provisions hereof, will (i) violate any provision of the Articles of
Incorporation or Bylaws of the Company or (ii) assuming that the consents and
approvals referred to in Section 2.4 hereof are duly obtained, (x) violate any
statute, code, ordinance, rule, regulation, judgment, order, writ, decree or
injunction applicable to the Company or any of the Shareholders or any of their
respective properties or assets, or (y) materially violate, materially conflict
with, result in a material breach of any provision of or the loss of any
material benefit under, constitute a material default (or an event which, with
notice or lapse of time, or both, would constitute a material default) under,
result in the termination of or a right of termination or cancellation under,
accelerate the performance required by, or result in the creation of any lien,
pledge, security interest, charge or other encumbrance upon any of the
properties or assets of the Company or any of the Shareholders under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, deed of
trust, material license, material sublicense, material lease, material agreement
or other material instrument or obligation to which the Company or any of the
Shareholders is a party, or by which the Company or any of the Shareholders or
any of their respective properties or assets may be bound or affected.

         2.4      Consents and Approvals. Except for (a) the filing of the
Certificate of Merger with the California Secretary of State and the Articles of
Merger with the Division pursuant to the CGCL and Section 1107 of the URBCA, (b)
any filings to be made by Parent or Merger Sub, including but not limited to,
any federal or state securities filings to perfect the private placement
exemption of the Merger Consideration, or (c) such filings, authorizations or
approvals as may be set forth in Section 2.4 of the Company Disclosure Schedule,
no consents or approvals orders or authorizations of or filings or registrations
with any court, administrative agency or commission or other governmental or
quasi-governmental authority or instrumentality, whether in the United States of
America or otherwise (each a "Governmental Entity") or with any third party are
necessary with respect to the Company or any of the Shareholders in connection
with (1) the execution and delivery of this Agreement and (2) the consummation
of the Merger and the other transactions contemplated hereby. All such
qualifications and filings required to be made by the Company will, in the case
of qualifications, be effective as of the Effective Time and will, in the case
of filings, be made within the time prescribed by law.

         2.5      Financial Statements. The Company has previously provided to
Parent true and correct copies of the Company's (a) unaudited consolidated
balance sheets of the Company at March 31, 2000, 2001 and 2002, together with
related unaudited consolidated statements of

                                       6

operations and cash flows for the fiscal years then ended, and (b) the Company's
unaudited consolidated balance sheet as of July 31, 2002 (the "Reference Balance
Sheet") and an unaudited statement of operations for the five months ended July
31, 2002 (collectively, the "Financial Statements"). Such Financial Statements
have been prepared substantially in accordance with generally accepted
accounting principles ("GAAP") except for immaterial items noted in the Company
Disclosure Schedule. The Financial Statements fairly present the financial
condition and operating results of the Company in all material respects as of
the dates, and for the periods indicated therein, subject to normal year end
adjustments.

         2.6      Absence of Undisclosed Liabilities. The Company has no
material obligations or liabilities of any nature (matured or unmatured, fixed
or contingent, including without limitation any obligations or liabilities as
guarantor or indemnitor of any other person, firm, partnership or corporation
("Person")) other than (i) those set forth or adequately provided for in the
Reference Balance Sheet, (ii) those incurred in the ordinary course of business
and not required to be set forth in the Reference Balance Sheet, (iii) those
incurred in the ordinary course of business since the Reference Balance Sheet
Date and consistent with past practice, and (iv) those set forth in Section 2.6
of the Company Disclosure Schedule.

         2.7      Absence of Certain Changes or Events. Except as disclosed in
Section 2.7 of the Company Disclosure Schedule, since the Reference Balance
Sheet Date, the Company has conducted its business in the ordinary course
consistent with past practice, and except as contemplated by this Agreement,
there has not occurred (i) any purchase or other acquisition of, sale, lease,
disposition, or other transfer of, or mortgage, pledge or subjection to any
material encumbrance or lien on, any material asset, tangible or intangible, of
the Company, other than in the ordinary course of business; (ii) any change in
accounting methods or practices (including any change in depreciation or
amortization policies or rates) by the Company or any revaluation by the Company
of any of its assets; (iii) any declaration, setting aside, or payment of a
dividend or other distribution with respect to the shares of the Company Common
Stock, or any split-up or other recapitalization in respect of the Company
Common Stock, or any direct or indirect redemption, purchase or other
acquisition by the Company of any shares of Company Common Stock; (iv) any
material contract entered into by the Company or any amendment or termination
of, or default under, any material contract to which the Company is a party or
by which it is bound; (v) any amendment or change to the Articles of
Incorporation or Bylaws of the Company; (vi) any material increase in or
modification of the compensation or benefits payable or to become payable by the
Company to any of their respective officers, directors or employees; (vii) any
issuance, transfer, sale or pledge by the Company or any Shareholder of any
shares of Company Common Stock or other securities or of any commitment, option,
right or privilege under which the Company is or may become obligated to issue
any shares of Company Common Stock or other securities; (viii) any indebtedness
for borrowed money incurred by the Company; (ix) any loan made or agreed to be
made by the Company, nor has the Company become liable or agreed to become
liable as a guarantor with respect to any loan; (x) any waiver or compromise by
the Company of any right or rights or any payment, direct or indirect, of any
material debt, liability or other obligation, other than in the ordinary course
of business; (xi) any sale, assignment, or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets, other than in the ordinary
course of business; (xii) any actual or, to the knowledge of the Company or
either of the Shareholders, threatened termination or loss of (a) any material
contract, lease, license or other agreement to which the Company was or is a
party; or (b) any

                                       7

certificate, license or other authorization required for the continued operation
by the Company of any portion of any of its business; (xiii) any resignation of
employment of any key officer or employee of the Company, or to the knowledge of
the Company, any impending resignation of employment of any such officer or
employee; (xiv) any negotiation by any executive officer of the Company or any
agreement by the Company to do any of the things described in the preceding
clauses (i) through (xiii) (other than negotiations with Parent and its
representatives regarding the transactions contemplated by this Agreement); or
(xv) any other event or circumstance that could reasonably be expected to have a
material adverse effect on the Company.

         2.8      Legal Proceedings. Except as provided in Section 2.8 of the
Company Disclosure Schedule, there are no legal actions, suits, arbitrations or
other legal, administrative or governmental proceedings or investigations
pending or, to the knowledge of the Company or either of the Shareholders,
threatened against the Company or any of its properties, assets or business and
to the knowledge of the Company and the Shareholders there exist no facts which
could reasonably be expected to result in any such action, suit or other
proceeding or which would challenge the validity or propriety of the
transactions contemplated by this Agreement. The Company is not in default with
respect to any judgment, order or decree of any court or any governmental agency
or instrumentality. The foregoing includes, without limiting the generality
thereof, pending or threatened actions involving the Company's use in connection
with the Company's business of any information or techniques allegedly
proprietary to a former employee.

         2.9      Restrictions on Business Activities. There is no agreement,
judgment, injunction, order or decree binding upon the Company which has or
could reasonably be expected to have the effect of prohibiting or materially
impairing any current business practice of the Company, any acquisition of
property by the Company, the ability of the Company to compete with any other
person or the conduct of business by the Company as currently conducted by the
Company.

         2.10     Governmental Authorization. Except as would not have a
materially adverse effect on the operations or financial conditions of the
Company, the Company has obtained each federal, state, county, local or foreign
governmental consent, license, permit, grant, or other authorization of a
Governmental Entity (i) pursuant to which the Company currently operates or
holds any interest in any of its properties or (ii) that is required for the
operation of the Company's business or the holding of any such interest ((i) and
(ii) herein collectively called the "Company Authorizations"), and all of such
Company Authorizations are in full force and effect.

         2.11     Title and Condition of Personal Property. The Company has good
and marketable title to all personal property owned by it that is material to
its business and reflected in the Reference Balance Sheet or acquired after the
Reference Balance Sheet Date (other than property sold or otherwise disposed of
since the Reference Balance Sheet Date in the ordinary course of business), free
and clear of all mortgages, liens, pledges, charges or encumbrances of any kind
or character or claims thereto, except (i) the lien of current taxes not yet due
and payable, (ii) such imperfections of title, liens and easements as do not and
will not materially detract from or interfere with the use of the properties
subject thereto or affected thereby, or otherwise materially impair business
operations involving such properties, (iii) liens securing debt which is
reflected on the Reference Balance Sheet, and (iv) as set forth in Section 2.11
of the Company Disclosure

                                       8

Schedule. The material property and equipment of the Company that is used in the
operations of its business are in all material respects in good operating
condition and repair. All material properties used in the operations of the
Company are reflected in the Reference Balance Sheet.

         2.12     Real and Leased Property.

                  (a)   The Company does not own any fee simple interest in real
property. The Company does not lease or sublease any real property other than as
set forth on Section 2.12 of the Company Disclosure Schedule. Section 2.12 of
the Company Disclosure Schedule sets forth the street address of each parcel of
real property leased or subleased by the Company (the "Leased Property"). The
Company has previously delivered to Parent a true and complete copy of all of
the lease and sublease agreements, as amended to date (the "Leases") relating to
the Leased Property. The Company enjoys a peaceful and undisturbed possession of
the Leased Property held by it. All improvements located on the Leased Property
are in a state of good maintenance and repair and in a condition adequate and
suitable for the effective conduct therein of the business conducted and
proposed to be conducted by the Company. No person other than the Company has
any right to use or occupy any part of the Leased Property, whether pursuant to
sublease, license or otherwise. The Leases are valid, binding and in full force
and effect, all rent and other sums and charges payable thereunder are current,
no notice of default or termination under any of the Leases is outstanding, no
termination event or condition or uncured default on the part of the Company or,
to the knowledge of the Company or either of the Shareholders, on the part of
the landlord or sublandlord, as the case may be, thereunder, exists under the
Leases, and to the knowledge of the Company or either of the Shareholders, no
event has occurred and no condition exists which, with the giving of notice or
the lapse of time or both, would constitute such a default or termination event
or condition. In the event that any of the Leases is a sublease, the Company, as
sublessee or sublessor, as the case may be, has obtained the required consent of
the prime landlord to such sublease, and such prime lease is in full force and
effect, there are no outstanding uncured notices of default or termination, and
no right of the Company in any such sublease conflicts with such prime lease.
All of the Leased Property is used in the conduct of the Company's business.

                  (b)   The heating, ventilation, air conditioning, plumbing,
electrical systems and telephone systems at the Leased Property are in a
condition reasonably adequate and suitable for the effective conduct therein of
the business conducted by the Company and will be so adequate and suitable on
the Closing Date. The Company has not experienced any material interruption in
the services provided to any of the Leased Property within the last twelve (12)
months. To the knowledge of the Company or either of the Shareholders, but
without any inquiry of the applicable landlord, no landlord under the Leases has
any plans to make any material alterations to any of the Leased Property, the
construction of which would interfere with the use of any portion of the Leased
Property. To the knowledge of the Company or either of the Shareholders, but
without any inquiry of the applicable landlord, no landlord under the Leases has
any plans to make any material alterations to any of the buildings in which
Leased Property is located, the costs of which alterations would be borne in any
part by a tenant under the applicable Lease.

                  (c)   The Company has all material permits, licenses,
franchises, approvals and authorizations (collectively, the "Real Property
Permits") of all Governmental Entities having jurisdiction over each Leased
Property and from all insurance companies and fire rating and

                                       9

other similar boards and organizations (collectively, the "Insurance
Organizations") necessary to conduct its business as presently conducted. To the
knowledge of the Company and the Shareholders, all such Real Property Permits
required or appropriate have been lawfully issued to the Company to enable each
Leased Property to be lawfully occupied and used for all of the purposes for
which they are currently occupied and useful and are, as of the date hereof, in
full force and effect. The Company has not received or been informed by a third
party of the receipt by it of any notice from any Governmental Entity having
jurisdiction over any Leased Property or from any Insurance Organization
threatening a suspension, revocation, modification or cancellation of any Real
Property Permit or of any insurance policies and, to the knowledge of the
Company or either of the Shareholders, there is currently no basis for the
issuance of any such notice or the taking of any such action.

                  (d)   To the knowledge of the Company or either of the
Shareholders, there are no liabilities (other than rent and other sums and
charges regularly payable) associated with any of the Leases including, without
limitation, any liability under any Environmental and Safety Law, which is or
which may become payable by the Surviving Corporation.

         2.13     Intellectual Property.

                  (a)   Section 2.13(a) of the Company Disclosure Schedule sets
forth an accurate and complete description of (i) all trademarks, service marks,
trade names, brands and copyrights of the Company; and (ii) substantially all
franchises, licenses, sublicenses, contracts, options and agreements, other than
shrink-wrap software licenses, pursuant to which the Company is authorized to
use any intellectual property not owned by the Company. The Company does not own
or use any patents.

                  (b)   Except as set forth in Section 2.13(b) of the Company
Disclosure Schedule, the Company owns or has the right to use all intellectual
property necessary for the conduct of its business as currently conducted by it,
including, without limitation, all network operating system and database
softwares or other intellectual property used by the Company.

                  (c) Except for third party licenses listed in Section 2.13(c)
of the Company Disclosure Schedule, the Company is the sole and exclusive owner
of its Intellectual Property including, but not limited to, those listed or
described on the Company Disclosure Schedule, or has the right to the use
thereof for the material covered thereby in connection with the services or
products in respect to which they have been or are now being used.

                  (d)   To the knowledge of the Company or either of the
Shareholders, except as set forth in Section 2.13(d) of the Company Disclosure
Schedule, there has been no unauthorized use, disclosure, infringement or
misappropriation of any material intellectual property rights of the Company,
any trade secret material to the Company, or any material intellectual property
right of any third party to the extent licensed by or through the Company, by
any third party, including any employee of the Company.

         2.14     Taxes.

                  (a)   The Company has duly and timely filed (including
applicable extensions granted without penalty) all material Tax Returns (as
hereinafter defined) required to be filed at

                                       10

or prior to the Effective Time, and such Tax Returns are true and correct in all
material respects, and the Company has paid in full or made adequate provision
in the Financial Statements for all material Taxes (as hereinafter defined)
shown to be due on such Tax Returns. As of the date hereof (i) the Company has
not requested any extension of time within which to file any Tax Returns in
respect of any fiscal year which have not since been filed and no request for
waivers of the time to assess any Taxes are pending or outstanding, (ii) no
claim for Taxes has become a lien against the property of the Company or is
being asserted against the Company other than liens for Taxes not yet due and
payable, (iii) no audit of any Tax Return of the Company is being conducted by a
Tax authority, (iv) no extension of the statute of limitations on the assessment
of any Taxes has been granted to the Company and is currently in effect, and (v)
there is no agreement, contract or arrangement to which the Company is a party
that may result in the payment of any amount that would not be deductible by
reason of Sections 280G, 162 or 404 of the Code. The Company has not been or
will be required to include any adjustment in taxable income for any Tax period
(or portion thereof) pursuant to Section 481 or 263A of the Code or any
comparable provision under state or foreign Tax laws as a result of
transactions, events or accounting methods employed prior to the Merger.

                  (b) For the purposes of this Agreement, "Taxes" shall mean all
taxes, charges, fees, levies, penalties or other assessments imposed by any
United States federal, state, local or foreign taxing authority, including, but
not limited to income, excise, property, sales, transfer, franchise, payroll,
withholding, social security or other taxes, including any interest, penalties
or additions attributable thereto. For purposes of this Agreement, "Tax Return"
shall mean any return, report, information return or other document (including
any related or supporting information) filed or required to be filed with a
Governmental Entity with respect to Taxes.

         2.15     Environmental Matters.

                  (a)   The following terms shall be defined as follows:

                        (i)       "Environmental and Safety Laws" shall mean any
federal, state, local or foreign laws, ordinances, codes, regulations, rules,
policies and orders that are intended to assure the protection of the
environment, or that classify, regulate, call for the remediation of, require
reporting with respect to, or list or define air, water, groundwater, solid
waste, hazardous or toxic substances, materials, wastes, pollutants or
contaminants, or which are intended to assure the safety of employees, workers
or other persons, including the public.

                        (ii)      "Property" shall mean all real property leased
or owned by the Company either currently or in the past.

                        (iii)     "Facilities" shall mean all buildings and
improvements on the Property of the Company.

                                       11

                  (b)   (i)       the Company has not received notice (oral or
written) of any noncompliance of the Facilities or its past or present
operations with Environmental and Safety Laws; (ii) no notices, administrative
actions or suits are pending or, to the knowledge of the Company or either of
the Shareholders, threatened relating to a violation of any Environmental and
Safety Laws; (iii) to the Company's and Shareholders' knowledge, the Company's
uses of and activities within the Facilities currently comply with all
Environmental and Safety Laws; and (iv) the Company has all the permits and
licenses required to be issued and are in full compliance with the terms and
conditions of those permits.

         2.16     Customers and Suppliers; Supplies. Except as indicated in
Section 2.16 of the Company Disclosure Schedule, all supplies and services
necessary for the conduct of the business of the Company as presently conducted,
may be obtained from alternate sources on terms and conditions comparable to
those presently available to the Company, and no facts, circumstances or
conditions exist which create a reasonable basis for believing that the Company
will be unable to continue to procure the supplies and services necessary to
conduct its business on substantially the same terms and conditions as such
supplies and services are currently procured.

         2.17     List of Accounts. Set forth in Section 2.17 of the Company
Disclosure Schedule is: (a) the name of each bank or other institution in which
the Company maintains an account (cash, securities or other) or safe deposit
box; (b) the name, phone number and telefax number of the contact person at such
bank or institution and (c) the account number of the relevant account, a
description of the type of account and a list of the authorized signatories on
such account.

         2.18     Employment Agreements. Section 2.18 of the Company Disclosure
Schedule contains the names, start dates, contracts dates, job descriptions,
annual salary rates and other compensation of all officers, directors and
employees of the Company or consultants being paid more than $20,000 a year by
the Company (including compensation paid or payable by the Company under the
Company Employee Plans). Section 2.18 of the Company Disclosure Schedule
contains a list of all employee policies, employee manuals or other written
statements of rules or policies as to hiring practices and procedures, working
conditions, vacation and sick leave, a complete copy of each of which has been
made available to Parent. Except as set forth in Section 2.18 of the Company
Disclosure Schedule, there are no employment, consulting, severance or
indemnification arrangements, agreements or understandings between the Company
and any officer, director, consultant or employee including, without limitation,
any contracts to employ executive officers, any severance, change in control or
similar arrangements with any officers, employees or agents of the Company that
will result in any obligation (absolute or contingent) of the Company to make
any payment to any officer, employee or agent of the Company following either
the consummation of the transactions contemplated hereby, termination of
employment, or both ("Company Employment Agreements").

         2.19     Employee Benefit Plans.

                  (a)   Section 2.19(a) of the Company Disclosure Schedule
lists, with respect to the Company (i) all material employee benefit plans (as
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA")) maintained, sponsored or

                                       12

contributed to or required to be contributed to by the Company, (ii) each loan
to a non-officer employee, loans to officers and directors and any stock option,
stock purchase, phantom stock, stock appreciation right, supplemental
retirement, severance, sabbatical, medical, dental, vision care, disability,
employee relocation, cafeteria benefit (Code section 125) or dependent care
(Code Section 129), life insurance or accident insurance plans, programs or
arrangements, (iii) all bonus, pension, profit sharing, savings, deferred
compensation or incentive plans, programs or arrangements, (iv) other fringe or
employee benefit plans, programs or arrangements that apply to senior management
of the Company and that do not generally apply to all employees, and (v) any
current or former employment or executive compensation or severance agreements,
written or otherwise, as to which unsatisfied obligations of the Company of
greater than $10,000 remain for the benefit of, or relating to, any present or
former employee, consultant or director of the Company (together, the "Company
Employee Plans"). There is no trade or business (whether or not incorporated)
which is treated as a single employer with the Company within the meaning of
Section 414(b), (c), (m) or (o) of the Code.

                  (b)   The Company has furnished to Parent a copy of the
Company Employee Plans and related plan documents, to the extent reduced to
writing (including trust documents, insurance policies or contracts, employee
booklets, summary plan descriptions and other authorizing documents, and, to the
extent still in its possession, any material employee communications relating
thereto) and has, with respect to each Company Employee Plan which is subject to
ERISA reporting requirements, provided copies of the Form 5500 reports filed for
the last three plan years. The Company has, with respect to any Company Employee
Plan intended to be qualified under Section 401(a) of the Code, either obtained
from the Internal Revenue Service a favorable determination letter as to its
qualified status under the Code, including all amendments to the Code effected
by the Tax Reform Act of 1986 and subsequent legislation, or applied to the
Internal Revenue Service for such a determination letter prior to the expiration
of the requisite period under applicable Treasury Regulations or Internal
Revenue Service pronouncements in which to apply for such determination letter
and to make any amendments necessary to obtain a favorable determination. The
Company has also furnished Parent with the most recent Internal Revenue Service
determination letter issued with respect to each such Company Employee Plan, and
nothing has occurred since the issuance of each such letter which could
reasonably be expected to cause the loss of the tax-qualified status of any
Company Employee Plan subject to Code Section 401(a).

                  (c)   Except as disclosed in Section 2.19(c) of the Company
Disclosure Schedule, to the Company's and either of the Shareholder's knowledge,
(i) none of the Company Employee Plans promises or provides retiree medical or
other retiree welfare benefits to any person; (ii) there has been no "prohibited
transaction," as such term is defined in Section 406 of ERISA and Section 4975
of the Code, with respect to any Company Employee Plan, for which no exemption
exists; (iii) each Company Employee Plan has been administered substantially in
accordance with its terms and in substantial compliance with the requirements
prescribed by any applicable statutes, rules and regulations (including
applicable provisions of ERISA and the Code); (iv) the Company has performed
substantially all obligations required to be performed by them under, are not in
any material respect in default under or violation of, and have no knowledge of
any material default or violation by any other party to, any of the Company
Employee Plans; (v) the Company is not subject to any liability or penalty under
Sections 4976 through 4980 of the Code or Title I of ERISA with respect to any
of the Company Employee

                                       13

Plans, other than obligations for the payment of benefits in the normal
operation of the Plan; (vi) all material contributions required to be made by
the Company to any Company Employee Plan have been made on a timely basis and
any accruals required by GAAP for contributions to each Company Employee Plan
for the current plan years are reflected on the financial statements of the
Company; (vii) with respect to each Company Employee Plan, no "reportable event"
within the meaning of Section 4043 of ERISA (excluding any such event for which
the thirty (30) day notice requirement has been waived under the regulations to
Section 4043 of ERISA) nor any event described in Section 4062, 4063 or 4041 of
ERISA has occurred with respect to any Company Employee Plan subject to Title IV
of ERISA; (viii) the Company has not incurred any liability under Title IV of
ERISA or Section 412 of the Code and (ix) no Company Employee Plan which is
subject to Title IV or ERISA has an "unfunded benefit liability" within the
meaning of Section 4001(a)(18) of ERISA. With respect to each Company Employee
Plan subject to ERISA as either an employee pension plan within the meaning of
Section 3(2) of ERISA or an employee welfare benefit plan within the meaning of
Section 3(1) of ERISA, the Company has prepared in good faith and timely filed
all requisite governmental reports (which were true and correct as of the date
filed) and has properly and timely filed and distributed or posted all notices
and reports to employees required to be filed, distributed or posted with
respect to each such Company Employee Plan. No suit, administrative proceeding,
action or other litigation has been brought, or to the knowledge of the Company
or either of the Shareholders is threatened, against or with respect to any such
Company Employee Plan, including any audit or inquiry by the IRS or United
States Department of Labor. The Company has no liability (including current or
potential withdrawal liability) with respect to any "multiemployer plan" as such
term is defined in Section 3(37) of ERISA. Each Company Employee Plan can be
amended, terminated or otherwise discontinued after Closing in accordance with
its terms without material liability (other than expenses typically incurred in
a termination event). The consummation of the transactions contemplated by this
Agreement will not entitle any current or former employee or other service
provider of the Company to severance benefits or any other payment, except as
provided by this Agreement or the schedules attached hereto.

                  (d)   With respect to each Company Employee Plan, the Company
has substantially complied with (i) the applicable health care continuation and
notice provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985
("COBRA") and the proposed regulations thereunder, (ii) the applicable
requirements of the Family Leave Act of 1993 and the regulations thereunder and
(iii) the applicable requirements of the Health Insurance Portability and
Accountability Act of 1996.

                  (e)   Consummation of the transactions contemplated by this
Agreement will not (i) entitle any current or former employee or other service
provider of the Company to severance benefits or any other payment, or (ii)
increase the amount of compensation due any such employee or service provider.

                  (f)   There has been no amendment to, written interpretation
or announcement (whether or not written) by the Company relating to, or change
in participation or coverage under, any Company Employee Plan which would
increase the expense of maintaining such Plan above the level of expense
incurred with respect to that Plan for the most recent fiscal year included in
the Company's financial statements, other than increases resulting from premium

                                       14

increases or the employment of additional employees, in each case in the
ordinary course of business.

         2.20     Labor Matters. Except as set forth in Section 2.20 of the
Company Disclosure Schedule, (a) the Company is not, and has not been, a party
to or otherwise bound by or to the Company's or either of the Shareholder's
knowledge threatened with any collective bargaining agreement or other labor
union contract and to the knowledge of the Company or either of the Shareholders
currently there are no organizational campaigns, petitions or other unionization
activities seeking recognition of a collective bargaining unit which could
affect the Company; (b) there are no controversies, strikes, slowdowns, work
stoppages or labor disturbances pending or to the knowledge of the Company or
either of the Shareholders threatened between the Company and any of its
employees, and the Company has not experienced any such controversy, strike,
slowdown, work stoppage or labor disturbances within the past three years; (c)
there are no unfair labor practice complaints pending against the Company before
the National Labor Relations Board or any other Governmental Entity or any
current union representation questions involving employees of the Company; (d)
there are no pending claims against the Company under any workers' compensation
plan or policy or for long-term disability; (e) to the knowledge of the Company
or either of the Shareholders, the Company has no obligations under COBRA with
respect to any former employees or qualifying beneficiaries thereunder; (f) the
Company is currently in compliance with all applicable Laws relating to the
employment of labor, including those related to wages, hours, collective
bargaining and the payment and withholding of taxes and other sums as required
by the appropriate Governmental Entity and has withheld and paid to the
appropriate Governmental Entity or is holding for payment not yet due to such
Governmental Entity all amounts required to be withheld from employees of the
Company and is not liable for any arrears of wages, taxes, penalties or other
sums for failure to comply with any of the foregoing; (g) the Company has paid
in full to all its employees or adequately accrued for in accordance with GAAP
all wages, salaries, commissions, bonuses, benefits and other compensation due
to or on behalf of such employees, including all compensation owing and due for
over-time work; (h) the Company has provided its employees with all relocation
benefits, stock options, bonuses and incentives, and all other compensation that
such employee has earned up through the date of this Agreement or that such
employee was otherwise promised in their employment agreements with the Company;
(i) there is no pending claim with respect to payment of wages, salary or
overtime pay that has been asserted or is now pending or to the knowledge of the
Company or either of the Shareholders threatened before any Governmental Entity
with respect to any Persons currently or formerly employed by the Company; (j)
the Company is not a party to, or otherwise bound by, any consent decree with,
or citation by, any Governmental Entity relating to employees or employment
practices; (k) there is no charge or proceeding with respect to a violation of
any occupational safety or health standards that to the Company's or either of
the Shareholder's knowledge has been asserted or is now pending or to the
knowledge of the Company or either of the Shareholders threatened with respect
to the Company; (l) there is no charge of discrimination in employment or
employment practices, for any reason, including, without limitation, age,
gender, race, religion or other legally protected category, which has been
asserted or is now pending or to the knowledge or the company or either of the
Shareholders threatened before the United States Equal Employment Opportunity
Commission, or any other Governmental Entity in any jurisdiction in which the
Company has employed or currently employs any Person; (m) the Company is in
compliance in all material respects with the requirements of the Americans With
Disabilities Act and any similar law of any

                                       15

Government Entity; and (n) the Company is in compliance with the requirements of
the Workers Adjustment and Retraining Notification Act ("WARN") and each has no
liabilities pursuant to WARN.

                  Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
severance benefits or any other payment (including, without limitation,
severance, unemployment compensation, golden parachute, bonus or otherwise)
becoming due to any current or former director, employee or other service
provider of the Company or any other ERISA Affiliate, (ii) increase any benefits
otherwise payable by the Company or (iii) result in the acceleration of the time
of payment or vesting of any such benefits, or any options or warrants to
purchase Company capital stock, or any increase in the amount of compensation of
benefits due any such person.

         2.21     Contracts and Commitments. Section 2.21 of the Company
Disclosure Schedule contains a complete and accurate list of all contracts and
agreements (including, without limitation, oral and informal arrangements) of
the following categories to which the Company is a party or by which it is bound
as of the date of this Agreement:

                  (a)   labor contracts;

                  (b)   manufacturing, distribution, franchise, license, sales,
agency or advertising contracts;

                  (c)   contracts which require the payment in excess of $10,000
per year for (i) the purchase of inventory, materials, supplies or equipment
which are not cancelable (without material penalty, cost or other liability)
within one (1) year, (ii) management, consulting, service or other similar
contracts, (iii) advertising or marketing agreements or arrangements, and (iv)
other contracts made in the ordinary course of business involving annual
expenditures or liabilities in excess of $10,000 which are not cancelable
(without material penalty, cost or other liability) within ninety (90) days,
other than purchase orders made in the ordinary course of business consistent
with past practice;

                  (d)   promissory notes, loans, agreements, indentures,
evidences of indebtedness or other instruments proving for the lending of money,
whether as borrower, lender or guarantor;

                  (e)   contracts (other than Leases) containing covenants
limiting the freedom of the Company to engage in any line of business or compete
with any Person or operate at any location;

                  (f)   joint venture or partnership agreements or joint
development or similar agreements;

                  (g)   agreement, contract or other arrangement with (i) the
Company or any affiliate of the Company or (ii) any current or former officer,
director or employee of the Company or any affiliate of the Company (other than
non-compete or intellectual property agreements);

                                       16

                  (h)   material lease or similar agreement with any person
under which (i) the Company is lessee of, or holds or uses, any machinery,
equipment, vehicle or other tangible property owned by any person or (ii) the
Company is a lessor or sublessor of, or makes available for use by any person,
any tangible personal property owned or leased by the Company, in any such case
which has an aggregate future liability or receivable, as the case may be, and
is not terminable by the Company by notice of not more than sixty (60) days;

                  (i)   contracts or other instruments (including so-called
take-or-pay or keepwell agreements) under which (i) any person has directly or
indirectly guaranteed indebtedness, liabilities or obligations of the Company or
(ii) the Company has directly or indirectly guaranteed indebtedness, liabilities
or obligations of any person (in each case other than endorsements for the
purpose of collection in the ordinary course of business);

                  (j)   contracts or other instruments under which the Company
has, directly or indirectly, made any advance, loan, extension of credit or
capital contribution to, or other investment in, any person involving aggregate
payments in excess of $25,000;

                  (k)   mortgage, pledge, security agreement, deed of trust or
other instrument granting a lien or other encumbrance upon any property of the
Company;

                  (l)   agreement or instrument providing for indemnification of
any person with respect to liabilities relating to any current or former
business of the Company, or any predecessor person; and

                  (m)   any exclusive retainer agreement or arrangement with
attorneys, accountants, actuaries, appraisers, investment bankers or other
professional advisors.

                  True copies of the written contracts identified in Section
2.21 of the Company Disclosure Schedule have been made available to Parent.

         2.22     Absence of Breaches or Defaults. The Company is not, and, to
the knowledge of the Company or either of the Shareholders, no other party is,
in material default under, or in material breach or violation of, any contract
to which the Company is a party, including, without limitation, those identified
on Section 2.21 of the Company Disclosure Schedule and, to the knowledge of the
Company or either of the Shareholders, no event has occurred which, with the
giving of notice or passage of time or both would constitute a material default
under any contract identified on Section 2.21 of the Company Disclosure
Schedule. Other than contracts which have terminated or expired in accordance
with their terms, each of the contracts identified on Section 2.21 of the
Company Disclosure Schedule is valid, binding and enforceable in accordance with
its terms (subject to the effects of bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally, general equitable principles (whether
considered on a proceeding in equity or at law)) and is in full force and
effect, and assuming all consents required by the terms thereof or applicable
law have been obtained, such contracts will continue to be valid, binding and
enforceable in accordance with their respective terms and in full force and
effect immediately following the consummation of the transactions contemplated
hereby. No event has occurred which either entitles, or would, on notice or
lapse of time or both, entitle the holder of any

                                       17

indebtedness for borrowed money affecting the Company (except for the execution
or consummation of this Agreement) to accelerate, or which does accelerate, the
maturity of any indebtedness affecting the Company, except as set forth in
Section 2.22 of the Company Disclosure Schedule.

         2.23     Interested Party Transactions. Except as set forth in Section
2.23 of the Company Disclosure Schedule, the Company is not indebted to any
director, officer, employee or agent of the Company (except for amounts due as
normal salaries and bonuses and in reimbursement of ordinary expenses), and no
such person is indebted to the Company. Except as set forth in Section 2.23 of
the Company Disclosure Schedule, no affiliate of the Company or any Shareholder
has, or has had, any interest in any material property (whether real, personal,
or mixed and whether tangible or intangible), used in or pertaining to the
Company.

         2.24     Compliance with Applicable Law. The Company holds all material
licenses, franchises, permits and authorizations which are necessary for it to
engage in the business currently conducted by it. The Company has complied with
and is not in default in any respect under any, applicable law, statute, order,
rule, regulation, policy and/or guideline of any Governmental Entity relating to
the Company except where the failure to do so would not have a material adverse
effect on the Company and the Company has not received notice of any violations
of any of the above.

         2.25     Insurance. Section 2.25 of the Company Disclosure Schedule
sets forth a true and complete list of all insurance policies providing
insurance coverage of any nature to the Company. To the knowledge of the Company
and the Shareholders, such policies are sufficient for compliance by the Company
with all requirements of law and all material agreements to which the Company is
a party or by which any of its assets are bound. To the knowledge of the Company
and the Shareholders, all of such policies are in full force and effect and are
valid and enforceable, and the Company has complied with all material terms and
conditions of such policies, including premium payments. Except as set forth on
the Company Disclosure Schedule, none of the insurance carriers has indicated to
the Company an intention to cancel any such policy. The Company has no claim
pending against any of the insurance carriers under any of such policies and
neither the Company nor either Shareholder has knowledge of any actual or
alleged occurrence of any kind which may give rise to any such claim.

         2.26     Brokers. Neither the Company nor any of its officers or
directors has employed any broker or finder or incurred any liability for any
broker's fees, commissions or finder's fees in connection with any of the
transactions contemplated by this Agreement.

         2.27     Minute Books. The minute books of the Company made available
to Parent contain a complete and accurate summary of all meetings of directors
and shareholders or actions by written consent since the time of incorporation
of the Company through the date of this Agreement, and reflect all transactions
referred to in such minutes accurately.

         2.28     Accounts and Notes Receivable. Subject to any reserves set
forth on the Reference Balance Sheet, the accounts receivable and the notes
receivable shown on the Reference Balance Sheet represent and will represent
bona fide claims arising in the ordinary course of business against debtors for
sales and other charges, and are not subject to discount

                                       18

except for normal cash and immaterial trade discounts. To the knowledge of the
Company or either of the Shareholders, and subject to any reserves set forth on
the Reference Balance Sheet, such accounts receivable and notes receivable are
collectible by the Company in the ordinary course of business. The amount
carried for doubtful accounts and allowances disclosed in the Reference Balance
Sheet is sufficient to provide for any losses which may be sustained on
realization of the accounts receivable and notes receivable.

         2.29     Certain Payments. Since January 1, 1997, to the knowledge of
the Company or either of the Shareholders, neither the Company nor any officer,
agent or employee of the Company or, to the knowledge of the Company or either
of the Shareholders, any other person affiliated with or acting on behalf of the
Company has directly or indirectly (a) made any contribution, gift, bribe,
rebate, payoff, influence payment, kickback, or other payment in violation of
any applicable law, rule or regulation to any person, private or public,
regardless of form, whether in money, property, or services, or (b) established
or maintained any fund or material asset that has not been recorded in the books
and records of the Company.

         2.30     Accredited Investor Status. Each of the Shareholders is an
"accredited investor" within the meaning of Regulation D promulgated under the
Securities Act of 1933, as amended.

         2.31     Representations Complete. None of the representations or
warranties made by the Company or Shareholders herein or in any Schedule hereto,
including the Company Disclosure Schedule, or certificate furnished by the
Company pursuant to this Agreement, contains any untrue statement of a material
fact.

                                  ARTICLE III

                         REPRESENTATIONS AND WARRANTIES
                            OF PARENT AND MERGER SUB

                  Parent and Merger Sub hereby jointly and severally represent
and warrant to the Company that, except as set forth in the disclosure schedule
attached hereto (the "Parent Disclosure Schedule"):

         3.1      Corporate Organization. Each of Parent and its subsidiaries is
a corporation duly organized, validly existing and in good standing under the
laws of its state of incorporation. Parent and each of its subsidiaries have the
corporate power and authority to own or lease their respective properties and
assets and to carry on their respective businesses as they are now being
conducted, and are duly qualified to do business in each jurisdiction in which
the nature of the business conducted by them or the character or location of the
properties and assets owned or leased by them makes such qualification
necessary.

         3.2      Authority; No Violation.

                  (a)   Each of Parent and Merger Sub has the requisite
corporate power and authority to execute and deliver this Agreement, to perform
its obligations hereunder and to consummate the transactions contemplated
hereby. The Board of Directors of Parent has unanimously approved this Agreement
and the Merger and all transactions contemplated hereby. The Board of Directors
and the stockholder of Merger Sub have approved this Agreement and

                                       19

the Merger and all transactions contemplated hereby. No other corporate
proceedings on the part of Parent or Merger Sub are necessary to approve this
Agreement and to consummate the transactions contemplated hereby. This Agreement
and all other agreements and documents to be entered into in connection herewith
have been duly and validly executed and delivered by Parent and Merger Sub and
(assuming due authorization, execution and delivery by the Company and
Shareholders) constitute valid and binding obligations of Parent and Merger Sub,
enforceable against each of them, in accordance with their terms, except as
enforcement may be limited by general principles of equity whether applied in a
court of law or a court of equity and by bankruptcy, insolvency and similar laws
affecting creditors' rights and remedies generally.

                  (b)   Neither the execution and delivery of this Agreement by
Parent and Merger Sub, nor the consummation by Parent and Merger Sub of the
transactions contemplated hereby, nor compliance by Parent and Merger Sub with
any of the terms or provisions hereof, will (i) violate any provision of the
Certificate or Articles of Incorporation or Bylaws of Parent or Merger Sub, or
(ii) assuming that the consents and approvals referred to in Section 3.3 hereof
are duly obtained, (x) violate any statute, code, ordinance, rule, regulation,
judgment, order, writ, decree or injunction applicable to Parent or Merger Sub
or any of their respective properties or assets, or (y) violate, conflict with,
result in a breach of any provision of or the loss of any benefit under,
constitute a default (or an event which, with notice or lapse of time, or both,
would constitute a default) under, result in the termination of or a right of
termination or cancellation under, accelerate the performance required by, or
result in the creation of any lien, pledge, security interest, charge or other
encumbrance upon any of the properties or assets of Parent or Merger Sub under,
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other instrument or
obligation to which Parent or Merger Sub is a party, or by which either of them
or any of their respective properties or assets may be bound or affected.

         3.3      Consents and Approvals. Except for (a) the filing of the
Certificate of Merger with the California Secretary of State and the Articles of
Merger with the Division pursuant to the CGCL and Section 1107 of the URBCA, (b)
any federal or state securities filings to be made by Parent or Merger Sub to
perfect the private placement exemption of the Merger Consideration, which shall
be timely made, (c) the listing of the Parent Common Stock on the New York Stock
Exchange, (d) such filings, authorizations or approvals as may be set forth in
Section 3.4 of the Parent Disclosure Schedule, no consents or approvals orders
or authorizations of or filings or registrations with any Governmental Entity or
with any third party are necessary with respect to the Parent or Merger Sub in
connection with (1) the execution and delivery of this Agreement and (2) the
consummation of the Merger and the other transactions contemplated hereby. All
such qualifications and filings required to be made by Parent or Merger Sub
will, in the case of qualifications, be effective as of the Effective Time and
will, in the case of filings, be made within the time prescribed by law.

         3.4      Financial Statements and Reports. Parent has timely filed all
required forms, reports, statements and documents with the Securities and
Exchange Commission (the "Commission") all of which have complied in all
material respects with all applicable requirements of the Securities Act and the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Parent has
delivered or made available to Company and the Shareholders true and complete
copies of (i) Parent's Annual Report on Form 10-K for the fiscal year ended

                                       20

October 31, 2001, (ii) its proxy statement relating to Parent's annual
stockholders meeting held March 26, 2002, and (iii) all other forms, reports,
statements and documents filed by Parent with the Commission since October 31,
2001 (collectively, the "Parent Reports"). As of their respective dates, the
Parent Reports did not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The consolidated financial statements of Parent included
or incorporated by reference in the Parent Reports were prepared in accordance
with GAAP applied on a consistent basis (except as otherwise stated in such
financial statements or, in the case of audited statements, the related report
thereon of independent certified public accounts), and present fairly the
financial position and results of operations, cash flows and of changes in
stockholders' equity of Parent and its consolidated subsidiaries as of the dates
and for the periods indicated, subject, in the case of unaudited interim
financial statements, to normal year-end audit adjustments, none of which either
singly or in the aggregate are or will be material, and except that the
unaudited interim financial statements do not contain all of the disclosures
required by GAAP.

         3.5      Parent Common Stock. The shares of Parent Common Stock to be
issued to the holders of Company Common Stock as contemplated hereunder are duly
authorized, and when issued pursuant to the terms of this Agreement, will be
validly issued, fully paid, non-assessable and not subject to any preemptive
rights.

         3.6      Compliance with Securities Laws. Based upon the representation
that Shareholders are "accredited investors" as that term is defined within the
meaning of Regulation D promulgated under the Securities Act of 1933, as
amended, the Stock Consideration will be issued to the Shareholders in
compliance with the applicable exemptions from (i) the registration and
prospectus delivery requirements of the Securities Act of 1933, as amended, and
(ii) the registration and qualification requirements of all applicable
securities laws of the states of the United States.

         3.7      Consents and Approvals. Neither the execution and delivery of
this Agreement by Parent or Merger Sub nor the consummation of the transactions
contemplated hereby will require any action or consent or approval of, or review
by, or registration or filing by Parent or any of its affiliates with, any third
party or any Governmental Entity, other than (i) registrations or other actions
required under federal and state securities laws as are contemplated by this
Agreement or (ii) consents or approvals of any Governmental Entity set forth in
Section 3.5 to the Parent Disclosure Schedule.

         3.8      Brokers. Neither Parent, Merger Sub, nor any of their
respective officers or directors has employed any broker or finder or incurred
any liability for any broker's fees, commissions or finder's fees in connection
with any of the transactions contemplated by this Agreement.

         3.9      Compliance. Parent is, or will timely be in all material
respects, in compliance with all current and proposed listing and corporate
governance requirements of the New York Stock Exchange, and is in compliance in
all material respects, and will continue to remain in compliance following the
Effective Time, with all rules, regulations, and requirements of the
Sarbanes-Oxley Act of 2002 and the Securities and Exchange Commission.

                                       21

         3.10     Representations Complete. None of the representations or
warranties made by Parent or Merger Sub herein or in any Schedule hereto,
including the Parent Disclosure Schedule, or certificate furnished by the Parent
or Merger Sub pursuant to this Agreement, contains any untrue statement of a
material fact.

         3.11     Taxes. The Parent has duly and timely filed (including
applicable extensions granted without penalty) all material Tax Returns (as
hereinafter defined) required to be filed at or prior to the Effective Time, and
such Tax Returns are true and correct in all material respects, and the Parent
has paid in full or made adequate provision in its financial statements included
in the Parent Reports for all material Taxes (as hereinafter defined) shown to
be due on such Tax Returns. As of the date hereof (i) the Parent has not
requested any extension of time within which to file any Tax Returns in respect
of any fiscal year which have not since been filed and no request for waivers of
the time to assess any Taxes are pending or outstanding, (ii) no claim for Taxes
has become a lien against the property of the Parent or is being asserted
against the Parent other than liens for Taxes not yet due and payable, (iii) no
known audit of any Tax Return of the Parent is being conducted by a Tax
authority, (iv) no extension of the statute of limitations on the assessment of
any Taxes has been granted to the Parent and is currently in effect, and (v)
there is no agreement, contract or arrangement to which the Parent is a party
that may result in the payment of any amount that would not be deductible by
reason of Sections 280G, 162 or 404 of the Code. The Parent has not been or will
be required to include any adjustment in taxable income for any Tax period (or
portion thereof) pursuant to Section 481 or 263A of the Code or any comparable
provision under state or foreign Tax laws as a result of transactions, events or
accounting methods employed prior to the Merger.

                                   ARTICLE IV

                              ADDITIONAL AGREEMENTS

         4.1      Covenants of the Company. During the period from the date of
this Agreement, and continuing until the Effective Time, except as expressly
contemplated or permitted by this Agreement, as identified in Section 4.1 of the
Company Disclosure Schedule, or with the prior written consent of Parent, the
Company shall carry on its business in the ordinary course consistent with past
practice. Without limiting the generality of the foregoing, or as otherwise
contemplated by this Agreement, as identified in Section 4.1 of the Company
Disclosure Schedule, or consented to in writing by Parent, the Company shall
not:

                  (a)   declare or pay any dividends on, or make other
distributions in respect of, any of the Company Common Stock;

                  (b)   (i) repurchase, redeem or otherwise acquire any shares
of its capital stock, or any securities convertible into or exercisable for any
shares of such capital stock, (ii) split, combine or reclassify any shares of
its capital stock or issue or authorize or propose the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock, or (iii) issue, deliver or sell, or authorize or propose the
issuance, delivery or sale of, any shares of its capital stock or any securities
convertible into or exercisable for, or any rights, warrants or options to
acquire, any such shares, or enter into any agreement with respect to any of the
foregoing;

                                       22

                  (c)   amend its Articles of Incorporation, Bylaws or other
similar governing documents;

                  (d)   make any capital expenditures other than those which are
made in the ordinary course of business or are necessary to maintain existing
assets in good repair;

                  (e)   enter into any new line of business;

                  (f)   acquire or agree to acquire, by merging or consolidating
with, or by purchasing a substantial equity interest in or a substantial portion
of the assets of, or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof or
otherwise acquire any assets, which would be material, individually or in the
aggregate, to the Company;

                  (g)   take any action that is intended or may reasonably be
expected to result in any of its representations and warranties set forth in
this Agreement being or becoming untrue, or in any of the conditions to the
Merger set forth in this Agreement not being satisfied;

                  (h)   change its methods of accounting in effect at March 31,
2002;

                  (i)   (i) except as contemplated by Section 5.2(h) or required
by applicable law or as required to maintain qualification pursuant to the Code,
adopt, amend, or terminate any employee benefit plan (including, without
limitation, any Company Employee Plan) or any agreement, arrangement, plan or
policy between the Company and one or more of its current or former directors,
officers or employees, (ii) except for normal increases in the ordinary course
of business consistent with past practice, bonuses to certain employees of the
Company to be paid immediately prior to the consummation of the Merger, or as
required by applicable law, increase in any manner the compensation or fringe
benefits of any director, officer or employee or pay any benefit not required by
any Company Employee Plan or agreement as in effect as of the date hereof
(including, without limitation, the granting of stock options, stock
appreciation rights, restricted stock, restricted stock units or performance
units or shares);

                  (j)   other than activities in the ordinary course of business
consistent with past practice, sell, lease, encumber, assign or otherwise
dispose of, or agree to sell, lease, encumber, assign or otherwise dispose of,
any of its material assets, properties or other rights or agreements;

                  (k)   other than in the ordinary course of business consistent
with past practice, incur any indebtedness for borrowed money or assume,
guarantee, endorse or otherwise as an accommodation become responsible for the
obligations of any other individual, corporation or other entity;

                  (l)   create, renew, amend or terminate or give notice of a
proposed renewal, amendment or termination of, any material contract, agreement
or lease for goods, services or office space to which the Company is a party or
by which the Company or any of its properties are bound, other than the renewal
in the ordinary course of business of any lease the term of which expires prior
to the Closing Date; or

                  (m)   agree to do any of the foregoing.

                                       23

         4.2      Access to Information. Upon reasonable notice and subject to
applicable laws relating to the exchange of information, the Company shall
afford to the officers, employees, accountants, counsel and other
representatives of Parent, access, during normal business hours during the
period prior to the Effective Time, to all its properties, books, contracts,
commitments, records, officers, employees, accountants, counsel and other
representatives and, during such period, the Company shall make available to
Parent all information concerning its business, properties and personnel as
Parent may reasonably request. All information furnished to Parent pursuant to
this Section 4.2 shall be subject to, and Parent shall hold all such information
in confidence in accordance with, the provisions of the confidentiality
agreement, dated January 25, 2002 (the "Confidentiality Agreement"), between
Parent and the Company.

         4.3      Public Disclosure. Unless otherwise permitted by this
Agreement, Parent and the Company shall consult with each other before issuing
any press release or otherwise making any public statement or making any other
public (or non-confidential) disclosure (whether or not in response to an
inquiry) regarding the terms of this Agreement and the transactions contemplated
hereby, and neither shall issue any such press release or make any such
statement or disclosure without the prior approval of the other (which approval
shall not be unreasonably withheld), except as may be required by law.

         4.4      Consents; Cooperation. Each of Parent, Merger Sub and the
Company shall promptly apply for or otherwise seek, and use its best efforts to
obtain, all consents and approvals required to be obtained by it for the
consummation of the Merger, and shall use commercially reasonable efforts to
obtain all necessary consents, waivers and approvals under any of its material
contracts in connection with the Merger for the assignment thereof or otherwise.

         4.5      Legal Requirements. Each of Parent, Merger Sub and the Company
will take all reasonable actions necessary to comply promptly with all legal
requirements which have been or which may be imposed on them with respect to the
consummation of the transactions contemplated by this Agreement and will
promptly cooperate with and furnish information to any party hereto necessary in
connection with any such requirements imposed upon such other party in
connection with the consummation of the transactions contemplated by this
Agreement and will take all reasonable actions necessary to obtain (and will
cooperate with the other parties hereto in obtaining) any consent, approval,
order or authorization of, or any registration, declaration or filing with, any
Governmental Entity or other person, required to be obtained or made in
connection with the taking of any action contemplated by this Agreement.

         4.6      Tax-Free Reorganization Treatment. The parties hereto intend
that the Merger will qualify as a reorganization within the meaning of Section
368(a) of the Code. Each of the parties hereto shall, and shall cause its
respective subsidiaries to, use its commercially reasonable efforts to cause the
Merger to so qualify. The parties hereto shall report the Merger in all Tax
Returns and other filings consistent with a reorganization within the meaning of
Section 368(a) of the Code.

         4.7      Certifications, Agreements, and Covenants of the Company. The
Company certifies, agrees, and covenants with Parent and Merger Sub as follows:

                                       24

                  (a)   The Merger will be carried out strictly in accordance
with the terms of this Agreement, and none of the material terms and conditions
thereof have been or will be waived or modified.

                  (b)   The consideration to be received in the Merger by the
Shareholders of the Company was the result of arm's length bargaining between
the managements of Parent and the Company. The fair market value of the Merger
Consideration and any cash received in lieu of fractional shares to be received
by each Shareholder of the Company will be approximately equal to the fair
market value of the Company Common Stock surrendered in the Merger.

                  (c)   In the Merger, the holders of Company Common Stock will
receive, in exchange for their Company Common Stock, the Merger Consideration.
Except for the consideration described herein, no cash or other property
originating with Parent or its affiliates has been or will be paid to the
holders of Company Common Stock in exchange for Company Common Stock. As of the
Effective Time, the Parent Common Stock issued in the Merger will have a value
that is not less than 50% of the aggregate value of the Merger Consideration as
of such time.

                  (d)   The payment of cash in lieu of fractional shares of
Parent Common Stock in the Merger is solely for the purpose of avoiding the
expense and inconvenience to Parent of issuing fractional shares, if any, and
does not represent separately bargained-for consideration. The total cash
consideration that will be paid in the Merger to holders of Company Common Stock
instead of issuing fractions of Parent Common Stock will not exceed one percent
(1%) of the total consideration that will be issued in the Merger to holders of
Company Common Stock in exchange for their Company Common Stock.

                  (e)   Prior to and in connection with the Merger, no shares of
Company Common Stock have been or will be (i) redeemed by the Company, (ii)
acquired by a person related to the Company (within the meaning of Treasury
Regulation Section 1.368-1(e)(3) determined without regard to Treasury
Regulation Section 1.368-1(e)(3)(i)(A)) for consideration other than Parent
Common Stock or Company Common Stock, or (iii) the subject of any extraordinary
distribution by the Company.

                  (f)   There is no plan or intention on the part of either of
the Shareholders to sell, exchange or otherwise dispose of any Parent Common
Stock to be received in the Merger by such holder directly or indirectly to
Parent or to a person related to Parent (within the meaning of Treasury
Regulation Section 1.368-1(e)(3)) for consideration other than Parent Common
Stock.

                  (g)   No shareholders of the Company will elect appraisal or
dissenters' rights.

                  (h)   The Company has no outstanding equity interests other
than as described in Section 2.2 of the Merger Agreement. At the Effective Time,
and following the Merger, the Company will not have outstanding any warrants,
options, convertible securities, or any other type of right pursuant to which
any person could acquire stock in the Company.

                  (i)   The Company has no plan or intention to issue additional
shares of its stock.

                                       25

                  (j)   The Company has not agreed to assume, nor will it
directly or indirectly assume, any expense or other liability, whether fixed or
contingent, of any holder of Company Common Stock.

                  (k)   The Company is not an investment company as defined in
Section 368(a)(2)(F)(iii) and (iv) of the Code.

                  (l)   The Company is not under the jurisdiction of a court in
a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the
Code.

                  (m)   There is no inter-corporate indebtedness existing
between Parent and the Company or between Merger Sub and the Company that was
issued, acquired or will be settled at a discount.

                  (n)   None of the compensation to be received by any
shareholder-employee of the Company in the Merger will be separate consideration
for, or allocable to, any of such person's shares of Company Common Stock; none
of the Parent Common Stock to be received by any shareholder-employee of the
Company will be separate consideration for, or allocable to, any past or future
services, and the compensation to be paid to any shareholder-employee after the
Merger will be for services actually rendered and will be commensurate with
amounts paid to third parties bargaining at arm's length for similar services.

                  (o)   In connection with the Merger, the Company has not sold,
transferred or otherwise disposed of any of its assets as would prevent Parent
from either continuing the historic business of the Company or using a
significant portion of the Company's historic business assets in a business
following the Merger, both within the meaning of Treasury Regulation Section
1.368-1(d).

                  (p)   On the date of the Merger, the fair market value of the
assets of the Company will exceed the sum of its liabilities, plus the amount of
liabilities, if any, to which the assets are subject.

                  (q)   In the Merger, Merger Sub will acquire at least 90% of
the fair market value of the net assets and at least 70% of the fair market
value of the gross assets held by the Company immediately prior to the Merger.
For purposes of this representation, amounts paid by the Company to shareholders
who receive cash or other property in the Merger, amounts used by the Company to
pay its reorganization expenses and those of its shareholders, and all
redemptions and distributions (except for regular, normal dividends) made by the
Company will be included as assets of the Company immediately prior to the
Merger.

                  (r)   All options, warrants or rights to acquire shares of
Company Common Stock were issued with an exercise price no less than fair market
value at the time of issue.

                  (s)   The Merger is being affected for bona fide business
reasons.

                  (t)   None of the Company's preferred stock is issued or
outstanding.

                                       26

                  (u)   The liabilities of the Company assumed by Merger Sub and
the liabilities to which the transferred assets of the Company are subject were
incurred by the Company in the ordinary course of business.

                  (v)   The Company will not take any position on any federal,
state, or local income or franchise tax return, or take any tax reporting
position, that is inconsistent with the treatment of the Merger as a
reorganization for federal income tax purposes, unless otherwise required by a
"determination" (as defined by Section 1313(a)(1) of the Code) or by a change in
law after the date hereof.

                  (w)   The Merger Agreement (including all exhibits and
attachments thereto) represents the full and complete agreement between Parent,
Merger Sub, Company, and the Shareholders regarding the Merger, and there are no
other written or oral agreements regarding the Merger.

         4.8      Certifications, Agreements, and Covenants of Parent and Merger
Sub. Parent and Merger Sub certify, agree, and covenant to the Company as
follows:

                  (a)   The Merger will be carried out strictly in accordance
with the terms of this Agreement, and none of the material terms and conditions
thereof have been or will be waived or modified.

                  (b)   The consideration to be issued in the Merger to the
Shareholders of the Company was the result of arm's length negotiation between
the managements of Parent and the Company. The fair market value of the Merger
Consideration and any cash in lieu of fractional shares to be received by each
of the Shareholders of the Company will be approximately equal to the fair
market value of the Company Common Stock surrendered in the Merger.

                  (c)   In the Merger, the holders of Company Common Stock will
receive, in exchange for their Company Common Stock, the Merger Consideration.
Except for the consideration described herein, no cash or other property
originating with Parent or its affiliates has been or will be paid to the
holders of Company Common Stock in exchange for Company Common Stock. As of the
Effective Time, the Parent Common Stock issued in the Merger will have a value
that is not less than 50% of the aggregate value of the Merger Consideration as
of such time.

                  (d)   The payment of cash in lieu of fractional shares of
Parent Common Stock in the Merger is solely for the purpose of avoiding the
expense and inconvenience to Parent of issuing fractional shares, if any, and
does not represent separately bargained-for consideration.

                  (e)   No shareholders of the Company will elect appraisal or
dissenters rights.

                  (f)   In the Merger, Merger Sub will acquire at least 90% of
the fair market value of the net assets and at least 70% of the fair market
value of the gross assets held by the Company immediately prior to the Merger.
For purposes of this representation, amounts paid by the Company to shareholders
who receive cash or other property in the Merger, amounts used by the Company to
pay its reorganization expenses and those of its shareholders, and all

                                       27

redemptions and distributions (except for regular, normal dividends) made by the
Company will be included as assets of the Company immediately prior to the
Merger.

                  (g)   Following the Merger, Parent will either continue the
historic business of the Company or use a significant portion of the Company's
historic business assets in a business, both within the meaning of Treasury
Regulation Section 1.368-1(d).

                  (h)   Parent has no plan or intention to: (a) liquidate Merger
Sub; (b) merge Merger Sub with or into another corporation; (c) sell, exchange,
transfer or otherwise dispose of any stock of Merger Sub except for transfers
described in Revenue Ruling 2001-24, 2001-22 I.R.B. 1290; or (d) cause Merger
Sub to sell, exchange, transfer or otherwise dispose of any of the assets of the
Company acquired in the Merger, except for dispositions made in the ordinary
course of business or transfers described in Section 368(a)(2)(C) of the Code or
Treasury Regulations Section 1.368-2(k)(1).

                  (i)   In connection with the Merger, neither Parent nor any
person related to Parent (within the meaning of Treasury Regulation Section
1.368-1(e)(3)) will purchase, exchange, redeem or otherwise acquire (directly or
indirectly) any Parent Common Stock issued to holders of Company Common Stock in
the Merger for consideration other than the Merger Consideration, except for (i)
cash paid in lieu of fractional shares of Parent Common Stock pursuant to the
Merger and (ii) open market purchases pursuant to Parent's stock repurchase
program, if any, consistent with Revenue Ruling 99-58, 1999-2 C.B. 701.

                  (j)   Parent and Merger Sub will pay their respective
expenses, if any, incurred in connection with the Merger, and will not pay any
of the expenses of the Company or of the Shareholders of the Company incurred in
connection with the Merger. Neither Parent nor Merger Sub has agreed to assume,
nor will it directly or indirectly assume, any expense or other liability,
whether fixed or contingent, of any holder of Company Common Stock.

                  (k)   Neither Parent nor any person related to Parent (within
the meaning of Treasury Regulation Section 1.368-1(e)(3)) has owned during the
past five (5) years any shares of stock of the Company.

                  (l)   Neither Parent nor Merger Sub is an investment company
as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code.

                  (m)   Before the Merger, Parent will own one hundred percent
(100%) of Merger Sub. No stock or securities of Merger Sub will be issued in the
Merger.

                  (n)   Parent has no plan or intention to cause Merger Sub to
issue additional shares of stock of Merger Sub that would result in Parent
losing control of Merger Sub within the meaning of Section 368(c) of the Code.
Prior to and immediately following the Merger, Merger Sub will not have
outstanding any warrants, options, convertible securities, or any other type of
right pursuant to which any person could acquire stock in Merger Sub that, if
exercised or converted, would affect Parent's ownership or retention of control
of Merger Sub within the meaning of Section 368(c) of the Code.

                                       28

                  (o)   There is no inter-corporate indebtedness existing
between Parent and the Company or between Merger Sub and the Company that was
issued, acquired or will be settled at a discount.

                  (p)   None of the compensation to be received by any
shareholder-employee of the Company in the Merger will be separate consideration
for, or allocable to, any of such person's shares of Company Common Stock; none
of the shares of Parent Common Stock to be received by any shareholder-employee
of the Company will be separate consideration for, or allocable to, any past or
future services; and the compensation to be paid to any shareholder-employee
after the Merger will be for services actually rendered and will be commensurate
with amounts paid to third parties bargaining at arm's length for similar
services.

                  (q)   The Merger is being affected for bona fide business
reasons.

                  (r)   Neither Parent nor Merger Sub will take any position on
any federal, state, or local income or franchise tax return, or take any tax
reporting position, that is inconsistent with the treatment of the Merger as a
reorganization for federal income tax purposes, unless otherwise required by a
"determination" (as defined by Section 1313(a)(1) of the Code) or by a change in
law after the date hereof.

                  (s)   The Merger Agreement (including all exhibits and
attachments thereto) represents the full and complete agreement between Parent,
Merger Sub, the Company, and the Shareholders regarding the Merger, and there
are no other written or oral agreements regarding the Merger.

         4.9      Shareholder Vote. Until this Agreement has been terminated in
accordance with its terms, the Shareholders agree to vote all shares of Company
Common Stock held by them in favor of the Merger.

         4.10     Registration Rights; NYSE Listing. Parent shall provide to the
Shareholders registration rights pursuant to the terms of a registration rights
agreement (the "Registration Rights Agreement") substantially in the form of
Exhibit A attached hereto. Within 7 days of the Effective Time, Parent shall
apply for the listing, and list, the shares of Parent Common Stock to be issued
pursuant to this Agreement on the New York Stock Exchange.

         4.11     Consulting Agreement. As a condition to the closing of the
Merger, John Thompson will enter into a consulting agreement with Parent (the
"Consulting Agreement") substantially in the form of Exhibit B attached hereto.

         4.12     Blue Sky Laws. Parent shall take such steps as may be
necessary to comply with the securities and blue sky laws of all jurisdictions
which are applicable to the issuance of the Parent Common Stock in connection
with the Merger. The Company shall use its best efforts to assist Parent as may
be necessary to comply with the securities and blue sky laws of all
jurisdictions which are applicable in connection with the issuance of Parent
Common Stock in connection with the Merger.

         4.13     Control of Operations. Nothing contained in this Agreement
shall give Parent, directly or indirectly, the right to control or direct the
operations of the Company prior to the

                                       29

Effective Time. Prior to the Effective Time, each of Parent and the Company
shall exercise, consistent with the terms and conditions of this Agreement,
complete control and supervision over its respective operations.

         4.14     Employee Matters. At the Effective Time, except for Rocky
Taylor, Megan Suhadolc, Karen Brooks, and Tabitha Fearn who will only be
employed through September 24, 2002, employees of the Company and its
subsidiaries immediately prior to the Effective Time as listed on Schedule 4.14
of the Company Disclosure Schedule will become employees of the Surviving
Corporation.

         4.15     Covenant Not to Compete. Each of the Shareholders, severally
and not jointly, agree that for a period of three (3) years from the Effective
Date (the "Non-Compete Period"), he or she shall not, directly or indirectly, as
principal, agent, employee, employer, consultant, stockholder, partner or in any
other individual or representative capacity, engage in any business directly
competitive with the business currently conducted by the Company in the United
States (the "Competitive Business"). Notwithstanding anything to the contrary
contained herein, the Shareholders may, without violating the provisions of this
Section 4.15, purchase and hold up to 5% of any entity whose shares are publicly
traded on NASDAQ or any U.S. stock exchange, whether or not such entity is
engaged in a Competitive Business. Any provision of this Section 4.15 which is
deemed invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction and subject to this paragraph be ineffective to the extent of such
invalidity or unenforceability, without affecting in any way the remaining
provisions of this paragraph in such jurisdiction or rendering that or any other
provisions of this Agreement invalid or unenforceable in any other jurisdiction.
If any covenant should be deemed invalid or unenforceable because of its scope,
geographical area or duration, or any combination thereof, such covenant shall
be modified and reformed so that the scope, geographic area and duration of the
covenant is reduced only to the minimum extent necessary to render the modified
covenant valid and enforceable.

         4.16     Best Efforts and Further Assurances. Each of the parties to
this Agreement shall use its best efforts to effectuate the transactions
contemplated hereby and to fulfill and cause to be fulfilled the conditions to
Closing under this Agreement. Each party hereto, at the reasonable request of
another party hereto, shall execute and deliver such other instruments and do
and perform such other acts and things as may be necessary or desirable for
effecting completely the consummation of this Agreement and the transactions
contemplated hereby.

         4.17     Landlord Consents. Parent, Company, and Merger Sub, as may be
applicable, shall execute all consents and estoppel certificate, in the form and
substance satisfactory to Parent and the Company, from the landlords with
respect to each of the leases and subleases set forth on Section 2.12 of the
Company Disclosure Schedule as soon as possible following the Effective Time.

                                       30

                                   ARTICLE V

                              CONDITIONS PRECEDENT

         5.1      Conditions to Each Party's Obligation to Effect the Merger.
The respective obligation of each party to effect the Merger shall be subject to
the satisfaction at or prior to the Effective Time of the following conditions:

                  (a)   No Injunctions or Restraints; Illegality. No temporary
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing the consummation of the Merger shall be in effect, nor
shall any proceeding brought by an administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any of
the foregoing be pending; nor shall there be any action taken, or any statute,
rule, regulation or order enacted, entered, enforced or deemed applicable to the
Merger, which makes the consummation of the Merger illegal. In the event an
injunction or other order shall have been issued, each party agrees to use its
reasonable diligent efforts to have such injunction or other order lifted.

                  (b)   Governmental Approval. The Company, Parent and Merger
Sub shall have timely obtained from each Governmental Entity all approvals,
waivers and consents, if any, necessary for consummation of or in connection
with the Merger and the several transactions contemplated hereby (each a
"Requisite Regulatory Approval"), including such approvals, waivers and consents
as may be required under the Securities Act and under state blue sky laws.

                  (c)   Consulting Agreement. Parent and John Thompson shall
have entered into the Consulting Agreement.

                  (d)   Continued Listing. Parent's Common Stock shall continue
to be listed and trading on the New York Stock Exchange.

                  (e)   Capitalization. No stock split, stock dividend
(including any dividend or distribution of securities convertible into Parent
Common Stock or Company Common Stock) reorganization, recapitalization,
reclassification or other like change with respect to Parent Common Stock or
Company Common Stock shall have occurred since the date of this Agreement.

         5.2      Conditions to Obligations of Parent and Merger Sub. The
obligation of Parent and Merger Sub to effect the Merger is also subject to
the satisfaction or waiver by Parent and Merger Sub at or prior to the
Effective Time of the following conditions:

                  (a)   Representations and Warranties. The representations and
warranties of the Company set forth in this Agreement shall be true and correct
in all material respects as of the date of this Agreement and (except to the
extent such representations and warranties speak as of an earlier date) as of
the Closing Date. Parent shall have received a certificate signed on behalf of
the Company by the Chief Executive Officer and the Chief Financial Officer of
the Company to the foregoing effect.

                                       31

                  (b)   Performance of Obligations of the Company. The Company
shall have performed in all material respects all obligations required to be
performed by it under this Agreement at or prior to the Closing Date, and Parent
shall have received a certificate signed on behalf of the Company by the Chief
Executive Officer and the Chief Financial Officer of the Company to such effect.

                  (c)   Injunctions or Restraints on Conduct of Business. No
temporary restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal or regulatory
restraint provision limiting or restricting Parent's conduct or operation of the
business of the Company following the Merger shall be in effect, nor shall any
proceeding brought by an administrative agency or commission or other
Governmental Entity, domestic or foreign, seeking the foregoing be pending.

                  (d)   No Material Adverse Changes. There shall not have
occurred any material adverse change in the condition (financial or otherwise),
properties, assets (including intangible assets), liabilities, business,
operations or results of operations of the Company.

                  (e)   Third Party Consents. Parent shall have been furnished
with evidence satisfactory to it of the consent or approval of those persons
whose consent or approval shall be required in connection with the Merger under
the contracts of the Company set forth on Section 2.4 of the Company Disclosure
Schedule.

                  (f)   Price of Parent Common Stock. The average closing price
of shares of Parent's Common Stock, as reported by the New York Stock Exchange,
for the fifteen (15) consecutive trading days ending on September 12, 2002 shall
be more than $32.71 per share.

                  (g)   Landlord Consents. The Company shall have provided
Parent a written status report of all consents and estoppel certificates from
the landlord with respect to each of the leases and subleases set forth on
Section 2.12 of the Company Disclosure Schedule.

                  (h)   Termination of 401(k) Plan. The Company shall have
terminated its 401(k) Plan in a manner satisfactory to Parent, which shall be
effective as of September 30, 2002.

         5.3      Conditions to the Obligations of Company and Shareholders. The
obligation of the Company to effect the Merger is also subject to the
satisfaction or waiver by the Company at or prior to the Effective Time of the
following conditions:

                  (a)   Representations and Warranties. The representations and
warranties of Parent and Merger Sub set forth in this Agreement shall be true
and correct in all material respects as of the date of this Agreement and
(except to the extent such representations and warranties speak as of an earlier
date) as of the Closing Date. The Company shall have received a certificate
signed (i) on behalf of Parent by the Chief Executive Officer and the Vice
President of Finance of Parent and (ii) on behalf of Merger Sub by the President
of Merger Sub, in each case to the foregoing effect.

                  (b)   Performance of Obligations of Parent and Merger Sub.
Parent and Merger Sub shall have performed in all material respects all
obligations required to be performed by

                                       32

them under this Agreement at or prior to the Closing Date, and the Company shall
have received a certificate signed (i) on behalf of Parent by the Chief
Executive Officer and the Vice President of Finance of Parent and (ii) on behalf
of Merger Sub by the President of Merger Sub, in each case to such effect.

                  (c)   Injunctions or Restraints on Conduct of Business. No
temporary restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal or regulatory
restraint provision limiting or restricting Parent's business following the
Merger shall be in effect, nor shall any proceeding brought by an administrative
agency or commission or other Governmental Entity, domestic or foreign, seeking
the foregoing be pending.

                  (d)   No Material Adverse Changes. There shall not have
occurred any material adverse change in the condition (financial or otherwise),
properties, assets (including intangible assets), liabilities, business,
operations or results of operations of Parent.

                  (e)   Price of Parent Common Stock. The average closing price
of Parent Common Stock, as reported by the New York Stock Exchange, for the
fifteen (15) consecutive trading days ending on September 12, 2002 shall be less
than $22.14 per share.

                                   ARTICLE VI

                            TERMINATION AND AMENDMENT

         6.1      Termination. This Agreement may be terminated at any time
prior to the Effective Time:

                  (a)   by mutual consent of the Company, Parent and Merger Sub
in a written instrument;

                  (b)   by either Parent or the Company upon written notice to
the other party if any Governmental Entity of competent jurisdiction shall have
issued a final nonappealable order enjoining or otherwise prohibiting the
Merger;

                  (c)   by either Parent or the Company if the Merger shall not
have been consummated on or before October 31, 2002 unless the failure of the
Closing to occur by such date shall be due to the failure of the party seeking
to terminate this Agreement to perform or observe the covenants and agreements
of such party set forth herein;

                  (d)   by either Parent or the Company if there shall have been
a material breach of any of the representations or warranties set forth in this
Agreement on the part of the other party, which breach is not cured within
thirty (30) days following written notice to the party committing such breach,
or which breach, by its nature, cannot be cured prior to the Closing; or

                  (e)   by either Parent or the Company if there shall have been
a material breach of any of the covenants or agreements set forth in this
Agreement on the part of the other party, which breach shall not have been cured
within thirty (30) days following receipt by the

                                       33

breaching party of written notice of such breach from the other party hereto, or
which breach, by its nature, cannot be cured prior to the Closing.

         6.2      Effect of Termination. In the event of termination of this
Agreement by either Parent or the Company as provided in Section 6.1, this
Agreement shall forthwith become void and have no effect except that (i) the
last sentence of Section 4.2, and each of Sections 4.3, 6.2, 7.1, 7.2, 7.3, 7.4
and 7.7 shall survive any termination of this Agreement and (ii) notwithstanding
anything to the contrary contained in this Agreement, no party shall be relieved
or released from any liabilities or damages arising out of its willful breach of
any provision of this Agreement.

         6.3      Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.

         6.4      Extension; Waiver. At any time prior to the Effective Time,
each of the parties hereto may, to the extent legally allowed, (a) extend the
time for the performance of any of the obligations or other acts of the other
party hereto, (b) waive any inaccuracies in the representations and warranties
of the other party contained herein or in any document delivered pursuant hereto
and (c) waive compliance with any of the agreements or conditions of the other
party contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in a written instrument
signed on behalf of such party, but such extension or waiver or failure to
insist on strict compliance with an obligation, covenant, agreement or condition
shall not operate as a waiver of, or estoppel with respect to, any subsequent or
other failure.

                                  ARTICLE VII

                               GENERAL PROVISIONS

         7.1      Expenses. All costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such costs and expenses.

         7.2      Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally, telecopied
(with confirmation), mailed by registered or certified mail (return receipt
requested) or delivered by an express courier (with confirmation) to the parties
at the following addresses (or at such other address for a party as shall be
specified by like notice):

                  If to Parent, to:         Quiksilver, Inc.
                                            15202 Graham Street
                                            Huntington Beach, CA 92649
                                            Attention: General Counsel

                  with a copy to:           Hewitt & O'Neil LLP
                                            19900 MacArthur Blvd., Suite 1050
                                            Irvine, CA 92612
                                            Attn: Paul A. Rowe, Esq.

                                       34

                                            and

                  If to the Company
                  or Shareholders, to:      2750 Meadow Creek Drive
                                            Park City, Utah 84060
                                            Attention: John Thompson

                  with a copy to:           Snell & Wilmer L.L.P.
                                            15 West South Temple, Suite 1200
                                            Gateway Tower West
                                            Salt Lake City, Utah 84101
                                            Attention: John G. Weston, Esq.

         7.3      Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA
(WITHOUT REFERENCE TO CONFLICT OF LAW PRINCIPLES OTHER THAN THOSE DIRECTING
CALIFORNIA LAW) EXCEPT TO THE EXTENT MANDATORILY GOVERNED BY THE LAWS OF THE
STATE OF UTAH.

         7.4      Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the Merger is not affected in any manner materially adverse to any party. Upon
such determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in good faith to
modify this Agreement so as to effect the original intent of the parties as
closely as possible in a mutually acceptable manner to the fullest extent
permitted by applicable law in order that the Merger may be consummated as
originally contemplated to the fullest extent possible.

         7.5      Assignment; Binding Effect; Benefit. Neither this Agreement
nor any of the rights, interests or obligations hereunder shall be assigned by
any of the parties hereto (whether by operation of law or otherwise) without the
prior written consent of the other parties hereto; provided, however, that
Merger Sub may assign its rights, interests and obligations hereunder to any
wholly-owned subsidiary of Parent unless such transfer or assignment would in
any way impact the tax-deferred nature of the Merger and transactions
contemplated herein. Subject to the preceding sentence, this Agreement shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns. Notwithstanding anything contained
in this Agreement to the contrary, nothing in this Agreement, expressed or
implied, is intended to confer on any person other than the parties hereto or
their respective successors and permitted assigns any rights or remedies under
or by reason of this Agreement.

         7.6      Headings. The descriptive headings contained in this Agreement
are included for convenience of reference only and shall not affect in any way
the meaning or interpretation of this Agreement.

         7.7      Entire Agreement. This Agreement (including the Exhibits,
Schedules, the Parent Disclosure Schedule and the Company Disclosure Schedule)
constitutes the entire agreement

                                       35

among the parties with respect to the subject matter hereof and supersede all
prior agreements and understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement shall be binding
upon any party hereto unless made in writing and signed by all parties hereto.

         7.8      Counterparts. This Agreement may be executed in two or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.

                            [Signature page follows]

                                       36

                  IN WITNESS WHEREOF, the parties have entered into this
Agreement as of the date first written above.

                                     PARENT:

                                     QUIKSILVER, INC.

                                     By: _______________________________________
                                         Name:
                                         Title:

                                     MERGER SUB:

                                     QS RETAIL, INC.

                                     By: _______________________________________
                                         Name:
                                         Title:

                                     COMPANY:

                                     BEACH STREET, INC.

                                     By: _______________________________________
                                         Name:
                                         Title:

                                     SHAREHOLDERS:

                                     ___________________________________________
                                     John Thompson

                                     ___________________________________________
                                     Diana Thompson

                      [SIGNATURE PAGE TO MERGER AGREEMENT]

                                       37

                          REGISTRATION RIGHTS AGREEMENT

                      FORM OF REGISTRATION RIGHTS AGREEMENT

         This REGISTRATION RIGHTS AGREEMENT (the "AGREEMENT") is entered into as
of September 17, 2002, by and between Quiksilver, Inc., a Delaware corporation
(the "COMPANY"), and John and Diana Thompson (each an "INVESTOR" and together
the "INVESTORS").

                                    RECITALS

         WHEREAS, the Investors were holders of all of the outstanding shares of
the capital stock of Beach Street, Inc., a Utah corporation ("BEACH STREET");

         WHEREAS, pursuant to the terms and conditions of that certain Agreement
and Plan of Merger and Reorganization, dated as of September 17, 2002 by and
among the Company, Beach Street, QS Retail, Inc. ("QS RETAIL") and the Investors
(the "MERGER AGREEMENT"), at the Effective Time (as defined in the Merger
Agreement) each Investor became a holder of shares of the common stock of the
Company ("COMMON STOCK"); and

         WHEREAS, in connection with entering into the Merger Agreement, the
Company agreed to grant the Investors certain registration rights with respect
to the shares of Common Stock issued to the Investors at the Effective Time
pursuant to the Merger Agreement.

                                    AGREEMENT

         NOW, THEREFORE, in consideration of the foregoing recitals, the mutual
promises hereinafter set forth, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:

1.       DEFINITIONS

         The following terms, as used herein, shall have the following meanings:

         "COMMISSION" means the Securities and Exchange Commission.

         "DEMAND REGISTRATION RIGHTS" means the rights of the Rights Holders to
have their Registrable Shares registered on the terms and conditions of this
Agreement pursuant to a Registration Statement under the Securities Act that is
filed by the Company as contemplated in Section 2.2 of this Agreement.

         "EFFECTIVE TIME" has the meaning set forth in the Merger Agreement.

         "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder, as they each may, from
time to time, be in effect.

         "MERGER" means the merger of Beach Street with and into QS Retail.

                                       A-1

         "MERGER SHARES" means the aggregate number of shares of Common Stock
received by the Investors in the Merger pursuant to the Merger Agreement in
exchange for the shares of Beach Street stock (calculated and allocated as
provided in the Merger Agreement) that were outstanding at the Effective Time.

         "RIGHTS HOLDERS" means the Investors during such time as they hold
Registrable Shares, and any persons or entities to whom the rights granted under
this Agreement are transferred in accordance with Section 12 hereof.

         "REGISTRABLE SHARES" means:

                  (a)   the Merger Shares; and

                  (b)   any other securities issued in respect of the Merger
Shares (because of stock splits, stock dividends, reclassifications,
recapitalizations, or similar events);

PROVIDED, HOWEVER, that shares which are Registrable Shares shall cease to be
Registrable Shares:

                        (i)       upon any sale or other transfer of such shares
pursuant to a Registration Statement or Rules 144 or 145 under the Securities
Act or any similar provision then in force; or

                        (ii)      if such shares are capable of being
distributed pursuant to Rule 144(k) under the Securities Act; or

                        (iii)     upon any sale or transfer to a person or
entity to which, pursuant to Section 12 of this Agreement, the rights provided
by this Agreement are not transferable.

         "REGISTRATION STATEMENT" means a registration statement filed by the
Company with the Commission for a public offering and sale of Common Stock
(other than a registration statement covering only securities proposed to be
issued in exchange for securities or assets of another person or entity or in
connection with an employee benefit plan).

         "SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder, as they each may, from time to
time, be in effect.

         "PIGGY BACK REGISTRATION RIGHTS" means the rights of the Rights Holders
to have their Registrable Shares registered on the terms and conditions of this
Agreement pursuant to a Registration Statement under the Securities Act that is
filed by the Company as contemplated in Subsection 2.1 of this Agreement.

2.       REGISTRATION RIGHTS

         2.1      PIGGYBACK REGISTRATION. If the Company proposes to file a
Registration Statement for shares of Common Stock to be issued by the Company
other than a Registration Statement (i) on Form S-4 or Form S-8 or any successor
Form thereto or (ii) filed in connection

                                       A-2

with an exchange offer (a "PIGGY BACK REGISTRATION STATEMENT") at any time until
the date that such shares cease to be Registrable Shares then, the Company will,
within 10 business days prior to such filing, give written notice to all Rights
Holders of its intention to do so and, upon the written request of Rights
Holders holding in the aggregate at least a majority of the Registrable Shares
given within twenty (20) days after the Company provides such notice, the
Company shall use its best efforts to cause all Registrable Shares which the
Company has been requested by such Rights Holders to register to be registered
under such Piggy Back Registration Statement; PROVIDED, HOWEVER, that the
Company shall have the right to postpone or withdraw any registration effected
pursuant to this Section 2.1 without incurring any liability for doing so to any
Rights Holder. Subject to Section 2.4 below, if any Registrable Shares are to be
registered pursuant to this Section 2.1, then the Company shall provide notice
of such fact to all Rights Holders, and all Rights Holders will then have the
right to register their Registrable Shares under such Piggy Back Registration
Statement. In the event the Company and its underwriters, if any, permit all
eligible Registrable Shares to be registered under Piggy Back Registration
Statement without any Cutback (as hereinafter defined), and such Registration
Statement (i) is declared effective by the Commission and (ii) remains effective
for the Applicable Registration Period (as hereinafter defined), then, the Piggy
Back Registration Rights under this Section 2.1 and the Demand Registration
Rights under Section 2.2 shall terminate at the end of such time period.

         2.2      DEMAND REGISTRATION. Subject to Section 2.1, at any time on or
after February 1, 2003, Rights Holders holding in the aggregate at least a
majority of the Registrable Shares may request, in writing, that the Company
effect the registration under the Securities Act of all or any portion of the
Registrable Shares. If the holders initiating the registration intend to
distribute the Registrable Shares by means of an underwriting, they shall so
advise the Company in their request. Upon receipt of any such request, the
Company shall promptly give written notice of such proposed registration to all
Rights Holders. All Rights Holders shall have the right, by giving written
notice to the Company within twenty (20) days after the Company provides its
notice, to elect to participate in such registration. In the event such
registration is underwritten, the right of other Rights Holders to participate
shall be conditioned on such Rights Holders' participation in such underwriting.
Subject to the provisions of Section 2.4, all Rights Holders who have elected to
participate in the registration may participate in the registration up to the
number of Registrable Shares which they hold. Thereupon, the Company shall, as
expeditiously as practicable, use its best efforts to effect the registration of
the amount of Registrable Shares so requested to be registered. If a required
registration pursuant to this Section 2.2 is an underwritten offering, the
Company may select a managing underwriter to administer the offering as long as
such underwriter is of recognized standing.

         2.3      NUMBER OF DEMANDS. Except as hereinafter set forth in Section
2.5 or Section 3.3, the Company shall not be required to effect more than one
(1) registration pursuant to Section 2.2 above; PROVIDED, HOWEVER, that no
registration statement filed pursuant to Section 2.2 shall count as a
registration statement that satisfies the Company's registration obligations
under Section 2.2, and such obligations shall continue in full force and effect,
if (i) the Registration Statement is not declared effective by the Commission
within 90 days after the date it was originally filed with the Commission, or
(ii) the Company fails to maintain the effectiveness of the Registration
Statement until the Registrable Shares could be sold pursuant to

                                       A-3

Rules 144 or 145 under the Securities Act or any similar provision then in force
(subject to the provisions herein regarding Suspension Events).

         2.4      UNDERWRITER CUTBACK. In connection with any registration under
Section 2.1 or Section 2.2 above involving an underwriting, the Company shall
not be required to include any Registrable Shares in such registration unless
the holders thereof accept the terms of the underwriting as agreed upon between
the Company and the underwriters selected by it (provided that such terms must
be consistent with this Agreement and the terms customarily included in
agreements of this nature for underwritten public offerings). If in the opinion
of the managing underwriter it is appropriate because of marketing factors to
limit the number of Registrable Shares to be included in the offering, then the
Company shall be required to include in the registration only that number of
Registrable Shares, if any, which the managing underwriter believes should be
included therein. If the number of Registrable Shares to be included in the
offering in accordance with the foregoing is less than the total number of
shares which the holders of Registrable Shares have requested to be included
("CUTBACK"), then the holders of Registrable Shares who have requested
registration and other holders of securities entitled to include securities in
such registration shall participate in the registration pro rata based upon
their total ownership of Common Stock. If any holder would thus be entitled to
include more securities than such holder requested to be registered, the excess
shall be allocated among other requesting holders pro rata in the manner
described in the preceding sentence.

         2.5      DELAY OF DEMAND. If at the time of the receipt of a request to
register Registrable Shares pursuant to Section 2.2 above, the Company is
engaged or plans to file a Registration Statement with the Commission within
forty-five (45) days after the time of the request in a registered public
offering or is engaged in any other activity which, in the good faith
determination of the Company's Board of Directors, would be adversely affected
by the requested registration to the material detriment of the Company, then the
Company may at its option, within five (5) business days after the receipt of
the Registration Request, direct that such request be delayed for a period not
in excess of sixty (60) days of the initial request. In the event of any such
delay, the time periods within which the Rights Holders are entitled to exercise
their registration rights under Sections 2.1 and 2.2 shall be extended for a
period of time equal to the duration of such delay.

3.       REGISTRATION PROCEDURES

         3.1      COMPANY ACTIONS UPON EXERCISE OF REGISTRATION RIGHTS. If and
whenever the Company is required by the provisions of this Agreement to use its
best efforts to effect the registration under the Securities Act of any of the
Registrable Shares, subject to Section 2.5, the Company shall:

                  (a)   as expeditiously as reasonably practicable prepare and
file with the Commission a Registration Statement with respect to such
Registrable Shares and use its best efforts to cause that Registration Statement
to become effective as soon as possible thereafter;

                  (b)   as expeditiously as reasonably practicable prepare and
file with the Commission any amendments and supplements to the Registration
Statement and the prospectus included in the Registration Statement as may be
necessary to keep the Registration Statement

                                       A-4

effective, in the case of a firm commitment underwritten public offering, until
each underwriter has completed the distribution of all securities purchased by
it and, in the case of any other offering, until the earlier of the sale of all
Registrable Shares covered thereby or September 30, 2003 (each, an "APPLICABLE
REGISTRATION PERIOD");

                  (c)   as expeditiously as reasonably practicable furnish to
each selling Rights Holder such reasonable numbers of copies of the prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents, as the selling Rights Holder may
reasonably request in order to facilitate the public sale or other disposition
of the Registrable Shares owned by the selling Rights Holder; and

                  (d)   as expeditiously as reasonably practicable use its best
efforts to register or qualify the Registrable Shares covered by the
Registration Statement under the securities or Blue Sky laws of such states as
the selling Rights Holders shall reasonably request, and do any and all other
acts and things that may be necessary or desirable to enable the selling Rights
Holders to consummate the public sale or other disposition in such states of the
Registrable Shares owned by the selling Rights Holder; PROVIDED, HOWEVER, that
the Company shall not be required in connection with this Section 3.1(d) to
qualify as a foreign corporation or execute a general consent to service of
process in any jurisdiction.

         3.2      SUSPENSION EVENTS. Following the effectiveness of a
Registration Statement (and the making of any required filings with any state
securities commissions), the Company may direct the selling Rights Holders to
suspend sales of the Registrable Securities, as provided herein, if one or more
of the following events (each, a "SUSPENSION EVENT") occurs:

                  (a)   an underwritten primary offering by the Company where
the Company is advised by the underwriters for such offering that sale of
Registrable Shares under the Registration Statement would have a material
adverse effect on the primary offering (a "PUBLIC OFFERING SUSPENSION EVENT");

                  (b)   (i)       pending negotiations relating to, or
consummation of, a transaction or the occurrence of an event:

                                    (A) that would require additional disclosure
                  of material information by the Company in the Registration
                  Statement (or such filings) not otherwise proposed to be
                  disclosed; or

                                    (B) that renders the Company unable to
                  comply with Commission requirements; or

                        (ii)      a good faith determination by the Company that
the offering of Registrable Securities would:

                                    (A) materially impede, delay or interfere
                  with any proposed financing, offer or sale of securities,
                  acquisition, corporate reorganization or other significant
                  transaction involving the Company; or

                                       A-5

                                    (B) conflict with material business plans of
                  the Company in a manner not in the best interests of the
                  Company (each, a "MATERIAL EVENT SUSPENSION"); or

                        (iii)       if at any time the Company would be required
to obtain audited financial statements not being prepared independently of the
Registration Statement, unless the Rights Holders undertake to pay the Company's
expenses in obtaining the requisite financial statements and an audit is
feasible and can be accomplished with minimal disruption to the Company and its
business ("REQUIRED FINANCIAL DISCLOSURE SUSPENSION").

PROVIDED, HOWEVER, that

         (x)      in the case of any Public Offering Suspension Event, the
period of suspension shall terminate (A) within forty-five (45) days if the
Registration Statement therefor is not filed with the Commission prior thereto,
(B) if the Registration Statement is filed with the Commission within such 45
day period, but is not declared effective within the succeeding 90 days, on the
earlier of the termination of such 90-day period or the withdrawal of such
Registration Statement by the Company;

         (y)      in the case of a Material Event Suspension under subsection
(ii), the duration of the suspension shall terminate on the earlier of the
public announcement of such Suspension Event and the expiration of forty-five
(45) days from the commencement of the suspension and, in the case of a Material
Event Suspension under subsection (i), the Company shall use its best efforts to
cause the duration of the suspension to terminate as soon as reasonably
practicable; and

         (z)      in the case of Required Financial Disclosure Suspension, the
period of suspension shall terminate when the requisite financial statements are
available.

In case of any Public Offering Suspension Event, Material Event Suspension or
Required Financial Disclosure Suspension, the duration of the Applicable
Registration Period of the suspended Registration Statement shall be extended
for a period of time equal to the duration of the suspension.

         3.3      AGREEMENT OF RIGHTS HOLDERS. In the case of a Suspension
Event, the Company shall give written notice (a "SUSPENSION NOTICE") to the
selling Rights Holders to suspend sales of the Registrable Shares so that the
Company may correct or update the Registration Statement (or such filings);
PROVIDED, HOWEVER, that such suspension shall continue no longer than the
applicable period of time set forth in Section 3.2 above. The selling Rights
Holders agree that they will not effect any sales of the Registrable Shares
pursuant to such Registration Statement (or such filings) at any time during the
period from the date they received a Suspension Notice from the Company to such
date as of which the Suspension Period shall expire as provided in clauses (x),
(y) and (z) of Section 3.2 above. If so directed by the Company, selling Rights
Holders will deliver to the Company all copies of the prospectus covering the
Registrable Shares held by them at the time of receipt of the Suspension Notice.
The selling Rights Holders may recommence sales of the Registrable Shares
pursuant to the Registration Statement (or such filings) following further
written notice to such effect (an "END OF SUSPENSION NOTICE") from the Company,
which End of Suspension Notice shall be

                                       A-6

accompanied by copies of the supplemented or amended prospectus necessary to
resume such sales.

         3.4      INTENTIONALLY OMITTED

         3.5      CESSATION OF OFFERS. Upon receipt of any notice (including any
Suspension Notice) from the Company of:

                  (a)   any Suspension Event;

                  (b)   any request by the Commission for amendments or
supplements to a Registration Statement or for additional information;

                  (c)   any amendment or supplement to the Registration
Statement to comply with the requirements of the Securities Act;

                  (d)   the issuance by the Commission of any stop order
suspending the effectiveness of a Registration Statement or the initiation of
any proceedings for that purpose;

                  (e)   the representations and warranties of the Company made
in any underwriting agreement relating to the registration ceasing to be true
and correct in any material respect;

                  (f)   the receipt by the Company of any notification with
respect to the suspension of the qualification of any Registrable Securities
registered in such registration for sale in any jurisdiction or the initiation
or threatening of any proceeding for such purpose (in which case the cessation
of sales shall pertain only to the applicable jurisdiction);

                  (g)   the happening of any event which makes any statement
made in a Registration Statement or any document incorporated therein by
reference untrue in any material respect or which requires the making of any
changes in any such Registration Statement so that they will not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading;
or

                  (h)   the Company's reasonable determination that a
post-effective amendment to a registration statement would be appropriate;

the selling Rights Holders shall immediately cease making offers of Registrable
Shares (and shall return all prospectuses) until the Company provides such
selling Rights Holders any required supplemental or amended materials or of
advice in writing that use of the applicable Registration Statement may be
resumed. In such event, the Company will use its reasonable efforts promptly to
correct or supplement the Registration Statement, to obtain the lifting of any
stop order or otherwise to remove the circumstances preventing the continuance
of offers and sales under the Registration Statement, subject to the Company's
right to delay such actions with respect to any Suspension Event. The Company
shall promptly after such correction or supplement provide the selling Rights
Holders with revised prospectuses and, following receipt of the revised
prospectuses, the selling Rights Holders shall be free to resume making offers
of the Registrable Shares. In such event, however, at the time the Rights
Holders are permitted to

                                       A-7

resume making such offers the Applicable Registration Period shall be extended
for a number of days equal to the period during which the Rights Holders were
required to cease selling their Registrable Shares pursuant to this Section 3.4.

4.       ALLOCATION OF EXPENSES

         The Company will pay all Registration Expenses of any registration
under this Agreement; PROVIDED, HOWEVER, that, except as otherwise provided in
Section 3.2, if a registration is withdrawn at the request of the Rights Holders
requesting such registration (other than as a result of information concerning
material adverse developments in the business or financial condition of the
Company which is made known to the Rights Holders after the date on which such
registration was requested) and if the requesting Rights Holders elect not to
have such registration counted as a registration requested under Section 2, the
requesting Rights Holders shall pay the Registration Expenses of such
registration pro rata in accordance with the number of their Registrable Shares
included in such registration (provided such registration was requested pursuant
to Section 2.2 hereof). For purposes of this Section 4, the term "REGISTRATION
EXPENSES" shall mean all expenses incurred by the Company in complying with this
Agreement, including, without limitation, all registration and filing fees,
exchange listing fees, printing expenses, fees and expenses of counsel for the
Company and the reasonable fees and expenses of one counsel selected by the
selling Rights Holders to represent the selling Rights Holders, state Blue Sky
fees and expenses, and the expense of any special audits incidental to or
required by any such registration, but excluding underwriting discounts, selling
commissions and the fees and expenses of any selling Rights Holder's own
counsel, or other out-of-pocket expenses of the Rights Holders or their agents
(other than the counsel selected to represent all selling Rights Holders).

5.       INDEMNIFICATION AND CONTRIBUTION

         5.1      In the event of any registration under the Securities Act of
any Registrable Shares pursuant to this Agreement, the Company will indemnify
and hold harmless the seller of such Registrable Shares, each underwriter of
such Registrable Shares, and each other person, if any, who controls such seller
or underwriter within the meaning of the Securities Act or the Exchange Act
against any losses, claims, damages or liabilities, joint or several, to which
such seller, underwriter or controlling person may become subject under the
Securities Act, the Exchange Act, state securities or Blue Sky laws or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement
under which such Registrable Shares were registered under the Securities Act,
any preliminary prospectus or final prospectus contained in the Registration
Statement, or any amendment or supplement to such Registration Statement, or
arise out of or are based upon the omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading; and the Company will reimburse such seller, underwriter
and each such controlling person for any legal or any other expenses reasonably
incurred by such seller, underwriter or controlling person in connection with
investigating or defending any such loss, claim, damage, liability or action as
and when incurred by them; PROVIDED, HOWEVER, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon any untrue statement or omission made
in such

                                       A-8

Registration Statement, preliminary prospectus or final prospectus, or any such
amendment or supplement, in reliance upon and in conformity with information
furnished to the Company, in writing, by or on behalf of such seller,
underwriter or controlling person specifically for use in the preparation
thereof; PROVIDED, FURTHER, HOWEVER, that the foregoing indemnity agreement with
respect to any registration statement or prospectus relating to the Registrable
Securities shall not inure to the benefit of any seller in such offering, its
officers, directors or agents, or controlling persons if:

                  (a)   a copy of a prospectus (as then amended or supplemented
if the Company shall have furnished any amendments or supplements thereto) for
such offering was not sent or given by or on behalf of such selling shareholder
to the person ("ASSERTING PERSON") asserting any losses, claims, damages or
liabilities as a result of an untrue statement of a material fact contained in
any registration statement or prospectus relating to the Registrable Securities
(as amended or supplemented if the Company shall have furnished any amendments
or supplements thereto) or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading and if such prospectus (as so amended or
supplemented) would have cured the defect giving rise to such losses, claims,
damages or liabilities; or

                  (b)   such selling shareholder sold Registrable Securities to
the Asserting Person during the period between the date of a Suspension Notice
and the date of an End of Suspension Notice.

         5.2      In the event of any registration under the Securities Act of
any of the Registrable Shares pursuant to this Agreement, each seller of
Registrable Shares, severally and not jointly, will indemnify and hold harmless
the Company, each of its directors and officers and each underwriter (if any)
and each person, if any, who controls the Company or any such underwriter within
the meaning of the Securities Act or the Exchange Act, against any losses,
claims, damages or liabilities, joint or several, to which the Company, such
directors and officers, underwriter or controlling person may become subject
under the Securities Act, Exchange Act, state securities or Blue Sky laws or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in any Registration Statement
under which such Registrable Shares were registered under the Securities Act,
any preliminary prospectus or final prospectus contained in the Registration
Statement, or any amendment or supplement to the Registration Statement, or
arise out of or are based upon any omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, if the statement or omission was made in reliance upon
and in conformity with information relating to such seller furnished in writing
to the Company by or on behalf of such seller specifically for use in connection
with the preparation of such Registration Statement, prospectus, amendment or
supplement; PROVIDED, HOWEVER, that the obligations of such Rights Holders
hereunder shall be limited to an amount equal to the proceeds to each Rights
Holder of Registrable Shares sold in connection with such registration. The
terms of any underwriting agreement entered into by the Company to effect a
registration of the Registrable Securities shall require the underwriter to
indemnify and hold harmless the Company, its officers, directors, controlling
persons and agents and each selling Rights Holder on substantially

                                       A-9

the same basis as that of the indemnification of the Company by each selling
holder as provided in this Section 5.

         5.3      Each party entitled to indemnification under this Section 5
("INDEMNIFIED PARTY") shall give notice to the party required to provide
indemnification ("INDEMNIFYING PARTY") promptly after such Indemnified Party has
actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom; PROVIDED, HOWEVER, that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section 5 (except to the extent
such failure to give notice has resulted in increased losses, damages or
liabilities for the Indemnifying Party). The Indemnified Party may participate
in such defense at such party's expense and the Indemnified Party and not the
Indemnifying Party shall bear or be responsible for the expenses thereof,
unless:

                  (a)   the Indemnifying Party and the Indemnified Party shall
have mutually agreed to the retention of such counsel, or

                  (b)   the named parties to any such proceeding (including any
impleaded parties) include both the Indemnified Party and the Indemnifying Party
and representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them.

No Indemnifying Party, in the defense of any such claim or litigation shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect of such claim or litigation, and no
Indemnified Party shall consent to entry of any judgment or settle such claim or
litigation without the prior written consent of the Indemnifying Party, which
shall not be unreasonably withheld.

         5.4      In order to provide for just and equitable contribution to
joint liability under the Securities Act in any case in which either:

                  (a)   any holder of Registrable Shares exercising rights under
this Agreement, or any controlling person of any such holder, makes a claim for
indemnification pursuant to this Section 5 but it is judicially determined (by
the entry of a final judgment or decree by a court of competent jurisdiction and
the expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that this Section 5 provides for indemnification in such case; or

                  (b)   contribution under the Securities Act may be required on
the part of any such selling Rights Holder or any such controlling person in
circumstances for which indemnification is provided under this Section 5;

then, in each such case, the Company and such Rights Holder will contribute to
the aggregate losses, claims, damages or liabilities to which they may be
subject (after contribution from others) in such proportions as is appropriate
to reflect the relative fault of the Indemnifying Party and Indemnified Parties
in connection with the actions which resulted in such losses, claims,

                                      A-10

damages, liabilities or expenses, as well as any other relevant equitable
considerations; PROVIDED, HOWEVER, that, in any such case:

                        (i)       no such holder will be required to contribute
any amount in excess of the proceeds to it of all Registrable Shares sold by it
pursuant to such Registration Statement; and

                        (ii)      no person or entity guilty of fraudulent
misrepresentation, within the meaning of Section 11(f) of the Securities Act,
shall be entitled to contribution from any person or entity who is not guilty of
such fraudulent misrepresentation.

6.       INDEMNIFICATION WITH RESPECT TO UNDERWRITTEN OFFERING

In the event that Registrable Shares are sold pursuant to a Registration
Statement in an underwritten offering, the Company agrees to enter into an
underwriting agreement containing customary representations and warranties with
respect to the business and operations of an issuer of the securities being
registered and customary covenants and agreements to be performed by such
issuer, including, without limitation, customary provisions with respect to
indemnification by the Company of the underwriters of such offering.

7.       INFORMATION BY RIGHTS HOLDER

         Each Rights Holder including Registrable Shares in any registration
shall furnish to the Company such information regarding such Rights Holder and
the distribution of such Right Holder's Registrable Shares proposed by such
Rights Holder as the Company may reasonably request in writing and as shall be
required in connection with any registration, qualification or compliance
referred to in this Agreement.

8.       INTENTIONALLY OMITTED

9.       NO LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS

         Nothing contained in this Agreement shall prohibit the Company from
granting to any holder or prospective holder of any securities of the Company
registration rights which would allow such holder or prospective holder to
include securities of the Company in any Registration Statement filed by the
Company.

9.       RULE 144 REQUIREMENTS

         The Company agrees to:

                  (a)   comply with the requirements of Rule 144(c) under the
Securities Act with respect to current public information about the Company;

                  (b)   to file with the Commission in a timely manner all
reports and other documents required of the Company under the Securities Act and
the Exchange Act (at any time after it has become subject to such reporting
requirements); and

                                      A-11

                  (c)   furnish to any holder of Registrable Shares upon
request:

                        (i)       a written statement by the Company as to its
compliance with the requirements of Rule 144(c) under the Securities Act, and
the reporting requirements of the Securities Act and the Exchange Act (at any
time after it has become subject to such reporting requirements);

                        (ii)      a copy of the most recent annual or quarterly
report of the Company; and

                        (iii)     such other reports and documents of the
Company as such holder may reasonably request to avail itself of any similar
rule or regulation of the Commission allowing it to sell any such securities
without registration.

11.      TERMINATION

         All of the Company's obligations to register Registrable Shares under
this Agreement shall terminate upon the last to occur of (i) the sale of all
Registrable Shares by the Rights Holders thereof pursuant to this Agreement or
(ii) the earliest date as of which all Registrable Shares have ceased being
Registrable Shares.

12.      TRANSFERS OF RIGHTS

         This Agreement, and the rights and obligations of each Rights Holder
hereunder, may only be assigned (including assignment by law) by such Rights
Holder to:

                  (a)   any family member or trust for the benefit of the
Rights Holder, if the Rights Holder is an individual; and

                        (i)       any entity controlled by, controlling or under
common control with the Rights Holder;

PROVIDED that the transferee provides written notice of such assignment to the
Company and agrees in writing to be bound by the terms and conditions hereof.

13.      OTHER PUBLIC OFFERINGS

         This Agreement is not intended to and shall not preclude the Company
from listing its Common Stock on any reputable non-United States exchange.

14.      NOTICES

         Each notice relating to this Agreement shall be in writing and shall be
delivered in person, by overnight air carrier, by registered or certified mail,
by facsimile transmission or by email, to the parties at the following addresses
(or at such other address for a party as shall be specified by like notice,
provided that notices of a change of address shall be effective only upon
receipt thereof):

                                      A-12

                  (a)      IF TO COMPANY:

                           Quiksilver, Inc.
                           15202 Graham Street
                           Huntington Beach, CA 92649
                           Attention: General Counsel

                           WITH A COPY TO:

                           Hewitt & O'Neil LLP
                           19900 MacArthur Blvd., Suite 1050
                           Irvine, CA 92612
                           Attn: Paul A. Rowe, Esq.

                  (b)      IF TO AN INVESTOR:

                           2750 Meadow Creek Drive
                           Park City, Utah 84060
                           Attention: John Thompson

         Unless otherwise specifically provided in this Agreement, a notice
shall be deemed to have been effectively given if mailed by registered or
certified mail to the proper address (with such notice to be effective upon the
earlier of actual receipt or five days after deposit in the mail), if given in
person or by overnight air carrier when delivered in person or by overnight air
carrier, if given by email or telecopy upon receipt if confirmed by return
telecopy, email or telephonic confirmation or otherwise; PROVIDED, HOWEVER, that
no notice shall be deemed received on a day that is not a business day in the
jurisdiction in which notices are to be addressed to such party. Any such notice
shall not be effective until the next business day in such jurisdiction.

15.      ENTIRE AGREEMENT

         This Agreement contains the entire agreement between the parties hereto
with respect to the transactions contemplated herein and supersedes all previous
oral and written and all contemporaneous oral negotiations, commitments and
understandings.

16.      AMENDMENTS AND WAIVERS

         Any term of this Agreement may be amended and the observance of any
term of this Agreement may be waived (either generally or in a particular
instance and either retroactively or prospectively), only with the written
consent of the Company and the holders of a majority of the Registrable Shares.
No waivers of or exceptions to any term, condition or provision of this
Agreement, in any one or more instances, shall be deemed to be, or construed as,
a further or continuing waiver of any such term, condition or provision.

                                      A-13

17.      COUNTERPARTS

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

18.      SEVERABILITY

         The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement.

19.      GOVERNING LAW

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

20.      SECTION HEADINGS

         The heading of each section, subsection or other subdivision of this
Agreement is for reference purposes only and shall not limit or control the
meaning thereof.

                            [Signature page follows]

                                      A-14

         IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
duly executed on its behalf as of the day and year first above written.

                                                COMPANY:

                                                QUIKSILVER, INC.

                                                By:    _________________________
                                                Name:  _________________________
                                                Title: _________________________

                                                RIGHTS HOLDERS:

                                                ________________________________
                                                John Thompson

                                                ________________________________
                                                Diana Thompson

                                      A-15

                              CONSULTING AGREEMENT

                              CONSULTING AGREEMENT

                  This Consulting Agreement (the "Agreement") is made and
entered into as of September 17, 2002, by and between Quiksilver, Inc., a
Delaware corporation (the "Company"), and John Thompson ("Consultant").

                                 R E C I T A L S

                  A.    The Company, through its wholly-owned subsidiary QS
Retail, Inc. ("QS Retail"), is purchasing Beach Street, Inc., a Utah corporation
("Beach Street"), pursuant to an Agreement and Plan of Merger and
Reorganization.

                  B.    Consultant has been a key employee of Beach Street and
the Company believes his services will be of benefit to the Company.

                  C.    The Company desires to engage Consultant to obtain the
benefit of Consultant's special knowledge, experience, background, skills and
abilities, and Consultant desires to accept such engagement, upon the terms and
subject to the conditions set forth herein.

                                    AGREEMENT

                  NOW, THEREFORE, in consideration of the foregoing recitals,
and the mutual representations, agreements and promises contained in this
Agreement, the Company and Consultant agree as follows:

                  1.    Engagement. The Company hereby engages Consultant as a
consultant to render the services and perform the duties described in this
Agreement, and Consultant hereby accepts such engagement, upon the terms and
subject to the conditions set forth herein.

                  2.    Term. The engagement of Consultant by the Company shall
commence on October 1, 2002 and continue for a period of one (1) year (the
"Consulting Period").

                  3.    Services and Duties. During the Consulting Period,
Consultant shall make himself reasonably available, consistent with his past
work schedule with Beach Street, Inc., on an as-requested basis to the Company's
officers, employees and agents, to consult with the Company on issues related to
the consummation and performance of the Merger Agreement between Quiksilver, QS
Retail and Beach Street. The Company shall provide reasonable notice to
Consultant of the services to be performed and the timing of such services. The
Company shall also accommodate the schedule of Consultant in performing the
services.

                  4.    Consulting Fees. For services rendered under this
Agreement during the Consulting Period, Consultant shall receive a consulting
fee of $200,000 payable in equal monthly installments of $16,667 during the
Consulting Period, with each payment being made on the first business day of
each calendar month beginning October 1, 2002.

                  5.    Expenses. The Company will reimburse Consultant for any
costs or expenses incurred by Consultant in rendering the Services; provided
that any such costs or

                                       B-1

expenses have been approved by the Company. Travel and lodging expenses incurred
by Consultant for travel at the request of the Company shall be paid by the
Company.

                  5.    Independent Contractor. Consultant acknowledges and
agrees that Consultant is an independent contractor and nothing contained in
this Agreement shall be construed to create the relationship of employer and
employee or principal and agent between Consultant and the Company. During the
Consulting Period, Consultant shall maintain and pay for all federal, state, and
local disability, workers' compensation, payroll taxes, self-employment
insurance, and income and other taxes, and the Company will not withhold or pay
any such taxes or insurance on behalf of Consultant. During the Consulting
Period, Consultant shall not be entitled to participate in any of the medical,
dental, insurance, or any other benefits provided by the Company for the benefit
of its employees.

                  6.    Non-Disclosure of Confidential Information. Consultant
agrees not to divulge, communicate, use to the detriment of the Company or for
his own benefit or for the benefit of any other person or persons, or misuse in
any way, any confidential information or trade secrets of the Company obtained
or acquired subsequent to the date of this Agreement.

                  7.    Authority. Consultant shall not have authority to act as
an agent of the Company, and he shall not represent the contrary to any person
or entity. Consultant shall not direct the work of any employee of the Company
nor make any management decisions or undertake to commit the Company to any
course of action in relation to third parties.

                  8.    Miscellaneous Provisions.

                        (a)    Notices. Any notice required in connection with
this Agreement shall be given in writing and shall be deemed effective upon
personal delivery or three business days after deposit in the United States
mail, registered or certified, postage prepaid and addressed to the party
entitled to such notice at the address indicated below such party's signature
line on this Agreement or at such other address as such party may designate by
ten (10) days' advance written notice under this Section 8(a) to all other
parties to this Agreement.

                        (b)    Entire Agreement. This Agreement constitutes the
entire agreement of the parties and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings, and negotiations between the
parties with respect to the subject matter hereof.

                        (c)    Change, Modification, Waiver. No change or
modification of this Agreement shall be valid unless it is in writing and signed
by each of the parties hereto. No waiver of any provision of this Agreement
shall be valid unless it is in writing and signed by the party against whom the
waiver is sought to be enforced.

                        (d)    Assignment and Binding Nature. The services and
duties to be performed by Consultant hereunder are personal and may not be
assigned. This Agreement shall be binding upon and inure to the benefit of the
Company, its successors and assigns.

                                       B-2

                        (e)    Attorneys' Fees. In the event any party
institutes any action or proceeding to enforce this Agreement or any provision
hereof, or for damages or equitable relief by reason of any alleged breach of
this Agreement or of any provision hereof, or for a declaration of rights
hereunder, the prevailing party in any such action or proceeding shall be
entitled to receive from the other party all costs and expenses, including
reasonable attorneys' fees, incurred by the prevailing party in connection with
such action or proceeding.

                        (f)    Governing Law and Forum. This Agreement shall be
construed in accordance with, and governed by, the laws of the State of Utah,
excluding any choice of law principles which direct the application of the laws
of another jurisdiction. The exclusive forum for the determination of any action
relating to the adjudication of any dispute hereunder shall be either an
appropriate court of said State or that court of the United States which
includes said State within its territorial jurisdiction.

                        (g)    Counterparts. This Agreement may be executed
simultaneously in counterparts, each of which shall be deemed an original, but
all of which together shall constitute one and the same instrument.

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

                                        "COMPANY"

                                        QUIKSILVER, INC., a Delaware corporation

                                        By: ____________________________________

                                        Its: ___________________________________

                                        Address:15202 Graham Street
                                              Huntington Beach, CA 92649
                                              Attention: Charles S. Exon, Esq.

                                        "CONSULTANT"
                                        ________________________________________
                                        John Thompson

                                        Address: 2750 Meadow Creek Drive
                                              Park City, Utah 84060
                                              Attention: John Thompson

                                       B-3

EX-21.1

EXHIBIT 21.1

                                QUIKSILVER, INC.

                     NAMES AND JURISDICTIONS OF SUBSIDIARIES



Subsidiary Name                                                    Jurisdiction
- ---------------                                                    ------------
                                                              
QS Retail, Inc.                                                      California
Mervin Manufacturing, Inc.                                           California
Mt. Waimea, Inc.                                                     California
Quiksilver Wetsuits, Inc.                                            California
Hawk Designs, Inc.                                                   California
Fidra, Inc.                                                          California
Quiksilver Australia Pty Ltd                                          Australia
Quiksilver International Pty Ltd                                      Australia
Pavilion Productions Pty Ltd                                          Australia
NaPali Europe, SAS                                                       France
Na Pali, SARL                                                            France
Gotcha Europe, SA                                                        France
Kokolo SARL                                                              France
Emerald Coast Europe, Eurl                                               France
Infoborn SARL                                                            France
Cariboo, Eurl                                                            France
Andaya, SARL                                                             France
Lanai Ltd.                                                       United Kingdom
Gen X Publishing Ltd.                                            United Kingdom
Molokai Ltd.                                                     United Kingdom
Emerald Coast Ltd.                                               United Kingdom
Kauai GmbH                                                              Germany
Makaha GmbH                                                             Germany
Quiksilver Europa, SL                                                     Spain
Sumbawa SL                                                                Spain
Bakio SL                                                                  Spain
Haapiti, SRL                                                              Italy
Pukalani BV                                                         Netherlands
Tuvalu BV                                                           Netherlands
Namotu Ltd.                                                             Ireland


                                       56

EX-23.1

                                                                   EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statements No.
33-24527, No. 33-65002, No. 33-65004, No. 33-58657, No. 333-04169, No.
333-56593, No. 333-40328, No. 333-64106, No. 33-65724 and No. 333-85204 of
Quiksilver, Inc. on Form S-8 of our report, dated December 17, 2002, appearing
in this Annual Report on Form 10-K of Quiksilver, Inc. for the year ended
October 31, 2002.

DELOITTE & TOUCHE LLP

Costa Mesa, California
January 27, 2003

                                       57

EX-99.1

                                                                   EXHIBIT 99.1

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Quiksilver, Inc. (the "Company") on Form
10-K for the period ending October 31, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Robert B. McKnight,
Jr., Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:

         (1)      The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and

         (2)      The information contained in the Report fairly presents,
in all material respects, the financial condition and result of operations of
the Company.

/s/ Robert B. McKnight, Jr.
- ---------------------------
Robert B. McKnight, Jr.
Chief Executive Officer
January 28, 2003

                                       58

EX-99.2

                                                                   EXHIBIT 99.2
                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Quiksilver, Inc. (the "Company") on Form
10-K for the period ending October 31, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Steven L. Brink, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

         (1)      The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and

         (2)      The information contained in the Report fairly presents, in
all material respects, the financial condition and result of operations of the
Company.

/s/ Steven L. Brink
- -------------------
Steven L. Brink
Chief Financial Officer
January 28, 2003

                                       59