e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2007


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

Commission file number 1-14229

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
92649
(Address of principal executive offices)
(Zip Code)

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

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 þ No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer þ Accelerated Filer o Non-Accelerated Filer o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares outstanding of Registrant’s Common Stock,
par value $0.01 per share, at
September 4, 2007 was 125,181,304

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

QUIKSILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)


	Three months ended July 31,
In thousands, except per share amounts	2007			2006
Revenues, net	$	612,756		$	525,854
Cost of goods sold		331,540			277,079

Gross profit		281,216			248,775

Selling, general and administrative expense		275,407			228,843

Operating income		5,809			19,932

Interest expense		15,332			11,877
Foreign currency loss		65			377
Minority interest and other (income) expense		(18	)		484

(Loss) income before (benefit) provision for income taxes		(9,570	)		7,194

(Benefit) provision for income taxes		(1,703	)		1,858

Net (loss) income	$	(7,867	)	$	5,336


Net (loss) income per share	$	(0.06	)	$	0.04

Net (loss) income per share, assuming dilution	$	(0.06	)	$	0.04


Weighted average common shares outstanding		124,013			122,341

Weighted average common shares outstanding, assuming dilution		124,013			127,737

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/LOSS
(Unaudited)


	Three months ended July 31,
In thousands	2007			2006
Net (loss) income	$	(7,867	)	$	5,336
Other comprehensive income (loss):
Foreign currency translation adjustment		5,541			5,798
Net unrealized gain (loss) on derivative instruments, net of tax of $1,277 (2007) and $(785) (2006)		2,308			(1,427	)

Comprehensive (loss) income	$	(18	)	$	9,707

See notes to condensed consolidated financial statements.

QUIKSILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)


	Nine months ended July 31,
In thousands, except per share amounts	2007			2006
Revenues, net	$	1,769,079		$	1,583,924
Cost of goods sold		958,649			852,098

Gross profit		810,430			731,826

Selling, general and administrative expense		776,708			655,986

Operating income		33,722			75,840

Interest expense		45,675			36,417
Foreign currency loss (gain)		3,481			(616	)
Minority interest and other (income) expense		(2,166	)		895

(Loss) income before (benefit) provision for income taxes		(13,268	)		39,144

(Benefit) provision for income taxes		(3,076	)		11,476

Net (loss) income	$	(10,192	)	$	27,668


Net (loss) income per share	$	(0.08	)	$	0.23

Net (loss) income per share, assuming dilution	$	(0.08	)	$	0.22


Weighted average common shares outstanding		123,579			121,928

Weighted average common shares outstanding, assuming dilution		123,579			127,564

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)


	Nine months ended July 31,
In thousands	2007			2006
Net (loss) income	$	(10,192	)	$	27,668
Other comprehensive income (loss):
Foreign currency translation adjustment		62,365			32,127
Net unrealized loss on derivative instruments, net of tax of $(4,233) (2007) and $(3,040) (2006)		(8,983	)		(5,996	)

Comprehensive income	$	43,190		$	53,799

See notes to condensed consolidated financial statements.

QUIKSILVER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)


	July 31,			October 31,
In thousands, except share amounts	2007			2006
ASSETS
Current assets:
Cash and cash equivalents	$	76,007		$	36,834
Trade accounts receivable, less allowance for doubtful accounts of $42,236 (2007) and $32,480 (2006)		610,973			721,562
Other receivables		52,357			35,324
Income tax receivable		11,018			—
Inventories		545,515			425,864
Deferred income taxes		94,941			84,672
Prepaid expenses and other current assets		31,482			28,926

Total current assets		1,422,293			1,333,182

Fixed assets, less accumulated depreciation and amortization of $208,139 (2007) and $176,647 (2006)		319,887			282,334
Intangible assets, net		252,300			248,206
Goodwill		545,196			515,710
Other assets		49,104			45,954
Assets held for sale		18,264			21,842

Total assets	$	2,607,044		$	2,447,228


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Lines of credit	$	327,477		$	315,891
Accounts payable		305,067			220,177
Accrued liabilities		176,045			201,087
Current portion of long-term debt		20,272			24,621
Income taxes payable		—			2,810

Total current liabilities		828,861			764,586

Long-term debt, net of current portion		716,901			689,690
Deferred income taxes and other long-term liabilities		101,368			100,632


Total liabilities		1,647,130			1,554,908


Minority interest		9,982			11,193

Stockholders’ equity:
Preferred stock, $.01 par value, authorized shares — 5,000,000; issued and outstanding shares — none		—			—
Common stock, $.01 par value, authorized shares — 185,000,000; issued shares — 128,041,504 (2007) and 126,401,836 (2006)		1,280			1,264
Additional paid-in capital		300,087			274,488
Treasury stock, 2,885,200 shares		(6,778	)		(6,778	)
Retained earnings		548,867			559,059
Accumulated other comprehensive income		106,476			53,094

Total stockholders’ equity		949,932			881,127

Total liabilities and stockholders’ equity	$	2,607,044		$	2,447,228

See notes to condensed consolidated financial statements.

QUIKSILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


	Nine months ended July 31,
In thousands	2007			2006
Cash flows from operating activities:
Net (loss) income	$	(10,192	)	$	27,668
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		52,785			47,581
Stock-based compensation and tax benefit on option exercises		11,276			16,056
Loss on sale of fixed assets		412			1,316
Foreign currency loss (gain)		994			(229	)
Asset impairments		8,163			—
Minority interest and equity in earnings		(2,107	)		1,427
Changes in operating assets and liabilities:
Trade accounts receivable		139,660			124,947
Other receivables		(15,994	)		(4,665	)
Inventories		(96,919	)		(113,325	)
Prepaid expenses and other current assets		(1,681	)		(3,967	)
Other assets		(1,521	)		(8,677	)
Accounts payable		77,819			22,559
Accrued liabilities		(26,595	)		(29,884	)
Income taxes payable		(12,862	)		(27,063	)

Net cash provided by operating activities		123,238			53,744

Cash flows from investing activities:
Proceeds from the sale of properties and equipment		11,673			2,420
Capital expenditures		(78,806	)		(61,321	)
Business acquisitions, net of cash acquired		(34,310	)		(34,848	)

Net cash used in investing activities		(101,443	)		(93,749	)

Cash flows from financing activities:
Borrowings on lines of credit		118,734			245,672
Payments on lines of credit		(120,318	)		(200,920	)
Borrowings on long-term debt		121,959			129,705
Payments on long-term debt		(111,878	)		(130,107	)
Stock option exercises, employee stock purchases and tax benefit on option exercises		12,415			6,491

Net cash provided by financing activities		20,912			50,841

Effect of exchange rate changes on cash		(3,534	)		(2,092	)

Net increase in cash and cash equivalents		39,173			8,744
Cash and cash equivalents, beginning of period		36,834			75,598

Cash and cash equivalents, end of period	$	76,007		$	84,342


Supplementary cash flow information:
Cash paid during the period for:
Interest	$	40,696		$	31,201

Income taxes	$	8,265		$	40,763

See notes to condensed consolidated financial statements.

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.		Basis of Presentation

		The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statement presentation.

		Quiksilver, Inc. (the “Company”), in its opinion, has included all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the financial statements for the three and nine month periods ended July 31, 2007 and 2006. The condensed consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes for the year ended October 31, 2006 included in the Company’s Annual Report on Form 10-K. Interim results are not necessarily indicative of results for the full year due to seasonal and other factors.

		For the three and nine months ended July 31, 2007, the potential dilutive effect of common stock equivalents was not included in the weighted average shares for the computation of diluted earnings per share, as the effect was antidilutive.

2.		New Accounting Pronouncements

		In May 2005, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections,” (“SFAS No. 154”) which replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS No. 154 applies to all voluntary changes in accounting principles and requires retrospective application (a term defined by the statement) to prior periods’ financial statements, unless it is impracticable to determine the effect of a change. It also applies to changes required by an accounting pronouncement that does not include specific transition provisions. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company adopted this standard during the nine months ended July 31, 2007. The adoption of this standard did not have a material impact on the Company’s financial condition, results of operations or cash flows.

		In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). This interpretation clarifies the application of SFAS No. 109, “Accounting for Income Taxes,” by defining criteria that an individual tax position must meet for any part of the benefit of that position to be recognized in the Company’s financial statements and also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company expects to adopt FIN 48 on November 1, 2007. The Company is currently assessing the impact the adoption of FIN 48 will have on its financial position and results of operations.

		In September 2006, the Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides interpretive guidance on the SEC’s views regarding the process of quantifying materiality of financial statement misstatements. The Company adopted this standard during the nine months ended July 31, 2007. The adoption of this accounting pronouncement did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

		In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007.

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

		The Company expects to adopt this standard at the beginning of the Company’s fiscal year ending October 31, 2009. The adoption of this accounting pronouncement is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

		In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” (“SFAS No. 159”), which permits companies to choose to measure certain financial instruments and other items at fair value that are not currently required to be measured at fair value. The Company expects to adopt this standard at the beginning of the Company’s fiscal year ending October 31, 2009. The Company has not determined the effect that the adoption of SFAS No. 159 will have on its consolidated financial statements.

3.		Stock-Based Compensation

		The Company accounts for stock-based compensation under the fair value recognition provisions of SFAS No. 123(R) “Share-Based Payment”. The Company uses the Black-Scholes option-pricing model to value compensation expense. Forfeitures are estimated at the date of grant based on historical rates and reduce the compensation expense recognized. The expected term of options granted is derived from historical data on employee exercises. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant. Expected volatility is based on the historical volatility of the Company’s stock. For the nine months ended July 31, 2007 and 2006, options were valued assuming a risk-free interest rate of 4.8% and 4.5%, respectively, volatility of 43.1% and 44.9%, respectively, zero dividend yield, and an expected life of 5.6 and 5.2 years, respectively. The weighted average fair value of options granted was $7.16 and $6.32 for the nine months ended July 31, 2007 and 2006, respectively. The Company records stock compensation expense using the graded vested method over the vesting period, which is generally three years. As of July 31, 2007, the Company had approximately $13.3 million of unrecognized compensation expense expected to be recognized over a weighted average period of approximately 2.2 years. Compensation expense was included as selling, general and administrative expense for the period.

		Changes in shares under option for the nine months ended July 31, 2007 are as follows:


				Weighted		Weighted		Aggregate
Dollar amounts in thousands,				Average		Average		Intrinsic
except per share amounts	Shares			Price		Life		Value
Outstanding, October 31, 2006		18,135,699		$	8.61
Granted		1,242,051			15.20
Exercised		(1,552,481	)		6.05			$	13,127
Canceled		(198,852	)		13.04


Outstanding, July 31, 2007		17,626,417		$	9.25		5.9	$	73,820


Options exercisable, July 31, 2007		12,667,614		$	7.50		5.0	$	71,406

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Changes in non-vested shares under option for the nine months ended July 31, 2007 are as follows:


				Weighted-
				Average Grant
	Shares			Date Fair Value
Non-vested, October 31, 2006		6,958,526		$	6.29
Granted		1,242,051			7.16
Vested		(3,217,691	)		5.92
Canceled		(24,083	)		6.89


Non-vested, July 31, 2007		4,958,803		$	6.72

		In March 2006, the Company’s shareholders approved the 2006 Restricted Stock Plan and in March 2007, the Company’s shareholders approved an amendment to the 2000 Stock Incentive Plan whereby restricted shares and restricted share units can be issued from such plan. Stock issued under these plans generally vests from three to five years and may have certain performance based acceleration features which allow for earlier vesting in the future.

		Changes in restricted stock for the nine months ended July 31, 2007 are as follows:


	Shares
Outstanding, October 31, 2006		800,000
Granted		40,000
Vested		—
Forfeited		(45,000	)

Outstanding, July 31, 2007		795,000

		Compensation expense is determined using the intrinsic value method and forfeitures are estimated at the date of grant based on historical rates and reduce the compensation expense recognized. The Company monitors the probability of meeting the restricted stock performance criteria and will adjust the amortization period as appropriate. As of July 31, 2007, there had been no acceleration of the amortization period. During the nine months ended July 31, 2007, the Company recognized approximately $0.5 million in related compensation expense. As of July 31, 2007, the Company had approximately $8.0 million of unrecognized compensation expense expected to be recognized over a weighted average period of approximately 2.2 years.

4.		Inventories

		Inventories consist of the following:


	July 31,		October 31,
In thousands	2007		2006
Raw materials	$	83,229	$	40,951
Work in-process		14,953		12,991
Finished goods		447,333		371,922

	$	545,515	$	425,864

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

5.		Intangible Assets and Goodwill

		A summary of intangible assets is as follows:


	July 31, 2007							October 31, 2006
						Net							Net
	Gross		Amorti-			Book		Gross		Amorti-			Book
In thousands	Amount		zation			Value		Amount		zation			Value
Amortizable trademarks	$	10,766	$	(4,023	)	$	6,743	$	7,965	$	(2,659	)	$	5,306
Amortizable licenses		11,436		(5,337	)		6,099		10,332		(4,047	)		6,285
Other amortizable intangibles		27,088		(8,133	)		18,955		27,379		(5,484	)		21,895
Non-amortizable trademarks		220,503		—			220,503		214,720		—			214,720

	$	269,793	$	(17,493	)	$	252,300	$	260,396	$	(12,190	)	$	248,206

		Certain trademarks and licenses 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 nine months ended July 31, 2007 and 2006 was $4.6 million and $3.7 million, respectively. Annual amortization expense is estimated to be approximately $5.7 million in the fiscal year ending October 31, 2007, approximately $4.2 million in the fiscal years ending October 31, 2008 through 2010 and $3.5 million in the fiscal year ending October 31, 2011.

		In connection with the planned acquisition of the minority interest in Roger Cleveland Golf Company, Inc., the Company’s U.S. golf equipment operations (see note 9), the Company remeasured the carrying value of related intangible assets. As a result, the Company recorded asset impairments of approximately $8.2 million which included a goodwill impairment of approximately $5.4 million, trademark impairments of approximately $2.4 million and patent impairments of approximately $0.4 million. These impairment charges are included in selling, general and administrative expense. In accordance with the Company’s existing accounting policy, it will conduct its annual goodwill impairment test during the three months ending October 31, 2007.

		Goodwill related to the Company’s operating segments is as follows:


	July 31,		October 31,
In thousands	2007		2006
Americas	$	127,045	$	132,674
Europe		277,826		255,558
Asia/Pacific		140,325		127,478

	$	545,196	$	515,710

		Goodwill increased approximately $29.5 million during the nine months ended July 31, 2007. Of this amount, approximately $8.9 million related to acquisitions of certain distributors and retail store locations, and $26.0 million related to the effect of changes in foreign currency exchange rates. This increase was offset by a $5.4 million decrease in goodwill related to the Cleveland Golf goodwill impairment.

6.		Accumulated Other Comprehensive Income

		The components of accumulated other comprehensive income include changes in fair value of derivative instruments qualifying as cash flow hedges, the fair value of interest rate swaps and foreign currency translation adjustments. The components of accumulated other comprehensive income, net of income taxes, are as follows:


	July 31,			October 31,
In thousands	2007			2006
Foreign currency translation adjustment	$	117,406		$	55,041
Loss on cash flow hedges and interest rate swaps		(10,930	)		(1,947	)

	$	106,476		$	53,094

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

7.		Segment 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 in the outdoor market of the sporting goods industry in which the Company designs, produces and distributes clothing, wintersports and golf equipment, footwear, accessories and related products. The Company operates in three segments, the Americas, Europe and Asia/Pacific. Costs that support all three operating segments, including trademark protection, trademark maintenance and licensing functions are part of corporate operations. Corporate operations also includes sourcing income and gross profit earned from the Company’s licensees. The Company’s largest customer accounted for approximately 4% of the Company’s net revenues for the nine months ended July 31, 2007.

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Information related to the Company’s operating segments is as follows:


	Three Months Ended July 31,
In thousands	2007			2006
Revenues, net:
Americas	$	335,013		$	277,413
Europe		212,696			190,998
Asia/Pacific		63,860			56,309
Corporate operations		1,187			1,134

	$	612,756		$	525,854


Gross profit:
Americas	$	138,795		$	119,075
Europe		111,266			101,401
Asia/Pacific		30,059			27,697
Corporate operations		1,096			602

	$	281,216		$	248,775


Operating income:
Americas	$	30,251		$	32,888
Europe		(10,733	)		(4,444	)
Asia/Pacific		4,662			3,999
Corporate operations		(18,371	)		(12,511	)

	$	5,809		$	19,932


	Nine Months Ended July 31,
In thousands	2007			2006
Revenues, net:
Americas	$	855,380		$	748,173
Europe		735,522			669,299
Asia/Pacific		175,012			162,898
Corporate operations		3,165			3,554

	$	1,769,079		$	1,583,924


Gross profit:
Americas	$	346,817		$	310,023
Europe		379,631			344,621
Asia/Pacific		81,328			75,554
Corporate operations		2,654			1,628

	$	810,430		$	731,826


Operating income:
Americas	$	40,200		$	58,508
Europe		37,090			51,159
Asia/Pacific		1,640			4,678
Corporate operations		(45,208	)		(38,505	)

	$	33,722		$	75,840


Identifiable assets:
Americas	$	909,268		$	824,703
Europe		1,281,178			1,120,009
Asia Pacific		351,927			319,806
Corporate operations		64,671			53,438

	$	2,607,044		$	2,317,956

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

8.		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.

		Derivatives that do not qualify for hedge accounting but are used by management to mitigate exposure to currency and interest rate risks are marked to fair value with corresponding gains or losses recorded in earnings. A loss of $0.6 million was recognized related to these types of derivatives during the nine months ended July 31, 2007. For all qualifying cash flow hedges, the changes in the fair value of the derivatives are recorded in other comprehensive income. As of July 31, 2007, the Company was hedging forecasted transactions expected to occur through October 2009. Assuming exchange rates at July 31, 2007 remain constant, $10.9 million of losses, net of tax, related to hedges of these transactions are expected to be reclassified into earnings over the next 27 months.

		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 management determines 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 nine months ended July 31, 2007, the Company reclassified into earnings a net loss of $4.7 million resulting from the expiration, sale, termination, or exercise of derivative contracts.

		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.

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

A summary of derivative contracts at July 31, 2007 is as follows:


	Notional
In thousands	Amount		Maturity	Fair Value
United States dollar	$	468,732	Aug 2007 – Oct 2009	$	(19,692	)
British pound		16,191	Aug 2007 – Oct 2007		275
Canadian dollar		8,439	Aug 2007 – Jan 2008		137
Interest rate swap		22,531	Apr 2008 – Sep 2009		(14	)

	$	515,893		$	(19,294	)

9.		Business Acquisitions

		In June 2007, the Company entered into a stock purchase agreement to acquire the minority interest of Roger Cleveland Golf Company, Inc. (“Cleveland Golf”), the Company’s U.S. golf equipment operations. The Company had previously acquired 63.63% of Cleveland Golf as part of the acquisition of Rossignol in July 31, 2005 and plans to acquire the remaining 36.37% of Cleveland Golf during the three months ending October 31, 2007. The purchase price for the remaining minority interest of Cleveland Golf, excluding transaction costs, will include a cash payment of $17.5 million at closing. The Company will account for this transaction as a step acquisition and will record 36.37% of any fair value adjustments related to the acquisition of the remaining portion of Cleveland Golf. The Company also agreed to terminate all consulting arrangements with the former minority interest holders of Cleveland Golf and recorded an expense of approximately $5.0 million in contract termination costs. These contract termination costs are expected to be paid upon closing of the minority interest acquisition during the three months ending October 31, 2007.

		Effective July 31, 2005, the Company acquired Skis Rossignol SA (“Rossignol”), a wintersports and golf equipment manufacturer. Rossignol offers a full range of wintersports equipment under the Rossignol, Dynastar, Lange, Look and Kerma brands, and also sells golf products under the Cleveland Golf and Never Compromise brands. The Company has included the operations of Rossignol in its results since August 1, 2005. The purchase price, excluding transaction costs, included cash of approximately $208.3 million, approximately 2.2 million restricted shares of the Company’s common stock, valued at $28.9 million, a deferred purchase price obligation of approximately $32.5 million, a liability of approximately $16.9 million for the mandatory purchase of approximately 0.7 million outstanding public shares of Rossignol representing less than 5% of the share capital of Rossignol, and a liability of approximately $2.0 million for the estimated fair value of 0.1 million fully vested Rossignol stock options. Transaction costs totaled approximately $16.0 million. The valuation of the common stock issued in connection with the acquisition was based on its quoted market price for the five days before and after the announcement date, discounted to reflect the estimated effect of its trading restrictions. The deferred purchase price obligation is expected to be paid in 2010 and will accrue interest equal to the 3-month euro interbank offered rate (“Euribor”) plus 2.35% (currently 6.6%). The mandatory purchase of the remaining Rossignol shares was required under French law as the Company had obtained over 95% of the outstanding shares of Rossignol through a combination of share purchases, including a public tender offer. The purchase of these shares was completed in the quarter ended October 31, 2005 and the Company now owns 100% of the shares in Rossignol. Upon the future exercise of the Rossignol stock options, the Company will purchase the newly issued shares from the Rossignol stock option holders, retaining 100% ownership in Rossignol. These Rossignol stock options are treated as variable for accounting purposes and subsequent changes in the value of these stock options are recorded as compensation expense in the Company’s consolidated statement of income. The Company acquired a majority interest in Cleveland Golf when it acquired Rossignol, but certain former owners of Cleveland Golf retained a minority interest of 36.37%. The Company and the minority owners entered into a put/call arrangement whereby the minority owners of Cleveland Golf can require the Company to buy all of their

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

		interest in Cleveland Golf after 4.5 years and the Company can buy their interest at its option after 7 years, each at a purchase price generally determined by reference to a multiple of Cleveland Golf’s annual profits and the Company’s price-earnings ratio. As a result of the minority interest and put/call arrangement, the Company accounted for Cleveland Golf as a step acquisition. In a step acquisition, where less than 100% of an entity is acquired, only a portion of the fair value adjustments are recorded in the acquiring company’s balance sheet equal to the percentage ownership in the acquired company. Based on this step acquisition accounting, the Company has recorded 63.63% of the fair value adjustments for Cleveland Golf in its balance sheet. In June 2007, the put/call arrangement was replaced by the stock purchase agreement discussed above. This transaction is expected to close during the three months ending October 31, 2007. Goodwill arises from synergies the Company believes can be achieved integrating Rossignol’s brands, products and operations with the Company’s, and is not expected to be deductible for income tax purposes. Amortizing intangibles consist of customer relationships, patents and athlete contracts with estimated useful lives of twenty, seven and two years, respectively. The acquired trademarks are non-amortizing as they have been determined to have indefinite lives.

		The following table summarizes the fair value of the assets acquired and the liabilities assumed at the date of the Rossignol acquisition in accordance with the purchase method of accounting:


	July 31,
In thousands	2005
Cash acquired	$	64,396
Accounts receivable		96,763
Inventory		232,525
Other current assets		21,548
Fixed assets		109,438
Deferred income taxes		3,572
Other assets		3,296
Amortizing intangible assets		20,400
Trademarks		94,700
Goodwill		292,168

Total assets acquired		938,806

Other liabilities		218,300
Long term debt and lines of credit		365,126
Deferred income taxes		40,657
Minority interest		10,109

Net assets acquired	$	304,614

		In connection with the acquisition of Rossignol, the Company has formulated the Rossignol Integration Plan (“the Plan”). As of July 31, 2007, the Company has recognized approximately $65.3 million of liabilities related to the Plan. See Note 11 for further description of the Plan.

		Effective August 1, 2005, the Company acquired 11 retail stores in Australia from Surfection Pty Ltd, Manly Boardriders Pty Ltd. and Sydney Boardriders Pty Ltd. (“Surfection”). The operations of Surfection have been included in the Company’s results since August 1, 2005. The initial purchase price, excluding transaction costs, included cash of approximately $21.4 million. Transaction costs totaled approximately $1.1 million. The sellers are entitled to additional payments ranging from zero to approximately $17.1 million if certain sales and margin targets are achieved through September 30, 2008. The amount of goodwill initially recorded for the transaction would increase if such contingent payments are made. Goodwill arises from synergies the Company believes can be achieved through Surfection’s retail expertise and store presence in key locations in Australia, and is not expected to be deductible for income tax purposes. Amortizing intangibles consist of non-compete agreements with estimated useful lives of five years.

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table summarizes the fair value of the assets acquired and liabilities assumed at the date of the Surfection acquisition in accordance with the purchase method of accounting:


	August 1,
In thousands	2005
Inventory and other current assets	$	3,239
Fixed assets		4,839
Amortizing intangible assets		450
Goodwill		21,393

Total assets acquired		29,921

Other liabilities		7,419

Net assets acquired	$	22,502

		The Company paid cash of approximately $34.3 million for business acquisitions during the nine months ended July 31, 2007, of which $20.2 million relates to a payment to the former owners of DC Shoes, Inc. related to the achievement of certain sales and earnings targets, and the remaining $14.1 million relates primarily to acquisitions of certain other distributors and retail store locations.

10.		Litigation, Indemnities and Guarantees

		The Company has been named in a class action lawsuit that alleges willful violation of the federal Fair and Accurate Credit Transaction Act based upon certain of the Company’s retail stores’ alleged electronic printing of receipts on which appeared more than the last five digits of customers’ credit or debit card number and/or the expiration date of such customers’ credit or debit card. The Company is currently unable to assess the extent of damages, if any, that could be awarded to the plaintiff class if it were to prevail. The Company intends to vigorously defend itself against the claims asserted. No provision has been made in the Company’s financial statements for the nine months ended July 31, 2007.

		The Company is also involved from time to time in legal claims involving trademark and intellectual property, licensing, employee relations and other matters incidental to its business. The Company believes the resolution of any such matter currently pending will not have a material adverse effect on its financial condition or results of operations.

		During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These include (i) intellectual property indemnities to the Company’s customers and licensees in connection with the use, sale and/or license of Company products, (ii) indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease, (iii) indemnities to vendors and service providers pertaining to claims based on the negligence or willful misconduct of the Company and (iv) indemnities involving the accuracy of representations and warranties in certain contracts. The duration of these indemnities, commitments and guarantees varies, and in certain cases, may be indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential for future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets.

11.		Rossignol Integration Plan and Pre-acquisition Restructuring Plan

		In connection with the acquisition of Rossignol, the Company has formulated the Rossignol Integration Plan (the “Plan”). The Plan covers the global operations of Rossignol and the Company’s existing businesses, and it includes the evaluation of facility relocations, nonstrategic business activities, redundant functions and other related items. As of July 31, 2007 the Company has recognized approximately $65.3 million of liabilities related to the Plan, including

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

		employee relocation and severance costs, moving costs, and other costs related primarily to the consolidation of Rossignol’s administrative headquarters in Europe, the consolidation of Rossignol’s European distribution, the consolidation and realignment of certain European manufacturing facilities, and the relocation of the Company’s wintersports equipment sales and distribution operations in the United States. These liabilities were included in the allocation of the purchase price for Rossignol in accordance with SFAS No. 141, “Business Combinations” and Emerging Issues Task Force (“EITF”) Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination”. As of July 31, 2007, the Company has also recognized approximately $1.4 million in inventory impairments relating to the realignment of its European manufacturing facilities. Costs that are not associated with the acquired company but relate to activities or employees of the Company’s existing operations are not significant and are charged to earnings. Certain land and facilities owned by the acquired company are expected to be sold during the next 12 months in connection with the Plan, while others are anticipated to be refinanced through sale-leaseback arrangements. Assets currently held for sale, primarily in France, total approximately $18.3 million at July 31, 2007. If the Company has overestimated these integration costs, the excess will reduce goodwill in future periods. If the Company has underestimated these integration costs, additional liabilities recognized will be recorded in earnings.

		Activity and liability balances recorded as part of the Plan are as follows:


				Facility
In thousands	Workforce			and Other			Total
Recorded in purchase price allocation	$	3,673		$	1,574		$	5,247
Adjustment to purchase price allocation		17,463			752			18,215
Cash payments		(17	)		(44	)		(61	)
Foreign currency translation		(83	)		(6	)		(89	)

Balance, October 31, 2005		21,036			2,276			23,312

Adjustment to purchase price allocation		36,733			5,130			41,863
Cash payments		(14,974	)		(2,555	)		(17,529	)
Foreign currency translation		2,689			90			2,779

Balance, October 31, 2006		45,484			4,941			50,425

Cash payments		(13,541	)		(2,597	)		(16,138	)
Foreign currency translation		2,889			533			3,422

Balance, July 31, 2007	$	34,832		$	2,877		$	37,709

		Prior to the acquisition of Rossignol, a restructuring plan was announced related to Rossignol’s French manufacturing facilities (“Pre-acquisition Restructuring Plan”). The costs associated with the Pre-acquisition Restructuring Plan consist of termination benefits achieved through voluntary early retirement and voluntary termination of certain employees.

		Activity and liability balances recorded as part of the Pre-acquisition Restructuring Plan are as follows:


In thousands	Workforce
Balance, October 31, 2006	$	1,587
Cash payments		(453	)
Foreign currency translation		100

Balance, July 31, 2007	$	1,234

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

12.		Condensed Consolidating Financial Information

		The Company has $400 million in publicly registered senior notes. Obligations under the Company’s senior notes are fully and unconditionally guaranteed by certain of its domestic subsidiaries. The Company is required to present condensed consolidating financial information for Quiksilver, Inc. and its domestic subsidiaries within the notes to the consolidated financial statements in accordance with the criteria established for parent companies in the SEC’s Regulation S-X, Rule 3-10(f). The following condensed consolidating financial information presents the results of operations, financial position and cash flows of Quiksilver Inc., its guarantor subsidiaries, its non-guarantor subsidiaries and the eliminations necessary to arrive at the information for the Company on a consolidated basis as of July 31, 2007 and October 31, 2006 and for the nine months ended July 31, 2007 and 2006. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. Due to the seasonality of the Company’s quarterly operations, management has applied the estimated consolidated annual effective income tax rate to both the guarantor and non-guarantor subsidiaries for interim reporting purposes. In the Company’s consolidated financial statements for the fiscal year ending October 31, 2007, management will apply the actual income tax rate to both the guarantor and non-guarantor subsidiaries. These interim tax rates may differ from the actual annual effective income tax rates for both the guarantor and non-guarantor subsidiaries.

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF INCOME
Nine Months Ended July 31, 2007


				Wholly-
				owned						Non-
	Quiksilver,			Guarantor			Cleveland			Guarantor
In thousands	Inc.			Subsidiaries			Golf			Subsidiaries		Elimination			Consolidated
Revenues, net	$	38		$	671,202		$	109,529		$	1,040,448	$	(52,138	)	$	1,769,079
Cost of goods sold		—			401,575			71,158			516,742		(30,826	)		958,649

Gross profit		38			269,627			38,371			523,706		(21,312	)		810,430

Selling, general and administrative expense		43,701			242,804			45,535			465,174		(20,506	)		776,708

Operating (loss) income		(43,663	)		26,823			(7,164	)		58,532		(806	)		33,722
Interest expense		32,062			4,319			2,503			6,791		—			45,675
Foreign currency loss		1,047			108			—			2,326		—			3,481
Minority interest and other expense		(2,204	)		(2	)		—			40		—			(2,166	)

(Loss) income before (benefit) provision for income taxes		(74,568	)		22,398			(9,667	)		49,375		(806	)		(13,268	)
(Benefit) provision for income taxes		(17,285	)		5,192			(2,241	)		11,258		—			(3,076	)

Net (loss) income	$	(57,283	)	$	17,206		$	(7,426	)	$	38,117	$	(806	)	$	(10,192	)

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF INCOME
Nine Months Ended July 31, 2006


				Wholly-
				owned					Non-
	Quiksilver,			Guarantor			Cleveland		Guarantor
In thousands	Inc.			Subsidiaries			Golf		Subsidiaries		Elimination			Consolidated
Revenues, net	$	418		$	608,367		$	108,980	$	914,147	$	(47,988	)	$	1,583,924
Cost of goods sold		—			367,138			59,106		456,320		(30,466	)		852,098

Gross profit		418			241,229			49,874		457,827		(17,522	)		731,826

Selling, general and administrative expense		36,270			199,510			44,320		393,036		(17,150	)		655,986

Operating (loss) income		(35,852	)		41,719			5,554		64,791		(372	)		75,840
Interest expense		28,300			2,317			2,473		3,327		—			36,417
Foreign currency (gain) loss		(674	)		(64	)		—		122		—			(616	)
Minority interest and other expense		694			—			—		201		—			895

(Loss) income before (benefit) provision for income taxes		(64,172	)		39,466			3,081		61,141		(372	)		39,144
(Benefit) provision for income taxes		(18,813	)		11,570			903		17,816		—			11,476

Net (loss) income	$	(45,359	)	$	27,896		$	2,178	$	43,325	$	(372	)	$	27,668

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET
At July 31, 2007


				Wholly-
				owned					Non-
	Quiksilver,			Guarantor		Cleveland			Guarantor
In thousands	Inc.			Subsidiaries		Golf			Subsidiaries			Elimination			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	(1,034	)	$	6,441	$	1,644		$	68,956		$	—		$	76,007
Trade accounts receivable, net		—			203,528		36,702			370,743			—			610,973
Other receivables		878			21,019		819			29,641			—			52,357
Income tax receivable		—			23,479		3,543			(16,004	)		—			11,018
Inventories		—			164,099		24,987			358,872			(2,443	)		545,515
Deferred income taxes		—			20,435		2,349			72,157			—			94,941
Prepaid expenses and other current assets		1,889			8,864		1,268			19,461			—			31,482

Total current assets		1,733			447,865		71,312			903,826			(2,443	)		1,422,293

Fixed assets, net		6,818			91,612		3,249			218,208			—			319,887
Intangible assets, net		2,588			80,294		1,481			167,937			—			252,300
Goodwill		—			157,932		2,472			384,792			—			545,196
Investment in subsidiaries		561,992			—		—			—			(561,992	)		—
Other assets		10,509			17,693		301			20,601			—			49,104
Assets held for sale		—			—		—			18,264			—			18,264

Total assets	$	583,640		$	795,396	$	78,815		$	1,713,628		$	(564,435	)	$	2,607,044


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Lines of credit	$	—		$	—	$	—		$	327,477		$	—		$	327,477
Accounts payable		1,004			122,940		9,678			171,445			—			305,067
Accrued liabilities		29,254			18,395		5,407			122,989			—			176,045
Current portion of long-term debt		—			—		—			20,272			—			20,272
Intercompany balances		131,426			38,173		37,772			(207,371	)		—			—

Total current liabilities		161,684			179,508		52,857			434,812			—			828,861

Long-term debt, net of current portion		400,000			153,950		—			162,951			—			716,901
Deferred income taxes and other long-term liabilities		—			28,650		(353	)		73,071			—			101,368

Total liabilities		561,684			362,108		52,504			670,834			—			1,647,130

Minority interest		—			9,982		—			—			—			9,982

Stockholders’/invested equity		21,956			423,306		26,311			1,042,794			(564,435	)		949,932

Total liabilities and stockholders’ equity	$	583,640		$	795,396	$	78,815		$	1,713,628		$	(564,435	)	$	2,607,044

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET
At October 31, 2006


			Wholly-
			owned					Non-
	Quiksilver,		Guarantor		Cleveland			Guarantor
In thousands	Inc.		Subsidiaries		Golf			Subsidiaries			Elimination			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	8	$	1,537	$	1,855		$	33,434		$	—		$	36,834
Trade accounts receivable, net		—		205,853		36,987			478,722			—			721,562
Other receivables		1,190		12,593		708			20,833			—			35,324
Inventories		—		144,740		27,122			255,636			(1,634	)		425,864
Deferred income taxes		—		14,459		2,349			67,864			—			84,672
Prepaid expenses and other current assets		1,703		9,968		1,953			15,302			—			28,926

Total current assets		2,901		389,150		70,974			871,791			(1,634	)		1,333,182

Fixed assets, net		6,343		83,495		3,801			188,695			—			282,334
Intangible assets, net		2,452		79,197		3,150			163,407			—			248,206
Goodwill		—		163,910		2,472			349,328			—			515,710
Investment in subsidiaries		561,992		—		—			—			(561,992	)		—
Other assets		10,909		4,730		274			30,041			—			45,954
Assets held for sale		—		3,500		—			18,342			—			21,842

Total assets	$	584,597	$	723,982	$	80,671		$	1,621,604		$	(563,626	)	$	2,447,228


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Lines of credit	$	—	$	209	$	—		$	315,682		$	—		$	315,891
Accounts payable		2,303		89,181		3,525			125,168			—			220,177
Accrued liabilities		13,535		43,691		6,085			137,805			(29	)		201,087
Current portion of long-term debt		—		4,305		—			20,316			—			24,621
Income taxes payable		—		14,277		1,343			(12,810	)		—			2,810
Intercompany balances		72,386		17,351		37,766			(127,503	)		—			—

Total current liabilities		88,224		169,014		48,719			458,658			(29	)		764,586
Long-term debt, net of current portion		433,701		122,150		—			133,839			—			689,690
Deferred income taxes and other long-term liabilities		—		25,773		(353	)		75,212			—			100,632

Total liabilities		521,925		316,937		48,366			667,709			(29	)		1,554,908

Minority interest		—		11,193		—			—			—			11,193

Stockholders’/invested equity		62,672		395,852		32,305			953,895			(563,597	)		881,127

Total liabilities and stockholders’ equity	$	584,597	$	723,982	$	80,671		$	1,621,604		$	(563,626	)	$	2,447,228

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended July 31, 2007


										Non-
				Guarantor			Cleveland			Guarantor
In thousands	Quiksilver, Inc.			Subsidiaries			Golf			Subsidiaries			Consolidated
Cash flows from operating activities:
Net (loss) income	$	(57,283	)	$	17,206		$	(7,426	)	$	37,311		$	(10,192	)
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		447			14,618			1,411			36,309			52,785
Stock-based compensation		11,276			—			—			—			11,276
Loss on disposal of fixed assets		—			16			—			396			412
Foreign currency loss		431			—			—			563			994
Asset impairment		—			6,707			1,456			—			8,163
Minority interest and equity in earnings		—			(2,459	)		—			352			(2,107	)
Changes in operating assets and liabilities:
Trade accounts receivable		—			2,325			285			137,050			139,660
Other receivables		220			(9,403	)		(110	)		(6,701	)		(15,994	)
Inventories		—			(19,011	)		2,135			(80,043	)		(96,919	)
Prepaid expenses and other current assets		(186	)		1,134			684			(3,313	)		(1,681	)
Other assets		400			216			(30	)		(2,107	)		(1,521	)
Accounts payable		(1,298	)		33,569			6,153			39,395			77,819
Accrued liabilities		16,265			(173	)		(678	)		(42,009	)		(26,595	)
Income taxes payable		—			(39,788	)		(4,886	)		31,812			(12,862	)

Net cash (used in) provided by operating activities		(29,728	)		4,957			(1,006	)		149,015			123,238

Cash flows from investing activities:
Proceeds from the sale of properties and equipment		—			4,463			—			7,210			11,673
Capital expenditures		(1,058	)		(27,132	)		(643	)		(49,973	)		(78,806	)
Business acquisitions, net of cash acquired		(752	)		(20,206	)		—			(13,352	)		(34,310	)

Net cash used in investing activities		(1,810	)		(42,875	)		(643	)		(56,115	)		(101,443	)

Cash flows from financing activities:
Borrowings on lines of credit		—			—			4,000			114,734			118,734
Payments on lines of credit		—			(209	)		(4,000	)		(116,109	)		(120,318	)
Borrowings on long-term debt		—			112,950			—			9,009			121,959
Payments on long-term debt		—			(85,005	)		—			(26,873	)		(111,878	)
Stock option exercises, employee stock purchases and tax benefit on option exercises		12,415			—			—			—			12,415
Intercompany		18,081			15,086			1,438			(34,605	)		—

Net cash provided by (used in) financing activities		30,496			42,822			1,438			(53,844	)		20,912

Effect of exchange rate changes on cash		—			—			—			(3,534	)		(3,534	)

Net (decrease) increase in cash and cash equivalents		(1,042	)		4,904			(211	)		35,522			39,173
Cash and cash equivalents, beginning of period		8			1,537			1,855			33,434			36,834

Cash and cash equivalents, end of period	$	(1,034	)	$	6,441		$	1,644		$	68,956		$	76,007

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Nine Months Ended July 31, 2006


										Non-
				Guarantor			Cleveland			Guarantor
In thousands	Quiksilver, Inc.			Subsidiaries			Golf			Subsidiaries			Consolidated
Cash flows from operating activities:
Net (loss) income	$	(45,359	)	$	27,896		$	2,178		$	42,953		$	27,668
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		434			14,519			1,522			31,106			47,581
Stock-based compensation		16,056			—			—			—			16,056
Loss on sale of fixed assets		—			25			—			1,291			1,316
Foreign currency (gain) loss		(33	)		14			—			(210	)		(229	)
Minority interest and equity in earnings		695			—			—			732			1,427
Changes in operating assets and liabilities:
Trade accounts receivable		—			22,084			(96	)		102,959			124,947
Other receivables		143			499			(1,044	)		(4,263	)		(4,665	)
Inventories		—			(34,052	)		(6,774	)		(72,499	)		(113,325	)
Prepaid expenses and other current assets		1,108			(1,694	)		1,244			(4,625	)		(3,967	)
Other assets		329			116			(299	)		(8,823	)		(8,677	)
Accounts payable		153			12,080			(1,087	)		11,413			22,559
Accrued liabilities		1,925			(3,957	)		(1,813	)		(26,039	)		(29,884	)
Income taxes payable		—			(1,276	)		1,714			(27,501	)		(27,063	)

Net cash (used in) provided by operating activities		(24,549	)		36,254			(4,455	)		46,494			53,744

Cash flows from investing activities:
Proceeds from the sale of properties and equipment		—			12			—			2,408			2,420
Capital expenditures		(2,257	)		(24,066	)		(1,278	)		(33,720	)		(61,321	)
Business acquisitions, net of cash acquired		(2,998	)		(5,000	)		—			(26,850	)		(34,848	)

Net cash used in investing activities		(5,255	)		(29,054	)		(1,278	)		(58,162	)		(93,749	)

Cash flows from financing activities:
Borrowings on lines of credit		—			172			—			245,500			245,672
Payments on lines of credit		—			(9,948	)		(5,000	)		(185,972	)		(200,920	)
Borrowings on long-term debt		(1,266	)		68,450			4,000			58,521			129,705
Payments on long-term debt		—			(29,189	)		(4,327	)		(96,591	)		(130,107	)
Proceeds from stock option exercises		6,491			—			—			—			6,491
Intercompany		22,858			(52,979	)		13,857			16,264			—

Net cash provided by (used in) financing activities		28,083			(23,494	)		8,530			37,722			50,841
Effect of exchange rate changes on cash		86			(867	)		—			(1,311	)		(2,092	)

Net (decrease) increase in cash and cash equivalents		(1,635	)		(17,161	)		2,797			24,743			8,744
Cash and cash equivalents, beginning of period		1,177			20,816			986			52,619			75,598

Cash and cash equivalents, end of period	$	(458	)	$	3,655		$	3,783		$	77,362		$	84,342

ROGER CLEVELAND GOLF COMPANY, INC.

Following are the financial statements of Roger Cleveland Golf Company, Inc. Roger Cleveland Golf Company, Inc. is a guarantor subsidiary of Quiksilver Inc.’s publicly registered senior notes. As Roger Cleveland Golf Company, Inc. is not wholly owned by Quiksilver, Inc., these condensed financial statements are being furnished pursuant to Rule 10-01 of Regulation S-X.


Roger Cleveland Golf Company, Inc. Condensed Statement of Operations and Comprehensive Income/Loss (Unaudited) Three Months Ended July 31, 2007 and 2006			26

Roger Cleveland Golf Company, Inc. Condensed Statement of Operations and Comprehensive Income/Loss (Unaudited) Nine Months Ended July 31, 2007 and 2006			27

Roger Cleveland Golf Company, Inc. Condensed Balance Sheets (Unaudited) July 31, 2007 and October 31, 2006			28

Roger Cleveland Golf Company, Inc. Condensed Statements of Cash Flows (Unaudited) Nine Months Ended July 31, 2007 and 2006			29

Roger Cleveland Golf Company, Inc. Notes to Condensed Financial Statements (Unaudited)			30

ROGER CLEVELAND GOLF COMPANY, INC.

CONDENSED BALANCE SHEETS

(Unaudited)


	July 31,		October 31,
In thousands (except share amounts)	2007		2006
ASSETS
Current assets:
Cash and cash equivalents	$	1,644	$	1,855
Accounts receivable, less allowance for bad debts of $757 (2007) and $1,000 (2006)		36,702		36,987
Income taxes receivable		3,543		—
Inventories		24,987		27,122
Deferred income taxes		2,349		2,349
Prepaid expenses and other current assets		2,087		2,661
Due from affiliates		8,282		8,591


Total current assets		79,594		79,565

Equipment and leasehold improvements less accumulated depreciation and amortization of $7,062 and $6,036		3,249		3,801
Other intangible assets, net		1,481		3,150
Goodwill		2,472		2,472
Deferred income taxes		353		353
Other assets		301		274

Total assets	$	87,450	$	89,615


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Line of credit	$	—	$	—
Accounts payable		9,678		3,525
Accrued payroll and benefits		2,142		2,677
Other accrued expenses		3,265		3,408
Due to affiliates		2,054		1,357
Income taxes payable		—		1,343


Total current liabilities		17,139		12,310

Due to affiliates		44,000		45,000


Total liabilities		61,139		57,310

Stockholders’ equity:
Common stock no par value – 500,000 shares authorized; 290,224 shares issued and outstanding		22,000		22,000
Retained earnings		4,311		10,305


Total stockholders’ equity		26,311		32,305


Total liabilities and stockholders’ equity	$	87,450	$	89,615

See notes to condensed financial statements.

ROGER CLEVELAND GOLF COMPANY, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended July 31,
In thousands	2007			2006
Cash flows from operating activities:
Net (loss) income	$	(5,994	)	$	1,910
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Depreciation and amortization		1,411			1,522
Asset impairment		1,456			—
Changes in assets and liabilities:
Accounts receivable, net		285			(96	)
Inventories		2,135			(6,774	)
Prepaid expenses and other current assets		574			200
Other assets		(30	)		(299	)
Accounts payable		6,153			(1,087	)
Due from affiliates, net		1,006			(1,143	)
Accrued expenses		(678	)		(1,813	)
Income taxes payable		(4,886	)		1,982


Net cash provided by (used in) operating activities		1,432			(5,598	)

Cash flows from investing activities:
Purchase of equipment and leasehold improvements		(643	)		(1,278	)


Net cash used in investing activities		(643	)		(1,278	)

Cash flows from financing activities:
Borrowings on lines of credit		4,000			4,000
Payments on lines of credit		(4,000	)		(5,000	)
Proceeds from affiliate loans, net of repayments		(1,000	)		15,000
Payments of long-term debt		—			(4,327	)


Net cash (used in) provided by financing activities		(1,000	)		9,673

Net (decrease) increase in cash		(211	)		2,797
Cash, beginning of period		1,855			986

Cash, end of period	$	1,644		$	3,783


Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest	$	2,910		$	2,522

Income taxes	$	1,213		$	(838	)

See notes to condensed financial statements.

ROGER CLEVELAND GOLF COMPANY, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

1.		Basis of Presentation

		The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statement presentation.

		Roger Cleveland Golf Company, Inc. (the “Company”) manufactures, markets, and distributes golf clubs and related accessories. The Company is owned 64.63% by certain subsidiaries of Quiksilver, Inc. (the “Parent”) and 36.37% by a group of individuals. The Parent acquired its majority interest in the Company on July 31, 2005, and as a result, the financial statements do not include financial statements for any periods prior to July 31, 2005. The Parent’s new basis is not reflected in the accompanying financial statements as these financial statements have been prepared on the carryover basis of accounting.

		The Parent has $400 million in publicly registered senior notes. In July 2006, the Company became a guarantor subsidiary of these senior notes, fully and unconditionally guaranteeing the senior note indebtedness of the Parent. Accordingly, the accompanying financial statements are being included in the Parent’s Form 10-Q in accordance with the SEC’s Regulation S-X, Rule 3-10. The inclusion of the Company’s financial statements in the Parent’s filings is expected to cease due to the Parent’s acquisition of the remaining minority interest in the Company. This acquisition is expected to close during the three months ending October 31, 2007 (see note 3).

2.		New Accounting Pronouncements

		In May 2005, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections,” (“SFAS No. 154”) which replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS No. 154 applies to all voluntary changes in accounting principles and requires retrospective application (a term defined by the statement) to prior periods’ financial statements, unless it is impracticable to determine the effect of a change. It also applies to changes required by an accounting pronouncement that does not include specific transition provisions. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company adopted this standard during the nine months ended July 31, 2007. The adoption of this standard did not have a material impact on the Company’s financial condition, results of operations or cash flows.

		In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”). This interpretation clarifies the application of SFAS No. 109, “Accounting for Income Taxes,” by defining criteria that an individual tax position must meet for any part of the benefit of that position to be recognized in the Company’s financial statements and also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company expects to adopt FIN 48 on November 1, 2007. The Company is currently assessing the impact the adoption of FIN 48 will have on its financial position and results of operations.

		In September 2006, the Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides interpretive guidance on the SEC’s views regarding the process of quantifying materiality of financial statement misstatements. The Company adopted this standard during the nine months ended July 31, 2007. The adoption of this accounting pronouncement did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

ROGER CLEVELAND GOLF COMPANY, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

		In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company expects to adopt this standard at the beginning of the Company’s fiscal year ending October 31, 2009. The adoption of this accounting pronouncement is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

		In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” (“SFAS No. 159”), which permits companies to choose to measure certain financial instruments and other items at fair value that are not currently required to be measured at fair value. The Company expects to adopt this standard at the beginning of the Company’s fiscal year ending October 31, 2009. The Company has not determined the effect that the adoption of SFAS No. 159 will have on its consolidated financial statements.

3.		Intangible Assets

		The Company’s intangible assets consist of the following:


	July 31, 2007							October 31, 2006
	Gross		Amorti-							Amorti-
In thousands	Amount		zation			Net		Amount		zation			Net
Tradenames and trademarks	$	800	$	—		$	800	$	3,100	$	(689	)	$	2,411
Patents		1,813		(1,546	)		267		1,643		(1,371	)		272
Customer relationships		700		(286	)		414		700		(233	)		467

	$	3,313	$	(1,832	)	$	1,481	$	5,443	$	(2,293	)	$	3,150

		In June 2007, the Parent entered into a stock purchase agreement to acquire the 36.37% minority interest in the Company. The transaction is expected to close during the three months ending October 31, 2007. As a result of this planned transaction, the Company remeasured the carrying values of related intangible assets. As a result, the Company recorded an impairment charge of approximately $1.5 million during the three months ended July 31, 2007.

		Amortization expense of intangible assets for the nine months ended July 31, 2007 and 2006 was approximately $0.4 million and $0.5 million, respectively. Annual amortization expense for the fiscal year ending October 31, 2007 is estimated to be $0.5 million. Annual amortization expense for fiscal years ending October 31, 2008 through 2011 is estimated to be $0.1 million.

4.		Inventories

		Inventories consist of the following:


	July 31,		October 31,
In thousands	2007		2006
Raw materials	$	14,071	$	12,287
Work in process		190		41
Finished goods		10,726		14,794

	$	24,987	$	27,122

ROGER CLEVELAND GOLF COMPANY, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

5.		Related Party Transactions

		Amounts due to affiliates consist of the following:


	July 31,			October 31,
In thousands	2007			2006
Affiliated debt due to Quiksilver Americas, Inc.	$	44,000		$	45,000
Amounts due to Parent and other Parent subsidiaries		2,054			1,357
Amounts due from Parent and other Parent subsidiaries		(8,282	)		(8,591	)

	$	37,772		$	37,766

		Interest expense on borrowings from Quiksilver Americas, Inc. was approximately $2.4 million for the nine months ended July 31, 2007 and 2006. The weighted average interest rate on these borrowings was 6.8% at July 31, 2007. This interest rate corresponds to the rate at which Quiksilver Americas, Inc. borrowed these funds, on the Company’s behalf, under the shared credit facility. Sales to Quiksilver, Inc. subsidiaries amounted to $18.8 million and $11.4 million for the nine months ended July 31, 2007 and 2006, respectively.

6.		Indemnities, Guarantees and Litigation

		During its normal course of business, the Company has made certain indemnities, commitments, and guarantees under which it may be required to make payments in relation to certain transactions. These include (i) intellectual property indemnities to the Company’s customers and licensees in connection with the use, sales, and/or license of Company products; (ii) indemnities to vendors and service providers pertaining to claims based on the negligence or willful misconduct of the Company; (iii) indemnities involving the accuracy of representations and warranties in certain contracts; (iv) indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of California; and (v) certain real estate leases under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises. In addition, the Company has made a contractual commitment to an employee providing for severance payments upon the occurrence of certain prescribed events. The duration of these indemnities, commitments, and guarantees varies and, in certain cases, may be indefinite. The majority of these indemnities, commitments, and guarantees do not provide for any limitation of the maximum potential for future payments the Company could be obligated to make. Historically, the Company has not been obligated to make significant payments for these obligations, and no liabilities have been recorded for these indemnities, commitments, and guarantees in the accompanying balance sheets.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context indicates otherwise, when we refer to “Quiksilver,” “we,” “our” or the “Company” in this Form 10-Q, we are referring to Quiksilver, Inc. and its subsidiaries on a consolidated basis. You should read the following discussion and analysis in conjunction with our unaudited condensed consolidated financial statements and related notes thereto contained elsewhere in this report. The information contained in this report is not a complete description of our business or the risks associated with an investment in our securities. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended October 31, 2006 and subsequent reports on Form 8-K which discuss our business and related risks in greater detail and should be considered carefully before deciding to purchase, hold or sell our securities.

We began operations in 1976 as a California company making boardshorts for surfers in the United States under a license agreement with the Quiksilver brand founders in Australia. Our product offering expanded in the 1980s as we grew our distribution channels. After going public in 1986 and purchasing the rights to the Quiksilver brand in the United States from our Australian licensor, we further expanded our product offerings and began to diversify. In 1991, we acquired the European licensee of Quiksilver and introduced Roxy, our surf brand for teenage girls. We also expanded demographically in the 1990s by adding products for boys, girls, toddlers and men, and we introduced our proprietary retail store concept, Boardriders Clubs, which displays the heritage and products of Quiksilver and Roxy. In 2000, we acquired the international Quiksilver and Roxy trademarks, and in 2002, we acquired our licensees in Australia and Japan. In 2004, we acquired DC Shoes, Inc. to expand our presence in action sports-inspired footwear. In July 2005, we acquired Skis Rossignol, S.A., a wintersports and golf equipment manufacturer. Rossignol offers a full range of wintersports equipment under the Rossignol, Dynastar, Lange, Look and Kerma brands, and also sells golf products under the Cleveland Golf and Never Compromise brands. Today our products are sold throughout the world, primarily in surf shops, snow shops, skate shops and specialty stores.

Over the past 36 years, Quiksilver has been established as a leading global brand representing the casual, youth lifestyle associated with boardriding sports. With our acquisition of Rossignol, we added a collection of leading ski equipment brands to our company that we believe will be the foundation for a full range of technical ski apparel, sportswear and accessories. Also, as part of our acquisition of Rossignol, we acquired a majority interest in Roger Cleveland Golf Company, Inc., a leading producer of wedges and golf clubs in the United States. We expect to acquire the remaining minority interest in Cleveland Golf during the three months ending October 31, 2007.

Since we acquired Rossignol, our business has become more seasonal. Our revenues and operating profits are generally higher in our fourth and first fiscal quarters ending October 31 and January 31, which affect our consolidated quarterly results. In addition, our working capital and debt levels can are generally higher during our third and fourth fiscal quarters ending July 31 and October 31.

We operate in the outdoor market of the sporting goods industry in which we design, produce and distribute branded apparel, wintersports and golf equipment, footwear, accessories and related products. We operate in three segments, the Americas, Europe and Asia/Pacific. The Americas segment includes revenues primarily from the U.S. and Canada. The European segment includes revenues primarily from Western Europe. The Asia/Pacific segment includes revenues primarily from Australia, Japan, New Zealand and Indonesia.

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. If we are unable to remain competitive and maintain our consumer loyalty, our business will be negatively affected. We believe that our historical success is due to the development of an experienced team of designers, artists, sponsored athletes, engineers, technicians, researchers, merchandisers, pattern makers and contractors. Our team and the heritage and current strength of our brands has helped us remain competitive in our markets. Our success in the future will depend on our ability to continue to design products that are acceptable to the marketplace and competitive in the areas of quality, brand image, technical specifications, distribution methods, price, customer service and intellectual property protection.

Results of Operations

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


	Three Months Ended						Nine Months Ended
	July 31,						July 31,
	2007			2006			2007			2006
Statement of Income data
Revenues, net		100.0	%		100.0	%		100.0	%		100.0	%
Gross profit		45.9			47.3			45.8			46.2
Selling, general and administrative expense		44.9			43.5			43.9			41.4

Operating income		1.0			3.8			1.9			4.8

Interest expense		2.5			2.3			2.6			2.3
Foreign currency and other expense		0.1			0.1			0.0			0.0

(Loss) income before (benefit) provision for income taxes		(1.6	)		1.4			(0.7	)		2.5

(Benefit) provision for income taxes		(0.3	)		0.4			(0.1	)		0.8

Net (loss) income		(1.3	)%		1.0	%		(0.6	)%		1.7	%


Other data
EBITDA ⁽¹⁾		6.0	%		7.6	%		6.0	%		8.8	%


⁽¹⁾		EBITDA is defined as net income before (i) interest expense, (ii) income tax expense, (iii) depreciation and amortization, (iv) non-cash stock-based compensation expense and (v) asset impairments. EBITDA is not defined under generally accepted accounting principles (“GAAP”), and it may not be comparable to similarly titled measures reported by other companies. We use EBITDA, along with other GAAP measures, as a measure of profitability because EBITDA helps us to compare our performance on a consistent basis by removing from our operating results the impact of our capital structure, the effect of operating in different tax jurisdictions, the impact of our asset base, which can differ depending on the book value of assets and the accounting methods used to compute depreciation and amortization, and the effect of non-cash stock-based compensation expense. We believe it is useful to investors for the same reasons. EBITDA has limitations as a profitability measure in that it does not include the interest expense on our debts, our provisions for income taxes, the effect of our expenditures for capital assets and certain intangible assets, the effect of non-cash compensation expense and the effect of asset impairments. Following is a reconciliation of net income to EBITDA:


	Three Months Ended					Nine Months Ended
	July 31,					July 31,
	2007			2006		2007			2006
Net (loss) income	$	(7,867	)	$	5,336	$	(10,192	)	$	27,668
(Benefit) provision for income taxes		(1,703	)		1,858		(3,076	)		11,476
Interest expense		15,332			11,877		45,675			36,417
Depreciation and amortization		18,669			16,229		52,785			47,581
Non-cash stock compensation expense		4,052			4,732		13,199			16,056
Non-cash asset impairments		8,163			—		8,163			—

EBITDA	$	36,646		$	40,032	$	106,554		$	139,198

Three Months Ended July 31, 2007 Compared to Three Months Ended July 31, 2006

Our total net revenues for the three months ended July 31, 2007 increased 17% to $612.8 million from $525.8 million in the comparable period of the prior year. Revenues in the Americas increased 21% to $335.0 million for the three months ended July 31, 2007 from $277.4 million in the comparable period of the prior year, and European revenues increased 11% to $212.7 million from $191.0 million for those same periods. As measured in euros, Quiksilver Europe’s primary functional currency, revenues in the current year’s quarter increased 4% compared to the prior year. Asia/Pacific revenues increased 13% to $63.9 million in the three months ended July 31, 2007 from $56.3 million in the comparable period of the prior year. In Australian dollars, Quiksilver Asia/Pacific’s primary functional currency, Asia/Pacific revenues increased 1% from the comparable period of the prior year.

Our net revenues can be categorized into two general classifications: apparel brands and equipment brands. Our apparel brand revenue classification includes Quiksilver, Roxy, DC and our other apparel brands of Hawk, Gotcha, Raisins, Leilani and Radio Fiji. Our equipment brand revenue classification includes our Rossignol and other wintersports brands, comprising Rossignol, Dynastar, Look, Lange, Kerma, Lib Technologies, Gnu and Bent Metal, along with our golf brands of Cleveland Golf, Never Compromise and Fidra.

Our apparel brand revenues for the three months ended July 31, 2007 increased 18% to $524.8 million from $446.4 million for the three months ended July 31, 2006. This increase resulted from strength in our DC, Quiksilver and Roxy brands, partially offset by a slight decrease in our other apparel brand revenues. DC’s growth was primarily in footwear and, to a lesser extent, its apparel and accessories products. Quiksilver and Roxy brand revenue growth came primarily from growth in apparel and, to a lesser extent, accessories and footwear products. Our equipment brand revenues increased 11% during the three months ended July 31, 2007 to $86.8 million from $78.3 million for the three months ended July 31, 2006. This increase in revenues came from our golf equipment brand business which was slightly offset by our wintersports equipment brand revenues. The increase in golf equipment brand revenues is primarily related to the clearance of prior model inventory. Our wintersports equipment brand revenues were down slightly as a result of lower sales offset by the positive effect of foreign currency exchange rates. Preorders of our wintersports equipment products for the upcoming 2007/2008 winter season, to be shipped during the three months ending October 31, 2007, are expected to be lower than the prior year’s season due to decreased market demand caused by the lack of snowfall in many parts of Europe and the United States in the 2006/2007 winter season.


	Three Months Ended July 31,
	2007						2006
			Equip-						Equip-
	Apparel		ment				Apparel		ment
In thousands	Brands		Brands		Total		Brands		Brands		Total
Americas	$	279,829	$	55,184	$	335,013	$	233,112	$	44,301	$	277,413
Europe		185,012		27,684		212,696		160,698		30,300		190,998
Asia/Pacific		59,936		3,924		63,860		52,577		3,732		56,309
Corporate operations		¾		¾		1,187		¾		¾		1,134

	$	524,777	$	86,792	$	612,756	$	446,387	$	78,333	$	525,854

In the Americas, our apparel brand revenues for the three months ended July 31, 2007 increased 20%, while our equipment brand revenues increased 25% compared to the three months ended July 31, 2006. In Europe, our apparel brand revenues for the three months ended July 31, 2007 increased 15% and our equipment brand revenues decreased 9% compared to the three months ended July 31, 2006. In Asia/Pacific, our apparel brand revenues for the three months ended July 31, 2007 increased 14%, while our equipment brand revenues increased 5% compared to the three months ended July 31, 2006.

Our consolidated gross profit margin for the three months ended July 31, 2007 decreased to 45.9% from 47.3% in the comparable period of the prior year. The Americas’ gross profit margin decreased to 41.4% from 42.9%, while the European gross profit margin decreased to 52.3% from 53.1%, and the Asia/Pacific gross profit margin decreased to 47.1% from 49.2% for those same periods. The decrease in the Americas’ gross profit margin was primarily due to lower margins from our equipment brands. Our European gross profit margin decrease was primarily due to sales from our lower margin equipment brands. In Asia/Pacific, the gross profit margin decrease was primarily due to lower margins in our apparel brands in Australia and, to a lesser extent, lower margins from our equipment brands.

Selling, general and administrative expense (“SG&A”) for the three months ended July 31, 2007 increased 20% to $275.4 million from $228.8 million in the comparable period of the prior year. Americas’ SG&A increased 26% to $108.5 million from $86.2 million, while European SG&A increased 15% to $122.0 million from $105.8 million and Asia/Pacific SG&A increased 7% to $25.4 million from $23.7 million for those same periods. As a percentage of revenues, SG&A increased to 44.9% for the three months ended July 31, 2007 from 43.5% for the three months ended July 31, 2006. The consolidated increase in SG&A as a percentage of revenue was primarily caused by intangible asset impairment charges and contract termination costs, the costs of additional retail stores and increased distribution costs. As a result of our planned acquisition of the remaining minority interest in Cleveland Golf, we recorded intangible asset impairment charges of approximately $8.2 million during the three months ended July 31, 2007. We also agreed to terminate all consulting arrangements with the former minority interest holder of Cleveland Golf and recorded an expense of approximately $5.0 million in contract termination costs during this period.

Interest expense for the three months ended July 31, 2007 increased to $15.3 million from $11.9 million in the three months ended July 31, 2006. This increase was primarily due to higher borrowing levels on our lines of credit to finance our increased working capital needs and, to a lesser extent, higher interest rates on our variable-rate debt in Europe and the United States.

Our foreign currency loss amounted to $0.1 million for the three months ended July, 31, 2007 compared to a loss of $0.4 million in the comparable period of the prior year. This loss resulted primarily from the foreign exchange effect of certain non-U.S. dollar denominated liabilities.

The effective income tax rate for the three months ended July 31, 2007 was 17.8% compared to 25.8% for the three months ended July 31, 2006. Our estimated annual effective income tax rate is lower than the prior period’s annual rate primarily due to the higher impact of certain beneficial items included in our tax rate.

Our net loss for the three months ended July 31, 2007 was $7.9 million or $0.06 per share on a diluted basis compared to net income of $5.3 million or $0.04 per share on a diluted basis in the comparable period of the prior year. Basic net loss per share was $0.06 per share for the three months ended July 31, 2007 compared to net income of $0.04 per share in the comparable period of the prior year. EBITDA decreased 9% to $36.6 million from $40.0 million for those same periods.

Nine Months Ended July 31, 2007 Compared to Nine Months Ended July 31, 2006

Our total net revenues for the nine months ended July 31, 2007 increased 12% to $1,769.1 million from $1,583.9 million in the comparable period of the prior year. Revenues in the Americas increased 14% to $855.4 million for the nine months ended July 31, 2007 from $748.2 million in the comparable period of the prior year, and European revenues increased 10% to $735.5 million from $669.3 million for those same periods. As measured in euros, European revenues in the first nine months of the current year increased 1% as compared to the prior year. Asia/Pacific revenues increased 7% to $175.0 million in the nine months ended July 31, 2007 compared to $162.9 million in the comparable period of the prior year. In Australian dollars, Asia/Pacific revenues decreased 1% over the comparable period of the prior year.

Our apparel brand revenues for the nine months ended July 31, 2007 increased 19% to $1,452.5 million from $1,224.1 million for the nine months ended July 31, 2006. This increase resulted from strength in our Quiksilver, Roxy and DC brands. Quiksilver and Roxy brand revenue growth came primarily from apparel and, to a lesser extent, footwear and accessories products. DC’s growth was primarily in footwear and, to a lesser extent, its apparel and accessories products. Our equipment brand revenues decreased 12% during the nine months ended July 31, 2007 to $313.4 million from $356.2 million for the nine months ended July 31, 2006. This decrease came from our wintersports equipment brands partially offset by a slight increase in our golf equipment brand revenue. We shipped wintersports equipment earlier during the 2006/2007 winter season compared to the year before, which resulted in higher revenues in the fourth quarter of our last full fiscal year ended October 31, 2006 compared to the comparable period of the prior year and lower revenues in the three months ended January 31, 2007 compared to the comparable period of the prior year. Between February and July 2007, our wintersports equipment brand revenues only increased slightly. Consequently, for the nine months ended July 31, 2007, our wintersports equipment brand revenues decreased compared to the previous year as a result of the timing of our shipments and because market demand was significantly lower in the 2006/2007 winter season due to the lack of snowfall in many parts of Europe and the United States.


	Nine Months Ended July 31,
	2007						2006
			Equip-						Equip-
	Apparel		ment				Apparel		ment
In thousands	Brands		Brands		Total		Brands		Brands		Total
Americas	$	712,466	$	142,914	$	855,380	$	602,024	$	146,149	$	748,173
Europe		577,923		157,599		735,522		479,478		189,821		669,299
Asia/Pacific		162,140		12,872		175,012		142,642		20,256		162,898
Corporate operations		¾		¾		3,165		¾		¾		3,554

	$	1,452,529	$	313,385	$	1,769,079	$	1,224,144	$	356,226	$	1,583,924

In the Americas, our apparel brand revenues for the nine months ended July 31, 2007 increased 18%, while our equipment brand revenues decreased 2% compared to the nine months ended July 31, 2006. In Europe, our apparel brand revenues for the nine months ended July 31, 2007 increased 21%, while our equipment brand revenues decreased 17% compared to the nine months ended July 31, 2006. In Asia/Pacific, our apparel brand revenues for the nine months ended July 31, 2007 increased 14%, while our equipment brand revenues decreased 36% compared to the nine months ended July 31, 2006.

Our consolidated gross profit margin for the nine months ended July 31, 2007 decreased to 45.8% from 46.2% in the comparable period of the prior year. The Americas’ gross profit margin decreased to 40.5% from 41.4%, while the European gross profit margin increased to 51.6% from 51.5% and the Asia/Pacific gross profit margin increased to 46.5% from 46.4% for those same periods. The decrease in our Americas’ gross profit margin was primarily due to lower margins from our equipment brands. Our European and Asia/Pacific gross profit margin increases were primarily due to higher margins from our apparel brands, which were partially offset by lower margins in our equipment brands.

SG&A for the nine months ended July 31, 2007 increased 18% to $776.7 million from $656.0 million in the comparable period of the prior year. Americas’ SG&A increased 22% to $306.6 million from $251.5 million, while European SG&A increased 17% to $342.5 million from $293.5 million and Asia/Pacific SG&A increased 12% to $79.7 million from $70.9 million for those same periods. As a percentage of revenues, SG&A increased to 43.9% for the nine months ended July 31, 2007 from 41.4% for the nine months ended July 31, 2006. The consolidated increase in our SG&A as a percentage of revenue was primarily caused by the cost of additional retail stores, increased distribution costs, asset impairments and contract termination costs. As a result of our planned acquisition of the remaining minority interest in Cleveland Golf, we recorded intangible asset impairment charges of approximately $8.2 million during the nine months ended July 31, 2007. We also agreed to terminate all consulting arrangements with the former minority interest holders of Cleveland Golf and recorded an expense of approximately $5.0 million in contract termination costs during this period.

Interest expense for the nine months ended July 31, 2007 increased to $45.7 million from $36.4 million in the comparable period of the prior year. This increase was primarily due to higher borrowing levels on our lines of credit to finance increased working capital needs and, to a lesser extent, higher interest rates on our variable-rate debt in Europe and the United States.

Our foreign currency loss amounted to $3.5 million for the nine months ended July 31, 2007 compared to a gain of $0.6 million in the comparable period of the prior year. This current period loss resulted primarily from the foreign currency contracts that we used to hedge the risk of translating the results of our international subsidiaries into U.S. dollars and the foreign exchange effect of certain non-U.S. dollar denominated liabilities.

The effective income tax rate for the nine months ended July 31, 2007 decreased to 23% from 29.3% in the comparable period of the prior year. Our estimated annual effective income tax rate is lower than the prior period’s annual rate primarily due to the higher impact of certain beneficial items included in our tax rate.

Our net loss for the nine months ended July 31, 2007 was $10.2 million or $0.08 per share on a diluted basis compared to net income of $27.7 million or $0.22 per share on a diluted basis in the comparable period of the prior year. Basic net loss per share was $0.08 per share for the nine months ended July 31, 2007 compared to net income per share of $0.23 per share in the comparable period of the prior year. EBITDA decreased 23% to $106.6 million from $139.2 million for those same periods.

Financial Position, Capital Resources and Liquidity

We generally finance our working capital needs and capital investments with operating cash flows and bank revolving lines of credit. Multiple banks in the United States, Europe and Australia make these lines of credit available to us. Term loans are also used to supplement these lines of credit and are typically used to finance long-term assets. In fiscal 2005, we issued $400 million in Senior Notes, primarily to fund a portion of the acquisition of Rossignol and to refinance certain existing indebtedness.

During the three months ended July 31, 2007, we were out of compliance with certain profitability covenants on a 50.0 million euro term loan at a Rossignol subsidiary in Europe. As of July 31, 2007, this debt was approximately $68.3 million (50.0 million euros). We obtained a waiver from the bank for the three months ended July 31, 2007 and additionally amended the existing agreement to remove these financial covenants through October 2008. Accordingly, we continue to classify this debt as long-term as of July 31, 2007. We will next be required to test the compliance of these covenants as of October 31, 2008.

The net increase in cash and cash equivalents for the nine months ended July 31, 2007 was $39.2 million compared to $8.7 million in the comparable period of the prior year. Cash and cash equivalents totaled $76.0 million at July 31, 2007 compared to $36.8 million at October 31, 2006, while working capital was $593.4 million at July 31, 2007 compared to $568.6 million at October 31, 2006. We believe our current cash balance, operating cash flows and current lines of credit are adequate to cover our seasonal working capital and other requirements for at least the next twelve months, and that increases in our lines of credit can be obtained as needed to fund future growth.

Cash Flows

We generated $123.2 million of cash from operating activities in the nine months ended July 31, 2007 compared to $53.7 in the comparable period of the prior year. During the nine months ended July 31, 2007, the decrease in accounts receivable provided cash of $139.7 million compared to $124.9 million during the nine months ended July 31, 2006, an increase in cash provided of $14.8 million. The change in inventories, net of the change in accounts payable used cash of $19.1 million during the nine months ended July 31, 2007 compared to $90.8 million for the same period of the prior year, a net increase in cash provided of $71.7 million. The change in net (loss) income, non-cash items and other operating assets and liabilities resulted in a decrease in cash provided of $17.0 million during the nine months ended July 31, 2007 compared to the comparable period of the prior year.

Capital expenditures totaled $78.8 million for the nine months ended July 31, 2007, compared to $61.3 million in the comparable period of the prior year. These investments include company-owned retail stores and ongoing investments in manufacturing, computer and warehouse equipment. We used $34.3 million of cash for acquisitions during the nine months ended July 31, 2007, of which $20.2 million relates to a payment to the former owners of DC Shoes, Inc., and the remaining $14.1 million relates primarily to acquisitions of certain distributors and retail store locations.

During the nine months ended July 31, 2007, net cash provided by financing activities totaled $20.9 million, compared to $50.8 million provided in the comparable period of the prior year. Borrowings decreased as we generated increased cash from our operating activities.

Commitments

We paid $20.2 million related to the achievement of certain sales and earnings targets to the former owners of DC Shoes, Inc. during the nine months ended July 31, 2007. Upon closing of the purchase of the minority interest in Cleveland Golf, we will pay approximately $17.5 million and approximately $5.0 million in contract termination costs to the minority interest holders. This transaction is expected to occur during the three months ending October 31, 2007. These contract termination costs are included in SG&A for the nine months ended July 31, 2007 and are included as a component of accrued liabilities as of July 31, 2007.

In connection with our acquisition of Rossignol, we formulated the Rossignol Integration Plan (the “Plan”). The Plan covers the global operations of Rossignol and our existing businesses, and it includes the evaluation of facility relocations, nonstrategic business activities, redundant functions and other related items. As of July 31, 2007, we had recognized $65.3 million of liabilities related to the Plan, including employee relocation and severance costs, moving costs and other costs related primarily to the consolidation of Rossignol’s administrative headquarters in Europe, the consolidation of Rossignol’s European distribution operations, the consolidation and realignment of certain European manufacturing facilities and the relocation of our wintersports equipment sales and distribution operations in the United States. As of July 31, 2007, we had paid approximately $33.7 million related to these integration activities. If we have overestimated our integration costs, the excess will reduce goodwill in future

periods. Conversely, if we have underestimated these costs, additional liabilities recognized will be recorded in earnings. Costs that are not associated with Rossignol but relate to activities or employees of our existing operations are not significant and are charged to earnings. Certain facilities owned by Rossignol are expected to be sold in connection with the Plan, while others are anticipated to be refinanced through sale-leaseback arrangements. Assets currently held for sale, primarily in France, totaled approximately $18.3 million at July 31, 2007.

Trade Accounts Receivable and Inventories

Accounts receivable decreased 15% to $611.0 million at July 31, 2007 from $721.6 million at October 31, 2006. Accounts receivable in the Americas decreased 4% to $285.8 million from $298.5 million, European accounts receivable decreased 20% to $267.8 million from $335.5 million and Asia/Pacific accounts receivable decreased 35% to $57.4 million from $87.6 million for those same periods. Compared to July 31, 2006, accounts receivable in the Americas increased 22%, European accounts receivable increased 26% and Asia/Pacific accounts receivable increased 23%. Included in accounts receivable is approximately $40.0 million of Value Added Tax and Goods and Services Tax related to foreign accounts receivable. Such taxes are not reported as net revenues and as such, must be accounted for to more accurately compute days sales outstanding. Overall average days sales outstanding increased by approximately 5 days at July 31, 2007 compared to July 31, 2006, while our apparel brand days sales outstanding remained unchanged.

Consolidated inventories increased 28% to $545.5 million at July 31, 2007 from $425.9 million at October 31, 2006. Inventories in the Americas increased 10% to $213.8 million from $194.1 million, while European inventories increased 49% to $262.5 million from $176.3 million and Asia/Pacific inventories increased 25% to $69.2 million from $55.5 million for those same periods. Consolidated inventories increased 6% compared to July 31, 2006. Inventories increased 3% in the Americas, 5% in Europe and 21% in Asia/Pacific compared to July 31, 2006. Consolidated average inventory turnover was consistent with the same period in the prior year.

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 believe that the following discussion addresses the accounting policies that are necessary to 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. 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 adjust inventory values for excess and obsolete inventory based primarily on estimated forecasts of product demand and market value. Demand for our products could fluctuate significantly. The demand for our products could be negatively affected by many factors, including the following:

•		weakening economic conditions;

•		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 licenses and other amortizable intangibles) whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss would be recognized when the carrying value exceeds the undiscounted future cash flows estimated to result from the use and eventual disposition of the asset. 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.

Goodwill

We evaluate the recoverability of goodwill at least annually based on a two-step impairment test. The first step compares the fair value of each reporting unit with its carrying amount including goodwill. If the carrying amount exceeds fair value, then the second step of the impairment test is performed to measure the amount of any impairment loss. Fair value is computed based on estimated future cash flows discounted at a rate that approximates our cost of capital. Such estimates are subject to change, and we may be required to recognize impairment losses in the future.

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.

Stock-Based Compensation Expense

Effective November 1, 2005, we adopted the fair value recognition provisions of SFAS 123(R), using the modified prospective transition method, and therefore have not restated prior periods’ results. Under this method we recognize compensation expense for all stock-based payments granted after November 1, 2005 and prior to but not yet vested as of November 1, 2005, in accordance with SFAS 123(R). Under the fair value recognition provisions of SFAS 123(R), we recognize stock-based compensation net of an

estimated forfeiture rate and only recognize compensation cost for those shares expected to vest using the graded vested method over the requisite service period of the award. Prior to SFAS 123(R) adoption, we accounted for stock-based payments under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and accordingly, we were not required to recognize compensation expense for options granted that had an exercise price equal to the market value of the underlying common stock on the date of grant.

Determining the appropriate fair value model and calculating the fair value of stock-based payment awards require the input of highly subjective assumptions, including the expected life of the stock-based payment awards and stock price volatility. We use the Black-Scholes option-pricing model to value compensation expense. The assumptions used in calculating the fair value of stock-based payment awards represent management’s best estimates, but the estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. See Note 3 to the Consolidated Condensed Financial Statements for a further discussion on stock-based compensation.

Foreign Currency Translation

A significant portion of our revenues are generated in Europe, where we operate with the euro as our primary functional currency, and a smaller portion of our revenues are generated in Asia/Pacific, where we operate with the Australian dollar and Japanese Yen as our primary functional currencies. Our European revenues in the United Kingdom are denominated in British pounds, and some European and Asia/Pacific 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. 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.

New Accounting Pronouncements

See Note 2 – New Accounting Pronouncements for a discussion of future pronouncements that may affect our financial reporting.

Forward-Looking Statements

Certain information included in this Form 10-Q and other materials filed or to be filed by us with the Securities and Exchange Commission (as well as information included in oral or written statements made by us or on our behalf), may contain forward-looking statements about our current and expected performance trends, growth plans, business goals and other matters. These statements may be contained in our filings with the Securities and Exchange Commission, in our press releases, in other written communications, and in oral statements made by or with the approval of one of our authorized officers. Words or phrases such as “believe,” “plan,” “anticipate,” “intend,” “expect,” “may,” “will,” “would,” “could,” “should” and similar expressions are intended to identify forward-looking statements. These statements, as well as any other statements that refer to projections of our future financial performance, our anticipated growth and trends in our business and other characterizations of future events or circumstances, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

We have identified and disclosed important factors, risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in forward-looking statements made by us, or on our behalf, or otherwise affect our business, results of operations and financial condition (see Part I,

Item 1A, “Risk Factors” included in our most recent Form 10-K). These cautionary statements are to be used as a reference in connection with any forward-looking statements. The factors, risks and uncertainties identified in these cautionary statements are in addition to those contained in any other cautionary statements, written or oral, which may be made or otherwise addressed in connection with a forward-looking statement or contained in any of our subsequent filings with the Securities and Exchange Commission. Because of these factors, risks and uncertainties, we caution against placing undue reliance on forward-looking statements. Although we believe that the assumptions underlying forward-looking statements are reasonable, any of the assumptions could be incorrect, and there can be no assurance that forward-looking statements will prove to be accurate. Forward-looking statements speak only as of the date on which they are made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise unless required to do so by securities laws.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency

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 period to period. By way of example, when the U.S. dollar strengthens compared to the euro, there is a negative effect on our overall reported results for Quiksilver Europe because it takes more profits in euros to generate the same amount of profits in stronger U.S. dollars. In addition, the statements of income of Quiksilver Asia/Pacific are translated from Australian dollars and Japanese yen into U.S. dollars, and there is an overall negative effect on our reported results for Quiksilver Asia/Pacific when the U.S. dollar is stronger in comparison to Australian dollar or Japanese yen.

European revenues increased 1% in euros during the nine months ended July 31, 2007 compared to the nine months ended July 31, 2006. As measured in U.S. dollars and reported in our consolidated statements of income, European revenues increased 10% as a result of a stronger euro versus the U.S dollar in comparison to the prior year.

Asia/Pacific revenues decreased 1% in Australian dollars during the nine months ended July 31, 2007 compared to the nine months ended July 31, 2006. As measured in U.S. dollars and reported in our consolidated statements of income, Asia/Pacific revenues increased 7% as a result of a stronger Australian dollar versus the U.S. dollar in comparison to the prior year.

Our foreign currency and interest rate risks are discussed in our Annual Report on Form 10-K for the year ended October 31, 2006 in Item 7A.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

We carried out an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of July 31, 2007, the end of the period covered by this report.

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of July 31, 2007.

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended July 31, 2007 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

On February 27, 2007, a class action captioned Burnis L. Simon, Jr. v. Quicksilver, Inc. (sic), Case No. CV07-01326, was filed against us in the United States District Court for the Central District of California. The complaint alleges willful violation of the federal Fair and Accurate Credit Transactions Act (“FACTA”) based upon certain of our retail stores’ alleged electronic printing of receipts on which appeared more than the last five digits of customers’ credit or debit card numbers and/or the expiration of such customers’ credit or debit cards. The complaint seeks statutory damages of not less than $100 and not more than $1,000 for each violation, as well as unspecified punitive damages, attorneys’ fees and a permanent injunction from further engaging in violations of FACTA. The complaint does not allege that any class member has suffered actual damages. Similar complaints have been filed against a number of other retailers. We intend to vigorously defend against the claims asserted. However, the results of any litigation are inherently uncertain and we cannot assure that we will be able to successfully defend against such claims. We are currently unable to assess the extent of damages and/or other relief, if any, that could be awarded to the plaintiff class if it were to prevail.

Item 6. Exhibits


Exhibits
	2.1	English Translation of the Acquisition Agreement, dated April 12, 2005, between the Company and Mr. Laurent Boix-Vives, Ms. Jeannine Boix-Vives, Ms. Christine Simon, Ms. Sylvie Bernard and SDI Société de Services et Développement (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on April 18, 2005).

	2.2	Stock Purchase Agreement between the Company and the Sellers of DC Shoes, Inc. dated March 8, 2004 (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed on May 18, 2004).

	2.3	First Amendment to the Stock Purchase Agreement between the Company and the Sellers of DC Shoes, Inc. dated May 3, 2004 (incorporated by reference to Exhibit 2.2 of the Company’s Current Report on Form 8-K filed on May 18, 2004).

	3.1	Restated Certificate of Incorporation of Quiksilver, Inc., as amended (incorporated by reference to Exhibit 3.1 of the Company’s Annual Report on Form 10-K for the year ended October 31, 2004).

	3.2	Certificate of Amendment of Restated Certificate of Incorporation of Quiksilver, Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2005).

	3.3	Amended and Restated Bylaws of Quiksilver, Inc. (incorporated by reference to Exhibit 3.2 of the Company’s Annual Report on Form 10-K for the year ended October 31, 2003).

	4.1	Indenture for the 6 7/8% Senior Notes due 2015 dated July 22, 2005, among Quiksilver, Inc., the subsidiary guarantors set forth therein and Wilmington Trust Company, as trustee, including the form of Global Note attached thereto (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed July 25, 2005).

	10.1	Restricted Stock Agreement by and between Quiksilver, Inc. and Douglas Ammerman dated June 7, 2007. ⁽¹⁾

	10.2	Stock Purchase Agreement dated June 20, 2007 by and between Quiksilver, Inc., Rossignol Ski Company, Inc., Laurent Boix-Vives, Jeannine Boix-Vives, Christine Simon, Sylvie Bernard and Services Expansion International.

	31.1	Rule 13a-14(a)/15d-14(a) Certifications – Principal Executive Officer

	31.2	Rule 13a-14(a)/15d-14(a) Certifications – Principal Financial Officer

	32.1	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2003 – Chief Executive Officer

	32.2	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2003 – Chief Financial Officer


⁽¹⁾		Management contract or compensatory plan

Exhibit Index


Exhibits
	2.1	English Translation of the Acquisition Agreement, dated April 12, 2005, between the Company and Mr. Laurent Boix-Vives, Ms. Jeannine Boix-Vives, Ms. Christine Simon, Ms. Sylvie Bernard and SDI Société de Services et Développement (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on April 18, 2005).

	2.2	Stock Purchase Agreement between the Company and the Sellers of DC Shoes, Inc. dated March 8, 2004 (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed on May 18, 2004).

	2.3	First Amendment to the Stock Purchase Agreement between the Company and the Sellers of DC Shoes, Inc. dated May 3, 2004 (incorporated by reference to Exhibit 2.2 of the Company’s Current Report on Form 8-K filed on May 18, 2004).

	3.1	Restated Certificate of Incorporation of Quiksilver, Inc., as amended (incorporated by reference to Exhibit 3.1 of the Company’s Annual Report on Form 10-K for the year ended October 31, 2004).

	3.2	Certificate of Amendment of Restated Certificate of Incorporation of Quiksilver, Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2005).

	3.3	Amended and Restated Bylaws of Quiksilver, Inc. (incorporated by reference to Exhibit 3.2 of the Company’s Annual Report on Form 10-K for the year ended October 31, 2003).

	4.1	Indenture for the 6 7/8% Senior Notes due 2015 dated July 22, 2005, among Quiksilver, Inc., the subsidiary guarantors set forth therein and Wilmington Trust Company, as trustee, including the form of Global Note attached thereto (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed July 25, 2005).

	10.1	Restricted Stock Agreement by and between Quiksilver, Inc. and Douglas Ammerman dated June 7, 2007. ⁽¹⁾

	10.2	Stock Purchase Agreement dated June 20, 2007 by and between Quiksilver, Inc., Rossignol Ski Company, Inc., Laurent Boix-Vives, Jeannine Boix-Vives, Christine Simon, Sylvie Bernard and Services Expansion International.

	31.1	Rule 13a-14(a)/15d-14(a) Certifications — Principal Executive Officer

	31.2	Rule 13a-14(a)/15d-14(a) Certifications — Principal Financial Officer

	32.1	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2003 — Chief Executive Officer

	32.2	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2003 — Chief Financial Officer


⁽¹⁾		Management contract or compensatory plan


	Three Months Ended July 31,
In thousands	2007			2006
Revenues, net	$	47,193		$	38,625
Cost of goods sold		29,753			21,006

Gross profit		17,440			17,619

Selling, general, and administrative expense		16,922			14,319

Operating income		518			3,300
Interest expense		950			865
Other income		—			(152	)

(Loss) income before (benefit) provision for income taxes		(432	)		2,587

(Benefit) provision for income taxes		(164	)		983

Net (loss) income and comprehensive (loss) income	$	(268	)	$	1,604


	Page No.
PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited):

Quiksilver, Inc. Condensed Consolidated Statements of Operations Three Months Ended July 31, 2007 and 2006		2

Quiksilver, Inc. Condensed Consolidated Statements of Comprehensive Income/Loss Three Months Ended July 31, 2007 and 2006		2

Quiksilver, Inc. Condensed Consolidated Statements of Operations Nine Months Ended July 31, 2007 and 2006		3

Quiksilver, Inc. Condensed Consolidated Statements of Comprehensive Income Nine Months Ended July 31, 2007 and 2006		3

Quiksilver, Inc. Condensed Consolidated Balance Sheets July 31, 2007 and October 31, 2006		4

Quiksilver, Inc. Condensed Consolidated Statements of Cash Flows Nine Months Ended July 31, 2007 and 2006		5

Quiksilver, Inc. Notes to Condensed Consolidated Financial Statements		6

Roger Cleveland Golf Company, Inc. Condensed Statements of Operations and Comprehensive Income/Loss Three Months Ended July 31, 2007 and 2006		26

Roger Cleveland Golf Company, Inc. Condensed Statements of Operations and Comprehensive Income/Loss Nine Months Ended July 31, 2007 and 2006		27

Roger Cleveland Golf Company, Inc. Condensed Balance Sheets July 31, 2007 and October 31, 2006		28

Roger Cleveland Golf Company, Inc. Condensed Statements of Cash Flows Nine Months Ended July 31, 2007 and 2006		29

Roger Cleveland Golf Company, Inc. Notes to Condensed Financial Statements		30

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations		34

Three Months Ended July 31, 2007 Compared to Three Months Ended July 31, 2006		34

Nine Months Ended July 31, 2007 Compared to Nine Months Ended July 31, 2006		36

Financial Position, Capital Resources and Liquidity		37

Critical Accounting Policies		39

New Accounting Pronouncements		41

Forward-Looking Statements		41

Item 3. Quantitative and Qualitative Disclosures About Market Risk		42

Item 4. Controls and Procedures		42

Part II — OTHER INFORMATION

Item 1. Legal Proceedings		43

Item 6. Exhibits		44

SIGNATURES		45
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

13.		Long-term debt

		During the three months ended July 31, 2007, the Company was out of compliance with certain profitability covenants on a 50.0 million euro term loan of a Rossignol subsidiary in Europe. As of July 31, 2007, this debt was approximately $68.3 million (50.0 million euros). The Company obtained a waiver from the bank for the three months ended July 31, 2007 and additionally amended the existing agreement to remove these financial covenants through October 2008. Accordingly, the Company continues to classify this debt as long term as of July 31, 2007.


	QUIKSILVER, INC., a Delaware corporation
September 10, 2007	/s/ Brad L. Holman
	Brad L. Holman
	Vice President of Accounting and Financial Reporting (Principal Accounting Officer and Authorized Signatory)