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, 2006


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		33-0199426
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		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 5, 2006 was 122,520,622

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

QUIKSILVER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)


	July 31,			October 31,
In thousands, except share amounts	2006			2005
ASSETS
Current assets:
Cash and cash equivalents	$	84,342		$	75,598
Trade accounts receivable, less allowance for doubtful accounts of $30,319 (2006) and $10,727 (2005)		492,414			599,486
Other receivables		32,400			27,414
Income tax receivable		5,253			—
Inventories		516,366			386,396
Deferred income taxes		46,859			41,646
Prepaid expenses and other current assets		27,991			21,819

Total current assets		1,205,625			1,152,359

Fixed assets, less accumulated depreciation and amortization of $170,674 (2006) and $121,453 (2005)		264,585			241,979
Intangible assets, net		247,263			247,702
Goodwill		525,846			449,377
Other assets		51,326			43,955
Assets held for sale		23,311			23,229

Total assets	$	2,317,956		$	2,158,601


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Lines of credit	$	278,261		$	220,113
Accounts payable		242,309			212,407
Accrued liabilities		195,797			182,973
Current portion of long-term debt		22,728			50,833
Income taxes payable		—			27,176

Total current liabilities		739,095			693,502

Long-term debt, net of current portion		681,248			640,348
Deferred income taxes		73,886			81,628


Total liabilities		1,494,229			1,415,478


Minority interest		10,935			10,241

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 — 125,374,489 (2006) and 124,093,392 (2005)		1,254			1,241
Additional paid-in capital		268,382			242,284
Treasury stock, 2,885,200 shares		(6,778	)		(6,778	)
Retained earnings		493,711			466,043
Accumulated other comprehensive income		56,223			30,092

Total stockholders’ equity		812,792			732,882

Total liabilities and stockholders’ equity	$	2,317,956		$	2,158,601

See notes to condensed consolidated financial statements.

QUIKSILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)


	Three months ended July 31,
In thousands, except per share amounts	2006		2005
Revenues, net	$	525,854	$	373,751
Cost of goods sold		277,079		198,836

Gross profit		248,775		174,915

Selling, general and administrative expense		228,843		133,589

Operating income		19,932		41,326

Interest expense		11,877		5,490
Foreign currency loss (gain)		377		(388	)
Minority interest and other expense		484		207

Income before provision for income taxes		7,194		36,017

Provision for income taxes		1,858		11,382

Net income	$	5,336	$	24,635


Net income per share	$	0.04	$	0.21

Net income per share, assuming dilution	$	0.04	$	0.20


Weighted average common shares outstanding		122,341		118,764

Weighted average common shares outstanding, assuming dilution		127,737		124,308

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)


	Three months ended July 31,
In thousands	2006			2005
Net income	$	5,336		$	24,635
Other comprehensive income (loss):
Foreign currency translation adjustment		5,798			(18,276	)
Net unrealized (loss) gain income on derivative instruments, net of tax of $(785) (2006) and $2,141 (2005)		(1,427	)		4,451

Comprehensive income	$	9,707		$	10,810

See notes to condensed consolidated financial statements.

QUIKSILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)


	Nine months ended July 31,
In thousands, except per share amounts	2006			2005
Revenues, net	$	1,583,924		$	1,143,464
Cost of goods sold		852,098			622,278

Gross profit		731,826			521,186

Selling, general and administrative expense		655,986			402,386

Operating income		75,840			118,800

Interest expense		36,417			10,548
Foreign currency gain		(616	)		(213	)
Minority interest and other expense		895			352

Income before provision for income taxes		39,144			108,113

Provision for income taxes		11,476			34,597

Net income	$	27,668		$	73,516


Net income per share	$	0.23		$	0.62

Net income per share, assuming dilution	$	0.22		$	0.59


Weighted average common shares outstanding		121,928			118,175

Weighted average common shares outstanding, assuming dilution		127,564			123,729

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)


	Nine months ended July 31,
In thousands	2006			2005
Net income	$	27,668		$	73,516
Other comprehensive income (loss):
Foreign currency translation adjustment		32,127			(10,936	)
Net unrealized (loss) gain income on derivative instruments, net of tax of $(3,040) (2006) and $3,657 (2005)		(5,996	)		6,826

Comprehensive income	$	53,799		$	69,406

See notes to condensed consolidated financial statements.

QUIKSILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


	Nine months ended July 31,
In thousands	2006			2005
Cash flows from operating activities:
Net income	$	27,668		$	73,516
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		47,581			25,232
Stock-based compensation		16,056			—
Provision for doubtful accounts		15,553			5,591
Loss on sale of fixed assets		1,316			174
Foreign currency (gain) loss		(229	)		1,240
Interest accretion		—			1,480
Minority interest and equity in earnings		1,427			—
Changes in operating assets and liabilities:
Trade accounts receivable		109,394			(61,862	)
Other receivables		(4,665	)		(2,546	)
Inventories		(113,325	)		(25,995	)
Prepaid expenses and other current assets		(3,967	)		(2,383	)
Other assets		(8,677	)		(7,585	)
Accounts payable		22,559			34,004
Accrued liabilities		(29,884	)		1,039
Income taxes payable		(27,063	)		11,857

Net cash provided by operating activities		53,744			53,762

Cash flows from investing activities:
Proceeds from the sale of fixed assets		2,420			—
Capital expenditures		(61,321	)		(45,085	)
Business acquisitions, net of cash acquired		(34,848	)		(181,827	)

Net cash used in investing activities		(93,749	)		(226,912	)


Cash flows from financing activities:
Borrowings on lines of credit		245,672			44,749
Payments on lines of credit		(200,920	)		(41,634	)
Borrowings on long-term debt		129,705			496,519
Payments on long-term debt		(130,107	)		(227,628	)
Proceeds from stock option exercises		6,491			7,285

Net cash provided by financing activities		50,841			279,291

Effect of exchange rate changes on cash		(2,092	)		(1,478	)

Net increase in cash and cash equivalents		8,744			104,663
Cash and cash equivalents, beginning of period		75,598			55,197

Cash and cash equivalents, end of period	$	84,342		$	159,860


Supplementary cash flow information:
Cash paid during the period for:
Interest	$	31,201		$	9,410

Income taxes	$	40,763		$	22,535

See notes to condensed consolidated financial statements.

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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, 2006 and 2005. 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, 2005 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.

2.		New Accounting Pronouncements

		In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs an amendment of ARB No. 43, Chapter 4”. SFAS No. 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 did not have a significant impact on the Company’s consolidated financial position, results of operation or cash flows.

		In December 2004, the FASB issued SFAS No. 123(R) “Share-Based Payment”. SFAS No. 123(R) requires that companies recognize compensation expense equal to the fair value of stock options or other share based payments. The Company adopted this standard during the nine months ended July 31, 2006 using the modified prospective method. See Note 3 for a description of the impact of this standard on the Company’s financial statements.

		In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” 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 will adopt SFAS No. 154 in the first quarter of fiscal 2007, but does not expect the adoption of SFAS No. 154 to have a material impact on its 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.

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3.		Stock Based Compensation

		On November 1, 2005, the Company adopted the fair value recognition provisions of SFAS No. 123(R). Prior to November 1, 2005, the Company had accounted for stock-based payments under the recognition and measurement provisions of Accounting Principles Board (“APB”) Opinion 25 and related interpretations, as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation.” In accordance with APB 25, no compensation expense was required to be recognized for options granted that had an exercise price equal to the market value of the underlying common stock on the date of grant.

		Under the modified prospective method of SFAS No. 123(R), compensation expense was recognized during the nine months ended July 31, 2006 and includes compensation expense for all stock-based payments granted prior to, but not yet vested as of November 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and compensation expense for all stock based payments granted after November 1, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). The Company’s financial results for the prior periods have not been restated.

		As a result of adopting SFAS No. 123(R), during the nine months ended July 31, 2006, the Company’s net income is $11.3 million lower than if it had continued to account for stock based compensation under APB 25 as it did for the nine months ended July 31, 2005. Basic and diluted earnings per share for the nine months ended July 31, 2006 would have been $0.07 and $0.07, respectively, if the Company had not adopted SFAS No. 123(R), compared to basic and diluted earnings per share of $0.04 and $0.04, respectively. Compensation expense was included as selling, general and administrative expense for the period. The impact on cost of goods sold was not significant. The adoption of SFAS No. 123(R) had no impact on the Company’s cash flows.

		Changes in shares under option for the nine months ended July 31, 2006 are as follows:


				Weighted		Weighted		Aggregate
				Average		Average		Intrinsic
	Shares			Price		Life		Value
								In thousands
Outstanding, October 31, 2005		17,366,457		$	7.64
Granted		2,303,500			13.67
Exercised		(1,062,004	)		3.91			$	10,575
Canceled		(167,869	)		10.95

Outstanding, July 31, 2006		18,440,084		$	8.57		6.51	$	88,028

Options exercisable, July 31, 2006		11,324,858		$	6.22		5.36	$	77,935

Changes in non-vested shares under option for the nine months ended July 31, 2006 are as follows:


				Weighted-
				Average
				Grant Date
	Shares			Fair Value
Non-vested, October 31, 2005		8,205,035		$	5.89
Granted		2,303,500			6.32
Vested		(3,284,305	)		5.35
Canceled		(109,004	)		6.47

Non-vested, July 31, 2006		7,115,226		$	6.27

		Consistent with the valuation method used for the disclosure only provisions of SFAS No. 123, the Company is using 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 three months ended July 31, 2005 options were valued assuming a risk-free interest rate of 4.3%, volatility of 50.3%, zero dividend yield, and an expected life of 5.2 years. The weighted average fair value of options granted was $8.11 for the three months ended July 31, 2005. No options were granted during the three months ended July 31, 2006. The Company records stock compensation expense using the graded vested method over the vesting period, which is generally three years. As of July 31, 2006, the Company had approximately $20.5 million of unrecognized compensation expense expected to be recognized over a weighted average period of approximately 1.0 years.

		The reported net income and net income per share for the three months and nine months ended July 31, 2005 have been presented below to reflect the impact of the adoption of SFAS No. 123(R) had the Company been required to adopt this standard for the nine months ended July 31, 2005.

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


	Three Months Ended		Nine Months Ended
In thousands, except per share amounts	July 31, 2005		July 31, 2005
Actual net income	$	24,635	$	73,516
Less: stock-based employee compensation expense determined under the fair value based method, net of tax		3,526		9,121

Pro forma net income	$	21,109	$	64,395


Actual net income per share	$	0.21	$	0.62

Pro forma net income per share	$	0.18	$	0.54

Actual net income per share, assuming dilution	$	0.20	$	0.59

Pro forma net income per share, assuming dilution	$	0.17	$	0.52

		On March 24, 2006, the Company’s shareholders approved the 2006 Restricted Stock Plan. A total of 1.0 million shares are reserved for issuance under the Restricted Stock Plan. As of July 31, 2006, no restricted shares have been granted under this plan.

4.		Inventories

		Inventories consist of the following:


	July 31,		October 31,
In thousands	2006		2005
Raw materials	$	57,129	$	46,659
Work in-process		13,692		10,416
Finished goods		445,545		329,321

	$	516,366	$	386,396

Intangible Assets and Goodwill

A summary of intangible assets is as follows:


	July 31, 2006							October 31, 2005
						Net							Net
	Gross		Amorti-			Book		Gross		Amorti-			Book
In thousands	Amount		zation			Value		Amount		zation			Value
Amortizable trademarks	$	5,592	$	(1,661	)	$	3,931	$	5,135	$	(1,349	)	$	3,786
Amortizable licenses		10,310		(3,780	)		6,530		10,081		(2,940	)		7,141
Other amortizable intangibles		26,810		(4,627	)		22,183		28,757		(2,022	)		26,735
Non-amortizable trademarks		214,619		—			214,619		210,040		—			210,040

	$	257,331	$	(10,068	)	$	247,263	$	254,013	$	(6,311	)	$	247,702

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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, 2006 and 2005 was $3.7 million and $1.8 million, respectively. Annual amortization expense is estimated to be approximately $4.9 million in the fiscal year ending October 31, 2006, $4.7 million in the fiscal year ending October 31, 2007 and $3.5 million in the fiscal years ending October 31, 2008 through 2010. Goodwill related to the Company’s segments is as follows:


	July 31,		October 31,
In thousands	2006		2005
Americas	$	155,863	$	144,948
Europe		227,590		175,392
Asia/Pacific		142,393		129,037

	$	525,846	$	449,377

		Goodwill increased $76.5 million during the nine months ended July 31, 2006 as a result of approximately $60.0 million related to Rossignol and other acquisitions, and $16.5 million due to the effect of changes in foreign currency exchange rates.

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	2006			2005
Foreign currency translation adjustment	$	59,857		$	27,730
(Loss) gain on cash flow hedges and interest rate swaps		(3,634	)		2,362

	$	56,223		$	30,092

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, winter sports 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, 2006.

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


	Three Months Ended July 31,
In thousands	2006			2005

Revenues, net:
Americas	$	277,413		$	196,261
Europe		190,998			133,573
Asia/Pacific		56,309			43,145
Corporate operations		1,134			772

	$	525,854		$	373,751


Gross Profit:
Americas	$	119,075		$	78,791
Europe		101,401			73,419
Asia/Pacific		27,697			22,298
Corporate operations		602			407

	$	248,775		$	174,915


Operating Income:
Americas	$	32,888		$	22,919
Europe		(4,444	)		19,096
Asia/Pacific		3,999			5,799
Corporate operations		(12,511	)		(6,488	)

	$	19,932		$	41,326


	Nine Months Ended July 31,
In thousands	2006			2005

Revenues, net:
Americas	$	748,173		$	554,727
Europe		669,299			442,435
Asia/Pacific		162,898			143,926
Corporate operations		3,554			2,376

	$	1,583,924		$	1,143,464


Gross Profit:
Americas	$	310,023		$	217,912
Europe		344,621			229,642
Asia/Pacific		75,554			72,121
Corporate operations		1,628			1,511

	$	731,826		$	521,186


Operating Income:
Americas	$	58,508		$	55,035
Europe		51,159			67,777
Asia/Pacific		4,678			19,494
Corporate operations		(38,505	)		(23,506	)

	$	75,840		$	118,800


Identifiable assets:
Americas	$	824,703		$	805,654
Europe		1,120,009			1,011,467
Asia Pacific		319,806			190,783
Corporate operations		53,438			63,059

	$	2,317,956		$	2,070,963

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 gain of $0.6 million was recognized related to these types of derivatives during the nine months ended July 31, 2006. 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, 2006, the Company was hedging forecasted transactions expected to occur through May 2008. Assuming exchange rates at July 31, 2006 remain constant, $3.6 million of losses, net of tax, related to hedges of these transactions are expected to be reclassified into earnings over the next 22 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, 2006, the Company reclassified into earnings a net loss of $1.8 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

A summary of derivative contracts at July 31, 2006 is as follows:


	Notional
In thousands	Amount		Maturity	Fair Value

United States dollar	$	347,379	Aug 2006 — May 2008	$	(6,337	)
Canadian dollar		6,894	Sept 2006 — May 2007		80
Interest rate swap		31,838	Jan 2007 — Sept 2009		(62	)

	$	386,111		$	(6,319	)

9.		Business Acquisitions

		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 5.5%). 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 have entered into a put/call arrangement whereby the minority owners of Cleveland Golf can require the Company to buy all of their 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 will account 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. 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.

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the fair values 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, 2006 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

The allocation of purchase price is based on preliminary estimates and is subject to change based on the finalization of the purchase price allocation. The following table summarizes the fair values of the assets acquired and the 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 $34.8 million during the nine months ended July 31, 2006, of which $5.8 million relates to a payment to the former owners of the Asia/Pacific business, $5.0 million relates to a payment to the former owners of DC Shoes, Inc., and the remaining $24.0 million relates primarily to insignificant acquisitions of certain other distributors, licensees and retail store locations.

10.		Indemnities and Guarantees

		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, 2006 the Company has recognized approximately $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, 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 Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and EITF Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination”. As of July 31, 2006, 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 the

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

		United States and France, total approximately $23.3 million at July 31, 2006. 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		(9,773	)		(2,011	)		(11,784	)
Foreign currency translation		2,803			273			3,076

Balance, July 31, 2006	$	50,799		$	5,668		$	56,467

		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, 2005	$	9,447
Cash payments		(6,719	)
Adjustment to purchase price allocation		(1,015	)
Foreign currency translation		86

Balance, July 31, 2006	$	1,799

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, 2006 and October 31, 2005 and for the nine months ended July 31, 2006 and 2005. During the three months ended July 31, 2006, Cleveland Golf was added as a guarantor subsidiary. As a result, the October 31, 2005 balance sheet has been adjusted to reflect Cleveland Golf as a guarantor subsidiary. 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 our consolidated financial statements for the fiscal year ending October 31, 2006, 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

CONDENSED CONSOLIDATING BALANCE SHEET
At July 31, 2006


				Wholly-
				owned						Non-
	Quiksilver,			Guarantor			Cleveland			Guarantor
In thousands	Inc.			Subsidiaries			Golf			Subsidiaries			Elimination			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	(458	)	$	3,655		$	3,783		$	77,362		$	—		$	84,342
Trade accounts receivable, net		—			169,036			30,755			292,623			—			492,414
Other receivables		777			4,465			1,044			26,114			—			32,400
Income tax receivable		—			10,390			(485	)		(4,652	)		—			5,253
Inventories		—			146,132			43,532			328,167			(1,465	)		516,366
Deferred income taxes		—			23,260			1,771			21,828			—			46,859
Prepaid expenses and other current assets		1,713			8,084			1,852			16,342			—			27,991

Total current assets		2,032			365,022			82,252			757,784			(1,465	)		1,205,625
Fixed assets, net		4,254			77,230			3,790			179,311			—			264,585
Intangible assets, net		2,558			79,609			2,947			162,149			—			247,263
Goodwill		—			162,011			2,472			361,363			—			525,846
Investment in subsidiaries		561,992			—			—			—			(561,992	)		—
Other assets		11,639			4,796			493			34,398			—			51,326
Assets held for sale		—			3,500			—			19,811			—			23,311

Total assets	$	582,475		$	692,168		$	91,954		$	1,514,816		$	(563,457	)	$	2,317,956


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Lines of credit	$	—		$	14		$	—		$	278,247		$	—		$	278,261
Accounts payable		1,639			88,554			6,741			145,375			—			242,309
Accrued liabilities		18,640			22,242			6,495			148,275			145			195,797
Current portion of long-term debt		—			1,231			—			21,497			—			22,728
Intercompany balances		57,405			(2,329	)		46,785			(101,861	)		—			—

Total current liabilities		77,684			109,712			60,021			491,533			145			739,095

Long-term debt, net of current portion		433,793			112,335			—			135,120			—			681,248
Deferred income taxes		—			32,239			—			41,647			—			73,886

Total liabilities		511,477			254,286			60,021			668,300			145			1,494,229

Minority interest		—			10,935			—			—			—			10,935
Stockholders’/invested equity		70,998			426,947			31,933			846,516			(563,602	)		812,792

Total liabilities and stockholders’ equity	$	582,475		$	692,168		$	91,954		$	1,514,816		$	(563,457	)	$	2,317,956

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING BALANCE SHEET
At October 31, 2005


				Wholly-
				owned					Non-
	Quiksilver,			Guarantor		Cleveland			Guarantor
In thousands	Inc.			Subsidiaries		Golf			Subsidiaries			Elimination			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	1,177		$	20,816	$	986		$	52,619		$	—		$	75,598
Trade accounts receivable, net		—			207,120		30,659			361,707			—			599,486
Other receivables		920			4,918		—			21,576			—			27,414
Inventories		—			118,548		36,758			232,130			(1,040	)		386,396
Deferred income taxes		—			22,531		1,774			17,341			—			41,646
Prepaid expenses and other current assets		1,788			6,588		3,096			10,347			—			21,819

Total current assets		3,885			380,521		73,273			695,720			(1,040	)		1,152,359

Fixed assets, net		2,679			66,604		3,531			169,165			—			241,979
Intangible assets, net		2,310			83,562		3,154			158,676			—			247,702
Goodwill		—			177,841		2,472			269,064			—			449,377
Investment in subsidiaries		578,719			—		—			—			(578,719	)		—
Other assets		11,735			4,933		490			26,797			—			43,955
Assets held for sale		—			4,225		—			19,004			—			23,229

Total assets	$	599,328		$	717,686	$	82,920		$	1,338,426		$	(579,759	)	$	2,158,601


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Lines of credit	$	—		$	6,138	$	1,000		$	212,975		$	—		$	220,113
Accounts payable		1,486			78,859		7,828			124,234			—			212,407
Accrued liabilities		18,237			29,777		8,306			126,359			294			182,973
Current portion of long-term debt		—			1,230		—			49,603			—			50,833
Income taxes payable		—			14,872		(1,497	)		13,801			—			27,176
Intercompany balances		(63,906	)		49,338		33,198			(18,630	)		—			—

Total current liabilities		(44,183	)		180,214		48,835			508,342			294			693,502

Long-term debt, net of current portion		431,944			76,456		4,285			127,663			—			640,348
Deferred income taxes		—			35,605		3			46,020			—			81,628

Total liabilities		387,761			292,275		53,123			682,025			294			1,415,478

Minority interest		—			10,241		—			—			—			10,241

Stockholders’/invested equity		211,567			415,170		29,797			656,401			(580,053	)		732,882

Total liabilities and stockholders’ equity	$	599,328		$	717,686	$	82,920		$	1,338,426		$	(579,759	)	$	2,158,601

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 loss (gain)		(674	)		(64	)		—		122		—			(616	)
Minority interest and other expense		694			—			—		201		—			895

(Loss) income before provision for income taxes		(64,172	)		39,466			3,081		61,141		(372	)		39,144
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

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 income	$	(45,359	)	$	27,896		$	2,178		$	42,953		$	27,668
Adjustments to reconcile net 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
Provision for doubtful accounts		—			1,284			3,075			11,194			15,553
Gain on sale of fixed assets		—			25			—			1,291			1,316
Foreign currency gain		(33	)		14			—			(210	)		(229	)
Minority interest		695			—			—			732			1,427
Changes in operating assets and liabilities:
Trade accounts receivable		—			20,800			(3,171	)		91,765			109,394
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 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 fixed assets		—			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 increase (decrease) 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

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Nine Months Ended July 31, 2005


							Non-
				Guarantor			Guarantor
In thousands	Quiksilver, Inc.			Subsidiaries			Subsidiaries			Consolidated
Cash flows from operating activities:
Net income	$	(14,108	)	$	29,856		$	57,768		$	73,516
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		167			11,490			13,575			25,232
Provision for doubtful accounts		—			2,238			3,353			5,591
Loss on sale of fixed assets		(3	)		277			(100	)		174
Foreign currency (gain) loss		(510	)		(106	)		1,856			1,240
Interest accretion		—			—			1,480			1,480
Changes in operating assets and liabilities:
Trade accounts receivable		—			(27,835	)		(34,027	)		(61,862	)
Other receivables		593			(460	)		(2,679	)		(2,546	)
Inventories		—			5,125			(31,120	)		(25,995	)
Prepaid expenses and other current assets		525			(1,850	)		(1,058	)		(2,383	)
Other assets		(128	)		(2,545	)		(4,912	)		(7,585	)
Accounts payable		(1	)		1,855			32,150			34,004
Accrued liabilities		(10,063	)		1,801			9,301			1,039
Income taxes payable		—			7,864			3,993			11,857

Net cash (used in) provided by operating activities		(23,528	)		27,710			49,580			53,762

Cash flows from investing activities:
Capital expenditures		(1,860	)		(18,145	)		(25,080	)		(45,085	)
Business acquisitions, net of cash acquired		(220,812	)		(12,937	)		51,922			(181,827	)

Net cash used in investing activities		(222,672	)		(31,082	)		26,842			(226,912	)

Cash flows from financing activities:
Borrowings on lines of credit		—			—			44,749			44,749
Payments on lines of credit		—			—			(41,634	)		(41,634	)
Borrowings on long-term debt		484,718			9,521			2,280			496,519
Payments on long-term debt		(140,705	)		(78,134	)		(8,789	)		(227,628	)
Proceeds from stock option exercises		7,285			—			—			7,285
Intercompany		(83,538	)		64,691			18,847			—

Net cash provided by (used in) financing activities		267,760			(3,922	)		15,453			279,291

Effect of exchange rate changes on cash		—			—			(1,478	)		(1,478	)

Net increase (decrease) in cash and cash equivalents		21,560			(7,294	)		90,397			104,663
Cash and cash equivalents, beginning of period		(1,070	)		9,489			46,778			55,197

Cash and cash equivalents, end of period	$	20,490		$	2,195		$	137,175		$	159,860

ROGER CLEVELAND GOLF COMPANY, INC.

BALANCE SHEETS


	July 31,		October 31,
In thousands (except share amounts)	2006		2005

ASSETS
Current assets:
Cash and cash equivalents	$	3,783	$	986
Accounts receivable, less allowance for bad debts of $1,068 (2006) and $1,354 (2005)		30,755		30,659
Income taxes receivable		—		1,497
Inventories		43,532		36,758
Deferred income taxes		1,774		1,774
Prepaid expenses and other current assets		2,896		3,096
Due from affiliates, net		2,945		1,802


Total current assets		85,685		76,572

Equipment and leasehold improvements, net		3,790		3,531
Other intangible assets, net		2,947		3,154
Goodwill		2,472		2,472
Other assets		493		490

Total assets	$	95,387	$	86,219


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Line of credit	$	—	$	1,000
Accounts payable		6,741		7,828
Accrued payroll and benefits		1,976		1,692
Other accrued expenses		4,517		6,614
Income taxes payable		485		—


Total current liabilities		13,719		17,134

Deferred income taxes		3		3
Due to affiliates, net		50,000		35,000
Other long-term debt		—		4,285


Total liabilities		63,722		56,422

Stockholders’ equity:
Common stock no par value — 500,000 shares authorized; 290,224 shares issued and outstanding		22,000		22,000
Retained earnings		9,665		7,755
Accumulated other comprehensive income		—		42


Total stockholders’ equity		31,665		29,797


Total liabilities and stockholders’ equity	$	95,387	$	86,219

See notes to financial statements.

ROGER CLEVELAND GOLF COMPANY, INC.

STATEMENT OF INCOME AND COMPREHENSIVE INCOME


	Nine months ended
In thousands	July 31, 2006

Revenues, net	$	108,980
Cost of goods sold		59,106

Gross profit		49,874

Selling, general, and administrative expense		44,675

Operating income		5,199
Interest expense		2,473
Other income		(355	)

Income before provision for income taxes		3,081

Provision for income taxes		1,171

Net income		1,910

Loss on derivative instruments, net of tax		(42	)

Comprehensive income	$	1,868

STATEMENT OF STOCKHOLDERS’ EQUITY

Nine Months Ended July 31, 2006


							Accumulated
							other			Total
	Common Stock				Retained		Comprehensive			Stockholders’
In thousands, except shares	Shares		Amounts		Earnings		Income			Equity

Balance, October 31, 2005		290,224	$	22,000	$	7,755	$	42		$	29,797
Unrealized loss on derivative instruments, net of tax		—		—		—		(42	)		(42	)
Net income		—		—		1,910		—			1,910

Balance, July 31, 2006		290,224	$	22,000	$	9,665	$	—		$	31,665

See notes to financial statements.

ROGER CLEVELAND GOLF COMPANY, INC.

STATEMENT OF CASH FLOWS


	Nine months ended
In thousands	July 31, 2006

Cash flows from operating activities:
Net income	$	1,910
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		1,522
Changes in assets and liabilities:
Accounts receivable, net		(96	)
Inventories		(6,774	)
Prepaid expenses and other current assets		200
Other assets		(299	)
Accounts payable		(1,087	)
Due from affiliates, net		(1,143	)
Accrued expenses		(1,813	)
Income taxes payable		1,982


Net cash used in operating activities		(5,598	)

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


Net cash used in investing activities		(1,278	)

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


Net cash provided by financing activities		9,673

Net increase in cash		2,797
Cash, beginning of period		986

Cash, end of period	$	3,783


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

Income taxes	$	(838	)

See notes to financial statements.

ROGER CLEVELAND GOLF COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS

1.		Summary of Significant Accounting Policies

		Basis of Presentation

		Roger Cleveland Golf Company, Inc. (the “Company”) manufactures, markets, and distributes golf clubs and related accessories. The Company is owned 64% by certain subsidiaries of Quiksilver, Inc. (the “Parent”) and 36% by a group of individuals. The Parent acquired its majority interest in the Company on July 31, 2005 and as a result the unaudited financial statements do not include financial statements for the three and nine month periods ended 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. Interim results are not necessarily indicative of results for the full year due to seasonal and other factors.

		The Parent has $400 million in publicly registered 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 unaudited financial statements are being furnished in accordance with the SEC’s Regulation S-X, Rule 3-10.

		Cash Equivalents

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

		Credit Risk

		The Company sells its products primarily to pro shops and other retailers of golf clubs and accessories throughout the United States and sells to distributors internationally. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for estimated bad debts, and those losses have generally been within management’s expectations.

		Inventories

		Inventories are valued at the lower of cost (first-in, first-out) or market. Management regularly reviews the inventory quantities on hand and adjusts inventory values for excess and obsolete inventory based primarily on estimated forecasts of product demand and market value.

		Equipment and Leasehold Improvements

		Equipment and leasehold improvements are stated at cost. Major improvements to equipment are capitalized, while repairs and maintenance are expensed as incurred. Depreciation and amortization are provided over the lesser of the estimated useful lives of the various assets or the lease term, if applicable, using the straight-line method.

		Long-Lived Assets and Goodwill

		Long-lived assets, including fixed assets and intangible assets (other than goodwill), are continually monitored and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The determination of recoverability is based on an estimate of undiscounted cash flows expected to result from the use of an asset and its eventual disposition. If an impairment is identified, the related asset would be written down to its estimated fair value.

		Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, goodwill is not amortized but is tested for impairment annually or when a possible impairment is indicated. Management has evaluated its long-lived assets and goodwill and has not identified any impairment as of October 31, 2005.

ROGER CLEVELAND GOLF COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS

		Revenue Recognition

		Revenues are recognized upon the transfer of title and risk of ownership to customers. The Company records an accrual for estimated returns and cash discounts at the time of product shipment based on historical experience.

		In accordance with Emerging Issues Task Force Issue No. 01-09, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products), the Company classifies sales rebates and promotional allowances as a reduction of revenues or cost of sales.

		Warranties

		The Company generally provides a one-year limited warranty against manufacturer’s defects on its golf equipment and records an estimate of such warranty costs when revenue is recorded. The Company’s standard warranty requires it to repair or replace the defective product returned to the Company during such warranty period. In estimating its future warranty obligations, the Company considers various factors, including it’s warranty policies and practices, the historical frequency of claims and the cost to replace or repair the products under warranty. The following table provides a reconciliation of the activity related to the Company’s reserve for warranty expense, which is included in other accrued expenses in the accompanying balance sheet as of July 31, 2006:


	July 31,
In thousands	2006

Beginning balance, October 31, 2005	$	435
Warranty expense		490
Repairs and replacements made		(565	)

Ending balance, July 31, 2006	$	360

		Income Taxes

		The Company accounts for income taxes under SFAS No. 109, Accounting for Income Taxes. This statement requires the recognition of deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company’s financial statements or tax returns. The measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and the tax bases of the Company’s assets and liabilities result in a deferred tax asset, SFAS No. 109 requires an evaluation of the probability of being able to realize the future benefits indicated by such asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

		Advertising Costs

		The Company advertises primarily through television and print media. Adverting costs are expensed as incurred. Advertising expense for the nine months ended July 31, 2006 was approximately $5.3 million.

		Research and Development

		The Company engages in research and development activities to enable it to design and launch new products in response to changing demand and to meet market expectations. Research and development costs are expensed as incurred. Included in selling, general, and administrative expenses are research and development costs of approximately $2.6 million for the nine months ended July 31, 2006.

ROGER CLEVELAND GOLF COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS

		Use of Estimates

		The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. The Company bases its estimates on historical experience and on various other assumptions that are believed reasonable under the circumstances. Actual results could differ from those estimates.

		Derivative Financial Instruments

		The Company uses derivative financial instruments in the management of its interest rate exposure on long-term debt. The Company does not hold such instruments for trading purposes, and the counterparties to these instruments are major financial institutions. The Company accounts for its derivative financial instruments in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 133, as amended, requires the recognition of all derivatives in the balance sheet as either an asset or a liability measured at fair value. The statement also requires a company to recognize changes in the derivative’s fair value currently in earnings, unless it meets specific hedge accounting criteria. If the derivative is designated as a cash-flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income. Changes in the fair value of this derivative are recorded, net of tax, in other comprehensive income. There were no derivative instruments outstanding at July 31, 2006.

		Fair Value of Financial Instruments

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

2.		New Accounting Pronouncements

		In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs an amendment of ARB No. 43, Chapter 4”. SFAS No. 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 did not have a significant impact on the Company’s consolidated financial position, results of operation or cash flows.

		In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” 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 will adopt SFAS No. 154 in the first quarter of fiscal 2007, but does not expect the adoption of SFAS No. 154 to have a material impact on its 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 an

ROGER CLEVELAND GOLF COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS

		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.

3.		Intangible Assets

		The Company’s amortizing intangible assets, which relate to an acquisition completed in 2003, consist of the following:


	July 31, 2006							October 31, 2005
						Net							Net
	Gross		Amorti-			Book		Gross		Amorti-			Book
In thousands	Amount		zation			Value		Amount		zation			Value

Tradenames and trademarks	$	3,100	$	(637	)	$	2,463	$	3,100	$	(482	)	$	2,618
Customer relationships		700		(216	)		484		700		(164	)		536

	$	3,800	$	(853	)	$	2,947	$	3,800	$	(646	)	$	3,154

		Amortization expense of intangible assets for the nine months ended July 31, 2006 was $0.2 million. Annual amortization expense for fiscal years ending October 31, 2006 through October 31, 2010 is estimated to be $0.3 million.

4.		Inventories

		Inventories consist of the following:


	July 31,		October 31,
In thousands	2006		2005

Raw materials	$	19,626	$	18,464
Work in process		160		97
Finished goods		23,746		18,197

	$	43,532	$	36,758

5.		Equipment and Leasehold Improvements

		Equipment and leasehold improvements consist of the following:


	Estimated	July 31,			October 31,
In thousands	useful life	2006			2005

Leasehold improvements	10 years	$	1,091		$	1,052
Machinery and equipment	3 to 7 years		2,878			2,451
Office furniture and equipment	3 to 5 years		4,336			3,816
Transportation equipment	3 years		1,113			729
Construction in progress			94			229

			9,512			8,277
Accumulated depreciation and amortization			(5,722	)		(4,746	)

		$	3,790		$	3,531

ROGER CLEVELAND GOLF COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS

6.		Debt

		The Company had an unsecured term note payable of $4.3 million that was repaid in December 2005. The Company’s $1.5 million unsecured line of credit expired in February 2006 and was not renewed.

		The Company has available an unsecured line of credit of $4.0 million, bearing interest at either a rate equal to LIBOR plus 0.95% or prime rate minus 0.8% or a fixed rate determined by the lender, at the election of the Company. The line of credit expires in November 2007. There were no amounts outstanding under this line of credit as of July 31, 2006.

		In July 2006, the Company became a participating subsidiary in the Parent’s revolving credit facility (“Credit Facility). The Credit Facility expires April 2010 and provides for a secured revolving line of credit of up to $250 million (with an option to expand the facility to $350 million under certain conditions). The Credit Facility bears interest based on either LIBOR or an alternate base rate plus an applicable margin. The margin on the LIBOR rate is based on the Parent’s fixed charge coverage ratio. The Credit Facility includes a $100 million sub limit for letters of credit and a $50 million sub limit for borrowings in certain foreign currencies. The borrowing base is limited to certain percentages of the eligible accounts receivable and inventory from participating subsidiaries of the Parent, including the Company. The Credit Facility contains customary restrictive covenants for facilities and transactions of this type, including, among others, certain limitations on: incurrence of additional debt and guarantees of indebtedness; creation of liens; mergers, consolidations or sales of substantially all of the Parent’s assets; sales or other dispositions of assets; distributions or dividends and repurchases of the Parent’s common stock; restricted payments, including without limitation, certain restricted investments; engaging in transactions with non-participating subsidiaries of the Parent and; sales and leaseback transactions. The Parent’s United States assets (including the Company’s) and a portion of the stock of QS Holdings, SARL, a wholly-owned international subsidiary of the Parent, have been pledged as collateral and to secure the Parent’s indebtedness under the Credit Facility. As of July 31, 2006, the Parent was in compliance with such covenants. As of July 31, 2006, the Company had no borrowings under the Credit Facility.

		In July 2006 the Company became a guarantor of the Parent’s publicly registered senior notes. Obligations under the Parent’s senior notes are fully and unconditionally guaranteed by certain of its existing domestic subsidiaries, including the Company.

7.		Income Taxes

		The tax rate of 38.0% for the nine months ended July 31, 2006 represents the Company’s estimated annual effective income tax rate.

		Major components of the Company’s net deferred income taxes at July 31, 2006 and October 31, 2005 are as follows:


In thousands
Allowance for bad debts	$	576
Prepaid expenses		(1,014	)
Accruals		1,000
Other		1,209

	$	1,771

ROGER CLEVELAND GOLF COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS

8.		Affiliate Transactions

		Net amounts due to/from affiliates consist of the following:


	July 31,			October 31,
In thousands	2006			2005
Amounts due to Quiksilver Americas, Inc.	$	50,181		$	35,033
Amounts due from Parent and other Parent Subsidiaries, net		(3,126	)		(1,835	)

	$	47,055		$	33,198

		Interest paid on borrowings from Quiksilver Americas, Inc. was approximately $2.4 million for the nine months ended July 31, 2006. The weighted average interest rate on these borrowings was 6.0% at July 31, 2006. Sales to Quiksilver, Inc. subsidiaries amounted to $11.4 million for the nine months ended July 31, 2006.

9.		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, 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.

		The Company is involved in litigation arising in the normal course of business. It is the opinion of management that the outcome of these matters will have no material adverse affect on the financial position or results of operations of the Company.

ROGER CLEVELAND GOLF COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS

10.		Commitments and Contingencies

		The Company leases a distribution and manufacturing facility and certain transportation and office equipment under operating lease agreements. In September 2003, the Company entered into a 10-year operating lease for a new facility that the Company occupied in December 2004. Rental expense includes the impact of fixed rent increases on a straight-line basis over the life of the lease. The Company has also entered into sponsorship agreements with certain professional golfers to promote the Company’s products. The sponsorship agreements generally run for one to four years and include minimum annual payments, plus bonus payments for tournament performance, player rankings, and other factors. It is not possible to determine the amounts the Company will ultimately be required to pay under these agreements, as they are subject to many variables, including performance-based bonuses, reductions in payment obligations if designated minimum performance criteria are not achieved, and severance agreements. Estimated future minimum commitments under these obligations for the years ending October 31 are as follows:


In thousands
2006	$	10,221
2007		6,630
2008		6,122
2009		2,553
2010		1,233
Thereafter		5,087

	$	31,846

		Rent expense was $0.9 million for the nine months ended July 31, 2006.

11.		Employee Plans

		The Company sponsors a defined contribution 401(k) Savings and Profit Sharing Plan (the “Plan”), covering substantially all of the Company’s employees, subject to certain eligibility requirements. The Company matches participant contributions up to 4% of the participant’s base earnings. If the Company earns a net profit, an additional contribution ranging from 1% to 4% of the participant’s base earnings will be contributed, subject to certain service requirements. The Company’s matching of participant contributions are fully vested and any profit sharing contributions vest over five years. At its discretion, the Company may make additional contributions to the Plan for employees who meet certain service requirements. Total contributions by the Company were approximately $0.4 million during the nine months ended July 31, 2006.

		In December 2005, the Company’s Board of Directors approved the dissolution and distribution of the Stock Appreciation Rights plan. Based on this decision, a full distribution of approximately $0.6 million occured during the nine months ended July 31, 2006.

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”, “us”, “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 quarterly report on Form 10-Q 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, 2005 and subsequent reports on Form 8-K, which discuss our business in greater detail. The section entitled “Risk Factors” set forth in Item 1A of our Annual Report on Form 10-K, and similar discussions in our other SEC filings, discuss some of the important risk factors that may affect our business, results of operations and financial condition. You should carefully consider those risks, in addition to the information in this report and in our other filings with the SEC, 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 the early 1990s, 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 May 2004, we acquired DC Shoes 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. The acquisition was effective July 31, 2005 and we have included the operations of Rossignol in our results since August 1, 2005. In July 2005, we issued $400 million in senior notes that bear a coupon interest rate of 6.875% and are due April 15, 2015. These senior notes were used to fund a portion of the Rossignol purchase price and to refinance certain existing indebtedness.

Over the past 35 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 have 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 believe that our acquisition of Rossignol provides us with multiple authentic brands in both snow and golf. We believe that Rossignol’s technical knowledge, combined with our current lifestyle brands, will enable us to produce and market apparel, equipment, footwear, accessories and related products for consumers in a broad cross section of the outdoor market. Furthermore, we believe the combination of our existing global expertise in branded apparel and footwear, along with Rossignol’s expertise in branded wintersports equipment, provide us with a diversified platform for continued growth and enhanced operating efficiencies. Our products are sold throughout the world, primarily in surf shops, ski shops, snow shops, skate shops and specialty stores.

Our acquisition of Rossignol has had, and is expected to continue to have a significant impact on our financial results. Our revenues and expenses have increased substantially. Also, our overall profit margins have been negatively impacted because Rossignol has historically generated lower profit margins than we have, and this trend is expected to continue in the foreseeable future. In addition, Rossignol’s business has historically been seasonal, with revenues and operating profits generally higher in August through December, which will affect our consolidated quarterly results. We are substantially more leveraged as a result of the debt incurred in connection with the acquisition, and we have an increased amount of capital committed to manufacturing functions.

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,
	2006			2005			2006			2005
Statement of Income data
Revenues, net		100.0	%		100.0	%		100.0	%		100.0	%
Gross profit		47.3			46.8			46.2			45.6
Selling, general and administrative expense		43.5			35.7			41.4			35.2

Operating income		3.8			11.1			4.8			10.4

Interest expense		2.3			1.5			2.3			0.9
Foreign currency and other expense		0.1			0.0			0.0			0.1

Income before provision for income taxes		1.4			9.6			2.5			9.4
Provision for income taxes		0.4			3.0			0.8			3.0

Net income		1.0	%		6.6	%		1.7	%		6.4	%

Other data
EBITDA⁽¹⁾		7.6	%		13.4	%		8.8	%		12.6	%


⁽¹⁾		EBITDA is defined as net income before (i) interest expense, (ii) income tax expense, (iii) depreciation and amortization, and (iv) non-cash stock based compensation expense. 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 and the effect of non-cash compensation expense. Following is a reconciliation of net income to EBITDA:


	Three Months Ended				Nine Months Ended
	July 31,				July 31,
	2006		2005		2006		2005
Net income	$	5,336	$	24,635	$	27,668	$	73,516
Provision for income taxes		1,858		11,382		11,476		34,597
Interest expense		11,877		5,490		36,417		10,548
Depreciation and amortization		16,229		8,606		47,581		25,232
Non-cash stock compensation expense		4,732		—		16,056		—

EBITDA	$	40,032	$	50,113	$	139,198	$	143,893

Three Months Ended July 31, 2006 Compared to Three Months Ended July 31, 2005

Our total net revenues for the three months ended July 31, 2006 increased 41% to $525.8 million from $373.8 million in the comparable period of the prior year. Revenue from our Rossignol and Cleveland Golf businesses, which were acquired on July 31, 2005, totaled $76.8 million for the three months ended July 31, 2006. Revenues in the Americas increased 41% to $277.4 million for the three months ended July 31, 2006 from $196.3 million in the comparable period of the prior year, and European revenues increased 43% to $191.0 million from $133.6 million for those same periods. As measured in euros, Quiksilver Europe’s primary functional currency, revenues in the current year’s quarter increased 38% compared to the prior year. Asia/Pacific revenues increased 31% to $56.3 million in the three months ended July 31, 2006 from $43.1 million in the comparable period of the prior year. In Australian dollars, Quiksilver Asia/Pacific’s primary functional currency, Asia/Pacific revenues increased 32% from the comparable period of the prior year.

In the Americas, revenues in our men’s category, which includes the Quiksilver Young Men’s, Boys, Toddlers, Quiksilveredition, Hawk and DC brands, increased 17% to $125.0 million from $106.8 million in the comparable period of the prior year, while revenues in our women’s category, which includes the Roxy, Roxy Girl, Teenie Wahine, DC, Raisins, Leilani and Radio Fiji brands, increased 24% to $108.5 million from $87.8 million. Revenues from our wintersports and golf equipment brands which include Rossignol, Dynastar, Look, Lange, Kerma, Cleveland Golf, Never Compromise, Lib Technologies, Gnu, Bent Metal and Roxy equipment, totaled $43.9 million for the current year’s quarter compared to $1.7 million in the prior year. The increase in Americas’ men’s revenues came primarily from the DC and Quiksilver brands partially offset by a decrease in our Hawk revenue which no longer generates product revenue after our license agreement of such brand with a third party. The increase in Americas’ women’s revenues came primarily from the Roxy and DC brands slightly offset by the discontinuation of our private label swimwear product line. The increase in wintersports and golf equipment revenue came primarily from the newly acquired Rossignol and Cleveland Golf businesses. In Europe and as reported in dollars, men’s revenues increased 16% to $107.7 million from $92.9 million, while women’s revenues increased 30% to $52.9 million from $40.7 million. Our European wintersports and golf equipment revenue of $30.4 million came from our newly acquired Rossignol and Cleveland Golf businesses. The European men’s revenue increase came primarily from growth in the Quiksilver brand and to a lesser extent the DC brand. The European women’s revenue increase reflects growth in the Roxy brand. As measured in euros, European men’s revenues increased 12% and women’s revenues increased 26%. The increase in Asia/Pacific revenues also came primarily from growth in the Roxy and Quiksilver brands.

Our consolidated gross profit margin for the three months ended July 31, 2006 increased to 47.3% from 46.8% in the comparable period of the prior year. The Americas’ gross profit margin increased to 42.9% from 40.1%, while the European gross profit margin decreased to 53.1% from 55.0%, and the Asia/Pacific gross profit margin decreased to 49.2% from 51.7% for those same periods. The increase in the Americas’ gross profit margin was primarily due to lower production costs and improved margins in our DC brand. Our European gross profit margin decrease was primarily due to sales from our lower margin wintersports business, partially offset by improved margins in our Quiksilver, Roxy and DC brand businesses. In Asia/Pacific, the gross profit margin decrease was primarily due to sales from our lower margin wintersports and golf equipment businesses and lower margins on our apparel brands in Australia.

Selling, general and administrative expense (“SG&A”) for the three months ended July 31, 2006 increased 71% to $228.8 million from $133.6 million in the comparable period of the prior year. Americas’ SG&A increased 54% to $86.2 million from $55.9 million, while European SG&A increased 95% to $105.8 million from $54.3 million, and Asia/Pacific SG&A increased 44% to $23.7 million from $16.5 million for those same periods. As a percentage of revenues, SG&A increased to 43.5% for the three months ended July 31, 2006 from 35.7% for the three months ended July 31, 2005.

The consolidated increase in SG&A as a percentage of revenue was primarily caused by our newly acquired wintersports equipment business. This business has a seasonally low shipping period during the three months ended July 31, 2006, causing the ratio of SG&A to revenue to be negatively impacted. The consolidated increase in SG&A as a percentage of revenue also increased due to $4.7 million in stock based compensation expense recorded in the current period as a result of adopting SFAS No. 123(R) and the cost of additional retail stores.

Interest expense for the three months ended July 31, 2006 increased to $11.9 million from $5.5 million in the three months ended July 31, 2005. This increase was primarily due to debt incurred and assumed in connection with the acquisition of Rossignol.

Our foreign currency loss amounted to $0.4 million for the three months ended July, 31, 2006 compared to a gain of $0.4 million in the comparable period of the prior year. This 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.

The effective income tax rate for the three months ended July 31, 2006 was 25.8% compared to 31.6% for the three months ended July 31, 2005. Our effective income tax rate for the nine months ended July 31, 2006 is 29.3%, which is lower than the prior year’s annual rate because a higher percentage of our 2006 profits are expected to be generated in countries with lower tax rates and from foreign tax credits.

Net income for the three months ended July 31, 2006 was $5.3 million or $0.04 per share on a diluted basis compared to $24.6 million or $0.20 per share on a diluted basis in the comparable period of the prior year. Basic net income per share was $0.04 per share for the three months ended July 31, 2006 compared to $0.21 in the comparable period of the prior year. EBITDA decreased 20% to $40.0 million from $50.1 million for those same periods.

Nine Months Ended July 31, 2006 Compared to Nine Months Ended July 31, 2005

Our total net revenues for the nine months ended July 31, 2006 increased 39% to $1,583.9 million from $1,143.5 million in the comparable period of the prior year. Our revenue from the Rossignol and Cleveland Golf businesses, which were acquired on July 31, 2005, totaled $354.7 million for the nine months ended July 31, 2006. Revenues in the Americas increased 35% to $748.2 million for the nine months ended July 31, 2006 from $554.7 million in the comparable period of the prior year, and European revenues increased 51% to $669.3 million from $442.4 million for those same periods. As measured in euros, European revenues in the first nine months of the current year increased 60% as compared to the prior year. Asia/Pacific revenues increased 13% to $162.9 million in the nine months ended July 31, 2006 compared to $143.9 million in the comparable period of the prior year. In Australian dollars, Asia/Pacific revenues increased 17% compared to the prior year.

In the Americas, revenues in our men’s category increased 11% to $308.8 million from $277.2 million in the comparable period of the prior year, while revenues in our women’s category increased 7% to $292.4 million from $274.1 million. Revenues from our wintersports and golf brands totaled $147.0 million during the current year’s nine-month period compared to revenues of $3.4 million in the comparable period of the prior year. The increase in Americas’ men’s revenues came primarily from an increase in the DC brand and, to a lesser extent, the Quiksilver brand. The increase in Americas’ women’s revenues came primarily from growth in the Roxy and DC brands, which was partially offset by a decrease in revenue due to the discontinuation of our private label swimwear product line. The increase in wintersports and golf equipment revenue came primarily from the newly acquired Rossignol and Cleveland Golf businesses. In Europe and as reported in dollars, men’s revenues increased 3% to $315.5 million from $305.0 million, while women’s revenues increased 19% to $163.0 million from $137.4 million. Our European wintersports and golf equipment revenue of $190.9 million came from our newly acquired Rossignol and Cleveland Golf businesses. The European men’s increase was primarily due to growth in the Quiksilver and DC brands which was partially offset by the negative effects of changes in foreign currency exchange rates. As measured in euros, European men’s revenue increased 9%. The women’s increase reflects growth in the Roxy brand partially offset by the negative effects of changes in foreign currency exchange rates. As measured in euros, women’s revenues increased 25%. In Asia/Pacific, the increase in revenues came primarily from the newly acquired Rossignol and Cleveland Golf businesses and to a lesser extent, increases in our other brand revenue, partially offset by the negative effects of foreign currency exchange rates.

Our consolidated gross profit margin for the nine months ended July 31, 2006 increased to 46.2% from 45.6% in the comparable period of the prior year. The Americas’ gross profit margin increased to 41.4% from 39.3%, while the European gross profit margin decreased to 51.5% from 51.9%, and the Asia/Pacific gross profit margin decreased to 46.4% from 50.1% for those same periods. The increase in Americas’ gross profit margin was primarily due to lower production costs and improved margins in our DC brand, and a higher percentage of sales through company owned retail stores where we earn both the wholesale and retail margins, partially offset by higher sales from our wintersports and golf equipment businesses. Our European gross profit margin decrease was primarily due to sales from our lower margin wintersports and golf equipment businesses partially offset by a higher percentage of sales through company owned retail stores. In Asia/Pacific, the gross profit margin decrease was primarily due to sales from our lower margin wintersports and golf equipment businesses and lower margins on our other brands, partially offset by a higher percentage of sales through company-owned retail stores.

SG&A for the nine months ended July 31, 2006 increased 63% to $656.0 million from $402.4 million in the comparable period of the prior year. Americas’ SG&A increased 54% to $251.5 million from $162.9 million, while European SG&A increased 81% to $293.5 million from $161.9 million, and Asia/Pacific SG&A increased 35% to $70.9 million from $52.6 million for those same periods. As a percentage of revenues, SG&A increased to 41.4% for the nine months ended July 31, 2006 from 35.2% for the nine months ended July 31, 2005.

The consolidated increase in SG&A as a percentage of revenue was primarily due to increased SG&A expenses from our newly acquired wintersports equipment business. Our wintersports equipment business has a seasonally low shipping period during the six months ended July 31, 2006, causing the ratio of SG&A to revenue to be negatively impacted. The consolidated increase in SG&A as a percentage of revenue also increased due to $16.1 million in stock based compensation recorded in the current period as a result of adopting SFAS No. 123(R) on November 1, 2005 and the cost of additional retail stores.

Interest expense for the nine months ended July 31, 2006 increased to $36.4 million from $10.5 million in the comparable period of the prior year. This increase was primarily due to debt incurred and assumed in connection with the acquisition of Rossignol.

Our foreign currency gain amounted to $0.6 million for the nine months ended July 31, 2006 compared to a gain of $0.2 million in the comparable period of the prior year. This current period gain 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.

The effective income tax rate for the nine months ended July 31, 2006 decreased to 29.3% from 32.0% in the comparable period of the prior year. This improvement resulted primarily because a higher percentage of our 2006 profits are expected to be generated in countries with lower tax rates and from foreign tax credits.

Net income for the nine months ended July 31, 2006 was $27.7 million or $0.22 per share on a diluted basis compared to $73.5 million or $0.59 per share on a diluted basis in the comparable period of the prior year. Basic net income per share was $0.23 per share for the nine months ended July 31, 2006 compared to $0.62 per share in the comparable period of the prior year. EBITDA decreased 3% to $139.2 million from $143.9 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.

The net increase in cash and cash equivalents for the nine months ended July 31, 2006 was $8.7 million compared to $104.7 million in the comparable period of the prior year. Cash and cash equivalents totaled $84.3 million at July 31, 2006 compared to $75.6 million at October 31, 2005, while working capital was $466.5 million at July 31, 2006 compared to $458.9 million at October 31, 2005. We believe our current cash balance and current lines of credit are adequate to cover our seasonal working capital and other requirements for the foreseeable future, and that increases in our lines of credit can be obtained as needed to fund future growth.

Cash Flows

We generated $53.7 million of cash from operating activities in the nine months ended July 31, 2006 compared to $53.8 in the comparable period of the prior year. During the nine months ended July 31, 2006, the decrease in accounts receivable provided cash of $109.4 million compared to cash used of $61.9 million during the nine months ended July 31, 2005, an increase in cash provided of $171.3 million. The change in inventories, net of the change in accounts payable used cash of $90.8 million during the nine months ended July 31, 2006 compared to cash provided of $8.0 million for the same period of the

prior year, a net decrease in cash provided of $98.8 million. An additional $72.6 million was used during the nine months ended July 31, 2006 compared to the comparable period of the prior year primarily due to changes in other operating assets and liabilities.

Capital expenditures totaled $61.3 million for the nine months ended July 31, 2006, compared to the $45.1 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 $34.8 million of cash for acquisitions, of which $5.8 million relates to a payment to the former owners of our Asia/Pacific business, $5.0 million relates to a payment to the former owners of DC Shoes, Inc., and the remaining $24.0 million relates primarily to acquisitions of certain other licensees, distributors and retail store locations.

During the nine months ended July 31, 2006, net cash provided by financing activities totaled $50.8 million, compared to $279.3 million provided in the comparable period of the prior year. The borrowings in the prior year’s period primarily relate to the issuance of our Senior Notes for net proceeds of $389 million. We used a majority of the proceeds from these notes to fund a portion of the Rossignol acquisition and the balance to refinance a portion of our existing debt.

Commitments

We paid $5.8 million related to the achievement of certain sales and earnings targets to the former owners of our Asia/Pacific business during the nine months ended July 31, 2006. This amount represents the final payment related to this acquisition. In addition, we paid $5.0 million related to the achievement of certain sales and earnings targets to the former owners of DC Shoes, Inc.

In connection with the acquisition of Rossignol, we have 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, 2006 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, 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, 2006, we have paid approximately $11.8 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 the United States and France, totaled approximately $23.3 million at July 31, 2006.

Trade Accounts Receivable and Inventories

Accounts receivable decreased 18% to $492.4 million at July 31, 2006 from $599.5 million at October 31, 2005. Accounts receivable in the Americas decreased 14% to $233.6 million from $273.0 million, European accounts receivable decreased 20% to $212.0 million from $263.8 million, and Asia/Pacific accounts receivable decreased 25% to $46.8 million from $62.7 million for those same periods. Compared to July 31, 2005, accounts receivable in the Americas increased 25%, European accounts receivable increased 9% and Asia/Pacific accounts receivable remained consistent. Included in accounts receivable is approximately $29.8 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 accurately compute days sales outstanding. Overall average days sales outstanding increased by approximately 4 days at July 31, 2006 compared to July 31, 2005. Of this increase, 8 days related to our wintersports and golf equipment businesses, offset by a 4 day improvement relating to our other businesses.

Consolidated inventories increased 34% to $516.4 million at July 31, 2006 from $386.4 million at October 31, 2005. Inventories in the Americas increased 27% to $208.6 million from $164.4 million, while European inventories increased 42% to $250.8 million from $176.9 million, and Asia/Pacific inventories increased 26% to $56.9 million from $45.1 million for those same periods. Consolidated inventories increased 18% compared to July 31, 2005. Inventories in the Americas and Asia/Pacific increased 40% and 51%, respectively, from the year earlier, while European inventories remained consistent for those same periods. Consolidated average inventory turnover was approximately 3.5 at July 31, 2006 compared to 4.0 at July 31, 2005.

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 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 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

All statements included in this report, other than statements or characterizations of historical fact, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not limited to, statements regarding the trends and uncertainties in our financial condition and results of operations. These forward-looking statements are based on our current expectations, estimates and projections about our industry, management’s beliefs, and certain assumptions made by us and speak only as of the date of this report. Forward-looking statements can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” and similar expressions, and variations or negatives of these words. In addition, any statements that refer to expectations, projections, guidance, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. These statements are not guarantees of future results and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statement as a result of various factors, including, but not limited to, the following:

•		our ability to achieve the financial results that we anticipate, or have experienced in the past;

•		our ability to fully realize the benefits we anticipate from our acquisition of Rossignol;

•		the impact of our substantial leverage on our ability to generate cash flows or obtain financing to fund our anticipated growth strategies and the cost of such financing;

•		our plans to expand internationally;

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

•		our plans to open new retail stores;

•		payments due on contractual commitments;

•		future expenditures for capital projects;

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

•		our ability to remain compliant with our debt covenants;

•		integration of acquired businesses and future acquisitions;

•		general economic and business conditions;

•		foreign exchange rate fluctuations; and

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

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

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 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 a 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 60% in euros during the nine months ended July 31, 2006 compared to the nine months ended July 31, 2005. As measured in U.S. dollars and reported in our consolidated statements of income, European revenues increased 51% as a result of a stronger U.S. dollar versus the euro in comparison to the prior year.

Asia/Pacific revenues increased 17% in Australian dollars during the nine months ended July 31, 2006 compared to the nine months ended July 31, 2005. As measured in U.S. dollars and reported in our consolidated statements of income, Asia/Pacific revenues increased 13% as a result of a stronger U.S. dollar versus the Australian 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, 2005 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, 2006, 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, 2006.

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, 2006 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


		Page No.
PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited):

Quiksilver, Inc. Condensed Consolidated Balance Sheets July 31, 2006 and October 31, 2005		2

Quiksilver, Inc. Condensed Consolidated Statements of Income Three Months Ended July 31, 2006 and 2005		3

Quiksilver, Inc. Condensed Consolidated Statements of Comprehensive Income Three Months Ended July 31, 2006 and 2005		3

Quiksilver, Inc. Condensed Consolidated Statements of Income Nine Months Ended July 31, 2006 and 2005		4

Quiksilver, Inc. Condensed Consolidated Statements of Comprehensive Income Nine Months Ended July 31, 2006 and 2005		4

Quiksilver, Inc. Condensed Consolidated Statements of Cash Flows Nine Months Ended July 31, 2006 and 2005		5

Quiksilver, Inc. Notes to Condensed Consolidated Financial Statements		6

Roger Cleveland Golf Company, Inc. Balance Sheets July 31, 2006 and October 31, 2005		22

Roger Cleveland Golf Company, Inc. Statement of Income and Comprehensive Income Three Months Ended July 31, 2006		23

Roger Cleveland Golf Company, Inc. Statement of Income and Comprehensive Income Nine Months Ended July 31, 2006		24

Roger Cleveland Golf Company, Inc. Statement of Stockholders’ Equity Nine Months Ended July 31, 2006		24

Roger Cleveland Golf Company, Inc. Statement of Cash Flows Nine Months Ended July 31, 2006		25

Roger Cleveland Golf Company, Inc. Notes to Financial Statements		26

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		33

Results of Operations		34

Three Months Ended July 31, 2006 Compared to Three Months Ended July 31, 2005		35

Nine Months Ended July 31, 2006 Compared to Nine Months Ended July 31, 2005		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 6. Exhibits		43

SIGNATURES		44
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2


				Wholly-owned		Non-
	Quiksilver,			Guarantor		Guarantor
In thousands	Inc.			Subsidiaries		Subsidiaries			Elimination			Consolidated
Revenues, net	$	2,904		$	567,318	$	598,723		$	(25,481	)	$	1,143,464
Cost of goods sold		—			346,869		284,907			(9,498	)		622,278

Gross profit		2,904			220,449		313,816			(15,983	)		521,186

Selling, general and administrative expense		21,362			167,368		230,041			(16,385	)		402,386

Operating (loss) income		(18,458	)		53,081		83,775			402			118,800
Interest expense		5,046			3,863		1,639			—			10,548
Foreign currency loss (gain)		(550	)		523		(186	)		—			(213	)
Minority interest and other expense		—			—		352			—			352

(Loss) income before provision for income taxes		(22,954	)		48,695		81,970			402			108,113
Provision for income taxes		(8,846	)		18,839		24,604			—			34,597

Net (loss) income	$	(14,108	)	$	29,856	$	57,366		$	402		$	73,516


Exhibits

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


		QUIKSILVER, INC., a Delaware corporation

September 11, 2006		/s/ Steven L. Brink

		Steven L. Brink
		Chief Financial Officer and Treasurer
		(Principal Accounting Officer)


Exhibit No.		Description

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


Date: September 11, 2006		/s/ Robert B. McKnight, Jr.

		Robert B. McKnight, Jr.
		Chief Executive Officer (Principal Executive Officer)


/s/ Robert B. McKnight, Jr.
Robert B. McKnight, Jr.
Chief Executive Officer
September 11, 2006


/s/ Steven L. Brink
Steven L. Brink
Chief Financial Officer
September 11, 2006