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 August 26, 2007
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 002-90139

LEVI STRAUSS & CO.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		94-0905160
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

1155 Battery Street, San Francisco, California 94111

(Address of Principal Executive Offices) (Zip Code)

(415) 501-6000
(Registrant’s Telephone Number, Including Area Code)

None

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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 o	Accelerated Filer o	Non-accelerated filer þ

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

The Company is privately held. Nearly all of its common equity is owned by members of the families of several descendants of the Company’s founder, Levi Strauss. There is no trading in the common equity and therefore an aggregate market value based on sales or bid and asked prices is not determinable.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock $.01 par value — 37,278,238 shares outstanding on October 4, 2007

PART I — FINANCIAL INFORMATION


Item 1.	*CONSOLIDATED FINANCIAL STATEMENTS*

LEVI STRAUSS & CO. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	(Unaudited)
	August 26,			November 26,
	2007			2006
	(Dollars in thousands)

ASSETS
Current Assets:
Cash and cash equivalents	$	284,761		$	279,501
Restricted cash		1,758			1,616
Trade receivables, net of allowance for doubtful accounts of $15,223 and $17,998		559,650			589,975
Inventories:
Raw materials		11,988			13,543
Work-in-process		12,803			13,479
Finished goods		550,628			523,041

Total inventories		575,419			550,063
Deferred tax assets, net		102,609			101,823
Other current assets		75,645			86,292

Total current assets		1,599,842			1,609,270
Property, plant and equipment, net of accumulated depreciation of $582,052 and $530,413		409,348			404,429
Goodwill		206,219			203,989
Other intangible assets, net		42,798			42,815
Non-current deferred tax assets, net		447,549			457,105
Other assets		136,314			86,457

Total assets	$	2,842,070		$	2,804,065


LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIT
Current Liabilities:
Short-term borrowings	$	8,919		$	11,089
Current maturities of capital leases		1,669			1,608
Accounts payable		229,152			245,629
Restructuring liabilities		8,786			13,080
Other accrued liabilities		185,263			194,601
Accrued salaries, wages and employee benefits		202,609			261,234
Accrued interest payable		46,176			61,827
Accrued income taxes		70,638			14,226

Total current liabilities		753,212			803,294
Long-term debt		2,161,142			2,206,323
Long-term capital leases, less current maturities		1,899			3,086
Postretirement medical benefits		298,219			379,188
Pension liability		184,110			184,090
Long-term employee related benefits		126,851			136,408
Long-term income tax liabilities		23,723			19,994
Other long-term liabilities		46,199			46,635
Minority interest		14,616			17,138

Total liabilities		3,609,971			3,796,156

Commitments and contingencies (Note 5)
Temporary equity		11,436			1,956

Stockholders’ deficit:
Common stock — $.01 par value; 270,000,000 shares authorized; 37,278,238 shares issued and outstanding		373			373
Additional paid-in capital		83,487			89,837
Accumulated deficit		(766,234	)		(959,478	)
Accumulated other comprehensive loss		(96,963	)		(124,779	)

Stockholders’ deficit		(779,337	)		(994,047	)

Total liabilities, temporary equity and stockholders’ deficit	$	2,842,070		$	2,804,065

The accompanying notes are an integral part of these consolidated financial statements.

LEVI STRAUSS & CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME


	Three Months Ended						Nine Months Ended
	August 26,			August 27,			August 26,			August 27,
	2007			2006			2007			2006
	(Dollars in thousands)
	(Unaudited)

Net sales	$	1,031,702		$	1,008,929		$	3,045,324		$	2,901,267
Licensing revenue		19,466			19,340			59,609			55,454

Net revenues		1,051,168			1,028,269			3,104,933			2,956,721
Cost of goods sold		564,957			555,592			1,657,980			1,573,185

Gross profit		486,211			472,677			1,446,953			1,383,536
Selling, general and administrative expenses		343,389			312,082			983,743			926,998
Restructuring charges, net		(579	)		2,615			12,302			13,064

Operating income		143,401			157,980			450,908			443,474
Interest expense		53,142			60,216			166,644			188,304
Loss on early extinguishment of debt		35			—			14,364			32,958
Other (income) expense, net		172			(9,524	)		(17,722	)		(14,101	)

Income before income taxes		90,052			107,288			287,622			236,313
Income tax expense		29,158			58,019			94,378			93,028

Net income	$	60,894		$	49,269		$	193,244		$	143,285

The accompanying notes are an integral part of these consolidated financial statements.

LEVI STRAUSS & CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended
	August 26,			August 27,
	2007			2006
	(Dollars in thousands) (Unaudited)

Cash Flows from Operating Activities:
Net income	$	193,244		$	143,285
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		54,385			46,765
Asset impairments		7,365			—
Loss (gain) on disposal of property, plant and equipment		76			(1,127	)
Unrealized foreign exchange gains		(5,763	)		(14,109	)
Realized loss on foreign currency contracts not designated for hedge accounting		4,106			—
Postretirement benefit plan curtailment gain		(39,394	)		(29,041	)
Write-off of unamortized costs associated with early extinguishment of debt		6,570			16,051
Amortization of deferred debt issuance costs		4,076			6,765
Stock-based compensation		3,130			888
Allowance for doubtful accounts		1,428			(1,355	)
Change in operating assets and liabilities:
Trade receivables		18,448			93,743
Inventories		(38,959	)		(34,461	)
Other current assets		14,018			(18,223	)
Other non-current assets		(14,691	)		(26,839	)
Accounts payable and other accrued liabilities		(29,285	)		(10,639	)
Income tax liabilities		60,743			65,869
Restructuring liabilities		(6,023	)		142
Accrued salaries, wages and employee benefits		(84,516	)		(37,436	)
Long-term employee related benefits		(21,622	)		(27,600	)
Other long-term liabilities		(987	)		435
Other, net		801			(1,616	)

Net cash provided by operating activities		127,150			171,497

Cash Flows from Investing Activities:
Purchases of property, plant and equipment		(53,834	)		(41,090	)
Proceeds from sale of property, plant and equipment		1,035			1,910
Acquisition of retail stores		(2,502	)		(1,373	)
Foreign currency contracts not designated for hedge accounting		(4,106	)		—

Net cash used for investing activities		(59,407	)		(40,553	)

Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt		322,563			475,690
Repayments of long-term debt		(381,315	)		(492,269	)
Net decrease in short-term borrowings		(2,560	)		(2,991	)
Debt issuance costs		(1,219	)		(12,168	)
Restricted cash		(182	)		1,653
Dividends to minority interest shareholders of Levi Strauss Japan K.K.		(3,141	)		—

Net cash used for financing activities		(65,854	)		(30,085	)

Effect of exchange rate changes on cash		3,371			1,520

Net increase in cash and cash equivalents		5,260			102,379
Beginning cash and cash equivalents		279,501			239,584

Ending cash and cash equivalents	$	284,761		$	341,963

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	171,965		$	179,721
Income taxes		36,325			66,892

The accompanying notes are an integral part of these consolidated financial statements.

LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE QUARTERLY PERIOD ENDED AUGUST 26, 2007


NOTE 1:	SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Levi Strauss & Co. (“LS&CO.” or the “Company”) is one of the world’s leading branded apparel companies. The Company designs and markets jeans and jeans-related pants, casual and dress pants, tops, jackets and related accessories, for men, women and children under the Levi’s^®, Dockers^® and Levi Strauss Signature^® brands. The Company markets its products in three geographic regions: North America, Europe and Asia Pacific.

Basis of Presentation and Principles of Consolidation

The unaudited consolidated financial statements of LS&CO. and its wholly-owned and majority-owned foreign and domestic subsidiaries (the “Company”) are prepared in conformity with generally accepted accounting principles in the United States (“U.S.”) for interim financial information. In the opinion of management, all adjustments necessary for a fair statement of the financial position and the results of operations for the periods presented have been included. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended November 26, 2006, included in the Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission on February 13, 2007.

The unaudited consolidated financial statements include the accounts of LS&CO. and its subsidiaries. All significant intercompany transactions have been eliminated. Management believes the disclosures are adequate to make the information presented herein not misleading. Certain prior-year amounts have been reclassified to conform to the current presentation. The results of operations for the three months and nine months ended August 26, 2007, may not be indicative of the results to be expected for any other interim period or the year ending November 25, 2007.

The Company’s fiscal year consists of 52 or 53 weeks, ending on the last Sunday of November in each year. Both the 2007 and 2006 fiscal years consist of 52 weeks ending on November 25, 2007, and November 26, 2006, respectively. Each quarter of both fiscal years 2007 and 2006 consists of 13 weeks. The fiscal year end for certain foreign subsidiaries is fixed at November 30 due to local statutory requirements. All references to years relate to fiscal years rather than calendar years.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes to consolidated financial statements. Estimates are based upon historical factors, current circumstances and the experience and judgment of management. Management evaluates its estimates and assumptions on an ongoing basis and may employ outside experts to assist in its evaluations. Changes in such estimates, based on more accurate future information, or different assumptions or conditions, may affect amounts reported in future periods.

Recently Issued Accounting Standards

The following recently issued accounting standards have been grouped by their required effective dates for the Company:

Fourth Quarter of 2007


	•	In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R)”

LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED AUGUST 26, 2007


		(“SFAS 158”). SFAS 158 requires employers to (a) recognize in their statement of financial position the funded status of a benefit plan measured as the difference between the fair value of plan assets and the benefit obligation, (b) recognize net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to SFAS No. 87, “Employer’s Accounting for Pensions” or SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” (c) measure defined benefit plan assets and obligations as of the date of the employer’s statement of financial position and (d) disclose additional information in the notes to the financial statements about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. The requirements of SFAS 158 are to be applied prospectively upon adoption, which is fiscal year end 2007 for the Company. The Company has pension and other postretirement plans which will be affected by the adoption of SFAS 158. The Company expects the impact from the adoption of FAS 158 at November 25, 2007, to result in a net decrease to total liabilities of approximately $81 million, with corresponding decreases to stockholder’s deficit of $49 million and to deferred tax assets of $32 million. The actual impact of the adoption of SFAS 158 will depend on the valuation of actual plan assets and obligations at November 25, 2007.

First Quarter of 2008


	•	In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which is an interpretation of SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109 and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on 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 is currently in the process of assessing the impact the adoption of FIN 48 will have on its financial statements.

	•	In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently in the process of assessing the impact the adoption of SFAS 157 will have on its financial statements.

	•	In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure certain financial assets and liabilities and other eligible items at fair value, which are not otherwise currently required to be measured at fair value. Under SFAS 159, the decision to measure items at fair value is made at specified election dates on an irrevocable instrument-by-instrument basis. Entities electing the fair value option would be required to recognize changes in fair value in earnings and to expense upfront cost and fees associated with the item for which the fair value option is elected. Entities electing the fair value option are required to distinguish on the face of the statement of financial position, the fair value of assets and liabilities for which the fair value option has been elected and similar assets and liabilities measured using another measurement attribute. If elected, SFAS 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007, with earlier adoption permitted provided that the entity also early adopts all of the

LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED AUGUST 26, 2007


		requirements of SFAS 159. The Company is currently evaluating this standard and whether to elect the fair value option provided for in it for any of the Company’s qualifying instruments.


NOTE 2:	INCOME TAXES

Effective Income Tax Rate. The Company’s income tax expense for the three and nine months ended August 26, 2007, was approximately $29.2 million and $94.4 million, respectively. The Company’s effective income tax rates for the three and nine months ended August 26, 2007, were 32.4% and 32.8%, respectively.

The Company’s income tax expense for the three and nine months ended August 27, 2006, was approximately $58.0 million and $93.0 million, respectively. The Company’s effective income tax rates for the three and nine months ended August 27, 2006, were 54.1% and 39.4%, respectively. The effective tax rate for the three months ended August 27, 2006, was higher than that for the nine months due to a discrete, non-cash tax benefit recognized in the second quarter of 2006 arising from a change in the ownership structure of certain foreign subsidiaries, which reduced by approximately $31.5 million the overall residual U.S. and foreign tax expected to be imposed upon future repatriations of the Company’s unremitted foreign earnings.

Estimated Annual Effective Income Tax Rate. The Company’s estimated annual effective income tax rates for 2007 and 2006 are 33.8% and 42.8%, respectively. These rates differ from the effective income tax rates of 32.8% and 39.4% for the nine months ended August 26, 2007, and August 27, 2006, respectively, primarily due to the greater impact that the Company’s discrete tax benefits have relative to the Company’s nine-month income before taxes as compared to its projected annual income before taxes. The Company’s discrete tax benefits in 2007 primarily reflect the recognition in the second quarter of 2007 of approximately $6.3 million resulting from an election to change the filing methodology of its California state income tax return; the discrete tax benefits in 2006 resulted primarily from the change in ownership structure of certain foreign subsidiaries described above.

The estimated annual effective income tax rates for 2007 and 2006 are as follows:


	Fiscal Year			Fiscal Year
	2007⁽¹⁾			2006⁽²⁾

Income tax expense at U.S. federal statutory rate		35.0	%		35.0	%
State income taxes, net of U.S. federal impact		0.4			1.3
Impact of foreign operations		(3.3	)		6.8
Reassessment of liabilities due to change in estimates		1.8			(0.5	)
Other		(0.1	)		0.2

		33.8	%		42.8	%


(1)		Estimated annual effective income tax rate for 2007.

(2)		Projected annual effective income tax rate used for the nine months ended August 27, 2006.

The “State income taxes, net of U.S. federal impact” item primarily reflects the expected state income tax expense for the year, net of related federal benefit. The impact of this item on the Company’s estimated annual effective tax rate decreased in 2007 from the prior year primarily due to the change in the California tax return filing methodology noted above.

The “Impact of foreign operations” item above reflects the impact of U.S. and foreign income taxes on profits earned outside the U.S. For 2007, the residual U.S. tax expected to be imposed upon a repatriation of foreign earnings was reduced due to the Company’s expectations regarding its ability to utilize some portion of the available related foreign tax credits.

LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED AUGUST 26, 2007

The “Reassessment of liabilities due to change in estimates” item relates primarily to changes in the Company’s estimate of its contingent tax liabilities. For 2007, this item relates to an increase of approximately $6.5 million in the Company’s estimated contingent tax liabilities primarily due to additional foreign uncertain tax positions. For 2006, the favorable impact of this item on the Company’s estimated annual effective tax rate relates primarily to a tax benefit of $6.0 million due to the release of certain state and foreign liabilities resulting from favorable court rulings and audit settlements, partially offset by additional tax expense resulting from an increase in other contingent tax liabilities of approximately $4.4 million.


NOTE 3:	GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill by business segment for the nine months ended August 26, 2007, were as follows:


	North				Asia
	America		Europe		Pacific			Total
	(Dollars in thousands)

Balance, November 26, 2006	$	199,905	$	3,814	$	270		$	203,989
Additions⁽¹⁾		—		—		2,175			2,175
Foreign currency fluctuation		—		142		(87	)		55

Balance, August 26, 2007	$	199,905	$	3,956	$	2,358		$	206,219


(1)		Additional goodwill resulted from the purchase of six retail stores

Other intangible assets were as follows:


	August 26, 2007						November 26, 2006
	Gross		Accumulated					Gross		Accumulated
	Carrying Value		Amortization			Total		Carrying Value		Amortization			Total
	(Dollars in thousands)

Trademarks and other intangible assets	$	43,059	$	(261)	$	42,798	$	43,059	$		(244)	$	42,815

Intangible assets are comprised primarily of owned trademarks with indefinite useful lives. Less than $0.1 million of the intangible assets balance is subject to amortization, for which the annual amortization expense is not material to the consolidated financial statements.

LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED AUGUST 26, 2007


NOTE 4:	LONG-TERM DEBT


	August 26,		November 26,
	2007		2006
	(Dollars in thousands)

Long-term debt
Secured:
Revolving credit facility	$	—	$	—
Notes payable, at various rates		123		117

Subtotal		123		117

Unsecured:
12.25% senior notes due 2012		522,676		522,453
Floating rate senior notes due 2012		—		380,000
8.625% Euro senior notes due 2013		343,510		330,952
Senior term loan due 2014		322,668		—
9.75% senior notes due 2015		450,000		450,000
8.875% senior notes due 2016		350,000		350,000
4.25% Yen-denominated Eurobonds due 2016		172,165		172,801

Subtotal		2,161,019		2,206,206
Less: current maturities		—		—

Total long-term debt	$	2,161,142	$	2,206,323

Short-term debt
Short-term borrowings	$	8,919	$	11,089

Total long-term and short-term debt	$	2,170,061	$	2,217,412

Senior Unsecured Term Loan; Redemption of Floating Rate Senior Notes due 2012

On March 27, 2007, the Company entered into a senior unsecured term loan agreement. The term loan consists of a single borrowing of $325.0 million, net of a 0.75% discount to the lenders. On April 4, 2007, the Company borrowed the maximum available $322.6 million under the term loan and used the borrowings plus cash on hand of approximately $66.4 million to redeem all of its outstanding $380.0 million floating rate senior notes due 2012 and to pay related redemption premiums, transaction fees and expenses of approximately $7.8 million. The term loan matures on April 4, 2014 and bears interest at 2.25% over LIBOR or 1.25% over the base rate. The term loan may not be prepaid during the first year but thereafter may be prepaid without premium or penalty.

Subsequent Event — Proposed Repurchase of 12.25% Senior Notes due 2012

Purchase or Redemption of 12.25% Senior Notes due 2012. On September 19, 2007, the Company announced its commencement of a cash tender offer for its outstanding $525.0 million aggregate principal amount of 12.25% senior notes due 2012. The Company is also seeking consent to amend the indenture under which the notes were issued to eliminate or make less restrictive most of the restrictive covenants, and certain related events of default, contained in the indenture. The tender offer will expire at 12:00 midnight, New York City time, on Wednesday, October 17, 2007, unless extended or earlier terminated by the Company. The Company intends to use cash on hand, as well as borrowings under a proposed amended and restated credit facility to finance the cash tender offer. Among other conditions, the Company’s obligation to consummate the tender offer is conditioned upon

LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED AUGUST 26, 2007

receipt of tenders and consents from holders of a majority of the principal amount of the notes and upon the amendment and restatement of its senior secured revolving credit facility to increase the facility by an additional $200 million to $750 million. The amended and restated facility will be secured by, among other domestic assets, certain U.S. trademarks associated with the Levi’s^® brand. The lien on the trademarks will be released upon the full payment of a new $250 million tranche under the facility.

Assuming all conditions to the tender offer are met, holders who tender their notes and consents in connection with the tender offer would receive cash consideration determined pursuant to a formula based on a fixed spread above a reference U.S. Treasury security. In addition, holders who tender their notes and consents on or prior to 5:00 p.m., New York City time, on October 3, 2007 would receive an early consent payment in cash of $30.00 per $1,000 principal amount of notes tendered. As of October 3, 2007, tenders and consents were received from holders of $505.8 million, or 96.3%, of the aggregate principal amount of the notes outstanding.

The Company intends to enter into the amended and restated credit facility on October 11, 2007. On such date, assuming all other conditions to the tender offer are met, the Company expects to accept and pay the tender offer consideration for all notes validly tendered prior to such date, plus it expects to pay the early consent payment for notes validly tendered prior to the October 3, 2007 deadline.

Based on notes validly tendered as of October 3, 2007, the Company currently expects to acquire those notes for a total cash consideration of $543.3 million, consisting of the tender offer consideration and any applicable consent payments, to pay approximately $1.5 million for transaction fees and expenses, and to write off approximately $10.6 million of unamortized debt issuance costs and any applicable discounts or premiums relating to the purchase and extinguishment of such notes.

Promptly following the expiration date of the tender offer, the Company expects to purchase any additional notes not yet purchased but validly tendered prior to the expiration date.

The 2012 notes are redeemable at the Company’s option on and after December 15, 2007. The Company intends, but is not obligated to, purchase all remaining outstanding 12.25% notes prior to their maturity as soon as practicable after the expiration of the pending tender offer pursuant to open market purchases, redemption or otherwise.

Loss on Early Extinguishment of Debt

For the nine months ended August 26, 2007, the Company recorded a loss of $14.4 million on early extinguishment of debt as a result of its redemption of its floating rate senior notes during the second quarter of 2007. The 2007 loss was comprised of a prepayment premium and other fees of approximately $7.8 million and the write-off of approximately $6.6 million of unamortized debt issuance costs related to the redemption of the floating rate senior notes. During the nine months ended August 27, 2006, the Company recorded a loss of $33.0 million on early extinguishment of debt in conjunction with the Company’s prepayment in March 2006 of the remaining balance of its prior senior secured term loan of approximately $488.8 million, and the amendment in May 2006 of the Company’s revolving credit facility. The 2006 loss was comprised of a prepayment premium and other fees and expenses of approximately $16.9 million and the write-off of approximately $16.1 million of unamortized capitalized costs.

Short-term Credit Lines and Standby Letters of Credit

Under the senior secured revolving credit facility, the Company is required to maintain certain reserves against availability (or deposit cash or investment securities in secured accounts with the administrative agent) including a $75.0 million reserve at all times. These reserves reduce the availability under the Company’s credit facility.

LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED AUGUST 26, 2007

As of August 26, 2007, the Company’s total availability, net of all applicable reserves, of $339.3 million under its senior secured revolving credit facility was reduced by $91.5 million for letters of credit and other credit usage allocated under the senior secured revolving credit facility, yielding a net availability of $247.8 million. Included in the $91.5 million of letters of credit and other credit usage, which arrangements are with various international banks, were $68.1 million of standby letters of credit (of which $42.8 million serve as guarantees by the creditor banks to cover U.S. workers’ compensation claims and customs bonds), $16.6 million of trade letters of credit and $6.8 million of other credit usage. The Company pays fees on letters of credit and other credit usage, and borrowings against the letters of credit are subject to interest at various rates.

Interest Rates on Borrowings

The Company’s weighted average interest rate on average borrowings outstanding during the three and nine months ended August 26, 2007, including the amortization of capitalized bank fees and underwriting fees, was 9.58% and 9.74%, respectively, compared to 9.95% and 10.28% in the same periods of 2006. The weighted average interest rate on average borrowings outstanding excludes interest payable to participants under deferred compensation plans and other miscellaneous items.


NOTE 5:	COMMITMENTS AND CONTINGENCIES

Foreign Exchange Contracts

The Company uses derivative instruments to manage its exposure to foreign currencies. As of August 26, 2007, the Company had U.S. dollar spot and forward currency contracts to buy $261.1 million and to sell $209.7 million against various foreign currencies. The Company also had Euro forward currency contracts to buy 8.3 million Euros ($11.3 million equivalent) against the Norwegian Krone and Swedish Krona. These contracts are at various exchange rates and expire at various dates through August 2008.

The Company is exposed to credit loss in the event of nonperformance by the counterparties to the foreign exchange contracts. However, the Company believes these counterparties are creditworthy financial institutions and does not anticipate nonperformance.

Other Contingencies

Wrongful Termination Litigation. Trial in the case before the United States District Court for the Northern District of California, San Jose Division, Case No. C-04-01026, as more fully described in the Company’s 2006 Annual Report on Form 10-K filed on February 13, 2007, is currently set for March 31, 2008. There have been no other material developments in this litigation since the Company filed its 2006 Annual Report. For more information about the litigation, see Note 7 to the consolidated financial statements contained in such Form 10-K.

Class Actions Securities Litigation. On September 11, 2007, in the matter In re Levi Strauss & Co., Securities Litigation, Case No. C-03-05605 RMW, pending before the United States District Court for the Northern District of California, San Jose Division, the Court dismissed the Section 10(b) and 20(a) claims and dismissed the tax fraud aspects of the Section 11 and 15 claims. The Court also limited the plaintiff class on the Section 11 and 15 claims by eliminating from the class those bondholders who purchased the bonds in private offerings and then exchanged them for registered bonds in the subsequent exchange offer. Plaintiffs were provided until January 18, 2008, to amend their complaint with respect to the tax-fraud claims. There have been no other material developments in this litigation since the Company filed its 2006 Annual Report on Form 10-K on February 13, 2007. For more information about the litigation, see Note 7 to the consolidated financial statements contained in such Form 10-K.

Other Litigation. In the ordinary course of business, the Company has various other pending cases involving contractual matters, employee-related matters, distribution questions, product liability claims, trademark

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED AUGUST 26, 2007

infringement and other matters. The Company does not believe there are any pending legal proceedings that will have a material impact on its financial condition or results of operations.


NOTE 6:	RESTRUCTURING LIABILITIES

The following describes the reorganization initiatives, including facility closures and organizational changes, associated with the Company’s restructuring liabilities as of August 26, 2007. In the table below, “Severance and employee benefits” relates to items such as severance packages, out-placement services and career counseling for employees affected by the closures and other reorganization initiatives. “Asset impairment” relates to the write-down of assets to their estimated fair value. “Other restructuring costs” primarily relates to lease loss liability and facility closure costs. “Charges” represents the initial charge related to the restructuring activity. “Utilization” consists of payments for severance, employee benefits and other restructuring costs, the effect of foreign exchange differences and asset impairments. “Adjustments” includes revisions of estimates related to severance, employee benefits and other restructuring costs.

For the three and nine months ended August 26, 2007, the Company recognized restructuring charges, net, of $(0.6) million and $12.3 million, respectively, which relate primarily to the planned closure of the Company’s distribution center in Heusenstamm, Germany and reorganization of the Company’s Eastern European operations, each described below. For the three and nine months ended August 27, 2006, the Company recognized restructuring charges, net, of $2.6 million and $13.0 million, respectively, which relate primarily to the closure of the Company’s distribution center in Little Rock, Arkansas and the reorganization of the Company’s Nordic operations.

The following table summarizes the restructuring activity for the nine months ended August 26, 2007, and the related restructuring liabilities balance as of November 26, 2006, and August 26, 2007:


	Restructuring
	Liabilities										Liabilities		Cumulative
	November 26,										August 26,		Charges
	2006		Charges		Utilization			Adjustments			2007		To Date
	(Dollars in thousands)
2007 reorganization initiatives:⁽¹⁾
Severance and employee benefits	$	—	$	5,823	$	155		$	(958	)	$	5,020	$	4,865
Asset impairment		—		7,008		(7,008	)		—			—		7,008
Prior reorganization initiatives:⁽²⁾
Severance and employee benefits		9,001		232		(6,136	)		(803	)		2,294		122,605
Other restructuring costs		11,746		1,209		(5,072	)		(209	)		7,674		38,873

Total	$	20,747	$	14,272	$	(18,061	)	$	(1,970	)	$	14,988	$	173,351

Current portion	$	13,080									$	8,786
Long-term portion		7,667										6,202

Total	$	20,747									$	14,988


(1)		On March 1, 2007, the Company announced the reorganization of its Eastern European operations to reduce complexity and streamline business processes. This reorganization will result in the elimination of the jobs of approximately 11 employees through 2007. The Company is obligated under lease commitments through the third quarter of 2009 and will record a lease loss liability upon ceasing use of the facility.

		On March 22, 2007, the Company announced its intent to close and sell its distribution center in Heusenstamm, Germany to enhance operational efficiencies in its European distribution network and concentrate logistics activities with the Company’s central logistics provider in Bornem, Belgium. In addition, the offices of the German business, which are located at the Heusenstamm facility, will move to a

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FOR THE QUARTERLY PERIOD ENDED AUGUST 26, 2007


		more central location in Frankfurt, Germany. The Company anticipates that the closure will take place in the first quarter of 2008. The closure will result in the elimination of the jobs of approximately 56 employees throughout 2007 and 2008.

		Current year charges include the estimated severance that will be payable to the terminated employees in respect of both of these 2007 reorganization initiatives. Additionally, as a result of the Heusenstamm facility closure, the Company recorded a $7.0 million impairment charge in the first quarter of 2007 relating to the write-down of building, land and some machinery and equipment to their estimated fair values. The Company estimates that it will incur additional restructuring charges related to these actions, principally in the form of additional termination benefits and facility-related costs, which will be recorded in future periods.

(2)		Prior reorganization initiatives include organizational changes and plant closures in 2002-2006, primarily in North America and Europe. Of the $10.0 million restructuring liability at August 26, 2007, $1.8 million resulted from its distribution facility closure in Little Rock, Arkansas, that commenced in 2006; $0.2 million resulted from the consolidation of its Nordic operations into its European headquarters in Brussels in 2006 and $8.0 million resulted from organizational changes in the United States and Europe that commenced in 2004. The liability for the 2004 activities primarily consists of lease loss liabilities.

		The Company estimates that it will incur future additional restructuring charges of approximately $0.9 million related to these actions. The Company expects to eliminate the jobs of approximately 10 employees related to these prior activities by the end of 2007.


NOTE 7:	EMPLOYEE BENEFIT PLANS

The following table summarizes the components of net periodic benefit cost (income) for the Company’s defined benefit pension plans and postretirement benefit plans:


	Pension Benefits						Postretirement Benefits
	Three Months Ended						Three Months Ended
	August 26,			August 27,			August 26,			August 27,
	2007			2006			2007			2006
	(Dollars in thousands)

Service cost	$	1,874		$	1,871		$	178		$	177
Interest cost		14,633			14,358			2,709			3,192
Expected return on plan assets		(15,089	)		(13,248	)		—			—
Amortization of prior service cost (benefit)		208			381			(11,432	)		(13,165	)
Amortization of transition asset		123			155			—			—
Amortization of actuarial loss		1,540			1,424			1,169			1,373
Curtailment loss (gain)⁽¹⁾		19			5,391			(14,073	)		(29,041	)
Net settlement gain		(120	)		—			—			—

Net periodic benefit cost (income)	$	3,188		$	10,332		$	(21,449	)	$	(37,464	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED AUGUST 26, 2007


	Pension Benefits						Postretirement Benefits
	Nine Months Ended						Nine Months Ended
	August 26,			August 27,			August 26,			August 27,
	2007			2006			2007			2006
	(Dollars in thousands)

Service cost	$	5,887		$	5,760		$	550		$	591
Interest cost		43,438			42,462			8,093			9,218
Expected return on plan assets		(45,068	)		(39,702	)		—			—
Amortization of prior service cost (benefit)⁽²⁾		3,394			1,200			(35,374	)		(41,943	)
Amortization of transition asset		363			455			—			—
Amortization of actuarial loss		4,993			5,394			3,815			4,715
Curtailment loss (gain)⁽¹⁾		19			7,317			(39,394	)		(29,041	)
Special termination benefit⁽³⁾		—			1,027			—			500
Net settlement (gain) loss⁽⁴⁾		(120	)		2,590			—			—

Net periodic benefit cost (income)	$	12,906		$	26,503		$	(62,310	)	$	(55,960	)


(1)		Pension benefit curtailment loss for the three and nine months ended August 27, 2006 includes a $5.4 million curtailment charge in respect of the supplemental executive retirement plan as a result of the retirement of the Company’s then president and chief executive officer, Philip A. Marineau. For the nine months, pension benefit curtailment loss also includes $1.8 million for the correction of an error in the actuarial calculation of the curtailment in the third quarter of 2004 associated with the 2003 closure of three Canadian facilities, and $0.1 million related to the job eliminations as a result of the facility closure in Little Rock, Arkansas.

		For the three and nine month periods of 2007, $14.1 million of the postretirement benefit curtailment gain was driven by the voluntary terminations resulting from field employees electing to participate in the Company’s separation and buyout program included in its new labor agreement with the union representing its distribution employees, as described in more detail below. The nine month period also includes $25.3 million of curtailment gain driven by job reductions in connection with the facility closure in Little Rock, Arkansas recorded in the first quarter of 2007. For the three and nine month periods of 2006, the $29.0 million curtailment gain relates to the job reductions in connection with the facility closure in Little Rock, Arkansas. In all periods, the postretirement benefit curtailment gain reflects the accelerated recognition of prior service benefit associated with prior plan amendments.

(2)		Amortization of prior service costs for the nine months ended August 26, 2007 includes a $2.8 million charge in the second quarter of 2007 for a termination indemnity employee benefit plan.

(3)		For the nine months ended August 27, 2006, amounts consist of additional expenses associated with special termination benefits offered to certain qualifying participants affected by the facility closure in Little Rock, Arkansas.

(4)		For the nine months ended August 27, 2006, amount primarily consists of a $2.6 million net loss resulting from the settlement of liabilities of certain participants in the Company’s hourly pension plan in Canada as a result of prior plant closures.

During the three months ended August 26, 2007 the Company entered into a new labor agreement with the union that represents many of its distribution-related employees in North America, which contained a voluntary separation and buyout program. As a result of the voluntary terminations that occurred with this program, the Company remeasured certain pension and postretirement benefit obligations as of July 31, 2007, which included an update to actuarial assumptions made at the end of the prior fiscal year. Net periodic benefit cost (income) related to these plans for the remainder of the fiscal year will reflect the revised assumptions. The revised actuarial assumptions included a change in the discount rate for both pension and postretirement benefit obligations from 5.6% and 5.6% to 6.8% and 6.5%, respectively. The Company utilized a bond pricing model that was tailored to the attributes of the Company’s pension and postretirement plans to determine the appropriate discount rate. Of the estimated total $31.7 million postretirement benefit curtailment gain, which is attributable to the accelerated recognition of benefits associated with prior plan changes, in the three months ended August 26, 2007, the Company recognized $14.1 million related to employees that elected the buyout and left the Company in the third quarter of 2007. The remaining curtailment gain of $17.6 million will be recognized when the remaining employees

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED AUGUST 26, 2007

voluntarily leave. The Company expects all the employees who elected the buyout to leave the Company by the end of the first quarter of 2008, with the majority leaving in the fourth quarter of 2007.

In addition, the pension plan remeasurement resulted in the recognition of a prepaid pension asset of $46.9 million, included in other long-term assets, a $7.9 million reduction in pension liability, and a $21.4 million reduction in non-current deferred tax assets, recorded through an adjustment to other comprehensive income of $33.4 million, net of taxes.


NOTE 8:	STOCK-BASED COMPENSATION

On August 1, 2007, the Board granted 325,196 stock appreciation rights (“SARs”) under the Company’s 2006 Equity Incentive Plan (“EIP”) to a small group of the Company’s senior-most executives with a strike price of $68.00, which was determined by management to be the fair market value of the Company’s common stock at the grant-date, based on a contemporaneous valuation obtained by the Company from an independent third-party. The SARs had an aggregate grant-date fair value of $9.2 million, as estimated on the date of grant using a Black-Scholes option valuation model. The vesting terms of the SARs are approximately four years, and have a maximum contractual life of 10 years. In conjunction with these grants, the Company amended the EIP, increasing the aggregate number of common shares available for grant from 418,175 to 700,000. The aggregate number of shares available for grant will adjust upward to the extent necessary to satisfy the exercise of SARs granted under the terms of the EIP.

On August 1, 2007, the Company granted 10,301 restricted stock unit (“RSU”) awards to certain members of its Board of Directors, with an aggregate grant-date fair value of $0.7 million derived from the aforementioned contemporaneous valuation. The restricted shares vest in a series of three equal installments at thirteen months, twenty-four months and thirty-six months following the date of grant. However, if the recipient’s continuous service terminates for reason other than cause after the first vesting installment (e.g. the director resigns from the board after September 1, 2008), then the remaining unvested portion of the award becomes fully vested as of the date of such termination.

As of August 26, 2007, temporary equity totaled $11.4 million as compared to $2.0 million as of November 26, 2006, as a result of an increase in the intrinsic value and the regular vesting of the outstanding SAR awards.


NOTE 9:	COMPREHENSIVE INCOME

The following is a summary of the components of total comprehensive income, net of related income taxes:


	Three Months Ended						Nine Months Ended
	August 26,			August 27,			August 26,			August 27,
	2007			2006			2007			2006
	(Dollars in thousands)

Net income	$	60,894		$	49,269		$	193,244		$	143,285

Other comprehensive income (loss):
Net investment hedge (losses) gains		(4,560	)		2,940			(7,516	)		(14,220	)
Foreign currency translation gains (losses)		1,629			(6,890	)		2,022			1,859
Unrealized (loss) gain on marketable securities		(267	)		62			(1,318	)		300
Decrease in cash flow hedges		172			—			1,180			—
Decrease in additional minimum pension liability⁽¹⁾		33,438			286			33,448			14,808

Total other comprehensive income (loss)		30,412			(3,602	)		27,816			2,747

Total comprehensive income	$	91,306		$	45,667		$	221,060		$	146,032

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED AUGUST 26, 2007


(1)		Amounts primarily relate to remeasurement of certain pension obligations resulting from the Little Rock, Arkansas, facility closure and the voluntary terminations associated with the 2007 labor agreement. See note 7 for more information.

The following is a summary of the components of “Accumulated other comprehensive loss,” net of related income taxes:


	August 26,			November 26,
	2007			2006
	(Dollars in thousands)

Net investment hedge losses	$	(13,923	)	$	(6,407	)
Foreign currency translation losses		(28,337	)		(30,359	)
Unrealized gain on marketable securities		214			1,532
Cash flow hedges		(189	)		(1,369	)
Additional minimum pension liability		(54,728	)		(88,176	)

Accumulated other comprehensive loss, net of income taxes	$	(96,963	)	$	(124,779	)


NOTE 10:	OTHER (INCOME) EXPENSE, NET

The following table summarizes significant components of “Other (income) expense, net”:


	Three Months Ended						Nine Months Ended
	August 26,			August 27,			August 26,			August 27,
	2007			2006			2007			2006
	(Dollars in thousands)

Foreign exchange management losses	$	1,673		$	3,843		$	6,118		$	10,578
Foreign currency transaction losses (gains)		2,190			(8,099	)		(10,904	)		(12,945	)
Interest income		(3,125	)		(4,346	)		(10,150	)		(11,360	)
Investment income		(54	)		(176	)		(3,431	)		(1,612	)
Minority interest — Levi Strauss Japan K.K.		141			90			800			1,313
Other		(653	)		(836	)		(155	)		(75	)

Total other (income) expense, net	$	172		$	(9,524	)	$	(17,722	)	$	(14,101	)


NOTE 11:	BUSINESS SEGMENT INFORMATION

As a result of establishing a new North America organization in late 2006, the Company changed its reporting segments in 2007 to align with the new operating structure. Results for the Company’s U.S. commercial business units — the U.S. Levi’s^®, Dockers^® and Levi Strauss Signature^® brands — and its operations in Canada and Mexico are now included in a single North America regional segment. The Company’s operations outside North America continue to be organized and managed through its Europe and Asia Pacific regions. The Company’s Europe region includes Eastern and Western Europe; Asia Pacific includes Asia Pacific, the Middle East, Africa and Central and South America.

Under the new structure, each regional segment is managed by a senior executive who reports directly to the chief operating decision maker: the Company’s chief executive officer. The Company’s management, including the chief operating decision maker, manages business operations, evaluates performance and allocates resources based on the regional operating income of the segments.

As a result of these changes in the Company’s reporting structure, the Company reclassified certain U.S. staff costs from “Corporate expense” to the North America segment. Additionally, in 2006 the Company corrected the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED AUGUST 26, 2007

reporting of net sales relating to certain sales arrangements in its Asia Pacific segment involving the use of a third party. The effect of this correction increased both “Net sales” and “Selling, general and administrative expenses” in the Company’s consolidated statements of income by approximately $5.6 million and $21.0 million for the three and nine months ended August 27, 2006. The correction had no impact on the Company’s reported operating income, net income, consolidated balance sheets or consolidated statements of cash flows for any period and an insignificant impact on gross profit and gross margin in all periods. The Company revised its business segment information for prior periods to conform to the new presentation.

Business segment information for the Company is as follows:


	Three Months Ended						Nine Months Ended
	August 26,			August 27,			August 26,			August 27,
	2007			2006			2007			2006
	(Dollars in thousands)

Net revenues:
North America	$	633,319		$	661,794		$	1,796,683		$	1,762,101
Europe		245,600			215,383			731,575			652,742
Asia Pacific		172,901			151,092			577,524			541,878
Corporate⁽¹⁾		(652	)		—			(849	)		—

Consolidated net revenues	$	1,051,168		$	1,028,269		$	3,104,933		$	2,956,721

Operating income:
North America	$	84,849		$	103,051		$	244,706		$	265,674
Europe		50,519			50,192			168,188			150,001
Asia Pacific		22,836			23,012			101,627			107,615

Regional operating income		158,204			176,255			514,521			523,290
Corporate:
Restructuring charges, net		(579	)		2,615			12,302			13,064
Postretirement benefit plan curtailment gain		(14,073	)		(29,041	)		(39,394	)		(29,041	)
Other corporate staff costs and expenses		29,455			44,701			90,705			95,793

Total corporate		14,803			18,275			63,613			79,816

Consolidated operating income		143,401			157,980			450,908			443,474
Interest expense		53,142			60,216			166,644			188,304
Loss on early extinguishment of debt		35			—			14,364			32,958
Other (income) expense, net		172			(9,524	)		(17,722	)		(14,101	)

Income before income taxes	$	90,052		$	107,288		$	287,622		$	236,313


(1)		Corporate net revenues reflect the impact of the settlement of the Company’s derivative instruments which hedged the related intercompany royalty flows for the three months and nine months ended August 26, 2007.


Item 2.	*MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS*

Overview

We design and market jeans and jeans-related pants, casual and dress pants, tops, jackets and related accessories for men, women and children under our Levi’s^®, Dockers^® and Levi Strauss Signature^® brands in established and emerging markets around the world. We also license our trademarks in many countries throughout the world for a wide array of products, including accessories, pants, tops, footwear, home and other products.

Our products are sold through more than 55,000 retail locations in multiple channels of distribution worldwide:


	•	We distribute our Levi’s^® and Dockers^® products primarily through chain retailers and department stores in the United States and primarily through department stores, specialty retailers and dedicated franchised stores abroad.

	•	We distribute our Levi Strauss Signature^® products primarily through mass channel retailers in the United States and mass and other value-oriented retailers and franchised stores abroad.

We also distribute our Levi’s^® and Dockers^® products through our online stores, and our Levi’s^®, Dockers^® and Levi Strauss Signature^® products through 183 company-operated stores located in 21 countries, including the United States. These stores generated approximately 6% of our net revenues in the first nine months of 2007.

We derived 42% of our net revenues and 52% of our regional operating income from our European and Asia Pacific businesses in the nine-month period of 2007. Sales of Levi’s^® brand products represented approximately 72% of our total net sales in the nine-month period of 2007. In our Europe and Asia regions, the Levi’s^® brand represented an even larger majority of our net sales. Sales of Dockers^® brand products represented approximately 21% of our total net sales in the nine-month period of 2007.

Our Third Quarter 2007 Results

Our third quarter 2007 results reflect continued growth, operating cash flow generation and debt reduction:


	•	Net revenues. Our consolidated net revenues increased by 2% compared to the third quarter of prior year. Net revenues would have been stable before the benefit of favorable foreign currency exchange rates, primarily in our Europe region. Net revenue increases in our Asia Pacific and Europe regions offset a decline in our North America region. Net revenue improvements were driven primarily by continued growth in our emerging markets in Asia Pacific such as China and India, across our Europe region, and in our U.S. Levi’s^® brand, reflecting incremental sales from dedicated stores and consumers’ continued response to our improved premium product lines.

	•	Operating Income. Our operating income declined $15 million from the prior year. The decline was primarily due to lower net sales and a lower gross margin in our North America region, and an increase in our selling, general and administrative expenses as a percentage of net revenues, reflecting our continued investment in retail expansion and our continued SAP implementation. Additionally, we recorded a lower postretirement benefit plan curtailment gain in 2007 as compared to 2006. Our gross margin and operating margin remained strong at 46% and 14%, respectively.

	•	Net income. Net income grew 24% to $61 million as compared to the prior year. Tax expense in 2007 decreased as compared to prior year, primarily due to a reduction in the U.S. tax we expect to be imposed upon our unremitted foreign earnings. Additionally, lower interest expense resulted from our debt refinancing activities in 2006 and in April 2007.

	•	Cash flows. Cash flows provided by operating activities were $127.2 million in the nine months of 2007 as compared to $171.5 million in the nine months of 2006. The decrease is primarily due to changes in the timing of sales and the timing of the related collections as compared to the prior year period. We used cash on hand to reduce our debt by $50 million in the second quarter of 2007, and we have continued to invest in systems and retail expansion.

On September 19, 2007, we announced the commencement of a cash tender offer for our outstanding $525.0 million aggregate principal amount of 12.25% senior notes due 2012. We expect to use approximately $225 million of cash on hand as well as borrowings under a proposed amended and restated credit facility in the fourth quarter of 2007 in connection with our repurchase of these notes.

Key challenges and risks for us during the remainder of the year include:


	•	consumer spending in the United States, where continued housing market, interest rate and energy price pressures may weigh on consumers, and the impact of retail consolidation and acquisition activity, are creating a challenging retail environment for us and our customers; and

	•	mature businesses in our Asia Pacific region, whose year-to-date declining results are offsetting strong performance in emerging markets within the region.

We expect to achieve modest growth in full-year net revenues and strong growth in full-year net income as compared with 2006, and continued operating cash flow generation and debt reduction.

Financial Information Presentation

Fiscal year. Our fiscal year consists of 52 or 53 weeks, ending on the last Sunday of November in each year. Both the 2007 and 2006 fiscal years consist of 52 weeks ending on November 25, 2007, and November 26, 2006, respectively. Each quarter of both fiscal years 2007 and 2006 consists of 13 weeks.

Segments. Our business is currently organized into three geographic regions: North America, Europe and Asia Pacific. As a result of establishing a new North America organization in late 2006, we changed our reporting segments to align with the new operating structure; results for our U.S. Levi’s^®, Dockers^® and Levi Strauss Signature^® brands, and our Canada and Mexico business, are now included in our North America segment. In addition, we began including in the North America segment certain staff costs previously included in corporate expense. Segment disclosures contained in this Form 10-Q conform to the new presentation for all reporting periods.

Classification. Our classification of certain significant revenues and expenses reflects the following:


	•	Net sales is primarily comprised of sales of products to retail customers, including franchised stores, and of direct sales to consumers at both our company-operated and online stores. It includes allowances for estimated returns, discounts, and retailer promotions and incentives.

	•	Licensing revenue consists of royalties earned from the use of our trademarks in connection with the manufacturing, advertising and distribution of trademarked products by third-party licensees.

	•	Cost of goods sold is primarily comprised of cost of materials, labor and manufacturing overhead, and also includes the cost of inbound freight, internal transfers, and receiving and inspection at manufacturing facilities.

	•	Selling costs include, among other things, all occupancy costs associated with company-operated stores.

	•	We reflect substantially all distribution costs in selling, general and administrative expenses, including costs related to receiving and inspection at distribution centers, warehousing, shipping, handling, and other activities associated with our distribution network.

Constant currency. Constant currency comparisons are based on current period local currency amounts, translated at the same foreign exchange rates utilized in the corresponding period in the prior year. We routinely evaluate our constant currency financial performance in order to facilitate period-to-period comparisons without regard to the impact of changing foreign currency exchange rates.

Results of Operations for Three and Nine Months Ended August 26, 2007, as Compared to Same Periods in 2006

The following table summarizes, for the periods indicated, the consolidated statements of income, the changes in these items from period to period and these items expressed as a percentage of net revenues:


	Three Months Ended															Nine Months Ended
										August 26,			August 27,												August 26,			August 27,
							%			2007			2006									%			2007			2006
	August 26,			August 27,			Increase			% of Net			% of Net			August 26,			August 27,			Increase			% of Net			% of Net
	2007			2006			(Decrease)			Revenues			Revenues			2007			2006			(Decrease)			Revenues			Revenues
	(Dollars in millions)

Net sales	$	1,031.7		$	1,008.9			2.3	%		98.1	%		98.1	%	$	3,045.3		$	2,901.3			5.0	%		98.1	%		98.1	%
Licensing revenue		19.5			19.4			0.7	%		1.9	%		1.9	%		59.6			55.4			7.5	%		1.9	%		1.9	%

Net revenues		1,051.2			1,028.3			2.2	%		100.0	%		100.0	%		3,104.9			2,956.7			5.0	%		100.0	%		100.0	%
Cost of goods sold		565.0			555.6			1.7	%		53.7	%		54.0	%		1,657.9			1,573.2			5.4	%		53.4	%		53.2	%

Gross profit		486.2			472.7			2.9	%		46.3	%		46.0	%		1,447.0			1,383.5			4.6	%		46.6	%		46.8	%
Selling, general and administrative expenses		343.4			312.1			10.0	%		32.7	%		30.4	%		983.8			927.0			6.1	%		31.7	%		31.4	%
Restructuring charges, net		(0.6	)		2.6			(122.1	)%		(0.1	)%		0.3	%		12.3			13.0			(5.8	)%		0.4	%		0.4	%

Operating income		143.4			158.0			(9.2	)%		13.6	%		15.4	%		450.9			443.5			1.7	%		14.5	%		15.0	%
Interest expense		53.1			60.2			(11.7	)%		5.1	%		5.9	%		166.6			188.3			(11.5	)%		5.4	%		6.4	%
Loss on early extinguishment of debt		—			—			—			—			—			14.4			33.0			(56.4	)%		0.5	%		1.1	%
Other (income) expense, net		0.2			(9.5	)		(101.8	)%		0.0	%		(0.9	)%		(17.7	)		(14.1	)		25.7	%		(0.6	)%		(0.5	)%

Income before income taxes		90.1			107.3			(16.1	)%		8.6	%		10.4	%		287.6			236.3			21.7	%		9.3	%		8.0	%
Income tax expense		29.2			58.0			(49.7	)%		2.8	%		5.6	%		94.4			93.0			1.5	%		3.0	%		3.1	%

Net income	$	60.9		$	49.3			23.6	%		5.8	%		4.8	%	$	193.2		$	143.3			34.9	%		6.2	%		4.8	%

Consolidated net revenues

The following table presents net revenues by segment for the periods indicated and the changes in net revenue by segment on both reported and constant currency bases from period to period:


	Three Months Ended											Nine Months Ended
						% Increase (Decrease)											% Increase (Decrease)
	August 26,			August 27,		As			Constant			August 26,			August 27,		As			Constant
	2007			2006		Reported			Currency			2007			2006		Reported			Currency
	(Dollars in millions)

Net revenues:
North America	$	633.3		$	661.8		(4.3	)%		(4.6	)%	$	1,796.7		$	1,762.1		2.0	%		1.9	%
Europe		245.6			215.4		14.0	%		6.5	%		731.6			652.7		12.1	%		3.5	%
Asia Pacific		172.9			151.1		14.4	%		10.7	%		577.5			541.9		6.6	%		5.6	%
Corporate		(0.6	)		—		—			—			(0.9	)		—		—			—

Total net revenues	$	1,051.2		$	1,028.3		2.2	%		(0.1	)%	$	3,104.9		$	2,956.7		5.0	%		2.9	%

Consolidated net revenues increased on a reported basis for both the three- and nine-month periods ended August 26, 2007, and on a constant currency basis for the nine-month period, compared to the same prior-year periods. Reported amounts were affected favorably by changes in foreign currency exchange rates, particularly in Europe. In the three-month period, our net revenue growth in our Asia Pacific and Europe regions continued, while in our North America region net revenue declined, partially offsetting that region’s growth in the first half of 2007.

North America. On both reported and constant currency bases, net revenues in North America decreased for the three-month period and increased for the nine-month period. Changes in foreign currency exchange rates did not affect net revenues significantly.

Net revenues for both periods increased for the U.S. Levi’s^® brand, our largest business, primarily driven by growth in the men’s category, particularly Red Tab^tm products, and additional company-operated retail stores. Continued net revenue declines for the U.S. Levi Strauss Signature^® brand were primarily due to lower sales of men’s and women’s products sold to mass channel retailers and price reductions. We are realigning our strategies for the brand and expect that performance will continue to be challenging until the new strategies are fully developed and implemented. Net revenues for the U.S. Dockers^® brand decreased for the three-month period, driven primarily by the impact of retail consolidation and the timing of certain Father’s Day shipments between the second and third quarter of 2007 as compared to 2006, due to a new promotional program in 2007, partially offset by growth in the women’s business. Net revenues for the U.S. Dockers^® brand increased for the nine-month period due to higher sales of both men’s and women’s products, despite the impact of retail consolidation and the loss of a customer earlier in the year. For both periods, as compared to the same prior-year periods, we recorded higher sales allowances and discounts in our U.S. Levi’s^® and U.S. Dockers^® brands to clear seasonal inventories and to support our retail customers, including customer marketing and promotional programs.

Europe. Net revenues in Europe increased on both reported and on constant currency bases for both periods. Changes in foreign currency exchange rates affected net revenues favorably by approximately $16 million and $56 million for the three- and nine-month periods, respectively.

Net revenues increased on a constant currency basis for both periods in both our wholesale and retail channels, led by the Levi’s^® brand, partially offset by the reduction in sales volume related to the withdrawal of Levi Strauss Signature^® brand products in the second quarter of 2007. New company-operated and franchisee stores, a higher proportion of premium-priced products, particularly Levi’s^® Red Tab^tm products and the success of both our Spring/Summer and Fall/Winter product offerings were key contributors to the net sales increase in both periods.

Asia Pacific. Total net revenues in Asia Pacific increased on both reported and constant currency bases for both periods. Changes in foreign currency exchange rates affected net revenues favorably by approximately $5 million for both the three- and nine-month periods.

Net sales increased for both periods primarily due to growth in our Levi’s^® brand. Dedicated stores continued to drive growth in the region with the addition of company-operated and franchised stores and higher sales of premium products. Net sales for both periods were strong in most markets, particularly in India and China. Our Japanese business, the largest in the region, had modest growth in the third quarter, primarily due to improvements in the high retail inventory that drove the revenue declines in the prior six months. Korea continues to experience high retail inventory and is rebalancing its product offering as a key product life cycle matures.

Gross profit

The following table shows consolidated gross profit and gross margin for the periods indicated and the changes in these items from period to period:


	Three Months Ended								Nine Months Ended
							%								%
	August 26,			August 27,			Increase		August 26,			August 27,			Increase
	2007			2006			(Decrease)		2007			2006			(Decrease)
	(Dollars in millions)

Net revenues	$	1,051.2		$	1,028.3			2.2%	$	3,104.9		$	2,956.7			5.0	%
Cost of goods sold		565.0			555.6			1.7%		1,657.9			1,573.2			5.4	%

Gross profit	$	486.2		$	472.7			2.9%	$	1,447.0		$	1,383.5			4.6	%

Gross margin		46.3	%		46.0	%		0.3 pp		46.6	%		46.8	%		(0.2	) pp

Our gross margin increased slightly for the three-month period and decreased slightly for the nine-month period, each ended August 26, 2007, compared to the same prior-year periods. For both periods, gross margins

declined in North America and Asia Pacific, and increased in Europe. For North America, the gross margin declines were primarily due to higher sales allowances and discounts. For Asia Pacific, the declines were primarily due to inventory markdowns and higher sales of closeout products in Japan and Korea. The gross margin increases in Europe were primarily due to lower sourcing costs and the increase in net sales from company-operated stores. For both periods, the increase in gross profit was primarily driven by changes in foreign currency exchange rates.

Our gross margins may not be comparable to those of other companies in our industry, since some companies may include costs related to their distribution network and occupancy costs associated with company-operated stores in cost of goods sold.

Selling, general and administrative expenses

The following table shows our selling, general and administrative expenses (“SG&A”) for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:


	Three Months Ended															Nine Months Ended
										August 26,			August 27,												August 26,			August 27,
							%			2007			2006									%			2007			2006
	August 26,			August 27,			Increase			% of Net			% of Net			August 26,			August 27,			Increase			% of Net			% of Net
	2007			2006			(Decrease)			Revenues			Revenues			2007			2006			(Decrease)			Revenues			Revenues
	(Dollars in millions)

Selling	$	92.0		$	71.8			28.1	%		8.8	%		7.0	%	$	265.0		$	215.5			23.0	%		8.5	%		7.3	%
Advertising and promotion		70.1			66.3			5.8	%		6.7	%		6.4	%		180.7			179.5			0.6	%		5.8	%		6.1	%
Administration		70.1			87.1			(19.6	)%		6.7	%		8.5	%		218.9			225.2			(2.8	)%		7.1	%		7.6	%
Curtailment gain		(14.1	)		(29.0	)		(51.5	)%		(1.3	)%		(2.8	)%		(39.4	)		(29.0	)		35.6	%		(1.3	)%		(1.0	)%
Other		125.3			115.9			8.1	%		11.9	%		11.3	%		358.6			335.8			6.8	%		11.5	%		11.4	%

Total SG&A	$	343.4		$	312.1			10.0	%		32.7	%		30.4	%	$	983.8		$	927.0			6.1	%		31.7	%		31.4	%

Total SG&A expenses increased $31.3 million and $56.8 million for the three- and nine-month periods ended August 26, 2007, respectively, compared to the same prior-year periods. For both periods, changes in foreign currency exchange rates contributed to the increase in SG&A expenses.

Selling. Selling expenses increased for both periods across all business segments, primarily reflecting higher selling costs associated with additional company-operated stores.

Advertising and promotion. Advertising and promotion expenses increased for the three-month period due to increased media spending in Europe, and were flat for the nine-month period, as the increase in Europe was offset by a reduction in spending in Japan in line with its net sales decline.

Administration. Administration expenses include corporate expenses and other administrative charges. For both periods, expenses decreased as compared to prior year due to a reduction in accruals for our annual and long-term incentive compensation programs and the accrual in the third quarter of 2006 of expenses related to the retirement of our former Chief Executive Officer. These decreases were partially offset by increases in other administrative expenses, primarily higher costs associated with the planned SAP implementation in the United States.

Curtailment gain. During the third quarter of 2006 and first quarter of 2007, we recorded postretirement benefit plan curtailment gains of $29.0 million and $25.3 million, respectively, associated with the closure of our Little Rock, Arkansas, distribution facility. During the third quarter of 2007, we recorded a postretirement benefit plan curtailment gain of $14.1 million associated with the voluntary termination of certain distribution center employees in North America during the period. We expect to recognize an additional postretirement benefit plan curtailment gain of $17.6 million when the remaining employees voluntarily leave, with the majority expected to leave in the fourth quarter of 2007. For more information, see notes 7 and 9 to our unaudited consolidated financial statements included in this report.

Other. Other SG&A costs include distribution, information resources, and marketing costs, gain or loss on sale of assets and other operating income. For the three-month period, these costs increased primarily due to higher distribution costs resulting from the separation and buyout costs of the voluntary termination of certain distribution center employees in North America. For the nine-month period, these costs increased primarily due to higher distribution costs and marketing expenses in line with the net revenue growth in the period, and with respect to distribution costs, the separation and buyout costs described above.

Restructuring charges

Restructuring charges, net, decreased to $12.3 million for the nine-month period ended August 26, 2007, from $13.0 million for the same period in 2006. The 2007 amount primarily consisted of asset impairment of $7.0 million and severance charges of $4.6 million recorded in association with the planned closure of our distribution center in Germany. The prior year amount primarily consisted of severance charges associated with the closure of our Little Rock distribution center, headcount reductions in Europe and additional lease costs associated with exited facilities in the United States.

Operating income

The following table shows operating income by reporting segment and the significant components of corporate expense for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:


	Three Months Ended															Nine Months Ended
										August 26,			August 27,												August 26,			August 27,
							%			2007			2006									%			2007			2006
	August 26,			August 27,			Increase			% of Net			% of Net			August 26,			August 27,			Increase			% of Net			% of Net
	2007			2006			(Decrease)			Revenues			Revenues			2007			2006			(Decrease)			Revenues			Revenues
	(Dollars in millions)

Operating income:
North America	$	84.9		$	103.1			(17.7	)%		13.4	%		15.6	%	$	244.7		$	265.7			(7.9	)%		13.6	%		15.1	%
Europe		50.5			50.2			0.7	%		20.6	%		23.3	%		168.2			150.0			12.1	%		23.0	%		23.0	%
Asia Pacific		22.8			23.0			(0.8	)%		13.2	%		15.2	%		101.6			107.6			(5.6	)%		17.6	%		19.9	%

Total regional operating income		158.2			176.3			(10.2	)%		15.1	%*		17.1	%*		514.5			523.3			(1.7	)%		16.6	%*		17.7	%*

Corporate:
Restructuring charges, net		(0.6	)		2.6			(122.1	)%		(0.1	)%*		0.3	%*		12.3			13.0			(5.7	)%		0.4	%*		0.4	%*
Postretirement benefit plan curtailment gain		(14.1	)		(29.0	)		(51.5	)%		(1.3	)%*		(2.8	)%*		(39.4	)		(29.0	)		35.6	%		(1.3	)%*		(1.0	)%*
Other corporate staff costs and expenses		29.5			44.7			(34.1	)%		2.8	%*		4.3	%*		90.7			95.8			(5.3	)%		2.9	%*		3.2	%*

Total corporate		14.8			18.3			(19.0	)%		1.4	%*		1.8	%*		63.6			79.8			(20.3	)%		2.0	%*		2.7	%*

Total operating income	$	143.4		$	158.0			(9.2	)%		13.6	%*		15.4	%*	$	450.9		$	443.5			1.7	%		14.5	%*		15.0	%*

Operating margin		13.6	%		15.4	%		(1.7	)pp								14.5	%		15.0	%		(0.5	)pp


*		Percentage of consolidated net revenues

Regional operating income. The following describes changes in operating income by segment for the three- and nine-month periods ended August 26, 2007, compared to the same prior-year periods:


	•	North America. Operating income decreased for both periods due to the decrease in net sales of our U.S. Levi Strauss Signature^® brand. Operating income and margin decreased for both periods due to the region’s lower wholesale gross margin, which resulted primarily from higher sales allowances and discounts to clear seasonal inventories, and an increase in SG&A expenses as a percentage of net revenues, reflecting our continued investment in retail expansion and continued SAP implementation.

	•	Europe. Operating income increased for both periods primarily due to the favorable impact of changes in foreign currency exchange rates. Operating margin decreased for the three-month period and was flat for the nine-month period. For both periods, increases in the region’s SG&A expenses as a percentage of net


		revenues, primarily reflecting our continued investment in retail expansion, and with respect to the three-month period, increased advertising spending, were offset by the region’s gross margin improvements.


	•	Asia Pacific. Operating income decreased primarily due to declines in net sales and gross margins in Korea for both periods, and in Japan for the nine-month period. For the remainder of the region, operating income increased primarily due to an increase in net sales, partially offset by continued investment in retail expansion.

Corporate. Corporate expense is comprised of restructuring charges, net, postretirement benefit plan curtailment gains, and other corporate expenses, including corporate staff costs.

Other corporate staff costs and expenses for the three- and nine-month periods decreased over the same prior-year periods primarily due to a reduction in executive retirement costs and long-term incentive compensation expense. These expense reductions were partially offset primarily by the accrual of distribution expenses related to the separation and buyout costs of the voluntary termination of certain distribution center employees in North America, and with respect to the nine-month period, increases in other corporate staff costs primarily associated with increased investment in our corporate information technology systems.

Interest expense

Interest expense decreased to $53.1 million and $166.6 million for the three- and nine-month periods in 2007, respectively, from $60.2 million and $188.3 million for the same periods in 2006. Lower debt levels and lower average borrowing rates in the 2007 periods, which resulted primarily from our refinancing and debt reduction activities in 2007 and 2006, caused the decrease.

The weighted average interest rates on average borrowings outstanding for the three- and nine-month periods in 2007, including the amortization of capitalized bank fees and underwriting fees, were 9.58% and 9.74%, respectively, as compared to 9.95% and 10.28%, respectively, for the same periods in 2006.

Loss on Early Extinguishment of Debt

For the nine-month period in 2007, we recorded a loss of $14.4 million on early extinguishment of debt as a result of our redemption of our floating rate senior notes during the second quarter of 2007. The 2007 loss was comprised of a prepayment premium and other fees of approximately $7.8 million and the write-off of approximately $6.6 million of unamortized debt issuance costs related to the redemption of the floating rate senior notes. During the nine-month period in 2006, we recorded a loss of $33.0 million on early extinguishment of debt in conjunction with our prepayment in March 2006 of the remaining balance of our prior senior secured term loan of approximately $488.8 million, and the amendment in May 2006 of our revolving credit facility. The 2006 loss was comprised of a prepayment premium and other fees and expenses of approximately $16.9 million and the write-off of approximately $16.1 million of unamortized capitalized costs.

Other (income) expense, net

For the three-month period in 2007, we recorded expense of $0.2 million as compared to income of $9.5 million for the same period in 2006; for the nine-month period in 2007, we recorded income of $17.7 million as compared to income of $14.1 million for the same period in 2006. The changes from the prior periods were primarily attributable to the impact of foreign currency fluctuation, primarily the weakening of the U.S. Dollar against the Japanese Yen.

Income tax expense

Income tax expense was $29.2 million and $94.4 million for the three- and nine-month periods in 2007, respectively, compared to $58.0 million and $93.0 million for the same periods in 2006. The effective income tax rate for the nine-month period in 2007 was 32.8% compared to 39.4% for the same period in 2006. The decrease in the effective income tax rate in 2007 as compared to prior year was primarily due to a reduction in the U.S. tax we expect to be imposed upon our unremitted foreign earnings.

The effective income tax rate for the nine-month period in 2007 of 32.8% is lower than the federal statutory rate primarily due to a discrete, non-cash tax benefit of $6.3 million recognized in the second quarter of 2007, which resulted from our election to change the filing methodology of our California state income tax return. The effective income tax rate for the nine-month period in 2006 of 39.4% is higher than the federal statutory rate primarily due to the overall residual U.S. and foreign tax expected to be imposed upon future repatriations of our unremitted foreign earnings.

Net income

Net income for the three- and nine-month periods in 2007 was $60.9 million and $193.2 million, respectively, compared to net income of $49.3 million and $143.3 million for the respective periods in 2006. For the three-month period, the $28.8 million reduction in tax expense and $7.1 million reduction in interest expense more than offset the $14.6 million reduction in operating income. For the nine-month period, net income increased primarily due to the $21.7 million reduction in interest expense, the $18.6 million lower loss on early extinguishment of debt and the $7.4 million increase in operating income.

Liquidity and Capital Resources

Liquidity Outlook

We believe we will have adequate liquidity over the next twelve months to operate our business and to meet our cash requirements.

Cash Sources

We are a privately-held corporation. We have historically relied primarily on cash flow from operations, borrowings under credit facilities, issuances of notes and other forms of debt financing. We regularly explore financing and debt reduction alternatives, including new credit agreements, unsecured and secured note issuances, equity financing, equipment and real estate financing, securitizations and asset sales. Key sources of cash include earnings from operations and borrowing availability under our revolving credit facility.

Prior to the proposed amendment and restatement of our senior secured revolving credit facility described below, the maximum availability under our senior secured revolving credit facility was $550.0 million. As of August 26, 2007, based on collateral levels as defined by the agreement, reduced by amounts reserved in accordance with this facility as described below, our total availability was approximately $339.3 million. We had no outstanding borrowings under this facility, but had utilization of other credit-related instruments such as documentary and standby letters of credit. Unused availability was approximately $247.8 million.

Under our senior secured revolving credit facility (prior to the proposed amendment and restatement), we are required to maintain certain reserves against availability (or deposit cash or investment securities in secured accounts with the administrative agent), including a $75.0 million reserve at all times. These reserves reduce the availability under our credit facility.

As of August 26, 2007, we had cash and cash equivalents totaling $284.8 million, resulting in a net liquidity position (unused availability and cash and cash equivalents) of $532.6 million.

Cash Uses

Our principal cash requirements include working capital, capital expenditures, payments of interest on our debt, payments of taxes, contributions to our pension plans and payments for postretirement health benefit plans. In addition, we regularly explore debt reduction and refinancing alternatives, including tender offers, redemptions, repurchases or otherwise, and we regularly evaluate our ability to pay dividends or repurchase stock, all consistent with the terms of our debt agreements.

The following table presents selected cash uses during the nine months ended August 26, 2007, and the related estimated cash requirements for the remainder of 2007 and the first nine months of 2008:


			Estimated for
	Paid in Nine		Remaining Three				Estimated for		Estimated for
Selected Cash	Months Ended		Months of		Total Estimated		Nine Months Ending		Twelve Months Ending
Requirements	August 26, 2007		Fiscal 2007		for Fiscal 2007		August 24, 2008		August 24, 2008
	(Dollars in millions)

Interest⁽¹⁾	$	172	$	63	$	235	$	117	$	180
Federal, foreign and state taxes (net of refunds)⁽²⁾		36		20		56		42		62
Postretirement health benefit plans		19		4		23		19		23
Capital expenditures		54		62		116		64		126
Pension plans		9		5		14		11		16

Total selected cash requirements	$	290	$	154	$	444	$	253	$	407


(1)		Estimates for interest payments include the effect of the tender offer for our 12.25% Senior Notes due 2012 and any related borrowings under the proposed amended and restated senior secured revolving credit facility. The projected interest payments in 2007 have increased as compared to the estimate contained in our 2006 Annual Report on Form 10-K, primarily because of expedited interest payments related to the tender of our 12.25% Senior Notes. This increase is partially offset by our refinancing activities in 2007. For more information, see note 4 to our unaudited consolidated financial statements included in this report.

(2)		Estimates for tax payments in 2007 have decreased as compared to the estimate contained in our 2006 Annual Report on Form 10-K, reflecting a reduction in expected tax payments in foreign jurisdictions.

Information in the preceding table reflects our estimates of future cash payments. These estimates are based upon assumptions that are inherently subject to significant economic, competitive, legislative and other uncertainties and contingencies, many of which are beyond our control. Accordingly, our actual expenditures and liabilities may be materially higher or lower than the estimates reflected in these tables. The inclusion of these estimates should not be regarded as a representation by us that the estimates will prove to be correct.

Cash Flows

As of August 26, 2007, we had total cash and cash equivalents of approximately $284.8 million, a $5.3 million increase from the $279.5 million balance as of November 26, 2006. Working capital as of August 26, 2007, was $846.6 million compared to $806.0 million as of November 26, 2006.

The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows:


	Nine Months Ended
	August 26,			August 27,
	2007			2006
	(Dollars in millions)

Cash provided by operating activities	$	127.2		$	171.5
Cash used for investing activities		(59.4	)		(40.6	)
Cash used for financing activities		(65.9	)		(30.1	)
Cash and cash equivalents		284.8			342.0

Cash flows from operating activities

Cash provided by operating activities was $127.2 million for the nine-month period in 2007, as compared to cash provided by operating activities of $171.5 million for the same period in 2006. This $44.3 million decrease in the amount of cash provided by operating activities was primarily driven by:


	•	a decrease in the amount of trade receivables collected during the first quarter of 2007, primarily due to the earlier timing of sales recorded in the fourth quarter of 2006, as compared to the corresponding periods in


		prior year, when the later timing of sales recorded in the fourth quarter of 2005 led to the related collections during the first quarter of 2006; and


	•	higher payments for annual and long-term incentive compensation and executive transitions.

These factors were partially offset by lower cash paid for income taxes.

Cash flows from investing activities

Cash used for investing activities was $59.4 million for the nine-month period in 2007 compared to $40.6 million for the same period in 2006. Cash used in both periods primarily related to investments made in our company-operated retail stores and information technology systems associated with the SAP installation in our Asia Pacific region and, with respect to the 2007 period, the United States.

Cash flows from financing activities

Cash used for financing activities was $65.9 million for the nine-month period in 2007 compared to $30.1 million for the same period in 2006. Cash used for financing activities in 2007 primarily reflects our redemption in April 2007 of all of our floating rate notes through borrowings under a new senior unsecured term loan and use of cash on hand. Cash used for financing activities in 2006 primarily reflects repayment of our prior term loan in March 2006 through issuance of our 2016 notes and additional 2013 Euro notes.

Indebtedness

As of August 26, 2007, we had fixed rate debt of approximately $1.9 billion (85% of total debt) and variable rate debt of approximately $0.3 billion (15% of total debt). The borrower of substantially all of our debt is Levi Strauss & Co., the parent and U.S. operating company. Our required aggregate short-term and long-term debt principal payments are $8.9 million in 2007 and the remaining $2.2 billion in years after 2011.

Our long-term debt agreements contain customary covenants restricting our activities as well as those of our subsidiaries. Currently, we are in compliance with all covenants related to our long-term debt.

New Term Loan; Redemption of Floating Rate Notes. On March 27, 2007, we entered into a senior unsecured term loan agreement. The term loan consists of a single borrowing of $325.0 million, net of a 0.75% discount to the lenders. The term loan matures on April 4, 2014 and bears interest at 2.25% over LIBOR or 1.25% over the base rate. On April 5, 2007, we used the borrowings under the term loan, plus cash on hand of approximately $66.4 million, to redeem all of our outstanding $380.0 million floating rate senior notes due 2012 and to pay related redemption premiums, transaction fees and expenses of approximately $7.8 million. We also wrote off approximately $6.6 million of unamortized debt issuance costs related to the redemption of the floating rate senior notes. As a result, for the nine-month period of 2007, we recorded a $14.4 million loss on early extinguishment of debt.

Subsequent Event — Proposed Repurchase of 12.25% Senior Notes due 2012

Purchase or Redemption of 12.25% Senior Notes due 2012. On September 19, 2007, we announced the commencement of a cash tender offer for our outstanding $525.0 million aggregate principal amount of 12.25% senior notes due 2012. We are also seeking consent to amend the indenture under which the notes were issued to eliminate or make less restrictive most of the restrictive covenants, and certain related events of default, contained in the indenture. The tender offer will expire at 12:00 midnight, New York City time, on Wednesday, October 17, 2007, unless extended or earlier terminated by us. We intend to use cash on hand of approximately $225 million, as well as borrowings under a proposed amended and restated credit facility to finance the cash tender offer. Among other conditions, our obligation to consummate the tender offer is conditioned upon receipt of tenders and consents from holders of a majority of the principal amount of the notes and upon the amendment and restatement of our senior secured revolving credit facility to increase the facility by an additional $200 million to $750 million. The amended and restated facility will be secured by, among other domestic assets, certain U.S. trademarks associated with the Levi’s^® brand. The lien on the trademarks will be released upon the full payment of a new $250 million tranche under the facility.

Assuming all conditions to the tender offer are met, holders who tender their notes and consents in connection with the tender offer would receive cash consideration determined pursuant to a formula based on a fixed spread above a reference U.S. Treasury security. In addition, holders who tender their notes and consents on or prior to 5:00 p.m., New York City time, on October 3, 2007 would receive an early consent payment in cash of $30.00 per $1,000 principal amount of notes tendered. As of October 3, 2007, tenders and consents were received from $505.8 million, or 96.3%, of the aggregate principal amount of the notes outstanding.

We intend to enter into the amended and restated credit facility on October 11, 2007. On such date, assuming all other conditions to the tender offer are met, we expect to accept and pay the tender offer consideration for all notes validly tendered prior to such date, plus we expect to pay the early consent payment for notes validly tendered prior to the October 3, 2007 deadline.

Based on notes validly tendered as of October 3, 2007, we currently expect to acquire those notes for a total cash consideration of $543.3 million, consisting of the tender offer consideration and any applicable consent payments, to pay approximately $1.5 million for transaction fees and expenses, and to write off approximately $10.6 million of unamortized debt issuance costs and any applicable discounts or premiums relating to the purchase and extinguishment of such notes.

Promptly following the expiration date of the tender offer, we expect to purchase any additional notes not yet purchased but validly tendered prior to the expiration date.

The 2012 notes are redeemable at our option on and after December 15, 2007. We intend, but are not obligated to, purchase all remaining outstanding 12.25% notes prior to their maturity as soon as practicable after the expiration of the pending tender offer pursuant to open market purchases, redemption or otherwise.

Off-Balance Sheet Arrangements, Guarantees and Other Contingent Obligations

Off Balance Sheet Arrangements and Other. There were no substantial changes from our 2006 Annual Report on Form 10-K to our off-balance sheet arrangements or contractual commitments in the third quarter of 2007. We have contractual commitments for non-cancelable operating leases. We have no other material non-cancelable guarantees or commitments.

Indemnification Agreements. In the ordinary course of our business, we enter into agreements containing indemnification provisions under which we agree to indemnify the other party for specified claims and losses. For example, our trademark license agreements, real estate leases, consulting agreements, logistics outsourcing agreements, securities purchase agreements and credit agreements typically contain these provisions. This type of indemnification provision obligates us to pay certain amounts associated with claims brought against the other party as the result of trademark infringement, negligence or willful misconduct of our employees, breach of contract by us including inaccuracy of representations and warranties, specified lawsuits in which we and the other party are co-defendants, product claims and other matters. These amounts are generally not readily quantifiable: the maximum possible liability or amount of potential payments that could arise out of an indemnification claim depends entirely on the specific facts and circumstances associated with the claim. We have insurance coverage that minimizes the potential exposure to certain of these claims. We also believe that the likelihood of substantial payment obligations under these agreements to third parties is low and that any such amounts would be immaterial.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes. There have been no significant changes to our critical accounting policies as disclosed in our 2006 Annual Report on Form 10-K.

Recently Issued Accounting Standards

The following recently issued accounting standards have been grouped by their required effective dates as they apply to us.

Fourth Quarter of 2007


	•	In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS 158”). SFAS 158 requires employers to (a) recognize in their statement of financial position the funded status of a benefit plan measured as the difference between the fair value of plan assets and the benefit obligation, (b) recognize net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to SFAS No. 87, “Employer’s Accounting for Pensions” or SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” (c) measure defined benefit plan assets and obligations as of the date of the employer’s statement of financial position and (d) disclose additional information in the notes to the financial statements about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. The requirements of SFAS 158 are to be applied prospectively upon adoption, which is fiscal year 2007 for us. We have pension and other postretirement plans which will be affected by the adoption of SFAS 158. We expect the impact from the adoption of FAS 158 at November 25, 2007, to result in a net decrease to total liabilities of approximately $81 million, with corresponding decreases to stockholder’s deficit of $49 million and to deferred tax assets of $32 million. The actual impact of the adoption of SFAS 158 will depend on the valuation of actual plan assets and obligations at November 25, 2007.

First Quarter of 2008


	•	In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which is an interpretation of SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109 and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently in the process of assessing the impact the adoption of FIN 48 will have on our financial statements.

	•	In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently in the process of assessing the impact the adoption of SFAS 157 will have on our financial statements.

	•	In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure certain financial assets and liabilities and other eligible items at fair value, which are not otherwise currently required to be measured at fair value. Under SFAS 159, the decision to measure items at fair value is made at specified election dates on an irrevocable instrument-by-instrument basis. Entities electing the fair value option would be required to recognize changes in fair value in earnings and to expense upfront cost and fees associated with the item for which the fair value option is elected. Entities electing the fair value option are required to distinguish on the face of the statement of financial position, the fair value of assets and liabilities for which the fair value option has been elected and similar assets and liabilities measured using another measurement attribute. If elected, SFAS 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007, with earlier adoption permitted provided that the entity also early adopts all of the requirements of SFAS 159. We are currently evaluating this standard and whether to elect the fair value option provided for in it for any of our qualifying instruments.

FORWARD-LOOKING STATEMENTS

Certain matters discussed in this report, including (without limitation) statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contain forward-looking statements. Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected.

These forward-looking statements include statements relating to our anticipated financial performance and business prospects and/or statements preceded by, followed by or that include the words “believe”, “anticipate”, “intend”, “estimate”, “expect”, “project”, “could”, “plans”, “seeks” and similar expressions. These forward-looking statements speak only as of the date stated and we do not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, even if experience or future events make it clear that any expected results expressed or implied by these forward-looking statements will not be realized. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these expectations may not prove to be correct or we may not achieve the financial results, savings or other benefits anticipated in the forward-looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control, that could cause actual results to differ materially from those suggested by the forward-looking statements, including, without limitation:


	•	changing U.S. and international retail environments and fashion trends;

	•	changes in the level of consumer spending for apparel in view of general economic conditions including interest rates, the housing market and energy prices;

	•	our ability to sustain improvements in our European business and to address challenges in our more mature Asian markets and our Levi Strauss Signature^® brand in the United States;

	•	our customers’ continuing focus on private label and exclusive products in all channels of distribution, including the mass channel;

	•	our ability to increase the number of dedicated stores for our products, including through opening and profitably operating company-operated stores;

	•	our ability to effectively shift to a more premium market position worldwide, sustain and grow the Dockers^® brand;

	•	our ability to implement SAP throughout our business without disruption;

	•	our effectiveness in increasing efficiencies in our logistics operations;

	•	our dependence on key distribution channels, customers and suppliers;

	•	mergers and acquisitions involving our top customers and their consequences;

	•	price, innovation and other competitive pressures in the apparel industry and on our key customers;

	•	our ability to increase our appeal to under-penetrated consumer segments;

	•	our ability to utilize our tax credits and net operating loss carryforwards;

	•	ongoing litigation matters and disputes and regulatory developments;

	•	changes in trade and tax laws; and

	•	political or financial instability in countries where our products are manufactured.

Our actual results might differ materially from historical performance or current expectations. We do not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.


Item 3.	*QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK*

Derivative Financial Instruments

We are exposed to market risk primarily related to foreign currencies and interest rates. We actively manage foreign currency risks with the objective of mitigating the potential impact of currency fluctuations while maximizing the U.S. dollar value of cash flows. We hold derivative positions only in currencies to which we have exposure. Although we currently do not hold any interest rate derivatives, we seek to mitigate interest rate risk by optimizing our capital structure using a combination of fixed and variable rate debt across various maturities.

We are exposed to credit loss in the event of nonperformance by the counterparties to the foreign exchange contracts. However, we believe these counterparties are creditworthy financial institutions and we do not anticipate nonperformance. We monitor the creditworthiness of our counterparties in accordance with our foreign exchange and investment policies. In addition, we have International Swaps and Derivatives Association, Inc. (ISDA) master agreements in place with our counterparties to mitigate the credit risk related to the outstanding derivatives. These agreements provide the legal basis for over-the-counter transactions in many of the world’s commodity and financial markets.

Foreign Exchange Risk

The global scope of our business operations exposes us to the risk of fluctuations in foreign currency markets. This exposure is the result of certain product sourcing activities, some intercompany sales, foreign subsidiaries’ royalty payments, earnings repatriations, net investment in foreign operations and funding activities. We actively manage forecasted exposures.

We operate a centralized currency management operation to take advantage of potential opportunities to naturally offset exposures against each other. For any residual exposures under management, we use a variety of financial instruments including forward exchange and option contracts to hedge certain anticipated transactions as well as certain firm commitments, including third-party and intercompany transactions. We manage the currency risk as of the inception of the exposure. We do not currently manage the timing mismatch between our forecasted exposures and the related financial instruments used to mitigate the currency risk.

Our foreign exchange risk management activities are governed by a foreign exchange risk management policy approved by our board of directors. Members of our foreign exchange committee, comprised of a group of our senior financial executives, review our foreign exchange activities to ensure compliance with our policies. The operating policies and guidelines outlined in the foreign exchange risk management policy provide a framework that allows for an active approach to the management of currency exposures while ensuring the activities are conducted within established parameters. Our policy includes guidelines for the organizational structure of our risk management function and for internal controls over foreign exchange risk management activities, including various measurements for monitoring compliance. We monitor foreign exchange risk, interest rate risk and related derivatives using different techniques including a review of market value, sensitivity analysis and a value-at-risk model. We use widely accepted valuation models that incorporate quoted market prices or dealer quotes to determine the estimated fair value of our foreign exchange derivative contracts.

We use derivative instruments to manage our exposure to foreign currencies. As of August 26, 2007, we had U.S. dollar spot and forward currency contracts to buy $261.1 million and to sell $209.7 million against various foreign currencies. We also had Euro forward currency contracts to buy 8.3 million Euros ($11.3 million equivalent) against the Norwegian Krone and Swedish Krona. These contracts are at various exchange rates and expire at various dates through August 2008.


Item 4.	*CONTROLS AND PROCEDURES*

Evaluation of Disclosure Controls and Procedure

As of August 26, 2007, we updated our evaluation of the effectiveness of the design and operation of our disclosure controls and procedures for purposes of filing reports under the Securities and Exchange Act of 1934 (the “Exchange Act”). This controls evaluation was done under the supervision and with the participation of management, including our chief executive officer and our chief financial officer. Our chief executive officer and our chief financial officer have concluded that our disclosure controls and procedures (as defined in Rule 13(a)-15(e) and 15(d)-15(e) under the Exchange Act) are effective to provide reasonable assurance that information relating to us and our subsidiaries that we are required to disclose in the reports that we file or submit to the SEC is recorded, processed, summarized and reported with the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures are designed to ensure 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.

Changes in Internal Controls

We maintain a system of internal control over financial reporting that is designed to provide reasonable assurance that our books and records accurately reflect our transactions and that our established policies and procedures are followed. There were no changes to our internal control over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We are currently implementing an enterprise resource planning system on a staged basis in our businesses around the world. We began in Asia Pacific (by implementing the system in several affiliates in the region in 2006 and 2007) and will continue implementation in other affiliates and organizations in the coming years. We designed our rollout and transition plan to minimize the risk of disruption to our business and controls. We believe implementation of this system will change, simplify and strengthen our internal control over financial reporting.

As a result of the SEC’s deferral of the deadline for non-accelerated filers’ compliance with the internal control requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as a non-accelerated filer we are not yet subject to the disclosure requirements in our Annual Report on Form 10-K. As currently provided in the rules, non-accelerated filers will be required to be compliant in 2008 (with respect to the management report) and 2009 (with respect to the independent auditor attestation report). We have planned for and expect to meet these requirements.

PART II — OTHER INFORMATION


Item 1.	*LEGAL PROCEEDINGS*

Wrongful Termination Litigation. Trial in the case before the United States District Court for the Northern District of California, San Jose Division, Case No. C-04-01026, as more fully described in our 2006 Annual Report on Form 10-K filed on February 13, 2007, is currently set for March 31, 2008. There have been no other material developments in this litigation since we filed our 2006 Annual Report. For more information about the litigation, see Note 7 to the consolidated financial statements contained in that Form 10-K.

Class Actions Securities Litigation. On September 11, 2007, in the matter In re Levi Strauss & Co., Securities Litigation, Case No. C-03-05605 RMW, pending before the United States District Court for the Northern District of California, San Jose Division, the Court dismissed the Section 10(b) and 20(a) claims and dismissed the tax fraud aspects of the Section 11 and 15 claims. The Court also limited the plaintiff class on the Section 11 and 15 claims by eliminating from the class those bondholders who purchased the bonds in private offerings and then exchanged them for registered bonds in the subsequent exchange offer. Plaintiffs were provided until January 18, 2008, to amend their complaint with respect to the tax-fraud claims. There have been no other material developments in this litigation since we filed our 2006 Annual Report on Form 10-K on February 13, 2007. For more information about the litigation, see Note 7 to the consolidated financial statements contained in that Form 10-K.

Other Litigation. In the ordinary course of business, we have various other pending cases involving contractual matters, employee-related matters, distribution questions, product liability claims, trademark infringement and other matters. We do not believe there are any pending legal proceedings that will have a material impact on our financial condition or results of operations.


Item 1A.	*RISK FACTORS*

There have been no material changes in our risk factors from those disclosed in our 2006 Annual Report on Form 10-K.


Item 2.	*UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS*

None.


Item 3.	*DEFAULTS UPON SENIOR SECURITIES*

None.


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

None.


Item 5.	*OTHER INFORMATION*

None.


Item 6.	*EXHIBITS*


31	.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
31	.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.

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			Page
			Number

PART I — FINANCIAL INFORMATION
	Item 1.	Consolidated Financial Statements (unaudited):
		Consolidated Balance Sheets as of August 26, 2007, and November 26, 2006		3
		Consolidated Statements of Income for the Three and Nine Months Ended August 26, 2007, and August 27, 2006		4
		Consolidated Statements of Cash Flows for the Nine Months Ended August 26, 2007, and August 27, 2006		5
		Notes to Consolidated Financial Statements		6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		32
	Item 4.	Controls and Procedures		33

PART II — OTHER INFORMATION
	Item 1.	Legal Proceedings		34
	Item 1A.	Risk Factors		34
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		34
	Item 3.	Defaults Upon Senior Securities		34
	Item 4.	Submission of Matters to a Vote of Security Holders		34
	Item 5.	Other Information		34
	Item 6.	Exhibits		34
SIGNATURE				35
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32