UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended October 31, 2006

OR

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

Commission file number 1-14229

QUIKSILVER, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ No o

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No þ

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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.

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

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

The aggregate market value of the Registrant’s Common Stock held by non-affiliates of the Registrant was approximately $1.67 billion as of April 30, 2006, the last business day of Registrant’s most recently completed second fiscal quarter.

As of January 4, 2007, there were 124,125,919 shares of the Registrant’s Common Stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held March 16, 2007 are incorporated by reference into Part III of this Form 10-K.

TABLE OF CONTENTS

		Page
PART I
Item 1.	BUSINESS
	Introduction		1
	Segment Information		2
	Products and Brands		2
	Product Categories		3
	Product Design		4
	Promotion and Advertising		4
	Customers and Sales		5
	Retail Concepts		6
	Seasonality		7
	Production and Raw Materials		7
	Imports and Import Restrictions		8
	Trademarks, Licensing Agreements and Patents		8
	Competition		9
	Future Season Orders		10
	Employees		10
	Environmental Matters		10
	Available Information		10
	Forward-Looking Statements		11
Item 1A.	RISK FACTORS		11
Item 1B.	UNRESOLVED STAFF COMMENTS		19
Item 2.	PROPERTIES		19
Item 3.	LEGAL PROCEEDINGS		20
Item 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		20
PART II
Item 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES		21
Item 6.	SELECTED FINANCIAL DATA		21
Item 7.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		23
Item 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		37
Item 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		38
Item 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		38
Item 9A.	CONTROLS AND PROCEDURES		38
Item 9B.	OTHER INFORMATION		42
PART III
Item 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT		43
Item 11.	EXECUTIVE COMPENSATION		43
Item 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS		43
Item 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS		43
Item 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES		43
PART IV
Item 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES		44
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS			45
SIGNATURES			94

PART I

Item 1. BUSINESS

Unless the context indicates otherwise, when we refer to “we”, “us”, “our”, or the “Company” in this Form 10-K, we are referring to Quiksilver, Inc. and its subsidiaries on a consolidated basis. Quiksilver, Inc. was incorporated in 1976 and was reincorporated in Delaware in 1986. Our fiscal year ends on October 31, and references to fiscal 2006, fiscal 2005 and fiscal 2004 refer to the years ended October 31, 2006, 2005 and 2004, respectively.

Introduction

We are a globally diversified company that designs, produces and distributes branded apparel, wintersports and golf equipment, footwear, accessories and related products. Our apparel and footwear brands represent a casual lifestyle for young-minded people that connect with our boardriding culture and heritage, while our wintersports and golf brands symbolize a long standing commitment to technical expertise and competitive success on the mountains and on the links. We believe that surfing, skateboarding, snowboarding, skiing, golf and other outdoor sports influence the apparel choices made by consumers as these activities are communicated to a global audience by television, the internet, movies and magazines. People are attracted to the venues in which these sports are performed and the values they represent, including individual expression, adventure and creativity.

Over the past 36 years, Quiksilver has been established as a leading global brand representing the casual, youth lifestyle associated with boardriding sports. Based on our fiscal 2006 revenues, we are the largest of the apparel and equipment companies that are identified with the sports of surfing, skateboarding and snowboarding. In July 2005, we acquired Skis Rossignol S.A. at a purchase price of approximately $304.6 million. This acquisition added a collection of leading ski equipment brands to our company that we believe will be the foundation for a full range of technical ski apparel, sportswear and accessories. Rossignol is one of the world’s leading manufacturers of alpine skiing equipment, including skis, boots, bindings and poles. Also, as part of this acquisition, we acquired a majority interest in Roger Cleveland Golf Company, Inc., a leading producer of wedges and golf clubs in the United States.

We believe that our acquisition of Rossignol provides us with multiple authentic brands in both snow and golf and that Rossignol’s technical knowledge, combined with our current lifestyle brands, enables us to produce and market apparel, equipment, footwear, accessories and related products for consumers in a broad cross section of the outdoor market. Furthermore, we believe the combination of our existing global expertise in branded apparel and footwear, along with Rossignol’s expertise in branded wintersports equipment, provides us with a diversified platform for continued growth and enhanced operating efficiencies.

Our products are sold in over 90 countries in a wide range of distribution channels, including surf shops, ski shops, skateboard shops, snowboard shops, our proprietary Boardriders Club shops, other specialty stores and select department stores. Our corporate and Americas’ headquarters are in Huntington Beach, California, while our European headquarters are in St. Jean de Luz and Moirans, France, and our Asia/Pacific headquarters are in Torquay, Australia.

In 2000, we acquired the international Quiksilver and Roxy trademarks from Quiksilver’s founders, and, in 2002, we acquired our licensees in Australia and Japan. Since 2000, we also have made several small acquisitions of other Quiksilver licensees. In May 2004, we acquired DC Shoes, Inc. to expand our presence in action sports-inspired footwear.

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Segment Information

We operate in the outdoor market of the sporting goods industry. We have three operating segments, the Americas, Europe and Asia/Pacific. The Americas segment includes revenues primarily from the U.S. and Canada. The European segment includes revenues primarily from Western Europe. The Asia/Pacific segment includes revenues primarily from Australia, Japan, New Zealand and Indonesia. Royalties earned from various licensees in other international territories are categorized in corporate operations. For information regarding the revenues, operating profits and identifiable assets attributable to our operating segments, see Note 15 of our consolidated financial statements.

Products and Brands

Our brands are focused on different sports within the outdoor market. Quiksilver and Roxy are rooted in the sport of surfing and are leading brands representing the boardriding lifestyle, which includes not only surfing, but also skateboarding and snowboarding. DC’s reputation is based on its technical shoes made for skateboarding. We have developed a portfolio of other brands also inspired by surfing, skateboarding and snowboarding. Our wintersports brands include Rossignol, Dynastar, Look, Lange and Kerma, which are focused on equipment for alpine skiing but have extended into other areas of wintersports including snowboarding, freestyle skiing, Nordic skiing and technical outerwear.

Quiksilver

We have grown our Quiksilver brand from its origins as a line of boardshorts to now include shirts, walkshorts, t-shirts, fleece, pants, jackets, snowboardwear, footwear, hats, backpacks, wetsuits, watches, eyewear and other accessories. Quiksilver has also expanded its target market beyond young men to include boys, toddlers and infants. Quiksilveredition is our brand targeted at men. In fiscal 2006, the Quiksilver brand represented approximately 31% of our revenues.

Roxy

Our Roxy brand for young women is a surf-inspired collection that we introduced in 1991, and later expanded to include girls, with the Teenie Wahine and Roxy Girl brands, and infants. Roxy includes a full range of sportswear, swimwear, footwear, backpacks, snowboardwear, snowboards, snowboard boots, skis, ski boots, fragrance, beauty care, bedroom furnishings and other accessories for young women. In fiscal 2006, the Roxy brand accounted for approximately 27% of our revenues.

Rossignol and Other Wintersports Brands

Our Rossignol and other wintersports brands cover all of the major product categories in the ski and snowboard markets, including skis, bindings, boots and poles in the alpine category; skis, boots and bindings in the cross-country category; snowboards, snowboard boots and bindings; and technical ski apparel. With a long history of success in ski racing, these brands have developed a reputation for excellence, innovation and technical knowledge that have enabled them to appeal to multiple styles of skiing, including racing, all-mountain, freeride and freestyle. In fiscal 2006, the Rossignol and other wintersports brands accounted for approximately 21% of our revenues.

Our other wintersports brands include the following:

• Dynastar—Dynastar symbolizes technically specific skis for committed skiers to use in all the different experiences of alpine sports. Dynastar has a heritage of racing and performance.

• Lange—Lange is a ski boot brand, combining its race boot prowess with a commitment to building better, more comfortable boots for dedicated skiers of every type.

• Look—Look bindings have a winning history in alpine ski racing. The focus of the Look brand is the production of high quality, innovative release bindings that perform at the highest level.

• Kerma—We produce poles that complement our ski products from both a technical and aesthetic viewpoint under the Kerma brand.

• Lib Technologies, Gnu, Bent Metal—We address the core snowboard market through our Lib Technologies and Gnu brands of snowboards and accessories and Bent Metal snowboard bindings.

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DC

Our DC brand specializes in performance skateboard shoes, snowboard boots, sandals and apparel for both young men and juniors. We believe that DC’s skateboard-driven image and lifestyle is well positioned within the global outdoor youth market and has appeal beyond its core skateboard base. In fiscal 2006, the DC brand accounted for approximately 10% of our revenues.

Cleveland Golf

For over 25 years, Cleveland Golf has produced high performance golf equipment including Cleveland Golf HiBORE woods, CG irons and wedges. Cleveland Golf also produces putters under the Never Compromise brand. In fiscal 2006, these brands accounted for approximately 7% of our revenues.

Other Apparel Brands

In fiscal 2006, our other apparel brands represented approximately 4% of our revenues.

• Raisins, Radio Fiji, Leilani—Raisins and Radio Fiji are swimwear labels for the juniors market, while Leilani is our contemporary swimwear label.

• Hawk—Tony Hawk, the world-famous skateboarder, is the inspiration for our Hawk brand. Our Hawk brand targets boys and young men who identify with the skateboarding lifestyle and recognize Tony Hawk from his broad media and video game exposure.

• Gotcha—Gotcha is one of our European labels and is designed to address European street fashion for young men.

Product Categories

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

	Percentage of Revenues
	2006(1)			2005(1)			2004
Wintersports equipment		18	%		9	%		2	%
T-Shirts		13			18			19
Accessories		11			12			14
Jackets, sweaters and technical outerwear		11			11			12
Footwear		11			11			9
Golf equipment		7			2			—
Pants		6			8			10
Shirts		6			7			9
Swimwear, excluding boardshorts		4			6			7
Fleece		4			4			5
Shorts		3			4			5
Boardshorts		3			4			4
Tops and dresses		3			4			4
		100	%		100	%		100	%

⁽¹⁾ These percentages were significantly impacted by our acquisition of Rossignol in July 2005.

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

We believe that the U.S. retail prices for our apparel products range from approximately $22 for a t-shirt and $44 for a typical short to a range of $170 to $385 for a snowboard jacket. For European products, retail prices range from approximately $38 for a t-shirt and about $80 for a typical short to $275 for a basic snowboard jacket. Asia/Pacific t-shirts sell for approximately $34, while shorts sell for approximately $60, and a basic snowboard jacket sells for approximately $260. Retail prices for a typical

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skate shoe range from approximately $65 in the U.S. to approximately $100 in Europe. The typical price for adult skis with bindings ranges from $350 to $1,300.

Product Design

Our apparel, footwear and related accessories are designed for young-minded people who live a casual lifestyle. Innovative design, active fabrics and quality of workmanship are emphasized. Our design and merchandising teams create seasonal product ranges for each of our brands. These design groups constantly monitor local and global fashion trends. We believe our most valuable input comes from our own managers, employees, sponsored athletes and independent sales representatives who are actively involved in surfing, skateboarding, skiing, snowboarding and other sports in our core market. This connection with our core market continues to be the inspiration for our products and is key to our reputation for distinct and authentic design. Our design centers in California, Europe, Australia and Japan develop and share designs and merchandising themes and concepts that are globally consistent while reflecting local adaptations for differences in geography, culture and taste.

Rossignol has been sucessful over its history in developing technical enhancements in both ski and golf equipment. We will continue research and development efforts for our wintersports and golf businesses enabling us to design and launch new products in response to changing demands and market expectations. We intend to continue to rely on the strong culture of technical expertise in the development of our products at our own facilities and at sub-contractor facilities.

Promotion and Advertising

The strength of our brands is based on many years of grassroots efforts that have established their legitimacy. We have always sponsored athletes that use our products in their outdoor sports, such as surfing, skiing, snowboarding, skateboarding, windsurfing and golf, and have sponsored events that showcase these sports. Our technical excellence and the innovation of our products are validated when professional athletes compete with our equipment and succeed at a world-class level. Over time, our brands have become closely identified not only with the underlying sports they represent, but also with the way of life that is associated with those who are active in such sports. Accordingly, our advertising efforts are focused on promoting the sports and related lifestyle rather than advertising a specific product. As our sports and lifestyle have grown in popularity, not only in the United States but also internationally, the visibility of our brands has increased.

We have relationships with athletes worldwide. These include such well-known personalities as Kelly Slater, Lisa Andersen, Tom Carroll, Sofia Mulanovich, Chelsea Georgeson, Tony Hawk, Danny Way, Bastien Salabanzi, Robbie Naish, Dave Mirra, Ricky Carmichael, David Toms and Vijay Singh. Our relationships with athletes in the snow category include Alberto Tomba, Ted Ligety, Julia Mancuso, Manu Gaidet, Raphael Poirée, Liv-Grete Poirée, Danny Kass, Todd Richards and Travis Rice. Along with these athletes, many of whom have achieved world champion status in their individual sports, we sponsor many amateurs and up-and-coming professionals. We believe that these athletes legitimize the performance of our products, form the basis for our advertising and promotional content, maintain a real connection with the core users of our products and create a general aspiration to the lifestyle that these athletes represent.

The events and promotions that we sponsor include world class boardriding events, such as Quiksilver’s Big Wave Invitational, which we believe is the most prestigious event among surfers, and the Roxy Pro, which we believe is the most visible women’s surf event of the pro season. We also sponsor many events in Europe, including the Slopestyle Pro snowboarding event and the Bowlriders skateboarding event, and our DC and Quiksilver athletes participate regularly in the Summer and Winter X-Games. Rossignol and our other wintersports brands receive international acclaim for winning on the world stage. In the 2006 Winter Olympics, our wintersports athletes won 36 medals, including 10 gold. Our wintersports brands continue to benefit from the publicity generated as sponsored athletes compete in the Ski World Cup, Winter Olympics, Freeride World Cup and Winter X-Games. In addition, we sponsor many regional and local events, such as surf camps and ski racing camps for beginners and enthusiasts, that reinforce the reputations of our brands as authentic among athletes and non-athletes alike.

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Our brand messages are communicated through advertising, editorial content and other programming in both core and mainstream media. Coverage of our sports, athletes and related lifestyle form the basis of content for core magazines, such as Surfer, Surfing, Snowboard Canada, Transworld Skateboarding, Golf Digest, Powder, Skieur and Freeride. Through our Quiksilver Entertainment division, we are bringing our lifestyle message to an even broader audience through television, films, books and co-sponsored events and products.

Customers and Sales

We sell our products in over 90 countries around the world. We believe that the integrity and success of our brands is dependent in part upon our careful selection of the retailers to whom we sell our products. Therefore, we maintain a strict and controlled distribution channel to uphold and grow the value of our brands.

The foundation of our business is the distribution of our products through surf shops, ski shops, skateboard shops, snowboard shops, golf pro shops and our proprietary Boardriders Clubs shops where the environment communicates our brand messages and the sale of equipment is supported with technical knowledge and experience. This core distribution channel serves as a base of legitimacy and long-term loyalty to us and our brands. Most of these stores stand alone or are part of small chains.

Our products are also distributed through independent specialty or active lifestyle stores and specialty chains. This category includes chains in the United States such as Pacific Sunwear, Nordstrom, Zumiez, Chicks Sporting Goods and Journeys, as well as many independent active lifestyle stores and sports shops in the United States and around the world. A limited amount of our apparel, footwear and accessories products are distributed through select department stores, including Macy’s, Dillards and Bloomingdales in the U.S.; Le Printemps and Galeries Lafayette in France; and Corte Ingles in Spain.

Many of our brands are sold through the same retail accounts; however, distribution can be different depending on the brand and demographic group. Our Quiksilver products are sold in the Americas to customers that have approximately 9,800 store locations combined. Likewise, Roxy products are sold in the Americas to customers with approximately 9,300 store locations. Most of these Roxy locations also carry Quiksilver product. In the Americas, DC products are carried in approximately 7,300 stores. Our swimwear brands (Raisins, Leilani and Radio Fiji) are found in approximately 9,100 stores in the Americas, including many small, specialty swim locations, while our wintersports equipment (Rossignol, Dynastar, Look, Lange, Kerma, Lib Technologies, Bent Metal and Gnu) is found in approximately 1,500 stores, including primarily ski and snowboard shops in the U.S. and Canada. Our golf brands (Cleveland Golf and Never Compromise) are carried in approximately 5,600 stores in the U.S. Our apparel, footwear and accessories are found in approximately 6,900 store locations in Europe, and in approximately 5,400 store locations in Asia/Pacific, and in both cases primarily include Quiksilver and Roxy. Our wintersports equipment is found in approximately 8,600 store locations in Europe.

Our European segment accounted for approximately 43% and 40% of our consolidated revenues during fiscal 2006 and 2005, respectively. Our Asia/Pacific segment accounted for approximately 11% and 12% of our consolidated revenues in fiscal 2006 and 2005, respectively. Other fiscal 2006 non-U.S. sales are in the Americas segment (i.e. Canada, Central and South America) and were approximately 7% of consolidated revenues.

The following table summarizes the approximate percentages of our fiscal 2006 revenues by distribution channel:

	Percentage of Revenues
Distribution Channel	Americas			Europe			Asia/Pacific			Consolidated
Core market shops		28	%		35	%		66	%		35	%
Specialty stores		46			41			25			42
Department stores		14			3			9			9
U.S. exports		10			—			—			5
Distributors		2			21			—			9
Total		100	%		100	%		100	%		100	%
Geographic segment		46	%		43	%		11	%		100	%

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Our revenues are spread over a large wholesale customer base. During fiscal 2006, approximately 14% of our consolidated revenues were from our ten largest customers, and our largest customer accounted for approximately 4% of such revenues.

Our products are sold by approximately 630 independent sales representatives in the Americas, Europe and Asia/Pacific. In addition, we use approximately 150 local distributors in Europe, which include approximately 90 Rossignol distributors. Our other international businesses use approximately 50 distributors, primarily in Asia/Pacific and South America. Our sales representatives are generally compensated on a commission basis. We employ retail merchandise coordinators in the United States who travel between specified retail locations of our wholesale customers to further improve the presentation of our product and build our image at the retail level.

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

	Percentage of Revenues
Geographic Region	2006			2005			2004
United States		39	%		42	%		44	%
Other Americas		7			6			5
France		14			15			15
United Kingdom and Spain		11			12			14
Other European countries		18			13			10
Asia/Pacific		11			12			12
Total		100	%		100	%		100	%

We generally sell our apparel, footwear and related accessories to customers on a net-30 to net-60 day basis in the Americas, and in Europe and Asia/Pacific on a net-30 to net-90 day basis depending on the country and whether we sell directly to retailers in the country or to a distributor. Some customers are on C.O.D. terms. For our wintersports and golf businesses, our sales terms vary by country, distribution channel and customer. We generally sell our wintersports and golf equipment on net-90 or greater terms. These terms are consistent with terms typically offered in the wintersports and golf markets. We generally do not reimburse our customers for marketing expenses, participate in markdown programs with our customers, or offer goods on consignment.

For additional information regarding our revenues, operating profits and identifiable assets attributable to our operating segments, see Note 15 of our consolidated financial statements.

Retail Concepts

Quiksilver concept stores (Boardriders Clubs) are an important part of our global retail strategy. These stores are stocked primarily with Quiksilver and Roxy product, and their proprietary design demonstrates our history, authenticity and commitment to surfing and other boardriding sports. We also have Roxy stores, which are dedicated to the juniors customer, Quiksilver Youth stores, Gotcha stores in Europe, Andaska shops in Europe that carry multiple brands in the outdoor market including our Rossignol brands, and other multibrand stores in Europe. In various territories, we also operate Quiksilver and Roxy shops that are part of larger department stores. These shops, which are typically smaller than a stand-alone shop but have many of the same operational characteristics, are referred to below as shop-in-shops.

We own 276 stores in selected markets that provide enhanced brand-building opportunities. In territories where we operated our wholesale businesses during fiscal 2006, we had 211 stores with independent retailers under license. We do not receive royalty income from these licensed stores. Rather, we provide the independent retailer with our retail expertise and store design concepts in exchange for the independent retailer agreeing to maintain our brands at a minimum of 80% of the store’s inventory. Certain minimum purchase obligations are also required. Furthermore, in our licensed and joint venture territories, such as China and Turkey, our licensees operate 47 Boardriders Clubs. We receive royalty income from sales in these stores based on the licensees’ revenues. We also distribute our products through outlet stores generally located in outlet malls in geographically diverse, non-urban locations. The

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total number of stores open at October 31, 2006 was 534. The unit count of both company-owned and licensed stores at October 31, 2006, excluding stores in licensed territories, is summarized in the following table:

	Number of Stores
	Americas				Europe				Asia/Pacific				Combined
	Company				Company				Company				Company
Store Concept	Owned		Licensed		Owned		Licensed		Owned		Licensed		Owned		Licensed
Boardriders Clubs		31		15		52		155		25		19		108		189
Shop-in-shops		—		—		44		—		13		—		57		—
Roxy stores		3		1		7		10		10		4		20		15
Outlet stores		39		—		22		1		19		2		80		3
Other stores		4		2		7		2		—		—		11		4
		77		18		132		168		67		25		276		211

Seasonality

Our sales fluctuate from quarter to quarter primarily due to seasonal consumer demand patterns for different categories of our products, and due to the effect that the Christmas and holiday season has on the buying habits of our customers. The acquisition of Rossignol in July 2005 significantly increased our revenues, particularly between August and December.

	Consolidated Revenues
Dollar amounts in thousands	2006				2005				2004
Quarter ended January 31	$	541,142	23	%	$	342,860	19	%	$	256,142	20	%
Quarter ended April 30		516,928	22			426,853	24			322,579	25
Quarter ended July 31		525,854	22			373,751	21			337,930	27
Quarter ended October 31		778,364	33			637,405	36			350,288	28
	$	2,362,288	100	%	$	1,780,869	100	%	$	1,266,939	100	%

Production and Raw Materials

Our apparel, footwear and accessories are generally sourced separately for our Americas, Europe and Asia/Pacific operations. We own a sourcing office in Hong Kong that manages the majority of production for our Asia/Pacific business and some of our Americas and European production. We believe that as we expand the Hong Kong sourcing operations, more products can be sourced together and additional efficiences can be obtained. Approximately 90% of our apparel, footwear and accessories are purchased or imported as finished goods from suppliers principally in Hong Kong, China and the far east, but also in Mexico, India, North Africa, Portugal and other foreign countries. After being imported, many of these products require embellishment such as screenprinting, dyeing, washing or embroidery. In the Americas, the remaining 10% of our production is manufactured by independent contractors from raw materials we provide, with a substantial majority of this manufacturing done in the U.S. and the balance in Mexico.

Our wintersports and golf equipment is sourced globally for our Americas, Europe and Asia/Pacific operations. Production of alpine skis, cross-country skis and snowboards is shared primarily between France and Spain, with some production in the United States. Alpine bindings are also produced in France with the support of a network of approved subcontractors. Ski boots and ski poles are manufactured primarily in Italy, with certain boot components provided by subcontractors in eastern European countries, primarily Romania. Our golf equipment is manufactured by subcontractors in Asia with some assembly activities occurring in the United States. For fiscal 2006, approxmately 26% of our wintersports and golf equipment manufacturing was subcontracted. All products are manufactured based upon design specifications that we provide, whether they are purchased or imported as finished goods or produced from raw materials that we provide.

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The majority of our apparel, footwear and accessories finished goods, as well as raw materials for apparel, accessories, wintersports and golf equipment must be committed to and purchased prior to the receipt of customer orders. If we overestimate the demand for a particular product, excess production can generally be distributed in our outlet stores or through secondary distribution channels. If we overestimate a particular raw material, it can generally be used in garments for subsequent seasons or in garments for distribution through our outlet stores or secondary distribution channels. If we overestimate a particular raw material for our wintersports equipment production, it also can be used in subsequent seasons.

During fiscal 2006, no single contractor of finished goods accounted for more than 7% of our consolidated production. No single raw material supplier accounted for more than 12% of our expenditures for raw materials during fiscal 2006. We believe that numerous qualified contractors, finished goods and raw materials suppliers are available to provide additional capacity on an as-needed basis and that we enjoy favorable on-going relationships with these contractors and suppliers.

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

Imports and Import Restrictions

We have for some time imported finished goods and raw materials for our domestic operations under multilateral and bilateral trade agreements between the U.S. and a number of foreign countries, including Hong Kong, India, China and Japan. These agreements impose quotas on the amount and type of textile and apparel products that are imported into the U.S. from the affected countries. We do not anticipate that these restrictions will adversely affect our operations since we would be able to meet our needs domestically or from other countries not affected by the restrictions.

In Europe, we operate in the European Union (“EU”) within which there are few trade barriers. We also operate under constraints imposed on imports of finished goods and raw materials from outside the EU, including quotas and duty charges. We do not anticipate that these restrictions will materially or adversely impact our operations since we have always operated under such constraints.

We retain independent buying agents, primarily in China, Hong Kong, India and other foreign countries to assist us in selecting and overseeing the majority of our independent third party manufacturing and sourcing of finished goods, fabrics, blanks and other products. In addition, these agents monitor quota and other trade regulations and perform some quality control functions. We also have approximately 180 employees in Hong Kong and China that are involved in sourcing and quality control functions to assist in monitoring and coordinating our overseas production.

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

Trademarks, Licensing Agreements and Patents

Trademarks

We own the “Quiksilver”, “Roxy” and famous mountain and wave and heart logos in virtually every country in the world. Other trademarks we own include “Raisins”, “Radio Fiji”, “Leilani”, “Quiksilveredition”, “Hawk”, “Fidra”, “Lib Tech”, “Gnu” and “Bent Metal”, “DCSHOECOUSA”, the “DC Star” logo and other trademarks. With the acquisition of Rossignol in 2005, we acquired the “Rossignol”, “Dynastar”, “Lange”, “Look”, “Kerma”, “Cleveland Golf” and “Never Compromise” trademarks in countries around the world.

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

Licensing Agreements and Patents

We own rights throughout the world to use and license the Quiksilver and Roxy trademarks in substantially all apparel and related accessory product classifications and we directly operate all of the global Quiksilver and Roxy businesses with the exception of licensees in Turkey, Argentina and Mauritius among others. We have also entered into several joint venture arrangements with independent third parties to sell and distribute Quiksilver, Roxy and other branded products in various foreign territories, including Mexico and Brazil. In connection with these joint ventures, we license certain of our trademarks for use in connection with the sale and promotion of our products in these territories.

We have a license to use the Gotcha trademark, which provides that we can sell apparel and accessory products primarily in Western Europe under the Gotcha trademark. We have entered into licensing agreements in certain foreign territories with respect to several other of our non-Quiksilver and Roxy brands where we believe operating efficiencies and brand protection may best be achieved through licensees.

In April 2005, we licensed our Hawk brand in the United States to Kohl’s Stores, Inc., a department store chain with over 700 stores. Under Kohl’s’ license agreement, Kohl’s has the exclusive right to manufacture and sell Hawk branded apparel and some related products in its U.S. stores and through its website. We receive royalties from Kohl’s based upon sales of Hawk branded products. Under the license agreement, we are responsible for product design and Kohl’s manages sourcing, distribution, marketing and all other functions relating to the Hawk brand. The license agreement has an initial term of five years, with three five-year extensions at Kohl’s’ option. We continue to manufacture and sell Hawk branded products outside of the United States.

Our patent portfolio has increased with the acquisition of Rossignol to include ski, ski boot, ski binding, and golf related patents in addition to our existing patents and applications primarily related to wetsuits, skate shoes, watches, board shorts, snowboards and snowboard boots.

Competition

Competition is strong in the global beachwear, skateboard shoe, casual sportswear and wintersports markets in which we operate, and each territory can have different competitors. Our direct competitors in the United States differ depending on distribution channel. Our principal competitors in our core channel of surf shops and Boardriders Clubs in the United States include Billabong International Pty Ltd, Volcom, Inc., O’Neill, Inc. and Hurley International LLC. Our competitors in the department store and specialty store channels in the United States include Tommy Hilfiger Corporation, Abercrombie & Fitch Co., Nautica Apparel, Inc. and Calvin Klein, Inc. Our principal competitors in the skateboard shoe market are Sole Technology, Inc. and DVS Shoe Company. In Europe, our principal competitors in the core channel include O’Neill, Inc., Billabong International Pty Ltd., Rip Curl International Pty Ltd., Oxbow S.A. and Chimsee. In Australia, our primary competitors are Billabong International Pty Ltd. and Rip Curl International Pty Ltd. In broader European distribution, and in Asia/Pacific, our competitors also include brands such as Nike Inc., Adidas AG and Levi Strauss & Co. Competition is strong in the wintersports market. Our principal competitors both in the United States and Europe in the wintersports market include Amer Sports Corporation (Atomic, Salomon), K2 Inc., Tecnica Group, Head N.V. and Burton Snowboards North America. Our principal competitors in the golf market include Callaway Golf Company, Taylor Made Golf Company, Inc., Fortune Brand, Inc. (Titleist & Cobra), Karsten Manufacturing Corporation (Ping) and Nike, Inc. Some of our competitors may be significantly larger and have substantially greater resources than us.

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

• maintain our reputation for authenticity in the core boardriding and outdoor sports lifestyle demographics;

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

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

• continue to develop leading technologies in ski and golf equipment; and

• convey our outdoor sports lifestyle messages to consumers worldwide.

Future Season Orders

At the end of November 2006, our backlog totaled $572 million compared to $556 million the year before. Our backlog depends upon a number of factors and fluctuates based on the timing of trade shows and sales meetings, the length and timing of various international selling seasons, changes in foreign currency exchange rates and market conditions. The timing of shipments also fluctuates from year to year based on the production of goods and the ability to distribute our products in a timely manner. As a consequence, a comparison of backlog from season to season is not necessarily meaningful and may not be indicative of eventual shipments.

Employees

At October 31, 2006, we had approximately 9,200 employees, consisting of approximately 3,700 in the United States and Canada, approximately 3,800 in Europe and approximately 1,700 in Asia/Pacific. None of our domestic employees are represented by trade unions, and less than 100 of our foreign employees are represented by trade unions. Certain French employees are represented by workers councils who negotiate with management on behalf of the employees. Management is generally required to share its plans with the workers councils, to the extent that these plans affect the represented employees. We have never experienced a work stoppage and consider our working relationships with our employees and the workers councils to be good.

Environmental Matters

Some of our facilities and operations are subject to various federal, state and local environmental laws and regulations which govern, among other things, the use and storage of hazardous materials, the storage and disposal of solid and hazardous wastes, the discharge of pollutants into the air, water and land, and the cleanup of contamination. Some of our manufacturing operations involve the use of, among other things, inks, plastics, solvents and wood, and produce related byproducts and wastes. We have acquired businesses and properties in the past, and may do so again in the future. In the event we or our predecessors fail or have failed to comply with environmental laws, or cause or have caused a release of hazardous substances or other environmental damage, whether at our sites or elsewhere, we could incur fines, penalties or other liabilities arising out of such noncompliance, releases or environmental damage. Compliance with and liabilities under environmental laws and regulations did not have a significant impact on our capital expenditures, earnings or competitive position during the last three fiscal years.

Available Information

We file with the Securities and Exchange Commission (SEC) our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, proxy statements and registration statements. The public may read and copy any material we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants, including us, that file electronically.

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Our corporate website is http://www.quiksilverinc.com. We make available free of charge, on or through this website, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the SEC. In addition, copies of the written charters for the committees of our board of directors, our Corporate Governance Guidelines, our Code of Ethics for Senior Financial Officers and our Code of Business Conduct and Ethics are also available on this website, and can be found under the Investor Relations and Corporate Governance links. Copies are also available in print, free of charge, by writing to Investor Relations, Quiksilver, Inc., 15202 Graham Street, Huntington Beach, California 92649. We may post amendments or waivers of our Code of Ethics for Senior Financial Officers and Code of Business Conduct and Ethics, if any, on our website. This website address is intended to be an inactive textual reference only, and none of the information contained on our website is part of this report or is incorporated in this report by reference.

Forward-Looking Statements

Various statements in this Form 10-K, or incorporated by reference into this Form 10-K, in future filings by us with the SEC, in our press releases and in oral statements made by or with the approval of authorized personnel, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations and are indicated by words or phrases such as “anticipate”, “estimate”, “expect”, “seek”, “plan”, “may”, “project”, “we believe”, “currently envisions” and similar words or phrases and involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Some of the factors that could affect our financial performance or cause actual results to differ from our estimates in, or underlying, such forward-looking statements are set forth under Item 1A. “Risk Factors”. Forward-looking statements include statements regarding, among other items:

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

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

• our plans to expand internationally;

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

• our plans to open new retail stores;

• payments due on contractual commitments;

• future expenditures for capital projects;

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

• our ability to remain compliant with our debt covenants;

• the integration of acquired businesses and future acquisitions;

• general economic and business conditions;

• foreign exchange rate fluctuations; and

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

These forward-looking statements are based largely on our expectations and are subject to a number of risks and uncertainties, many of which are beyond our control. Actual results could differ materially from these forward-looking statements as a result of the risks described in Item 1A. “Risk Factors”, and other factors including, among others, changes in the competitive marketplace, including the introduction of new products or pricing changes by our competitors, changes in the economy, and other events leading to a reduction in discretionary consumer spending. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, we cannot assure you that the forward-looking information contained in this Form 10-K will, in fact, transpire.

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Item 1A. RISK FACTORS

Our business faces many risks. The risks described below may not be the only risks we face. Additional risks that we do not yet know of, or that we currently think are immaterial, may also impair our business operations or financial results. If any of the events or circumstances described in the following risks actually occurs, our business, financial condition or results of operations could suffer and the trading price of our common stock or our senior notes could decline. You should consider the following risks before deciding to invest in our common stock or senior notes.

The apparel, sporting goods and footwear industries are each highly competitive, and if we fail to compete effectively, we could lose our market position.

The apparel, sporting goods and footwear industries are each highly competitive. We compete against a number of domestic and international designers, manufacturers, retailers and distributors of apparel, sporting goods and footwear, some of whom are significantly larger and have significantly greater financial resources than we do. In order to compete effectively, we must (1) maintain the image of our brands and our reputation for authenticity in our core boardriding and outdoor sports markets; (2) be flexible and innovative in responding to rapidly changing market demands on the basis of brand image, style, performance and quality; and (3) offer consumers a wide variety of high quality products at competitive prices.

The purchasing decisions of consumers are highly subjective and can be influenced by many factors, such as brand image, marketing programs and product design. Several of our competitors enjoy substantial competitive advantages, including greater brand recognition and greater financial resources for competitive activities, such as sales and marketing and strategic acquisitions. The number of our direct competitors and the intensity of competition may increase as we expand into other product lines or as other companies expand into our product lines. Our competitors may enter into business combinations or alliances that strengthen their competitive positions or prevent us from taking advantage of such combinations or alliances. Our competitors also may be able to respond more quickly and effectively than we can to new or changing opportunities, standards or consumer preferences. Our results of operations and market position may be adversely impacted by our competitors and the competitive pressures in the apparel, sporting goods and footwear industries.

If we are unable to develop innovative and stylish products in response to rapid changes in consumer demands and fashion trends, we may suffer a decline in our revenues and market share.

The apparel, sporting goods and footwear industries are subject to constantly and rapidly changing consumer demands based on fashion trends and performance features. Our success depends, in part, on our ability to anticipate, gauge and respond to these changing consumer preferences in a timely manner while preserving the authenticity and quality of our brands.

Our success also depends upon our ability to continue to develop innovative products. Our future success will depend, in part, upon our continued ability to develop and introduce innovative products reflective of technological advances in the respective markets in which we compete. If we are unable to successfully introduce new outdoor sporting goods products, or if our competitors introduce superior products, customers may purchase outdoor sporting goods products from our competitors, which could adversely affect our revenues and results of operations.

As is typical with new products, market acceptance of new designs and products we may introduce is subject to uncertainty. In addition, we generally make decisions regarding product designs several months in advance of the time when consumer acceptance can be measured. If trends shift away from our products, or if we misjudge the market for our product lines, we may be faced with significant amounts of unsold inventory or other conditions which could have a material adverse effect on our results of operations.

The failure of new product designs or new product lines to gain market acceptance could also adversely affect our business and the image of our brands. Achieving market acceptance for new products may also require substantial marketing efforts and expenditures to expand consumer demand. These requirements could strain our management, financial and operational resources. If we do not continue to

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develop stylish and innovative products that provide better design and performance attributes than the products of our competitors and that are accepted by consumers, or if our future product lines misjudge consumer demands, we may lose consumer loyalty, which could result in a decline in our revenues and market share.

War, acts of terrorism, or the threat of either could have an adverse effect on our ability to procure our products and on the United States and/or international economies.

In the event of war or acts of terrorism or the escalation of existing hostilities, or if any are threatened, our ability to procure our products from our manufacturers for sale to our customers may be negatively affected. We import a substantial portion of our products from other countries. If it becomes difficult or impossible to import our products into the countries in which we sell our products, our sales and profit margins may be adversely affected. Additionally, war, military responses to future international conflicts and possible future terrorist attacks may lead to a downturn in the U.S. and/or international economies, which could have a material adverse effect on our results of operations.

Changes in foreign currency exchange or interest rates could affect our revenues and costs.

We are exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to certain sales, royalty income, and product purchases of our international subsidiaries that are denominated in currencies other than their functional currencies. We are also exposed to foreign currency gains and losses resulting from domestic transactions that are not denominated in U.S. dollars, and to fluctuations in interest rates related to our variable rate debt. If we are unsuccessful in using various foreign currency exchange contracts or interest rate swaps to hedge these potential losses, our profits and cash flows could be significantly reduced. In some cases, as part of our risk management strategies, we may choose not to hedge our exposure to foreign currency exchange rate changes, or we may choose to maintain variable interest rate debt. If we misjudge these risks, there could be a material adverse effect on our operating results and financial position.

Furthermore, we are exposed to gains and losses resulting from the effect that fluctuations in foreign currency exchange rates have on the reported results in our consolidated financial statements due to the translation of the statements of income and balance sheets of our international subsidiaries into U.S. dollars. We use foreign currency exchange contracts to hedge the profit and loss effects of this translation effect; however, accounting rules do not allow us to classify these contracts as hedges, but require us to mark these contracts to fair value at the end of each financial reporting period and translate our revenues and expenses at average exchange rates during the period. As a result, the reported revenues and expenses of our international subsidiaries would decrease if the U.S. dollar increased in value in relation to other currencies, including, the euro, Australian dollar or Japanese yen.

Our business could be harmed if we fail to maintain proper inventory levels.

We maintain an inventory of selected products that we anticipate will be in high demand. We may be unable to sell the products we have ordered in advance from manufacturers or that we have in our inventory. Inventory levels in excess of customer demand may result in inventory write-downs or the sale of excess inventory at discounted or closeout prices. These events could significantly harm our operating results and impair the image of our brands. Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply quality products in a timely manner, we may experience inventory shortages, which might result in unfilled orders, negatively impact customer relationships, diminish brand loyalty and result in lost revenues, any of which could harm our business.

Our current and potential future acquisitions and related financings may place a significant debt burden on us.

From time to time, we have pursued, and may continue to pursue, acquisitions which involve the incurrence of additional debt, such as was incurred in connection with our acquisitions of DC Shoes and Rossignol. If one or more acquisitions results in our becoming substantially more leveraged on a consolidated basis, our flexibility in responding to adverse changes in economic, business or market conditions may be adversely affected, which could have a material adverse effect on our results of operations.

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Our significant debt obligations could limit our flexibility in managing our business and expose us to certain risks.

We are highly leveraged. Our high degree of leverage may have important consequences, including the following:

• we may have difficulty satisfying our obligations under our senior notes or other indebtedness and, if we fail to comply with these requirements, an event of default could result;

• we may be required to dedicate a substantial portion of our cash flow from operations to required payments on indebtedness, thereby reducing the availability of cash flow for working capital, capital expenditures and other general corporate activities;

• covenants relating to our indebtedness may limit our ability to obtain additional financing for working capital, capital expenditures and other general corporate activities;

• covenants relating to our indebtedness may limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

• we may be more vulnerable to the impact of economic downturns and adverse developments in our business; and

• we may be placed at a competitive disadvantage against any less leveraged competitors.

The occurrence of any one of these events could have a material adverse effect on our business, financial condition, results of operations, prospects and ability to satisfy our obligations under our senior notes.

Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.

Borrowings under our revolving credit facility are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows would decrease.

Our success is dependent on our ability to protect our worldwide intellectual property rights, and our inability to enforce these rights could harm our business.

Our success depends to a significant degree upon our ability to protect and preserve our intellectual property, including copyrights, trademarks, patents, service marks, trade dress, trade secrets and similar intellectual property. We rely on the intellectual property, patent, trademark and copyright laws of the United States and other countries to protect our proprietary rights. However, we may be unable to prevent third parties from using our intellectual property without our authorization, particularly in those countries where the laws do not protect our proprietary rights as fully as in the United States. The use of our intellectual property or similar intellectual property by others could reduce or eliminate any competitive advantage we have developed, causing us to lose sales or otherwise harm our business. From time to time, we resort to litigation to protect these rights, and these proceedings can be burdensome and costly and we may not prevail.

We have obtained some U.S. and foreign trademarks, patents and service mark registrations, and have applied for additional ones, but cannot guarantee that any of our pending applications will be approved by the applicable governmental authorities. Moreover, even if the applications are approved, third parties may seek to oppose or otherwise challenge these or other registrations. A failure to obtain trademark, patents or service mark registrations in the United States and in other countries could limit our ability to protect our trademarks, patents and service marks and impede our marketing efforts in those jurisdictions. The loss of such trademarks, patents and service marks, or the loss of the exclusive use of our trademarks, patents and service marks, could have a material adverse effect on our business, financial condition and results of operations. Accordingly, we devote substantial resources to the establishment and protection of our trademarks, patents and service marks on a worldwide basis and continue to evaluate the registration of additional trademarks, patents and service marks, as appropriate. We cannot assure you that our actions taken to establish and protect our trademarks, patents and service marks will be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as violative of their trademark or other proprietary rights.

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Our products may infringe the intellectual property rights of others, which may cause us to incur unexpected costs or prevent us from selling our products.

We cannot be certain that our products do not and will not infringe the intellectual property rights of others. We may be subject to legal proceedings and claims in the ordinary course of our business, including claims of alleged infringement of the intellectual property rights of third parties by us or our customers in connection with their use of our products. Any such claims, whether or not meritorious, could result in costly litigation and divert the efforts of our personnel. Moreover, should we be found liable for infringement, we may be required to enter into licensing agreements (if available on acceptable terms or at all) or to pay damages and cease making or selling certain products. Moreover, we may need to redesign or rename some of our products to avoid future infringement liability. Any of the foregoing could cause us to incur significant costs and prevent us from manufacturing or selling our products.

Our current executive officers and management are critical to our success, and the loss of any of these individuals could harm our business, brands and image.

We are heavily dependent on our current executive officers and management. We believe that our success depends to a significant degree upon the continued contributions of our executive officers and other key personnel, both individually and as a group. The loss of any of our executive officers or management or the inability to attract or retain qualified personnel could delay the development and introduction of new products, harm our ability to sell our products, damage the image of our brands and prevent us from executing our business strategy.

If we are unable to maintain and expand our endorsements by professional athletes, our ability to market and sell our products may be harmed.

A key element of our marketing strategy has been to obtain endorsements from prominent athletes, which contributes to the authenticity and image of our brands. We believe that this strategy has been an effective means of gaining brand exposure worldwide and creating broad appeal for our products. We cannot assure you that we will be able to maintain our existing relationships with these individuals in the future or that we will be able to attract new athletes to endorse our products. Larger companies with greater access to capital for athlete sponsorships may in the future increase the cost of sponsorships for these athletes to levels we may choose not to match. If this were to occur, our sponsored athletes may terminate their relationships with us and endorse the products of our competitors and we may be unable to obtain endorsements from other comparable athletes.

We also are subject to risks related to the selection of athletes whom we choose to endorse our products. We may select athletes who are unable to perform at expected levels or who are not sufficiently marketable. In addition, negative publicity concerning any of our athletes could harm our brand and adversely impact our business. If we are unable in the future to secure prominent athletes and arrange athlete endorsements of our products on terms we deem to be reasonable, we may be required to modify our marketing platform and to rely more heavily on other forms of marketing and promotion, which may not prove to be effective. In either case, our inability to obtain endorsements from professional athletes could adversely affect our ability to market and sell our products, resulting in loss of revenues and a loss of profitability.

We could be negatively impacted if we fail to successfully integrate the businesses we acquire.

We have acquired businesses that we believe can enhance our business opportunities and our growth prospects. All acquisitions involve risks that can materially and adversely affect our business and operating results. These risks include:

• distracting management from our business operations;

• losing key personnel and other employees;

• costs, delays, and inefficiencies associated with integrating acquired operations and personnel;

• the impairment of acquired assets and goodwill; and

• acquiring the contingent and other liabilities of the businesses we acquire.

In addition, acquired businesses may not provide us with increased business opportunities, or result in the growth that we anticipate. Furthermore, integrating acquired operations is a complex, time-consuming,

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and expensive process. Combining acquired operations with us may result in lower overall operating margins, greater stock price volatility, and quarterly earnings fluctuations. Cultural incompatibilities, career uncertainties, and other factors associated with such acquisitions may also result in the loss of employees. Failing to acquire and successfully integrate complementary practices, or failing to achieve the business synergies or other anticipated benefits, could materially adversely affect our business and results of operations.

For example, in July 2005 we acquired Rossignol, and we expect that the acquisition of Rossignol will result in certain synergies, business opportunities and growth prospects. We, however, may never realize these expected synergies, business opportunities and growth prospects. In addition, integrating operations will require significant efforts and expenses. Personnel may leave or be terminated because of the acquisition and our management time and attention may be diverted from their other responsibilities. If these or other factors limit our ability to successfully integrate the operations of Rossignol on a timely basis, our expectations of future results of operations, including certain cost savings and synergies expected to result from the acquisition, may not be achieved. In addition, if the growth and operating strategies of Rossignol are not effective, it could have a material adverse effect on our business, financial condition and results of operations.

Cyclical trends in apparel, sporting goods and footwear retailing could have a material adverse effect on our results of operations.

The apparel, sporting goods and footwear industries historically have been subject to substantial cyclical variations. As domestic and international economic conditions change, trends in discretionary consumer spending become unpredictable and could be subject to reductions due to uncertainties about the future. When consumers reduce discretionary spending, purchases of specialty apparel, footwear and sporting goods may decline. In addition, a general reduction in consumer discretionary spending due to a recession in the domestic and/or international economies or uncertainties regarding future economic prospects could have a material adverse effect on our results of operations.

As a result of our acquisition of Rossignol, we face greater challenges in managing several brands.

While we believe that we have significant experience in managing our apparel and footwear brands and their respective channels of distribution, with our acquisition of Rossignol, we have further penetrated the wintersports and golf markets. If we are unable to effectively manage our multiple product lines in multiple markets, our profitability may be reduced and our image and reputation could be harmed.

Employment related matters, such as unionization, may affect our profitability.

As of October 31, 2006, less than 100 of our employees were unionized, all outside of the United States, and certain French employees are represented by workers’ councils. We have little control over the union activities in these areas and could face difficulties in the future. There can be no assurance that we will not experience work stoppages or other labor problems in the future with our unionized employees, non-unionized employees or employees represented by workers councils or that we will be able to renew the collective bargaining agreements on similar or more favorable terms.

We may be subject to restrictions due to our minority interest in Cleveland Golf.

We directly or indirectly own approximately 64% of the outstanding capital stock of Roger Cleveland Golf Company, Inc., with the remaining approximately 36% held by minority shareholders, including Laurent Boix-Vives, one of our directors. As a result, conflicts of interest may develop between us and the minority shareholders of Cleveland Golf, and we may need to devote significant management attention to dealing with the minority shareholders. In addition, we owe fiduciary duties to such minority shareholders which may restrict our control of Cleveland Golf and impede our ability to transfer cash and assets to and from Cleveland Golf or to realize the full benefits of capital that we provide to Cleveland Golf. Although we have entered into a shareholders agreement with these minority shareholders which addresses some of these concerns, no assurances can be given that the minority interest in Cleveland Golf will not cause conflicts in the future.

The demand for our products is seasonal and sales are dependent upon the weather.

Our revenues and operating results are subject to seasonal trends when measured on a quarterly basis. For example, sales of apparel products are typically lower during our first fiscal quarter when compared

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with our other fiscal quarters, while Rossignol’s sales have historically been higher between August and December at the peak of it’s winter equipment shipping activities. These trends are dependent on many factors, including the holiday seasons, weather, consumer demand, markets in which we operate and numerous other factors beyond our control. The seasonality of our business, unseasonable weather during our peak selling periods and/or misjudgment in consumer demands could have a material adverse effect on our financial condition and results of operations.

Factors affecting international commerce and our international operations may seriously harm our financial condition.

We generate a majority of our revenues from outside of the United States, and we anticipate that revenue from our international operations could account for an increasingly larger portion of our revenues. Our international operations are directly related to, and dependent on, the volume of international trade and foreign market conditions. International commerce and our international operations are subject to many risks, including:

• recessions in foreign economies;

• the adoption and expansion of trade restrictions;

• limitations on repatriation of earnings;

• difficulties in protecting our intellectual property or enforcing our intellectual property rights under the laws of other countries;

• longer receivables collection periods and greater difficulty in collecting accounts receivable;

• difficulties in managing foreign operations;

• social, political and economic instability;

• unexpected changes in regulatory requirements;

• our ability to finance foreign operations;

• tariffs and other trade barriers; and

• U.S. government licensing requirements for exports.

The occurrence or consequences of any of these risks may restrict our ability to operate in the affected regions and decrease the profitability of our international operations, which may seriously harm our financial condition.

We have established, and may continue to establish, joint ventures in various foreign territories, such as Brazil and Mexico, with independent third party business partners to distribute and sell Quiksilver, Roxy and other branded products in such territories. These joint ventures are subject to substantial risks and liabilities associated with their operations, as well as the risk that our relationships with our joint venture partners do not succeed in the manner that we anticipate. If our joint venture operations, or our relationships with our joint venture partners, are not successful, our results of operation and financial condition may be adversely affected.

If the popularity of the sports associated with our brands were to decrease, our revenues could be adversely affected and our results of operations could be impaired.

We generate a significant portion of our revenues from the sale of products directly associated with boardriding, wintersports and golf. The demand for such products is directly related to the popularity of boardriding activities, wintersports and golf and the number of respective participants worldwide. If the demand for boardriding, wintersports and/or golf equipment and accessories decreases, our revenues could be adversely affected and our results of operations could be impaired. In addition, if participation in boardriding activities, wintersports and/or golf were to decrease, sales of many of our products could decrease.

Our industry is subject to pricing pressures that may adversely impact our financial performance.

We manufacture many of our products offshore because such products generally cost less to make, primarily because labor costs are lower. Many of our competitors also source their product requirements offshore to achieve lower costs, possibly in locations with lower costs than our offshore operations, and those competitors may use these cost savings to reduce prices. To remain competitive, we must adjust

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our prices from time to time in response to these industry-wide pricing pressures. Our financial performance may be negatively affected by these pricing pressures if:

• we are forced to reduce our prices and we cannot reduce our production costs; or

• our production costs increase and we cannot increase our prices.

Changing international trade regulations and the elimination of quotas on imports of textiles and apparel may increase competition in the apparel industry.

Future quotas, duties or tariffs may have a material adverse effect on our business, financial condition and results of operations. We currently import raw materials and/or finished garments into the majority of countries in which we sell our apparel products. Substantially all of our import operations are subject to:

• quotas imposed by bilateral textile agreements between the countries where our apparel-producing facilities are located and foreign countries; and

• customs duties imposed by the governments where our apparel-producing facilities are located on imported products, including raw materials.

In addition, the countries in which our apparel products are manufactured or to which they are imported may from time to time impose additional new quotas, duties, tariffs, requirements as to where raw materials must be purchased, additional workplace regulations or other restrictions on our imports, or otherwise adversely modify existing restrictions. Adverse changes in these costs and restrictions could harm our business. We cannot assure you that future trade agreements will not provide our competitors with an advantage over us, or increase our costs, either of which could have a material adverse effect on our business, results of operations and financial condition.

Our apparel-producing operations are also subject to the effects of international trade agreements and regulations such as the North American Free Trade Agreement, and the activities and regulations of the World Trade Organization, referred to as the WTO. Generally, such trade agreements benefit our apparel business by reducing or eliminating the duties and/or quotas assessed on products manufactured in a particular country. However, trade agreements can also impose requirements that negatively impact our apparel business, such as limiting the countries from which we can purchase raw materials and setting quotas on products that may be imported into the United States from a particular country. In addition, the WTO may commence a new round of trade negotiations that liberalize textile trade. This increased competition could have a material adverse effect on our business, results of operations and financial condition.

We rely on third-party manufacturers and problems with, or loss of, our suppliers or raw materials could harm our business and results of operations.

Substantially all of our apparel products are produced by independent manufacturers. We face the risk that these third-party manufacturers with whom we contract to produce our products may not produce and deliver our products on a timely basis, or at all. We cannot be certain that we will not experience operational difficulties with our manufacturers, such as reductions in the availability of production capacity, errors in complying with product specifications, insufficient quality control, failures to meet production deadlines or increases in manufacturing costs. The failure of any manufacturer to perform to our expectations could result in supply shortages for certain products and harm our business.

The capacity of our manufacturers to manufacture our products also is dependent, in part, upon the availability of raw materials. Our manufacturers may experience shortages of raw materials, which could result in delays in deliveries of our products by our manufacturers or in increased costs to us. Any shortage of raw materials or inability of a manufacturer to manufacture or ship our products in a timely manner, or at all, could impair our ability to ship orders of our products in a cost-efficient, timely manner and could cause us to miss the delivery requirements of our customers. As a result, we could experience cancellations of orders, refusals to accept deliveries or reductions in our prices and margins, any of which could harm our financial performance and results of operations.

In addition, substantially all of the raw materials for our wintersports equipment are sold to us by unaffiliated suppliers located primarily in Europe and Asia. We have no exclusive or significant long-term contracts with these suppliers and we compete with other companies for such suppliers’ output. Although

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we believe that we have established solid relationships with such suppliers, the inability to maintain such relationships or to find additional sources to cover future growth could have a material adverse effect on our business.

Our failure to comply with, or the imposition of liability under, environmental laws and regulations could result in significant costs.

Some of our facilities and operations are subject to various environmental laws and regulations which govern, among other things, the use and storage of hazardous materials, the storage and disposal of solid and hazardous wastes, the discharge of pollutants into the air, water and land, and the cleanup of contamination. Violations of these requirements could result in significant fines or penalties being imposed on us. Discovery of contamination for which we are responsible, the enactment of new laws and regulations, or changes in how existing requirements are enforced, could require us to incur additional costs for compliance or subject us to unexpected liabilities. Any such costs or liabilities could have a material adverse effect on our business and results of operation.

Item 1B. UNRESOLVED STAFF COMMENTS

None.

Item 2. PROPERTIES

As of October 31, 2006, our principal facilities in excess of 40,000 rentable square feet, all of which are leased, are as follows:

		Approximate		Current Lease
Location	Principal Use	Sq. Ft.		Expiration
Huntington Beach, California	Corporate headquarters		120,000		2023	*
St Etienne de Crossey, France	Wintersports manufacturing		200,000		2007
Verrayes, Italy	Wintersports manufacturing		75,000		2016	*
Huntington Beach, California	Americas distribution center		225,000		2018	*
Huntington Beach, California	Americas distribution center		112,000		2018	*
Huntington Beach, California	Americas distribution center		100,000		2018	*
Huntington Beach, California	Americas distribution center		100,000		2018	*
Huntington Beach, California	Americas distribution center		75,000		2023	*
Huntington Beach, California	Americas distribution center		129,000		2024
Mira Loma, California	Americas distribution center		683,000		2027	*
Vista, California	Corporate headquarters		98,000		2007
Ogden, Utah	Americas distribution center		104,000		2016
St. Jean de Luz, France	European headquarters		80,000		2011
St. Jean de Luz, France	European distribution center		100,000		2007
Hendaye, France	European distribution center		100,000		2008
Satolas, France	European distribution center		215,000		2016
Moirans, France	European distribution center		130,000		2008
Torquay, Australia	Asia/Pacific headquarters		54,000		2024	*
Geelong, Australia	Asia/Pacific distribution center		81,000		2018	*

* Includes extension periods exercisable at our option.

As of October 31, 2006, we operated 77 retail stores in the Americas, 132 European retail stores, and 67 retail stores in Asia/Pacific on leased premises. The leases for our facilities required aggregate annual rentals of approximately $75.8 million in fiscal 2006. We anticipate that we will be able to extend those leases that expire in the near future on terms satisfactory to us, or, if necessary, locate substitute facilities on acceptable terms. We believe that our corporate, distribution and retail leased facilities are suitable and adequate to meet our current needs.

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Item 3. LEGAL PROCEEDINGS

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

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

No matters were submitted for a vote of our stockholders during the fourth quarter of the fiscal year ended October 31, 2006.

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PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

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

	High		Low
Fiscal 2006
4th quarter ended October 31, 2006	$	14.30	$	11.83
3rd quarter ended July 31, 2006		13.49		12.00
2nd quarter ended April 30, 2006		14.80		13.19
1st quarter ended January 31, 2006		14.26		11.34
Fiscal 2005
4th quarter ended October 31, 2005	$	16.61	$	10.68
3rd quarter ended July 31, 2005		16.79		14.31
2nd quarter ended April 30, 2005		17.80		13.03
1st quarter ended January 31, 2005		15.55		13.51

Prices have been adjusted to reflect a 2-for-1 stock split effected in May 2005.

We have historically reinvested our earnings in our business and have never paid a cash dividend. No change in this practice is currently being considered. Our payment of cash dividends in the future will be determined by our Board of Directors, considering conditions existing at that time, including our earnings, financial requirements and condition, opportunities for reinvesting earnings, business conditions and other factors. In addition, under the indenture related to our senior notes and under our principal credit agreement with a bank group, there are limits on the dividends and other payments that certain of our subsidiaries may pay to us and we must obtain the note holders and bank group’s prior consent to pay dividends to our shareholders above a pre-determined amount.

On January 4, 2007, there were approximately 659 holders of record of our common stock and an estimated 23,485 beneficial stockholders.

Item 6. SELECTED FINANCIAL DATA

The statement of income and balance sheet data shown below were derived from our consolidated financial statements. Our consolidated financial statements as of October 31, 2006 and 2005 and for each of the three years in the period ended October 31, 2006, included herein, have been audited by Deloitte & Touche LLP, our independent registered public accounting firm. You should read this selected financial data together with our consolidated financial statements and related notes, as well as the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

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	Years Ended October 31,
Amounts in thousands, except ratios and
per share data	2006(1)(2)(3)(4)		2005(2)(3)(4)		2004(3)(4)		2003(4)		2002
Statement of Income Data
Revenues, net	$	2,362,288	$	1,780,869	$	1,266,939	$	975,005	$	705,484
Income before provision for income taxes		131,342		158,346		121,992		90,067		59,986
Net income		93,016		107,120		81,369		58,516		37,591
Net income per share (5)		0.76		0.90		0.71		0.54		0.40
Net income per share, assuming dilution (5)		0.73		0.86		0.68		0.52		0.38
Weighted average common shares		122,074		118,920		114,388		108,448		93,836
Weighted average common shares outstanding, assuming dilution (5)		127,744		124,335		119,288		113,270		97,888
Balance Sheet Data
Total assets	$	2,447,228	$	2,158,601	$	990,990	$	707,970	$	450,589
Working capital		568,596		458,857		343,100		286,625		160,518
Lines of credit		315,891		220,113		10,801		20,951		32,498
Long-term debt		714,311		691,181		173,513		123,419		54,085
Stockholders’ equity		881,127		732,882		588,244		446,508		272,873
Other Data
EBITDA (6)	$	268,544	$	222,160	$	155,229	$	119,519	$	82,975
Current ratio		1.7		1.7		2.6		3.0		2.2
Return on average stockholders’ equity(7)		11.5		16.2		15.7		16.3		15.4

(1)	Fiscal 2006 includes stock compensation expense related to the adoption of Statement of Financial Accounting Standards No. 123(R).
(2)	Fiscal 2006 and 2005 includes the operations of Rossignol since August 1, 2005. See Note 2 of our consolidated financial statements.
(3)	Fiscal 2006, fiscal 2005 and fiscal 2004 include the operations of DC since its acquisition effective May 1, 2004. See Note 2 of our consolidated financial statements.
(4)	Fiscal 2006, fiscal 2005, fiscal 2004 and fiscal 2003 include the operations of Asia/Pacific since its acquisition effective December 1, 2002. See Note 2 of our consolidated financial statements.
(5)	Per share amounts and shares outstanding have been adjusted to reflect two-for-one stock splits effected on May 11, 2005 and May 9, 2003.
(6)	EBITDA is defined as net income before (i) interest expense, (ii) income tax expense, (iii) depreciation and amortization, and (iv) non-cash stock-based compensation expense. EBITDA is not defined under generally accepted accounting principles (“GAAP”), and it may not be comparable to similarly titled measures reported by other companies. We use EBITDA, along with other GAAP measures, as a measure of profitability because EBITDA helps us to compare our performance on a consistent basis by removing from our operating results the impact of our capital structure, the effect of operating in different tax jurisdictions, the impact of our asset base, which can differ depending on the book value of assets and the accounting methods used to compute depreciation and amortization, and the effect of non-cash stock-based compensation expense. We believe it is useful to investors for the same reasons. EBITDA has limitations as a profitability measure in that it does not include the interest expense on our debts, our provisions for income taxes, the effect of our expenditures for capital assets and certain intangible assets and the effect of non-cash compensation expense. Following is a reconciliation of net income to EBITDA:

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	Years Ended October 31,
	2006		2005		2004		2003		2002
Net income	$	93,016	$	107,120	$	81,369	$	58,516	$	37,591
Income taxes		38,326		51,226		40,623		31,551		22,395
Interest		50,836		21,950		6,390		8,267		8,640
Depreciation and amortization		65,615		41,864		26,847		21,185		14,349
Non-cash stock compensation expense		20,751		—		—		—		—
EBITDA	$	268,544	$	222,160	$	155,229	$	119,519	$	82,975

⁽⁷⁾ Computed based on net income divided by the average of beginning and ending stockholders’ equity.

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

The following discussion should be read together with our consolidated financial statements and related notes, which are included in this report and the “Risk Factors” information, set forth in Item 1A. above.

Overview

We began operations in 1976 as a California company making boardshorts for surfers in the United States under a license agreement with the Quiksilver brand founders in Australia. Our product offering expanded in the 1980s as we grew our distribution channels. After going public in 1986 and purchasing the rights to the Quiksilver brand in the United States from our Australian licensor, we further expanded our product offerings and began to diversify. In 1991, we acquired the European licensee of Quiksilver and introduced Roxy, our surf brand for teenage girls. We also expanded demographically in the 1990s by adding products for boys, girls, toddlers and men and we introduced our proprietary retail store concept, Boardriders Clubs, which displays the heritage and products of Quiksilver and Roxy. In 2000, we acquired the international Quiksilver and Roxy trademarks, and in 2002, we acquired our licensees in Australia and Japan. In May 2004, we acquired DC Shoes, Inc. to expand our presence in action sports-inspired footwear. Brand building has been a key to our growth, and we have always maintained our roots in the boardriding lifestyle. In July 2005, we acquired Skis Rossignol, S.A., a wintersports and golf equipment manufacturer. Rossignol offers a full range of wintersports equipment under the Rossignol, Dynastar, Lange, Look and Kerma brands, and also sells golf products under the Cleveland Golf and Never Compromise brands. The acquisition was effective July 31, 2005 and we included the operations of Rossignol in our results beginning on August 1, 2005. Today our products are sold throughout the world, primarily in surf shops, snow shops, skate shops and specialty stores.

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

Over the last five years, our revenues have grown from $705 million in fiscal 2002 to $2.36 billion in fiscal 2006. We operate in the outdoor market of the sporting goods industry in which we design, produce and distribute branded apparel, wintersports and golf equipment, footwear, accessories and related products. We operate in three segments, the Americas, Europe and Asia/Pacific. The Americas segment includes revenues primarily from the U.S. and Canada. The European segment includes revenues primarily from Western Europe. The Asia/Pacific segment includes revenues primarily from Australia, Japan, New Zealand and Indonesia. Royalties earned from various licensees in other international territories are categorized in corporate operations along with revenues from sourcing services for our licensees. Revenues by segment are as follows:

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	Years Ended October 31,
In thousands	2006		2005		2004		2003		2002
Americas	$	1,078,611	$	843,677	$	616,818	$	492,442	$	418,008
Europe		1,015,133		712,310		496,276		386,226		282,684
Asia/Pacific		263,158		220,941		148,733		94,187		—
Corporate operations		5,386		3,941		5,112		2,150		4,792
Total revenues, net	$	2,362,288	$	1,780,869	$	1,266,939	$	975,005	$	705,484

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

Results of Operations

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

	Years Ended October 31,
	2006			2005			2004
Statement of Income Data
Revenues, net		100.0	%		100.0	%		100.0	%
Gross profit		45.8			45.4			45.6
Selling, general and administrative expense		38.0			35.2			35.2
Operating income		7.8			10.2			10.4
Interest expense		2.2			1.2			0.5
Foreign currency, minority interest and other expense		0.0			0.1			0.3
Income before provision for income taxes		5.6	%		8.9	%		9.6	%
Other data
EBITDA (1)		11.4	%		12.5	%		12.3	%

⁽¹⁾ For a definition of EBITDA and a reconciliation of Net Income to EBITDA, see footnote (6) to the table under Item 6. Selected Financial Data.

Fiscal 2006 Compared to Fiscal 2005

Revenues

Our total net revenues increased 33% in fiscal 2006 to $2,362.3 million from $1,780.9 million in fiscal 2005 primarily as a result of the Rossignol acquisition, increased unit sales and new products. Revenues in the Americas increased 28%, European revenues increased 43%, and Asia/Pacific revenues increased 19%. We completed the acquisition of Rossignol and Cleveland Golf effective July 31, 2005, and these operations are included in our results for only three months in fiscal 2005, but a full year in fiscal 2006, resulting in consolidated revenue growth of 24% in fiscal 2006. Rossignol and Cleveland Golf operate in all three of our operating segments, primarily producing wintersports and golf equipment, and accounted for net revenues of $640.1 million in fiscal 2006 compared to $214.5 million in fiscal 2005.

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Net revenues in the Americas were approximately 46% of our consolidated total in fiscal 2006. Americas’ net revenues in our men’s category, which includes the Quiksilver Young Men’s, Boys, Toddlers, Quiksilveredition, DC, and Hawk brands, increased 9% to $430.2 million in fiscal 2006 from $394.0 million the year before. Americas’ net revenues in our women’s category, which includes the Roxy, Roxy Girl, Teenie Wahine, DC, Raisins, Leilani and Radio Fiji brands, increased 11% to $391.5 million from $352.9 million for those same periods. Wintersports and golf equipment are sold under the Rossignol, Dynastar, Look, Lange, Kerma, Cleveland Golf, Never Compromise, Lib Technologies, Gnu, Bent Metal and Roxy brands and totaled $256.9 million in fiscal 2006 compared to $96.7 million in fiscal 2005. Men’s revenues in the Americas increased primarily from growth in the DC brand and, to a lesser extent, the Quiksilver brand. The women’s increase came primarily from growth in the Roxy brand and, to a lesser extent, increased growth in the DC brand. We believe that our product design and marketing efforts are resulting in increased consumer demand for products in our men’s and women’s categories in the Americas. The increase in wintersports and golf equipment revenue was primarily due to the Rossignol and Cleveland Golf businesses as we had a full year of wintersports and golf equipment operations in fiscal 2006 compared to three months in fiscal 2005.

European net revenues were approximately 43% of our consolidated total in fiscal 2006. In U.S. dollars, revenues in the men’s category increased 5% to $428.6 million in fiscal 2006 from $406.6 million in the previous year. Women’s revenues increased 25% to $229.2 million from $184.0 million for those same periods. Our wintersports and golf equipment revenues were $357.3 million in fiscal 2006 compared to $121.7 million in fiscal 2005. The European men’s revenue increase came primarily from increased Quiksilver brand revenue and, to a lesser extent, growth in the DC brand. The women’s revenue increase primarily reflects growth in the Roxy brand. The increase in wintersports and golf equipment revenue was primarily due to the Rossignol and Cleveland Golf businesses as we had a full year of wintersports and golf equipment operations in fiscal 2006 compared to three months in fiscal 2005. For consolidated financial statement reporting, euro results must be translated into U.S. dollar amounts at average exchange rates, but this can distort performance when exchange rates change from year to year. To understand our European fiscal 2006 growth and better assess competitive performance, we believe it is important to look at revenues in euros as well, which is our functional currency in Europe. In euros, revenues grew 45% in fiscal 2006. This is higher than the 43% growth rate in U.S. dollars because the U.S. dollar was worth more euros on average in fiscal 2006 compared to fiscal 2005.

Asia/Pacific net revenues were approximately 11% of our consolidated total in fiscal 2006. In U.S. dollars, Asia/Pacific net revenues increased 19% to $263.2 million in fiscal 2006 from $220.9 million in the previous year. This increase came primarily from increases in the Rossignol and Cleveland Golf businesses and, to a lesser extent, increases in other brand revenues. For consolidated financial statement reporting, Australian dollar results must be translated into U.S. dollar amounts at average exchange rates, but as with our European segment, this can distort performance when exchange rates change from year to year. In Australian dollars, revenues grew 22% in fiscal 2006. This is higher than the 19% growth rate in U.S. dollars because the U.S. dollar was worth more Australian dollars on average in fiscal 2006 compared to fiscal 2005.

Gross Profit

Our consolidated gross profit margin increased to 45.8% in fiscal 2006 from 45.4% in the previous year. The gross profit margin in the Americas increased to 41.0% from 39.7%, our European gross profit margin increased to 51.0% from 50.8%, and our Asia/Pacific gross profit margin decreased to 45.2% from 49.7%. The increase in the Americas’ gross profit margin was primarily due to lower production costs, improved margins in our DC brand, and a higher percentage of sales through company owned retail stores where we earn both wholesale and retail margins, partially offset by higher sales from our wintersports and golf equipment businesses, which operated at lower margins than our other businesses. Our European gross profit margin increased slightly due to a higher percentage of sales through company-owned retail stores. This increase was substantially offset by the impact of the lower margins from our Rossignol business. In Asia/Pacific, the gross profit margin decrease was primarily due to sales from our lower margin wintersports and golf equipment businesses and lower margins on our other brands, partially offset by a higher percentage of sales through company-owned retail stores.

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Selling, General and Administrative Expense

Selling, general and administrative expense increased 43% in fiscal 2006 to $897.6 million from $627.3 million in fiscal 2005. In the Americas, these expenses increased 37% to $343.3 million from $250.0 million, in Europe they increased 56% to $403.1 million from $258.9 million, and in Asia/Pacific they increased 21% to $97.1 million from $80.1 million for those same periods. As a percentage of revenues, selling, general and administrative expense increased to 38.0% of sales in fiscal 2006 compared to 35.2% in fiscal 2005. The increase in selling, general and administrative expense as a percentage of revenues is primarily due to $20.8 million in stock compensation expense recorded in the current period as a result of adopting SFAS No. 123(R) on November 1, 2005, the cost of additional retail stores and, to a lesser extent, a full year of our wintersports and golf equipment businesses, which operated with slightly higher selling, general and administrative expenses as a percentage of revenues compared to our other businesses.

Non-operating Expenses

Interest expense increased to $50.8 million in fiscal 2006 compared to $22.0 million in fiscal 2005 primarily as a result of debt incurred and assumed in connection with the acquisition of Rossignol.

Our foreign currency loss amounted to $0.5 million in fiscal 2006 compared to a foreign currency gain of $0.1 million in fiscal 2005. This current year loss resulted primarily from the foreign currency contracts that we used to mitigate the risk of translating the results of our international subsidiaries into U.S. dollars.

Our income tax rate decreased to 29.2% in fiscal 2006 from 32.4% in fiscal 2005. This improvement resulted primarily because a higher percentage of our fiscal 2006 profits were generated in countries with lower tax rates and from foreign tax credits.

Net Income and EBITDA

Net income in fiscal 2006 decreased 13% to $93.0 million, and earnings per share on a diluted basis decreased 15% to $0.73. EBITDA increased 21% in fiscal 2006 to $268.5 million.

Fiscal 2005 Compared to Fiscal 2004

Revenues

Our total net revenues increased 41% in fiscal 2005 to $1,780.9 million from $1,266.9 million in fiscal 2004 primarily as a result of increased unit sales, new products and the Rossignol acquisition. Revenues in the Americas increased 37%, European revenues increased 44%, and Asia/Pacific revenues increased 49%. We completed the acquisition of Rossignol effective July 31, 2005, and Rossignol’s operations are included in our results since August 1, 2005. Rossignol operates in all three of our geographic segments, primarily producing wintersports and golf equipment, and accounted for approximately 17% of our consolidated revenue growth during fiscal 2005. We acquired DC Shoes, Inc. at the beginning of our third quarter in fiscal 2004, and the inclusion of DC for the full year of fiscal 2005 compared to just six months in fiscal 2004 accounted for approximately 6% of our consolidated revenue growth during fiscal 2005.

Net revenues in the Americas were approximately 48% of our consolidated total in fiscal 2005. Americas’ net revenues in our men’s category increased 27% to $394.0 million in fiscal 2005 from $310.8 million the year before. Americas’ revenues in our women’s category increased 19% to $352.9 million from $295.6 million for those same periods. Wintersports and golf equipment totaled $96.7 million in fiscal 2005 compared to $10.4 million in fiscal 2004. Men’s revenues in the Americas increased primarily from the DC brand and, to a lesser extent, the Quiksilver Young Men’s brand. The women’s increase came primarily from the Roxy brand and, to a lesser extent, the DC brand. The increase in wintersports and golf equipment revenue was primarily due to the Rossignol and Cleveland businesses.

European net revenues were approximately 40% of our consolidated total in fiscal 2005. In U.S. dollars, revenues in the men’s category increased 18% to $428.9 million in fiscal 2005 from $364.7 million in the previous year. Women’s revenues increased 23% to $161.8 million from $131.6 million for those same periods. Our wintersports and golf equipment revenue was $121.7 million in fiscal 2005. The European men’s revenue increase came primarily from the Quiksilver Young Men’s brand and, to a lesser extent,

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the DC brand. The women’s revenue increase primarily reflects growth in the Roxy brand. Our wintersports and golf equipment revenue was due to the Rossignol and Cleveland Golf businesses. In euros, revenues grew 39% in fiscal 2005. This is lower than the 44% growth rate in U.S. dollars because the U.S. dollar was worth fewer euros on average in fiscal 2005 compared to fiscal 2004.

Asia/Pacific net revenues were approximately 12% of our consolidated total in fiscal 2005. In U.S. dollars, Asia/Pacific net revenues increased 49% to $220.9 million in fiscal 2005 from $148.7 million in the previous year. The increase came primarily from the Roxy brand and, to a lesser extent, the Quiksilver and DC brands. In Australian dollars, revenues grew 41% in fiscal 2005. This is lower than the 49% growth rate in U.S. dollars because the U.S. dollar was worth fewer Australian dollars on average in fiscal 2005 compared to fiscal 2004.

Gross Profit

Our consolidated gross profit margin decreased to 45.4% in fiscal 2005 from 45.6% in the previous year. The gross profit margin in the Americas decreased to 39.7% from 40.8%, our European gross profit margin increased to 50.8% from 50.7%, and our Asia/Pacific gross profit margin increased to 49.7% from 49.2%. The decrease in the Americas’ gross profit margin was primarily due to lower margins on in-season business during the first six months of fiscal 2005 in comparison to the prior year and, to a lesser extent, the impact of the Rossignol and Cleveland Golf businesses, which produced a lower gross margin than our other businesses during the last three months of fiscal 2005. These decreases were partially offset by generating a higher percentage of sales through company-owned retail stores. We earn higher gross margins on sales in company-owned stores, but these higher gross margins are generally offset by store operating costs. Our European gross profit margin increased due to lower production costs resulting from a stronger euro in relation to the U.S. dollar compared to the 2004 fiscal year and, to a lesser extent, a higher percentage of sales through company-owned retail stores, but these increases were substantially offset by the impact of the lower margins from the Rossignol and Cleveland Golf businesses. In Asia/Pacific, the gross profit margin increased primarily due to lower production costs resulting from a stronger Australian dollar in relation to the U.S. dollar compared to the 2004 fiscal year and, to a lesser extent, a higher percentage of sales through company-owned retail stores.

Selling, General and Administrative Expense

Selling, general and administrative expense increased 41% in fiscal 2005 to $627.3 million from $446.2 million in fiscal 2004. In the Americas, these expenses increased 33% to $250.0 million from $187.5 million, in Europe they increased 45% to $258.9 million from $178.2 million, and in Asia/Pacific they increased 54% to $80.1 million from $52.0 million for those same periods. The increase among all three segments was primarily due to the Rossignol and Cleveland Golf businesses, additional company-owned retail stores, the inclusion of DC for the full year of fiscal 2005 compared to just six months of fiscal 2004, additional marketing and other expenses related to increased sales volume. As a percentage of revenues, selling, general and administrative expense remained consistent at 35.2% of revenues for 2005 and 2004. The increase in selling, general and administrative expense as a percentage of revenues due to additional company-owned retail stores and increased marketing activities was offset by general leverage on growth.

Non-operating Expenses

Interest expense increased to $22.0 million in fiscal 2005 compared to $6.4 million in fiscal 2004 primarily as a result of debt incurred and assumed in connection with the acquisition of Rossignol.

We had a foreign currency gain of $0.1 million in fiscal 2005 compared to a foreign currency loss of $2.9 million in fiscal 2004. This gain resulted primarily from the foreign currency contracts that we used to mitigate the risk of translating the results of our international subsidiaries into U.S. dollars.

Our income tax rate decreased to 32.4% in fiscal 2005 from 33.3% in fiscal 2004. This improvement resulted primarily because a higher percentage of our fiscal 2005 profits were generated in countries with lower tax rates.

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Net Income and EBITDA

Net income in fiscal 2005 increased 32% to $107.1 million, and earnings per share on a diluted basis increased 26% to $0.86. EBITDA increased 43% in fiscal 2005 to $222.2 million.

Financial Position, Capital Resources and Liquidity

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

Cash and cash equivalents totaled $36.8 million at October 31, 2006 versus $75.6 million at October 31, 2005. Working capital amounted to $568.6 million at October 31, 2006, compared to $458.9 million at October 31, 2005, an increase of 24%. We believe that our current cash balances, cash flows and credit facilities are adequate to cover our cash needs for the foreseeable future. Furthermore, we believe that increases in our credit facilities can be obtained if needed to fund future growth.

Operating Cash Flows

We used $8.3 million of cash in our operating activities in fiscal 2006 compared to cash used of $1.4 million in fiscal 2005. This $6.9 million increase in cash used was primarily caused by an increase in inventories, net of accounts payable, which used cash of $20.1 million in fiscal 2006 compared to providing cash of $49.9 million in fiscal 2005, and an increase in cash used for other working capital components, which used cash of $70.5 million in fiscal 2006 compared to cash provided of $16.8 million in fiscal 2005. These increases in cash used were partially offset by an increase in cash profits, which provided $193.7 million of cash in fiscal 2006 compared to $160.8 million in fiscal 2005, and a decrease in cash used for accounts receivable growth which used $111.4 million in cash in the current year compared to $228.9 million in fiscal 2005.

We used $1.4 million of cash in our operating activities in fiscal 2005 compared to cash generated of $130.6 million in fiscal 2004. This $132.0 million decrease in cash provided was primarily caused by an increase in accounts receivable partially offset by a decrease in inventories, net of accounts payable. We acquired Rossignol effective July 31, 2005, just prior to the season when demand for wintersports equipment is the highest. Accordingly, there was a significant increase in accounts receivable related to revenues from the sale of these products. Accounts receivable also increased, but to a lesser extent, as revenues from our other businesses grew compared to the previous year. During fiscal 2005, the increase in accounts receivable used cash of $228.9 million compared to $33.9 million the year before, a decrease in cash provided of $195.0 million. The decrease in inventories, net of accounts payable, generated cash of $49.9 million in fiscal 2005 compared to $8.9 million the year before, an increase in cash provided of $41.0 million. Cash provided by net income adjusted for non-cash expenses increased $40.7 million compared to the year before, which more than offset the decrease in cash provided by other working capital components of $18.7 million, resulting in a net increase in cash provided of $22.0 million related to these items.

Capital Expenditures

We have historically avoided high levels of capital expenditures for our manufacturing functions by using independent contractors for sewing and other processes such as washing, dyeing and embroidery. We perform the cutting process in-house for certain product categories in the Americas to enhance control and efficiency, and we screenprint a portion of our product in-house in both the Americas and in Europe. The acquisition of Rossignol has increased, and is expected to continue to increase, our capital expenditures for manufacturing functions.

Fiscal 2006 capital expenditures were $97.9 million, which was approximately $27.0 million higher than the $70.9 million we spent in fiscal 2005. In fiscal 2006, we increased our investment in company-owned retail stores, manufacturing equipment, warehouse equipment, and computer systems.

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New company-owned retail stores are again part of our plans in fiscal 2007. Computer hardware and software will also be purchased to continuously improve our systems. Capital spending for these and other projects in fiscal 2007 is expected to range between $115.0 million and $125.0 million, depending on the pace of our retail expansion. We expect to fund our capital expenditures primarily from our operating cash flows and our credit facilities.

Acquisitions

On July 31, 2005, we acquired Rossignol, a wintersports and golf equipment manufacturer. We have included the operations of Rossignol in our results since August 1, 2005. The purchase price, excluding transaction costs, included cash of approximately $208.3 million, approximately 2.2 million restricted shares of our common stock, valued at $28.9 million, a deferred purchase price obligation of approximately $32.5 million, a liability of approximately $16.9 million for the mandatory purchase of approximately 0.7 million outstanding public shares of Rossignol representing less than 5% of the share capital of Rossignol, and a liability of approximately $2.0 million for the estimated fair value of 0.1 million fully vested Rossignol stock options. The deferred purchase price obligation is denominated in euros, and a weakening of the U.S. dollar in relation to the euro would cause the actual obligation to be greater. Conversely, a strengthening of the U.S. dollar in relation the euro would cause the actual obligation to be lower. Transaction costs totaled approximately $16.0 million. The valuation of the common stock issued in connection with the acquisition was based on its quoted market price for five days before and after the announcement date, discounted to reflect the estimated effect of its trading restrictions.

The deferred purchase price obligation is expected to be paid in 2010 and will accrue interest equal to the 3-month euro interbank offered rate (“Euribor”) plus 2.35%. Since we obtained over 95% of the outstanding shares of Rossignol through a combination of share purchases, including a public tender offer, a mandatory purchase of the remaining Rossignol shares was required under French law. We completed the purchase of these shares in the quarter ended October 31, 2005. Upon the future exercise of the Rossignol stock options, we will purchase the resulting issued shares from the Rossignol stock option holders. We also acquired a majority interest in Cleveland Golf when we acquired Rossignol, but certain former owners of Cleveland Golf retained a minority interest of 36.37%. We have entered into a put/call arrangement with these minority owners whereby they can require us to buy all of their interest in Cleveland Golf after October 2009 and we can buy their interest at our option after April 2012, each at a purchase price generally determined to be fixed by reference to a multiple of Cleveland Golf’s annual profits and our price-earnings ratio.

In connection with the acquisition of Rossignol, we have formulated the Rossignol Integration Plan (the “Plan”). The Plan covers the global operations of Rossignol and our existing businesses, and it includes the evaluation of facility relocations, nonstrategic business activities, redundant functions and other related items. As of October 31, 2006, we had recognized $65.3 million of liabilities related to the Plan, including employee relocation and severance costs, moving costs, and other costs related primarily to the consolidation of Rossignol’s administrative headquarters in Europe, the consolidation of Rossignol’s European distribution, the consolidation and realignment of certain European manufacturing facilities, and the relocation of our wintersports equipment sales and distribution operations in the United States. As of October 31, 2006, we have paid approximately $17.6 million related to these integration activities. If we have overestimated our integration costs, the excess will reduce goodwill in future periods. Conversely, if we have underestimated these costs, additional liabilities recognized will be recorded in earnings. Costs that are not associated with Rossignol but relate to activities or employees of our existing operations are not significant and are charged to earnings. Certain facilities owned by Rossignol are expected to be sold in connection with the Plan, while others are anticipated to be refinanced through sale-leaseback arrangements. Assets currently held for sale, primarily in the United States and France, totaled approximately $21.8 million at October 31, 2006.

Effective May 1, 2004, we acquired DC. The initial purchase price, excluding transaction costs, included cash of approximately $52.8 million, 1.6 million restricted shares of our common stock, valued at $27.3 million, and the repayment of approximately $15.3 million in funded indebtedness. Transaction costs totaled $2.9 million. Of the initial purchase price, $63.4 million was paid in fiscal 2004, $3.7 million was paid during fiscal 2005, and $1.0 million is expected to be paid based on the resolution of certain remaining contingencies. The sellers also received $13.0 million in fiscal 2005 and 2006, and we have accrued an additional $20.0 million at October 31, 2006, based on achieving certain sales and earnings

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targets. The sellers are entitled to future payments ranging from zero to $19.0 million if certain sales and earnings targets are achieved during the year ending October 31, 2007. The amount of goodwill initially recorded for the transaction would increase if such contingent payments are made. Goodwill arises from synergies we believe can be achieved integrating DC’s product lines and operations with our other businesses, and is not expected to be deductible for income tax purposes.

Debt Structure

We generally finance our working capital needs and capital investments with operating cash flows and bank revolving lines of credit. Multiple banks in the United States, Europe and Australia make these lines of credit available. Term loans are also used to supplement these lines of credit and are typically used to finance long-term assets. In July 2005, we issued $400 million in senior notes to fund a portion of the acquisition of Rossignol and to refinance certain existing indebtedness. Our debt structure includes short-term lines of credit and long-term loans as follows:

	October 31,
In thousands	2006
European short-term credit arrangements	$	261,593
Asia/Pacific short-term lines of credit		41,464
Americas short-term lines of credit		12,834
Americas Credit Facility		121,150
Americas long-term debt		4,305
European long-term debt		135,796
Senior Notes		400,000
Deferred purchase price obligation		34,701
Capital lease obligations and other borrowings		18,359
Total debt	$	1,030,202

In July 2005, we issued $400 million in senior notes, which bear a coupon interest rate of 6.875% and are due April 15, 2015. The senior notes were issued at par value and sold in accordance with Rule 144A and Regulation S. In December 2005, these senior notes were exchanged for publicly registered notes with identical terms. The senior notes are guaranteed on a senior unsecured basis by certain of our domestic subsidiaries that guarantee any of our indebtedness or our subsidiaries’ indebtedness, or is an obligor under our existing Credit Facility (defined below). We may redeem some or all of the senior notes after April 15, 2010 at fixed redemption prices as set forth in the indenture. In addition, prior to April 15, 2008, we may redeem up to 35% of the senior notes with the proceeds from certain equity offerings at a redemption price set forth in the indenture.

The indenture for our senior notes includes covenants that limit our ability to, among other things: incur additional debt; pay dividends on our capital stock or repurchase our capital stock; make certain investments; enter into certain types of transactions with affiliates; limit dividends or other payments by our restricted subsidiaries to us; use assets as security in other transactions; and sell certain assets or merge with or into other companies. If we experience specific kinds of changes of control, we will be required to offer to purchase the senior notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest. We currently are in compliance with these covenants. In addition, we have approximately $10.0 million in debt issuance costs included in other assets as of October 31, 2006.

In April 2005, we replaced our line of credit in the Americas with a new revolving credit facility, which has subsequently been amended (the “Credit Facility”). The Credit Facility expires April 2010 and provides for a secured revolving line of credit of up to $250 million (with our option to expand the facility to $350 million under certain conditions). The Credit Facility bears interest based on either LIBOR or an alternate base rate plus an applicable margin. The margin on the LIBOR rate is based on our fixed charge coverage ratio. The weighted average interest rate at October 31, 2006 was 7.1%. We paid certain financing fees that will be amortized over the expected life of the Credit Facility. The Credit Facility includes a $100.0 million sublimit for letters of credit and a $35.0 million sublimit for borrowings in certain foreign currencies. As of October 31, 2006, $121.2 million was outstanding under the Credit Facility in addition to outstanding letters of credit of $57.4 million.

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The borrowing base is limited to certain percentages of our eligible accounts receivable and inventory. The Credit Facility contains customary restrictive covenants for facilities and transactions of this type, including, among others, certain limitations on: incurrence of additional debt and guarantees of indebtedness; creation of liens; mergers, consolidations or sales of substantially all of our assets; sales or other dispositions of assets; distributions or dividends and repurchases of our common stock; restricted payments, including without limitation, certain restricted investments; engaging in transactions with our affiliates and; sale and leaseback transactions. Our United States assets and a portion of the stock of QS Holdings, SARL, a wholly-owned international subsidiary, have been pledged as collateral and to secure our indebtedness under the Credit Facility. As of October 31, 2006, we were in compliance with these covenants.

In the United States and Canada, we have arrangements with banks that provide for approximately $27.5 million of unsecured, uncommitted lines of credit. These lines of credit expire on various dates through 2007. The amount outstanding on these lines of credit at October 31, 2006 was $12.8 million at an average interest rate of 4.2%.

In Europe, we have arrangements with several banks that provide approximately $394.0 million for cash borrowings and approximately $81.7 million for letters of credit. These lines of credit expire on various dates through 2007, and we believe that the banks will continue to make these facilities available with substantially similar terms. The amount outstanding on these lines of credit at October 31, 2006 was $261.6 million at an average interest rate of 4.0%.

In Asia/Pacific, we have revolving lines of credit with banks that provide up to approximately $61.0 million for cash borrowings and letters of credit. These lines of credit will be reviewed by the banks on various dates through 2007, and we believe the banks will continue to make these facilities available with substantially similar terms. The amount outstanding on these lines of credit at October 31, 2006 was $41.5 million at an average interest rate of 2.5%.

These line of credit commitments and agreements in the Americas, Europe and Asia/Pacific allow for total maximum cash borrowings and letters of credit of $819.0 million. Commitments totaling $596.0 million expire in fiscal 2007, while $250.0 million expire in fiscal 2010. We had $437.0 million of borrowings drawn on these lines of credit as of October 31, 2006, and letters of credit issued at that time totaled $83.7 million.

We also have term loans in the Americas that amounted to $4.3 million at October 31, 2006 and contain covenants that are customary for such long-term indebtedness. This amount is secured by certain assets including leasehold improvements at our headquarters in Huntington Beach, California. At October 31, 2006, the interest rate on this long term debt is 8.4%.

In Europe, we also have $135.8 million of long-term debt outstanding as of October 31, 2006. This debt is with several banks and contains covenants that are customary for such long-term indebtedness, including among other things, minimum financial ratios of net debt to shareholders’ equity and term debt to cash flow. At October 31, 2006, the overall weighted average interest rate on this long-term debt is 3.4%. Principal and interest payments are required either monthly, quarterly or annually, and the loans are due at various dates through 2010.

As part of the acquisition of Rossignol, we deferred a portion of the purchase price. This deferred purchase price obligation is expected to be paid in 2010 and accrues interest equal to the 3-month Euribor plus 2.35% (currently 5.9%) and is denominated in euros. The carrying amount of the obligation fluctuates based on changes in the exchange rate between euros and U.S. dollars. As of October 31, 2006, the deferred purchase price obligation totaled $33.7 million. We also have $1.0 million in debt related to the DC acquisition.

Our European and Asia/Pacific segments also have approximately $18.4 million in capital leases and other borrowings as of October 31, 2006.

Our financing activities provided $106.0 million, $347.9 million and $20.4 million of cash in fiscal 2006, 2005 and 2004, respectively, as debt was increased to fund the business acquisitions and capital expenditures discussed above.

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Joint Ventures

We have entered into several joint venture arrangements with independent third parties to sell and distribute Quiksilver, Roxy and other branded products in various foreign territories, including Mexico and Brazil. In connection with these joint ventures, we have funded, and may continue to fund, a portion of the working capital required to finance these joint venture operations based on our ownership percentage in each joint venture. In addition, in certain circumstances the joint venture agreements provide that we are required to purchase the equity interests of our joint venture partners. The purchase price applicable to these obligations is typically based on formulas that will be used to value the joint ventures at the time of a purchase. It is not possible to determine in advance the amounts we may pay for these equity purchases since they are subject to many variables.

Contractual Obligations and Commitments

We lease certain land and buildings under non-cancelable operating leases. The leases expire at various dates through 2017, excluding extensions at our option, and contain various provisions for rental adjustments including, in certain cases, adjustments based on increases in the Consumer Price Index. The leases generally contain renewal provisions for varying periods of time. We also have long-term debt and obligations related to business acquisitions. The former owners of DC are entitled to future payments of up to $19.0 million if certain performance targets are achieved through October 31, 2007. In fiscal 2007, $20.0 million is expected to be paid based on the achievment of certain sales and earnings targets and is reflected in our balance sheet at October 31, 2006 as a component of accrued liabilities. Our deferred purchase price obligation related to the Rossignol acquisition totals $33.7 million and is included in long-term debt as of October 31, 2006. Our significant contractual obligations and commitments as of October 31, 2006, excluding any additional payments that may be due if these acquired businesses achieve certain performance targets in the future, are summarized in the following table:

	Payments Due by Period
			Two to		Four to		After
	One		Three		Five		Five
In thousands	Year		Years		Years		Years		Total
Operating lease obligations	$	68,611	$	116,517	$	92,739	$	121,950	$	399,817
Long-term debt obligations(1)		24,621		39,180		250,510		400,000		714,311
Professional athlete sponsorships(2)		27,042		18,595		3,401		—		49,038
Certain other obligations(3)		84,882		1,737		507		—		87,126
	$	205,156	$	176,029	$	347,157	$	521,950	$	1,250,292

(1)	Excludes required interest payments. See Note 7 of Notes to Consolidated Financial Statements for interest terms.
(2)	We establish relationships with professional athletes in order to promote our products and brands. We have entered into endorsement agreements with professional athletes in sports such as skiing, golf, surfing, skateboarding, snowboarding and windsurfing. Many of these contracts provide incentives for magazine exposure and competitive victories while wearing or using our products. It is not possible to determine the amounts we may be required to pay under these agreements as they are subject to many variables. The amounts listed are the approximate amounts of minimum obligations required to be paid under these contracts. The estimated maximum amount that could be paid under existing contracts is approximately $75.2 million and would assume that all bonuses, victories, etc. are achieved during a five-year period. The actual amounts paid under these agreements may be higher or lower than the amounts listed as a result of the variable nature of these obligations.
(3)	Certain other obligations include approximately $83.7 million of contractual letters of credit with maturity dates of less than one year and total payments related to a consulting agreement entered into in connection with our Rossignol acquisition. We have the option to acquire the minority interest in Cleveland Golf through a put/call arrangement whereby the minority shareholders can require us to buy all of their interest in Cleveland Golf after October 2009, and we can require them to sell us their interest after April 2012, each at a purchase price generally determined by reference to a multiple of Cleveland Golf’s annual profit and our price-earnings ratio. The amount of this obligation is based on a formula of Cleveland Golf earnings and our stock price, which cannot be determined and is not included in this line item. We also enter into unconditional purchase obligations with various vendors and suppliers of goods and services in the normal course of operations through purchase orders or other documentation or that are undocumented except for an invoice. Such unconditional purchase

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obligations are generally outstanding for periods less than a year and are settled by cash payments upon delivery of goods and services and are not reflected in this line item. In addition, in certain circumstances we are required to acquire additional equity interests from certain of our joint venture partners. The purchase price applicable to these obligations are typically based on formulas that will be used to value the joint venture operations at the time of purchase. These potential purchase amounts cannot be determined in advance and are not included in this line item.

Trade Accounts Receivable and Inventories

Our trade accounts receivable were $721.6 million at October 31, 2006, versus $599.5 million the year before, an increase of 20%. Receivables in the Americas totaled $298.5 million, while European receivables totaled $335.5 million and Asia/Pacific receivables totaled $87.6 million. Among all three segments, accounts receivable increased primarily from increased revenue. Included in accounts receivable are approximately $46.0 million of Value Added Tax and Goods and Services Tax related to foreign accounts receivable. Such taxes are not reported as net revenues and as such, must be subtracted from accounts receivable to accurately compute days sales outstanding.

Consolidated inventories totaled $425.9 million as of October 31, 2006, versus $386.4 million the year before, an increase of 10%. Inventories in the Americas totaled $194.1 million, while European inventories totaled $176.3 million and Asia/Pacific inventories totaled $55.5 million. Consolidated average inventory turnover from all businesses was approximately 2.9 at October 31, 2006 compared to approximately 4.1 at October 31, 2005. The decrease in consolidated average turnover is primarily related to our wintersports and golf equipment businesses, which operate with higher levels of inventory than our other businesses and were included in the full year of fiscal 2006.

Inflation

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

New Accounting Pronouncements

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

In December 2004, the FASB issued SFAS No. 123(R) “Share-Based Payment”. SFAS No. 123(R) requires that companies recognize compensation expense equal to the fair value of stock options or other share based payments. We adopted this standard during the year ended October 31, 2006 using the modified prospective method. See Note 10 of our consolidated financial statements for a description of the impact of this standard on our financial statements.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS No. 154 applies to all voluntary changes in accounting principle and requires retrospective application (a term defined by the statement) to prior periods’ financial statements, unless it is impracticable to determine the effect of a change. It also applies to changes required by an accounting pronouncement that does not include specific transition provisions. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We will adopt SFAS No. 154 in the first quarter of fiscal 2007, but we do not expect the adoption of SFAS No. 154 to have a material impact on our financial condition, results of operations or cash flows.

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes ¯ an interpretation of FASB Statement No. 109” (“FIN 48”). This interpretation clarifies the application of SFAS No. 109, “Accounting for Income Taxes,” by defining criteria that an individual tax position must meet for any part of the benefit of that position to be recognized in our financial statements and also provides

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guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We expect to adopt FIN 48 on November 1, 2007. We are currently assessing the impact the adoption of FIN 48 will have on our financial position and results of operations.

In September 2006, the Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides interpretive guidance on the SEC’s views regarding the process of quantifying materiality of financial statement misstatements. SAB 108 is effective for our fiscal 2007. The adoption of this accounting pronouncement is not expected to have a material effect on our consolidated financial position, results of operations or cash flows.

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

Critical Accounting Policies

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

Revenue Recognition

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

Accounts Receivable

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

Inventories

We value inventories at the cost to purchase and/or manufacture the product or the current estimated market value of the inventory, whichever is lower. We regularly review our inventory quantities on hand, and adjust inventory values for excess and obsolete inventory based primarily on estimated forecasts of product demand and market value. Demand for our products could fluctuate significantly. The demand for our products could be negatively affected by many factors, including the following:

• weakening economic conditions;

• terrorist acts or threats;

• unanticipated changes in consumer preferences;

• reduced customer confidence in the retail market; and

• unseasonable weather.

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

Long-Lived Assets

We acquire tangible and intangible assets in the normal course of our business. We evaluate the recoverability of the carrying amount of these long-lived assets (including fixed assets, trademarks licenses and other amortizable intangibles) whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss would be recognized when the carrying value exceeds the undiscounted future cash flows estimated to result from the use and eventual disposition of the asset. Impairments, if any, would be recognized in operating earnings. We continually use judgment when applying these impairment rules to determine the timing of the impairment tests, the undiscounted cash flows used to assess impairments, and the fair value of a potentially impaired asset. The reasonableness of our judgment could significantly affect the carrying value of our long-lived assets.

Goodwill

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

Income Taxes

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

Stock-Based Compensation Expense

Effective November 1, 2005, we adopted the fair value recognition provisions of SFAS 123(R), using the modified prospective transition method, and therefore have not restated prior periods’ results. Under this method we recognize compensation expense for all stock-based payments granted after November 1, 2005 and prior to but not yet vested as of November 1, 2005, in accordance with SFAS 123(R). Under the fair value recognition provisions of SFAS 123(R), we recognize stock-based compensation net of an estimated forfeiture rate and only recognize compensation cost for those shares expected to vest using the graded vested method over the requisite service period of the award. Prior to SFAS 123(R) adoption, we accounted for stock-based payments under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and accordingly, we were not required to recognize compensation expense for options granted that had an exercise price equal to the market value of the underlying common stock on the date of grant.

Determining the appropriate fair value model and calculating the fair value of stock-based payment awards require the input of highly subjective assumptions, including the expected life of the stock-based payment awards and stock price volatility. We use the Black-Scholes option-pricing model to value

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compensation expense. The assumptions used in calculating the fair value of stock-based payment awards represent management’s best estimates, but the estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. See Note 10 to the Consolidated Condensed Financial Statements for a further discussion on stock-based compensation.

Foreign Currency Translation

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

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

Forward-Looking Statements

Various statements in this Form 10-K, or incorporated by reference into this Form 10-K in future filings by us with the SEC, in our press releases and in oral statements made by or with the approval of authorized personnel, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations and are indicated by words or phrases such as “anticipate”, “estimate”, “expect”, “seek”, “plan”, “may”, “project”, “we believe”, “currently envisions” and similar words or phrases and involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Some of the factors that could affect our financial performance or cause actual results to differ from our estimates in, or underlying, such forward-looking statements are set forth under Item 1A. “Risk Factors”. Forward-looking statements include statements regarding, among other items:

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

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

• our plans to expand internationally;

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

• our plans to open new retail stores;

• payments due on contractual commitments;

• future expenditures for capital projects;

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

• our ability to remain compliant with our debt covenants;

• integration of acquired businesses and future acquisitions;

• general economic and business conditions;

• foreign exchange rate fluctuations; and

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

36

These forward-looking statements are based largely on our expectations and are subject to a number of risks and uncertainties, many of which are beyond our control. Actual results could differ materially from these forward-looking statements as a result of the risks described in Item 1A. “Risk Factors”, and other factors including, among others, changes in the competitive marketplace, including the introduction of new products or pricing changes by our competitors, changes in the economy, and other events leading to a reduction in discretionary consumer spending. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, we cannot assure you that the forward-looking information contained in this Form 10-K will, in fact, transpire.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to a variety of risks. Two of these risks are foreign currency fluctuations and changes in interest rates that affect interest expense. (See also Note 16 of our consolidated financial statements.)

Foreign Currency and Derivatives

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

Derivatives that do not qualify for hedge accounting but are used by management to mitigate exposure to currency risks are marked to fair value with corresponding gains or losses recorded in earnings. A gain of $1.2 million was recognized related to these types of contracts during fiscal 2006. For all qualifying cash flow hedges, the changes in the fair value of the derivatives are recorded in other comprehensive income. As of October 31, 2006, we were hedging forecasted transactions expected to occur through October 2008. Assuming exchange rates at October 31, 2006 remain constant, $1.9 million of gains, net of tax, related to hedges of these transactions are expected to be reclassified into earnings over the next 24 months.

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

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

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

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

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

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

We enter into forward exchange and other derivative contracts with major banks and are exposed to credit losses in the event of nonperformance by these banks. We anticipate, however, that these banks

37

will be able to fully satisfy their obligations under the contracts. Accordingly, we do not obtain collateral or other security to support the contracts.

Translation of Results of International Subsidiaries

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

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

In fiscal 2006, the U.S. dollar strengthened compared to the euro and the Australian dollar. As a result, our European revenues increased 45% in euros compared to an increase of 43% in U.S. dollars. Asia/Pacific revenues increased 22% in Australian dollars compared to an increase of 19% in U.S. dollars.

Interest Rates

Most of our lines of credit and long-term debt bear interest based on LIBOR and EURIBOR. Interest rates, therefore, can move up or down depending on market conditions. As discussed above, we have entered into interest rate swap agreements to hedge a portion of our exposure to such fluctuations. The approximate amount of our remaining variable rate debt was $529.5 million at October 31, 2006, and the average interest rate at that time was 4.7%. If interest rates were to increase by 10%, our net income would be reduced by approximately $1.8 million based on these fiscal 2006 levels.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item appears beginning on page 46.

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

Not Applicable.

Item 9A. CONTROLS AND PROCEDURES

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

38

We carried out an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of October 31, 2006, the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, and were operating at the reasonable assurance level as of October 31, 2006.

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter and year ended October 31, 2006 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

39

Management’s Report on Internal Control Over Financial Reporting

Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:

• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Management is responsible for establishing and maintaining adequate internal control over our financial reporting.

Management has used the framework set forth in the report entitled “Internal Control—Integrated Framework” published by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission to evaluate the effectiveness of its internal control over financial reporting. Management has concluded that its internal control over financial reporting was effective as of the end of the most recent fiscal year. Deloitte & Touche LLP has issued an attestation report (see below) on management’s assessment of our internal control over financial reporting.

The foregoing has been approved by our management, including our Chief Executive Officer and Chief Financial Officer, who have been involved with the assessment and analysis of our internal controls over financial reporting.

40

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Board of Directors and Shareholders
Quiksilver, Inc.:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing above, that Quiksilver, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of October 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of October 31, 2006 is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 31, 2006, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended October 31, 2006 of Quiksilver, Inc. and subsidiaries and our report dated January 11, 2007 expressed an unqualified opinion on those financial statements.

/s/ Deloitte & Touche LLP

Costa Mesa, California
January 11, 2007

41

Item 9B. OTHER INFORMATION

None.

42

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required to be included by this item will be included under the heading “Election of Directors” and “Executive Compensation and Other Information” in our proxy statement for the 2007 Annual Meeting of Stockholders. That information is incorporated herein by reference to our proxy statement, which will be filed with the Securities and Exchange Commission within 120 days of our fiscal year ended October 31, 2006.

We have adopted a Code of Ethics for Senior Financial Officers in compliance with applicable rules of the Securities and Exchange Commission that applies to all of our employees, including our principal executive officer, our principal financial officer and our principal accounting officer or controller, or persons performing similar functions. We have posted a copy of this Code of Ethics on our website, at www.quiksilverinc.com. We intend to disclose any amendments to, or waivers from, any provision of the Code of Ethics by posting such information on such website.

Item 11. EXECUTIVE COMPENSATION

The information required to be included by this item will be included under the heading “Executive Compensation and Other Information” in our proxy statement for the 2007 Annual Meeting of Stockholders. That information is incorporated herein by reference to our proxy statement, which will be filed with the Securities and Exchange Commission within 120 days of our fiscal year ended October 31, 2006.

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

The information required to be included by this item will be included under the heading “Ownership of Securities” in our proxy statement for the 2007 Annual Meeting of Stockholders. That information is incorporated herein by reference to our proxy statement, which will be filed with the Securities and Exchange Commission within 120 days of our fiscal year ended October 31, 2006.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required to be included by this item will be included under the heading “Certain Transactions” in our proxy statement for the 2007 Annual Meeting of Stockholders. That information is incorporated herein by reference to our proxy statement, which will be filed with the Securities and Exchange Commission within 120 days of our fiscal year ended October 31, 2006.

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required to be included by this item will be included under the heading “Independent Auditors” in our proxy statement for the 2007 Annual Meeting of Stockholders. That information is incorporated herein by reference to our proxy statement, which will be filed with the Securities and Exchange Commission within 120 days of our fiscal year ended October 31, 2006.

43

PART IV

Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The following documents are filed as part of this Annual Report on Form 10-K:

1.	Consolidated Financial Statements
	See “Index to Consolidated Financial Statements” on page 44
2.	Exhibits
	The Exhibits listed in the Exhibit Index, which appears immediately following the signature page and is incorporated herein by reference, are filed as part of this Annual Report on Form 10-K.

44

QUIKSILVER, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Audited consolidated financial statements of Quiksilver, Inc. as of and for each of the three years in the period ended October 31, 2006
Report of Independent Registered Public Accounting Firm		46
Consolidated Balance Sheets October 31, 2006 and 2005		47
Consolidated Statements of Income Years Ended October 31, 2006, 2005 and 2004		48
Consolidated Statements of Comprehensive Income Years Ended October 31, 2006, 2005 and 2004		48
Consolidated Statements of Stockholders’ Equity Years Ended October 31, 2006, 2005 and 2004		49
Consolidated Statements of Cash Flows Years Ended October 31, 2006, 2005 and 2004		50
Notes to Consolidated Financial Statements		51
Audited financial statements of Roger Cleveland Golf Company, Inc. as of October 31, 2006 and for the year in the period ending October 31, 2006 and the three months ended October 31, 2005
Report of Independent Registered Public Accounting Firm		82
Balance Sheets October 31, 2006 and 2005		83
Statements of Income and Comprehensive Income Year Ended October 31, 2006 and the Three Months Ended October 31, 2005		84
Statements of Stockholders’ Equity Year Ended October 31, 2006 and the Three Months Ended October 31, 2005		84
Statements of Cash Flows Year Ended October 31, 2006 and the Three Months Ended October 31, 2005		85
Notes to Financial Statements		86

45

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Quiksilver, Inc.

We have audited the accompanying consolidated balance sheets of Quiksilver, Inc. and subsidiaries (the “Company”) as of October 31, 2006 and 2005, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended October 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of October 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Notes 1 and 10 to the consolidated financial statements, the Company changed its method of accounting for stock-based compensation during the year ended October 31, 2006 as a result of adopting Statement of Financial Accounting Standards No. 123(R), “Share-based Payment.”

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of October 31, 2006, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated January 11, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP

January 11, 2007
Costa Mesa, California

46

QUIKSILVER, INC.

CONSOLIDATED BALANCE SHEETS
October 31, 2006 and 2005

In thousands, except share amounts	2006			2005
ASSETS
Current assets:
Cash and cash equivalents	$	36,834		$	75,598
Trade accounts receivable, net — Note 3		721,562			599,486
Other receivables		35,324			27,414
Inventories — Note 4		425,864			386,396
Deferred income taxes — Note 13		84,672			41,646
Prepaid expenses and other current assets		28,926			21,819
Total current assets		1,333,182			1,152,359
Fixed assets, net — Note 5		282,334			241,979
Intangible assets, net — Notes 2 and 6		248,206			247,702
Goodwill — Notes 2, 6 and 15		515,710			449,377
Other assets		45,954			43,955
Assets held for sale — Note 12		21,842			23,229
Total assets	$	2,447,228		$	2,158,601
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Lines of credit — Note 7	$	315,891		$	220,113
Accounts payable		220,177			212,407
Accrued liabilities — Note 8		201,087			182,973
Current portion of long-term debt — Note 7		24,621			50,833
Income taxes payable — Note 13		2,810			27,176
Total current liabilities		764,586			693,502
Long-term debt — Notes 7 and 18		689,690			640,348
Deferred income taxes and other long-term liabilities — Note 13		100,632			81,628
Total liabilities		1,554,908			1,415,478
Commitments and contingencies — Note 9
Minority interest — Note 2		11,193			10,241
Stockholders’ equity — Note 10:
Preferred stock, $.01 par value, authorized shares - 5,000,000; issued and outstanding shares — none		¾			¾
Common stock, $.01 par value, authorized shares - 185,000,000; issued shares – 126,401,836 (2006) and 124,093,392 (2005)		1,264			1,241
Additional paid-in capital		274,488			242,284
Treasury stock, 2,885,200 shares		(6,778	)		(6,778	)
Retained earnings		559,059			466,043
Accumulated other comprehensive income — Note 11		53,094			30,092
Total stockholders’ equity		881,127			732,882
Total liabilities and stockholders’ equity	$	2,447,228		$	2,158,601

See notes to consolidated financial statements.

47

QUIKSILVER, INC.

CONSOLIDATED STATEMENTS OF INCOME
Years Ended October 31, 2006, 2005 and 2004

In thousands, except per share amounts	2006		2005			2004
Revenues, net	$	2,362,288	$	1,780,869		$	1,266,939
Cost of goods sold		1,280,738		972,345			688,780
Gross profit		1,081,550		808,524			578,159
Selling, general and administrative expense		897,628		627,342			446,221
Operating income		183,922		181,182			131,938
Interest expense		50,836		21,950			6,390
Foreign currency loss (gain)		489		(106	)		2,861
Minority interest and other expense — Note 2		1,255		992			695
Income before provision for income taxes		131,342		158,346			121,992
Provision for income taxes — Note 13		38,326		51,226			40,623
Net income	$	93,016	$	107,120		$	81,369
Net income per share — Note 1	$	0.76	$	0.90		$	0.71
Net income per share, assuming dilution — Note 1	$	0.73	$	0.86		$	0.68
Weighted average common shares outstanding — Note 1		122,074		118,920			114,388
Weighted average common shares outstanding, assuming dilution — Note 1		127,744		124,335			119,288

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended October 31, 2006, 2005 and 2004

In thousands	2006			2005			2004
Net income	$	93,016		$	107,120		$	81,369
Other comprehensive income (loss):
Foreign currency translation adjustment		27,311			(14,694	)		18,554
Net (loss) gain on derivative instruments, net of tax of $2,101 (2006), $(5,468) (2005) and $1,792 (2004)		(4,309	)		10,008			(3,628	)
Comprehensive income	$	116,018		$	102,434		$	96,295

See notes to consolidated financial statements.

48

QUIKSILVER, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended October 31, 2006, 2005 and 2004

													Accumulated
					Additional								Other			Total
	Common Stock				Paid-in			Treasury			Retained		Comprehensive			Stockholders’
In thousands, except share amounts	Shares		Amounts		Capital			Stock			Earnings		Income (Loss)			Equity
Balance, November 1, 2003		114,041,034		1,140		154,740			(6,778	)		277,554		19,852			446,508
Exercise of stock options		2,997,440		30		8,730			¾			¾		¾			8,760
Tax benefit from exercise of stock options		¾		¾		8,411			¾			¾		¾			8,411
Employee stock purchase plan		131,422		1		957			¾			¾		¾			958
DC acquisition		3,169,150		32		27,280			¾			¾		¾			27,312
Net income and other comprehensive income		¾		¾		¾			¾			81,369		14,926			96,295
Balance, October 31, 2004		120,339,046		1,203		200,118			(6,778	)		358,923		34,778			588,244
Exercise of stock options		1,447,010		14		6,528			¾			¾		¾			6,542
Tax benefit from exercise of stock options		¾		¾		5,109			¾			¾		¾			5,109
Employee stock purchase plan		157,298		2		1,644			¾			¾		¾			1,646
Rossignol acquisition		2,150,038		22		28,885			¾			¾		¾			28,907
Net income and other comprehensive loss		¾		¾		¾			¾			107,120		(4,686	)		102,434
Balance, October 31, 2005		124,093,392		1,241		242,284			(6,778	)		466,043		30,092			732,882
Exercise of stock options		1,289,351		13		5,119			¾			¾		¾			5,132
Tax benefit from exercise of stock options		¾		¾		3,976			¾			¾		¾			3,976
Stock compensation expense		¾		¾		20,751			¾			¾		¾			20,751
Restricted stock		800,000		8		(8	)		¾			¾		¾			¾
Employee stock purchase plan		219,093		2		2,366			¾			¾		¾			2,368
Net income and other comprehensive income		¾		¾		¾			¾			93,016		23,002			116,018
Balance, October 31, 2006		126,401,836	$	1,264	$	274,488		$	(6,778	)	$	559,059	$	53,094		$	881,127

See notes to consolidated financial statements.

49

QUIKSILVER, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended October 31, 2006, 2005 and 2004

In thousands	2006			2005			2004
Cash flows from operating activities:
Net income	$	93,016		$	107,120		$	81,369
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		65,615			41,864			26,847
Stock-based compensation		20,751			¾			¾
Provision for doubtful accounts		3,826			3,621			6,123
Loss on disposal of fixed assets		1,205			3,444			1,761
Foreign currency gain		(487	)		(221	)		(159	)
Interest accretion		¾			1,319			1,368
Minority interest and equity in earnings		1,835			¾			¾
Deferred income taxes		7,917			3,661			2,811
Changes in operating assets and liabilities, net of effects from business acquisitions:
Trade accounts receivable		(111,433	)		(228,861	)		(33,851	)
Other receivables		(11,354	)		8,949			(1,022	)
Inventories		(20,894	)		27,340			(13,140	)
Prepaid expenses and other current assets		(6,022	)		(761	)		1,124
Other assets		(3,283	)		(7,245	)		265
Accounts payable		830			22,533			22,013
Accrued liabilities and other long-term liabilities		(28,446	)		7,549			21,953
Income taxes payable		(21,374	)		8,274			13,133
Net cash (used in) provided by operating activities		(8,298	)		(1,414	)		130,595
Cash flows from investing activities:
Proceeds from the sale of properties and equipment		5,117			¾			¾
Capital expenditures		(97,934	)		(70,858	)		(52,457	)
Business acquisitions, net of acquired cash — Note 2		(40,530	)		(251,865	)		(70,619	)
Net cash used in investing activities		(133,347	)		(322,723	)		(123,076	)
Cash flows from financing activities:
Borrowings on lines of credit		315,719			123,976			83,482
Payments on lines of credit		(228,748	)		(97,801	)		(63,945	)
Borrowings on long-term debt		158,013			630,456			5,592
Payments on long-term debt		(150,206	)		(316,953	)		(14,478	)
Stock option exercises, employee stock purchases and tax benefit on option exercises		11,212			8,188			9,718
Net cash provided by financing activities		105,990			347,866			20,369
Effect of exchange rate changes on cash		(3,109	)		(3,328	)		(557	)
Net (decrease) increase in cash and cash equivalents		(38,764	)		20,401			27,331
Cash and cash equivalents, beginning of year		75,598			55,197			27,866
Cash and cash equivalents, end of year	$	36,834		$	75,598		$	55,197
Supplementary cash flow information:
Cash paid during the year for:
Interest	$	50,241		$	19,013		$	5,009
Income taxes	$	52,446		$	34,458		$	22,046
Non-cash investing and financing activities:
Deferred purchase price obligation — Note 2	$	24,967		$	32,508		$	6,460
Common stock issued for business acquisitions — Note 2	$	¾		$	28,907		$	27,312

See notes to consolidated financial statements.

50

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended October 31, 2006, 2005 and 2004

Note 1 ¾ Significant Accounting Policies

Company Business

Quiksilver, Inc. and its subsidiaries (the “Company”) design, produce and distribute branded apparel, wintersports and golf equipment, footwear, accessories and related products. The Company’s apparel and footwear brands represent a casual lifestyle for young-minded people that connect with its boardriding culture and heritage, while its wintersports and golf brands symbolize a long standing commitment to technical expertise and competitive success on the mountains and on the links. The Company’s Quiksilver, Roxy, DC Shoes and Hawk brands are synonymous with the heritage and culture of surfing, skateboarding and snowboarding, and its beach and water oriented swimwear brands include Raisins, Radio Fiji and Leilani. The Rossignol, Dynastar, Look, Lange, and Kerma brands are leaders in the alpine ski market, and the Company makes snowboarding equipment under its Rossignol, DC Shoes, Roxy, Lib Technologies, Gnu and Bent Metal labels. The Company’s products are sold in over 90 countries in a wide range of distribution channels, including surf shops, ski shops, skateboard shops, snowboard shops, its proprietary Boardriders Club shops, other specialty stores and select department stores. Distribution is primarily in the United States, Europe and Australia. The Company performs ongoing credit evaluations of its customers and generally does not require collateral.

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

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Quiksilver, Inc. and subsidiaries, including Na Pali, SAS and subsidiaries (“Quiksilver Europe”), Quiksilver Australia Pty Ltd. and subsidiaries (“Quiksilver Asia/Pacific” and “Quiksilver International”) and Skis Rossignol SAS and subsidiaries (“Rossignol”). The Company holds a majority interest in its subsidiary, Roger Cleveland Golf Company, Inc. (“Cleveland Golf”), with the minority interest in Cleveland Golf separately stated in the accompanying consolidated financial statements (See Note 2). Intercompany accounts and transactions have been eliminated in consolidation.

Basis of Presentation

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

Cash Equivalents

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

Inventories

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

Fixed Assets

Furniture and other equipment, computer equipment, manufacturing equipment and buildings are recorded at cost and depreciated on a straight-line basis over their estimated useful lives, which generally range from two to twenty years. Leasehold improvements are recorded at cost and amortized over their estimated useful lives or related lease term, whichever is shorter. Land use rights for certain leased retail locations are amortized to estimated residual value.

51

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Years Ended October 31, 2006, 2005 and 2004

Long-Lived Assets

The Company accounts for the impairment and disposition of long-lived assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. In accordance with SFAS No. 144, management assesses potential impairments of its long-lived assets whenever events or changes in circumstances indicate that an asset’s carrying value may not be recoverable. An impairment loss would be recognized when the carrying value exceeds the undiscounted future cash flows estimated to result from the use and eventual disposition of the asset. The Company determined that no impairment loss was necessary as of October 31, 2006, 2005 or 2004.

Goodwill and Intangible Assets

The Company accounts for goodwill and intangible assets in accordance with SFAS No. 142, “Goodwill and Intangible Assets.” Under SFAS No. 142, goodwill and intangible assets with indefinite lives are not amortized but are tested for impairment annually and also in the event of an impairment indicator. The annual impairment test is a fair value test as prescribed by SFAS No. 142 which includes assumptions such as growth and discount rates. Any subsequent impairment losses will be reflected in operating income. The Company determined that no impairment loss was necessary as of October 31, 2006, 2005 or 2004.

Revenue Recognition

Revenues are recognized upon the transfer of title and risk of ownership to customers. Allowances for estimated returns and doubtful accounts are provided when revenues are recorded. Returns and allowances are reported as reductions in revenues, whereas allowances for bad debts are reported as a component of selling, general and administrative expense. Royalty income is recorded as earned. Revenues in the Consolidated Statements of Income include the following:

	Years Ended October 31,
In thousands	2006		2005		2004
Product shipments, net	$	2,357,766	$	1,778,987	$	1,264,457
Royalty income		4,522		1,882		2,482
	$	2,362,288	$	1,780,869	$	1,266,939

Promotion and Advertising

The Company’s promotion and advertising efforts include athlete sponsorships, world-class boardriding and skiing contests, magazine advertisements, retail signage, television programs, co-branded products, surf camps, skate park tours and other events. For the fiscal years ended October 31, 2006, 2005 and 2004, these expenses totaled $187.2 million, $108.3 million and $66.5 million, respectively. Advertising costs are expensed when incurred.

Research and Development

The Company engages in research and development activities to enable it to design and launch new products for its wintersports and golf equipment businesses, acquired in 2005, in response to changing demand and to meet market expectations. Research and development costs are expensed as incurred. Included in selling, general and administrative expenses is approximately $16.0 million and $4.1 million of research and development costs for the fiscal years ended October 31, 2006 and 2005, respectively.

Warranties

The Company generally provides a one-year limited warranty against manufacturer’s defects on its wintersports and golf equipment and records an estimate of such warranty costs when revenue is recorded. The Company’s standard warranty requires it to repair or replace the defective product returned to the Company during such warranty period. In estimating its future warranty obligations, the

52

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Years Ended October 31, 2006, 2005 and 2004

Company considers various factors, including its warranty policies and practices, the historical frequency of claims and the cost to replace or repair the products under warranty (see Note 8).

Stock-Based Compensation

Effective November 1, 2006, the Company adopted SFAS No. 123(R) “Share-Based Payment”. As a result, the Company recognizes compensation expense equal to the fair value of stock options or other share based payments. See Note 10 for a description of the impact of this standard on the Company’s financial statements.

Income Taxes

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

Net Income per Share

The Company reports basic and diluted earnings per share (“EPS”). Basic EPS is based on the weighted average number of shares outstanding during the periods, while diluted EPS additionally includes the dilutive effect of the Company’s outstanding stock options computed using the treasury stock method. For the years ended October 31, 2006, 2005 and 2004, the weighted average common shares outstanding, assuming dilution, includes 5,670,000, 5,415,000 and 4,900,000, respectively, of dilutive stock options.

Stock Split

During fiscal 2005, the Company’s Board of Directors approved a two-for-one stock split that was effected May 11, 2005. All share and per share information has been restated to reflect the stock split.

Foreign Currency and Derivatives

The Company’s primary functional currency is the U.S. dollar, while Quiksilver Europe functions in euros and British pounds, and Quiksilver Asia/Pacific functions in Australian dollars and Japanese yen. Assets and liabilities of the Company denominated in foreign currencies are translated at the rate of exchange on the balance sheet date. Revenues and expenses are translated using the average exchange rate for the period.

Derivative financial instruments are recognized as either assets or liabilities in the balance sheet and are measured at fair value. The accounting for changes in the fair value of a derivative depends on the use and type of the derivative. The Company’s derivative financial instruments principally consist of foreign currency exchange contracts and interest rate swaps, which the Company uses to manage its exposure to the risk of foreign currency exchange rates and variable interest rates. The Company’s objectives are to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange and interest rates. The Company does not enter into derivative financial instruments for speculative or trading purposes.

Comprehensive Income

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

53

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Years Ended October 31, 2006, 2005 and 2004

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fair Value of Financial Instruments

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

New Accounting Pronouncements

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

In December 2004, the FASB issued SFAS No. 123(R) “Share-Based Payment”. SFAS No. 123(R) requires that companies recognize compensation expense equal to the fair value of stock options or other share based payments. The Company adopted this standard during the fiscal year ended October 31, 2006 using the modified prospective method. See Note 10 for a description of the impact of this standard on the Company’s financial statements.

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

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

In September 2006, the Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides interpretive guidance on the SEC’s views regarding the process of quantifying materiality of financial statement misstatements. SAB 108 is

54

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Years Ended October 31, 2006, 2005 and 2004

effective for the Company’s fiscal year ending October 31, 2007. The adoption of this accounting pronouncement is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

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

Note 2 ¾ Business Acquisitions

Effective July 31, 2005, the Company acquired Skis Rossignol SA (“Rossignol”), a wintersports and golf equipment manufacturer. Rossignol offers a full range of wintersports equipment under the Rossignol, Dynastar, Lange, Look and Kerma brands, and also sells golf products under the Cleveland Golf and Never Compromise brands. The Company has included the operations of Rossignol in its results since August 1, 2005. The purchase price, excluding transaction costs, included cash of approximately $208.3 million, approximately 2.2 million restricted shares of the Company’s common stock, valued at $28.9 million, a deferred purchase price obligation of approximately $32.5 million, a liability of approximately $16.9 million for the mandatory purchase of approximately 0.7 million outstanding public shares of Rossignol representing less than 5% of the share capital of Rossignol, and a liability of approximately $2.0 million for the estimated fair value of 0.1 million fully vested Rossignol stock options. Transaction costs totaled approximately $16.0 million. The valuation of the common stock issued in connection with the acquisition was based on its quoted market price for the five days before and after the announcement date, discounted to reflect the estimated effect of its trading restrictions. The deferred purchase price obligation is expected to be paid in 2010 and will accrue interest equal to the 3-month euro interbank offered rate (“Euribor”) plus 2.35% (currently 5.9%). The mandatory purchase of the remaining Rossignol shares was required under French law as the Company had obtained over 95% of the outstanding shares of Rossignol through a combination of share purchases, including a public tender offer. The purchase of these shares was completed in the quarter ended October 31, 2005 and the Company now owns 100% of the shares in Rossignol. Upon the future exercise of the Rossignol stock options, the Company will purchase the newly issued shares from the Rossignol stock option holders, retaining 100% ownership in Rossignol. These Rossignol stock options are treated as variable for accounting purposes and subsequent changes in the value of these stock options are recorded as compensation expense in the Company’s consolidated statement of income. The Company acquired a majority interest in Cleveland Golf when it acquired Rossignol, but certain former owners of Cleveland Golf retained a minority interest of 36.37%. The Company and the minority owners have entered into a put/call arrangement whereby the minority owners of Cleveland Golf can require the Company to buy all of their interest in Cleveland Golf after October 2009 and the Company can buy their interest at its option after April 2012, each at a purchase price generally determined by reference to a multiple of Cleveland Golf’s annual profits and the Company’s price-earnings ratio. As a result of the minority interest and put/call arrangement, the Company accounted for Cleveland Golf as a step acquisition. In a step acquisition, where less than 100% of an entity is acquired, only a portion of the fair value adjustments are recorded in the acquiring company’s balance sheet equal to the percentage ownership in the acquired company. Based on this step acquisition accounting, the Company has recorded 63.63% of the fair value adjustments for Cleveland Golf in its balance sheet. Goodwill arises from synergies the Company believes can be achieved by integrating Rossignol’s brands, products and operations with the Company’s, and is not expected to be deductible for income tax purposes. Amortizing intangibles consist of customer relationships, patents and athlete contracts with estimated useful lives of twenty, seven and two years, respectively. The acquired trademarks are non-amortizing as they have been determined to have indefinite lives.

55

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Years Ended October 31, 2006, 2005 and 2004

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

	July 31,
In thousands	2005
Cash acquired	$	64,396
Accounts receivable		96,763
Inventory		232,525
Other current assets		21,548
Fixed assets		109,438
Deferred income taxes		3,572
Other assets		3,296
Amortizing intangible assets		20,400
Trademarks		94,700
Goodwill		292,168
Total assets acquired		938,806
Other liabilities		218,300
Long term debt and lines of credit		365,126
Deferred income taxes		40,657
Minority interest		10,109
Net assets acquired	$	304,614

In connection with the acquisition of Rossignol, the Company has formulated the Rossignol Integration Plan (“the Plan”). As of October 31, 2006 the Company has recognized approximately $65.3 million of liabilities related to the Plan. See Note 12 for further description of the Plan.

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

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

	August 1,
In thousands	2005
Inventory and other current assets	$	3,239
Fixed assets		4,839
Amortizing intangible assets		450
Goodwill		21,393
Total assets acquired		29,921
Other liabilities		7,419
Net assets acquired	$	22,502

Effective May 1, 2004, the Company acquired DC Shoes, Inc. (“DC”), a premier designer, producer and distributor of action sports inspired footwear, apparel and related accessories in the United States and internationally. The operations of DC have been included in the Company’s results since May 1, 2004. The initial purchase price, excluding transaction costs, included cash of approximately $52.8 million, 1.6

56

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Years Ended October 31, 2006, 2005 and 2004

million restricted shares of the Company’s common stock, valued at $27.3 million, and the repayment of approximately $15.3 million in funded indebtedness. Transaction costs totaled $2.9 million. The valuation of the common stock issued in connection with the acquisition was based on its quoted market price for five days before and after the announcement date, discounted to reflect the estimated effect of its trading restrictions. Of the initial purchase price, $63.4 million was paid in fiscal 2004, $3.7 million was paid during the year ended October 31, 2005, and $1.0 million is expected to be paid based on the resolution of certain remaining contingencies. As of October 31, 2006 the Company has paid or accrued $33.0 million based on the achievement of certain sales and earnings targets by DC. The sellers are entitled to additional payments ranging from zero to $19.0 million if certain sales and earnings targets are achieved during the year ending October 31, 2007. The amount of goodwill initially recorded for the transaction would increase if such contingent payments are made. Goodwill arises from synergies the Company believes can be achieved integrating DC’s product lines and operations with the Company’s other businesses, and is not expected to be deductible for income tax purposes. Amortizing intangibles consist of non-compete agreements, customer relationships and patents with estimated useful lives ranging from four to eighteen years.

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

	May 1,
In thousands	2004
Current assets	$	37,528
Fixed assets		1,818
Deferred income taxes		2,359
Amortizing intangible assets		5,633
Trademarks		36,000
Goodwill		54,081
Total assets acquired		137,419
Other liabilities		20,808
Deferred income taxes		18,292
Net assets acquired	$	98,319

The results of operations for each of the acquisitions are included in the Consolidated Statements of Income from their respective acquisition dates. Assuming these fiscal 2005 and 2004 acquisitions had occurred as of November 1, 2003, unaudited pro forma consolidated net sales would have been $2,202.0 million and $1,890.0 million for the years ended October 31, 2005 and 2004, respectively. Unaudited pro forma net income would have been $13.3 million and $49.9 million, respectively, for those same periods, and unaudited pro forma diluted earnings per share would have been $0.11 and $0.41, respectively.

The Company paid cash of approximately $40.5 million during the year ended October 31, 2006, of which $5.8 million relates to a payment to the former owners of the Asia/Pacific business, $5.0 million relates to a payment to the former owners of DC Shoes, Inc., and the remaining $29.7 million relates primarily to insignificant acquisitions of certain other distributors, licensees and retail store locations.

57

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Years Ended October 31, 2006, 2005 and 2004

Note 3 ¾ Allowance for Doubtful Accounts

The allowance for doubtful accounts, which includes bad debts and returns and allowances, consists of the following:

	Years Ended October 31,
In thousands	2006			2005			2004
Balance, beginning of year	$	31,350		$	11,367		$	8,700
Provision for doubtful accounts		3,826			3,621			6,123
Acquired balance		—			20,623			—
Deductions		(2,336	)		(4,261	)		(3,456	)
Balance, end of year	$	32,840		$	31,350		$	11,367

The provision for doubtful accounts represents charges to selling, general and administrative expense for estimated bad debts, whereas the provision for returns and allowance is reported as a reduction of revenues.

Note 4 ¾ Inventories

Inventories consist of the following:

	October 31,
In thousands	2006		2005
Raw materials	$	40,951	$	46,659
Work in process		12,991		10,416
Finished goods		371,922		329,321
	$	425,864	$	386,396

Note 5 ¾ Fixed Assets

Fixed assets consist of the following:

	October 31,
In thousands	2006			2005
Furniture and other equipment	$	145,337		$	110,803
Computer equipment		84,281			63,760
Manufacturing equipment		55,973			45,771
Leasehold improvements		104,248			85,491
Land use rights		37,291			23,200
Land and buildings		31,851			34,407
		458,981			363,432
Accumulated depreciation and amortization		(176,647	)		(121,453	)
	$	282,334		$	241,979

58

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Years Ended October 31, 2006, 2005 and 2004

Note 6 ¾ Intangible Assets and Goodwill

A summary of intangible assets is as follows:

	October 31,
	2006							2005
	Gross		Amorti-			Net Book		Gross		Amorti-			Net Book
In thousands	Amount		zation			Value		Amount		zation			Value
Amortizable trademarks	$	7,965	$	(2,659	)	$	5,306	$	5,135	$	(1,349	)	$	3,786
Amortizable licenses		10,332		(4,047	)		6,285		10,081		(2,940	)		7,141
Other amortizable intangibles		27,379		(5,484	)		21,895		28,757		(2,022	)		26,735
Non-amortizable trademarks		214,720		¾			214,720		210,040		¾			210,040
	$	260,396	$	(12,190	)	$	248,206	$	254,013	$	(6,311	)	$	247,702

The change in non-amortizable trademarks is due primarily to foreign exchange fluctuations. Other amortizable intangibles primarily include non-compete agreements, patents and customer relationships. Certain trademarks and licenses will continue to be amortized by the Company using estimated useful lives of 10 to 25 years with no residual values. Intangible amortization expense for the fiscal years ended October 31, 2006 and 2005 was $5.9 million and $3.0 million, respectively. Annual amortization expense, based on the Company’s amortizable intangible assets as of October 31, 2006, is estimated to be approximately $5.1 million in the fiscal year ending October 31, 2007, approximately $3.9 million in the fiscal years ending October 31, 2008 through 2010 and approximately $3.5 million in the fiscal year ending October 31, 2011.

Goodwill arose primarily from the acquisitions of Rossignol, Quiksilver Europe, Quiksilver Asia/Pacific, DC and Surfection. Goodwill increased approximately $66.3 million during the fiscal year ended October 31, 2006, with $13.4 million related to the Rossignol acquisition (as described in Note 2 to these financial statements), approximately $15.0 million related to the DC acquisition, and $37.9 million primarily related to other insignificant acquisitions and foreign exchange fluctuations. Goodwill increased $279.6 million during the fiscal year ended October 31, 2005, with $243.6 million related to the Rossignol acquisition, $19.3 million related to the Surfection acquisition (both as described in Note 2 to these financial statements), approximately $10.9 million due to contingent purchase price payments recorded for the acquisitions of Quiksilver Asia/Pacific and DC, and approximately $5.8 million primarily related to other acquisitions offset by foreign exchange fluctuations.

Note 7 ¾ Lines of Credit and Long-term Debt

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

	October 31,
In thousands	2006		2005
European short-term credit arrangements	$	261,593	$	167,677
Asia/Pacific short-term lines of credit		41,464		31,656
Americas short-term lines of credit		12,834		20,780
Americas Credit Facility		121,150		71,150
Americas long-term debt		4,305		9,375
European long-term debt		135,796		158,911
Senior Notes		400,000		400,000
Deferred purchase price obligation		34,701		32,945
Capital lease obligations and other borrowings		18,359		18,800
	$	1,030,202	$	911,294

59

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Years Ended October 31, 2006, 2005 and 2004

In July 2005, the Company issued $400 million in senior notes (“Senior Notes”), which bear a coupon interest rate of 6.875% and are due April 15, 2015. The Senior Notes were issued at par value and sold in accordance with Rule 144A and Regulation S. In December 2005, these Senior Notes were exchanged for publicly registered notes with identical terms. The Senior Notes are guaranteed on a senior unsecured basis by each of the Company’s domestic subsidiaries that guarantee any of its indebtedness or its subsidiaries’ indebtedness, or is an obligor under its existing senior secured credit facility (the “Guarantors”). The Company may redeem some or all of the Senior Notes after April 15, 2010 at fixed redemption prices as set forth in the indenture related to such Senior Notes. In addition, prior to April 15, 2008, the Company may redeem up to 35% of the Senior Notes with the proceeds from certain equity offerings at a redemption price set forth in the indenture.

The Senior Notes indenture includes covenants that limit the ability of the Company and its restricted subsidiaries to, among other things: incur additional debt; pay dividends on their capital stock or repurchase their capital stock; make certain investments; enter into certain types of transactions with affiliates; limit dividends or other payments to the Company; use assets as security in other transactions; and sell certain assets or merge with or into other companies. If the Company experiences specific kinds of changes of control, it will be required to offer to purchase the Senior Notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest. As of October 31, 2006, the Company was in compliance with these covenants. In addition, the Company has approximately $10.0 million in debt issuance costs included in other assets as of October 31, 2006.

In April 2005, the Company replaced its line of credit in the Americas with a new revolving credit facility, which was subsequently amended (the “Credit Facility”). The Credit Facility expires April 2010 and provides for a secured revolving line of credit of up to $250 million (with a Company option to expand the facility to $350 million under certain conditions). The Credit Facility bears interest based on either LIBOR or an alternate base rate plus an applicable margin. The margin on the LIBOR rate is based on the Company’s fixed charge coverage ratio. The weighted average interest rate at October 31, 2006 is 7.1%. The Credit Facility includes a $100 million sublimit for letters of credit and a $35 million sublimit for borrowings in certain foreign currencies. As of October 31, 2006, $121.2 million was outstanding under the Credit Facility, in addition to outstanding letters of credit of $57.4 million.

The borrowing base is limited to certain percentages of the eligible accounts receivable and inventory from participating subsidiaries. The Credit Facility contains customary restrictive covenants for facilities and transactions of this type, including, among others, certain limitations on: incurrence of additional debt and guarantees of indebtedness; creation of liens; mergers, consolidations or sales of substantially all of the Company’s assets; sales or other dispositions of assets; distributions or dividends and repurchases of the Company’s common stock; restricted payments, including without limitation, certain restricted investments; engaging in transactions with non-participating subsidiaries of the Company and; sale and leaseback transactions. The Company’s United States assets and a portion of the stock of QS Holdings, SARL, a wholly-owned international subsidiary, have been pledged as collateral and to secure the Company’s indebtedness under the Credit Facility. As of October 31, 2006, the Company was in compliance with such covenants.

In the United States and Canada, the Company has arrangements with banks that provide for approximately $27.5 million of unsecured, uncommitted lines of credit. These lines of credit expire on various dates through 2007. The amount outstanding on these lines of credit at October 31, 2006 was $12.8 million at an average interest rate of 4.2%.

Quiksilver Europe has arrangements with banks that provide for maximum cash borrowings of approximately $394.0 million in addition to approximately $81.7 million available for the issuance of letters of credit. At October 31, 2006, these lines of credit bore interest at an average rate of 4.0%, and $261.6 million was outstanding. The lines of credit expire in 2007, and the Company believes that these lines of credit will continue to be available with substantially similar terms.

60

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Years Ended October 31, 2006, 2005 and 2004

Quiksilver Asia/Pacific has revolving lines of credit with banks that provide up to $61.0 million for cash borrowings and letters of credit. These lines of credit will be reviewed by the banks on various dates through 2007, and the Company believes these lines of credit will continue to be available with substantially similar terms. The amount outstanding on these lines of credit at October 31, 2006 was $41.5 million at an average interest rate of 2.5%.

The Company has a loan in the Americas that amounted to $4.3 million at October 31, 2006 and contains covenants that are customary for such long-term indebtedness. This loan is secured by certain assets including leasehold improvements at the Company’s headquarters in Huntington Beach, California. At October 31, 2006, the interest rate on this long-term debt was 8.4%.

Quiksilver Europe also has $135.8 million of long-term debt as of October 31, 2006. This debt is with several banks and contains covenants that are customary for such long-term indebtedness, including among other things, minimum financial ratios of net debt to shareholders’ equity and term debt to cash flow. At October 31, 2006, the overall weighted average interest rate on this long-term debt is 3.4%. Principal and interest payments are required either monthly, quarterly or annually, and the loans are due at various dates through 2010.

As part of the acquisition of Rossignol, the Company deferred a portion of the purchase price. This deferred purchase price obligation is expected to be paid in 2010 and accrues interest equal to the 3-month Euribor plus 2.35% (currently 5.9%) and is denominated in euros. The carrying amount of the obligation fluctuates based on changes in the exchange rate between euros and U.S. dollars. As of October 31, 2006, the deferred purchase price obligation totaled $33.7 million. The Company also has $1.0 million in debt related to the DC acquisition (See Note 2).

Quiksilver Europe and Asia/Pacific also have approximately $18.4 million in capital leases and other borrowings as of October 31, 2006.

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

2007	$	24,621
2008		21,772
2009		17,408
2010		234,533
2011		15,977
Thereafter		400,000
	$	714,311

Note 8 ¾ Accrued Liabilities

Accrued liabilities consist of the following:

	October 31,
In thousands	2006		2005
Accrued employee compensation and benefits	$	69,281	$	65,010
Accrued sales and payroll taxes		21,988		21,449
Derivative liability		2,456		119
Amounts payable for business acquisitions		26,683		14,091
Integration Plan and Pre-acquisition Restructuring Plan liabilities (Note 12)		52,012		32,759
Other liabilities		28,667		49,545
	$	201,087	$	182,973

61

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Years Ended October 31, 2006, 2005 and 2004

The following table provides a reconciliation of the activity related to the Company’s reserve for warranty expense, which is included in other accrued expenses in the accompanying balance sheets as of October 31:

	October 31,
In thousands	2006			2005
Beginning balance	$	2,810		$	—
Acquired balance		—			2,788
Warranty expense		2,023			671
Repairs and replacements made		(2,054	)		(649	)
Ending balance	$	2,779		$	2,810

Note 9 ¾ Commitments and Contingencies

Operating Leases

The Company leases certain land and buildings under long-term operating lease agreements. The following is a schedule of future minimum lease payments required under such leases as of October 31, 2006 (in thousands):

2007	$	68,611
2008		60,441
2009		56,076
2010		48,935
2011		43,804
Thereafter		121,950
	$	399,817

Total rent expense was $75.8 million, $44.4 million and $31.5 million for the years ended October 31, 2006, 2005 and 2004, respectively.

Professional Athlete Sponsorships

We establish relationships with professional athletes in order to promote our products and brands. We have entered into endorsement agreements with professional athletes in sports such as skiing, golf, surfing, skateboarding, snowboarding and windsurfing. Many of these contracts provide incentives for magazine exposure and competitive victories while wearing or using our products. Such expenses are an ordinary part of our operations and are expensed as incurred. The following is a schedule of future estimated minimum payments required under such endorsement agreements as of October 31, 2006 (in thousands):

2007	$	27,042
2008		14,995
2009		3,600
2010		1,740
2011		1,661
	$	49,038

Consulting Agreement

In connection with the Rossignol acquisition, the Company entered into a consulting agreement with an entity controlled by Laurent Boix-Vives, a member of the Company’s Board of Directors. This related party agreement provides for consulting services with a total estimated value of $4.7 million through October 31, 2010. The Company recognized $1.3 million in expense related to this agreement for the year ended October 31, 2006.

62

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Years Ended October 31, 2006, 2005 and 2004

Litigation

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

Indemnities and Guarantees

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

Note 10 ¾ Stockholders’ Equity

In March 2000, the Company’s stockholders approved the Company’s 2000 Stock Incentive Plan (the “2000 Plan”), which generally replaced the Company’s previous stock option plans. Under the 2000 Plan, 31,444,836 shares are reserved for issuance over its term, consisting of 12,944,836 shares authorized under predecessor plans plus an additional 18,500,000 shares. Nonqualified and incentive options may be granted to officers and employees selected by the plan’s administrative committee at an exercise price not less than the fair market value of the underlying shares on the date of grant. Payment by option holders upon exercise of an option may be made in cash or, with the consent of the committee, by delivering previously outstanding shares of the Company’s common stock. Options vest over a period of time, generally three years, as designated by the committee and are subject to such other terms and conditions as the committee determines. Certain stock options have also been granted to employees of acquired businesses under other plans.

Changes in shares under option are summarized as follows:

	Years Ended October 31,
	2006					2005					2004
				Weighted					Weighted					Weighted
				Average					Average					Average
In thousands	Shares			Price		Shares			Price		Shares			Price
Outstanding, beginning of year		17,366,457		$	7.63		15,084,168		$	5.56		14,084,608		$	3.90
Granted		2,338,300			13.67		3,877,800			14.44		4,030,000			9.35
Exercised		(1,289,351	)		3.99		(1,447,010	)		3.96		(2,997,440	)		2.83
Canceled		(279,707	)		11.70		(148,501	)		10.12		(33,000	)		8.73
Outstanding, end of year		18,135,699		$	8.61		17,366,457		$	7.63		15,084,168		$	5.56
Options exercisable, end of year		11,177,173		$	6.29		9,161,422		$	4.77		7,191,042		$	3.76

The aggregate intrinsic value of options exercised, outstanding and exercisable as of October 31, 2006 is $12.6 million, $98.7 million and $86.3 million, respectively. The weighted average life of options outstanding and exercisable as of October 31, 2006 is 6.3 and 5.2 years, respectively.

63

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Years Ended October 31, 2006, 2005 and 2004

Outstanding stock options at October 31, 2006 consist of the following:

	Options Outstanding						Options Exercisable
			Weighted
			Average		Weighted				Weighted
			Remaining		Average				Average
Range of Exercise Prices	Shares		Life		Price		Shares		Price
				(Years)
$1.64 — $3.27		1,978,136		2.1	$	2.69		1,978,136	$	2.69
$3.27 — $4.91		3,955,780		4.2		3.90		3,955,780		3.90
$4.91 — $6.54		104,000		5.5		5.72		104,000		5.72
$6.54 — $8.18		2,644,012		6.2		6.80		2,056,012		6.80
$8.18 — $9.82		2,634,670		7.0		8.73		1,366,659		8.73
$9.82 — $11.45		885,001		7.5		11.08		511,986		11.04
$11.45 — $14.72		5,690,100		8.6		14.06		1,111,770		14.25
$14.72 — $16.36		244,000		8.6		16.30		92,830		16.31
		18,135,699		6.3	$	8.61		11,177,173	$	6.29

Changes in non-vested shares under option for the year ended October 31, 2006 are as follows:

				Weighted-
				Average
				Grant Date
	Shares			Fair Value
Non-vested, beginning of year		8,205,035		$	5.89
Granted		2,338,300			6.32
Vested		(3,376,971	)		5.35
Canceled		(207,838	)		6.39
Non-vested, end of year		6,958,526		$	6.29

As of October 31, 2006, there were 1,470,238 shares of common stock that were available for future grant.

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

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

As a result of adopting SFAS No. 123(R), during the year ended October 31, 2006, the Company’s net income and operating income are $14.6 million and $20.8 million lower, respectively, than if it had continued to account for stock-based compensation under APB 25 as it did for the years ended October 31, 2005 and 2004. Basic and diluted earnings per share for the year ended October 31, 2006 would have been $0.88 and $0.84, respectively, if the Company had not adopted SFAS No. 123(R), compared

64

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Years Ended October 31, 2006, 2005 and 2004

to basic and diluted earnings per share of $0.76 and $0.73, respectively. Compensation expense was included as selling, general and administrative expense for the period. The impact on cost of goods sold was not significant. The adoption of SFAS No. 123(R) had no impact on the Company’s cash flows.

Consistent with the valuation method used for the disclosure only provisions of SFAS No. 123, the Company is using the Black-Scholes option-pricing model to value compensation expense. Forfeitures are estimated at the date of grant based on historical rates and reduce the compensation expense recognized. The expected term of options granted is derived from historical data on employee exercises. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant. Expected volatility is based on the historical volatility of the Company’s stock. The fair value of each option grant was estimated as of the grant date using the Black-Scholes option-pricing model for the years ended October 31, 2006, 2005 and 2004 assuming risk-free interest rates of 4.5%, 4.5% and 4.0%, respectively, volatility of 44.9%, 48.7% and 56.1%, respectively, zero dividend yield, and expected lives of 5.2, 5.1 and 5.4 years, respectively. The weighted average fair value of options granted was $6.32, $7.51 and $5.01 for the years ended October 31, 2006, 2005, and 2004, respectively. The Company records stock compensation expense using the graded vested method over the vesting period, which is generally three years. As of October 31, 2006, the Company had approximately $15.9 million of unrecognized compensation expense expected to be recognized over a weighted average period of approximately 1.0 year.

The reported net income and net income per share for the years ended October 31, 2005 and 2004 have been presented below to reflect the impact of the adoption of SFAS No. 123(R) had the Company been required to adopt this standard on November 1, 2003.

	Years Ended October 31,
In thousands, except per share amounts	2005		2004
Net income	$	107,120	$	81,369
Less stock-based employee compensation expense determined under the fair value based method, net of tax tax		12,442		9,188
Pro forma net income	$	94,678	$	72,181
Net income per share	$	0.90	$	0.71
Pro forma net income per share	$	0.80	$	0.63
Net income per share, assuming dilution	$	0.86	$	0.68
Pro forma net income per share, assuming dilution	$	0.77	$	0.61

In March 2006, the Company’s shareholders approved the 2006 Restricted Stock Plan (the “Restricted Stock Plan”). A total of 1.0 million shares were reserved for issuance under the Restricted Stock Plan. Stock under this plan generally vests over five years and may have certain performance based acceleration features which allow for earlier vesting in the future. Compensation expense is determined using the intrinsic value method and forfeitures are estimated at the date of grant based on historical rates and reduce the compensation expense recognized. The Company monitors the probability of meeting the restricted stock performance criteria and will adjust the amortization period as appropriate. As of October 31, 2006, there has been no acceleration of the amortization period. During the fiscal year ended October 31, 2006, a total of 800,000 shares were issued under the Restricted Stock Plan, there were no forfeitures and the Company recognized approximately $0.2 million in related compensation expense. As of October 31, 2006, the Company had approximately $9.1 million of unrecognized compensation expense expected to be recognized over a weighted average period of approximately 2.6 years.

The Company began the Quiksilver Employee Stock Purchase Plan (the “ESPP”) in fiscal 2001, which provides a method for employees of the Company to purchase common stock at a 15% discount from fair market value as of the beginning or end of each purchasing period of six months, whichever is lower.

65

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Years Ended October 31, 2006, 2005 and 2004

The ESPP covers substantially all full-time domestic and Australian employees who have at least five months of service with the Company. Since the adoption of SFAS 123(R), compensation expense has been recognized for shares issued under the ESPP plan and is included in the total compensation expense noted above. During the years ended October 31, 2006, 2005 and 2004, 219,093, 157,298 and 131,422 shares of stock were issued under the plan with proceeds to the Company of $2.4 million, $1.6 million and $1.0 million, respectively.

Note 11 ¾ Accumulated Other Comprehensive Income

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

	October 31,
In thousands	2006			2005
Foreign currency translation adjustment	$	55,041		$	27,730
(Loss) gain on cash flow hedges and interest rate swaps		(1,947	)		2,362
	$	53,094		$	30,092

Note 12 ¾ Rossignol Integration Plan and Pre-acquisition Restructuring Plan

In connection with the acquisition of Rossignol, the Company has formulated the Rossignol Integration Plan (the “Plan”). The Plan covers the global operations of Rossignol and the Company’s existing businesses, and it includes the evaluation of facility relocations, nonstrategic business activities, redundant functions and other related items. As of October 31, 2006 the Company recognized approximately $65.3 million of liabilities related to the Plan, including employee relocation and severance costs, moving costs, and other costs related primarily to the consolidation of Rossignol’s administrative headquarters in Europe, the consolidation of Rossignol’s European distribution, the consolidation and realignment of certain European manufacturing facilities, and the relocation of the Company’s wintersports equipment sales and distribution operations in the United States. These liabilities were included in the allocation of the purchase price for Rossignol in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and EITF Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination”. As of October 31, 2006, the Company also recognized approximately $1.4 million in inventory impairments relating to the realignment of its European manufacturing facilities. Costs that are not associated with the acquired company but relate to activities or employees of the Company’s existing operations are not significant and are charged to earnings. Certain land and facilities owned by the acquired company are expected to be sold during the next 12 months in connection with the Plan, while others are anticipated to be refinanced through sale-leaseback arrangements. Assets currently held for sale, primarily in the United States and France, totaled approximately $21.8 million at October 31, 2006. If the Company has overestimated these integration costs, the excess will reduce goodwill in future periods. If the Company has underestimated these integration costs, additional liabilities recognized will be recorded in earnings.

66

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Years Ended October 31, 2006, 2005 and 2004

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

				Facility
In thousands	Workforce			and Other			Total
Recorded in purchase price allocation	$	3,673		$	1,574		$	5,247
Adjustment to purchase price allocation		17,463			752			18,215
Cash payments		(17	)		(44	)		(61	)
Foreign currency translation		(83	)		(6	)		(89	)
Balance, October 31, 2005		21,036			2,276			23,312
Adjustment to purchase price allocation		36,733			5,130			41,863
Cash payments		(14,974	)		(2,555	)		(17,529	)
Foreign currency translation		2,689			90			2,779
Balance, October 31, 2006	$	45,484		$	4,941		$	50,425

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

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

In thousands	Workforce
Balance, October 31, 2005	$	9,447
Cash payments		(6,926	)
Adjustment to purchase price allocation		(1,015	)
Foreign currency translation		81
Balance, October 31, 2006	$	1,587

Note 13 ¾ Income Taxes

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

	Years Ended October 31,
In thousands	2006			2005		2004
Current:
Federal	$	5,776		$	10,374	$	7,201
State		75			2,308		2,539
Foreign		25,299			34,883		28,072
		31,150			47,565		37,812
Deferred:
Federal		(1,843	)		2,072		5,548
State		(617	)		262		814
Foreign		9,636			1,327		(3,551	)
		7,176			3,661		2,811
Provision for income taxes	$	38,326		$	51,226	$	40,623

67

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Years Ended October 31, 2006, 2005 and 2004

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

	Years Ended October 31,
	2006			2005			2004
Computed “expected” statutory federal income tax rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal income tax benefit		(0.3	)		1.1			0.6
Foreign tax rate differential		(6.7	)		(1.9	)		(1.4	)
Foreign tax exempt income		(5.5	)		(2.0	)		(1.0	)
Repatriation of foreign earnings, net of credits		5.0			(0.5	)		—
Other		1.7			0.7			0.1
Effective income tax rate		29.2	%		32.4	%		33.3	%

The components of net deferred income taxes are as follows:

	October 31,
In thousands	2006			2005
Deferred income tax assets:
Allowance for doubtful accounts	$	22,356		$	10,113
Other comprehensive income		5,915			—
Operating loss carryforwards		31,088			8,873
Nondeductible accruals and other		54,086			41,319
		113,445			60,305
Deferred income tax liabilities:
Depreciation and Amortization		(23,933	)		(25,833	)
Other comprehensive loss		—			(1,909	)
Intangibles		(63,295	)		(63,184	)
		(87,228	)		(90,926	)
Deferred income taxes		26,217			(30,621	)
Valuation allowance		(26,960	)		(9,361	)
Net deferred income taxes	$	(743	)	$	(39,982	)

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

Income before provision for income taxes includes $146.4 million, $124.6 million and $70.1 million from foreign jurisdictions for the years ended October 31, 2006, 2005 and 2004, respectively. The Company does not provide for the U.S. federal, state or additional foreign income tax effects on certain foreign earnings that management intends to permanently reinvest. As of October 31, 2006, foreign earnings earmarked for permanent reinvestment totaled approximately $266.6 million.

At October 31, 2006, the Company has U.S. and state net operating loss carryforwards of approximately $6.2 million and $14.2 million respectively, which will expire on various dates through 2026. In addition, the Company has foreign net operating loss carryforwards of approximately $83.1 million for the year ended October 31, 2006. Approximately $57.7 million will be carried forward until fully utilized, with the remaining $25.4 million expiring on various dates through 2026.

The change in the valuation allowance of $17.6 million for fiscal 2006 relates primarily to acquired deferred tax assets offset by a full valuation allowance that was recorded in connection with the

68

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Years Ended October 31, 2006, 2005 and 2004

finalization of the Company’s Rossignol Integration Plan. Decreases in the valuation allowance related to such acquired deferred tax assets will be offset against goodwill.

Note 14 ¾ Employee Plans

Retirement and additional pension plan benefits

The Company’s Skis Rossignol SAS subsidiary pays employees retirement indemnities in a lump sum at the date of retirement, which are calculated based on years of service and compensation levels. These liabilities are unfunded and are accounted for as a defined benefit obligation under SFAS No. 87, “Employers Accounting for Pensions.”

Pursuant to SFAS No. 87, the Company records a net periodic pension cost in its statement of income, which represents the cost of the pension benefit for the period. There are no unrecognized benefit obligations at October 31, 2006 and 2005. These amounts are determined using an assumed discount rate of 4.40% and 3.50%, an average salary increase of 2.00% and 2.25%, a turnover rate of 2.00% and 2.00% and an inflation rate of 1.85% and 1.75% for the year ended October 31, 2006 and the three months ended October 31, 2005, respectively. The following table summarizes the components of net periodic pension cost and the change in the benefit obligation:

	Year			Three months
	ended			ended
In thousands	October 31, 2006			October 31, 2005
Net periodic pension cost:
Service cost	$	1,109		$	261
Interest charge		153			101
Realized actuarial (gains) losses during the period		(529	)		61
	$	733		$	423
Benefit obligation:
Balance, beginning of period		9,984			9,704
Disbursements		(1,375	)		(143	)
Net periodic pension costs		733			423
Balance, end of period	$	9,342		$	9,984

The following represents estimated future gross benefit payments related to the pension plan as of October 31, 2006:

In thousands
2007	$	359
2008		522
2009		543
2010		434
2011		560
Thereafter		6,924
	$	9,342

The Company maintains the Quiksilver 401(k) Employee Savings Plan and Trust (the “401(k) Plan”). This plan is generally available to all domestic employees with six months of service and is funded by employee contributions and periodic discretionary contributions from the Company, which are approved by the Company’s Board of Directors. The Company made contributions of $0.9 million, $0.9 million and $0.7 million to the 401(k) Plan for the years ended October 31, 2006, 2005 and 2004, respectively. The Company also made contributions of $0.6 million and $0.2 million for the years ended October 31, 2006

69

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Years Ended October 31, 2006, 2005 and 2004

and 2005 to 401(k) plans maintained on behalf of employees in certain Rossignol and Cleveland Golf subsidiaries in the United States.

Employees of certain of the Company’s French subsidaries including, Na Pali, SAS, Skis Rossignol SAS, Skis Dynastar SAS and Look Fixations, with three months of service are covered under French Profit Sharing Plans (the “French Profit Sharing Plans”), which are mandated by law. Compensation is earned under the French Profit Sharing Plans based on statutory computations with an additional discretionary component. Funds are maintained by the Company and vest with the employees after five years, although earlier disbursement is optional if certain personal events occur or upon the termination of employment. Compensation expense of $2.1 million, $3.2 million and $2.3 million was recognized related to the French Profit Sharing Plans for the fiscal years ended October 31, 2006, 2005 and 2004, respectively.

Note 15 ¾ Segment and Geographic Information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Company’s management in deciding how to allocate resources and in assessing performance. The Company operates in the outdoor market of the sporting goods industry in which the Company designs, produces and distributes clothing, wintersports and golf equipment, footwear, accessories and related products. The Company operates in three segments, the Americas, Europe and Asia/Pacific. The Americas segment includes revenues primarily from the United States and Canada, while the European segment includes revenues primarily from Western Europe, and the Asia/Pacific segment includes revenues primarily from Australia, Japan, New Zealand and Indonesia. Costs that support all three operating segments, including trademark protection, trademark maintenance and licensing functions are part of corporate operations. Corporate operations also includes sourcing income and gross profit earned from the sale of products to certain licensees. The Company’s largest customer accounts for approximately 4% of its revenues.

The Company produces different product lines within each geographical segment. The percentages of revenues attributable to each product line are as follows:

	Percentage of Revenues
	2006			2005			2004
Wintersports equipment		18	%		9	%		2	%
T-Shirts		13			18			19
Accessories		11			12			14
Jackets, sweaters and technical outerwear		11			11			12
Footwear		11			11			9
Golf equipment		7			2			—
Pants		6			8			10
Shirts		6			7			9
Swimwear, excluding boardshorts		4			6			7
Fleece		4			4			5
Shorts		3			4			5
Boardshorts		3			4			4
Tops and dresses		3			4			4
		100	%		100	%		100	%

70

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Years Ended October 31, 2006, 2005 and 2004

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

	Years Ended October 31,
In thousands	2006			2005			2004
Revenues, net:
Americas	$	1,078,611		$	843,677		$	616,818
Europe		1,015,133			712,310			496,276
Asia/Pacific		263,158			220,941			148,733
Corporate operations		5,386			3,941			5,112
Consolidated	$	2,362,288		$	1,780,869		$	1,266,939
Gross profit:
Americas	$	442,148		$	335,356		$	251,357
Europe		518,218			362,172			251,692
Asia/Pacific		118,866			109,698			73,152
Corporate operations		2,318			1,298			1,958
Consolidated	$	1,081,550		$	808,524		$	578,159
Operating income:
Americas	$	98,860		$	85,335		$	63,811
Europe		115,082			103,308			73,517
Asia/Pacific		21,794			29,600			21,164
Corporate operations		(51,814	)		(37,061	)		(26,554	)
Consolidated	$	183,922		$	181,182		$	131,938
Identifiable assets:
Americas	$	851,260		$	813,549		$	443,028
Europe		1,198,803			977,057			413,454
Asia/Pacific		346,491			313,993			118,918
Corporate operations		50,674			54,002			15,590
Consolidated	$	2,447,228		$	2,158,601		$	990,990
Goodwill:
Americas	$	132,674		$	144,948		$	86,382
Europe		255,558			175,392			70,057
Asia/Pacific		127,478			129,037			13,346
Consolidated	$	515,710		$	449,377		$	169,785

France accounted for 33.8%, 36.4% and 38.4% of European net sales to unaffiliated customers for the years ended October 31, 2006, 2005 and 2004, respectively, while Spain accounted for 14.3%, 15.2% and 17.0%, respectively, and the United Kingdom accounted for 10.3%, 15.4% and 18.7%, respectively. Identifiable assets in the United States totaled $827.3 million as of October 31, 2006.

Note 16 ¾ Derivative Financial Instruments

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

71

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Years Ended October 31, 2006, 2005 and 2004

Derivatives that do not qualify for hedge accounting but are used by management to mitigate exposure to currency risks are marked to fair value with corresponding gains or losses recorded in earnings. A gain of $1.2 million was recognized related to these types of contracts during fiscal 2006. For all qualifying cash flow hedges, the changes in the fair value of the derivatives are recorded in other comprehensive income. As of October 31, 2006, the Company was hedging transactions expected to occur through October 2008. Assuming exchange rates at October 31, 2006 remain constant, $1.9 million of gains, net of tax, related to hedges of these transactions are expected to be reclassified into earnings over the next 24 months.

On the date the Company enters into a derivative contract, management designates the derivative as a hedge of the identified exposure. The Company formally documents all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for entering into various hedge transactions. In this documentation, the Company identifies the asset, liability, firm commitment, or forecasted transaction that has been designated as a hedged item and indicates how the hedging instrument is expected to hedge the risks related to the hedged item. The Company formally measures effectiveness of its hedging relationships both at the hedge inception and on an ongoing basis in accordance with its risk management policy. The Company would discontinue hedge accounting prospectively (i) if management determines that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item, (ii) when the derivative expires or is sold, terminated, or exercised, (iii) if it becomes probable that the forecasted transaction being hedged by the derivative will not occur, (iv) because a hedged firm commitment no longer meets the definition of a firm commitment, or (v) if management determines that designation of the derivative as a hedge instrument is no longer appropriate. As a result of the expiration, sale, termination, or exercise of derivative contracts, the Company reclassified into earnings net (gains) losses of $(0.8) million, $5.3 million and $3.6 million during the fiscal years ended October 31, 2006, 2005 and 2004, respectively.

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

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

	Notional
In thousands	Amount		Maturity	Fair Value
United States dollar	$	349,652	Nov. 2006 - Oct. 2008	$	(2,937	)
Canadian dollar		15,612	Dec. 2006 - May 2007		264
New Zealand dollar		2,220	Nov. 2006 - Jan. 2007		(37	)
British pound		665	Jan. 2007		(3	)
Interest rate instruments		29,257	Jan. 2007 - Sept. 2009		30
	$	397,406		$	(2,683	)

72

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Years Ended October 31, 2006, 2005 and 2004

Note 17 ¾ Quarterly Financial Data (Unaudited)

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

	Quarter Ended
In thousands, except per share amounts	January 31		April 30		July 31		October 31
Year ended October 31, 2006
Revenues, net	$	541,142	$	516,928	$	525,854	$	778,364
Gross profit		248,561		234,490		248,775		349,724
Net income		18,603		3,729		5,336		65,348
Net income per share, assuming dilution		0.15		0.03		0.04		0.51
Trade accounts receivable		533,468		482,978		492,414		721,562
Inventories		406,542		402,033		516,366		425,864
Year ended October 31, 2005
Revenues, net	$	342,860	$	426,853	$	373,751	$	637,405
Gross profit		152,906		193,365		174,915		287,338
Net income		14,214		34,667		24,635		33,604
Net income per share, assuming dilution		0.11		0.28		0.20		0.27
Trade accounts receivable		252,097		342,035		428,266		599,486
Inventories		236,819		177,842		438,336		386,396

Note 18 ¾ Condensed Consolidating Financial Information

In December 2005, the Company completed an exchange offer to exchange the Senior Notes for publicly registered notes with identical terms. Obligations under the Company’s Senior Notes are fully and unconditionally guaranteed by certain of its existing domestic subsidiaries.

The Company is required to present condensed consolidating financial information for Quiksilver, Inc. and its domestic subsidiaries within the notes to the consolidated financial statements in accordance with the criteria established for parent companies in the SEC’s Regulation S-X, Rule 3-10(f). The following condensed consolidating financial information presents the results of operations, financial position and cash flows of Quiksilver Inc., its Guarantor subsidiaries, its non-Guarantor subsidiaries and the eliminations necessary to arrive at the information for the Company on a consolidated basis as of October 31, 2006 and 2005 and for the years ended October 31, 2006, 2005 and 2004. During the year ended October 31, 2006, Cleveland Golf was added as a Guarantor subsidiary. As a result, the October 31, 2005 balance sheet has been adjusted to reflect Cleveland Golf as a Guarantor subsidiary. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. Prior to November 1, 2004, certain of the Company’s Guarantor subsidiaries did not exist and were created as part of an internal restructuring on that date. As a result, information presented prior to November 1, 2004 contains certain allocations between Quiksilver, Inc. and its Guarantor subsidiaries to conform to the current subsidiary structure under which the guarantees exist.

73

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Years Ended October 31, 2006, 2005 and 2004

CONDENSED CONSOLIDATING BALANCE SHEET

AT OCTOBER 31, 2006

			Wholly-owned					Non-
	Quiksilver,		Guarantor		Cleveland			Guarantor
In thousands	Inc.		Subsidiaries		Golf			Subsidiaries			Elimination			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	8	$	1,537	$	1,855		$	33,434		$	—		$	36,834
Trade accounts receivable, net		—		205,853		36,987			478,722			—			721,562
Other receivables		1,190		12,593		708			20,833			—			35,324
Inventories		—		144,740		27,122			255,636			(1,634	)		425,864
Deferred income taxes		—		14,459		2,349			67,864			—			84,672
Prepaid expenses and other current assets		1,703		9,968		1,953			15,302			—			28,926
Total current assets		2,901		389,150		70,974			871,791			(1,634	)		1,333,182
Fixed assets, net		6,343		83,495		3,801			188,695			—			282,334
Intangible assets, net		2,452		79,197		3,150			163,407			—			248,206
Goodwill		—		163,910		2,472			349,328			—			515,710
Investment in subsidiaries		561,992		—		—			—			(561,992	)		—
Other assets		10,909		4,730		274			30,041			—			45,954
Assets held for sale		—		3,500		—			18,342			—			21,842
Total assets	$	584,597	$	723,982	$	80,671		$	1,621,604		$	(563,626	)	$	2,447,228
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Lines of credit	$	—	$	209	$	—		$	315,682		$	—		$	315,891
Accounts payable		2,303		89,181		3,525			125,168			—			220,177
Accrued liabilities		13,535		43,691		6,085			137,805			(29	)		201,087
Current portion of long-term debt		—		4,305		—			20,316			—			24,621
Income taxes payable		—		14,277		1,343			(12,810	)		—			2,810
Intercompany balances		72,386		17,351		37,766			(127,503	)		—			—
Total current liabilities		88,224		169,014		48,719			458,658			(29	)		764,586
Long-term debt, net of current portion		433,701		122,150		—			133,839			—			689,690
Deferred income taxes		—		25,773		(353	)		75,212			—			100,632
Total liabilities		521,925		316,937		48,366			667,709			(29	)		1,554,908
Minority interest		—		11,193		—			—			—			11,193
Stockholders’/invested equity		62,672		395,852		32,305			953,895			(563,597	)		881,127
Total liabilities and stockholders’ equity	$	584,597	$	723,982	$	80,671		$	1,621,604		$	(563,626	)	$	2,447,228

74

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Years Ended October 31, 2006, 2005 and 2004

CONDENSED CONSOLIDATING BALANCE SHEET

AT OCTOBER 31, 2005

				Wholly-owned					Non-
	Quiksilver,			Guarantor		Cleveland			Guarantor
In thousands	Inc.			Subsidiaries		Golf			Subsidiaries			Elimination			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	1,177		$	20,816	$	986		$	52,619		$	¾		$	75,598
Trade accounts receivable, net		¾			207,120		30,659			361,707			¾			599,486
Other receivables		920			4,918		¾			21,576			¾			27,414
Inventories		¾			118,548		36,758			232,130			(1,040	)		386,396
Deferred income taxes		¾			22,531		1,774			17,341			¾			41,646
Prepaid expenses and other current assets		1,788			6,588		3,096			10,347			¾			21,819
Total current assets		3,885			380,521		73,273			695,720			(1,040	)		1,152,359
Fixed assets, net		2,679			66,604		3,531			169,165			¾			241,979
Intangible assets, net		2,310			83,331		3,385			158,676			¾			247,702
Goodwill		¾			177,841		2,472			269,064			¾			449,377
Investment in subsidiaries		578,719			¾		¾			¾			(578,719	)		—
Other assets		11,735			5,164		259			26,797			¾			43,955
Assets held for sale		¾			4,225		¾			19,004			¾			23,229
Total assets	$	599,328		$	717,686	$	82,920		$	1,338,426		$	(579,759	)	$	2,158,601
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Lines of credit	$	¾		$	6,138	$	1,000		$	212,975		$	¾		$	220,113
Accounts payable		1,486			78,859		7,828			124,234			¾			212,407
Accrued liabilities		18,237			29,777		8,306			126,359			294			182,973
Current portion of long-term debt		¾			1,230		¾			49,603			¾			50,833
Income taxes payable		¾			14,872		(1,497	)		13,801			¾			27,176
Intercompany balances		(63,906	)		49,338		33,198			(18,630	)		¾			¾
Total current liabilities		(44,183	)		180,214		48,835			508,342			294			693,502
Long-term debt, net of current portion		431,944			76,456		4,285			127,663			¾			640,348
Deferred income taxes		¾			35,605		3			46,020			¾			81,628
Total liabilities		387,761			292,275		53,123			682,025			294			1,415,478
Minority Interest		¾			10,241		¾			¾			¾			10,241
Stockholders’/invested equity		211,567			415,170		29,797			656,401			(580,053	)		732,882
Total liabilities and stockholders’ equity	$	599,328		$	717,686	$	82,920		$	1,338,426		$	(579,759	)	$	2,158,601

75

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Years Ended October 31, 2006, 2005 and 2004

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Year Ended October 31, 2006

				Wholly-owned				Non-
	Quiksilver,			Guarantor		Cleveland		Guarantor
In thousands	Inc.			Subsidiaries		Golf		Subsidiaries		Elimination			Consolidated
Revenues, net	$	592		$	859,344	$	151,236	$	1,415,687	$	(64,571	)	$	2,362,288
Cost of goods sold		—			520,399		84,983		714,919		(39,563	)		1,280,738
Gross profit		592			338,945		66,253		700,768		(25,008	)		1,081,550
Selling, general and administrative expense		49,142			266,563		58,624		547,767		(24,468	)		897,628
Operating (loss) income		(48,550	)		72,382		7,629		153,001		(540	)		183,922
Interest expense		38,301			3,934		3,305		5,296		—			50,836
Foreign currency (gain) loss		(730	)		43		—		1,176		—			489
Minority interest and other expense		951			—		—		304		—			1,255
(Loss) income before provision for income taxes		(87,072	)		68,405		4,324		146,225		(540	)		131,342
Provision for income taxes		(23,684	)		25,520		1,774		34,716		—			38,326
Net (loss) income	$	(63,388	)	$	42,885	$	2,550	$	111,509	$	(540	)	$	93,016

76

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Years Ended October 31, 2006, 2005 and 2004

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Year Ended October 31, 2005

				Wholly-owned					Non-
	Quiksilver,			Guarantor		Cleveland			Guarantor
In thousands	Inc.			Subsidiaries		Golf			Subsidiaries			Elimination			Consolidated
Revenues, net	$	2,904		$	809,018	$	37,849		$	965,449		$	(34,351	)	$	1,780,869
Cost of goods sold		—			492,575		20,602			470,548			(11,380	)		972,345
Gross profit		2,904			316,443		17,247			494,901			(22,971	)		808,524
Selling, general and administrative expense		31,690			238,373		14,316			365,623			(22,660	)		627,342
Operating (loss) income		(28,786	)		78,070		2,931			129,278			(311	)		181,182
Interest expense		12,940			4,739		450			3,821			—			21,950
Foreign currency (gain) loss		(356	)		481		(46	)		(185	)		—			(106	)
Other expense		—			—		—			992			—			992
(Loss) income before provision for income taxes		(41,370	)		72,850		2,527			124,650			(311	)		158,346
Provision for income taxes		(14,972	)		29,078		679			36,441			—			51,226
Net (loss) income	$	(26,398	)	$	43,772	$	1,848		$	88,209		$	(311	)	$	107,120

77

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Years Ended October 31, 2006, 2005 and 2004

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Year Ended October 31, 2004

				Wholly-Owned		Non-
	Quiksilver,			Guarantor		Guarantor
In thousands	Inc.			Subsidiaries		Subsidiaries		Elimination			Consolidated
Revenues, net	$	685		$	648,119	$	644,819	$	(26,684	)	$	1,266,939
Cost of goods sold		¾			383,383		312,558		(7,161	)		688,780
Gross profit		685			264,736		332,261		(19,523	)		578,159
Selling, general and administrative expense		19,244			195,545		250,368		(18,936	)		446,221
Operating (loss) income		(18,559	)		69,191		81,893		(587	)		131,938
Interest (income) expense		(7,156	)		2,569		10,977		¾			6,390
Foreign currency loss		1,390			1,403		68		¾			2,861
Other expense		¾			¾		695		¾			695
(Loss) income before provision for income taxes		(12,793	)		65,219		70,153		(587	)		121,992
Provision for income taxes		(4,804	)		24,271		21,156		¾			40,623
Net (loss) income	$	(7,989	)	$	40,948	$	48,997	$	(587	)	$	81,369

78

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Years Ended October 31, 2006, 2005 and 2004

CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended October 31, 2006

				Wholly-
				owned						Non-
				Guarantor			Cleveland			Guarantor
In thousands	Quiksilver, Inc.			Subsidiaries			Golf			Subsidiaries			Consolidated
Cash flows from operating activities:
Net income	$	(63,388	)	$	42,885		$	2,550		$	110,969		$	93,016
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		251			19,597			1,888			43,879			65,615
Stock-based compensation		20,751			—			—			—			20,751
Provision for doubtful accounts		—			(1,891	)		1,162			4,555			3,826
Loss on sale of fixed assets		—			257			—			948			1,205
Foreign currency gain		(68	)		(78	)		—			(341	)		(487	)
Minority interest and equity in earnings		—			952			—			883			1,835
Deferred income taxes		—			887			(931	)		7,961			7,917
Changes in operating assets and liabilities:
Trade accounts receivable		—			(18,849	)		(7,490	)		(85,094	)		(111,433	)
Other receivables		(270	)		(7,643	)		(674	)		(2,767	)		(11,354	)
Inventories		—			(34,544	)		9,636			4,014			(20,894	)
Prepaid expenses and other current assets assets		174			(3,489	)		1,109			(3,816	)		(6,022	)
Other assets		1,577			115			(15	)		(4,960	)		(3,283	)
Accounts payable		817			12,744			(4,303	)		(8,428	)		830
Accrued liabilities		(3,436	)		2,783			(2,221	)		(25,572	)		(28,446	)
Income taxes payable		—			3,960			2,840			(28,174	)		(21,374	)
Net cash (used in) provided by operating activities		(43,592	)		17,686			3,551			14,057			(8,298	)
Cash flows from investing activities:
Proceeds from the sale of properties and equipment		—			17			—			5,100			5,117
Capital expenditures		(4,057	)		(35,142	)		(1,923	)		(56,812	)		(97,934	)
Business acquisitions, net of cash acquired		(3,074	)		(8,812	)		—			(28,644	)		(40,530	)
Net cash used in investing activities		(7,131	)		(43,937	)		(1,923	)		(80,356	)		(133,347	)
Cash flows from financing activities:
Borrowings on lines of credit		—			639			2,735			312,345			315,719
Payments on lines of credit		—			(6,992	)		(7,735	)		(214,021	)		(228,748	)
Borrowings on long-term debt		—			90,781			4,000			63,232			158,013
Payments on long-term debt		(840	)		(41,972	)		(4,327	)		(103,067	)		(150,206	)
Proceeds from stock option exercises		11,212			—			—			—			11,212
Intercompany		39,096			(34,962	)		4,568			(8,702	)		—
Net cash provided by (used in) financing activities		49,468			7,494			(759	)		49,787			105,990
Effect of exchange rate changes on cash		86			(522	)		—			(2,673	)		(3,109	)
Net (decrease) increase in cash and cash equivalents		(1,169	)		(19,279	)		869			(19,185	)		(38,764	)
Cash and cash equivalents, beginning of period		1,177			20,816			986			52,619			75,598
Cash and cash equivalents, end of period	$	8		$	1,537		$	1,855		$	33,434		$	36,834

79

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Years Ended October 31, 2006, 2005 and 2004

CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended October 31, 2005

				Wholly-
				owned						Non-
				Guarantor			Cleveland			Guarantor
In thousands	Quiksilver, Inc.			Subsidiaries			Golf			Subsidiaries			Consolidated
Cash flows from operating activities:
Net income	$	(26,398	)	$	43,772		$	1,848		$	87,898		$	107,120
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		246			16,036			513			25,069			41,864
Provision for doubtful accounts		¾			1,665			¾			1,956			3,621
(Gain) loss on sale of fixed assets		(3	)		1,207			(5	)		2,245			3,444
Foreign currency gain		(221	)		¾			¾			¾			(221	)
Interest accretion		¾			¾			¾			1,319			1,319
Deferred income taxes		¾			1,783			(1,076	)		2,954			3,661
Changes in operating assets and liabilities:
Trade accounts receivable		¾			(62,277	)		(5,459	)		(161,125	)		(228,861	)
Other receivables		4,386			(2,659	)		(709	)		7,931			8,949
Inventories		¾			22,431			(7,862	)		12,771			27,340
Prepaid expenses and other current assets assets		(18	)		32			(339	)		(436	)		(761	)
Other assets		421			(1,623	)		(129	)		(5,914	)		(7,245	)
Accounts payable		(203	)		12,409			117			10,210			22,533
Accrued liabilities		(10,081	)		11,934			1,050			4,646			7,549
Income taxes payable		¾			2,351			1,873			4,050			8,274
Net cash (used in) provided by operating activities		(31,871	)		47,061			(10,178	)		(6,426	)		(1,414	)
Cash flows from investing activities:
Capital expenditures		(2,473	)		(30,176	)		(586	)		(37,623	)		(70,858	)
Business acquisitions, net of cash acquired		(231,948	)		(11,885	)		¾			(8,032	)		(251,865	)
Net cash used in investing activities		(234,421	)		(42,061	)		(586	)		(45,655	)		(322,723	)
Cash flows from financing activities:
Borrowings on lines of credit		¾			6,208			1,000			116,768			123,976
Payments on lines of credit		¾			(51,876	)		¾			(45,925	)		(97,801	)
Borrowings on long-term debt		484,843			9,630			¾			135,983			630,456
Payments on long-term debt		(140,705	)		(82,524	)		(714	)		(93,010	)		(316,953	)
Proceeds from stock option exercises		8,188			¾			¾			¾			8,188
Intercompany		(81,518	)		124,396			11,464			(54,342	)		—
Net cash provided by financing activities		270,808			5,834			11,750			59,474			347,866
Effect of exchange rate changes on cash		(2,269	)		493			¾			(1,552	)		(3,328	)
Net increase in cash and cash equivalents		2,247			11,327			986			5,841			20,401
Cash and cash equivalents, beginning of period		(1,070	)		9,489			—			46,778			55,197
Cash and cash equivalents, end of period	$	1,177		$	20,816		$	986		$	52,619		$	75,598

80

QUIKSILVER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Years Ended October 31, 2006, 2005 and 2004

CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended October 31, 2004

							Non-
				Guarantor			Guarantor
In thousands	Quiksilver, Inc.			Subsidiaries			Subsidiaries			Consolidated
Cash flows from operating activities:
Net income	$	(7,989	)	$	40,948		$	48,410		$	81,369
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		722			12,332			13,793			26,847
Provision for doubtful accounts		¾			3,381			2,742			6,123
Loss on sale of fixed assets		¾			792			969			1,761
Foreign currency gain		(159	)		¾			¾			(159	)
Interest accretion		¾			¾			1,368			1,368
Deferred income taxes		¾			6,363			(3,552	)		2,811
Changes in operating assets and liabilities:
Trade accounts receivable		¾			(33,098	)		(753	)		(33,851	)
Other receivables		782			203			(2,007	)		(1,022	)
Inventories		¾			(5,176	)		(7,964	)		(13,140	)
Prepaid expenses and other current assets		303			2,070			(1,249	)		1,124
Other assets		(288	)		959			(406	)		265
Accounts payable		661			1,169			20,183			22,013
Accrued liabilities		1,488			15,194			5,271			21,953
Income taxes payable		¾			15,753			(2,620	)		13,133
Net cash (used in) provided by operating activities		(4,480	)		60,890			74,185			130,595
Cash flows from investing activities:
Capital expenditures		(5,019	)		(18,524	)		(28,914	)		(52,457	)
Business acquisitions, net of cash acquired		¾			(65,074	)		(5,545	)		(70,619	)
Net cash used in investing activities		(5,019	)		(83,598	)		(34,459	)		(123,076	)
Cash flows from financing activities:
Borrowings on lines of credit		¾			75,000			8,482			83,482
Payments on lines of credit		(14,900	)		(27,921	)		(21,124	)		(63,945	)
Borrowings on long-term debt		¾			¾			5,592			5,592
Payments on long-term debt		¾			(3,647	)		(10,831	)		(14,478	)
Proceeds from stock option exercises		9,718			¾			¾			9,718
Intercompany		14,846			(20,884	)		6,038			¾
Net cash provided by (used in) financing activities		9,664			22,548			(11,843	)		20,369
Effect of exchange rate changes on cash		¾			¾			(557	)		(557	)
Net increase (decrease) in cash and cash equivalents		165			(160	)		27,326			27,331
Cash and cash equivalents, beginning of period		(1,235	)		9,649			19,452			27,866
Cash and cash equivalents, end of period	$	(1,070	)	$	9,489		$	46,778		$	55,197

81

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Roger Cleveland Golf Company, Inc.

We have audited the accompanying balance sheets of Roger Cleveland Golf Company, Inc. (the “Company”) as of October 31, 2006 and 2005, and the related statements of income and comprehensive income, stockholders’ equity and cash flows for the twelve months ended October 31, 2006, and the three months ended October 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the financial position of Roger Cleveland Golf Company, Inc. as of October 31, 2006 and 2005, and the results of its operations and its cash flows for the twelve months and three months ended October 31, 2006 and 2005, respectively, in conformity with accounting principles generally accepted in the United States of America.

As disclosed in Note 1 to the financial statements, the Company’s majority shareholder and certain other shareholders were acquired by Quiksilver, Inc. in July 2005.

/s/ Deloitte & Touche LLP

January 11, 2007
Costa Mesa, California

82

ROGER CLEVELAND GOLF COMPANY, INC.

BALANCE SHEETS

	October 31,		October 31,
In thousands (except share amounts)	2006		2005
ASSETS
Current assets:
Cash and cash equivalents	$	1,855	$	986
Accounts receivable, less allowance for bad debts of $1,000 (2006) and $1,354 (2005)		36,987		30,659
Income tax receivable		—		1,497
Inventories		27,122		36,758
Deferred income taxes		2,349		1,774
Prepaid expenses and other current assets		2,661		3,096
Due from affiliates		8,591		2,326
Total current assets		79,565		77,096
Equipment and leasehold improvements, net		3,801		3,531
Other intangible assets, net		3,150		3,385
Goodwill		2,472		2,472
Deferred income taxes		353		—
Other assets		274		259
Total assets	$	89,615	$	86,743
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Line of credit	$	—	$	1,000
Accounts payable		3,525		7,828
Accrued payroll and benefits		2,677		1,692
Other accrued expenses		3,408		6,614
Due to affiliates		1,357		524
Income taxes payable		1,343		—
Total current liabilities		12,310		17,658
Deferred income taxes		—		3
Long-term debt:
Due to affiliates		45,000		35,000
Other long-term debt		—		4,285
Total long-term debt		45,000		39,285
Stockholders’ equity:
Common stock no par value – 500,000 shares authorized; 290,224 shares issued and outstanding		22,000		22,000
Retained earnings		10,305		7,755
Accumulated other comprehensive income		—		42
Total stockholders’ equity		32,305		29,797
Total liabilities and stockholders’ equity	$	89,615	$	86,743

83

ROGER CLEVELAND GOLF COMPANY, INC.

STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

	Year ended			Three months ended
In thousands	October 31, 2006			October 31, 2005
Revenues, net	$	151,236		$	37,849
Cost of goods sold		84,983			20,602
Gross profit		66,253			17,247
Selling, general, and administrative expense		58,702			14,316
Operating income		7,551			2,931
Interest expense		3,305			450
Other income		(78	)		(46	)
Income before provision for income taxes		4,324			2,527
Provision for income taxes		1,774			679
Net income		2,550			1,848
(Loss) gain on derivative instruments, net of tax		(42	)		3
Comprehensive income	$	2,508		$	1,851

STATEMENTS OF STOCKHOLDERS’ EQUITY

Year Ended October 31, 2006 and Three Months Ended October 31, 2005

							Accumulated
							other			Total
	Common Stock				Retained		Comprehensive			Stockholders’
In thousands, except shares	Shares		Amounts		Earnings		Income			Equity
Balance, July 31, 2005		290,224	$	22,000	$	5,907	$	39		$	27,946
Unrealized gain on derivative instruments, net of tax		—		—		—		3			3
Net income		—		—		1,848		—			1,848
Balance, October 31, 2005		290,224		22,000		7,755		42			29,797
Unrealized loss on derivative instruments, net of tax		—		—		—		(42	)		(42	)
Net income		—		—		2,550		—			2,550
Balance, October 31, 2006		290,224	$	22,000	$	10,305	$	—		$	32,305

84

ROGER CLEVELAND GOLF COMPANY, INC.

STATEMENTS OF CASH FLOWS

	Year ended			Three months ended
In thousands	October 31, 2006			October 31, 2005
Cash flows from operating activities:
Net income	$	2,550		$	1,848
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		1,888			513
Gain on disposal of equipment		—			(5	)
Deferred income taxes		(931	)		(1,076	)
Changes in assets and liabilities:
Accounts receivable, net		(6,328	)		(5,459	)
Inventories		9,636			(7,862	)
Prepaid expenses and other current assets		435			(339	)
Other assets		(15	)		68
Accounts payable		(4,303	)		117
Due from affiliates and due to affiliates		(5,432	)		(709	)
Accrued expenses		(2,221	)		931
Income taxes payable		2,840			1,873
Net cash used in operating activities		(1,881	)		(10,100	)
Cash flows from investing activities:
Purchase of equipment and leasehold improvements		(1,923	)		(664	)
Net cash used in investing activities		(1,923	)		(664	)
Cash flows from financing activities:
Proceeds from line of credit		6,735			1,000
Payments on line of credit		(7,735	)		(714	)
Proceeds from affiliate loans		31,000			42,000
Payments of affiliate loans		(21,000	)		(32,500	)
Payments of long-term debt		(4,327	)		—
Net cash provided by financing activities		4,673			9,786
Net increase (decrease) in cash		869			(978	)
Cash, beginning of period		986			1,964
Cash, end of period	$	1,855		$	986
Supplemental disclosures of cash flow information:
Cash (received) paid during the period for:
Interest	$	2,920		$	178
Taxes	$	(162	)	$	—

85

ROGER CLEVELAND GOLF COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS

Note 1 ¾ Summary of Significant Accounting Policies

Basis of Presentation

Roger Cleveland Golf Company, Inc. (the “Company”) manufactures, markets, and distributes golf clubs and related accessories. The Company is owned 64% by certain subsidiaries of Quiksilver, Inc. (the “Parent”) and 36% by a group of individuals. The Parent acquired its majority interest in the Company on July 31, 2005 and as a result the financial statements do not include financial statements for any periods prior to July 31, 2005. The Parent’s new basis is not reflected in the accompanying financial statements as these financial statements have been prepared on the carryover basis of accounting.

The Parent has $400 million in publicly registered senior notes. In July, 2006, the Company became a guarantor subsidiary of these senior notes, fully and unconditionally guaranteeing the senior note indebtedness of the Parent. Accordingly, the accompanying financial statements are being included in the Parent’s Form 10-K in accordance with the SEC’s Regulation S-X, Rule 3-10.

Cash Equivalents

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

Credit Risk

The Company sells its products primarily to pro shops and other retailers of golf clubs and accessories throughout the United States and sells to distributors internationally. The Company had export sales that account for 27% and 20% of net sales in the year ended and three-month period ended October 31, 2006 and 2005, respectively. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for estimated bad debts, and those losses have generally been within management’s expectations.

Inventories

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

Equipment and Leasehold Improvements

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

Long-Lived Assets and Goodwill

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

Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, goodwill is not amortized but is tested for impairment annually or when a possible impairment is indicated. Management has evaluated its long-lived assets and goodwill and has not identified any impairment as of October 31, 2006.

86

ROGER CLEVELAND GOLF COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS

Revenue Recognition

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

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

Warranties

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

	October 31,			October 31,
In thousands	2006			2005
Balance, beginning of period	$	435		$	447
Warranty expense		400			96
Repairs and replacements made		(487	)		(108	)
Balance, end of period	$	348		$	435

Income Taxes

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

Advertising Costs

The Company advertises primarily through television and print media. Advertising costs are expensed as incurred. Advertising expense for the year and three months ended October 31, 2006 and 2005 were $6.0 million and $0.7 million, respectively.

Research and Development

The Company engages in research and development activities to enable it to design and launch new products in response to changing demand and to meet market expectations. Research and development costs are expensed as incurred. Included in selling, general, and administrative expenses are research and development costs of approximately $3.8 million and $1.0 million for the year and three months ended October 31, 2006 and 2005, respectively.

87

ROGER CLEVELAND GOLF COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS

Use of Estimates

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

Derivative Financial Instruments

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

Fair Value of Financial Instruments

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

New Accounting Pronouncements

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

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

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

88

ROGER CLEVELAND GOLF COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS

15, 2006. The Company expects to adopt FIN 48 on November 1, 2007. The Company is currently assessing the impact the adoption of FIN 48 will have on its financial position and results of operations.

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

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

Note 2 ¾ Intangible Assets

The Company’s amortizing intangible assets consist of the following:

	October 31,
	2006							2005
	Gross		Accumulated					Gross		Accumulated
In thousands	Amount		Amortization			Net		Amount		Amortization			Net
Tradenames and trademarks	$	3,100	$	(689	)	$	2,411	$	3,100	$	(482	)	$	2,618
Patents		1,643		(1,371	)		272		1,346		(1,115	)		231
Customer relationships		700		(233	)		467		700		(164	)		536
	$	5,443	$	(2,293	)	$	3,150	$	5,146	$	(1,761	)	$	3,385

Amortization expense of intangible assets for the year ended and three-month period ended October 31, 2006 and 2005 was $0.5 million and $0.1 million, respectively. Annual amortization expense for fiscal year ending October 31, 2007 is estimated to be $0.5 million. Annual amortization expense for fiscal years ending October 31, 2008 through 2011 is estimated to be $0.3 million.

Note 3 ¾ Inventories

Inventories consist of the following:

	October 31,		October 31,
In thousands	2006		2005
Raw materials	$	12,287	$	18,464
Work in process		41		97
Finished goods		14,794		18,197
	$	27,122	$	36,758

89

ROGER CLEVELAND GOLF COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS

Note 4 ¾ Equipment and Leasehold Improvements

Equipment and leasehold improvements consist of the following:

	Estimated		October 31,			October 31,
In thousands	useful life		2006			2005
Leasehold improvements	10 years		$	1,131		$	1,052
Machinery and equipment		3 to 7 years		3,011			2,451
Office furniture and equipment		3 to 5 years		4,346			3,816
Transportation equipment	3 years			1,203			729
Construction in progress				146			229
				9,837			8,277
Accumulated depreciation and amortization				(6,036	)		(4,746	)
			$	3,801		$	3,531

Note 5 ¾ Debt

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

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

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

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

90

ROGER CLEVELAND GOLF COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS

Note 6 ¾ Income Taxes

The components of income tax expense are as follows:

	Year ended			Three months ended
In thousands	October 31, 2006			October 31, 2005
Current income taxes:
Federal	$	2,186		$	1,750
State		492			29
		2,678			1,779
Deferred income taxes:
Federal	$	(554	)	$	(368	)
State		(350	)		(732	)
		(904	)		(1,100	)
	$	1,774		$	679

A reconciliation of income tax expense to the amount of income tax benefit that would result from applying the federal statutory rate to income before income taxes is as follows:

In thousands	2006			2005
Provision for income taxes at statutory rate		35.0	%		35.0	%
State income taxes, net of federal income tax benefit		2.1			3.8
Other		3.9			(11.9	)
Effective income tax rate		41.0	%		26.9	%

Major components of the Company’s net deferred income taxes are as follows:

	October 31,			October 31,
In thousands	2006			2005
Allowance for bad debts	$	425		$	576
Prepaid expenses		(258	)		(1,014	)
Accruals		893			1,000
Other		1,642			1,209
	$	2,702		$	1,771

As of October 31, 2006, the Company had state net operating loss carryforwards of approximately $5.5 million, which begin to expire in fiscal 2025. In addition, the Company has state tax credit carryforwards of approximately $0.4 million, which may be carried forward indefinitely to offset future taxable income.

Note 7 ¾ Related Party Transactions

Amounts due to affiliates consist of the following:

	October 31,			October 31,
In thousands	2006			2005
Affiliated debt due to Quiksilver Americas, Inc.	$	45,000		$	35,000
Amounts due to Parent and other Parent subsidiaries		1,357			524
Amounts due from Parent and other Parent subsidiaries		(8,591	)		(2,326	)
	$	37,766		$	33,198

Interest paid on borrowings from Quiksilver Americas, Inc. was approximately $2.6 million for the year ended October 31, 2006 and $0.4 million for the three months ended October 31, 2005. The weighted average interest rate on these borrowings was 6.7% at October 31, 2006. This interest rate corresponds to the rate at which Quiksilver Americas, Inc. borrowed these funds, on the Company’s behalf, under the

91

ROGER CLEVELAND GOLF COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS

Credit Facility. Sales to Quiksilver, Inc. subsidiaries amounted to $15.5 million for the year ended October 31, 2006 and $3.2 million for the three months ended October 31, 2005.

For the year ended October 31, 2006, the Company recorded approximately $0.4 million of expense for services provided by Laurent Boix-Vives, a minority shareholder.

Note 8 ¾ Commitments and Contingencies

The Company leases a distribution and manufacturing facility and certain transportation and office equipment under operating lease agreements. In September 2003, the Company entered into a 10-year operating lease, which is guaranteed by a Parent subsidiary, for a new facility that the Company occupied in December 2004. Rental expense includes the impact of fixed rent increases on a straight-line basis over the life of the lease. Estimated future payments under these lease obligations for the years ending October 31 are as follows:

In thousands
2007	$	1,458
2008		1,408
2009		1,387
2010		1,277
2011		1,275
Thereafter		3,928
	$	10,733

The Company has also entered into sponsorship agreements with certain professional golfers to promote the Company’s products. The sponsorship agreements generally run for one to four years and include minimum annual payments, plus bonus payments for tournament performance, player rankings, and other factors. It is not possible to determine the amounts the Company will ultimately be required to pay under these agreements, as they are subject to many variables, including performance-based bonuses, reductions in payment obligations if designated minimum performance criteria are not achieved, and severance agreements. Estimated future minimum commitments under these obligations for the years ending October 31 are as follows:

In thousands
2007	$	8,516
2009		6,329
2009		1,351
	$	16,196

Rent expense was $1.2 million and $0.3 million for the years ended October 31, 2006 and the three month period ended October 31, 2005.

Indemnities, Commitments, and Guarantees

During its normal course of business, the Company has made certain indemnities, commitments, and guarantees under which it may be required to make payments in relation to certain transactions. These include (i) intellectual property indemnities to the Company’s customers and licensees in connection with the use, sales, and/or license of Company products; (ii) indemnities to vendors and service providers pertaining to claims based on the negligence or willful misconduct of the Company; (iii) indemnities involving the accuracy of representations and warranties in certain contracts; (iv) indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of California; and (v) certain real estate leases under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises. In addition, the Company has made a contractual commitment to an employee providing for severance payments upon the occurrence of certain prescribed events. The duration of these indemnities, commitments, and guarantees varies and, in certain cases, may be indefinite. The

92

ROGER CLEVELAND GOLF COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS

majority of these indemnities, commitments, and guarantees do not provide for any limitation of the maximum potential for future payments the Company could be obligated to make. Historically, the Company has not been obligated to make significant payments for these obligations, and no liabilities have been recorded for these indemnities, commitments, and guarantees in the accompanying balance sheets.

Litigation

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

Note 9 ¾ Employee Incentive Plans and Agreements

The Company sponsors a defined contribution 401(k) Savings and Profit Sharing Plan (the “Plan”), covering substantially all of the Company’s employees, subject to certain eligibility requirements. The Company matches participant contributions up to 4% of the participant’s base earnings. If the Company earns a net profit, an additional contribution ranging from 1% to 4% of the participant’s base earnings will be contributed, subject to certain service requirements. The Company’s matching of participant contributions are fully vested and any profit sharing contributions vest over five years. At its discretion, the Company may make additional contributions to the Plan for employees who meet certain service requirements. Total contributions by the Company were approximately $0.7 million during the year ended October 31, 2006 and $0.1 million for the three month period ending October 31, 2005.

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

Note 10 ¾ Segment and Product Information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Company’s management in deciding how to allocate resources and in assessing performance. The Company operates in the sporting goods industry in which the Company designs, produces and distributes golf equipment and related products. The Company operates in one segment. The Company’s largest customer accounts for less than 1% of it’s revenues.

The Company produces different products. The percentages of revenues attributable to each product line are as follows:

	Percentage of Revenues
	2006			2005
Woods		56	%		51	%
Irons		38			44
Putters		3			3
Accessories and other		3			2
		100	%		100	%

No foreign country represented more than 10% of the Company’s revenues. Revenues by geographic area are as follows:

	Percentage of Revenues
	2006			2005
United States		73	%		80	%
Asia/Pacific		15			10
Europe		8			8
Other Americas		4			2
		100	%		100	%

93

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: January 11, 2007

QUIKSILVER, INC.
(Registrant)

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

KNOW ALL PERSONS BY THESE PRESENTS, that each of the persons whose signature appears below hereby constitutes and appoints Robert B. McKnight, Jr. and Steven L. Brink, each of them acting individually, as his attorney-in-fact, each with the full power of substitution, for him in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming our signatures as they may be signed by our said attorney-in-fact and any and all amendments to this Annual Report on Form 10-K.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signatures	Title	Date Signed
/s/ Robert B. McKnight, Jr. Robert B. McKnight, Jr.	Chairman of the Board and Chief Executive Officer (Principal Executive Officer)	January 11, 2007
/s/ Steven L. Brink Steven L. Brink	Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)	January 11, 2007
/s/ Bernard Mariette Bernard Mariette	President and Director	January 11, 2007
/s/ Charles S. Exon Charles Exon	Executive Vice President, General Counsel and Director	January 11, 2007
/s/ Douglas K. Ammerman Douglas K. Ammerman	Director	January 11, 2007
/s/ William M. Barnum, Jr. William M. Barnum, Jr.	Director	January 11, 2007

94

Signatures	Title	Date Signed
Laurent Boix-Vives	Director	January 11, 2007
/s/ Charles E. Crowe Charles E. Crowe	Director	January 11, 2007
/s/ Michael H. Gray Michael H. Gray	Director	January 11, 2007
/s/ Timothy Harmon Timothy Harmon	Director	January 11, 2007
/s/ Heidi J. Ueberroth Heidi J. Ueberroth	Director	January 11, 2007

95

EXHIBIT INDEX

Exhibit
Number	DESCRIPTION
2.1	English Translation of the Acquisition Agreement, dated April 12, 2005, between the Company and Mr. Laurent Boix-Vives, Ms. Jeannine Boix-Vives, Ms. Christine Simon, Ms. Sylvie Bernard and SDI Société de Services et Développement (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on April 18, 2005).
2.2	Stock Purchase Agreement between the Company and the Sellers of DC Shoes, Inc. dated March 8, 2004 (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed on May 18, 2004).
2.3	First Amendment to the Stock Purchase Agreement between the Company and the Sellers of DC Shoes, Inc. dated May 3, 2004 (incorporated by reference to Exhibit 2.2 of the Company’s Current Report on Form 8-K filed on May 18, 2004).
3.1	Restated Certificate of Incorporation of Quiksilver, Inc., as amended (incorporated by reference to Exhibit 3.1 of the Company’s Annual Report on Form 10-K for the year ended October 31, 2004).
3.2	Certificate of Amendment of Restated Certificate of Incorporation of Quiksilver, Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2005).
3.3	Amended and Restated Bylaws of Quiksilver, Inc. (incorporated by reference to Exhibit 3.2 of the Company’s Annual Report on Form 10-K for the year ended October 31, 2003).
4.1	Indenture for the 6 7/8% Senior Notes due 2015 dated July 22, 2005, among Quiksilver, Inc., the subsidiary guarantors set forth therein and Wilmington Trust Company, as trustee, including the form of Global Note attached thereto (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed July 25, 2005).
10.1	Registration Rights Agreement for the 6 7/8% Senior Notes due 2015 dated as of July 22, 2005, among Quiksilver, Inc., certain subsidiaries of Quiksilver, Inc. and the purchasers listed therein (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed July 25, 2005)
10.2	Purchase Agreement for the 67/8% Senior Notes due 2015 dated July 14, 2005, among Quiksilver, Inc., certain subsidiaries of Quiksilver, Inc. and the purchasers listed therein (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2005).
10.3	English translation of Subscription Agreement for the 3.231% EUR 50,000,000 notes due July, 2010 dated July 11, 2005 among Skis Rossignol S.A. and certain subsidiaries and Societe Generale Bank & Trust (incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2005).
10.4	Amended and Restated Credit Agreement, dated as of June 3, 2005, by and among the Company, Quiksilver Americas, Inc., the Lenders named therein, JPMorgan Chase Bank, N.A., as Administrative Agent, and J.P. Morgan Securities, Inc. as Sole Bookrunner and Sole Lead Arranger (the “Amended and Restated Credit Agreement”) (incorporated by reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2005).
10.5	First Amendment to the Amended and Restated Credit Agreement dated October 28, 2005 (incorporated by reference to Exhibit 10.5 of the Company’s Annual Report on Form 10-K for the year ended October 31, 2005).
10.6	Second Amendment to the Amended and Restated Credit Agreement dated January 17, 2006 (incorporated by reference to Exhibit 10.6 of the Company’s Annual Report on Form 10-K for the year ended October 31, 2005).

96

Exhibit
Number	DESCRIPTION
10.7	Third Amendment to the Amended and Restated Credit Agreement dated March 27, 2006.
10.8	Form of Indemnity Agreement between Quiksilver, Inc. and individual directors and officers of Quiksilver, Inc. (1)
10.9	Quiksilver, Inc. Annual Incentive Plan, as restated (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2005).(1)
10.10	Quiksilver, Inc. 2000 Stock Incentive Plan, as amended and restated, together with form Stock Option Agreements (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on March 28, 2006).(1)
10.11	Quiksilver, Inc. 1996 Stock Option Plan, together with form Stock Option Agreements. (1)
10.12	Quiksilver, Inc. 1998 Nonemployee Directors’ Stock Option Plan, together with form Stock Option Agreement (incorporated by reference to Exhibit 10.9 of the Company’s Annual Report on Form 10-K for the year ended October 31, 2004).(1)
10.13	Employment Agreement between David Morgan and Quiksilver, Inc. dated December 22, 2006. (1)
10.14	Employment Agreement between Robert B. McKnight, Jr. and Quiksilver, Inc. dated May 25, 2005 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on May 27, 2005).(1)
10.15	Amendment to Employment Agreement between Robert B. McKnight, Jr. and Quiksilver, Inc. dated December 21, 2006. (1)
10.16	Employment Agreement between Bernard Mariette and Quiksilver, Inc. dated May 25, 2005 (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on May 27, 2005).(1)
10.17	Amendment to Employment Agreement between Bernard Mariette and Quiksilver, Inc. dated December 21, 2006. (1)
10.18	Employment Agreement between Charles S. Exon and Quiksilver, Inc. dated May 25, 2005 (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed on May 27, 2005).(1)
10.19	Amendment to Employment Agreement between Charles S. Exon and Quiksilver, Inc. dated December 21, 2006. (1)
10.20	Employment Agreement between Steven L. Brink and Quiksilver, Inc. dated May 25, 2005 (incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed on May 27, 2005).(1)
10.21	Amendment to Employment Agreement between Steven L. Brink and Quiksilver, Inc. dated December 21, 2006. (1)
10.22	Quiksilver, Inc. Written Description of Nonemployee Director Compensation.(1)
10.23	Quiksilver, Inc. Long Term Incentive Plan (incorporated by reference to Exhibit 10.20 of the Company’s Annual Report on Form 10-K for the year ended October 31, 2004).(1)
10.24	Award grant under Quiksilver, Inc. Long-Term Incentive Plan dated January 25, 2006 (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2005).(1)
10.25	Award grant under Quiksilver, Inc. Long-Term Incentive Plan dated December 20, 2006.(1)
10.26	English translation for the Roger Cleveland Shareholders’ Agreement between Quiksilver, Rossignol Ski Company, Inc., Skis Rossignol, S.A., Laurent Boix-Vives, Jeannine Boix-Vives, Christine Simon, Sylvie Bernard and SDI Société Service et Developpement dated April 12, 2005 (incorporated by reference to Exhibit 2.7 of Exhibit 10.1 to the Company’s Current Report of Form 8-K filed on April 18, 2005).

97

Exhibit
Number	DESCRIPTION
10.27	English Translation of the Service Provision Agreement between Quiksilver, Inc. and Service Expansion International dated April 12, 2005 (incorporated by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the year ended October 31, 2005).
10.28	Quiksilver, Inc. 2006 Restricted Stock Plan (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 28, 2006). (1)
10.29	Standard Form of Restricted Stock Issuance Agreement under the Quiksilver, Inc. 2006 Restricted Stock Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 4, 2006). (1)
10.30	Amendments to executive officer base salaries effective as of November 1, 2006. (1)
10.31	Fourth Amendment to Amended and Restated Credit Agreement dated December 22, 2006.
21.1	Subsidiaries of Quiksilver, Inc.
23.1	Consent of Deloitte & Touche LLP
24.1	Power of Attorney (included on signature page).
31.1	Rule 13a-14(a)/15d-14(a) Certifications – Principal Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certifications — Principal Financial Officer
32.1	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2003
32.2	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2003

(1) Management contract or compensatory plan.

98