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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended April 30, 2003

OR

Commission file number 0-15131

QUIKSILVER, INC.

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

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

The number of shares outstanding of issuer’s Common Stock,
par value $0.01 per share, at
June 9, 2003 was
54,891,374

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QUIKSILVER, INC.

FORM 10-Q
INDEX

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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

QUIKSILVER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

See notes to condensed consolidated financial statements.

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QUIKSILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

See notes to condensed consolidated financial statements.

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QUIKSILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

See notes to condensed consolidated financial statements.

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QUIKSILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See notes to condensed consolidated financial statements.

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QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.		Basis of Presentation
		The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statement presentation.
		The Company, in its opinion, has included all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results of operations for the three and six months ended April 30, 2003 and 2002. The condensed consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes for the year ended October 31, 2002 included in the Company’s Annual Report on Form 10-K. Interim results are not necessarily indicative of results for the full year due to seasonal and other factors.
2.		New Accounting Pronouncements
		Effective November 1, 2002, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which superseded previous guidance on financial accounting and reporting for the impairment or disposal of long-lived assets and for segments of a business to be disposed of. The adoption of SFAS No. 144 had no impact on our financial position or results of operations. However, future impairment reviews may result in charges against earnings to write down the value of long-lived assets.
		In November 2002, the Financial Accounting Standards Board (“FASB”) issued FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN No. 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, while the provisions of the disclosure requirements are effective beginning with our financial statements for the three months ended January 31, 2003. The adoption of FIN No. 45 has not had a material impact on our operational results or financial position.
		In August 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, which requires that costs associated with exit or disposal activities be recognized when they are incurred rather than at the date of a commitment to an exit or disposal plan. We must apply SFAS No. 146 prospectively to exit or disposal activities initiated after December 31, 2002. If we initiate exit or disposal activities after that date, SFAS No. 146 will affect the timing of the recognition of the related costs. We do not expect the adoption of this standard to have a significant impact on our financial position or results of operations.
		In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We are required to follow the prescribed format and provide the additional disclosures required by SFAS No. 148 in our financial statements for the year ending October 31, 2003 and have provided the disclosures required for interim periods below.

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The Company applies Accounting Principles Board Opinion 25 and related interpretations in accounting for its stock option plans. No stock-based employee compensation expense is reflected in net income, as all options granted under the Company’s stock option plans had exercise prices equal to the market value of the underlying common stock on the grant dates. The following table contains the pro forma disclosure requirements and of SFAS No. 123, “Accounting for Stock-Based Compensation”.

3.		Inventories
		Inventories consist of the following:

4.		Segment Information
		Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Company’s management in deciding how to allocate resources and in assessing performance. The Company operates exclusively in the consumer products industry in which the Company designs, produces and distributes clothing, accessories and related products. Operating results of the Company’s various product lines have been aggregated because of their common characteristics and their reliance on shared operating functions. Within the consumer products industry, the Company has historically operated in the Americas (primarily the U.S.) and Europe. Effective with its acquisition of Quiksilver Asia/Pacific on December 1, 2002, the Company has added operations in Australia, Japan, New Zealand and other Southeast Asian countries and territories. Accordingly, the Company has revised its geographic segments to include Asia/Pacific and corporate operations. Costs that support all three geographic segments, including trademark protection and maintenance, licensing functions and related royalty income are part of corporate operations. Prior period segment disclosures have been revised to conform to this new segment presentation. No single customer accounts for more than 10% of the Company’s revenues.

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

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5.		Derivative Financial Instruments
		The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to certain sales, royalty income, and product purchases of its international subsidiaries that are denominated in currencies other than their functional currencies. The Company is also exposed to foreign currency gains and losses resulting from domestic transactions that are not denominated in U.S. dollars, and to fluctuations in interest rates related to its variable rate debt. Furthermore, the Company is exposed to gains and losses resulting from the effect that fluctuations in foreign currency exchange rates have on the reported results in the Company’s consolidated financial statements due to the translation of the operating results and financial position of the Company’s international subsidiaries. As part of its overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, the Company uses various foreign currency exchange contracts and intercompany loans. In addition, interest rate swaps are used to manage the Company’s exposure to the risk of fluctuations in interest rates.
		For all qualifying cash flow hedges, the changes in the fair value of the derivatives are recorded in other comprehensive income. Other derivatives, which do not qualify for hedge accounting but are used by management to mitigate exposure to currency risks, are marked to fair value with corresponding gains or losses recorded in earnings. As of April 30, 2003, the Company was hedging forecasted transactions expected to occur in the following five months. Assuming exchange rates at April 30, 2003 remain constant, $3.4 million of losses, net of tax, related to hedges of these transactions are expected to be reclassified into earnings over the next five months. Also included in accumulated other comprehensive income at April 30, 2003 is a $0.2 million loss, net of tax, related to cash flow hedges of the Company’s long-term debt, which is denominated in Australian dollars and matures through fiscal 2005, and the fair value of interest rate swaps, totaling a loss of $1.0 million, net of tax, which is related to the Company’s U.S. dollar denominated long-term debt that matures through fiscal 2007.
		On the date the Company enters into a derivative contract, management designates the derivative as a hedge of the identified exposure. The Company formally documents all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for entering into various hedge transactions. In this documentation, the Company identifies the asset, liability, firm commitment, or forecasted transaction that has been designated as a hedged item and indicates how the hedging instrument is expected to hedge the risks related to the hedged item. The Company formally measures effectiveness of its hedging relationships both at the hedge inception and on an ongoing basis in accordance with its risk management policy. The Company would discontinue hedge accounting prospectively (i) if it is determined that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item, (ii) when the derivative expires or is sold, terminated, or exercised, (iii) if it becomes probable that the forecasted transaction being hedged by the derivative will not occur, (iv) because a hedged firm commitment no longer meets the definition of a firm commitment, or (v) if management determines that designation of the derivative as a hedge instrument is no longer appropriate. During the six months ended April 30, 2003, the Company reclassified into earnings a net loss of $2.1 million resulting from the expiration, sale, termination, or exercise of derivative contracts. Additionally, a loss of $0.4 million was recognized during the six months ended April 30, 2003 for changes in the value of derivatives that were marked to fair value.
		The Company enters into forward exchange and other derivative contracts with major banks and is exposed to credit losses in the event of nonperformance by these banks. The Company anticipates, however, that these banks will be able to fully satisfy their obligations under the contracts. Accordingly, the Company does not obtain collateral or other security to support the contracts.

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A summary of derivative contracts at April 30, 2003 is as follows:

6.		Business Acquisitions
		Effective December 1, 2002, the Company acquired its licensees in Australia and Japan to unify its global operating platform. This group of companies is referred to herein as “Quiksilver Asia/Pacific” and comprises two Australian companies, Ug Manufacturing Co. Pty Ltd. and QSJ Holdings Pty Ltd., and one Japanese company, Quiksilver Japan KK. Ug Manufacturing Co. Pty Ltd. was still owned by the founders of the Quiksilver brand and was the original Quiksilver operating company that has been producing Quiksilver products in Australia and surrounding countries and territories for over 30 years. Along with a Japanese partner, the founders also started Quiksilver Japan KK, which has been the Quiksilver licensee in Japan for approximately 20 years. In conjunction with its acquisition of Quiksilver Asia/Pacific, the Company also acquired a 25% interest in its Turkish licensee. The operations of Quiksilver Asia/Pacific have been included in the Company’s results since December 1, 2002.
		The initial purchase price, excluding transaction costs, includes cash of $28.2 million and 2.8 million shares of the Company’s common stock valued at $71.3 million. Transaction costs are estimated to total $3.0 million. The valuation of the common stock issued in connection with the acquisition was based on the quoted market price for 5 days before and after the announcement date. The initial purchase price is subject to adjustment based on the closing balance sheet, which is expected to be finalized in the third quarter of the Company’s fiscal year ending October 31, 2003. The sellers are entitled to future payments ranging from zero to $18.6 million if certain sales and earnings targets are achieved during the three years ending October 31, 2005. The amount of goodwill initially recorded for the transaction would increase if such contingent payments are made.
		Quiksilver Asia/Pacific is in the process of finalizing its closing balance sheet, and third-party valuations of goodwill and certain intangible assets are being completed; accordingly, the allocation of the purchase price is preliminary and subject to refinement. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

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

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		Effective November 1, 2002, the Company acquired the operations of its European licensee for eyewear and wetsuits, Omareef Europe, S.A. The initial purchase price was $5.2 million, which includes a cash payment of $4.9 million and assumed debt of $0.3 million. The acquisition has been recorded using the purchase method of accounting and resulted in goodwill of $3.5 million at the acquisition date. Goodwill is not subject to amortization and is generally not expected to be deductible for tax purposes.
		Effective February 1, 2003, the Company acquired its United States eyewear licensee, Q.S. Optics, Inc. The initial purchase price was $2.9 million, which includes a cash payment of $2.4 million and assumed debt of $0.5 million. The acquisition has been recorded using the purchase method of accounting and resulted in goodwill of $2.1 million at the acquisition date. Goodwill is not subject to amortization and is generally not expected to be deductible for tax purposes.
		The results of operations for each of the acquisitions are included in the Condensed Consolidated Statements of Income from their respective acquisition dates. Assuming these acquisitions had occurred as of November 1, 2001, consolidated net sales would have been $460.9 million and $372.0 million for the six months ended April 30, 2003 and 2002, respectively. Net income would have been $29.2 million and $18.8 million, respectively, for those same periods, and diluted earnings per share would have been $0.52 and $0.35, respectively.
7.		Other Contingent Contractual Obligations
		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, (iv) indemnities involving the accuracy of representations and warranties in certain contracts, and (v) indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of Delaware. 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.
8.		Stockholders’ Equity
		During the three months ended April 30, 2003, the Company’s Board of Directors approved a two-for-one split of the Company’s Common Stock. The split was effected in the form of a dividend on May 8, 2003 to shareholders of record on April 30, 2003. All share and per-share information has been restated to reflect the stock split.

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PART I - FINANCIAL INFORMATION

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

Unless the context indicates otherwise, when we refer to “Quiksilver”, “we”, “us”, “our”, or the “Company” in this Form 10-Q, we are referring to Quiksilver, Inc. and its subsidiaries on a consolidated basis. Quiksilver, Inc. was incorporated in 1976 and was reincorporated in Delaware in 1986.

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

Results of Operations

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

Three Months Ended April 30, 2003 Compared to Three Months Ended April 30, 2002

Revenues for the three months ended April 30, 2003 increased 40% to $262.2 million from $187.4 million in the comparable period of the prior year. Revenues in the Americas increased 15% to $127.5 million for the three months ended April 30, 2003 from $111.2 million in the comparable period of the prior year, and European revenues increased 45% to $108.5 million from $74.8 million for those same periods. As measured in euros, Quiksilver Europe’s functional currency, revenues in the current year’s quarter increased 18% compared to the prior year. Asia/Pacific revenues totaled $25.6 million in the three months ended April 30, 2003. In the Americas, mens revenues increased 15% to $63.3 million from $55.2 million in the comparable period of the prior year, while womens revenues increased 14% to $63.5 million from $55.5 million. Revenues of snowboards, boots and bindings amounted to $0.7 million for the current year’s quarter compared to $0.5 million in the prior year. The increase in America’s mens revenues came primarily from the Quiksilver Young Mens, Boys and Quiksilveredition divisions. The increase in America’s womens revenues came from both the Roxy and Raisins divisions. In Europe and as reported in dollars, mens revenues increased 44% to $84.5 million from $58.4 million, while womens revenues increased 47% to $24.0 million from $16.3 million. The European mens revenues increase came primarily from the Quiksilver Young Mens, Boys and Hawk divisions, and the women’s revenue increase reflects growth in the Roxy division. These comparisons of revenues in Europe were impacted by the strong euro in comparison to the prior year. In euros, mens revenues increased 18% and womens revenues increased 20%. The Asia/Pacific revenues were added as we acquired Quiksilver Asia/Pacific effective December 1, 2002.

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Royalty income for the three months ended April 30, 2003 totaled $0.6 million compared to $1.5 million in the comparable period of the prior year. Royalty income decreased because we acquired our domestic outlet store and eyewear licensees during the fourth quarter of fiscal 2002 and second quarter of fiscal 2003, respectively, terminated our domestic watch licensee toward the end of fiscal 2002, and acquired Quiksilver Asia/Pacific in the first quarter of fiscal 2003. Royalty income previously earned from these licensees is now eliminated.

Our consolidated gross profit margin for the three months ended April 30, 2003 increased to 45.2% from 40.4% in the comparable period of the prior year. The America’s gross profit margin increased to 43.1% from 36.3%, while the European gross profit margin increased to 47.6% from 45.4% for those same periods. The Asia/Pacific gross profit margin for the three months ended April 30, 2003 was 44.7%. The increase in the America’s gross profit margin resulted primarily from higher profit margins on sales of the Company’s end-of-season inventories compared to the prior year and from the acquisition of our outlet store chain in fiscal 2002, which has enabled us to capture the retail gross margin on U.S. sales through the outlet channel. In Europe, the gross profit margin increased primarily due to lower production costs resulting from a stronger euro in comparison to the prior year.

Selling, general and administrative expense (“SG&A”) for the three months ended April 30, 2003 increased 58% to $81.4 million from $51.6 million in the comparable period of the prior year. America’s SG&A increased 30% to $37.3 million from $28.7 million in the comparable period of the prior year, and European SG&A increased 53% to $30.4 million from $19.9 million for those same periods. The increase in both the America’s and European SG&A was primarily due to higher personnel and other costs related to increased sales volume. The stronger euro in relation to the previous year also contributed to higher SG&A in Europe. In the Americas and in Europe, SG&A increased as a percentage of revenues primarily as a result of additional company-owned retail stores and from increased marketing activities. SG&A in our newly added Asia/Pacific segment totaled $7.6 million in the second quarter of fiscal 2003. Corporate operations SG&A increased to $6.1 million in the three months ended April 30, 2003 from $3.0 million in the comparable period of the prior year primarily due to higher expenses to support our trademarks and brands around the world.

Interest expense for the three months ended April 30, 2003 decreased 8% to $2.1 million from $2.3 million in the comparable period of the prior year. This decrease was due to lower interest rates in the Americas compared to the previous year and lower average balances on the Company’s debt in the Americas, which more than offset the additional interest from the Asia/Pacific acquisition.

The effective income tax rate for the three months ended April 30, 2003, which is based on current estimates of the annual effective income tax rate, decreased to 34.9% from 37.3% in the comparable period of the prior year as we generate a higher portion of our profits in lower-tax jurisdictions.

As a result of the above factors, net income for the three months ended April 30, 2003 increased 68% to $22.6 million or $0.40 per share on a diluted basis from $13.5 million or $0.28 per share on a diluted basis in the comparable period of the prior year. Basic net income per share increased to $0.42 per share for the three months ended April 30, 2003 from $0.29 in the comparable period of the prior year.

Six Months Ended April 30, 2003 Compared to Six Months Ended April 30, 2002

Revenues for the six months ended April 30, 2003 increased 36% to $454.3 million from $334.4 million in the comparable period of the prior year. Revenues in the Americas increased 14% to $229.5 million for the six months ended April 30, 2003 from $201.0 million in the comparable period of the prior year, and European revenues increased 42% to $185.7 million from $130.7 million for those same periods. As measured in euros, Quiksilver Europe’s net sales in the first six months of the current year increased 19% compared to the prior year. Asia/Pacific revenues totaled $37.7 million in the six months ended April 30, 2003. In the Americas, mens revenues increased 13% to $116.3 million from $103.0 million in the comparable period of the prior year, while womens revenues increased 16% to $111.4 million from $96.3 million. Revenues of snowboards, boots and bindings amounted to $1.8 million in the current year’s six-month period compared to $1.7 million in the prior year. The increase in America’s mens revenues came primarily for the Quiksilver Young Mens, Boys and Quiksilveredition divisions. The increase in America’s womens revenues came from both the Roxy and Raisins divisions. In Europe and as reported in dollars, mens revenues increased 45% to $142.1 million from $97.8 million, while womens revenues increased 33% to $43.6 million from $32.9 million. The European mens revenues increase came primarily from the Quiksilver Young Mens, Boys and Hawk divisions, and the womens revenue increase reflects growth in the

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Roxy division. These comparisons of revenues in Europe were impacted by the strong euro in comparison to the prior year. In euros, mens revenues increased 21% and womens revenues increased 11%. The Asia/Pacific revenues were added as we acquired Quiksilver Asia/Pacific effective December 1, 2002.

Royalty income for the three months ended April 30, 2003 totaled $1.4 million compared to the $2.6 million in the comparable period of the prior year. Royalty income decreased because we acquired our domestic outlet store and eyewear licensees during the fourth quarter of fiscal 2002 and second quarter of fiscal 2003, respectively, terminated our domestic watch licensee toward the end of fiscal 2002, and acquired Quiksilver Asia/Pacific in the first quarter of fiscal 2003. Royalty income previously earned from these licensees is now eliminated.

Our consolidated gross profit margin for the six months ended April 30, 2003 increased to 44.0% from 39.0% in the comparable period of the prior year. The America’s gross profit margin increased to 41.0% from 34.2%, while the European gross profit margin increased to 46.8% from 45.2% for those same periods. The Asia/Pacific gross profit margin for the six months ended April 30, 2003 was 46.8%. The increase in the America’s gross profit margin resulted primarily from higher profit margins on sales of the Company’s end-of-season inventories compared to the prior year and from the acquisition of our outlet store chain in fiscal 2002, which has enabled us to capture the retail gross margin on U.S. sales through the outlet channel. In Europe, the gross profit margin increased primarily due to lower production costs and a higher level of sales through company-owned retail stores in comparison to the prior year.

SG&A for the six months ended April 30, 2003 increased 52% to $149.8 million from $98.8 million in the comparable period of the prior year. America’s SG&A increased 29% to $70.7 million from $55.0 million in the comparable period of the prior year, and European SG&A increased 48% to $56.7 from $38.3 for those same periods. The increase in both the America’s and European SG&A was primarily due to higher personnel and other costs related to increased sales volume. The stronger euro in relation to the previous year also contributed to higher SG&A in Europe. SG&A increased as a percentage of revenues primarily as a result of additional company-owned retail stores and from increased marketing activities in the three months ended April 30, 2003. SG&A in our newly added Asia/Pacific segment totaled $12.0 million in the first half of fiscal 2003. Corporate operations SG&A increased to $10.4 million in the six months ended April 30, 2003 from $5.5 million in the comparable period of the prior year primarily due to higher expenses to support our trademarks and brands around the world.

Interest expense for the six months ended April 30, 2003 decreased 10% to $4.2 million from $4.7 million in the comparable period of the prior year. This decrease was due primarily to lower average balances on the Company’s debt in the Americas and lower interest rates in the Americas compared to the previous year, which more than offset the additional interest from the Asia/Pacific acquisition.

The effective income tax rate for the six months ended April 30, 2003, which is based on current estimates of the annual effective income tax rate, decreased to 35.1% from 37.5% in the comparable period of the prior year as we generate a higher portion of our profits in lower-tax jurisdictions.

As a result of the above factors, net income for the six months ended April 30, 2003 increased 76% to $29.2 million or $0.53 per share on a diluted basis from $16.5 million or $0.34 per share on a diluted basis in the comparable period of the prior year. Basic net income per share increased to $0.55 for the six months ended April 30, 2003 from $0.36 in the comparable period of the prior year.

Financial Position, Capital Resources and Liquidity

We finance our working capital needs and capital investments with operating cash flows and bank revolving lines of credit. Multiple banks in the U.S., Europe and 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.

We used $11.5 million of cash from operating activities in the six months ended April 30, 2003 compared to $32.2 million provided by operating activities in the comparable period of the prior year. This decrease

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in cash provided was primarily due to changes in inventories net of accounts payable. During the six months ended April 30, 2003, the increase in inventories net of the increase in accounts payable used cash of $19.4 million compared to $21.2 million provided in the prior year. The $15.7 million increase in net income plus non cash expenses was substantially offset by the increase in trade accounts receivable, which occurred due to seasonal factors.

Capital expenditures totaled $15.3 million for the six months ended April 30, 2003, compared to the $9.3 million in the comparable period of the prior year. These investments include company-owned Boardriders Clubs and ongoing investments in computer and warehouse equipment. During the six months ended April 30, 2003, we used $27.7 million of cash, net of cash acquired, to purchase Quiksilver Asia/Pacific, our wetsuit and eyewear licensee in Europe and our eyewear licensee in the Americas. See Note 6 - Business Acquisitions.

During the six months ended April 30, 2003, net cash provided by financing activities totaled $73.0 million, compared to cash used of $21.2 million in the comparable period of the prior year. Borrowings were increased to fund the investments described above and the increase in inventories.

The net increase in cash and cash equivalents for the six months ended April 30, 2003 was $18.8 million compared to $1.9 million in the comparable period of the prior year. Cash and cash equivalents totaled $21.4 million at April 30, 2003 compared to $2.6 million at October 31, 2002, while working capital was $186.7 million at April 30, 2003 compared to $160.5 million at October 31, 2002. We believe our current cash balance and current lines of credit are adequate to cover our seasonal working capital and other requirements for the foreseeable future and that increases in our lines of credit can be obtained as needed to fund future growth.

Accounts receivable increased 35% to $227.0 million at April 30, 2003 from $168.2 million at October 31, 2002. Accounts receivable in the Americas increased 11% to $89.9 million at April 30, 2003 from $80.8 million at October 31, 2002, and European accounts receivable increased 35% to $118.3 million from $87.4 million for that same period. Asia/Pacific accounts receivable totaled $18.8 million at April 30, 2003. Accounts receivable in the Americas decreased 1% compared to April 30, 2002 while European receivables increased 46% compared to April 30, 2002. In euros, the European accounts receivable increase was only 19%. The growth in European receivables was generally consistent with the increase in European revenues. However, domestic receivables decreased even though revenues increased primarily because of improved collections and the elimination of certain trade accounts receivable when we acquired our domestic outlet store licensee, Beach Street, Inc., in September 2002.

Consolidated inventories increased 26% to $120.8 million at April 30, 2003 from $95.9 million at October 31, 2002. Inventories in the Americas increased 20% to $82.6 million from $69.0 million at October 31, 2002, and European inventories increased 3% to $27.6 million from $26.9 million for that same period. Asia/Pacific inventories totaled $10.6 million at April 30, 2003. Inventories in the Americas increased 47% compared to April 30, 2002. This increase relates primarily to a change in seasonal production patterns. In fiscal 2003, the Americas mens divisions will produce three seasons, while in the previous year, four seasons were produced. This change required both the extension of the Spring season into the third quarter endind July 31, 2003 and the earlier production of Fall season goods. These factors resulted in higher intentories at April 30, 2003 in comparison to the previous year. European inventories increased 37% compared to April 30, 2002, which in euros equates to an increase of only 11%.

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

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Revenue Recognition

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

Accounts Receivable

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

Inventories

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

•		weakening economic conditions,
•		further terrorist acts or threats,
•		unanticipated changes in consumer preferences,
•		reduced customer confidence in the retail market, and
•		unseasonable weather.

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

Long-Lived Assets

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

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Income Taxes

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

Foreign Currency Translation

A significant portion of our revenues are generated by our European and Asia/Pacific divisions, where we operate with the euro, 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. We also have other foreign currency obligations related to our acquisition of Quiksilver International. Our assets and liabilities that are denominated in foreign currencies are translated at the rate of exchange on the balance sheet date. Revenues and expenses are translated using the average exchange rate for the period. Gains and losses from translation of foreign subsidiary financial statements are included in accumulated other comprehensive income or loss.

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

New Accounting Pronouncements

See Note 2 – New Accounting Pronouncements for a discussion of newly adopted accounting standards and future pronouncements that affect our financial reporting.

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PART I – FINANCIAL INFORMATION

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency

Our foreign currency and interest rate risks are discussed in the our Annual Report on Form 10-K for the year ended October 31, 2002 in Item 7a.

Quiksilver Europe’s statements of income are translated from euros into U.S. dollars at average exchange rates in effect during the reporting period. When the euro strengthens compared to the U.S. dollar there is a positive effect on Quiksilver Europe’s results as reported in the Company’s Consolidated Financial Statements. Conversely, when the U.S. dollar strengthens, there is a negative effect. Likewise, the statements of income of Quiksilver Asia/Pacific are translated from Australian dollars and Japanese yen into U.S. dollars, and there is a positive effect on our results from a stronger Australian dollar or Japanese yen in comparison to the U.S. dollar.

European revenues increased 19% in euros during the six months ended April 30, 2003 compared to the six months ended April 30, 2002. As measured in U.S. dollars and reported in the Company’s Consolidated Statements of Income, European revenues increased 42% as a result of a stronger euro versus the U.S. dollar in comparison to the prior year. Thus far in the Company’s third quarter, the euro continues to be stronger relative to the U.S. dollar in comparison to the prior year.

PART I – FINANCIAL INFORMATION

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Controls

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

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PART II – OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds

On April 9, 2003, we filed a certificate of amendment to our Restated Certificate of Incorporation increasing our total authorized shares of common stock from 45,000,000 to 85,000,000.

PART II – OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security-Holders

The Company’s Annual Meeting of Stockholders was held on March 28, 2003. At the Annual Meeting, the following directors were elected to serve on the Company’s Board of Directors until the next Annual Meeting and until their respective successors are elected and qualified:

In addition, the amendment of the Company’s 2000 Stock Incentive Plan was approved by the stockholders with 14,202,539 votes for, 11,230,259 votes against, and 30,840 votes abstained, and the amendment of the Company’s Certificate of Incorporation was approved by the stockholders with 24,150,634 votes for, 1,294,042 votes against, and 18,962 votes abstained.

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PART II – OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8K

(a)

Exhibits