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SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)

Commission file number: 0-19402

VANS, INC.

(562) 565-8267
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to section 12(b) of the Act: None

Securities registered pursuant to section 12(g) of the Act:

Common Stock, $.001 par value per share
(Title of Class)
Common Stock Purchase Rights
(Title of Class)

Indicate by check mark whether 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 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 [X].

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12 b-2 of the Act).

Yes  [X]     No  [    ]

The approximate aggregate market value of the Common Stock held by non-affiliates of registrant (computed based on the closing sales price of the Common Stock, as reported on the NASDAQ Stock Market on August 14, 2003), was $158,286,870.

The number of shares of registrant’s Common Stock outstanding at August 14, 2003, was 17,898,787.

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Documents Incorporated By Reference:

Portions of registrant’s definitive Proxy Statement for its 2003 Annual Meeting of Stockholders are incorporated by reference into Part III of this report, and certain exhibits are incorporated by reference into Part IV of this report.

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VANS, INC.

FORM 10-K

For the Fiscal Year Ended May 31, 2003

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     Note: “VANS,” Core Sports, the VANS Triple Crown Series, certain trademarks of events comprising the VANS Triple Crown Series, the names of our products, the VANS Warped Tour, the High Cascade Snowboard Camp, Pro-Tec and AGENCY are our registered and common law trademarks in the U.S. and other jurisdictions.

     This report contains forward-looking statements about our business and financial information. Our actual results may vary significantly and could be impacted by a number of important factors, including but not limited to those discussed in the Risk Factors section on page 15 of this report.

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ITEM 1. BUSINESS

INTRODUCTION

     Vans is a leading global sports and lifestyle company that merchandises, designs, sources and distributes VANS-branded active-casual and performance footwear, apparel and accessories for Core Sports. Core Sports, including skateboarding, snowboarding, surfing, wakeboarding, BMX riding and motocross, are generally recognized for the fun, creativity and individual achievement experienced while attempting various tricks or maneuvers within these sports. Over the past seven years, our focus has been proprietary branding with the goal of creating a leadership position for our brand and a strong emotional connection with our customers. Our VANS brand targets 10 to 24 year old participants, enthusiasts and emulators of the Core Sports culture.

     We distribute our products through over 2,000 U.S. domestic wholesale accounts and 162 Vans retail stores, internationally to approximately 50 countries, as well as on the Internet. Key accounts in the U.S. include Journeys, Pacific Sunwear, Famous Footwear, Kohl’s, Mervyn’s, JC Penney, and Gart’s. As of August 15, 2003, we had 102 Vans full-price retail stores, 53 domestic outlet stores and 7 outlet stores in Europe. Internationally we vary our marketing and distribution approach on a country-by-country basis, taking into account the particular cultural, economic and business conditions present in each international market. We have direct sales operations in key European markets, including the U.K., France, and most recently, Germany; a licensing arrangement for Japan, Hong Kong, Taiwan and South Korea; and distribution agreements for approximately 36 other countries.

     Vans was founded in 1966 in Southern California as a domestic manufacturer of vulcanized canvas shoes, many of which appealed to skateboard enthusiasts and the Southern California skate and surf culture. Our 37-year heritage has been the basis for our branding and marketing strategy over the past seven years and helps provide us with the authenticity and credibility to be the leading brand with Core Sports enthusiasts, participants and emulators. For most of our first 30 years, we were a Southern California shoe manufacturer and based our products on one trademark gum rubber outsole. In 1995, we initiated a fundamental restructuring of the business which included assembling a new management team, focusing the business on reestablishing the heritage of the VANS brand and shifting product sourcing overseas to third party manufacturers, which allowed us to begin to be more innovative in terms of outsoles and overall design. Over the past four years, we have targeted significant resources to further build the VANS brand worldwide, promote the Core Sports lifestyle and enhance our product merchandising, design, sourcing and development.

     Additional information about Vans is available on our website, www.vans.com. We post all of our SEC filings on our Investor Relations website, www.vans.biz, as soon as practicable after we file them with the SEC. Those filings are available free of charge.

FISCAL 2003 RESULTS

     In fiscal 2003, we continued to experience the challenges to our business that began to manifest themselves in fiscal 2002. Our overall revenues in fiscal 2003 were down slightly to $330.2 million from $331.4 million a year ago; our U.S. wholesale business declined 7.2%, year-over-year, from $124.2 million to $115.2 million; and our retail same-store sales decreased 3.2% for the year, excluding skatepark sessions and concessions.

     Additionally, the negative trends which began to affect our U.S. retail and skatepark businesses in fiscal 2002, also continued during fiscal 2003. These trends led us to write-down some or all of the long-lived assets of 17 of our retail stores, all of the long-lived assets of 10 of our skateparks and the long-lived assets associated with the construction of a skatepark that was scheduled to open in Sacramento, California, in fiscal 2004. We incurred aggregate pre-tax non-cash impairment charges of approximately $16.5 million in the third and fourth quarters in connection with those and other asset write-downs.

     As a result of the negative trends at our skateparks, we decided to substantially exit the skatepark business and we began negotiations with the landlords to obtain rent concessions and/or terminations of our skatepark leases. As of August 15, 2003, we have reached agreements to terminate the leases for eight of the 12 skateparks we operated as of the beginning of fiscal 2003 plus the lease for a proposed park in Sacramento, California. Of these parks, six will remain open for terms ranging from three months to one year at reduced rents and subject to the landlords’ right to recapture the space upon 30 days written notice. Two of the six parks will close on August 30, 2003. We incurred lease termination costs of $10.0 million in the fourth quarter related to six of the lease terminations, and we will incur additional lease termination costs in connection with three lease terminations in the first quarter of fiscal 2004. See Part II Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Fiscal 2003 Overview” for a more extensive discussion of the costs we incurred in the fourth quarter. Our consolidated results of operations have been recast to present as discontinued operations the net operating results for those skateparks that had been closed by May 31, 2003. As of May 31, 2003, discontinued operations included the results of the Bakersfield skatepark which was the only skatepark that had been closed as of that date.

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     On a go-forward basis, we are continuing to focus on improving the selection and styling of our footwear product, particularly our core and women’s product; improving the product selection and merchandising at our retail stores; and controlling costs across the organization. These efforts began to yield results in the latter part of fiscal 2003, with retail same-store sales, excluding skatepark sessions and concessions, increasing 9.0%, year-over-year, in the fourth quarter of fiscal 2003. Those trends have continued into the first quarter of fiscal 2004.

THE VANS STRATEGY

     Our overall strategy continues to be leveraging our 37-year heritage and our proprietary branding initiatives to become the leading Core Sports and lifestyle company for the youth market worldwide. Key elements of our strategy include:

     Building the Leading Core Sports and Lifestyle Brand Worldwide. Our primary strategy is to continue to build and reinforce the authenticity and credibility of the VANS brand with our core customer base of 10 to 24 year old Core Sports enthusiasts and the broader market of consumers that identify with the Core Sports lifestyle. To further enhance and strengthen the bond with our target market, we utilize multi-dimensional marketing tools aimed at creating an emotional connection between our customers and the VANS brand. The goal of these efforts is to establish a “Covenant with Youth”, which underscores our commitment to the further promotion of the individuality and independence of the Core Sports lifestyle. We execute our brand building strategy in the following ways:

	•		We sponsor world class male and female Core Sports athletes to reinforce our brand as an authentic element of Core Sports. The athletes compete in world-class competitions and participate in tours that include store visits and autograph signings for key accounts.
	•		We advertise and promote the VANS brand and Core Sports image through targeted advertising campaigns on television networks such as NBC, MTV, and Fox Sports Net, as well as in magazines such as TransWorld SKATEboarding, Thrasher, TransWorld SNOWboarding, Source, Maxim, Seventeen and Teen People.
	•		We own, produce and sponsor Core Sports events and contests such as the VANS Triple Crown Series.
	•		We create unique brand building content such as the VANS Warped Tour to reinforce the authenticity of our brand and to further define it.
	•		We create and operate entertainment venues such as our skateparks and our VANS High Cascade Snowboard Camp, although, as discussed above, we are substantially exiting the skatepark business.
	•		We develop key relationships to further enhance our brand and our business such as our joint venture with Pacific Sunwear, sponsorship agreements for the VANS Triple Crown Series with other leading brands, including Mountain Dew, Microsoft/Xbox, Ford Ranger, Gillette, and TransWorld Media and media alliances with NBC Sports and Fox Sports Net for the broadcast of the VANS Triple Crown Series and other Core Sports events.
	•		We market our products and brand image online at www.vans.com, which includes multimedia content along with our online store.
	•		We operate 101 full-price stores where our full footwear line is displayed.

     Designing and Developing a Strong and Appropriately Targeted Range of Products. We focus on the design and development of products that maintain the authenticity of the VANS brand while reflecting the current tastes and styles of our core customers. Our performance and casual footwear products incorporate distinctive outsoles, materials, fabrics, styles and colors and dependable construction designed to appeal to male and female Core Sports participants seeking performance footwear as well as the larger market of more mainstream consumers seeking footwear that represents youth, individuality and independence. We also seek to capitalize on the development of the VANS brand as an authentic Core Sports and active lifestyle brand to broaden our product offerings within our footwear line. In addition, through selective licensing of the VANS name and trademarks, we have strategically

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broadened our product offering to non-footwear categories, such as apparel and accessories, that appropriately represent the VANS brand image.

     Further Penetrating the Market Through our Multiple Channels of Distribution. We have developed a multi-faceted distribution system which provides the flexibility to adapt to particular markets and reach a broad range of customers. Our distribution system is comprised of the following:

	•		Domestic Wholesale Sales. We distribute our products through over 2,000 domestic wholesale accounts.
	•		Retail Sales. Our retail stores are an integral component of our strategy for building the VANS brand and staying close to the trends and fashion interests of our customers.
	•		International Sales. We market and distribute our products on a country-by-country basis, taking into account the particular cultural, economic and business conditions present in each market. Our management is focused on realizing growth of our international sales primarily through the continued strengthening of our brand positioning and product merchandising and the growing overall awareness of our brand and Core Sports in the U.S. and abroad.
	•		Internet. We also offer our products online in the U.S. at www.vans.com. We believe the Internet is an important platform to increase the exposure of our brand and proprietary content worldwide.

     Capitalizing on the Value of our Entertainment Content. Integral to our success in building VANS as a premiere lifestyle brand has been our emphasis on the creation of unique entertainment content and properties which reinforce and further define our brand image.

     Selectively Pursuing Strategic Acquisitions and Alliances. We often evaluate potential strategic acquisitions and alliances in the ordinary course as a means to build upon or complement our current business strategy. We selectively identify acquisition candidates and strategic alliances that will enable us to capitalize on our established infrastructure and our knowledge of the youth market to enhance and expand our product, Core Sports and entertainment offerings. Past acquisitions include: a majority interest in the VANS Warped Tour; Pro-Tec, Inc., formerly known as Mosa Extreme Sports, Inc., maker of PRO-TEC protective gear; Switch Manufacturing; and the VANS High Cascade Snowboard Camp. We also have begun to operate directly in Europe by acquiring the sales operations of our U.K. distributor, our French sales agent, and in fiscal 2003, our German sales agent. We also consider from time to time larger acquisitions or alliances which, if completed, could have a more significant impact on our overall business.

PROPRIETARY BRANDING

     Our current branding and marketing strategy is to develop unique content and properties and seek out diverse opportunities to reinforce our brand image as indicative of the lifestyle embraced by Core Sports participants, enthusiasts and emulators. Our efforts in this regard are focused on building and reinforcing the authenticity and credibility of the VANS brand with our core customer base of 10 to 24 year olds. We are currently exploring potential strategic alliances with third parties to assist us in recognizing the growth opportunities which may be realized by the properties discussed below.

Sponsorship of World Class Core Sports Athletes

     The professional and amateur athletes that we sponsor participate in a wide variety of Core Sports, including skateboarding, snowboarding, surfing, wakeboarding, freestyle motocross, BMX riding and mountain biking. We seek out the top male and female athletes in these categories for sponsorship because of the positive association with the VANS brand image created by their success and because of their influence on the tastes, trends and fashions prevalent in the Core Sports lifestyle. Included among our featured premier athletes are the following:

	•		Geoff Rowley: Thrasher magazine’s 2000 Skater of the Year
	•		Tony Trujillo: Thrasher magazine’s 2002 Skater of the Year
	•		Bastien Salabanzi: 2001 and 2002 World Cup and World Champion Street Skater
	•		Steve Caballero: According to Thrasher magazine, “likely to be looked upon as the greatest skater of the last century”
	•		Tara Dakides: 2001 VANS Triple Crown of Snowboarding Champion and 2002 X-Games slopestyle Snowboarding Champion

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	•		Danny Kass: Winner of a silver medal at the 2002 Winter Olympics
	•		Carey Hart: the first athlete to ever successfully complete a back flip on a motorcycle in competition
	•		Serena Brooke: a top female surfer
	•		Cory “Nasty” Nastazio: The 2000 “King of Dirt” champion
	•		Rick Thorne: a top BMX rider and co-host of the Fox television show 54321
	•		Bucky Lasek, two-time X-Games gold medal winner in vert

     We support our athlete endorsements with advertising and the distribution of posters, all featuring our sponsored athletes. Our sponsored athletes aid in the design of our products, make promotional appearances, wear our products exclusively and increase overall consumer awareness of the VANS brand.

Ownership, Production and Sponsorship of Core Sports Events

     The identification of our brand with Core Sports and its lifestyle is most clearly established through our ownership, production and sponsorship of Core Sports events. While our most well known events are those that collectively make up the VANS Triple Crown Series, we are also active in the sponsorship and promotion of other Core Sports contests and events.

     The VANS Triple Crown Series. The VANS Triple Crown Series is a series of three major events in each of six Core Sports. We own and produce a majority of these events and we are the exclusive title sponsor of the overall Series. The VANS Triple Crown Series is currently comprised of the following:

	•		The VANS Triple Crown of Skateboarding
	•		The VANS Triple Crown of Surfing
	•		The VANS Triple Crown of Snowboarding
	•		The VANS Triple Crown of Wakeboarding
	•		The VANS Triple Crown of Freestyle Motocross
	•		The VANS Triple Crown of BMX

     These events feature top worldwide athletes, many of whom we sponsor, competing in sanctioned contests at venues around the United States and Canada. The VANS Triple Crown Series includes skateboarding, surfing, BMX, snowboarding, wakeboarding and freestyle motocross events and is televised on the NBC and Fox Sports Net networks. The popularity and prestige of the VANS Triple Crown Series events also enables us to associate our brands with other top brands who sponsor these events, and are focused on our customer base, including Mountain Dew, Gillette, Ford Ranger, Microsoft/Xbox, and Transworld Media.

     Other Core Sports Events. In addition to the VANS Triple Crown Series, we produce and sponsor other popular Core Sports contests and events. For example, we sponsor the VANS World Amateur Skateboarding Championships. We believe our association with these events and contests has been a critical aspect of solidifying the VANS brand as an authentic element of the Core Sports lifestyle.

Creation of Unique Brand Building Content

     Our branding strategy is furthered by our efforts to create content that emphasizes the lifestyle appealing to our targeted customer base of 10 to 24 year old Core Sports participants, enthusiasts and emulators. In addition to creating a positive association between the

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VANS brand and this lifestyle, we believe these properties actually serve to further define the more appealing aspects of this lifestyle to our targeted customers. The uniqueness of this content also provides us with an opportunity to utilize it beyond brand building and capitalize on its intrinsic entertainment value.

     For example, we own a majority interest in the VANS Warped Tour, a traveling lifestyle, music and sports festival that visits top young adult markets throughout the world each summer. The 2003 VANS Warped Tour visited 45 U.S. and Canadian cities and had approximately 506,000 attendees, a 3.0% increase in attendance over 2002 even though the Tour visited three fewer cities in 2003. Included among the activities featured on the Tour are skateboarding and BMX demonstrations, vendor booths, video games, prize giveaways and performances by top alternative music bands. The 2003 VANS Warped Tour featured such popular bands as AFI, The Ataris, Pennywise, and the Mighty Mighty Bosstones.

Developing Key Relationships to Further Enhance our Brand

     We seek to enhance our own brand building activities by establishing relationships with key partners that further reinforce the VANS brand image and increase exposure for our brand and products globally. Our key strategic relationships cover a diverse range of brand building activities, including the following:

     Apparel Joint Venture. In an effort to extend our brand image and product line beyond footwear, we have entered into a joint venture with Pacific Sunwear to develop, market and sell apparel and accessories utilizing the VANS brand. In addition to providing an excellent channel of distribution for VANS-branded products, this venture allows us to associate our brand with a premier retailer of clothing and apparel that targets our core 10 to 24 year old customers.

     Sponsorship of VANS Triple Crown Series Events. Over the last five years we have signed and renewed sponsorship agreements for the VANS Triple Crown Series with a number of leading brands, including Mountain Dew, G-Shock, Ford Ranger, Gillette, Microsoft/Xbox, Sea Doo, and Transworld Media. The sponsorship agreements with these brands not only help to finance and expand the VANS Triple Crown Series, but also provide valuable cross-promotion opportunities with brands that we believe enable us to further connect with our core customers.

     Media Distribution Alliances. We have alliances with media outlets to further the exposure of our brand and products. We have agreements with NBC Sports and Fox Sports Net to provide for the broadcast of the VANS Triple Crown Series and other VANS-sponsored Core Sports. We believe these agreements further the prestige of these events and make them more attractive for syndication outside the United States.

     Artist Relations. We build the VANS brand through product placement with key artists in the music, television and motion picture industries. For example, VANS-branded product, events and venues were prominently featured in the recent movies X-Men and Charlie’s Angels 2: Full Throttle, and the 2002 movies XXX and Blue Crush, and MTV recently aired a mini-concert by the group New Found Glory held in conjunction with a performance by Tony Hawk’s “Boom Boom Huck Jam” skate and BMX team at our Orange, California skatepark. We also were involved with the production of the WB series Boarding House: North Shore which chronicled the lives of seven young surfers who competed in the 2002 VANS Triple Crown of Surfing. We leverage these relationships through promotional tie-ins throughout our distribution network, such as in-store promotions and e-mail campaigns through our website.

Creation and Operation of Entertainment Venues

     We have developed unique venues for the promotion of and participation in Core Sports that, in addition to providing us with alternative sources of revenue, are important tools for reinforcing the authenticity of the VANS brand and its relationship to the Core Sports lifestyle.

     Skateparks. As of August 15, 2003, we operated 10 skateparks which range from 29,000 to 69,000 square feet and feature world-class skateboarding facilities as well as a retail store and a pro shop. As discussed under the caption “Fiscal 2003 Overview,” due to the decline in revenue and profitability we have experienced at our skateparks over the past two years we have taken steps to

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substantially exit the skatepark business. We expect, however, to continue to operate one or two of the skateparks to promote awareness of the VANS brand.

     VANS High Cascade Snowboard Camp. We own and operate the VANS High Cascade Snowboard Camp, the top summer snowboard destination in North America, located at the base of Mt. Hood in Oregon. Participants in the seven and ten day camp sessions enjoy state of the art snowboarding facilities and receive instruction from top snowboard coaches. When not snowboarding, campers may use other recreational facilities and have the opportunity to go wakeboarding and skateboarding. In fiscal 2002, we began operating skate camps at High Cascade.

Targeted Advertising and Promotion

     We seek to further enhance the VANS brand and Core Sports image through targeted mainstream advertising campaigns. These campaigns, which typically depict youthful, contemporary lifestyles and attitudes, are currently carried on television networks such as WB, MTV, NBC, and Fox Sports Net, and are also featured in magazines that appeal to our target demographic, including TransWorld SKATEboarding, Thrasher, TransWorld SNOWboarding, Source, Maxim, Seventeen and Teen People. We develop most of our advertising in-house, which allows us to control our creative messaging as well as our costs so that we can most efficiently utilize this means of brand promotion.

     Additionally, although we have traditionally focused on promoting the VANS brand and image without emphasizing individual products, we have begun, in selected cases, to focus promotional activities on the introduction of new styles or products.

Online Marketing

     In addition to providing an additional distribution channel for the sale of our products in the U.S., our website at www.vans.com provides an alternative forum for us to further our marketing and branding strategy. Our website includes product photos, commercials, live video feeds from our flagship skatepark at The Block in Orange, California, and Core Sports events, photos, profiles of and interviews with our sponsored athletes, information on our sponsored events, and our history.

PRODUCT DESIGN AND DEVELOPMENT

     From our inception in 1966 through the mid-1990’s, our production capacity was limited to our domestic manufacturing facilities and our product design was limited to vulcanized canvas shoes featuring a single form of gum rubber outsole. In 1995, we shifted our manufacturing focus from our domestic facilities to sourcing our products through an agent in South Korea, which allowed us to incorporate a new “cupsole” type of shoe and increase the breadth of our shoe products. We have established an office in Hong Kong to oversee our production, and that office implemented direct sourcing from third party manufacturers in China and the Philippines in order to further capitalize on the strength of our brand with a stronger assortment of product.

     Our team of footwear merchandisers focuses on the design and development of products that maintain the authenticity of our brand while reflecting the current tastes and styles of core customers. Our merchandising professionals monitor styles prevalent in worldwide youth culture, including areas such as Core Sports, alternative music, television, clothing and movies to guide our designers. Integral to the design and development of our products is the input and feedback of our sponsored athletes, who assist in developing the technical features and styles of our products, and our retailers who provide feedback to help us remain in touch with the tastes and preferences of our target market. We also, from time to time, contract with third-party designers to supplement our in-house design group.

PRODUCTS

Men’s Footwear

     We segment our men’s footwear products through four categories of retail stores: independent skate and surf shops, specialty boutiques, mall-based specialty lifestyle stores, and family shoe, department, and specialty athletic and sporting goods stores.

     Independent Skate and Surf Shops. These stores cater to Core Sports participants and primarily carry our “Core,” “Signature” and “Classics” shoe lines. Our Core and Signature models are designed with specific features for skateboarding and contain more variations in material and more advanced technical performance features. Core and Signature models are endorsed by some of the world’s top skaters, including Geoff Rowley, Jim Greco, Tony Trujillo, Steve Caballero, John Cardiel, Bastien Salabanzi, and Dustin

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Dollin, and include such shoes as the Rowley XL2, the Dustin Dollin 2, the Dr. T, the Jim Greco 2, the Bastien Pro and the TNT. The Classics shoe line features our traditional vulcanized canvas and suede shoes and includes the Classic Slip-On, Authentic, Old Skool and Sk8-Hi.

     Specialty Boutiques. Stores such as Conveyor, 99x, Madison, Sportie LA, Floyd Mancini and Shoe Biz carry our new “Vault” line, which consists of new and retro styles targeted to brand conscious, individualistic, fashion-forward consumers and featuring high end materials such as Italian leathers and pony hair.

     Mall-based Specialty Lifestyle Stores. Stores such as Journeys, Pacific Sunwear, Tilly’s, Gadzooks and Zumiez carry a cross-section of our products, including Signature and athlete-endorsed models, Classics, other lifestyle footwear, such as sandals, and some of our “Performance” shoes. Performance shoes are those which are designed for mainstream skate and lifestyle consumers, such as the Cooley, Floyd, Prone and Dempsey. Signature and athlete-endorsed shoes carried by these stores include the TNT and the Rowley XL2.

     Family Shoe Stores, Department Stores and Specialty Athletic and Sporting Goods Stores. Stores such as Kohl’s, Mervyn’s, Famous Footwear, JC Penny and Finish Line carry our Performance shoes, including such shoes as the Cooley, Floyd, Mancini, Graph, Prone and Dempsey.

Women’s Footwear

     We market and sell our women’s footwear products through the same types of stores as our men’s footwear products. Our women’s footwear products include skate-influenced performance footwear, California lifestyle footwear, Classics and sandals. Many of these products incorporate fundamental performance features of traditional skate shoes but with fashion-conscious detailing, colors and fabrics, such as suede, leather and canvas. Some of our women’s shoes include the Cara-Beth V (the fifth generation of the first women’s signature skate shoe), the Westchester, Shelby and Mannaz. Many of our women’s shoes are endorsed by top Core Sports female athletes, including Tara Dakides, Serena Brooke and Cara-Beth Burnside.

Children’s Footwear

     We offer a variety of boys’ casual footwear based upon the styles of our men’s Signature and Performance lines, as well as Classics. These shoes include the Rowley XL2 and TNT. We have also expanded our children’s line to include young girls’ shoes which are based upon the styles of our women’s line, including the Mannaz, Westchester and Wesley.

Snowboard Boots; Step-in Bindings

     Our snowboard boot line is comprised of conventional strap-on boots and step-in boots which are designed to be compatible with the Switch Autolock step-in binding system. Our boots are endorsed by several world-class snowboarders, including Danny Kass (winner of a Silver Medal at the 2002 Winter Olympics), Tara Dakides, Daniel Franck (winner of a Silver Medal at the 1998 Winter Olympics), Temple Cummings, Kurt Wastell and Axel Pauporte. These riders work with our design and development team to create one of the most technically advanced lines in the market.

     We also were the first company to introduce snowboard boots featuring the Boa™ closure system. This revolutionary new system allows the rider to close and secure his or her boots by turning a dial rather than tying straps or boot laces. We license the Boa closure system from a third party pursuant to a long-term license agreement.

     During fiscal 2003, our snow business continued to be adversely impacted by the decrease in sales of Switch step-in bindings. As a result, we wrote-down the entire amount of the goodwill associated with our 1998 acquisition of Switch. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Fiscal 2003 Overview.”

     We also are a leader in the step-in snowboard binding market through our Switch product line and sell conventional strap-bindings for snowboard boots under the AGENCY brand.

Apparel

     We design active lifestyle and skateboard apparel that embodies the VANS brand image. Our line includes T-shirts, hats, woven shirts, fleece, walkshorts and pants which focus on the skateboard and Core Sports culture. Our line also includes wallets and

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backpacks and is sold primarily through our own retail stores as well as to specialty skate and surf shops and lifestyle stores such as Journeys and Delias.

     We own a 51% interest in a joint venture with Pacific Sunwear, to develop, market and sell apparel. Pacific Sunwear provides product development, design, sourcing, quality control and inventory planning to the joint venture, and we contribute design services and license the VANS and Triple Crown trademarks and logos to the venture. Under the terms of the joint venture, we are precluded from entering into other licenses for apparel in the U.S. without Pacific Sunwear’s consent while maintaining the right to sell VANS branded apparel directly to other accounts.

Skateboard Hard Goods

     We sell a comprehensive selection of third-party skateboard hard goods in our skateparks and certain of our retail stores as a means to further strengthen our position as a leader in the skateboard market as well as enhance the overall product offering of our retail stores. We currently offer skateboard decks, trucks and wheels in many of our full-price stores and all of skateparks, and in a select number of our outlets. Along with other brand name Core Sports equipment, we also offer a limited number of VANS branded Core Sports equipment items, such as safety helmets and pads, through our retail stores.

Pro-tec Protective Gear

     In April 2002, we acquired Pro-tec, Inc. (formerly known as Mosa Extreme Sports, Inc.), the leading maker of protective gear for Core Sports. Pro-tec markets its products under the PRO-TEC brand. The PRO-TEC product line includes helmets, knee and elbow pads, and wrist guards. Many of the leading Core Sports athletes endorse PRO-TEC products including skateboarders Bob Burnquist, Steve Caballero, Andy MacDonald, Brian Patch and Bucky Lasek, snowboarders Tara Dakides and Todd Richards, BMX riders Cory Nastazio and TJ Lavin, and wakeboarder Darin Shapiro. The acquisition of Pro-tec enables us to vertically integrate the PRO-TEC brand into our retail stores and further leverage the VANS brand across multiple Core Sports.

SALES AND DISTRIBUTION

     We have a multi-faceted, worldwide distribution system designed to adapt our product mix to particular markets and reach a broad range of customers. The primary distribution channels for our products are:

Domestic Wholesale Sales Channel

     We sell our products through over 2,000 domestic wholesale accounts. We also sell our products through independent retailers such as skateboard and surf shops to maintain our authenticity and to stay close to our core customers.

     We strive to maintain the integrity of the VANS image by segmenting the distribution channels for our products based on criteria which include the retailer’s image, customer base and ability to effectively promote our products. Substantially all of our larger domestic accounts are managed by our in-house sales executives. We typically engage our independent sales representatives for our smaller accounts, as well as work with some of our larger accounts, pursuant to one year agreements. Compensation of independent sales representatives is limited to commissions on sales.

Retail Sales Channel

     Our retail distribution strategy is comprised of three principal formats: full price retail stores, outlet stores and skateparks. All of our retail stores carry a wide variety of VANS footwear products, along with apparel and accessory items, most of which bear the VANS brand name and logo. In addition, we sell a growing array of skateboard hard goods which are popular with our core customers. Our retail channel is an integral part of our strategy for building the VANS brand, providing wide exposure to all of our products and enabling us to stay close to the needs of our core customers.

     Full Price Retail Stores. We currently operate 101 full price retail stores in the United States. Our full price retail stores generally range from 1,500 to 2,500 square feet and are located in a mix of mall and free-standing locations. We also, as a matter of course, seek to identify underperforming stores for possible closure. We anticipate that we will open our first flagship retail store in Europe on Carnaby Street in London at the end of 2003.

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     Outlet Stores. We currently operate 61 outlet stores in the United States, the United Kingdom, Austria, Spain and Guam. These stores serve an important role in our overall inventory management by allowing us to effectively distribute a significant portion of our discontinued or out of season products.

     Skateparks. As of August 15, 2003, we operated 10 skateparks which range from 29,000 to 69,000 square feet and feature world-class skateboarding facilities as well as a retail store and a pro shop. As discussed under the caption “Fiscal 2003 Overview,” due to the decline in revenue and profitability we have experienced at our skateparks over the past two years we have taken steps to substantially exit the skatepark business. We expect, however, to continue to operate one or two of the skateparks to promote awareness of the VANS brand.

     For each of our skateparks, we carry liability insurance to cover accidents which may occur, and require that all users or their guardians execute waivers of liability. We require all users of our skateparks to wear helmets, and all users of non-California parks under the age of sixteen must wear knee pads and elbow pads. Pursuant to California law, all users of our California parks must wear knee pads and elbow pads. To date, we have incurred no significant liability with respect to activities at our skateparks.

International Sales Channel

     Our international distribution system is based on a market by market approach, that takes into account the particular cultural, economic and business conditions present in each international market. This strategy has led us to establish direct operations in key European markets, a joint venture in Mexico, a licensing arrangement for Japan, Hong Kong, Taiwan and South Korea and distribution agreements in approximately 36 other countries.

     Direct Sales and Distributors. We currently sell VANS products directly through our sales agents or employees or through distributors and licensees in approximately 50 foreign countries.

     In fiscal 1997, we undertook a strategy to capture increased international sales and profit by commencing direct sales efforts in selected European countries. In connection with that strategy, we acquired our distributor for the United Kingdom, and our sales agents for France and Germany.

     The direct sales strategy enables us to capture some or all of the sales and profits previously realized by independent distributors, to better coordinate our brand marketing strategies in these key European countries and increase our product availability to local customers through our third party distribution center in Holland. Under our sales agency agreements, agents are paid a commission on sales and are responsible for all sales efforts in a particular territory. Our sales in Europe are made in local currencies.

     We currently use third party distributors for sales in approximately 36 countries worldwide. Vans’ international distributors purchase products pursuant to a price list set for international distributors and are granted the right to resell such products in defined territories, usually a country or group of countries. Distribution agreements generally are exclusive, restrict the distributor’s ability to sell competing products, have a term of one to three years, provide a minimum sales threshold which increases annually, and generally require the distributor to spend a certain percentage of its revenues on marketing. We receive payment from all of our distributors in United States dollars.

     Licensing. We have established an exclusive five-year licensing arrangement with ABC Mart, Inc., a Japanese public company and one of the leading distributors and retailers of footwear and related accessories in Japan. Under this arrangement, ABC licenses the VANS brand name to market and sell products such as footwear, sandals, apparel, hats, snowboard boots, bindings, and snowboards in Japan, Taiwan and South Korea. ABC also licenses the VANS brand for the sale of footwear in Hong Kong. Beyond ABC, we selectively license our trademarks to some of our other third party footwear distributors, generally for use in the production and sales of apparel and accessories, such as T-shirts and backpacks.

Internet

     We currently offer a broad range of our products, including exclusive product offerings, domestically through our website at www.vans.com. Our electronic commerce channel provides us with the opportunity to broaden our reach with minimal sales costs. Our website also allows us to effectively utilize elements of our unique marketing and entertainment content to showcase our products within the context of the VANS brand image.

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BACKLOG

     As of August 14, 2003, our backlog of orders for delivery in the second and third quarter of fiscal year 2004 was approximately $24.8 million, as compared to a backlog of approximately $22.3 million as of August 14, 2002, for delivery of orders in the second and third quarter of fiscal year 2003. Our backlog amounts exclude orders from our retail stores. Our backlog depends upon a number of factors, including the timing of trade shows, during which some of our orders are received, the timing of shipments, product mix of customer orders and the amount of in-season orders. As a result of these and other factors, period-to-period comparisons of backlog may not necessarily be meaningful.

     In addition, we have historically shipped less than all orders in our backlog and we have shipped a large portion of our products towards the end of the quarter to meet seasonal peaks for the holiday and spring selling seasons. As a result, we may not learn of sales shortfalls until late in any particular fiscal quarter, which could result in an immediate and adverse effect on our business, financial condition and results of operations. Additionally, backlog orders are subject to both cancellation by customers and the ability of third party manufacturers to timely deliver product to fill such orders.

INFRASTRUCTURE

     We have developed an operational infrastructure that allows us to effectively address a variety of market opportunities. Our ability to procure and distribute a wide range of products enables us to maintain the authenticity of the VANS brand while addressing changes in Core Sports and youth trends.

Sourcing and Manufacturing

     In 1995, we shifted our manufacturing focus from our own domestic facilities to a network of experienced third party overseas manufacturers. This strategy minimizes capital expenditures relating to manufacturing and allows us to maximize product quality and product variety.

     We currently source all of our footwear products from independent third party manufacturers in China and the Philippines. The production staff of our Hong Kong subsidiary, located in Hong Kong, oversees all aspects of manufacturing and production in China and the Philippines. Approximately 25% of our apparel is sourced off-shore throughout Asia.

Distribution Facilities

     Products for domestic accounts are shipped either to our 144,000 square foot distribution center located in Santa Fe Springs, California or directly to our retail customers. Approximately 25% of our domestic sales are shipped directly from manufacturers to our retail customers. Our products for international distribution, with the exception of Europe, are typically shipped directly from the manufacturers to our distributors. Shipments of product to European countries are made through a third-party operated distribution facility located in Holland. In fiscal 2003 we upgraded our distribution logistics systems, supply chain monitoring systems and inventory information systems.

Management Information Systems

     Our management information systems are designed to provide, among other things, comprehensive order processing, production, accounting and management information for the marketing, manufacturing, importing and distribution functions of our business. We utilize information technology to improve customer service, reduce operating costs and provide information needed by management to make timely sales and merchandising decisions and to control inventory levels.

     In fiscal 2002, we installed point-of-sale systems in all of our stores and skateparks that enable us to track inventory from store receipt to final sale on a real-time basis, allow for rapid stock replenishment and concise merchandise planning, and managing inventory shrink. In fiscal 2003 we installed a warehouse management system and material handling equipment at our Santa Fe Springs, California distribution center to enable us to achieve greater productivity at such facility.

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COMPETITION

Footwear Industry

     The athletic and casual footwear industry is highly competitive. We compete on the basis of the design, quality and technical aspects of our products, the strength of the VANS brand, the brand’s authenticity with our core customer base and the athletes who participate in the Core Sports we promote and sponsor. Many of our competitors, such as Nike, Reebok, Adidas and Puma, have significantly greater financial resources than we do, have more comprehensive product offerings, compete with us in China and the Philippines for manufacturing sources and spend substantially more on product advertising than we do. In addition, the general availability of offshore shoe manufacturing capacity allows for rapid expansion by competitors and new entrants in the footwear market. In this regard, we face competition from large, well-known companies, such as Nike, which has entered the market for skateboard shoes through an investment in a company called Savier and has also entered the skate and surf lifestyle market through its acquisition of Hurley. In addition, in the casual footwear market, we compete with a number of companies, such as Skechers, Converse (which Nike recently announced it was acquiring), Airwalk, and Stride Rite (Keds), some of which may have significantly greater financial and other resources than we do. We also compete with companies such as Sole Technology, DC Shoes, DVS, Globe and Osiris which focus on selling products to Core Sports participants.

Skateparks

     Our skateparks have faced increased competition from large, free, public skateparks which are often located near our parks and are better maintained and more sophisticated than older public skateparks. This increased competition has had a material adverse impact on our skatepark business over the past two years and has led to our decision to substantially exit the skatepark business. See “Fiscal 2003 Overview.”

Snowboard Industry

     We face significant competition in the snowboard boot and binding industries, most notably from Burton Snowboards, Salomon and K2. In the step-in binding segment of the industry, we compete, through Switch, on the basis of the quality and technical aspects of the Autolock binding system, and the strength of the Switch and Autolock brand names. Several large, well-known companies have developed step-in systems that compete with the Autolock binding system. In addition, conventional strap-in bindings have captured a much greater market share than step-in systems and we anticipate this will likely continue for at least the next few years. Although we sell strap-in bindings under our AGENCY brand, our sales of such bindings have not been substantial.

Apparel Industry

     We are a relatively new entrant in the apparel business. The apparel industry is highly competitive, more fashion-oriented and more fragmented than the athletic footwear market. Many of our competitors have significantly greater financial resources than we do and spend substantially more on product advertising.

INTELLECTUAL PROPERTY

     We hold trademarks, copyrights and patents on our products, brand names and designs which we believe are material to our business. We have made federal, state and international filings with respect to our material intellectual property, and intend to keep these filings current. We believe that our rubber “Off the Wall” sole design, the VANS trademark, various logos, trademarks and designs incorporating the VANS trademark, the striped designs known as the “Old Skool,” “Knu Skool,” and “Fairlane,” the “PRO-TEC” trademark for protective gear, and certain patents we hold for the SWITCH AUTOLOCK binding system and related technology are significant to our business and have gained acceptance among consumers and in the footwear industry. We are aware of several potentially conflicting trademark claims in the United States and other countries, and are currently engaged in, or contemplating trademark opposition or other legal proceedings, with respect to these claims. We do not believe these claims will have a material effect on our business. There can be no assurance that we will be able to use all of our trademarks and patents in any of the jurisdictions where conflicts exist. We regard our trademarks and other proprietary rights as valuable assets and believe that they have significant value in the marketing of our products. We vigorously protect our trademarks against infringement both in the United States and internationally, including through the use of cease and desist letters, administrative proceedings and lawsuits.

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EMPLOYEES

     As of August 14, 2003, we had 1,885 employees in the U.S. We consider our employee relations to be satisfactory. Our employees are not unionized and we have never suffered a material interruption of business caused by labor disputes.

RISK FACTORS

     We are currently engaged in a business turnaround at Vans. The success of a turnaround, by its very nature, involves a significant number of risks. You should carefully consider the risks described below before investing in our common stock. If any of the following risks actually occur, our business could be materially harmed and our turnaround could be negatively impacted. It also could cause the price of our stock to decline, and you may lose part or all of your investment.

IF WE ARE UNABLE TO CONTINUE TO DEVELOP AND MAINTAIN THE POPULARITY OF OUR BRAND OR FAIL TO ACCURATELY ANTICIPATE CHANGES IN FASHION TRENDS, DEMAND FOR OUR PRODUCTS MAY DECREASE.

     Our success is largely dependent on the continued strength of the VANS brand. In addition, we must anticipate the rapidly changing fashion tastes of our customers and provide merchandise that appeals to their preferences in a timely manner. We cannot assure that consumers will continue to prefer our brand or that we will respond in a timely manner to changes in consumer preferences. In particular, fashion trends change more rapidly with respect to our women’s footwear line, which is comprised of fewer styles than our men’s footwear lines.

     Achieving market acceptance for new products may also require substantial marketing and product development efforts and expenditures to create consumer demand. Decisions with respect to product designs often need to be made several months in advance of the time when consumer acceptance can be determined. As a result, we may fail to anticipate, identify or react appropriately to changes in consumer acceptance of our products’ styles and features. This could lead to problems such as excess inventories and higher than normal markdowns, lower gross margins due to the necessity of providing discounts to retailers, impairment of our brand name and brand image, as well as the inability to sell such products through our retail and outlet stores. In addition, our failure to anticipate consumer demand could result in inventory shortages, which can adversely affect the timing of shipments to customers, negatively impacting retailer and distributor relationships and diminishing brand loyalty.

     In addition, we use a variety of specialized fabrics in our footwear and apparel. The failure of footwear or apparel using such fabrics to perform to customer requirements could result in customer dissatisfaction with our products and could adversely affect the image of our brand name. We also in the past four years significantly increased the technical aspects of certain of our footwear and snowboard boots. If these technical features fail to operate as expected or satisfy customers, or if we fail to develop new and innovative technical features in a timely fashion, the result could adversely affect our business.

OUR RETAIL STORE SALES DECLINED FOR SIX CONSECUTIVE QUARTERS AND HAVE ONLY RECENTLY BEGUN TO IMPROVE.

After seven years of increases in sales in our retail stores when compared with comparable periods during the prior year on a same-store basis, we experienced same-store declines for the six consecutive fiscal quarters ended March 1, 2003. We reversed this trend in the fiscal quarter ended May 31, 2003, recognizing a 9.0% increase, year-over-year, in same-store revenues, excluding skatepark sessions and concessions. This trend is continuing in the first quarter of fiscal 2004.

     However, if this recent trend is not sustained, and we again experience declines in sales revenues in our retail stores when compared to prior periods, our business as a whole will be materially adversely affected since our retail sales account for approximately one-third of our total sales, and the gross margins associated with our retail sales are generally higher than the gross margins we achieve in other segments of our business.

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SALES TO OUR WHOLESALE CUSTOMERS FLUCTUATE PERIODICALLY AND WE ARE DEPENDENT ON SUCCESSFUL SELL-THROUGHS OF OUR FOOTWEAR PRODUCT LINES FOR A LARGE PORTION OF OUR SALES.

     Sales to our largest wholesale customers periodically fluctuate as do the gross margins associated with those sales. Our U.S. wholesale sales decreased 11.1%, year-over-year, in fiscal 2002 and 7.2%, year-over-year, in fiscal 2003. If this trend is not reversed, our business will continue to be materially adversely affected.

     In addition, the retail industry, and footwear retailers in particular, have periodically experienced consolidation, contractions and financial difficulties and if they happen again in the future this may result in loss of customers or uncollectability of accounts receivables in excess of amounts we have reserved. Furthermore, we depend upon our footwear product lines for a significant portion of our total sales. If retail sell-throughs of our footwear products decline, our financial results would be adversely affected.

OUR FINANCIAL RESULTS WILL BE AFFECTED BY MARKET CONDITIONS IN THE FOOTWEAR, SKATE AND APPAREL INDUSTRIES, WHICH ARE INTENSELY COMPETITIVE.

     The athletic and casual footwear industry is highly competitive. Competitive factors that affect our market position within the footwear and apparel industries include the style, quality and technical aspects of our products and the strength and authenticity of the VANS brand. Many of our competitors such as Nike, Reebok, Adidas and Puma have significantly greater financial resources than we do, have more comprehensive lines of product offerings, have greater brand recognition, compete with us in China and the Philippines for manufacturing sources and spend substantially more on product advertising than we do. In addition, the general availability of offshore shoe manufacturing capacity allows for rapid expansion by competitors and new entrants in the footwear market. In this regard, we face competition from large, well-known companies, such as Nike, which has entered the market for skateboard shoes through an investment in a company called Savier and has also entered the skate and surf lifestyle market through its acquisition of Hurley. In addition, in the casual footwear market, we compete with a number of companies, such as Skechers, Converse (which Nike recently announced it was acquiring), Airwalk and Stride Rite (Keds), some of which may have significantly greater financial and other resources than we do. We also compete with smaller companies, such as DC Shoes, Sole Technology, Globe, DVS and Osiris which specialize in marketing to our core skateboarding customers.

     Our skateparks have faced increased competition from large, free, public skateparks which are often located near our parks and are better maintained and more sophisticated than older public skateparks. This increased competition has had a material adverse impact on our skatepark business over the past two years and has led to our decision to substantially exit the skatepark business. See “Fiscal 2003 Overview.”

     We also face significant competition in the snowboard boot and binding industries, most notably from Burton Snowboards, Salomon and K2. Our Autolock snowboard binding system competes with several large well-known companies which have developed step-in bindings. In addition, conventional strap-in bindings have captured a much greater market share than step-in systems and we anticipate this will likely continue for at least the next few years. Although we sell strap-in bindings under our AGENCY brand, our sales of such bindings have not been substantial. Our inability to effectively compete with other snowboard boot companies or other manufacturers of binding systems could harm our business.

     We are a relatively new entrant in the apparel business. The apparel industry is highly competitive, more fashion-oriented and more fragmented than the athletic footwear industry. Many of our competitors have significantly greater financial resources than we do and spend substantially more on product advertising. Our inability to effectively compete in the apparel market would harm our ability to successfully grow this aspect of our business.

OUR RELIANCE UPON INDEPENDENT CONTRACT MANUFACTURERS EXPOSES US TO VARIOUS RISKS ASSOCIATED WITH DISRUPTION IN PRODUCT SUPPLY, ANY OF WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.

     All of our shoes and snowboard boots are manufactured by independent suppliers located in the Peoples Republic of China for most of our international markets, and the Philippines for some European markets, Mexico and Argentina. Although we execute manufacturing agreements with our foreign manufacturers, we cannot assure that we will not experience difficulties with our manufacturers, such as reduction in the availability of production capacity, errors in complying with product specifications, inability to obtain sufficient raw materials, insufficient quality control, failure to comply with our requirements for the proper utilization of our intellectual property, failure to meet production deadlines, or increases in manufacturing costs. In addition, if our relationship with any of our manufacturers were to be interrupted or terminated, alternative manufacturing sources will have to be located. The establishment of new manufacturing relationships involves numerous uncertainties, and we cannot assure that we would be able to

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obtain alternative manufacturing sources on a timely basis or on satisfactory terms. Should a change in our suppliers become necessary, we would likely experience increased costs, as well as substantial disruption and resulting loss of sales. We also utilize international sourcing agents who assist us in selecting and overseeing third party manufacturers, ensuring quality, sourcing fabrics and monitoring quotas and other trade regulations. The loss or reduction in the level of services from such agents could significantly affect our ability to efficiently source products from our independent manufacturers overseas, which could have a material adverse effect on our business.

     In addition, our relationships with independent foreign manufacturers are also subject to a number of risks, including work stoppage, transportation delays and interruptions, political instability, foreign currency fluctuations, changing economic conditions, an increased likelihood of counterfeit, knock-off or gray market goods, expropriation, nationalization, imposition of tariffs, import and export controls and other non-tariff barriers (including quotas) and restrictions on the transfer of funds, environmental regulation, and other changes in governmental policies. In particular, changes in U.S. tax law or interpretations thereof related to our operations could materially impact our effective tax rate. In addition, adverse changes in trade or political relations with China or political instability in China would severely interfere with our manufacturing and would have a material adverse effect on our business. We cannot be certain that these factors will not materially adversely affect our ability to procure manufactured products in a cost-effective or timely manner in the future. Although we require our manufacturers to represent to us that their operations comply with their local laws governing labor practices and work conditions, and we periodically monitor such compliance, the failure of our manufacturers to comply with such laws could adversely impact our reputation and business.

     All of our products manufactured overseas and imported into the United States are subject to duties collected by the United States Customs Service. We may be subjected to additional duties, significant monetary penalties, the seizure and the forfeiture of the products we are attempting to import or the loss of import privileges if we or our suppliers are found to be in violation of U.S. laws and regulations applicable to the importation of our products. Also, we may suffer delays in distributing our products due to work stoppages, slowdowns, or strikes at the ports where we land our products, such as the lockout which occurred in the fall of 2002 at the Long Beach, California port where we land the vast majority of our products.

     In addition, although the products sold by us are not currently subject to quotas in the United States, certain countries in which our products are sold are subject to certain quotas and restrictions on foreign products which to date have not had a material adverse effect on our business. The enactment of any additional or modified duties, quotas or restrictions could result in material increases in the cost of such products and might adversely affect our sales or profitability.

OUR EXPANSION INTO INTERNATIONAL MARKETS AND OUR TRANSACTING BUSINESS IN FOREIGN CURRENCY EXPOSES US TO RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.

     We do business through wholly-owned and co-owned subsidiaries and sales agents in a number of countries throughout the world. In connection with this strategy, we have established an operational structure to support the activities of our subsidiaries and sales agents in Europe. We also currently operate a joint venture to sell our products in Mexico. We may experience risks while doing business directly in foreign countries such as managing operations effectively and efficiently from a far distance and understanding and complying with local laws, regulations and customs. In fiscal 2003 we terminated the operations of our joint venture subsidiaries in Brazil, Argentina, and Uruguay.

     In addition, we sell products in a number of countries throughout the world, and thus are exposed to economic fluctuations and movements in foreign currency exchange rates. In particular, our four largest international markets are Japan, France, the United Kingdom and Germany. Adverse changes in our business in those countries or in the economies of those or other countries in which we do business could have a material adverse effect on our business. The major foreign currency exposure for us involves the euro, the British sterling, the Japanese yen and the Mexican peso. In particular, fluctuations in the past in the value of the euro and the British sterling have had a significant, negative impact on our European business. Additionally, in fiscal 2002 weaknesses in Latin American economies, particularly Argentina, negatively affected our business in Brazil, Argentina and Uruguay, leading to our decision to terminate the operations of our joint ventures in those countries. We are also exposed to risks resulting from political instability, tariffs, counterfeit goods, restrictions on transfers of funds and other changes in governmental regulations.

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IF WE WERE UNABLE IN THE FUTURE TO SPONSOR SUITABLE ATHLETES TO ENDORSE OUR PRODUCTS ON REASONABLE TERMS, WE MAY HAVE TO CHANGE OUR MARKETING PLANS, WHICH MAY NEGATIVELY AFFECT OUR BRAND AND OUR BUSINESS.

     A key element of our marketing strategy has been to obtain endorsements from prominent Core Sports athletes in both the U.S. and internationally. These contracts typically have fixed terms, and we cannot assure that they will be renewed or that athletes signed by us will continue to be effective promoters of our products. If we are unable in the future to sponsor suitable athletes to endorse our products on terms we deem reasonable, we would probably have to modify our marketing plans and rely more heavily on other forms of advertising and promotion, which might not be as effective. In addition, negative publicity about our sponsored athletes could harm our reputation and brand and adversely impact our business.

IF THE CORE SPORTS WE SUPPORT DECREASE IN POPULARITY OR FAIL TO ATTRACT MEDIA COVERAGE, OR WE FAIL TO ATTRACT OR RETAIN SPONSORS FOR OUR CORE SPORTS EVENTS, OUR BUSINESS MAY BE HARMED.

     Our brand strategy is focused, to a large extent, on the promotion and support of Core Sports. Many Core Sports are relatively new or have historically fluctuated in popularity, due in part to limited media coverage of these sports. Core Sports are followed by significantly fewer fans than more traditional sports, such as football, baseball and basketball. Although participation in, and viewership of, many of the Core Sports we promote are growing at a high rate, we cannot assure that the popularity of Core Sports will continue to grow. If any of the key Core Sports we promote loses popularity or fails to grow or attract media coverage, we may have to change our strategy with respect to those sports, which could have a material adverse effect on our business, financial condition and results of operations.

     Additionally, we rely on the sale of advertising spots to help finance the television programs we produce for our Core Sports events. Due to the weak market for selling such advertisements, we have been unable to sell sufficient advertisements to offset the cost of broadcasting our television programs on NBC and Fox Sports Net. Also, we rely on sponsorships to help finance and expand our Core Sports events. If our current sponsors do not renew their sponsorship agreements or if the revenues we receive from such sponsors decrease, and we are unable to attract additional sponsors, we will have to finance a greater portion of our Core Sports events ourselves, which would have a material adverse effect on our results of operations.

THE INABILITY TO SUBSTANTIALLY EXIT THE SKATEPARK BUSINESS, OR A HIGHER THAN ANTICIPATED COST OF TERMINATING REMAINING SKATEPARK LEASES, COULD ADVERSELY EFFECT OUR FUTURE PROFITABILITY.

     As discussed under the caption “Fiscal 2003 Overview,” due to the decline in revenue and profitability we have experienced at our skateparks over the past two years, we have taken steps to substantially exit the skatepark business. As of August 15, 2003 we have reached agreements to terminate the leases for eight of our operating skateparks plus a planned park for Sacramento, California. If we are unable to reach agreements to terminate the leases for at least two of the remaining four parks, or if the two parks we plan to keep open experience significant future declines in revenue, our overall profitability could be materially impacted.

OUR FINANCIAL RESULTS MAY FLUCTUATE FROM QUARTER TO QUARTER AS A RESULT OF SEASONALITY IN OUR BUSINESS.

     The footwear industry generally is characterized by significant seasonality of net sales and results of operations. Our business is seasonal, with the largest percentage of our U.S. sales and earnings realized in our first fiscal quarter (June through August) or the “Back to School” months. This seasonal fluctuation in consumer demand could have a material adverse effect on our business, financial condition and results of operations.

     In addition, we have historically shipped less than all orders in our backlog and we have shipped a large portion of our products towards the end of the quarter to meet seasonal peaks for the back-to-school, holiday and spring selling seasons. As a result, we may not learn of sales shortfalls until late in any particular fiscal quarter, which could result in an immediate and adverse effect on our business, financial condition and results of operations. Additionally, backlog orders are subject to both cancellation by customers and the ability of third party manufacturers to timely deliver product to fill such orders.

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DISRUPTIONS IN THE SUPPLY OF LEATHER OR OTHER RAW MATERIALS COULD SIGNIFICANTLY INCREASE OUR PRODUCTION COSTS.

     Disruptions in the worldwide supply of leather, such as those that resulted from the outbreak of “mad cow” and “hoof and mouth” diseases in 2001, could cause prices for leather, which is a raw material component of our footwear products, to increase. If leather prices increase, the costs associated with our production of footwear would increase. In addition, increases in the cost of oil could increase the cost of rubber, which is also a raw material component of our footwear products. We may not be able to increase the price of our products to offset these increased costs. Any significant increases in our production costs could have a material adverse impact on our business.

ENERGY SHORTAGES, NATURAL DISASTERS, HEALTH EPIDEMICS, A DECLINE IN ECONOMIC CONDITIONS IN CALIFORNIA OR FUTURE TERRORIST ACTIVITIES OR THREATS COULD INCREASE OUR OPERATING EXPENSES OR ADVERSELY AFFECT OUR SALES REVENUE.

     A substantial portion of our operations are centered in California, including more than half of our retail stores, three skateparks, our corporate headquarters and our central distribution center. In fiscal 2002 we experienced increased electricity and energy rates due to California’s energy and electricity shortages. Future shortages could impact or interrupt our business. Any such impact or interruption could be material and adversely affect our profitability. In addition, because a significant portion of our revenue comes from sales in California through our retail stores, the recent economic decline in California has adversely affected our business. Continued economic declines in California would likely have the same effect. Furthermore, a natural disaster or other catastrophic event, such as an earthquake affecting California, could significantly disrupt our business. We may be more susceptible to these issues than our competitors whose operations are not as concentrated in California.

     Our business could also be adversely impacted by other matters beyond our control, such as the recent outbreak of the SARS virus in China and Hong Kong. Although we have not, to date, experienced any interruption in our ability to obtain product from the Far East as a result of SARS, any prolonged interruption in our ability to send personnel to China to inspect and develop product, or a high absenteeism rate at factories in China or at our offices in Hong Kong, could have an adverse effect on our ability to finalize, manufacture and ship products. Finally, our future results could be affected by changes in business, political and economic conditions, including the cost and availability of insurance, due to the September 11, 2001 or subsequent terrorist attacks in the U.S., the threat of future terrorist activity in the U.S. and other parts of the world and related U.S. military action overseas.

THE ACQUISITION OF ADDITIONAL BUSINESS ENTITIES IN THE FUTURE MAY HAVE UNANTICIPATED CONSEQUENCES THAT HARM OUR BUSINESS.

     We often evaluate various business entities as potential acquisition candidates in the ordinary course to build upon or complement our current business. Pursuant to this strategy, in fiscal 2002 we acquired Pro-tec. Future acquisitions may be larger in scale than the Pro-tec acquisition or other acquisitions we have completed in the past. Any acquisition we pursue, whether or not successfully completed, will involve numerous risks, including difficulties in the assimilation and integration of the operations, employees, technologies and products of the acquired companies, difficulties in potential conflicts with the existing culture of acquired companies, the diversion of management’s attention from other business concerns, risks associated with entering markets or conducting operations with which we have no or limited direct prior experience, and the potential loss of key employees of acquired businesses. Moreover, we cannot be certain that we will realize the anticipated benefits of any acquisition. Future acquisitions, which may be accomplished through a cash purchase transaction or the issuance of our equity securities, or a combination of both, could result in potentially dilutive issuances of our equity securities, the incurrence of debt and contingent liabilities and amortization expenses related to goodwill and other intangible assets, any of which could harm our business and financial condition.

IF WE ARE UNABLE TO RETAIN OUR MANAGEMENT TEAM, OUR BUSINESS MAY BE HARMED.

     Our future success is highly dependent on the services of our management team. In particular, we are dependent on the continued services of Gary H. Schoenfeld, our President and Chief Executive Officer. The loss of the services of Mr. Schoenfeld or any of our other executive officers could have a material adverse effect on our business. In addition, the market for key personnel in the industries in which we compete is highly competitive, and we may not be able to attract and retain key personnel with the skills and expertise necessary to manage our business, both in the United States and internationally.

IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY OR BECOME SUBJECT TO INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS, OUR BUSINESS MAY BE HARMED.

     We consider our “intellectual property” (trademarks, patents, etc.) to be critical to our business. We rely on trademark, copyright and trade secret protection, patents, non-disclosure agreements and licensing arrangements to establish, protect and enforce our intellectual property rights in our products. Despite our efforts to safeguard and maintain such rights, we cannot assure that we will be

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successful in this regard, and we cannot assure that third parties will not sue us for intellectual property infringement in the future. Furthermore, we cannot assure that our trademarks, products and promotional materials do not or will not violate the intellectual property rights of others, that they would be upheld if challenged or that we would, in such an event, not be prevented from using our trademarks and other intellectual property. Although any claims may ultimately prove to be without merit, the necessary diversion of management attention to, and legal costs associated with, litigation could materially and adversely affect our business. We have in the past sued and been sued by third parties in connection with certain matters regarding our trademarks, none of which has materially impaired our ability to utilize our trademarks. We also are from time to time involved in other litigation, not including intellectual property, which could adversely affect our business and financial condition.

     The laws of certain foreign countries do not protect intellectual property rights to the same extent or in the same manner as the laws of the U.S. Although we continue to implement protective measures and intend to defend our intellectual property rights vigorously, we cannot assure that these efforts will be successful or that the costs associated with protecting our rights in certain jurisdictions will not be extensive.

     From time to time, we discover products in the marketplace that are counterfeit reproductions of our products or that otherwise infringe upon our intellectual property rights. We cannot assure that the actions we take to establish and protect our intellectual property rights will be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as violating intellectual property rights. If we are unsuccessful in challenging a third party’s rights, continued sales of such product by that or any other third party could adversely impact our brand, result in the shift of consumer preferences away from our products, and generally have a material adverse effect on our business.

     In addition, we license several of our trademarks for third party products. While these licenses provide for quality control standards, such as the review and approval by us of all licensed products and proposed distribution channels, there can be no assurance that licensees will not breach their agreements and market inferior products or sell products through unapproved distribution channels, any of which would have an adverse impact on our brand.

CUSTOMERS THAT USE OUR PRODUCTS AND SKATEPARKS ENGAGE IN HIGH-RISK ACTIVITIES THAT COULD RESULT IN LEGAL CLAIMS THAT, IF SUCCESSFUL, COULD ADVERSELY IMPACT OUR BUSINESS.

     Participants at our skateparks and the VANS High Cascade Snowboard Camp and users of our products, including those who wear PRO-TEC protective gear, engage in high-risk activities such as skateboarding, snowboarding, in-line skating, freestyle motocross, supercross and BMX riding. Consequently, we are exposed to the risk of product liability or personal injury claims in the event that a user of our products or a visitor to our entertainment venues, including the concert venues of the VANS Warped Tour, is injured. Participants at our entertainment venues or users of our products may engage in imprudent or even reckless behavior, thereby increasing the risk of injury. We maintain general liability insurance (which includes product liability coverage) and excess liability insurance coverage in an amount which we believe is sufficient. However, we cannot be certain that such coverage will be sufficient, will continue to be available on acceptable terms, will be available in amounts sufficient to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our financial condition and business reputation.

OUR STOCK PRICE MAY BE VOLATILE DUE TO FACTORS BEYOND OUR CONTROL.

     The market price of our common stock has fluctuated substantially since our initial public offering in August 1991. We cannot assure that the market price of our common stock will not continue to fluctuate significantly. Events such as future announcements concerning us or our competitors, quarterly variations in operating results, the introduction of new products or changes in product pricing policies by us or our competitors, changes in earnings estimates by analysts, our failure to achieve analysts’ earning estimates, or changes in accounting policies, could cause the market price of our common stock to fluctuate substantially. In addition, stock markets have experienced extreme price and volume volatility in recent years, including decreases in the overall market indexes during the past three years. This volatility has had a substantial effect on the market prices of securities of many smaller public companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations could adversely affect the market price of our common stock and consequently, our ability to raise capital in the future.

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WE HAVE IMPLEMENTED ANTI-TAKEOVER PROVISIONS WHICH COULD POSSIBLY DISCOURAGE OR PREVENT OR DELAY A TAKEOVER.

     Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock (of which 1,500,000 shares have been designated Series A Junior Preferred Stock) and to fix the rights, preferences, privileges and restrictions of such shares without any further vote or action by our stockholders. The potential issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control, may discourage bids for the common stock at a premium over the market price of the common stock and may adversely affect the market price of, and the voting and other rights of the holders of, our common stock. We have no current plans to issue shares of preferred stock. Additionally, the board of directors has adopted a Stockholder Rights Plan pursuant to which the holders of our common stock have a Series A Junior Preferred Stock purchase right for every share of common stock owned by them. The rights are exercisable upon the occurrence of certain transactions and entitle the holder to acquire additional shares of our common stock or of a potential acquirer at a price equal to 50% of the then current market price of such stock. The rights could have the effect of deterring tender offers or takeover attempts. Other provisions of our charter and bylaws may also have the effect of delaying or deterring a change in control.

ITEM 2. PROPERTIES

     All of our retail stores and skateparks are leased. Leases for our outlet stores typically provide for an initial lease term of three to five years with at least one renewal option for an additional three or five years. Leases for full-price, mall-based stores typically provide for a term of 10 years with no renewal option. Skatepark leases typically have an initial term of ten years with at least one ten-year renewal option. As discussed under the caption “Fiscal 2003 Overview,” as of August 15, 2003, we have terminated eight of the leases for our operating skateparks plus the lease for a planned skatepark in Sacramento, California, and are seeking to terminate at least two of the remaining four leases.

     In most cases, we pay rent on a monthly basis, which is subject to periodic rent escalation provisions plus additional rent based on a percentage of sales in excess of certain breakpoints. In fiscal year 2003, our annual rent for our retail stores and skateparks was approximately $16.7 million without contingent payments.

     Until 1994, all of our retail stores were located in California. Since then we have added retail stores throughout the U.S. and Europe. Currently, more than half of our retail stores are in California with no more than three full-price retail stores or four outlet stores in any state or country outside California.

     Our corporate headquarters are located in Santa Fe Springs, California and consist of an aggregate of 36,000 square feet. The lease for our headquarters expires in 2007 with an option to extend for 10 years. The current aggregate annual rent for our headquarters is approximately $920,000 and is subject to adjustment during the term of the lease. We also lease space for our distribution center, which is attached to our corporate headquarters. The rent for this facility is included in the total rent payments for our headquarters. The distribution center is approximately 144,000 square feet and is believed to be adequate at this time.

ITEM 3. LEGAL PROCEEDINGS

     Litigation involving former Officer and Consultant and Their Affiliates. On March 20, 2002, we filed a complaint in the Superior Court for the County of Los Angeles entitled Vans, Inc. vs. Scott Brabson, Gordana Brabson, Jay Rosendahl, Heidi Rosendahl, Catch Air Technology, et al, Case No. BC 27031. In this action, we alleged that the defendants, one of whom is a former officer of Vans, and another of whom is a former consultant of Vans, engaged in a conspiracy to obtain unauthorized payments from certain of our factories in China (the “Superior Court Action”). We also filed a separate arbitration proceeding against Messrs. Brabson and Rosendahl in which we made the same allegations.

     The arbitration was concluded in December 2002. On January 28, 2003, the arbitrator issued a final award against Scott Brabson finding that he had breached his employment agreement with Vans; breached his fiduciary duties to Vans; and committed numerous other torts against Vans. The arbitrator awarded damages of approximately $4.8 million to Vans along with interest and attorney’s fees of approximately $3.2 million. The award was subsequently confirmed by the judge in the Superior Court Action. Brabson has appealed the confirmation of the award. Subsequently, the arbitrator issued a final award against Jay Rosendahl finding that he had breached his consulting agreement with Vans and committed numerous torts against Vans. Both Brabson and Rosendahl have filed for protection under Chapter 7 of the federal bankruptcy law. No portion of the award has been recorded in our consolidated financial statements.

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     In the Superior Court Action, default judgments were entered against Heidi Rosendahl and various companies controlled by the defendants in July 2003. We separately settled our case against Gordana Brabson. No amounts were paid to either party in connection with the settlement.

     Additionally, on March 1, 2002, we were sued in Superior Court for the County of Los Angeles by Cross-Fire Technology and its related entities (Cross-Fire Technology, et al vs. Vans, Inc. and Arthur I. Carver, Case No. BC 269228). The plaintiffs were controlled by certain of the individual defendants in the above lawsuit. The plaintiffs alleged that an officer of Vans made unlawful threats against certain factories that made footwear for us and the plaintiffs and slanderous statements against an affiliate of the plaintiffs. This case was dismissed with prejudice in July 2003. Accordingly, we will not be reporting further on this case.

     Gordana Brabson vs. Vans, Inc. et. al, Superior Court of California, County of Santa Barbara, Case No. 01110315. This lawsuit was filed against Vans, two of Vans’ executive officers, and certain other individuals and entities on December 6, 2002, in connection with the above-mentioned litigation. Mrs. Brabson alleges causes of action for invasion of privacy, trespass, and intentional infliction of emotional distress relating to the investigation conducted in connection with that litigation. She seeks an unspecified amount of compensatory, special and punitive damages. We brought a so-called “SLAPP” motion to dismiss this case on the grounds that it was designed to inhibit our ability to pursue our remedies in the above litigation. The court denied this motion. Discovery has been substantially concluded in this matter and it has been set for trial on September 4, 2003.

     In addition to the foregoing, from time to time we are the subject of claims in the ordinary course of our business.

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

     Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Stock Information.

     Our common stock is traded on the Nasdaq National Market under the symbol “VANS.” The following table sets forth, for the periods indicated, the high and low closing sale prices for our common stock, as reported by the Nasdaq National Market.

     On August 14, 2003, the last reported sale price of our common stock on the Nasdaq National Market was $9.03. As of August 14, 2003, there were 258 holders of record of our common stock. That figure does not include beneficial owners who hold shares in nominee name.

Dividend Policy

     We have never declared or paid a cash dividend on our common stock. We presently intend to retain earnings to fund the development and growth of our business and, therefore, we do not anticipate paying any cash dividends in the foreseeable future.

Equity Compensation Plan Information.

     The following table provides information, as of May 31, 2003, with respect to all of our compensation plans under which equity securities are authorized for issuance:

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

     The information set forth below should be read in conjunction with the consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this report.

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

     The following discussion of our financial condition and results of operations should be read in conjunction with our selected consolidated financial data and our consolidated financial statements included in this report. Certain amounts have been reclassified to conform to the current year presentation. This discussion contains forward-looking statements which involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors, including but not limited to those discussed in Item 1. “Business — Risk Factors” and elsewhere in this report.

GENERAL OVERVIEW

     Vans is a leading global sports and lifestyle company that merchandises, designs, sources and distributes VANS-branded active-casual and performance footwear, apparel and accessories for Core Sports. Core Sports, including skateboarding, snowboarding, surfing, wakeboarding, BMX riding and motocross, are generally recognized for the fun, creativity and individual achievement experienced while attempting various tricks or maneuvers within these sports. Our focus has been proprietary branding with the goal of creating a leadership position for our brand and a strong emotional connection with our customers. Our VANS brand targets 10 to 24 year old participants, enthusiasts and emulators of the Core Sports culture. We have implemented a unique marketing plan to reach

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our customers through multiple points of contact which include owning and operating Core Sports entertainment events and venues, such as the VANS Triple Crown Series, VANS skateparks and the VANS High Cascade Snowboard Camp, sponsoring professional and amateur athletes and the VANS Warped Tour, as well as advertising in targeted print and television media.

FISCAL 2003 OVERVIEW

     In fiscal 2003, we continued to experience the challenges to our business that began to manifest themselves in fiscal 2002. Our overall revenues in fiscal 2003 were down slightly to $330.2 million from $331.4 million a year ago; our U.S. wholesale business declined 7.2%, year-over-year, from $124.2 million to $115.2 million; and our retail same-store sales decreased 3.2% for the year.

     Additionally, the negative trends which began to affect our U.S. retail and skatepark businesses in fiscal 2002 also continued during fiscal 2003. These trends led us to write-down some or all of the long-lived assets of 17 of our retail stores, all of the long-lived assets of 10 of our skateparks, and the long-lived assets associated with the construction of a skatepark that was scheduled to open in Sacramento, California in fiscal 2004. We incurred aggregate pre-tax non-cash impairment charges of approximately $16.5 million in the third and fourth quarters in connection with those and other asset write-downs.

     As a result of the negative trends at our skateparks, we decided to substantially exit the skatepark business and we began negotiations with the landlords to obtain rent concessions and/or terminations of our skatepark leases. As of August 15, 2003, we have reached agreements to terminate the leases for eight of the 12 skateparks we operated as of the beginning of fiscal 2003 plus the lease for a proposed park in Sacramento, California. Of these parks, six will remain open for terms ranging from three months to one year at reduced cash rents and subject to the landlords’ right to recapture the space upon 30 days written notice. Two of the six parks will close on August 30, 2003. We incurred lease termination costs of $10.0 million in the fourth quarter related to six of those lease terminations, and we will incur additional lease termination costs in connection with three lease terminations in the first quarter of fiscal 2004.

     Also, during the year, our snow business continued to be adversely impacted by the decrease in sales of our Switch step-in bindings. As a result, as of March 31, 2003, we determined that the goodwill associated with our 1998 acquisition of Switch had become impaired, and we wrote-down the entire amount of such goodwill.

     A summary of the charges and lease termination costs we incurred during the year are as follows:

CRITICAL ACCOUNTING POLICIES

     Our financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. Changes in the estimates or other judgements of matters inherently uncertain that are included within these accounting policies could result in a significant change to the information presented in the financial statements. We believe our most critical accounting policies relate to:

     Revenue Recognition. We recognize product, skatepark, royalty, event and other revenue upon concluding that all of the fundamental criteria for revenue recognition have been met. We record wholesale revenues when title passes and the risks and rewards of ownership have passed to the customer. Retail store revenues are recorded at the time of sale. As part of our revenue recognition policy, we record estimated returns and miscellaneous claims from customers as reductions to revenues at the time revenues are recorded. We base our estimates on historical rates of product returns and claims as well as specific identification of outstanding claims and returns not yet received from customers. Actual returns and claims in any future period are inherently uncertain and thus may differ from our estimates.

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     Accounts Receivable. We provide allowances for doubtful accounts based on a number of factors including historical experience and past due status as well as individual customer circumstances such as ability to pay, bankruptcy, credit ratings and payment history. If actual market conditions are less favorable than those projected by us, additional provisions for doubtful accounts may be required.

     Inventory. Inventories are valued at the lower of cost or market. Finished goods inventories are valued using the first-in, first-out method (“FIFO”). We provide reserves for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by us, additional inventory write-downs may be required.

     Impairment of Property, Plant and Equipment. We evaluate the carrying value of property, plant and equipment assets for impairment when the assets experience a negative event (i.e., significant downturn in operations, losses from operating units, natural disaster, etc.). When these events are identified, we review the last two years of operations, for example, on a store-by-store basis and, if there are losses, we estimate future undiscounted cash flows. If the projected undiscounted cash flows do not exceed the carrying value of the assets, we write-down the assets to fair value based on discounted projected future cash flows. The most significant assumptions we use in this analysis are those made in estimating future discounted cash flows. In estimating cash flows, we generally use the financial assumptions in our current budget and our strategic plan and modify them on a store-by-store basis if other factors should be considered. The discount rate applied is based upon our weighted average cost of capital adjusted for the risks associated with the operations being analyzed. As described in Note 9 to the Consolidated Financial Statements and above under the caption “Fiscal 2003 Overview,” we recorded impairment charges aggregating $16.5 million in fiscal 2003 to write down the long-lived assets associated with 10 of our skateparks, some or all of the long-lived assets of 17 of our retail stores, and the long-lived assets associated with the construction of the planned Sacramento park and certain other long-lived assets, to net realizable value. Although we believe the assumptions made regarding our other long-lived assets are reasonable given our current operating performance, any change in market conditions could result in additional impairment losses. During fiscal 2002, we incurred impairment charges of $5.9 million in connection with the planned closure of our Bakersfield skatepark and the write-down of assets at our Denver skatepark and three retail stores.

     Goodwill. Goodwill is tested for impairment annually as of March 31 at the reporting unit level unless a change in circumstances indicates more frequent impairment analysis is required. Impairment, if any, is measured in part based on the estimated fair value of the reporting units with the recorded goodwill. Fair value is determined by using a combination of techniques, such as the traditional present value approach, the expected cash flow approach, and the multiple of earnings approach. The most significant assumptions we use in this analysis are those made in estimating future cash flows. In estimating future cash flows, we generally use the financial assumptions in our current budget and our strategic plan, subject to modification as considered necessary, including sales and expense growth rates and the discount rate we estimate to represent our cost of funds. Goodwill is comprised of $12.7 million associated with the acquisition of our predecessor company; $6.2 million associated with the acquisition of Pro-tec; $5.8 million related to the acquisition of Global Accessories Limited (now known as Vans Inc. Limited), our U.K. distributor; $4.9 million associated with our acquisition of a majority interest in the VANS Warped Tour; and $2.1 million associated with our acquisition of Compagnie Sunspot SA, our sales agent for France. As described under the caption “Fiscal 2003 Overview” and in Note 2 to the Consolidated Financial Statements, we recorded an impairment charge of $4.6 million to fully write down the goodwill associated with our 1998 acquisition of the Switch snowboard boot binding business.

     Taxes. We record valuation allowances to reduce our deferred tax assets to amounts that we believe are more likely than not to be realized. Realization of deferred tax assets (such as net operating loss carryforwards) is dependent on future taxable earnings and is therefore uncertain. On a quarterly basis, we assess the likelihood that our deferred tax asset balance will be recovered from future taxable income. To the extent we believe that recovery is not likely, we establish a valuation allowance against our deferred tax asset, increasing our income tax expense in the period such determination is made.

     We have not recorded U.S. income tax expense for foreign earnings that we have determined to be indefinitely reinvested offshore, thus reducing our overall income tax expense. The amount of earnings designated as indefinitely reinvested offshore is based upon the actual deployment of such earnings in our offshore assets and our expectations of the future cash needs of our U.S. and foreign entities. Income tax considerations are also a factor in determining the amount of foreign earnings to be repatriated. In the event actual cash needs of our U.S. entities exceed our current expectations or the actual cash needs of our foreign entities are less than expected, we may need to repatriate foreign earnings which have been designated as indefinitely reinvested offshore. This would result in additional income tax expense being recorded. Because the determination of foreign earnings as indefinitely reinvested offshore involves future plans and expectations, there is a possibility that amounts determined to be indefinitely reinvested offshore may vary from our current expectations, thereby affecting future income tax expense.

     On an interim basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision in accordance with the anticipated annual rate. As the fiscal year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction during the year. This continual estimation process can result in changes to our expected

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effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision equals the expected annual rate.

RESULTS OF OPERATIONS

     The following table sets forth our operating results, expressed as a percentage of net sales, for the periods indicated.

FISCAL YEAR ENDED MAY 31, 2003 (“FISCAL 2003”), AS COMPARED TO FISCAL YEAR ENDED MAY 31, 2002 (“FISCAL 2002”)

Net Sales

     Net sales for Fiscal 2003 decreased slightly to $330.2 million from $331.4 million in Fiscal 2002. The sales decrease was the net effect of increases in Retail and International sales, offset by a decrease in National sales, as discussed below.

     Retail. Retail sales, which consist solely of sales through our U.S. retail stores and skatepark sessions and concessions, increased 3.8% to $114.2 million in Fiscal 2003 from $110.0 million in Fiscal 2002. This increase was primarily the result of the addition of 20 new stores, including four skateparks, in Fiscal 2002 as well as a strong fourth quarter in Fiscal 2003 in which we experienced an increase in average selling prices year-over-year of 4.2% accompanied by comparable store sales increases of 5.4%. Excluding revenue from concessions and skate sessions at our skateparks, we experienced a fourth quarter increase in comparable store sales of 9% year-over-year.

     In Fiscal 2003, comparable store sales (excluding revenue from concessions and skate sessions at our skateparks) declined 3.2%, primarily due to a year-over-year decline in average selling prices of 3.2% across all of our stores. Comparable revenues from concessions and skate sessions at our skateparks declined 34%, or $3.3 million, year-over-year. The decline in skatepark revenue was largely attributable to ongoing competition from free skateparks operated by local municipalities in nearly all of our skatepark markets. As discussed under the caption “Fiscal 2003 Overview,” these factors led to the impairment charges recorded in the third and fourth quarters of Fiscal 2003 and our decision to substantially exit the skatepark business.

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     National. National sales, which include all U.S. sales except sales through our U.S. retail stores, decreased 7.2% to $115.2 million in Fiscal 2003 from $124.2 million in Fiscal 2002. Excluding revenue from sales of protective gear products by Pro-tec, and revenue from the VANS Warped Tour, both of which were acquired in the second half of Fiscal 2002, national sales were down 21.9% to $95.9 million. The decrease in national sales in Fiscal 2003 was primarily related to decreased orders from our retail customers due to lower sell-through levels of our product.

     International. International sales, which include sales through our seven European stores, increased 3.6% to $100.8 million in Fiscal 2003 from $97.3 million in Fiscal 2002. This increase was primarily due to increased sales in Europe of $15.3 million, partially offset by decreased sales in Mexico and South America of approximately $3.5 million and $4.5 million, respectively, decreased sales in Asia of approximately $1.9 million, decreased sales in Canada of approximately $1.1 million, and reduced royalty payments from our licensee for Japan of approximately $750,000.

     The $15.3 million sales increase in Europe was largely due to a $9.7 million favorable variance in exchange rates and a $5.6 million increase in unit sales and local currency average selling prices. The decreased sales in Mexico, Asia and Canada were primarily a result of weakness in local retail markets. The results for Fiscal 2003 only contain one month of sales for South America as a result of the deconsolidation of our South American joint ventures in July 2002.

Gross Profit

     Gross profit decreased 1.3% to $149.8 million in Fiscal 2003 from $151.7 million in Fiscal 2002. As a percentage of net sales, gross profit decreased to 45.4% for Fiscal 2003, versus 45.8% in Fiscal 2002, primarily due to decreases in domestic gross profits, partially offset by increases in international gross profits. Domestically, retail gross profit decreased as a percentage of sales from 58.0% in Fiscal 2002 to 56.2% in Fiscal 2003 largely due to decreased sessions and concessions at our skateparks. National gross profits decreased as a percentage of sales from 35.9% in Fiscal 2002 to 32.6% in Fiscal 2003 primarily due to the absence of margin contribution from the newly acquired VANS Warped Tour in the first quarter of Fiscal 2003, the liquidation of certain excess inventory at no margin which was reserved for in the fourth quarter of Fiscal 2002 and the tough promotional environment in the U.S. which led to continued downward pricing pressure. Internationally, gross profit increased as a percentage of sales from 44.7% in Fiscal 2002 to 47.8% in Fiscal 2003, driven primarily by favorable fluctuations in the euro and the British sterling.

Loss from Operations

     We incurred a loss from operations of $32.6 million in Fiscal 2003, versus income from operations of $14,000 in Fiscal 2002. Operating expenses in Fiscal 2003 increased 20.2% to $182.4 million versus $151.7 million in Fiscal 2002 primarily as a result of the asset impairment charges and lease termination costs of $16.5 million and $10.1 million, respectively, incurred in the third and fourth quarters of Fiscal 2003. As a percentage of net sales, operating expenses increased to 55.2% versus 45.8% last year. The material components of the increase in operating expenses are discussed below.

     Retail. Retail expenses increased 12.5% to $68.1 million in Fiscal 2003 from $60.5 million in Fiscal 2002, primarily due to increased costs associated with the expansion of our retail division by the net addition of 19 new stores and four skateparks since the beginning of Fiscal 2002.

     Marketing, advertising and promotion. Marketing, advertising and promotion expenses decreased 18.6% to $27.8 million in Fiscal 2003 from $34.2 million in Fiscal 2002. This decrease was primarily due to a $4.0 million decrease in expenditures related to the VANS Triple Crown Series and other promotional activities, and $3.0 million of planned reductions in U.S. media expenditures partially offset by increased expenditures in Europe of approximately $900,000 as a result of the continued expansion of our European business and an increase of approximately $800,000 in expenditures by Pro-tec, which was acquired in the fourth quarter of Fiscal 2002.

     Selling, distribution and administrative. Selling, distribution and administrative expenses increased 5.5% to $54.5 million in Fiscal 2003 from $51.7 million in Fiscal 2002, primarily due to increased costs of approximately $2.7 million as a result of growth in our European business, increased costs of approximately $2.6 million by Pro-tec, which was acquired in the fourth quarter of Fiscal 2002, increased costs of approximately $1.7 million incurred by our joint venture in Mexico, which were largely due to losses incurred by the minority partner in the joint venture, and $750,000 incurred in the fourth quarter of fiscal 2003 to settle a dispute with a former employee. These increases were partially offset by a reduction in expenditures of $1.9 million as a result of the deconsolidation of our South America joint ventures in July 2002 and a net reduction in domestic selling and distribution costs of approximately $3.0 million as a result of the decrease in National sales from Fiscal 2002 to Fiscal 2003.

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     Asset impairment charges. Please see the discussion of these charges under the caption “Fiscal 2003 Overview.”

     Goodwill impairment charges. Please see the discussion of these charges under the caption “Fiscal 2003 Overview.”

     Lease termination costs. Please see the discussion of these costs under the caption “Fiscal 2003 Overview.”

     Amortization of intangibles. Amortization of intangibles increased to $734,000 in Fiscal 2003 from $266,000 in Fiscal 2002 as a result of the amortization of intangible assets acquired in the Pro-tec acquisition which occurred in the fourth quarter of Fiscal 2002.

Interest Income, Net

     Interest income, net of interest expense, decreased 38.7% to $690,000 in Fiscal 2003 from $1.1 million in Fiscal 2002, primarily due to lower interest rates on monies invested by us.

Other Expense, Net

     Other expense, net, primarily consists of royalty payments received from the non-footwear related licensing of our trademarks, exchange rate gains and losses, and rental income. Other expense, net, decreased to $712,000 in Fiscal 2003 from $1.1 million in Fiscal 2002, primarily due to a decrease in losses generated on unhedged U.S. dollar denominated transactions within our European business as well as the non-recurrence of foreign currency transaction losses that occurred in Fiscal 2002 related to Argentina and Brazil.

Income Tax (Benefit) Expense

     We recognized a tax benefit of $3.9 million in Fiscal 2003 versus an expense of $80,000 in Fiscal 2002, primarily as a result of the losses we incurred in Fiscal 2003. Our effective tax rate was 12.1% in Fiscal 2003 versus 100% in Fiscal 2002. The change in our effective tax rate was due to the effect of tax benefits on domestic losses being provided at different tax rates than tax provisions applied to offshore income. In future periods, our effective tax rate could fluctuate if the mix between taxable income from U.S. and foreign jurisdictions significantly changes. See the discussion above under the caption “Critical Accounting Policies — Taxes” and Note 5 to the Consolidated Financial Statements.

Minority Interest

     Minority interest decreased 46.4% to $675,000 in Fiscal 2003 from $1.3 million in Fiscal 2002, primarily as a result of approximately $1.3 million in losses incurred by the minority shareholder in connection with our joint venture in Mexico, partially offset by the increased profitability of our domestic joint venture with Pacific Sunwear of California, Inc. (“Pac Sun”), Van Pac LLC.

Loss from Discontinued Operations, Net of Tax

     As discussed more fully above under the caption “Fiscal 2003 Overview,” in Fiscal 2003 we made the decision to substantially exit the skatepark business. Discontinued operations for Fiscal 2003 include the net results of operations of the Bakersfield skatepark, which was the only skatepark that had been closed as of May 31, 2003. Losses from discontinued operations decreased to $648,000 in Fiscal 2003 from $1.3 million in Fiscal 2002 primarily as a result of impairment charges recorded in relation to the Bakersfield skatepark in Fiscal 2002. As we close additional skateparks in the future, the related operating results will be recast as discontinued operations in the consolidated statements of operations for all periods presented.

FISCAL YEAR ENDED MAY 31, 2002, AS COMPARED TO FISCAL YEAR ENDED MAY 31, 2001 (“FISCAL 2001”)

Net Sales

     Net sales for Fiscal 2002 decreased 2.6% to $331.4 million from $340.2 million in Fiscal 2001. The sales decrease was the net effect of increases in Retail sales offset by decreases in National and International sales, as described below. As our sales are largely

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dependent upon the retail environment, Fiscal 2002 sales were negatively impacted as a result of decreased retail foot traffic following the terrorist attacks that occurred in New York on September 11, 2001.

     Retail. Retail sales, which consist solely of sales through our U.S. retail stores and skatepark sessions and concessions, increased 7.5% to $110.0 million in Fiscal 2002 from $102.3 million in Fiscal 2001. This increase was driven by additional sales from a net increase of 16 stores and four skateparks versus Fiscal 2001, partially offset by a decline of 3.5% in comparable store sales (excluding revenue from concessions and skate sessions at our skateparks). Comparable revenues from concessions and skate sessions at our skateparks declined 25.2% from Fiscal 2001.

     National. National sales, which include all U.S. sales except sales through our U.S. retail stores, decreased 11.1% to $124.2 million in Fiscal 2002 from $139.6 million in Fiscal 2001. Excluding revenue from sales of protective gear products by Pro-tec, and revenue from the VANS Warped Tour, both of which were acquired in the second half of Fiscal 2002, national sales declined 12.1% to $122.8 million. The decrease in national sales in Fiscal 2002 was primarily a result of significant declines in our women’s business.

     International. International sales, which include sales through our seven European stores, decreased 0.9% to $97.3 million in Fiscal 2002 from $98.2 million in Fiscal 2001. This decrease was primarily due to decreased sales in Asia of approximately $1.7 million, decreased sales in Australia of approximately $1.1 million, and decreased sales in Canada of approximately $800,000, partially offset by a $2.9 million increase in sales in Europe.

Gross Profit

     Gross profit increased 2.8% to $151.7 million in Fiscal 2002 from $147.6 million in Fiscal 2001. As a percentage of net sales, gross profit increased to 45.8% for Fiscal 2002, versus 43.4% in Fiscal 2001 as a result of retail sales increasing in proportion to total sales from 30.1% in Fiscal 2001 to 33.2% in Fiscal 2002. Domestically, retail gross profit remained consistent, decreasing only slightly from 58.2% in Fiscal 2001 to 58.0% in Fiscal 2002. National gross profit increased as a percentage of sales from 34.1% in Fiscal 2001 to 35.9% in Fiscal 2002 and international gross profit increased from 41.5% in Fiscal 2001 to 44.7% in Fiscal 2002, primarily as a result of increased average selling prices.

Income from Operations

     We had income from operations of $14,000 in Fiscal 2002, versus $26.8 million in Fiscal 2001. Primarily as a result of a $14.7 million increase in retail expenses and $5.0 million of asset impairment charges incurred in Fiscal 2002, operating expenses in Fiscal 2002 increased 25.6% to $151.7 million from $120.8 million in Fiscal 2001. As a percentage of net sales, operating expenses increased to 45.8% in Fiscal 2002 from 35.5% in Fiscal 2002. The material components of the increase in operating expenses are discussed below.

     Retail. Retail expenses increased 32.0% to $60.5 million in Fiscal 2002 from $45.9 million in Fiscal 2001, primarily due to increased costs associated with the expansion of our retail division by the net addition of 22 new stores and 7 skateparks since the beginning of Fiscal 2001.

     Marketing, advertising and promotion. Marketing, advertising and promotion expenses increased 37.2% to $34.2 million in Fiscal 2002 from $24.9 million in Fiscal 2001. This increase was mainly due to (i) approximately $2.5 million in increased television airtime costs in connection with the VANS Triple Crown Series, which we were unable to offset through the sale of advertising spots; and (ii) approximately $5.9 million in planned increases in marketing expenditures related to the VANS Triple Crown Series, increased advertising during the back-to-school selling season and new product-specific advertising.

     Selling, distribution and administrative. Selling, distribution and administrative expenses increased 7.0% to $51.7 million in Fiscal 2002 from $48.3 million in Fiscal 2001, largely attributable to (i) a $1.6 million specific reserve recorded in Fiscal 2002 in connection with the planned closure of our joint venture operations in Brazil, Argentina and Uruguay; (ii) increased legal expenses of approximately $1.3 million in Fiscal 2002 related to the settlement of the wage and hour litigation more fully described in our Annual Report on Form 10-K for Fiscal 2002; (iii) increased employee-related expenses of approximately $1.0 million; (iv) increased costs associated with our European operations of approximately $800,000; and (v) consulting fees of approximately $600,000 in Fiscal 2002 related to due diligence costs of an acquisition that did not close and international tax planning. These increases were offset by a decrease of $3.1 million in bonus provision year-over-year.

     Asset impairment charges. As a result of a general slowdown in business around the world and in California, lower-than-expected performance of our back-to-school 2001 and Spring 2002 product lines, and decreased attendance and revenues at our skateparks, we recorded pre-tax impairment charges of $5.0 million in the fourth quarter of Fiscal 2002. Of this amount, approximately $3.4 million

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related to the write-down of long-lived assets at our Denver skatepark, approximately $884,000 related to the write-down of long-lived assets at three of our domestic full-price retail stores, and approximately $727,000 related to the write-down of production costs for certain entertainment assets. No impairment charges were recorded in Fiscal 2001.

     Amortization of intangibles. Amortization of intangibles decreased to $266,000 in Fiscal 2002 from $1.7 million in Fiscal 2001 as a result of our June 1, 2001 adoption of Statement of the Financial Accounting Standards (“SFAS”) Nos. 141 and 142 “Business Combinations” and “Goodwill and Other intangible Assets,” which require that we prospectively cease the amortization of goodwill and instead conduct periodic impairment tests of goodwill and intangible assets deemed to have an indefinite life.

Interest (Income) Expense, Net

     Interest (income) expense, net increased 143.8% to income of $1.1 million in Fiscal 2002 from expense of $2.6 million in Fiscal 2001 due to higher cash balances and a reduced level of debt resulting from cash generated in our May 2001 public stock offering.

Other (Income) Expense, Net

     Other (income) expense, net decreased 185.3% to an expense of $1.1 million in Fiscal 2002 from $1.2 million of income in Fiscal 2001. The expense in Fiscal 2002 was largely comprised of foreign currency transaction losses of approximately $1.8 million, related primarily to Argentina and Brazil, offset by non-footwear licensing income of approximately $529,000. In Fiscal 2001, other income was largely comprised of (i) $1.5 million in gains and rental income recognized in connection with the sale of our former manufacturing facility in Orange, California; (ii) an $835,000 gain recognized from the sale and earn-out of our interest in the entity which owned the VANS Warped Tour, which was repurchased by us in Fiscal 2002; and (iii) approximately $732,000 in non-footwear licensing income, offset by a $1.1 million other-than-temporary decline in the fair value of securities held by us and approximately $642,000 in foreign currency transaction losses.

Income Tax Expense

     Income tax expense decreased to $80,000 in Fiscal 2002 from $8.7 million in Fiscal 2001 primarily due to decreased income in Fiscal 2002. Our effective tax rate was 100% in Fiscal 2002 versus 34% in Fiscal 2001. The change in our effective tax rate was due to the effect of tax benefits on domestic losses being provided at higher tax rates than tax provisions applied to offshore income.

Minority Interest

     Minority interest increased 2.9% to $1.3 million in Fiscal 2002 from $1.2 million in Fiscal 2001, primarily due to increased profitability of our joint venture in Mexico and our domestic joint venture with Pac Sun, Van Pac LLC, mostly offset by the decreased profitability of our joint ventures in Brazil and Argentina.

Loss from Discontinued Operations, Net of Tax

     As discussed more fully above under the caption “Fiscal 2003 Overview,” in Fiscal 2003 we made the decision to substantially exit the skatepark business. Discontinued operations include the net results of operations for those skateparks that have been closed by May 31, 2003. All prior period results of operations have been recast to reflect the impact of discontinued operations. As of May 31, 2003, discontinued operations included the results of the Bakersfield skatepark, which was the only skatepark that had been closed as of that date. Losses from discontinued operations increased to $1.3 million in Fiscal 2002 from $162,000 in Fiscal 2001 primarily as a result of impairment charges recorded in relation to this skatepark in Fiscal 2002.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

     We have historically financed our operations with a combination of cash flows from operations, borrowings under a credit facility and the sale of equity securities. In May 2001, we completed an underwritten public offering of our common stock. In connection with the offering, 2,800,000 shares of our common stock were sold for net proceeds of $60.1 million. In June 2001, an additional 420,000 shares were sold for net proceeds of $9.2 million to cover over-allotments. Most of the proceeds of such offering were used to open retail stores and skateparks and for general corporate purposes. Certain of the proceeds were used to repay debt that was outstanding at the time of the offering.

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     At May 31, 2003, we had $106.1 million in working capital and $52.8 million in cash and cash equivalents. This compares to working capital of $121.9 million, cash and cash equivalents of $28.4 million and short-term marketable debt securities of $27.5 million at May 31, 2002. Our working capital declined in 2003 due primarily to lease termination costs incurred in connection with our decision to substantially exit the skatepark business, as discussed under the caption “Fiscal 2003 Overview,” and a decrease in our deferred tax assets as a result of valuation allowances provided against certain of our domestic deferred tax assets. See Note 5 to the Consolidated Financial Statements. Our combined cash and investment balances declined by approximately $3.1 million largely due to the timing of inventory purchases in preparation for the 2003 back-to-school season.

     Accounts receivable decreased $2.4 million to $25.6 million during 2003 primarily as a result of decreased wholesale sales in the U.S.

     Inventory levels increased from $48.8 million at May 31, 2002 to $64.0 million at May 31, 2003 as a result of increased levels of in-transit inventory at year-end as well as increased inventory levels at our retail stores.

     During Fiscal 2003 operating activities provided $8.3 million in cash. Although we had a net loss of $30.0 million in 2003, this loss included non-cash items aggregating $31.5 million resulting from depreciation and amortization, asset impairment charges and goodwill impairment charges. In addition to the impact of these non-cash items, our Fiscal 2003 operating activities also reflected decreases in accounts receivable and prepaid expenses and increases in inventories, net deferred taxes, accounts payable, accrued liabilities and income taxes payable. Additionally, at May 31, 2003, we had lease termination liabilities of $9.9 million as a result of lease terminations and modifications we negotiated during the fourth quarter of Fiscal 2003 in our efforts to reduce the number of skateparks that we operate. In Fiscal 2002, operating activities provided cash in the amount of $22.6 million, a large portion of which was the result of the net loss of $2.6 million being offset by non-cash charges aggregating $13.2 million. Other significant components of Fiscal 2002 cash from operations were a decrease in accounts receivable of $10.1 million, a decrease in inventories of $4.0 million and a decrease in taxes payable of $4.4 million.

     Investing activities provided cash of $15.3 million in Fiscal 2003, primarily as a result of net sales and maturities of marketable debt securities of $27.5 million, offset by $9.9 million of capital expenditures and $2.5 million paid primarily in connection with the purchase of our sales agent for France in June 2002. In Fiscal 2002 investing activities used cash of $61.8 million, due mainly to net purchases of marketable debt securities of $27.5 million, capital expenditures of $20.2 million and $14.5 million in cash outflows related to our acquisitions of Pro-tec and a majority interest in the VANS Warped Tour. Capital expenditures were higher in Fiscal 2002 than in Fiscal 2003 as a result of new retail store and skatepark openings as well as additional expenditures required to integrate the acquisition of Pro-tec.

     Cash used in financing activities was $4.4 million in Fiscal 2003, which was primarily related to a net outflow of $2.3 million paid to repurchase shares of common stock, $1.4 million in dividends paid to the minority shareholder of one of our subsidiaries and $669,000 in net repayments on long-term debt. In Fiscal 2002, cash provided by financing activities was $8.7 million, which was the result of $9.1 million received in connection with the net sale of shares of common stock, primarily the over-allotments described above, and net proceeds from long-term debt of $844,000, offset by $1.3 million in dividends paid to the minority shareholder of one of our subsidiaries.

     The following table presents our contractual payment obligations and commitments as of May 31, 2003:

     At May 31, 2003, we had firm commitments to purchase inventory in the amount of $41.3 million during the first two quarters of fiscal 2004. These commitments included contingent liabilities under open letters of credit with foreign suppliers aggregating $17.4 million.

Borrowings

     Through March 2003, we maintained an unsecured revolving credit facility pursuant to a credit agreement with several lenders in an amount not to exceed $45.0 million. The credit agreement permitted us to draw upon the credit facility for general corporate

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purposes, capital expenditures, acquisitions and stock repurchases and would have expired on April 30, 2004. We had the option to pay interest on revolving credit facility advances at a rate equal to either LIBOR plus a margin, or the base rate plus a margin. In March 2003, we terminated this credit agreement because we only utilized it for the issuance of letters of credit. At the time of termination there were no amounts outstanding under the revolving credit facility.

     We have replaced the credit facility with a $20.0 million credit facility which enables us to obtain advances for the issuance of commercial letters of credit and standby letters of credit. Outstanding letters of credit are secured by our cash balances. The new facility will mature on May 1, 2004. As of May 31, 2003, $17.4 million in open commercial letters of credit were outstanding under this facility.

     Vans Latinoamericana maintains a note payable to Tavistock Holdings A.G., a 49.99% owner of Vans Latinoamericana. The loans evidenced by the note were made by Tavistock pursuant to a shareholders’ agreement requiring Tavistock to provide operating capital, on an as-needed basis, in the form of loans to Vans Latinoamericana. At May 31, 2003, the aggregate outstanding balance under the note was approximately $2.1 million.

Share Repurchase Program

     On September 21, 2001, we adopted a 1.0 million share repurchase program. Through August 14, 2003, we have repurchased 555,700 shares under the program for an aggregate of $3.3 million.

Capital Expenditures

     Our future material commitments for capital expenditures are primarily related to the opening and remodeling of retail stores, including a planned opening of a store on Carnaby Street in London in the second quarter of Fiscal 2004. In addition to this new store and a new outlet store, we plan to remodel/re-size 15 existing stores and relocate two existing stores during Fiscal 2004. We estimate the aggregate cost of these openings, remodels and relocations to be approximately $3.9 million.

Capital Resources

     Our liquid asset position consists of cash and cash equivalents of $52.8 million at May 31, 2003. This compares to cash and cash equivalents of $28.4 million and marketable debt securities of $27.5 million at May 31, 2002. We believe our capital resources will be sufficient to fund our operations and capital expenditures and anticipated growth plan for the foreseeable future.*

RECENT ACCOUNTING PRONOUNCEMENTS

     Effective June 1, 2002, we adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), which supersedes 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. With the implementation of SFAS 144, the presentation of our skatepark operations differs from the presentation that we would have presented under Accounting Principles Bulletin Opinion (“APB”) No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” (“APB 30”). SFAS 144 broadens the presentation of discontinued operations to include components of a business in addition to segments of a business. Additionally, under SFAS 144, the results of operations of a segment or component of a business must be included within the results of continuing operations until the period in which the component has either been disposed of or is classified as held for sale, at which time the current and all prior statements of operations shall present the results of operations of the component in discontinued operations. As a result of the implementation of SFAS 144, and as further

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discussed in Note 10 to the consolidated financial statements, our consolidated results of operations present as discontinued operations the results of operations for skateparks that have been closed prior to the end of the periods presented.

     In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement 13 and Technical Corrections” (“SFAS 145”), which became effective for us in Fiscal 2003. SFAS 145 eliminates the classification of debt extinguishment activity as extraordinary items; eliminates inconsistencies in lease modification treatment; and makes various technical corrections or clarifications of other existing authoritative pronouncements. The adoption of SFAS 145 had no financial impact to our consolidated financial statements.

     In July 2002, the FASB issued SFAS No. 146, “Accounting For Costs Associated With Exit or Disposal Activities” (“SFAS 146”), which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. As a result of the implementation of SFAS 146, the accounting for amounts recorded in connection with our decision to substantially exit the skatepark business was materially impacted. Under the guidance of EITF 94-3, we would have recorded as an expense during the year ended May 31, 2003 (the period in which management committed to an exit plan for the skateparks), an estimate of certain costs that would be directly incurred in connection with skatepark closures. The most significant element of these costs is lease termination charges. With the implementation of SFAS 146, costs associated with exit activities are to be recorded in the period in which they are incurred. In the case of lease termination costs, this is the period in which we enter into an agreement with the landlord. Accordingly, our future consolidated results of operations will include lease termination charges in the periods in which we enter into an agreement. Additionally, other direct costs associated with closing skateparks will be expensed in future periods as they are incurred.

     In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (“SFAS 148”), which permits two additional transition methods for companies that elect to adopt the fair-value-based method of accounting for stock-based employee compensation. The statement also expands the disclosure requirements for stock-based compensation. The provisions of this statement apply to financial statements for fiscal years ending after December 15, 2002. The adoption of SFAS 148 had no material financial impact on our consolidated financial statements. We have provided the additional disclosures required by SFAS 148 for the year ended May 31, 2003.

     In January 2003, the FASB issued FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires a company to recognize a liability for the obligations it has undertaken in issuing a guarantee. This liability would be recorded at the inception of a guarantee and would be measured at fair value. The measurement provisions of this statement apply prospectively to guarantees issued or modified after December 31, 2002. The disclosure provisions of the statement apply to financial statements for periods ending after December 15, 2002. The adoption of FIN 45 did not have an impact on our consolidated financial statements.

     In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 requires a company to consolidate a variable interest entity if it is designated as the primary beneficiary of that entity even if the company does not have a majority of voting interests. A variable interest entity is generally defined as an entity which has insufficient equity to finance its activities or the owners of the entity lack the risk and rewards of ownership. The provisions of this statement apply at inception for any entity created after January 31, 2003. For an entity created before February 1, 2003, the provisions of this Interpretation must be applied at the beginning of the first interim or annual period beginning after June 15, 2003. We will adopt the provisions of FIN 46 in the quarter ending November 29, 2003, for existing entities that are within the scope of this Interpretation. The statement also has disclosure requirements, some of which are required to be included in financial statements issued after January 31, 2003. We do not believe FIN 46 will have an impact on our consolidated financial statements.

SEASONALITY

     The following table contains unaudited selected consolidated quarterly financial data for the eight quarters ended May 31, 2003 and this data as a percentage of net sales. In the opinion of management, this unaudited information has been prepared on the same basis as the audited information and includes all adjustments necessary to fairly present the information set forth therein. Results of a particular quarter are not necessarily indicative of the results for any subsequent quarter.

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UNAUDITED CONSOLIDATED QUARTERLY RESULTS
(DOLLARS IN THOUSANDS)

     Our business is seasonal, with the largest percentage of U.S. sales and earnings realized in the first fiscal quarter (June through August), the “back to school” selling months.

     In addition to seasonal fluctuations, our operating results fluctuate quarter-to-quarter as a result of the timing of holidays, weather, timing of shipments, product mix, cost of materials and the mix between wholesale and retail channels. Because of such fluctuations, the results of operations of any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year or any future quarter. In addition, there can be no assurance that our future results will be consistent with past results or the projections of securities analysts.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

     Our exposure to market risk associated with changes in interest rates relates primarily to our cash and cash equivalents. At May 31, 2003, we held $52.8 million in cash and cash equivalents. Cash equivalents consist of highly liquid investments in federal treasury securities, commercial paper and money market time deposits with original maturities of three months or less. Due to the relatively short-term nature of our cash equivalents, cost approximates fair value. We do not use derivative or other financial instruments to

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hedge interest rate risks. A 1% decline in the annual yield on cash and cash equivalents would decrease our interest income by approximately $528,000.

Foreign Currency Risk

     We operate our business and sell our products in a number of countries throughout the world and, as a result, we are exposed to movements in foreign currency exchange rates between the local currencies of the foreign markets in which we operate and the U.S. dollar. Our foreign currency exposure is generally related to Europe, Mexico and Japan.

     In Fiscal 2002, we were subjected to foreign currency risk in South America through our involvement in joint venture operations in Brazil, Argentina and Uruguay. Our South America business was negatively impacted by weaknesses in South American economies, particularly Argentina. In July 2002, we made the decision to close our joint venture operations in our South America, and as of July 1, 2002, the entities for these joint venture operations are no longer consolidated in our balance sheet. At May 31, 2003, our remaining exposure to foreign currency risk in South America consists of net trade receivables of $600,000 from these joint ventures. Our ability to collect these amounts is also subject to our ability to successfully liquidate our assets in South America.

     Our primary foreign exchange risk arises from purchases of inventory in U.S. dollars by our European subsidiaries, whose functional currencies are the euro and British sterling. To hedge this risk, we utilize forward foreign exchange contracts and /or foreign currency options with durations of generally from three to twelve months. We generally hedge a substantial portion of our projected exposure from inventory purchases for the coming 6 to 12 months. As of May 31, 2003, we had $11.9 million outstanding in foreign exchange forward contracts to hedge the euro against the U.S. dollar, at an average contract rate of $1.10 per euro. Net unrealized losses on foreign exchange contracts at May 31, 2003 aggregated $918,000, all of which is included in accumulated other comprehensive income and is expected to be reclassified into earnings within the next ten months as the inventory related to the foreign exchange contracts is sold. During the period from June 1, 2003 through August 14, 2003, we entered into additional forward contracts aggregating $9.4 million to hedge the U.S. dollar against the euro, at an average contract rate of $1.14 per euro. These additional contracts are to hedge a portion of projected inventory purchases that will occur during the remainder of Fiscal 2004 and the first quarter of Fiscal 2005.

     In addition to hedging inventory purchases, we may also hedge other foreign currency cash flow and balance sheet exposures as they are identified. We do not hold or issue derivative instruments for trading purposes.

     Our financial performance can be affected by fluctuations in the value of the euro and British sterling when translating the financial statements of our European subsidiaries into U.S. dollars.

     Revenues from euro-sourced and sterling-sourced operations aggregated $53.1 million and $23.7 million, respectively, in Fiscal 2003.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

VANS, INC.
CONSOLIDATED BALANCE SHEETS
MAY 31, 2003 AND 2002
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

See accompanying notes to consolidated financial statements.

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VANS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE-YEAR PERIOD ENDED MAY 31, 2003
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)