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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

Commission File Number: 1-13848

Oakley, Inc.
(Exact name of registrant as specified in its charter)

(949) 951-0991
(Registrant's telephone number, including area code)

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

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  ý    No  o

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

Oakley, Inc.
Index to Form 10-Q

PART I. FINANCIAL INFORMATION

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share data)

See accompanying Notes to Consolidated Financial Statements

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OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except share and per share data)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)

See accompanying Notes to Consolidated Financial Statements

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OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)

See accompanying Notes to Consolidated Financial Statements

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Oakley, Inc.
Notes to Unaudited Consolidated Financial Statements

Note 1—Basis of Presentation

        The accompanying unaudited consolidated financial statements of Oakley, Inc. and its wholly-owned subsidiaries (the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles ("GAAP") for complete financial statements.

        In the opinion of management, the unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair statement of the consolidated balance sheet as of September 30, 2003, the consolidated statements of income and comprehensive income for the three- and nine-month periods ended September 30, 2003 and 2002, and cash flows for the nine-month periods ended September 30, 2003 and 2002. The results of operations for the three- and nine-month periods ended September 30, 2003 are not necessarily indicative of the results of operations for the entire year ending December 31, 2003.

Note 2—Stock Based Compensation

        The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," under which no compensation expense is recognized for stock option awards granted with exercise prices at fair market value. Stock based awards to non-employees are accounted for using the fair value method in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation."

        SFAS No. 123 requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method in accounting for stock-based awards as of the beginning of fiscal 1995. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option-pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option-pricing model with the following weighted average assumptions:

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        If the computed fair value of stock option awards during the three- and nine- months ended September 30, 2003 and 2002 had been amortized to expense over the vesting period of the awards, net income would have been as follows:

Note 3—Inventories

        Inventories consist of the following:

Note 4—Goodwill and Intangible Assets

        On January 1, 2002, the Company adopted SFAS No. 142 "Goodwill and Other Intangible Assets," which eliminated the amortization of purchased goodwill and other intangibles with indefinite useful lives. Upon adoption of SFAS No. 142, the Company performed an impairment test of the carrying value of its goodwill and intangible assets, and determined that no impairment existed. Under SFAS No. 142, goodwill and non-amortizing intangible assets will be tested for impairment at least annually and more frequently if an event occurs which indicates that goodwill or intangible assets may be impaired. As of September 30, 2003, no events have occurred which indicate that goodwill or non-amortizing intangible assets may be impaired.

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        Included in other assets in the accompanying consolidated financial statements are the following amortizing intangible assets.

        Intangible assets other than goodwill are amortized by the Company using estimated useful lives of 5 to 15 years and no residual values. Intangible amortization expense for the three and nine months ended September 30, 2003 was approximately $317,000 and $950,000, respectively, and is estimated to be, based on intangible assets at September 30, 2003, approximately $1,267,000 for fiscal 2003. Annual estimated amortization expense, based on the Company's intangible assets at September 30, 2003, is as follows:

        Changes in goodwill related to domestic and foreign entities are as follows:

Note 5—Accrued Expenses and Other Current Liabilities

        Accrued liabilities consist of the following:

Note 6—Accrued Warranty

        The Company provides a one-year limited warranty against manufacturer's defects in its eyewear. All authentic Oakley watches are warranted for one year against manufacturer's defects when purchased from an authorized Oakley watch dealer. Footwear is warranted for 90 days against

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manufacturer's defects, and apparel is warranted for 30 days against manufacturer's defects. The Company's standard warranties require the Company to repair or replace defective product returned to the Company during such warranty period. While warranty costs have historically been within the Company's expectations, there can be no assurance that the Company will continue to experience the same warranty return rates or repair costs as in the prior years. A significant increase in product return rates, or a significant increase in the costs to repair product, could have a material adverse impact on the Company's operating results.

        The Company maintains a reserve for its product warranty liability based on estimates calculated using historical warranty experience. Warranty liability activity for the nine months ended September 30 was as follows:

Note 7—Financing Arrangements

        Line of Credit—In January 2001, the Company amended its unsecured line of credit with a bank syndicate which allows for borrowings up to $75 million and matures in August 2004. The amended line of credit bears interest at either LIBOR or IBOR plus 0.75% (1.86% at September 30, 2003) or the bank's prime lending rate minus 0.25% (3.75% at September 30, 2003). At September 30, 2003, the Company did not have any balance outstanding under such facility. The credit agreement contains various restrictive covenants including the maintenance of certain financial ratios. At September 30, 2003, the Company was in compliance with all restrictive covenants and financial ratios. Certain of the Company's foreign subsidiaries have negotiated local lines of credit to provide working capital financing. These foreign lines of credit bear interest from 0.78% to 5.65%. Some of the Company's foreign subsidiaries have bank overdraft accounts that renew annually and bear interest from 4.50% to 13.50%. The aggregate borrowing limit on the foreign lines of credit is $25.1 million, of which $11.1 million was outstanding at September 30, 2003.

        Long-Term Debt—The Company has a real estate term loan which matures in September 2007 and had an outstanding balance of $13.7 million at September 30, 2003. The term loan, which is collateralized by the Company's corporate headquarters, requires quarterly principal payments of approximately $380,000 ($1,519,000 annually), plus interest based upon LIBOR plus 1.00% (2.14% at September 30, 2003). In January 1999, the Company entered into an interest rate swap agreement that eliminated the Company's risk of fluctuations in the variable rate of its long-term debt by fixing the interest rate over the term of the loan at 6.31%. Payments on the Company's long-term debt for the quarter ended September 30, 2003 were $380,000 and are estimated to be approximately $1,519,000 for fiscal 2003.

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        The Company's minimum annual principal payments on its long-term debt are as follows:

        The Company also has a note in the amount of $1.8 million, net of discounts, as of September 30, 2003, payable as a result of an acquisition. Payments under the note are due in annual installments of $500,000 ending in 2006, with such payments contingent upon certain conditions.

Note 8—Commitments and Contingencies

        Indemnities, Commitments and Guarantees—During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include indemnities to the Company's customers in connection with the sales of its products and indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease. The Company has also issued a guarantee in the form of a standby letter of credit as security for contingent liabilities under certain workers compensation insurance policies. The duration of these indemnities, commitments and guarantees varies. Some of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. The fair value of indemnities, commitments and guarantees that the Company issued during the three months ended September 30, 2003 was not significant to the Company's financial position, results of operations or cash flows.

        Litigation—The Company is a party to various claims, complaints and litigation incidental to the Company's business. In the opinion of management, the ultimate resolution of such matters, individually and in the aggregate, will not have a material adverse effect on the accompanying consolidated financial statements.

Note 9—Derivative Financial Instruments

        The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to transactions of its international subsidiaries as well as fluctuations in its variable rate debt. As part of its overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, the Company and its subsidiaries use foreign exchange contracts in the form of forward contracts. In addition, as part of its overall strategy to manage the level of exposure to the risk of fluctuations in interest rates, in January 1999 the Company entered into an interest rate swap agreement that resulted in a fixed interest rate over the term of the Company's ten-year real estate term loan. As of September 30, 2003, the fair value of the Company's interest rate swap agreement was a loss of approximately $1,172,000. At September 30, 2003, all of the Company's derivatives were designated and qualified as cash flow hedges. For all qualifying and highly effective cash flow hedges, the changes in the fair value of the derivative are recorded in other comprehensive income. The Company is currently hedging forecasted foreign currency transactions that could result in the recognition of $7.9 million of losses over the next twelve months. The Company hedges forecasted transactions that are determined probable to occur within fifteen months or less.

        On the date the Company enters into a derivative contract, management designates the derivative as a hedge of the identified exposure. The Company does not enter into derivative instruments that do not qualify as cash flow hedges as described in SFAS No. 133. The Company formally documents all

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relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking various hedge transactions. In this documentation, the Company specifically identifies the asset, liability, firm commitment or forecasted transaction that has been designated as a hedged item and states how the hedging instrument is expected to hedge the risks related to the hedged item. The Company formally measures effectiveness of its hedging relationships both at the hedge inception and on an ongoing basis in accordance with its risk management policy. The Company would discontinue hedge accounting prospectively (i) if it is determined that the derivative is no longer effective in offsetting change in the cash flows of a hedged item, (ii) when the derivative expires or is sold, terminated, or exercised, (iii) when the derivative is designated as a hedge instrument, because it is probable that the forecasted transaction will not occur, (iv) because a hedged firm commitment no longer meets the definition of a firm commitment, or (v) if management determines that designation of the derivative as a hedge instrument is no longer appropriate. During the three- and nine-months ended September 30, 2003, the Company recognized losses of $2.5 and $6.2 million, net of taxes, respectively, resulting from the expiration, sale, termination or exercise of foreign currency exchange contracts.

        The following is a summary of the foreign exchange contracts by currency at September 30, 2003:

        The Company is exposed to credit losses in the event of nonperformance by counterparties to its forward exchange contracts but has no off-balance sheet credit risk of accounting loss. The Company anticipates however, that the counterparties will be able to fully satisfy their obligations under the contracts. The Company does not obtain collateral or other security to support the forward exchange contracts subject to credit risk but monitors the credit standing of the counterparties. As of September 30, 2003, outstanding contracts were recorded at fair value and the resulting gains and losses were recorded in the consolidated financial statements pursuant to the policy set forth above.

Note 10—Restructure Charge

        A restructure charge of $2.8 million ($1.8 million, or $0.02 per diluted share, on an after-tax basis) was recorded during the fourth quarter of fiscal 2002 to restructure (the "Restructuring Plan") the Company's European operations with significant changes to the regional sales and distribution organization. Approved by the Company's Board of Directors in December 2002, relationships with several outside sales agents have been modified or terminated, and changes are being implemented to rationalize other warehousing and distribution functions within the European markets.

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        This charge was included in selling and shipping and warehousing expenses and is comprised of the following components:

Note 11—Earnings Per Share

        Basic earnings per share is computed using the weighted average number of common shares outstanding during the reporting period. Earnings per share assuming dilution is computed using the weighted average number of common shares outstanding and the dilutive effect of potential common shares outstanding. For the three months ended September 30, 2003 and 2002, the diluted weighted average common shares outstanding included 402,000 and 376,000, respectively, of dilutive stock options. For the nine months ended September 30, 2003 and 2002, the diluted weighted average common shares outstanding included 222,000 and 740,000, respectively, of dilutive stock options.

Note 12—Comprehensive Income

        Comprehensive income represents the results of operations adjusted to reflect all items recognized under accounting standards as components of comprehensive earnings.

        The components of comprehensive income for the Company include net income, unrealized gains or losses on foreign currency cash flow hedges, unrealized gains or losses on an interest rate swap, and foreign currency translation adjustments. The components of accumulated other comprehensive income, net of tax, are as follows:

Note 13—Dividend Payable

        On August 12, 2003, the Company's Board of Directors announced the initiation of an annual dividend policy and declared an initial annual cash dividend of $0.14 per share. This dividend, totaling $9.5 million, was paid on October 31, 2003 to shareholders of record as of the close of business on October 15, 2003. Any future dividends are at the discretion, and subject to the approval, of the Company's Board of Directors.

Note 14—New Accounting Pronouncements

        In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs

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Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in EITF Issue 94-3 is recognized on the date of an entity's commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. SFAS No. 146 is effective for exit and disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 has not had a material impact on the Company's financial position or results of operation.

        In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others." FIN 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002; the provisions of the disclosure requirements are effective for financial statements of interim or annual reports ending after December 15, 2002. The Company's adoption of FIN 45 has not had a material impact on the Company's financial position or results of operations. See Note 8.

        In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (SFAS 148), "Accounting for Stock-Based Compensation—Transition and Disclosure." SFAS 148 amends Statement No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," to provide alternative methods for voluntary transition to SFAS 123's fair value method of accounting for stock-based employee compensation ("the fair value method"). SFAS 148 also requires disclosure of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income (loss) and earnings (loss) per share in annual and interim financials statements. The Company is required to follow the prescribed disclosure format and has provided the additional disclosures required by SFAS No. 148 for the quarterly period ended September 30, 2003 in Note 2.

        In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities." In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The consolidation requirements of FIN 46 are applicable for the first interim or annual period ending after December 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. Since the Company does not currently have any variable interest entities, the adoption of the provisions of FIN 46 did not have a material impact on the Company's financial position or results of operations.

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Item 2. Management's Discussion And Analysis of Financial Condition And Results Of Operations

        The following discussion includes the operations of Oakley, Inc. and its subsidiaries for each of the periods discussed.

Overview

        Oakley is an innovation-driven designer, manufacturer and distributor of consumer products that include high-performance eyewear, footwear, watches, apparel and accessories. The Company's products are sold in the United States through a carefully selected base of approximately 9,200 active accounts with approximately 15,600 locations comprised of optical stores, sunglass retailers and specialty sports stores, including bike, surf, ski and golf shops, and motorcycle, athletic footwear and sporting goods stores and limited department store distribution. The Company also operates 24 Oakley retail stores in the United States that offer the full range of Oakley products. Additionally, the Company owns Iacon, Inc., a sunglass retailing chain headquartered in Scottsdale, Arizona, with 69 sunglass specialty retail stores at September 30, 2003.

        Internationally, the Company sells its products in over 70 countries outside the United States, with direct offices in France, Germany, United Kingdom, Italy, Japan, Mexico, South Africa, Canada, Australia, New Zealand and Brazil. In those parts of the world not serviced by the Company or its subsidiaries, Oakley products are sold through distributors who possess local expertise. These distributors sell the Company's products either exclusively or with complementary products and agree to respect the marketing philosophy and practices of the Company. Sales to the Company's distributors are denominated in U.S. dollars. The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to transactions of its international subsidiaries. The Company and its subsidiaries use foreign exchange contracts in the form of forward contracts to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates.

Critical Accounting Policies and Certain Risks and Uncertainties

        The Company's historical success is attributable, in part, to its introduction of products which are perceived to represent an improvement in performance over products available in the market. The Company's future success will depend, in part, upon its continued ability to develop and introduce such innovative products, although there can be no assurance of the Company's ability to do so. The consumer products industry, including the eyewear, apparel, footwear and watch categories, is fragmented and highly competitive. In order to retain its market share, the Company must continue to be competitive in the areas of quality, technology, method of distribution, style, brand image, intellectual property protection and customer service. These industries are subject to changing consumer preferences and shifts in consumer preferences may adversely affect companies that misjudge such preferences.

        The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. As such, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenue and expense during the reporting periods. Actual results could significantly differ from such estimates. The Company believes that the following discussion addresses the Company's accounting policies, which are the most critical to aid in fully understanding and evaluating the Company's reported financial results.

Revenue Recognition

        The Company recognizes wholesale revenue when merchandise is shipped to a customer and the risks and rewards of ownership have passed based on the terms of sale. Revenue from the Company's

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retail store operations is recognized upon purchase by customers at the point of sale. Generally, the Company extends credit to its wholesale customers and does not require collateral. The Company performs ongoing credit evaluations of those customers and historic credit losses have been within management's expectations. Sales agreements with dealers and distributors normally provide general payment terms of 30 to 120 days, depending on the product category. The Company's standard sales agreements with its customers do not provide for any rights of return by the customer other than returns for product warranty related issues. In addition to these product warranty related returns, the Company occasionally accepts other returns at its discretion. The Company records a provision for sales returns and claims based upon historical experience. Actual returns and claims in any future period may differ from the Company's estimates. In addition, although the Company, at its sole discretion, may repurchase its own products to protect the Company image, this practice is infrequent and, historically, the value of these repurchases has not been significant.

Accounts Receivable

        The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer's current creditworthiness, as determined by the Company's review of their current credit information. The Company continuously monitors its customer collections and payments and maintains a provision for estimated credit losses based upon the Company's historical experience and any specific customer collection issues that have been identified. While such credit losses have historically been within the expectations and the provisions established by the Company, there can be no assurances that the Company will continue to experience the same credit loss rates that have been experienced in the past.

Inventories

        Inventories are stated at the lower of cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. The Company regularly reviews its inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on the Company's estimated forecast of product demand and production requirements. Demand for the Company's products can fluctuate significantly. Factors which could affect demand for the Company's products include unanticipated changes in general market conditions or other factors, which may result in cancellations of advance orders or a reduction in the rate of reorders placed by retailers; continued weakening of economic conditions, which could reduce demand for products sold by the Company and which could adversely affect profitability; and future terrorist acts or war, or the threat or escalation thereof, which could adversely affect consumer confidence and spending, interrupt production and distribution of product and raw materials and, as a result, adversely affect the Company's operations and financial performance. Additionally, management's estimates of future product demand may be inaccurate, which could result in an understated or overstated provision required for excess and obsolete inventory.

Long-Lived Assets

        In the normal course of business, the Company acquires tangible and intangible assets. The Company periodically evaluates the recoverability of the carrying amount of its long-lived assets (including property, plant and equipment, and other intangible assets) whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. An impairment is assessed when the undiscounted expected future cash flows derived from an asset are less than its carrying amount. Impairments are recognized in operating earnings. The Company uses its best judgment based on the most current facts and circumstances surrounding its business when applying these impairment rules to determine the timing of the impairment test, the undiscounted cash flows used to assess impairments, and the fair value of a potentially impaired asset. Changes in assumptions

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used could have a significant impact on the Company's assessment of recoverability. Numerous factors, including changes in the Company's business, industry segment or the global economy, could significantly impact management's decision to retain, dispose of or idle certain of its long-lived assets.

Goodwill

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

Warranties

        The Company provides a one-year limited warranty against manufacturer's defects in its eyewear. All authentic Oakley watches are warranted for one year against manufacturer's defects when purchased from an authorized Oakley watch dealer. Footwear is warranted for 90 days against manufacturer's defects, and apparel is warranted for 30 days against manufacturer's defects. The Company's standard warranties require the Company to repair or replace defective product returned to the Company during such warranty period. The Company maintains a reserve for its product warranty liability based on estimates calculated using historical warranty experience. While warranty costs have historically been within the Company's expectations, there can be no assurance that the Company will continue to experience the same warranty return rates or repair costs as in the prior years. A significant increase in product return rates, or a significant increase in the costs to repair product, could have a material adverse impact on the Company's operating results.

Income Taxes

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

Foreign Currency Translation

        The Company has direct operations in Continental Europe, United Kingdom, Japan, Canada, Mexico, South Africa, Australia, New Zealand and Brazil which collect at future dates in the customers' local currencies and purchase finished goods in U.S. dollars. Accordingly, the Company is exposed to transaction gains and losses that could result from changes in foreign currency. Assets and liabilities of the Company denominated in foreign currencies are translated at the rate of exchange on the balance sheet date. Revenues and expenses are translated using the average exchange rate for the period. Gains and losses from translation of foreign subsidiary financial statements are included in accumulated other comprehensive income (loss). Gains and losses on short-term intercompany foreign currency transactions are recognized as incurred. As part of the Company's overall strategy to manage its level

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of exposure to the risk of fluctuations in foreign currency exchange rates, the Company and its subsidiaries have entered into various foreign exchange contracts in the form of forward contracts.

Vulnerability Due to Supplier Concentrations

        The Company relies on a single source for the supply of several product components, including the uncoated lens blanks from which substantially all of its sunglass lenses are cut. In the event of the loss of its source for lens blanks, the Company has identified an alternate source which may be available. The effect of the loss of any of these sources (including any possible disruption in business) will depend primarily upon the length of time necessary to find a suitable alternative source and could have a material adverse effect on the Company's business. There can be no assurance that, if necessary, an additional source of supply for lens blanks or other critical materials can be located or developed in a timely manner.

Vulnerability Due to Customer Concentrations

        Net sales to the retail group of Luxottica S.p.A ("Luxottica"), which include Sunglass Hut locations worldwide, were $8.7 million, or 6.0% of the Company's net sales, for the three months ended September 30, 2003 compared to $13.2 million, or 10.0% of net sales, for the comparative 2002 period. For the nine months ended September 30, 2003, net sales to Luxottica were $37.8 million, or 9.5% of net sales, compared to $51.8 million, or 13.4% of net sales, for the nine months ended September 30, 2002. Luxottica is also one of the Company's largest competitors in the sunglass and optical frame markets. Luxottica acquired Sunglass Hut in April 2001 and implemented changes which adversely affected the Company's net sales to Sunglass Hut in 2001. In December 2001, the Company and Luxottica entered into a new three-year commercial agreement for the distribution of Oakley products through Sunglass Hut retail stores which marked the resumption of the business relationship between the two companies after a short disruption that began in August 2001. The arrangements between the companies do not obligate Luxottica to order product from the Company, and there can be no assurances as to the future of the relationship between the Company and Luxottica. In September 2003, Luxottica completed the acquisition of all the shares of Australian eyewear retailer OPSM Group Ltd ("OPSM"). OPSM operates in the South Pacific and Southeast Asia regions with approximately 600 retail locations, a portion of which currently offer some of the Company's products. For 2002, the Company's net sales to OPSM were approximately AUS $2.8 million, or approximately $1.5 million in U.S. dollars based on the weighted average exchange rate for 2002. These sales exclude a limited amount of sales generated through the Company's international distributors. In November 2003, Luxottica completed the acquisition of New Zealand eyewear retailer Sunglass Store New Zealand ("SSNZ"), the Company's largest customer in New Zealand. SSNZ operates in New Zealand with 16 retail locations which offer some of the Company's products. There can be no assurance that the recent acquisitions or future acquisitions by Luxottica will not have a material adverse impact on the Company's financial position or results of operations.

Commitments and Contingencies

        The Company has entered into operating leases, primarily for facilities and retail stores, and has commitments under endorsement contracts with selected athletes and others who endorse the Company's products.

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Results of Operations

Three Months Ended September 30, 2003 and 2002

Net sales

        Net sales for the three months ended September 30, 2003 were $145.0 million compared to $131.9 million for the three months ended September 30, 2002, an increase of $13.1 million, or 9.9%. Gross sales were $155.3 million for the third quarter of 2003 compared to $142.8 million for the third quarter of 2002. Gross sunglass sales decreased 9.7% to $77.7 million for the three months ended September 30, 2003 from $86.0 million for the comparable 2002 period. Sunglass unit shipments declined 16.8% due to several factors, including a reduction in sales from newer sunglass introductions and weaker U.S. sales as a result of high inventory levels in the channel due to the soft early summer selling season caused by poor spring weather. Internationally, the Company experienced lower than expected sunglass sales due to competitive pressures from strong fashion brands in the southern European markets, a continued soft retail environment in Japan and a disruption in sales in the South Pacific region associated with Luxottica's acquisition of OPSM, two of the Company's largest customers in the region. The Company expects this disruption to be temporary as the two companies begin the process of integrating operations of Sunglass Hut and OPSM. The decline in sunglass units was partially offset by an 8.6% increase in the average selling price compared to the third quarter of 2002. The increase in average selling price was a result of a higher contribution from the Company's retail store operations, the benefit of a weaker U.S. dollar on international sales and a higher contribution from higher-priced polarized versions of the Company's sunglass styles. Gross sales from the Company's newer product categories, comprised of footwear, apparel, watches and prescription eyewear, increased 31.8%, or $12.2 million, to $50.6 million for the three months ended September 30, 2003 from $38.4 million for the three months ended September 30, 2002 and accounted for 32.6% of total third quarter 2003 gross sales. The strongest growth was from the footwear and apparel categories where strong fall seasonal product launches drove sales increases. Sales of the Company's goggles increased 49.4% on the strength on new styles and better third quarter fulfillment in 2003 compared to 2002.

        The Company's U.S. net sales, excluding the Company's retail store operations, decreased 1.1% to $55.3 million in the third quarter of 2003 from $55.9 million in the third quarter of 2002, as the decline in sunglass sales was only partially offset by increased sales of the Company's newer product categories and goggles. Sales to the Company's largest U.S. customer, Sunglass Hut and its affiliates, decreased 40.0% to $6.3 million for the three months ended September 30, 2003 from $10.5 million for the three months ended September 30, 2002, partially offset by an 8.0% increase in net sales to the Company's broad specialty store account base and other domestic sales. The decline in Sunglass Hut sales is primarily due to its decision to reduce the inventory levels of Oakley product on which to operate its business. Net sales from the Company's retail store operations increased to $15.0 million for the quarter ended September 30, 2003 as a result of increased store locations and positive comparable store sales, compared to $8.5 million for the quarter ended September 30, 2002, an increase of $6.5 million, or 75.9%. At the end of the quarter, the Company operated 24 Oakley stores, including four new Oakley stores opened during the quarter, and 69 Iacon stores, including four new stores opened in the quarter. Total U.S. net sales, including retail store operations, increased 9.2% in the third quarter of 2003 to $70.3 million from $64.4 million in the comparable quarter of 2002.

        During the three months ended September 30, 2003, the Company's international net sales increased 10.7%, or $7.2 million, to $74.7 million from $67.5 million during the third quarter of 2002. The weaker U.S. dollar accounted for 7.9 percentage points, or $5.3 million, of this increase. The Company's operations in Europe, Latin America, Japan and South Africa each achieved double-digit growth, while Asia reported five percent growth and Canada reported no significant change. This growth was offset by an 11% decline in sales in the South Pacific region partially due to a reduction in

18

orders from Sunglass Hut and OPSM as discussed above. All product categories except sunglasses experienced growth in international sales.

Gross profit

        Gross profit increased to $82.5 million, or 56.9% of net sales, for the three months ended September 30, 2003 from $74.3 million, or 56.3% of net sales, for the three months ended September 30, 2002, an increase of $8.2 million, or 11.0%. This increase in gross profit as a percentage of net sales was primarily due to improved margins from the Company's newer product categories and the positive effect of a weaker U.S. dollar, partially offset by the negative effects of a lower mix of sales from sunglasses and reduced sunglass margins due to lower production volumes.

Operating expenses

        Operating expenses increased to $61.4 million for the three months ended September 30, 2003 from $55.0 million for the three months ended September 30, 2002, an increase of $6.4 million, or 11.5%. As a percentage of net sales, operating expenses increased to 42.3% of net sales for the three months ended September 30, 2003 compared to 41.7% of net sales for the comparable period, primarily due to higher foreign operating expenses resulting from a weaker U.S. dollar and higher selling expenses related to the Company's expanded retail store operations. The weakening of the U.S. dollar, compared to most other currencies in which the Company transacts, contributed approximately $2.1 million, or 32.8%, of the increase. Operating expenses included $5.0 million of expenses for the Company's retail store operations. Total retail store operating expenses for the three months ended September 30, 2003 increased $1.8 million over the three months ended September 30, 2002. Research and development expenses decreased $0.8 million to $3.6 million, or 2.5% of net sales, for the three months ended September 30, 2003, from $4.4 million, or 3.3% of net sales, for the three months ended September 30, 2002, primarily due to leverage on footwear and apparel design expenses and a delay of certain planned product development expenses to later in 2003. Selling expenses increased $6.0 million to $38.0 million, for the three months ended September 30, 2003, from $32.0 million for the three months ended September 30, 2002. As a percentage of net sales, selling expenses increased to 26.2% of net sales for the third quarter of 2003 compared to 24.3% for the comparable prior year period as a result of increased retail selling expenses, sales management costs, field sales technical support, sports marketing expenses, sales promotion and display depreciation. Shipping and warehousing expenses increased $0.1 million to $4.9 million for the three months ended September 30, 2003, from $4.8 million for the three months ended September 30, 2002. As a percentage of net sales, shipping expenses decreased to 3.3% of net sales for the third quarter of 2003 compared to 3.6% for the comparable prior year period as a result of the Company's efforts to leverage its shipping labor and facility infrastructure, in addition to reduced freight costs. General and administrative expenses increased $1.0 million to $14.8 million, or 10.2% of net sales, for the three months ended September 30, 2003, from $13.8 million, or 10.5% of net sales, for the three months ended September 30, 2002. This decrease in general and administrative expenses as a percentage of net sales was principally a result of management's efforts to manage expenses effectively and leverage existing resources.

Operating income

        The Company's operating income increased $1.8 million to $21.1 million for the three months ended September 30, 2003 from $19.3 million for the three months ended September 30, 2002. As a percentage of net sales, operating income remained flat at 14.6% for the three months ended September 30, 2003 and 2002.

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Interest expense, net

        The Company had net interest expense of $0.3 million for the three months ended September 30, 2003, as compared with net interest expense of $0.4 million for the three months ended September 30, 2002.

Income taxes

        The Company recorded a provision for income taxes of $7.3 million for the three months ended September 30, 2003 compared to $6.6 million for the three months ended September 30, 2002. The Company's effective tax rate was 35% for the quarters ended September 30, 2003 and 2002.

Net income

        The Company's net income increased to $13.5 million for the three months ended September 30, 2003 from $12.3 million for the three months ended September 30, 2002, an increase of $1.2 million, or 10.3%.

Nine Months Ended September 30, 2003 and 2002

Net sales

        Net sales increased to $400.0 million for the nine months ended September 30, 2003 from $386.6 million for the nine months ended September 30, 2002, an increase of $13.4 million, or 3.5%. Gross sales were $431.0 million for the first nine months of 2003 compared to $418.1 million for the first nine months of 2002. Gross sunglass sales decreased 9.3% to $247.0 million for the nine months ended September 30, 2003 from $272.3 million for comparable 2002 period. Sunglass unit shipments declined 13.5% due to a number of adverse factors including weak consumer spending related in part to the events in Iraq during the first part of the year, a reduction in sales from newer sunglass introductions, an unusually long winter followed by cool, wet weather in the U.S. during the second quarter which led to lower than expected U.S. sales, competitive pressures from strong fashion brands in the southern European markets, and a continued soft retail environment in Japan and certain other markets. The decrease in sunglass units was partially offset by a 4.8% increase in the average selling price compared to the first nine months of 2002, primarily as a result of a weaker U.S. dollar, a higher contribution from retail store operations and a higher contribution from higher-priced polarized versions of the Company's sunglass styles. The Company experienced declines in sales of more mature products, which were partially offset by increased sales from the Half Jacket, Half Wire and Splice, introduced in 2002, increased sales of polarized versions of the Company's sunglass styles, as well as sales of the Company's new 2003 sunglass styles, the Valve, Big Square Wire, Teaspoon, Monster Dog and Plate. Gross sales from the Company's new product categories, comprised of footwear, apparel, watches and prescription eyewear, increased 21.9%, or $22.7 million, to $126.4 million for the nine months ended September 30, 2003 from $103.7 million for the nine months ended September 30, 2002 and accounted for 29.3% of total gross sales for the nine months ended September 30, 2003. The strongest results were from the apparel, footwear and prescription eyewear categories where strong line introductions drove sales increases. Gross sales of the Company's goggles increased 53.6% in the first nine months of 2003, driven by the success of Wisdom, the Company's most advanced snow goggle, introduced in the fourth quarter of 2002, and better third quarter fulfillment in 2003.

        The Company's U.S. net sales, excluding the Company's retail store operations, decreased 10.8% to $165.3 million in the first nine months of 2003 from $185.3 million in the first nine months of 2002, as a result of a 4.4% decrease in net sales to the Company's broad specialty store account base and other domestic sales, with sales to the Company's largest U.S. customer, Sunglass Hut and its affiliates, decreasing 30.9% to $30.6 million for the nine months ended September 30, 2003 from $44.3 million for the nine months ended September 30, 2002. The decline in U.S. net sales reflects the generally

20

depressed retail environment during the first half of 2003, which had a more pronounced effect on the Company's mature sunglass category and contributed to the decline in sunglass sales. Additionally, unusual cooler weather conditions during the second quarter of 2003 adversely affected the Company's summer product sales, particularly sunglasses, sandals, the summer apparel line and the Company's prescription sunglasses which led to lower than expected U.S. sales. The Company's U.S. net sales during the nine months ended September 30, 2003 benefited from increased department store concept shop locations and strong growth in military sales over the comparable 2002 period. Net sales from the Company's retail store operations increased to $37.5 million for the nine months ended September 30, 2003 as a result of increased store locations, compared to $23.1 million for the nine months ended September 30, 2002, an increase of $14.3 million, or 61.6%. During the nine months ended September 30, 2003, the Company opened ten new Oakley stores and ten Iacon stores, including the acquisition of Celebrity Eyeworks Studio located at Downtown Disney in Orlando, Florida. At the end of the third quarter, the Company operated 24 Oakley stores and 69 Iacon stores. Total U.S. net sales, including retail store operations, decreased 2.7% in the first nine months of 2003 to $202.8 million from $208.4 million in the comparable period of 2002.

        During the nine months ended September 30, 2003, the Company's international net sales increased 10.7%, or $19.0 million, to $197.2 million from $178.2 million during the first nine months of 2002. The weaker U.S. dollar accounted for 9.8 percentage points, or $17.5 million, of this increase. All product categories except sunglasses experienced growth, although a weak optical retail environment in key European markets resulted in slower growth in the Company's sunglass and prescription eyewear business than originally forecasted. Europe, Japan, Latin America, Canada and South Africa each achieved growth, partially offset by declines in the Middle East and the rest of Asia. The decline in sales in Asia is partially due to travel and related retail businesses being affected by the SARS crisis during the first half of 2003.

Gross profit

        Gross profit increased to $229.9 million, or 57.5% of net sales, for the nine months ended September 30, 2003 from $223.0 million, or 57.7% of net sales, for the nine months ended September 30, 2002, an increase of $6.9 million, or 3.1%. The decrease in gross profit as a percent of net sales was primarily due to the negative effects of a lower mix of sales from sunglasses and prescription eyewear and slightly lower sunglass margins due to the decline in sunglass unit volume, partially offset by the positive effects of improved footwear and apparel margins and the positive effect of a weaker U.S. dollar.

Operating expenses

        Operating expenses increased to $175.0 million for the nine months ended September 30, 2003 from $160.0 million for the nine months ended September 30, 2002, an increase of $15.0 million, or 9.4%. As a percentage of net sales, operating expenses increased to 43.7% of net sales for the nine months ended September 30, 2003 compared to 41.4% of net sales for the comparable period in 2002, primarily due to higher foreign operating expenses resulting from a weaker U.S. dollar and higher selling expenses related to the Company's expanded retail store operations. The weakening of the U.S. dollar, compared to most other currencies in which the Company transacts, contributed approximately $7.0 million, or 46.7%, of the increase. Operating expenses included $13.3 million of expenses for the Company's retail store operations. Total retail store operating expenses for the nine months ended September 30, 2003 increased $4.9 million over the nine months ended September 30, 2002 and represented 32.7% of the first nine months 2003 increase in total operating expenses. Research and development expenses decreased $1.5 million to $10.7 million, or 2.7% of net sales, for the nine months ended September 30, 2003, from $12.2 million, or 3.2% of net sales, for the nine months ended September 30, 2002, primarily due to leverage on footwear and apparel design expenses and a delay of

21

certain planned product development projects to later in 2003. Selling expenses increased $13.1 million to $106.9 million, for the nine months ended September 30, 2003, from $93.8 million for the nine months ended September 30, 2002. As a percentage of net sales, selling expenses increased to 26.7% of net sales for the 2003 period compared to 24.3% for the comparable period in 2002 as a result of increased retail selling expenses, sales management expenses, field sales technical support, sports marketing, sales promotion, display depreciation, and travel expenses. Shipping and warehousing expenses increased $0.3 million to $14.0 million for the nine months ended September 30, 2003, from $13.7 million for the nine months ended September 30, 2002. As a percentage of net sales, shipping expenses decreased to 3.5% of net sales for the first nine months of 2003 compared to 3.6% for the comparable prior year period as a result of the Company's efforts to leverage its shipping labor and facility infrastructure, in addition to reduced freight. General and administrative expenses increased $3.1 million to $43.4 million, or 10.8% of net sales, for the nine months ended September 30, 2003, from $40.3 million, or 10.4% of net sales, for the nine months ended September 30, 2002. This increase in general and administrative expenses was principally a result of greater personnel-related costs, greater facility related costs, such as property taxes, depreciation and utilities, as well as increased general and administrative expenses for retail store operations.

Operating income

        The Company's operating income decreased to $54.9 million for the nine months ended September 30, 2003 from $63.0 million for the nine months ended September 30, 2002, a decrease of $8.1 million. As a percentage of net sales, operating income decreased to 13.7% for the nine months ended September 30, 2003 from 16.3% for the nine months ended September 30, 2002.

Interest expense, net

        The Company recorded net interest expense of $1.1 million for the nine-month period ended September 30, 2003 as compared to $1.3 million in 2002. During the 2002 period, the Company recorded a one-time gain of $350,000 related to the favorable settlement of a treasury lock hedge which the Company had entered into in connection with anticipated long-term financing.

Income taxes

        The Company recorded a provision for income taxes of $18.8 million for the nine months ended September 30, 2003 compared to $21.6 million for the nine months ended September 30, 2002. The Company's effective tax rate was 35% for the nine months ended September 30, 2003 and 2002.

Net income

        The Company's net income decreased to $35.0 million for the nine months ended September 30, 2003 from $40.2 million for the nine months ended September 30, 2002, a decrease of $5.2 million, or 12.9%.

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Liquidity and Capital Resources

        The Company historically has financed its operations almost entirely with cash flow generated from operations and borrowings from its credit facilities. Cash provided by operating activities totaled $37.9 million for the nine months ended September 30, 2003 compared to cash provided by operating activities of $69.8 million for the comparable period in 2002. At September 30, 2003, working capital was $148.9 million compared to $130.1 million at September 30, 2002, a 14.5% increase. Working capital may vary from time to time as a result of seasonality, new product category introductions and changes in accounts receivable and inventory levels. Accounts receivable balances, less allowance for doubtful accounts, were $96.4 million at September 30, 2003 compared to $88.8 million at June 30, 2003 and $83.7 million at September 30, 2002, with accounts receivable days outstanding at September 30, 2003 of 61 compared to 56 at June 30, 2003 and 58 at September 30, 2002. Inventories increased to $104.5 million at September 30, 2003 compared to $103.7 million at June 30, 2003 and $85.9 million at September 30, 2002. More than half of this increase is due to greater combined footwear, apparel and goggle inventories, which increased at a rate below that of their combined year-over-year sales growth. In addition, footwear and apparel inventories increased to support the increase in fall season backlog which has increased 55% compared to a year ago. Additionally, the increase in the number of retail stores has resulted in retail inventories increasing by $4.1 million from September 30, 2002 and there was a modest increase in sunglass inventories at September 30, 2003 which is partially a result of lower than anticipated sunglass sales. Quarterly inventory turns were 2.4 at September 30, 2003 compared to 2.7 at September 30, 2002, and up from 2.2 at June 30, 2003.

        Capital expenditures, net of retirements, for the nine months ended September 30, 2003 were $21.4 million, which included $5.4 million for retail store operations. As of September 30, 2003, the Company had commitments of approximately $0.7 million for future capital expenditures.

        On September 10, 2002, the Company's Board of Directors authorized the repurchase of up to $20 million of the Company's common stock to occur from time to time as market conditions warrant. During the third quarter of 2003, the Company repurchased 75,000 shares for $0.8 million at an average share price of $10.63. The Company intends to continue to make repurchases under the share repurchase program as market conditions warrant. As of September 30, 2003, the Company has repurchased 829,600 shares for $8.6 million at an average share price of $10.37. Approximately $11.4 million remains available under the current authorization with total common shares outstanding of 67,927,420 as of September 30, 2003.

        On August 12, 2003, the Company's Board of Directors announced the initiation of an annual dividend policy and declared an initial annual cash dividend of $0.14 per share. This dividend, totaling $9.5 million, was paid on October 31, 2003 to shareholders of record as of the close of business on October 15, 2003. Any future dividends are at the discretion, and subject to the approval, of the Company's Board of Directors.

        In January 2001, the Company amended its unsecured line of credit with a bank syndicate which allows for borrowings up to $75 million and matures in August 2004. The amended line of credit bears interest at either LIBOR or IBOR plus 0.75% (1.86% at September 30, 2003) or the bank's prime lending rate minus 0.25% (3.75% at September 30, 2003). At September 30, 2003, the Company did not have any balance outstanding under such facility. The credit agreement contains various restrictive covenants including the maintenance of certain financial ratios. At September 30, 2003, the Company was in compliance with all restrictive covenants and financial ratios. Certain of the Company's foreign subsidiaries have negotiated local lines of credit to provide working capital financing. These foreign lines of credit bear interest from 0.78% to 5.65%. Some of the Company's foreign subsidiaries have bank overdraft accounts that renew annually and bear interest from 4.50% to 13.50%. The aggregate borrowing limit on the foreign lines of credit is $25.1 million, of which $11.1 million was outstanding at September 30, 2003. The Company also has a ten-year real estate term loan, which is collateralized by

23

the Company's corporate headquarters and requires quarterly principal payments of approximately $380,000 plus interest based on LIBOR plus 1.00% (2.14% at September 30, 2003). In January 1999, the Company entered into an interest rate swap agreement that resulted in a fixed interest rate over the term of the loan at 6.31%. At September 30, 2003, the outstanding balance on the term loan was $13.7 million. The term loan is due in September 2007.

        The Company also has a note in the amount of $1.8 million, net of discounts, as of September 30, 2003, payable as a result of an acquisition. Payments under the note are due in annual installments of $500,000 ending in 2006, with such payments contingent upon certain conditions.

        The following table gives additional guidance related to the Company's future obligations and commitments as of September 30, 2003:

        The Company believes that existing capital, anticipated cash flow from operations, and current and potential future credit facilities will be sufficient to meet operating needs and capital expenditures for the foreseeable future.

Seasonality

        Historically, the Company's sales, in the aggregate, have been highest in the period from March to September, the period during which sunglass use in the Northern Hemisphere is typically highest. As a result, operating margins are typically lower in the first and fourth quarters, as fixed operating costs are spread over lower sales volume. In anticipation of seasonal increases in demand, the Company typically builds inventories in the fourth quarter and second quarter when net sales have historically been lower. In addition, the Company's shipments of other products, which generate gross profits at lower levels than sunglasses are generally lowest in the second quarter. This seasonal trend contributes to the Company's gross profit in the second quarter, which historically has been the highest of the year. Although the Company's business generally follows this seasonal trend, new product category introductions, such as apparel, footwear and watches, and the Company's international expansion have partially mitigated the impact of seasonality, and the expansion of the Company's retail store operations has also affected its historical seasonality.

Backlog

        Historically, the Company has generally shipped most eyewear orders within one day of receipt, with longer lead times for its other pre-booked product categories. At September 30, 2003, the Company had a backlog of $56.1 million, including backorders (merchandise remaining unshipped beyond its scheduled shipping date) of $9.6 million, compared to a backlog of $58.2 million, including backorders of $12.1 million at September 30, 2002. The decrease in backlog reflects a one-month shift, from September in 2002 to October this year, in the timing of receipt of large holiday product orders from Sunglass Hut; lower goggle orders compared with last year's orders which were high as a result of an unintended delay in the 2002 release of the Wisdom goggle; and a decrease in orders from large

24

U.S. department store customers which, during the fourth quarter of 2002, were establishing beginning inventory levels at Oakley concept shops launched during that quarter. These decreases were partially offset by significant increases in global orders for the Company's apparel products.

Inflation

        The Company does not believe inflation has had a material impact on the Company in the past, although there can be no assurance that this will be the case in the future.

GAAP and Non-GAAP Financial Measures

        This document includes a discussion of gross sales and components thereof, each of which may be a non-GAAP financial measure. The Company believes that use of this financial measure allows management and investors to evaluate and compare the Company's operating results in a more meaningful and consistent manner. As required by Item 10 of Regulation S-K, a reconciliation of these measures is as follows:

Reconciliation of Gross Sales to Net Sales:

Forward-Looking Statements

        This document contains certain statements of a forward-looking nature. Such statements are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The accuracy of such statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including: risks related to the Company's ability to manage rapid growth; the ability to identify qualified manufacturing partners; the ability to coordinate product development and production processes with those partners; the ability of those manufacturing partners and the Company's internal production operations to increase production volumes on raw materials and finished goods in a timely fashion in response to increasing demand and enable the Company to achieve timely delivery of finished goods to its retail customers; the ability to provide adequate fixturing to existing and future retail customers to meet anticipated needs and schedules; the dependence on eyewear sales to Sunglass Hut and its affiliates which is owned by a major competitor and, accordingly, could materially alter or terminate its relationship with the Company; the Company's ability to expand distribution channels and its own retail operations in a timely manner; unanticipated changes in general market conditions or other factors, which may result in cancellations of advance orders or a reduction in the rate of reorders placed by retailers; continued weakness of economic conditions could continue to reduce or further reduce demand for products sold by the Company and could adversely affect profitability, especially of the Company's retail operations; further terrorist acts, or the threat thereof, could continue to adversely affect consumer confidence and spending, could interrupt production and distribution of product and raw materials and could, as a result, adversely affect the Company's operations and financial performance; the ability of the Company to integrate acquisitions without adversely affecting operations; the ability to continue to develop and produce innovative new products and introduce them in a timely manner; the acceptance in the marketplace of the Company's new products and changes in consumer preferences; reductions in sales of products, either as the result of economic or other conditions or reduced consumer acceptance of a product, could result in a buildup of inventory; the

25

ability to source raw materials and finished products at favorable prices to the Company; the potential effect of periodic power crises on the Company's operations including temporary blackouts at the Company's facilities; foreign currency exchange rate fluctuations; earthquakes or other natural disasters concentrated in Southern California where substantially all of the companies operations are based; the Company's ability to identify and execute successfully cost control initiatives; and other risks outlined in the Company's SEC filings, including but not limited to the Annual Report on Form 10-K for the year ended December 31, 2002 and other filings made periodically by the Company. The Company undertakes no obligation to update this forward-looking information.

Item 3. Quantitative and Qualitative Disclosures About Market Risks

        Foreign currency—The Company has direct operations in Continental Europe, United Kingdom, Japan, Canada, Mexico, South Africa, Australia, New Zealand and Brazil which collect at future dates in the customers' local currencies and purchase finished goods in U.S. dollars. Accordingly, the Company is exposed to transaction gains and losses that could result from changes in foreign currency exchange rates. As part of its overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, the Company and its subsidiaries use foreign exchange contracts in the form of forward contracts. All of the Company's derivatives were designated and qualified as cash flow hedges at September 30, 2003.

        On the date the Company enters into a derivative contract, management designates the derivative as a hedge of the identified exposure. The Company only enters into derivative instruments that qualify as cash flow hedges as described in SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." For all instruments qualifying as highly effective cash flow hedges, the changes in the fair value of the derivative are recorded in other comprehensive income. The following is a summary of the foreign exchange contracts by currency at September 30, 2003:

        The Company is exposed to credit losses in the event of nonperformance by counterparties to its forward exchange contracts but has no off-balance sheet credit risk of accounting loss. The Company anticipates, however, that the counterparties will be able to fully satisfy their obligations under the contracts. The Company does not obtain collateral or other security to support the forward exchange contracts subject to credit risk but monitors the credit standing of the counterparties. As of September 30, 2003, outstanding contracts were recorded at fair market value and the resulting gains and losses were recorded in the consolidated financial statements pursuant to the policy set forth above.

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        Interest Rates—The Company's principal line of credit, with no outstanding balance at September 30, 2003, bears interest at either LIBOR or IBOR plus 0.75% or the bank's prime lending rate minus 0.25%. Based on the weighted average interest rate of 3.86% on the line of credit during the nine months ended September 30, 2003, if interest rates on the line of credit were to increase by 10%, and to the extent that borrowings were outstanding, for every $1.0 million outstanding on the Company's line of credit, net income would be reduced by approximately $2,500 per year.

        The Company's long-term real estate loan, with a balance of $13.7 million outstanding at September 30, 2003, bears interest at LIBOR plus 1.0%. In January 1999, the Company entered into an interest rate swap agreement that eliminates the Company's risk of fluctuations in the variable rate of this long-term debt. At September 30, 2003, the fair value of the Company's interest rate swap agreement was a loss of approximately $1,172,000.

Item 4. Controls and Procedures

        Disclosure Controls and Procedures—The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

        Internal Control Over Financial Reporting—There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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Part II—OTHER INFORMATION

Item 1. Legal Proceedings

        The Company is a party to various claims, complaints and other legal actions that have arisen in the normal course of business from time to time. The Company believes the outcome of these pending legal proceedings, in the aggregate, will not have a material adverse effect on the operations or financial position of the Company.

Item 2. Changes in Securities and Use of Proceeds

        None

Item 3. Defaults Upon Senior Securities

        None

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

        None

Item 5. Other Information

        None

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits

        The following exhibits are included herein:

(1)

Previously filed with the Registration Statement on Form S-1 of Oakley, Inc. (Registration No. 33-93080).



(2)

Previously filed with the Form 10-K of Oakley, Inc. for the year ended December 31, 1996.



(3)

Previously filed with the Form 10-K of Oakley, Inc. for the year ended December 31, 1998.



(4)

Filed herewith.

(b)

Reports on Form 8-K

        The Company did not file any reports on Form 8-K during the three months ended September 30, 2003.

        The Company furnished a Current Report on Form 8-K, dated July 18, 2003, in connection with the press release issued by the Company on July 16, 2003 announcing its financial results for the fiscal quarter ended June 30, 2003.

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SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

29

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PART I. FINANCIAL INFORMATION

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements

Item 2. Management's Discussion And Analysis of Financial Condition And Results Of Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risks
Item 4. Controls and Procedures

Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security-Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K