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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549





Form 10-K

(Mark One)

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

For the fiscal year ended December 31, 2008

Or



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

Commission file number: 000-51382





Volcom, Inc.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 33-0466919                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|1740 Monrovia Avenue Costa Mesa, California                    |  | 92627                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

(949) 646-2175

(Registrants telephone number, including area code)

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



|                               |  |                                          
|------------------------------ |  | -----------------------------------------
|Title of Each Class            |  | Name of Each Exchange on Which Registered
|Common stock, $0.001 par value |  | The NASDAQ Global Select Market          

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

None

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

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

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports)
and (2) has been subject to such requirements for the past 90 days. Yes þ    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 the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                          |  |                     |  |                                               |  |                            
|------------------------- |  | ------------------- |  | --------------------------------------------- |  | ---------------------------
|Large accelerated filer  ̈ |  | Accelerated filer þ |  | Non-accelerated filer  ̈                       |  | Smaller reporting company  ̈
|                          |  |                     |  | (Do not check if a smaller reporting company) |  |                            

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

The
aggregate market value of Common Stock held by non-affiliates of the registrant as of June 30, 2008, the end of the most recently completed second quarter, was approximately $387.1 million.

As of March 9, 2009, there were 24,374,362 shares of the registrants common stock, par value $0.001, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates information by reference from the registrants definitive proxy statement (the Proxy Statement) for the 2009 Annual Meeting of Stockholders, which will be held on May 5, 2009.









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TABLE OF CONTENTS



|          |  |                                                                                                              |  |     
|--------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|          |  |                                                                                                              |  | Page
|PART I.   |  |                                                                                                             
|Item 1.   |  | Business                                                                                                     |  | 1   
|Item 1A.  |  | Risk Factors                                                                                                 |  | 14  
|Item 1B.  |  | Unresolved Staff Comments                                                                                    |  | 24  
|Item 2.   |  | Properties                                                                                                   |  | 24  
|Item 3.   |  | Legal Proceedings                                                                                            |  | 24  
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                                          |  | 24  
|          | 
|PART II.  |  |                                                                                                             
|Item 5.   |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 25  
|Item 6.   |  | Selected Financial Data                                                                                      |  | 28  
|Item 7.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 30  
|Item 7A.  |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  | 46  
|Item 8.   |  | Financial Statements and Supplementary Data                                                                  |  | 47  
|Item 9.   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 47  
|Item 9A.  |  | Controls and Procedures                                                                                      |  | 47  
|Item 9B.  |  | Other Information                                                                                            |  | 50  
|          | 
|PART III. |  |                                                                                                             
|Item 10.  |  | Directors, Executive Officers and Corporate Governance                                                       |  | 50  
|Item 11.  |  | Executive Compensation                                                                                       |  | 50  
|Item 12.  |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 50  
|Item 13.  |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 50  
|Item 14.  |  | Principal Accounting Fees and Services                                                                       |  | 50  
|          | 
|PART IV.  |  |                                                                                                             
|Item 15.  |  | Exhibits, Financial Statement Schedules                                                                      |  | 50  



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Cautionary Note Regarding Forward-Looking Statements

This annual report on Form 10-K and other documents we file with the Securities and Exchange Commission, or SEC, contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act, and we intend that such forward-looking statements be subject to the safe harbors created thereby. These statements
relate to future events or our future financial performance. We have attempted to identify forward-looking statements with terminology including anticipate, believe, can, continue, could,
estimate, expect, intend, may, plan, potential, predict, should or will or similar expressions as they relate to us and our business,
industry, markets, retailers, licensees, manufacturers and consumers. Such forward-looking statements, including but not limited to statements relating to expected growth and strategies, future operating and financial results, financial expectations
and current business indicators, are based upon current information and expectations, and are subject to change based on factors beyond our control.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Actual results could differ
materially from these forward-looking statements as a result of numerous factors, some of which are described herein under Item 1A Risk Factors. We are not under any duty to update any of the forward-looking statements after the
date of this Form 10-K to conform these statements to actual results, unless required by law.

PART I



|ITEM 1. | BUSINESS
|------- | --------

We are an innovative
designer, marketer and distributor of premium quality young mens and young womens clothing, footwear, accessories and related products under the Volcom brand name. We believe that we have one of the worlds leading brands in the action sports
industry, built upon our history in the boardsports of skateboarding, snowboarding and surfing. Our position as a premier brand in these three boardsports differentiates us from many of our competitors within the broader action sports industry and
has enabled us to generate strong growth in revenues and operating income.

Our products, which include, among others, t-shirts, fleece,
bottoms, tops, jackets, boardshorts, denim, outerwear, sandals, girls swimwear and a complete collection of kids and boys clothing, combine fashion, functionality and athletic performance. We develop and introduce products that we believe set the
industry standard for style and quality in each of our product categories. We seek to offer products that appeal to both boardsport participants and those who affiliate themselves with the broader action sports youth lifestyle.

The Volcom brand, symbolized by The Volcom Stone 

LOGO , is athlete-driven, innovative and creative. We have consistently followed our motto of youth against establishment, and our brand is inspired by the energy of youth culture. We reinforce our brand
image through the sponsorship of world-class athletes, targeted grassroots marketing events, distinctive advertising, and by producing and selling music under our Volcom Entertainment label and boardsports-influenced films through Veeco Productions,
our film division. We believe our multi-faceted marketing approach integrates our brand image with the lifestyles and aspirations of our consumers.

We seek to enhance our brand image by controlling the distribution of our products. We sell to retailers that we believe merchandise our products in an environment that supports and reinforces our brand and that provide a superior in-store
experience. This strategy has enabled us to develop strong relationships with key boardsport and youth lifestyle retailers that share our focus. Our retail customers are primarily comprised of specialty boardsports retailers and several retail
chains. Some of these include 17th Street Surf, Becker Surfboards, Froghouse, Hotline, Huntington Surf & Sport, IG Performance, K5 Board Shop, Macys, Nordstrom, Pacific Sunwear, Snowboard Connection, Sun Diego, Surfside Sports,
Tillys, Val Surf, West Beach and Zumiez. Our products are sold over the Internet through selected authorized online retailers. At December 31, 2008, we



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operated 13 full-price Volcom branded retail stores and licensed an additional eight full-price stores located in strategic markets around the world, where
we are able to present our brand message directly to our target market. Additionally, we own two multibrand Laguna Surf & Sport stores.

Volcom branded products are currently sold throughout the United States and in over 40 countries internationally by either us or international licensees. We serve the United States, Europe, Canada, Latin America, Asia Pacific and Puerto
Rico through our in-house sales personnel, independent sales representatives and distributors. Our product revenues in the United States were $195.8 million, $174.3 million and $157.6 million for 2008, 2007 and 2006, respectively.
Revenues from our European operations were $77.9 million, $40.1 million and $4.5 million for 2008, 2007, and 2006, respectively. The increase in revenues from our European operations in 2007 was generally a result of the transition of
our European operations from a licensee model to a direct control model during the third quarter of 2007. Product revenues from operations other than those generated in the United States or Europe were $58.4 million, $50.8 million and
$39.1 million for 2008, 2007 and 2006, respectively. We also license our brand in other areas of the world, including Australia, Indonesia, South Africa and Brazil, to entities that we believe have valuable local market insight and strong
relationships with retailers in their respective territories. We receive royalties on the sales of Volcom branded products sold by our licensees. Our license agreement with our European licensee terminated on December 31, 2006. Pursuant to an
agreement between us and Volcom Europe (our former European licensee), Volcom Europe produced and distributed the Spring 2007 Volcom line in Europe and paid us our same royalty rate as required under the license agreement. As a result, we
experienced a decrease in our licensing revenues and an increase in our selling, general and administrative expense while we built the necessary infrastructure and hired employees to establish and support our own operations in Europe. Our product
revenues have increased in Europe as we now recognize revenue from the direct sale of our products in this territory.

As part of our
strategy to take direct control of our European operations, we constructed a new European headquarters in Anglet, France, which was completed in February 2007, and delivered our first full season product line during the third quarter of 2007. In
2008, we entered into an agreement to take direct control of the Volcom brand in the UK. We furthered our international expansion in 2008 by completing the acquisition of our distributor of Volcom branded products in Japan.

On January 17, 2008, we acquired all of the outstanding membership interests of Electric Visual Evolution LLC, or Electric, for $26.3 million plus
transaction costs of $1.2 million. Known for its Volt logo, Electric is a core action sports lifestyle brand. The companys growing product line includes sunglasses, goggles, t-shirts, bags, hats, belts and other accessories. The company was
founded in 2000 by industry veterans Kip Arnette and Bruce Beach and is headquartered in Orange County, California.

Volcom was founded in
1991 by Richard Woolcott and Tucker Hall in Orange County, California, the epicenter of boardsports culture. We reincorporated in Delaware in April 2005. We believe we were the first major apparel company founded on the boardsports of skateboarding,
snowboarding and surfing. Our founders set out to build a company that combined their passion for these sports with their love of art, music and film. Since that time, Richard has led a committed, talented management team to create one of the
leading action sports brands in the world. Stockholders may obtain a copy of our SEC reports, free of charge, from the SECs website at www.sec.gov or from our website at www.volcom.com, or by writing to Investor Relations,
Volcom, Inc., 1740 Monrovia Avenue, Costa Mesa, California 92627. Information contained on our website is not incorporated by reference herein.

Products

We design and distribute an innovative collection of young mens and young womens clothing, footwear and
accessories inspired by the boardsports of skateboarding, snowboarding and surfing. Our products are created for participants in these sports, as well as those who affiliate themselves with the broader action sports lifestyle. All of our clothes and
accessories are sold under the Volcom brand and typically retail at premium prices.



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We have six primary product categories: mens, girls, boys, footwear, girls swim and snow. The principal
products sold within these categories are:

T-Shirts and Fleece. We believe our prints and designs distinguish our t-shirts and
fleece from those of our competitors and are staple items for our consumers. The majority of these items display a distinctive art style, utilizing unique treatments, placements of screened images, designs and embroideries. On some of our t-shirts
and fleece, we promote our Featured Artist Series, a program in which we work closely with boardsports athletes and relevant artists associated with our target market to design certain products. Most pieces prominently display the Volcom name or the
Volcom Stone logo.

Tops and Jackets. Our knit and woven tops and casual jackets are recognizable for their bold and creative
styling. Many of our designs are built on traditional fashions, with a distinctive Volcom image or style feature that creates a distinguishing look our consumers have come to expect.

Bottoms. We design a variety of casual and dress pants, shorts and skirts. Our bottoms are generally made using cotton or cotton-blend
fabrics. Our bottoms are designed to be both functional and distinctive and generally have one or more elements that provide a unique Volcom look.

Denim. We first introduced our Volcom brand jeans in 1993 and they have become one of our most popular product lines. The design and construction of our denim products is directly influenced by our skateboard team. We offer
denim products in a variety of washes and fits to suit individual preferences for appearance and functionality.

Boardshorts. We introduced our boardshorts line in 1992. Our boardshorts are designed with input from our surf team and incorporate technical features such as mesh paneling and enhanced waterproof zipper fly technology. Our
boardshorts are known for their art inspired prints and unique embellishments.

Outerwear. Our outerwear products, which were introduced in 2000, consist of technically advanced jackets and pants that are designed to meet the demands of snowboarding. Our outerwear is designed with a number of technical
features and fabrics and includes significant input from our snowboard team. Some of the technical aspects of our outerwear include Gore-Tex® fabrics, taped and welded seam construction,
waterproof zippers and our patented Zip-Tech jacket/pant connection system. We believe that our outerwear provides consumers with a distinctive mix of fashion and technical performance, which distinguishes it from many of our competitors
products.

Accessories. We also sell a variety of accessories such as hats, wallets, socks, belts and bags to complement our
clothing lines.

Creedlers. We introduced a complete line of sandals and bedroom slippers branded Creedlers in 2006. These
products are sold year round and are offered in our mens, boys and girls categories. They are generally distributed within our existing customer base.

Swim. We introduced our girls swimwear line in 2007. The swimwear product complements our existing girls business and is merchandised with the girls sportswear, Creedlers and accessories. Our swimwear is
generally distributed within our existing customer base.

V.co-Operative. We also partner with our team riders to design
certain signature product styles, called V.co-Operative, such as those designed in conjunction with team riders Bruce Irons, Mark Appleyard, Ozzie Wright, Dean Morrison, Bjorn Leines, Geoff Rowley and Dustin Dollin.

Music and Film. We also generate revenues from the sale of music produced by our label, Volcom Entertainment, and films produced by Veeco
Productions, our film production division.



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Electric. With our acquisition of Electric in January 2008, we now offer a full line of
innovative and high-quality sunglasses and goggles as well as t-shirts, fleece and accessories under the Electric brand name.

Product Design

We believe that our reputation for creativity and innovation enables us to design products that continuously evolve in style and
functionality while remaining attractive to consumers in our target market and to our retail accounts. We have put in place design processes that we believe allow us to respond quickly to changing consumer tastes and preferences.

We employ design and product development teams located in our Orange County, California headquarters and our European headquarters. These teams are
organized into groups that separately focus on our mens, girls, boys, snow, Creedler and girls swimwear categories. In addition to our in-house design team, each of our international licensees employs designers and merchandisers to create products
that reflect local trends, while maintaining our brand image. Our in-house design team and designers from our international licensees generally meet several times each year to collaboratively develop designs that reflect fashion trends from around
the world. Additionally, design teams for each product category participate in approximately three trips per year to locations known for their influence on fashion and style, such as New York, Paris, London, Sydney and Tokyo. Our domestic designers
and those of our international licensees share the majority of our seasonal styles, resulting in a consistent look for Volcom products sold worldwide. We also involve our team riders and core retail accounts in the design process. We believe that
team rider input adds to the style and functionality of our products and reinforces the credibility and authenticity of our brand. We also believe that involving our retailers provides us with additional insight into consumer preferences.

Our design calendar is typically organized around five major seasons: spring, summer, fall, snow and holiday. As a result of the feedback
gathered from our sponsored athletes and core retailers, we are able to incorporate new looks and features into each seasons product line. These changes range from evolutions within our basic product lines to new fashion-forward styles.

Manufacturing and Sourcing

We
generally contract for the manufacture of each of our product lines separately based on our fabric and design requirements. We do not own or operate any manufacturing facilities, and source our products from independently-owned manufacturers. Our
apparel and accessories are generally purchased or imported as finished goods, and we purchase only a limited amount of raw materials. Our manufacturers operate facilities using advanced machinery and equipment, and we believe these manufacturers
represent some of the strongest in their industry. In 2008, we imported over 79% of our products from China and Mexico, with Asian manufacturers producing the majority of our imported products. Our t-shirts are screen-printed in the United States,
which has resulted in short lead times and has enabled us to react quickly to reorder demand from our retailers and distributors.

We have
developed a sourcing process that allows us to maintain production flexibility and to avoid the capital expenditures and ongoing costs of operating an in-house manufacturing function. During 2008, we contracted for the manufacture of our products
with approximately 49 foreign manufacturers. Approximately 66% and 14% of our total product costs during 2008 and approximately 72% and 13% of our total product costs during 2007 were derived from manufacturing operations in China and Mexico,
respectively. We also contract with several domestic screen printers. Other than Dragon Crowd and Ningbo Jehson Textiles, two of our manufacturers located in China that accounted for 18% and 14% of our product costs during 2008, respectively, and
for 19% and 14% of our product costs during 2007, respectively, no single manufacturer of finished goods accounted for more than 10% of our production expenditures during 2008 or 2007. We do not have any long-term contracts with our manufacturers,
choosing instead to retain the flexibility to re-evaluate our sourcing and manufacturing decisions. We evaluate our vendors primarily on the quality of their work, ability to deliver on



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time and cost. Representatives from our design and production staff visit and formally assess our foreign contract manufacturers multiple times per year. We
also use the services of third parties to assist us in quality control and to ensure that our manufacturers are in compliance with applicable labor practices. These third parties generally perform periodic social compliance audits, provide regular
quality inspections, monitor delivery deadlines and assess overall vendor performance. We believe that our commitment to quality control and our monitoring procedures are an important and effective means of maintaining the quality of our products
and our reputation among consumers.

We work directly with local sourcing agents aligned with foreign contract manufacturers to direct our
production needs to factories that meet our quality and timing needs. We typically choose our manufacturers based on their expertise in specific product lines. Many of our manufacturers specialize in multiple product lines, allowing us to reallocate
orders, if necessary, to manufacturers with whom we have established relationships. We believe this enhances the efficiency and consistency of our sourcing operations. In addition, we maintain relationships with numerous qualified manufacturers that
are available to provide additional capacity on an as-needed basis. We regularly research, test and add alternate and back-up manufacturers to our network to ensure that we maintain a constant flow of products in order to meet the needs of our
retailers and distributors. In addition, we source products with multiple vendors allowing for competitive pricing and manufacturing flexibility. Based on our historical experience with a wide range of manufacturers, we believe alternate
manufacturing sources are available at comparable costs.

We arrange for the production of a majority of our products primarily based on
orders received. We have traditionally received a significant portion of our customer orders prior to placement of our initial manufacturing orders. We use these early season orders, and our experience, to project overall demand for our products in
order to secure manufacturing capacity and to enable our manufacturers to order sufficient raw materials. We believe that our ability to effectively forecast seasonal orders, combined with our flexible sourcing model, limits our sourcing risk,
increases our ability to deliver our products to our customers on time, helps us better manage our inventory and contributes to our overall profitability.

Imports and Import Restrictions

Our independent buying agents, primarily in China and Hong Kong, and to a lesser extent, in
other foreign countries, assist us in selecting and overseeing the majority of our independent third-party manufacturing and sourcing. These agents also monitor economic and other trade regulations in addition to facilitating our quality control
function.

Our products manufactured abroad are subject to U.S. customs laws, which impose tariffs as well as import quota
restrictions for textiles and apparel. Quota represents the right, pursuant to bilateral or other international trade arrangements, to export amounts of certain categories of merchandise into a country or territory pursuant to a visa or license.
Pursuant to the Agreement on Textiles and Clothing, quota on textile and apparel products was eliminated for World Trade Organization, or WTO, member countries, on January 1, 2005. Notwithstanding quota elimination, Chinas accession
agreement for membership in the WTO provides that WTO member countries (including the United States, Canada and European countries) may re-impose quotas on specific categories of products in the event it is determined that imports from China have
surged and are threatening to create a market disruption for such categories of products (so called safeguard quota provisions).

During 2005, the United States and China agreed to a new quota arrangement, which imposed quotas on certain textile products through the end of 2008. The United States may also unilaterally impose additional duties in response to a
particular product being imported (from China or other countries) in such increased quantities as to cause (or threaten) serious damage to the relevant domestic industry (generally known as anti-dumping actions). We do not expect the
limitations on imports from China to materially affect our operations because we believe we will be able to meet our needs from countries not affected by the restrictions or tariffs or from domestic sources. We intend to closely monitor our sourcing
in China to avoid disruptions. The United States and



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other countries in which our products are manufactured and sold may, from time to time, impose new duties, tariffs, surcharges or other import controls or
restrictions, including the imposition of safeguard quota, or adjust presently prevailing duty or tariff rates or levels. In an effort to minimize our potential exposure to import risk, we actively monitor import restrictions and quota
fill rates and, if needed, can shift production to other countries or manufacturers. The United States and China have not finalized a new quota arrangement subsequent to December 31, 2008.

Additionally, China offers a rebate tax on exports to control the amount of exports from China, which can affect our cost either positively or
negatively. These potential cost increases, along with the rising currency and labor shortages in China, will have an impact on our business. While we do not believe the limitations on imports from China will have a material effect on our
operations, there will be increased pressure on costs and we intend to closely monitor our sourcing in China to avoid disruptions.

Distribution and
Sales

We seek to enhance our brand image by controlling the distribution of our products around the world and selling to retailers that
we believe merchandise our products in an environment that supports and reinforces our brand image. Our retail customers are primarily comprised of specialty boardsports retailers and several retail chains. We encourage our retailers to maintain
specific merchandise presentation standards. Our products are offered over the Internet through selected authorized online retailers. At December 31, 2008, we operated 13 full-price Volcom branded retail stores and licensed an additional eight
full-price stores located in strategic markets around the world. Additionally, we own two multibrand Laguna Surf & Sport stores and license eight Volcom outlet stores. In addition to our retail accounts, we sell to distributors in Latin
America, Asia Pacific and other developing markets throughout the world.

Our specialty retailers attract skateboarders, snowboarders and
surfers who we believe have influence over fashion trends and demand for boardsports products. We focus on our relationships with these specialty retailers, as we believe they represent the foundation of the boardsports market. We collaborate with
our specialty retailers by providing in-store marketing displays, which include racks, wall units and point-of-purchase materials that promote our brand image. We believe that these programs have enabled us to grow our sales within these accounts
and will enable us to increase our floor space going forward. We also sponsor events and programs at our retailers such as autograph signings and boardsport demonstrations with our team riders. We believe that our relationships with our retailers
are a critical element of our success.

We maintain a national sales force of independent sales representatives. These representatives are
compensated on a commission basis, which we believe provides them with strong incentives to promote our products. We are typically the exclusive apparel brand sold by these representatives, who may also sell complementary products from other
companies. For certain of our larger retail accounts and distributors, we manage the sales relationship in-house rather than using independent sales representatives.

We employ an in-house sales team to serve major national accounts, such as Zumiez, Pacific Sunwear, Nordstrom, Macys, Tillys and Dillards. We also employ an in-house sales team to serve international
territories not represented by one of our international licensees, such as Canada, Asia Pacific and Latin America.

In order to maintain
sufficient inventories to meet the demands of our retailers, we typically pre-book orders in advance of delivery. None of our sales agreements with any of our customers provides for any rights of return. As is customary in our industry, we do
approve returns on a case-by-case basis at our sole discretion to protect our brand and our image.

We inspect, sort, pack and ship
substantially all of our products, other than those sold by our licensees or in Canada, from our distribution warehouse located in Orange County, California for our US operations, and from our warehouse in Anglet, France for our European operations.
We distribute our products sold in Canada through



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a third-party distribution center located in Kamloops, British Columbia. All products received into these distribution centers are subject to our strict
quality control standards, which include cross-referencing each style back to the pre-production and fit comments, which were made throughout the production cycle, reviewing design comments against product shipments, overall shipment inspection for
water or other damage by our receiving department, and garment inspection and specification measurements by our quality control department.

Licensing

We serve Australia, Brazil, South Africa and Indonesia through license agreements with four independent licensees. Our license
agreement with our European licensee terminated on December 31, 2006. Pursuant to an agreement between us and Volcom Europe (our former European licensee), Volcom Europe produced and distributed the Spring 2007 Volcom line in Europe and paid us
our same royalty rate as required under the license agreement. As part of our international strategy, we have established our own operations in Europe in order to take direct control of the Volcom brand in Europe. We have a 13.9% ownership interest
in our Australian licensee, Volcom Australia.

Our international license agreements grant our licensees exclusive, non-transferable rights
to produce and sell specified Volcom branded products in their respective geographic areas. Our licensees pay us a specified royalty rate on their sales of these products. The license agreements require the licensee to follow our quality and design
standards so that all products sold by licensees are consistent with the style, image, design and quality of other products we sell. We retain the right to require each licensee to discontinue selling any product that we believe does not meet our
quality and design requirements. Each licensee is also required to provide us with samples of the Volcom branded products it intends to sell.

Our international license agreements expire as follows:



|             |  |                   |  |                           
|------------ |  | ----------------- |  | --------------------------
|Licensee     |  | Expiration Date   |  | Extension Termination Date
|Australia    |  | June 30, 2012     |  | N/A                       
|Brazil       |  | December 31, 2013 |  | N/A                       
|South Africa |  | December 31, 2011 |  | N/A                       
|Indonesia    |  | December 31, 2009 |  | December 31, 2014         

In the future, we may assume responsibility for serving territories that are currently represented
by our licensees in order to better control our international distribution and branding. We may accomplish this by acquiring some of our licensees or by establishing our operations abroad in anticipation of the expiration of our license agreements.
We believe directly controlling our international distribution will result in increased international revenues and profitability. Certain of our license agreements may be extended at the option of the licensee for an additional five-year term after
the initial expiration of the agreement. Pursuant to our international growth strategy, we established our own operations in Europe in anticipation of the expiration of our licensing agreement with our European licensee on December 31, 2006. We
completed the construction of our European headquarters in Anglet, France in February 2007, and delivered our first full season of product line during the third quarter of 2007.

Advertising and Promotion

Our brand message blends elements of our athletes, fashion, art, music and
film. We employ a multi-faceted advertising and promotion strategy. We do not generally use outside marketing agencies, preferring instead to utilize our internal marketing and art departments to create our advertisements and manage our various
grassroots programs. Our advertising and promotional strategy consists of athlete sponsorship, Volcom branded events, print advertisements, music, film, our Featured Artist Series, our Volcom branded retail stores and online marketing programs.



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Athlete Sponsorship

We believe that sponsoring high-profile skateboarding, snowboarding, surfing and motocross athletes, as well as supporting emerging talents, is an
essential promotional tool to continue building our brand. We believe our association with top athletes builds brand equity and authenticity, and strengthens the link between our products and our target consumers. We seek credibility in our target
market by maintaining a strong sponsorship presence with our athletes in order to differentiate us from our competitors.

We sponsor
domestic and international teams of leading athletes that wear our apparel, use our products and prominently display the Volcom brand and the Volcom Stone logo in competitions and other public appearances. We also produce films featuring our
athletes, and support contests and other events in which our athletes promote our products. Some of our best-known athletes in each of our three boardsports include the following:

Skateboarding



| |  |  | Geoff Rowley  Geoff won the prestigious Thrasher Skater of the Year in 2001 and has been on the cover of many major skateboard publications. He remains
one of the highest profile skateboarders at the core level on our team. He has been focusing much time and energy into the development of Volcoms Stone-Age line, a skate specific line catering to core skateshops, as well as finishing up for
Flip Skateboards highly anticipated Extremely Sorry video, due to be released in 2009.
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| |  |  | Mark Appleyard  Mark was named the Transworld Street Skater of the Year in 2007 and 2003. Mark was also the Thrasher Skater of the Year in 2003 and won
the Transworld Readers Choice Award for 2004. Mark is currently a featured character in the highly popular EA Sports Skate 2 video game. Mark had recent covers on the European Magazine Kingpin and Canadas SBC Magazine.
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| |  |  | Rune Glifberg  In 2008, Rune won the Vans Pro-tec Pool Party for the third time in four years in Orange County, California. He won a Gold Medal at the
X-Games in the Superpark event. He won the Quiksilver Bowlriders in Malmo, Sweden for the second year running as well as winning the Wellington Bowl-A-Rama in Wellington New Zealand. Rune also had the cover and a 16 page interview in the July 2008
Issue of Thrasher Magazine.
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Snowboarding



| |  |  | Gigi Rüf  Gigi has been a Volcom team rider for many years and rides Volcom Outerwear and snowboards. He was featured on the cover of the
February 2008 issue of Snowboarder, the March 2008 issue of Transworld Snowboarding and three additional magazine covers in Europe. He was awarded the number three spot in Snowboarder Magazines 10 Best Riders Of The Year and multiple
nominations at the Transworld Rider Poll Awards.
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| |  |  | Terje Haakonsen  Terjes championships include, among others, two-time Air & Style Champion, three-time U.S. Open Half-Pipe Champion,
three-time International Snowboard Federation World Half-Pipe Champion, six-time Mt. Baker Banked Slalom Champion and five-time European Half-Pipe Champion. Recently, Terje set the world record (9.8 meters) for the biggest backside 360 at the 2007
Arctic Challenge. In 2008, Terje released a television show on Fuel TV featuring six episodes of his travels around the globe.
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| |  |  | Bjorn Leines  Bjorn placed fourth in Slopestyle at the 2005 X Games, won the 2003 Red Bull Heavy Metal, has twice been ranked second by Snowboarder
magazine for Rider of the Year, is a featured rider in Xbox games Amped and Amped 2 and has been a Transworld Snowboarding Magazine Readers Choice Award nominee.
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| |  |  | Kevin Pearce  Kevin won his first major international event during the 2006/2007 season at the Toyota Big Air in Sapporo, Japan. Also during the
2006/2007 season, he went on to win the Nippon Open Slopestyle, The Artic Challenge quarter-pipe contest, and received second place at the
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| | Abominable Snow Jam in both half-pipe and quarter-pipe. Kevin finished the 2006/2007 season ranked 4th in the Ticket To Ride (TTR) world rankings for
the 2006/2007 season. In the 2007/2008 season, Kevin won the worlds largest snowboard event, The Munich Air and Style, landing a cab 1260 in front of 30,000 fans. Kevin has also landed 3rd on the podium at the X-Trial quarter-pipe in
Tokyo, Japan, and won the European Open half-pipe in Laax, Switzerland. At the 2008 Winter X-Games in Aspen, Colorado, Kevin earned 2nd in Big Air, 2nd in Slopestyle and 3rd in Super-Pipe. Kevin also won the Air and Style quarter-pipe
contest in Innsbruck, Austria, as well as the 2008 Arctic Challenge in Norway. In 2008, he was crowned the champion of the TTR World Snowboard Tour. In 2009, Kevin earned a halfpipe victory at the European open, third place in the halfpipe at the
Mt. Snow Dew Tour and a second place finish at the Winter X Games. Kevin also had an interview in Snowboard Magazine and was ranked #2 in Snowboarder Magazines 10 Best Riders of the Year.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Janna Meyen  Janna was the first female 4-peat X Games gold medalist. She was named Most Influential Female Snowboarder of All Time by
Snowboarder Magazine in 2008 and was crowned the 2004 Womens Rider of the Year by Transworld Snowboarding Magazine. Her abilities range from big mountain riding to halfpipe, slopestyle and handrails. In 2009, she placed third in slopestyle at
the Dew Tour in Lake Tahoe, CA.
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| |  |  | Elena Hight  Elena was the youngest member of the 2006 U.S. Winter Olympic Snowboarding team and placed sixth at the Winter Olympic Halfpipe event.
She is training and working towards qualifying for the 2010 U.S. Olympic team. Elena had back-to-back wins at the Vans Cup snowboard halfpipe competition in 2007 and 2008. She recently finished with a third overall placement in the 2009 Winter Dew
Tour. She was voted Womens 2006 Rookie of the Year by Transworld Snowboarding Magazine and the 2006 Grom of the Year at the Fuel Action Sports TV Awards.
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Surfing



| |  |  | Bruce Irons  After five years on the Association of Surfing Professionals (ASP) World Championship Tour (WCT), Bruce has decided to step away from
competitive surfing. With Volcoms support, he has made the decision to leave full time competition to pursue his passion for free surfing. Before Bruce joined the WCT tour he was considered by many in the surfing world to be the best free
surfer on the planet. Bruce will search to regain that title in pursuit of the biggest and best surf on the globe. All of his travels will be documented by photograph and film. We believe he will be more valuable to the Volcom brand as he will be in
the spotlight of all media forms. As Bruce announced his departure off the tour he showed the world his competitive potential by winning a WCT event in Bali, Indonesia in August of 2008. Also in 2008, Bruce scored three covers of each of Surfing,
Surfer and Transworld Surf magazines. He was also featured on an additional Surfer cover as one of five athletes labeled as The worlds most influential surfers. He rocketed to the top of Transworld Businesss Exposure Meter to
finish 2008 in the number two spot. Bruces previous competitive accomplishments include winning: The 2004 Eddie Aikau Big Wave Invitational at Waimea Bay in Hawaii, the 2005 Mr. Price Pro (World Qualifying Series (WQS) six star, the
2001 WCT Pipe Masters, and the 2001 HIC Pipeline Pro. Bruce was voted ASP Rookie of the Year for the 2004 WCT season.
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| |  |  | Dean Morrison  Dean is a permanent fixture on the ASPs WCT. Dean consistently finishes in the top 10 of the WCT year-end tour standings. Dean
finished second at the WCT Pipe Masters event in December 2007. This significant result solidified his ninth place rating on the ASPs WCT tour in 2007. Dean also received his first cover of Surfer Magazine in 2007. He is consistently featured
throughout the pages of the major surf magazines and the prestigious Surfline.com website. Dean has had many quarter and semi-final appearances in recent years. He won the WCT event at his home break at Snapper Rock, Australia in 2003.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Ozzie Wright  Ozzie is one of the worlds most unique and talented free surfers. The combination of his talent, including surfing, art and music,
has proven that he is one of the most marketable athletes in the sport. Ozzie pushes the sport of surfing with his innovative and progressive approach. In 2007, he
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| | was featured on the cover of Surfing magazine. In previous years he was also featured on the cover of Surfer magazine and two covers of Transworld Surf. He
is at the forefront of pushing some of surfings newest tricks, including a kickflip, which is a skateboard maneuver that has never been completed on a surfboard. Ozzies band The Goons of Doom has toured globally and their
music has been part of many Veeco Productions films and other video projects throughout the surf film industry. Ozzie is an avid artist and his art is consistently featured throughout the Volcom clothing line. He is currently working on a Featured
Artist Series boardshort for the 2010 spring line.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Dusty Payne  In the past two years, Dustys fast rise has been due to his radical media exposure and contest winnings. Some of his coverage includes a
Surfing magazine cover, a Surfer magazine special edition Hot 100 cover, the Surfline.com Breakthrough Performer on the 08/09 Hawaii season, and numerous major magazine spreads and interviews. Dusty won two major Pro Jr. events in 2008,
the Oakley Pro Jr. Global Challenge, and the Sunset Pro Jr. in Hawaii. He also finished runner up in Hawaiis Triple Crown of Surfing. Dusty will be featured as one of the six of the worlds best up and coming riders in Taylor
Steeles new film project called Modern Collective, due late 2009.
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Motocross



| |  |  | Ryan Villopoto  Ryan is currently one of the fastest Motocross racers in the world, with numerous race wins and a total of four championship titles to his
name, including the 2007 Lites Supercross Championship, and the 2006, 2007 and 2008 Lites Motocross Championship. Ryan has also helped lead Team USA to three Motocross Des Nation victories. Ryan just graduated to the premiere 450 class and has been
running up front, already scoring three podium finishes in 2009.
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| |  |  | Nico Izzi  With over 200 amateur wins, Nicos skills in the 85 class propelled him into the limelight at an early age, and set up his future as a pro.
This past season Nico has had solid podium finishes in both the Supercross and Motocross 250 classes. He also received Rookie of the Year honors in the 250 class for 2008. Nico is currently #2 in points and fighting for a championship in the 250
class on the Supercross circuit.
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We sponsor additional high-profile athletes. Some of these athletes include Gavin
Beschen, Caswell Berry, Dustin Dollin, Tyler Flanagan, David Gonzalez, Alex Gray, Coco Ho, Seth Huot, Mark Landvik, Pat Moore, Darrell Stanton, Nick Trapasso and Wille Yli-Luoma.

We have contractual relationships with our sponsored athletes whereby we compensate them for promoting our products. Sponsorship arrangements are
typically structured to give our athletes financial incentives to maintain a highly visible profile. Our contracts typically grant us an unlimited license for the use of the athletes names and likenesses, and typically require the athletes to
maintain exclusive association with our apparel. In turn, we agree to make cash payments to the athletes for various public appearances, magazine exposure and competitive victories while wearing our products. In addition to cash payments, we also
generally provide limited free products for the athletes use, and fund some travel expenses incurred by sponsored athletes in conjunction with promoting our products.

Volcom Branded Events

An
important aspect of our marketing platform is our creation and support of grassroots skateboard, snowboard and surfing events in markets worldwide. We describe the driving philosophy behind many of these events as Let The Kids Ride Free,
which we believe embodies our anti-establishment brand image. We believe that these events help our brand reach a wide audience within our target market. Hundreds of competitors and spectators typically attend these events.

We run a separate contest series for each of skateboarding, snowboarding and surfing. These contests include the Wild in the Parks Skate Series, the
Peanut Butter and Rail Jam Snow Series and the Totally Crustaceous Surf Series. These contests are held around the world both by us and by our international licensees.



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At these events, we emphasize fun and excitement for participants and spectators. The contests are open on a first-come, first-served basis and entry is
free, so amateurs and first time competitors can compete alongside professionals. Additionally, free beverages and food are often provided, along with giveaways from us and other companies. We have recently created a global championship event for
each series where we invite the top qualifiers from each event to compete.

We organize, produce and manage these events through our
internal marketing department, which is responsible for choosing venues, arranging sponsored athlete attendance, marketing and working at each contest. By promoting Volcom branded events throughout the year, we are able to collect consumer feedback
and insight that, we believe, allows us to keep our brand connected to our target market and enables us to keep our products fresh and relevant.

Print Advertisements

We place the majority of our print advertisements in boardsports magazines such as Thrasher,
Transworld Skateboarding and Snowboarding, Snowboarder, Surfing and Surfer. We also advertise in fashion lifestyle magazines such as Vice, Frank 151 and Elle. We combine athletes, lifestyle, innovative visual designs and our unique style into our
advertisements. Our internal art department designs all of our advertisements, including most of those placed in international publications to support our licensees. We do not generally use outside advertising agencies. By maintaining complete
creative control of our advertisements, we are able to ensure that our brand image remains consistent with our heritage and passion for action sports.

Music

We operate our own music label, Volcom Entertainment, which identifies and signs
musical artists and produces and distributes recordings in the form of CDs, digital downloads, vinyl LPs and wireless media worldwide through our retail accounts, music retailers and online distribution channels. Some of our best-known artists
include Year Long Disaster, a rock band from Los Angeles, California; Valient Thorr, a rock band from Chapel Hill, North Carolina; Riverboat Gamblers, a rock band from Austin, Texas; Pepper, an alternative band from Kona, Hawaii; and ASG, a rock
band from Wilmington, North Carolina. We believe that this component of our marketing platform provides us with a creative and artistic medium to connect with our target market and differentiates us from our competitors.

While we currently generate modest revenues from sales of music, these products reinforce our brand image and enhance our marketing efforts. The music
and bands are also integrated into the Volcom brand seasonally via a line of music and musician inspired clothing. During 2007, we launched The Volcom Tour, a company branded international music tour featuring our artists. We also
operate and sponsor an annual music competition for unsigned rock bands called the Band Joust. In 2008, we launched a subscription based vinyl record club coined Volcom Ent Vinyl Club, which delivers subscribers collectable vinyl singles
on a bi-monthly basis. Additionally, our bands play at tradeshows, account demonstrations and other Volcom events. We have entered into a distribution arrangement with WEA Rock LLC, pursuant to which ADA, a music distribution company owned by Warner
Music Group, distributes our music. This arrangement provides us with a greater array of worldwide distribution options for our bands. We intend to continue to promote Volcom Entertainment as an enhancement to our brand.

Film

We produce
skateboarding, snowboarding and surfing films that feature our sponsored athletes through Veeco Productions, our film production division. We started this division in 1993, and believe that our films, like our music, are an integral part of our
marketing and branding efforts.

Veeco has produced over 15 films including Alive We Ride, The Garden, Subjekt: Haakonsen, Magnaplasm,
Chichagof, The Bruce Movieand Escramble.In 2007, our Australian licensee produced Lets Live,a skateboard



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movie starring the Volcom Australia skateboard team as well as other international Volcom riders. Our films have been critically acclaimed and have won
awards such as Best Core Film at the X-Dance Film Festival, Best Cinematography for a Snow Movie at the Unvailed Band and Board Event, Surfer Magazines Video of the Year and Surfer Magazines Video Award for Best Performance by a Male
Surfer (Bruce Irons  twice). In our films, we feature Volcom team riders such as Geoff Rowley, Terje Haakonsen and Bruce Irons wearing Volcom branded products, which emphasizes our boardsports heritage and close association with leading
boardsports athletes. Our films are distributed to our retail customers, as well as music and video stores.

In 2008, Veeco Productions
entered into distribution deals with iTunes and Fuel TV. Currently, we sell four movies on iTunes under Volcom Films and have produced and released two movies specifically for Fuel TV.

Featured Artist Series

In
1995, we introduced the Volcom Featured Artist Series. This series was developed to showcase the artistic depth of our brand. We produce t-shirts and other products featuring the artwork of team riders, employees and other talented artists
affiliated with us and the action sports community. The art created by our featured artists has been shown in art shows around the world, including exclusive exhibits at some of our company-owned retail stores. The Volcom Featured Artist Series is
important to our brand and differentiates us from our competition.

Retail

We currently operate 13 full-price Volcom branded retail stores located in strategic markets around the world. We believe that operating company-owned,
branded retail stores is an effective way for us to promote our products, athletes and brand image. The Volcom stores are stocked with much of our product line, as well as limited edition goods only available in our stores. Our Volcom stores
regularly host events with our athletes, Volcom featured artists and musicians, which attract consumers and enable us to showcase our brand. The design and layout of the stores, which include an assortment of our apparel, art presentations, a music
listening station with Volcom Entertainment titles and a Veeco Productions section with all of our film titles, exemplifies our philosophy of change and youth culture. Our licensees currently operate eight Volcom branded retail stores in such places
as Brazil, South Africa and Thailand. We also own two multibrand Laguna Surf & Sport stores and license eight Volcom outlet stores.

The Volcom Pipehouse

In February 2007, we purchased one of the most famous houses in surfing history directly in
front of the Pipeline surf break on the North Shore of Oahu, Hawaii, commonly referred to as the Pipehouse. This house is our second residence in front of the world renowned Pipeline surf break. This home will be the headquarters for top Volcom team
riders and will also be used as a research and development center for product design and testing and retailer roundtables. The original Volcom house will continue to accommodate the majority of Volcoms domestic and international up-and-coming
team riders and serve as a marketing location throughout the year. We believe these two properties provide Volcom with a unique global marketing platform.

Online Marketing

Our website, located at www.volcom.com, serves as an additional
medium for us to communicate our brand message. Visitors to our website are able to view our line of apparel and accessories, read news releases, learn about our team riders and view information about our Volcom branded events. Our website offers a
directory of our traditional, store-based retailers and we sell our films and music direct to consumers on our website. We do not generally sell apparel on our website, other than certain Volcom Entertainment products, but we do provide links to
select online retailers. As a means to further connect with our core consumers, we allow visitors to sign-up for email distribution of periodic news releases as well as updates on our product line, team riders and Volcom branded events. Information
contained on our website does not constitute part of, nor is it incorporated into, this Form 10-K.



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Competition

We compete globally with companies of various size and scale, many of whom are significantly larger than we are and have substantially greater resources than we have. We believe our most significant direct competitors currently include
Quiksilver Inc., including the Quiksilver, Roxy and DC brands; Billabong International Limited, including the Billabong and Element brands; Burton; and Hurley. We also compete with smaller companies that focus on one or more boardsport segments. The
boardsports market is susceptible to rapid changes in consumer preferences, which could affect acceptance of our products.

We compete
primarily on the basis of successful brand management and recognition, marketing and product design, style, performance and quality. We believe that we compete favorably with our competitors on these bases, although because several of our
competitors are public companies, or are owned by public companies, with greater resources than we have, they have been able to allocate these resources toward brand building and marketing programs that are greater in scope and size than ours. In
order to further our success and continued growth we believe it will be necessary to:



| |  |  | maintain our reputation as a popular lifestyle brand among the skateboarding, snowboarding and surfing community and others who associate themselves with the action
sports youth lifestyle;
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| |  |  | continue to develop and respond to global fashion and lifestyle trends in our target market;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | advance our brand as an authentic, anti-establishment brand while continuing to grow as a global business;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | design stylish, high-quality products at appropriate prices for our target market; and
| | - |  | --------------------------------------------------------------------------------------



| |  |  | continue to convey our lifestyle message to our target market worldwide.
| | - |  | ------------------------------------------------------------------------

Principal Customers

In 2008, 2007 and 2006, 28%, 33% and 44%, respectively, of our product revenues
were derived from our five largest customers. Other than Pacific Sunwear, which accounted for 16%, 18% and 26% of our product revenues in 2008, 2007 and 2006, respectively, no single customer accounted for more than 10% of our product revenues
during 2008, 2007 or 2006. We believe that revenues from our five largest accounts, including Pacific Sunwear, will continue to decrease as a percentage of our overall revenues as we continue to diversify our account base.

Credit and Collection

We extend credit to our
customers based on an assessment of a customers financial condition, generally without requiring collateral. To assist in the scheduling of production and the shipping of products within our snow category, consistent with industry practice, we
offer customers discounts for placing pre-season orders and extended payment terms for taking delivery before the peak shipping season. These extended payment terms increase our exposure to the risk of uncollectible receivables. However, throughout
the year, we perform credit evaluations of our customers, and we adjust credit limits based on payment history and the customers creditworthiness. We continually monitor our collections and maintain a reserve for estimated credit losses based
on our historical experience and any specific customer collections issues that are identified. While such credit losses have historically been within our expectations and reserves, we cannot assure you that we will continue to experience the same
credit loss rates we have experienced in the past.

Intellectual Property

We own the Volcom and Volcom Stone Design trademarks and various combinations of these marks in approximately 100 countries around the world, along with
several issued and pending patents in the United States, China, Europe, and Japan. We also own the Electric and Electric Volt logo in more than 20 countries



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around the world, as well as several design patent registrations in the United States. Our pending and registered trademarks in the United States and other
nations are primarily used on apparel and related accessories, sunglasses, goggles and for retail services. We also apply for and register our Volcom Entertainment and Veeco Productions trademarks in the United States and internationally mainly for
use with our music and film products. We believe our trademarks and registered trademarks and our other intellectual property are crucial to the successful marketing and sale of our products, and we attempt to vigorously prosecute and defend our
rights throughout the world. Each trademark registered with the U.S. Patent and Trademark Office has a duration of ten years and is subject to an indefinite number of renewals for a like period upon appropriate application. Trademarks
registered outside of the United States typically have a duration of between seven and fourteen years depending upon the jurisdiction and are also generally subject to an indefinite number of renewals for a like period upon appropriate application.

Government Regulation

Our products
are subject to governmental health safety regulations in most countries where they are sold, including the United States, the European Union and Australia, as well as import duties and tariffs on products being imported into countries outside of the
United States. In addition, we are subject to various state and Federal regulations generally applicable to similar businesses. We regularly inspect our production techniques and standards for compliance with applicable requirements including the
Customs Trade Partnership Act Against Terrorism.

Management Information Systems

We use an integrated software package for substantially all of our operations. The software package is specifically designed for apparel distributors and
producers. This software package is used for stock keeping unit, or SKU, management and classification inventory tracking, purchase order management, merchandise distribution, automated ticket generation, general ledger functions, sales auditing,
accounts payable management and integrated financial management. The system provides summary data for all departments and a daily executive summary report used by management to observe business and financial trends.

Employees

We believe our employees are among our
most valuable resources and have been an important part of our success. As of December 31, 2008, we had a total of 490 full-time European and domestic employees. We are not party to any labor agreements and none of our employees are
represented by a labor union. We consider our relationship with our employees to be excellent and have never experienced a work stoppage.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

Before deciding to
purchase, hold or sell our common stock, you should carefully consider the risks described below in addition to the other cautionary statements and risks described elsewhere, and the other information contained, in this Report and in our other
filings with the SEC, including our subsequent reports on Forms 10-Q and 8-K. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem
immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on us, our business, financial condition and results of operations could be seriously harmed. In that
event, the market price for our common stock will likely decline, and you may lose all or part of your investment.

One retail
customer represents a material amount of our revenues, and the loss of this retail customer or reduced purchases from this retail customer may have a material adverse effect on our operating results.

Pacific Sunwear accounted for approximately 16% of our product revenues in 2008 and approximately 18% in 2007. We do not have a long-term contract with
Pacific Sunwear, and all of its purchases from us have



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historically been on a purchase order basis. Sales to Pacific Sunwear increased 7%, or $3.4 million, for 2008 compared to 2007. However, our sales to
Pacific Sunwear may decrease in the future and we currently expect a decrease in 2009 revenue from Pacific Sunwear compared to 2008. We recognize that any customer concentration creates risks and we are, therefore, assessing strategies to lessen our
concentration with Pacific Sunwear. We cannot predict whether such strategies will reduce, in whole or in part, our sales concentration with Pacific Sunwear in the near or long term. Because Pacific Sunwear has represented such a significant amount
of our product revenues, our results of operations are likely to be adversely affected by any Pacific Sunwear decision to decrease its rate of purchases of our products. A continuing decrease in its purchases of our products, a cancellation of
orders of our products or a change in the timing of its orders will have an additional adverse affect on our operating results.

The
current downturn in the global economy coupled with cyclical economic trends in apparel retailing could have a material adverse effect on our results of operations.

The apparel industry historically has been subject to substantial cyclicality. As the economic conditions in the global economy have deteriorated,
discretionary consumer spending has been reduced. The current global economic slowdown may result in lower than expected orders of our products and pressure on our gross margins due to the promotional environment. Reduced sales by our wholesale
customers may lead to lower retail inventory levels, reduced orders from suppliers like Volcom, or order cancelations. Reduced sales by some of our wholesale customers, along with the possibility of their reduced access to, or inability to access,
the credit markets, may result in various retailers experiencing significant financial difficulties. Financial difficulties of customers could result in reduced sales to those customers or could result in store closures, bankruptcies or
liquidations. Higher credit risk relating to receivables from customers experiencing financial difficulty may result. Many of our retail customers, including Pacific Sunwear, have reported negative same store sales growth comparisons and experienced
a difficult 2008 holiday season. The economic downturn in the United States, European and broader global economy or continued uncertainties regarding future economic prospects could have a material adverse effect on our results of operations.

We may be adversely affected by the financial condition of our retailers.

Some of our retailers have experienced financial difficulties in the past. A retailer experiencing such difficulties will generally not purchase and sell
as many of our products as it would under normal circumstances and may cancel orders. In addition, a retailer experiencing financial difficulties generally increases our exposure to the risk of uncollectible receivables. We extend credit to our
retailers based on our assessment of the retailers financial condition, generally without requiring collateral. While such credit losses have historically been within our expectations and reserves, we cannot assure you that this will continue.
Financial difficulties on the part of our retailers could have a material adverse effect on our results of operations and financial condition.

If we are unable to successfully integrate the operations of Electric or our other acquisitions, including our Japanese and UK territories, our business and earnings may be negatively affected.

We occasionally consider and, as we believe appropriate, make acquisitions of products and businesses that we believe are complementary to our business.
Acquisitions involve significant integration efforts. Successful integration of an acquired company will depend primarily on our ability to consolidate operations, systems, procedures, properties and personnel. Acquisitions also pose other risks
commonly associated with similar transactions, including unanticipated liabilities, unexpected costs and the diversion of managements attention to the integration. We cannot assure you that we will be able to integrate an acquired
companys operations without encountering difficulties including, but not limited to, the loss of key employees, the disruption of its respective ongoing businesses or possible inconsistencies in standards, controls, procedures and policies. If
we have difficulties integrating an acquired company, we might not achieve the economic benefits we expect to result from the acquisition, and this may hurt our business and earnings. In addition, we may experience greater than



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expected costs or difficulties relating to the integration of a business and may not realize expected benefits from the acquisition within the expected time
frame, if at all.

As a result of our acquisition of Electric, we face greater challenges in managing an additional brand and related
products.

While we believe that we have significant experience in managing our clothing, accessories and related products with the
Volcom brand name and their respective channels of distribution, with our acquisition of Electric, we have further penetrated the action sports industry and have added a second brand and additional product categories. If we are unable to effectively
manage our multiple product lines, our profitability and cash flow may be reduced and our brand image and reputation could be harmed.

If the United States continues to impose tariffs and import quota restrictions on products manufactured in China and we are unable to obtain sufficient product from countries other than China or from domestic sources, or if the
products we obtain from these other countries or domestic sources are of insufficient quality or fail to comply with U.S. consumer product laws, it could materially affect our gross margin and financial performance.

Quota represents the right, pursuant to bilateral or other international trade arrangements, to export amounts of certain categories of merchandise into a
country or territory pursuant to a visa or license. Pursuant to the Agreement on Textiles and Clothing, quota on textile and apparel products was eliminated for World Trade Organization, or WTO, member countries on January 1, 2005.
Notwithstanding quota elimination, Chinas accession agreement for membership into the WTO provides that WTO member countries (including the United States, Canada and European countries) may re-impose quotas on specific categories of products
in the event it is determined that imports from China have surged and are threatening to create a market disruption for such categories of products (so called safeguard quota provisions). In June 2005, safeguard quota provisions were
implemented on certain apparel categories to restrict the amount of apparel being imported into the United States by China. These safeguard quota provisions remained intact until the end of 2008. Virtually all of our merchandise imported into the
United States is subject to duties. The United States may also unilaterally impose additional duties in response to a particular product being imported (from China or other countries) in such increased quantities as to cause (or threaten) serious
damage to the relevant domestic industry (generally known as anti-dumping actions). Beginning January 1, 2008, our imports from China to Europe are quota-free. The United States and other countries in which our products are
manufactured and sold may, from time to time, impose new duties, tariffs, surcharges or other import controls or restrictions, including the imposition of safeguard quota, or adjust presently prevailing duty or tariff rates or levels.
The establishment of these quotas or additional quotas or duties could cause disruption in our supply chain and could materially adversely affect our gross margin and financial performance. The United States and China have not finalized a new quota
arrangement for after December 31, 2008.

Additionally, China offers a rebate tax on exports to control the amount of exports from
China, which can affect our cost either positively or negatively. These potential cost increases, along with the rising currency and labor shortages in China, will have an impact on our business. While we do not believe the limitations on imports
from China will have a material effect on our operations, there will be increased pressure on costs and we intend to closely monitor our sourcing in China to avoid disruptions.

With the passage of the Consumer Product Safety Improvement Act of 2008, there are new requirements mandated for the textiles and apparel
industries. These requirements relate to all metal and painted trim items and certain other raw materials used in childrens age 12 and under apparel. The Consumer Product Safety Commission, or CPSC, will require certification and
testing for lead in paint and metal trims, pointed or sharp edge items, Phthalates, and fabric flammability to meet the CPSCs limits. Volcom is working with an accredited third party testing service to comply with all CPSC requirements
and testing to ensure product safety. We will



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continue to monitor the situation and intend to abide by all rules and changes made by the CPSC. This could have a negative impact on the cost of our goods
and poses a potential risk if we do not adhere to these requirements.

Our balance sheet includes a significant amount of intangible
assets and goodwill. A decline in the estimated fair value of an intangible asset or of a reporting unit could result in an asset impairment charge, which would be recorded as an operating expense.

Under current accounting standards, we estimate the fair value of acquired assets, including intangible assets, and assumed liabilities arising from a
business acquisition. The excess, if any, of the cost of the acquired business over the fair value of net tangible assets acquired is allocated to intangible assets and goodwill.

At December 31, 2008, we had approximately $6.9 million of non-amortizing trademark and other non-amortizing intangible assets and $0.7 million of
goodwill on our balance sheet. These assets are not required to be amortized under current accounting rules. In addition, we had approximately $3.7 million of intangible assets, net of accumulated amortization, that are being amortized under current
accounting rules. The combined amounts represent 5% of our total assets and 6% of total stockholders equity.

Goodwill and
non-amortizing intangible assets must be tested for impairment annually or in the event of an impairment indicator. We evaluate the recoverability of goodwill 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 the 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 our cost of capital. Intangible assets that are being amortized must be tested for impairment whenever events or circumstances indicate that their carrying value might not be
recoverable.

The fair value of a reporting unit could decline if forecasted revenues or cash flows were to be lower in the future due to
effects of the global recession or other causes. If the carrying value of intangible assets or of goodwill were to exceed its fair value, the asset would be written down to its fair value, with the impairment loss recognized as a noncash charge. In
2008, we had impairment charges of $16.2 million associated with the goodwill and intangible assets related to Electric and Laguna Surf & Sport. In 2007, we had impairment charges of $0.2 million associated with the goodwill related to
Welcom Distribution SARL. A significant reduction in the estimated future cash flows could result in additional impairment losses, which could have a material adverse effect on our results of operations and financial condition.

If we are required to establish new manufacturing relationships due to the termination of current key manufacturing relationships with large
contractors such as Ningbo Jehson Textiles and Dragon Crowd, we would likely experience increased costs, disruptions in the manufacture and shipment of our products and a loss of revenue.

Our manufacturers could cease to provide products to us with little or no notice. We also understand that some factories in China, where we produced
approximately 66% of our goods in 2008, are closing due to rising costs and an inability to operate at a profit. If factories where we produce goods were to close or stop producing goods for us, it could result in delayed deliveries to our
retailers, could adversely impact our revenues in a given season and could require the establishment of new manufacturing relationships. The establishment of new manufacturing relationships involves numerous uncertainties, such as whether the new
manufacturers will perform to our expectations and produce quality products in a timely, cost-efficient manner on a consistent basis, either of which could make it difficult for us to meet our retailers orders on satisfactory commercial terms.
Furthermore, purchases from two contractors, Dragon Crowd and Ningbo Jehson Textiles, totaled approximately 18% and 14%, respectively, of our product costs in 2008, and approximately 19% and 14% of our product costs in 2007. The loss of either of
these manufacturers would likely require us to establish new manufacturing relationships, which would likely cause increased costs, disruptions in the manufacture and shipment of our products and a corresponding loss of revenues.



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If we are unable to continue to develop innovative and stylish products, demand for our products
may decrease and our brand image may be harmed.

The boardsports apparel industry is subject to constantly and rapidly changing
consumer preferences based on fashion trends and performance features. Our success depends largely on our ability to anticipate, gauge and respond to these changing consumer demands and fashion trends in a timely manner while preserving the
relevancy and authenticity of our brand. In addition, we generally make decisions regarding product designs several months in advance of the time when consumer acceptance can be measured.

Our success is largely dependent upon our ability to continue to develop innovative and stylish products. As is typical with new products, market
acceptance of new designs and products we may introduce is subject to uncertainty. We cannot assure you that our efforts will be successful. The failure of new product designs or new product lines to gain market acceptance could adversely affect our
business and our brand image. Achieving market acceptance for new products may also require substantial marketing efforts and expenditures to expand consumer demand. These requirements could strain our management, financial and operational
resources. If we do not continue to develop stylish and innovative products that provide better design and performance attributes than the products of our competitors and that are accepted by consumers, we may lose consumer loyalty, which could
result in a decline in our revenues and market share.

Changes in the mix of retailers to whom we distribute our products could
impact our gross margin and brand image, which could have a material adverse effect on our results of operations.

We sell our
products through a mix of retailers, including specialty boardsports retailers and several retail chains. Although we do not currently anticipate material changes in the mix of our retail customers, any such changes could adversely affect our gross
margin and could negatively affect both our brand image and our reputation with our consumers. A negative change in our gross margin or our brand image and acceptance could have a material adverse effect on our results of operations and financial
condition.

We may be unable to sustain our past growth, which may have a material adverse effect on our future operating results.

We have experienced rapid growth since our inception, and have increased our revenues from $113.2 million in 2004 to
$334.3 million in 2008. We anticipate our rate of growth in the future will depend upon, among other things, the success of our growth strategies, which we cannot assure you will be successful. In addition, we may have more difficulty
maintaining our prior rate of growth of revenues and profitability. Our future success will depend upon various factors, including the economic environment, the strength of our brand image, the market success of our current and future products,
competitive conditions and our ability to manage increased revenues, if any, or implement our growth strategy.

Future growth may place a
significant strain on our management and operations. If we continue to experience growth in our operations, our operational, administrative, financial and legal procedures and controls may need to be expanded. As a result, we may need to train and
manage an increasing number of employees, which could distract our management team from our business. Our future success will depend substantially on the ability of our management team to manage our anticipated growth. If we are unable to anticipate
or manage our growth effectively, our operating results could be adversely affected.

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

We have traditionally received a substantial portion of our customer orders prior to placement of
our initial manufacturing orders. However, we also maintain an inventory of selected core products that we anticipate will be in high demand, such as t-shirts. We may be unable to sell the products we have ordered in advance from manufacturers or
that we have in our inventory. The current economic environment has made accurate projecting of inventory levels increasingly challenging. Inventory levels in excess of customer demand may result in



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inventory write-downs, or the sale of excess inventory at discounted or close-out prices, all of which could adversely affect our gross margins. These events
could significantly harm our operating results and impair our brand image. Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply quality products in a timely manner, we may experience inventory
shortages. Inventory shortages might result in unfilled orders, negatively impact retailer relationships, diminish brand loyalty and result in lost revenues, any of which could harm our business.

Fluctuations in foreign currency exchange rates could harm our results of operations.

We are exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to certain sales, royalty income, and product
purchases of our international subsidiaries that are denominated in currencies other than their functional currencies. We are also exposed to foreign currency gains and losses resulting from domestic transactions that are not denominated in U.S.
dollars (primarily sales of goods to Canada, collection of receivables denominated in Canadian dollars and purchases of sunglasses in Euro). We have not historically entered into foreign currency exchange contracts to hedge this risk, however during
2008 we entered into forward exchange contracts to hedge a portion of our European operations U.S. dollar denominated inventory purchases. If we are unsuccessful in using various foreign currency exchange contracts our profits and cash flows could
be significantly reduced. In some cases, as part of our risk management strategies, we may choose not to hedge our exposure to foreign currency exchange rate changes. If we misjudge these risks, there could be a material adverse effect on our
operating results and financial position.

Furthermore, we are exposed to gains and losses resulting from the effect that fluctuations in
foreign currency exchange rates have on the reported results in our consolidated financial statements due to the translation of the statements of operations and balance sheets of our international subsidiaries into U.S. dollars. We have not used
foreign currency exchange contracts to hedge the profit and loss effects of this translation effect. We translate our revenues and expenses at average exchange rates during the period. As a result, the reported revenues and expenses of our
international subsidiaries would decrease if the U.S. dollar increased in value in relation to other currencies, including the Euro, Swiss Franc, British pound or Japanese yen.

We do not have long-term contracts with any of our retailers, and the loss of orders for our products from our retailers may have a material
adverse effect on our operating results.

We do not maintain long-term contracts with any of our retailers, and retailers generally
purchase products from us on a purchase order basis. As a result, our retailers generally may, with little or no notice or penalty, decide to cease ordering and selling our products, or could materially reduce their orders in any period. If certain
retailers, individually or in the aggregate, choose to no longer sell our products, it may be difficult for us to change our distribution to other retailers in a timely manner, which could have a material adverse effect on our financial condition
and results of operations.

Any inability to receive timely deliveries from our manufacturers could harm our business.

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

The purchasing decisions of consumers are
highly subjective and can be influenced by many factors, such as brand image, marketing programs and product design. Several of our competitors enjoy substantial competitive advantages, including greater brand recognition, longer operating
histories, more comprehensive product lines



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and greater financial resources for competitive activities, such as sales and marketing and strategic acquisitions. The number of our direct competitors and
the intensity of competition may increase as we expand into other product lines or as other companies expand into our product lines. Our competitors may enter into business combinations or alliances that strengthen their competitive positions or
prevent us from taking advantage of such combinations or alliances. Our competitors also may be able to respond more quickly and effectively than we can to new or changing opportunities, standards or consumer preferences, which could result in a
decline in our revenues and market share.

The market price of our common stock is highly volatile and may result in investors
selling shares of our common stock at a loss.

The trading price of our common stock is highly volatile and subject to wide
fluctuations in price in response to various factors, many of which are beyond our control, including:



| |  |  | actual or anticipated variations in quarterly operating results;
| | - |  | ----------------------------------------------------------------



| |  |  | changes in financial estimates by securities analysts;
| | - |  | ------------------------------------------------------



| |  |  | conditions or trends in the fashion and boardsports industries; and
| | - |  | -------------------------------------------------------------------



| |  |  | changes in the market valuations of similar companies.
| | - |  | ------------------------------------------------------

In addition, the stock market in general and the NASDAQ in particular have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of listed
companies. Industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market, securities class-action litigation has often been instituted
against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of managements attention and resources and could further a decline in the market price of our common stock. Stock price volatility
may result in investors selling shares of our common stock at a loss.

If our marketing efforts do not effectively maintain and
expand our brand name recognition, we may not be able to achieve our growth strategy.

We believe that broader recognition and
favorable perception of our brand by consumers in our target market is essential to our future success. To increase brand recognition, we believe we must continue to devote significant amounts of time and resources to advertising and promotions.
These expenditures, however, may not result in an increase in favorable recognition of our brand or a sufficient increase in revenues to cover such advertising and promotional expenses. In addition, even if our brand recognition increases, our
consumer base and our revenues may not increase, and may in fact decline, either of which could harm our business.

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

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



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We also are subject to risks related to the selection of athletes to endorse our products. We may select
athletes who are unable to perform at expected levels or who are not sufficiently marketable. In addition, negative publicity concerning any of our athletes could harm our brand and adversely impact our business. If we are unable in the future to
secure prominent athletes and arrange athlete endorsements of our products on terms we deem to be reasonable, we may be required to modify our marketing platform and to rely more heavily on other forms of marketing and promotion, which may not prove
to be as effective.

If we fail to secure or protect our intellectual property rights, counterfeiters may be able to copy and sell
imitations of our products and competitors may be able to use our designs, each of which could harm our reputation, reduce our revenues and increase our costs.

We rely on intellectual property laws to protect our proprietary rights with respect to our trademarks and pending patent. We are susceptible to injury from the counterfeiting of our products, which may harm our
reputation for producing high-quality products or force us to incur additional expense in enforcing our rights. It is difficult and expensive to detect and prevent counterfeiting. Despite our efforts to protect our intellectual property,
counterfeiters may continue to violate our intellectual property rights by using our trademarks and imitating our products, which could potentially harm our brand, reputation and financial condition.

Since our products are sold internationally, we are also dependent on the laws of foreign countries to protect our intellectual property. These laws may
not protect intellectual property rights to the same extent or in the same manner as the laws of the United States. We cannot be certain that our efforts to protect our intellectual property will be successful or that the costs associated with
protecting our rights abroad will not negatively impact our results of operations. We may face significant expenses and liability in connection with the protection of our intellectual property rights both inside and outside of the United States.
Infringement claims and lawsuits likely would be expensive to resolve and would require substantial management time and resources. Any adverse determination in litigation could subject us to the loss of our rights to a particular trademark, which
could prevent us from manufacturing, selling or using certain aspects of our products or could subject us to substantial liability, any of which would harm our results of operations. Aside from infringement claims against us, if we fail to secure or
protect our intellectual property rights, our competitors may be able to use our designs. If we are unable to successfully protect our intellectual property rights or resolve any conflicts, our results of operations may be harmed.

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

We are heavily dependent on our current executive officers and management. The loss of any executive officers or
management personnel, or the inability to attract or retain qualified personnel, could delay the development and introduction of, and harm our ability to sell, our products and damage our brand image. We believe that our future success is highly
dependent on the contributions, talents and leadership of Richard Woolcott, our Chairman, Chief Executive Officer and co-founder. While our other key executive officers have substantial experience and have made significant contributions to our
business, Richard remains a driving force behind our brand image and philosophy. We have not entered into an employment agreement with Richard and we cannot be certain that he will stay with us. Richards services would be very difficult to
replace. We do not carry key man insurance and do not expect to carry such insurance in the future. We may not be able to retain our current executive officers and management personnel, which could have a material adverse effect on our results of
operations.

Our ability to attract and retain qualified design and sales and marketing personnel is critical to our success, and any
inability to attract and retain such personnel could harm our business.

Our future success may also depend on our ability to
attract and retain additional qualified design and sales and marketing personnel. We face competition for these individuals worldwide, and there is a significant



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concentration of boardsports apparel and action sports companies based in and around our headquarters in Orange County, California. We may not be able to
attract or retain these employees, which could have a material adverse effect on our results of operations and financial condition.

Any shortage of raw materials could impair our ability to ship orders of our products in a cost-efficient manner or could cause us to miss the delivery requirements of our customers, which could harm our business.

The capacity of our manufacturers to manufacture our products is dependent, in part, upon the availability of raw materials. Our manufacturers may
experience shortages of raw materials, which could result in delays in deliveries of our products by our manufacturers or in increased costs to us. Any shortage of raw materials or inability to control costs associated with manufacturing could
increase the costs for our products or impair our ability to ship orders of our products in a cost-efficient manner and could cause us to miss the delivery requirements of our customers. As a result, we could experience cancellation of orders,
refusal to accept deliveries or a reduction in our prices and margins, any of which could harm our financial performance and results of operations.

Our business could suffer if any of our or our licensees key manufacturers fails to use acceptable labor practices.

It is difficult to monitor and control the labor practices of our independent manufacturers. The violation of labor or other laws by an independent manufacturer utilized by us or a licensee of ours, or the divergence of an independent
manufacturers or licensing partners labor practices from those generally accepted as ethical in the United States, could damage our reputation or interrupt, or otherwise disrupt the shipment of finished products to us or our licensees if
such manufacturer is ordered to cease its manufacturing operations due to violations of laws or if such manufacturers operations are adversely affected by such failure to use acceptable labor practices. If this were to occur, it could have a
material adverse effect on our financial condition and results of operations.

We may not be able to compete effectively, which could
cause our revenues and market share to decline.

The boardsports apparel industry, and the apparel industry in general, is highly
competitive. We compete with numerous domestic and foreign designers, distributors, marketers and manufacturers of apparel, accessories and other related products, some of which are significantly larger and have greater resources than we do. We
believe that in order to compete effectively, we must continue to maintain our brand image and reputation, be flexible and innovative in responding to rapidly changing market demands and consumer preferences, and offer consumers a wide variety of
high-quality apparel at premium prices. We compete primarily on the basis of brand image, style, performance and quality.

Our
revenues and operating income fluctuate on a seasonal basis and decreases in sales or margins during our peak seasons could have a disproportionate effect on our overall financial condition and results of operations.

Historically, our operating results have been subject to seasonal trends when measured on a quarterly basis. In the past, we have experienced greater
revenues in the second half of the year than those in the first half due to a concentration of shopping around the fall and holiday seasons, and pricing differences between our products sold during the first and second half of the year, as products
we sell in the fall and holiday seasons generally have higher prices per unit than products we sell in the spring and summer seasons. We typically sell more of our summer products (boardshorts and t-shirts) in the first half of the year and a
majority of our winter products (pants, long sleeve shirts, sweaters, fleece, jackets and outerwear) in the second half of the year. We anticipate that this seasonal impact on our revenues is likely to continue. Because a substantial portion of our
operating income is derived from our third and fourth quarter revenues, a shortfall in expected third and fourth quarter revenues would cause our annual operating results to suffer significantly.



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Additionally, our direct European operations began shipping product during the second half of 2007, which
caused a slightly higher concentration of revenues in the second half of 2007 over historical levels. Our business in Europe is extremely seasonal with revenues concentrated primarily in the first and third quarters, shipment of low margin samples
concentrated in the second and fourth quarters, and a relatively steady pace of selling, general and administrative expenses throughout the year. As 2008 was the first year that our European business was fully operational throughout the entire year,
we may experience a shift in our historical revenue, gross profit and operating income trends.

We face business, political,
operational, financial and economic risks because a portion of our revenues are from international customers, substantially all of our products are sourced overseas and our licensees operate outside of the United States.

We and our international licensees are subject to risks inherent in international business, many of which are beyond our and our licensees control,
including:



| |  |  | difficulties obtaining domestic and foreign export, import and other governmental approvals, permits and licenses, and compliance with foreign laws, which could
halt, interrupt or delay our operations if we cannot obtain such approvals, permits and licenses;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | difficulties encountered by our international licensees or us in staffing and managing foreign operations or international sales;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | transportation delays and difficulties of managing international distribution channels;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | longer payment cycles for, and greater difficulty collecting, accounts receivable and royalty payments;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | trade restrictions, higher tariffs, currency fluctuations or the imposition of additional regulations relating to import or export of our products, especially in
China, where a large portion of our products are manufactured, which could force us to seek alternate manufacturing sources or increase our expenses;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | unexpected changes in regulatory requirements, royalties and withholding taxes that restrict the repatriation of earnings and effects on our effective income tax
rate due to profits generated or lost in foreign countries;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | political and economic instability, including weakening financial institutions, regional or global recessions, wars, terrorism, political unrest, boycotts,
curtailment of trade and other business restrictions; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | natural disasters.
| | - |  | ------------------

Any of these
factors could reduce our revenues, decrease our gross margins or increase our expenses and could materially adversely affect our revenues and results of operations. To the extent that we establish our own operations in international territories
where we have previously utilized a licensee, such as in Europe, we will increasingly become subject to risks associated with operating outside of the United States.

If the ownership of our common stock continues to be highly concentrated, it may prevent you and other stockholders from influencing significant corporate decisions and may result in conflicts of interest that
could cause our stock price to decline.

As of December 31, 2008, our executive officers, directors and their affiliates
beneficially own or control approximately 22.6% of the outstanding shares of our common stock, of which René Woolcott and Richard Woolcott own approximately 7.1% and 13.3%, respectively, of the 24,374,362 outstanding shares. Accordingly, our
current executive officers, directors and their affiliates, acting as a group, will have substantial control over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale
of all or substantially all of our assets or any other significant corporate transactions. These



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stockholders may also delay or prevent a change of control of us, even if such a change of control would benefit our other stockholders. The significant
concentration of stock ownership may adversely affect the trading price of our common stock due to investors perception that conflicts of interest may exist or arise.



|ITEM 1B. | UNRESOLVED STAFF COMMENTS
|-------- | -------------------------

None



|ITEM 2. | PROPERTIES
|------- | ----------

Our principle executive,
administrative, warehousing and distribution offices are located in Costa Mesa, California. Our primary distribution facility, which became operational in the fourth quarter of 2007, is located in Irvine, California. As a result of the existing and
planned improvements to our current headquarters and the additional Irvine distribution facility, we believe our current facilities will be adequate to meet our needs for the next twelve months.

The location, general use, approximate size and final lease option term of our material properties as of December 31, 2008, none of which is owned
by us, except for the building in Anglet, France, are set forth below:



|                         |  |                       |  |                |  |            
|------------------------ |  | --------------------- |  | -------------- |  | -----------
|Location                 |  | Use                   |  | Term           |  | Square Feet
|Costa Mesa, California   |  | Global headquarters   |  | July 2024      |  | 104,000    
|Irvine, California       |  | Distribution center   |  | September 2017 |  | 164,000    
|San Clemente, California |  | Electric headquarters |  | March 2009     |  | 11,000     
|Anglet, France(1)        |  | European headquarters |  | May 2036       |  | 34,000     



|(1) | We own the facilities located on the leased land in Anglet,
France.
|--- | -------------------------------------------------------------------

As of December 31, 2008, we also operated 15 retail stores located around the world on leased premises. We
anticipate that we will be able to extend those leases that expire in the near future on terms satisfactory to us, or, if necessary, locate substitute facilities on acceptable terms.



|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------

We are subject to
various claims, complaints and legal actions in the normal course of business from time to time. We do not believe we have any currently pending litigation of which the outcome will have a material adverse effect on our operations or financial
position.



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

No matters were submitted to a vote of security holders during the quarter ended December 31, 2008.



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PART II



|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ------------------------------------------------------------------------------------------------------------

Market Information and Holders

Our common stock has
traded on the NASDAQ National Market and NASDAQ Global Select Market under the symbol VLCM since June 30, 2005. Prior to that time there was no public market for our common stock. The following table sets forth, for the periods
indicated, the high and low closing sale prices for our common stock as reported on the NASDAQ National Market and NASDAQ Global Select Market, as applicable:



|                                   |  |                            |       |     |   |      
|---------------------------------- |  | -------------------------- | ----- | --- | - | -----
|                                   |  | Price Range ofCommon Stock
|                                   |  | High                       |       | Low
|Year Ended December 31, 2008       |  |                            |       |     |   |      
|First Quarter (March 31, 2008)     |  | $                          | 22.98 |     | $ | 13.82
|Second Quarter (June 30, 2008)     |  | $                          | 28.88 |     | $ | 18.57
|Third Quarter (September 30, 2008) |  | $                          | 26.00 |     | $ | 16.25
|Fourth Quarter (December 31, 2008) |  | $                          | 17.41 |     | $ | 6.39 
|Year Ended December 31, 2007       |  |                            |       |     |   |      
|First Quarter (March 31, 2007)     |  | $                          | 37.55 |     | $ | 28.13
|Second Quarter (June 30, 2007)     |  | $                          | 51.00 |     | $ | 34.14
|Third Quarter (September 30, 2007) |  | $                          | 50.64 |     | $ | 33.83
|Fourth Quarter (December 31, 2007) |  | $                          | 45.00 |     | $ | 21.51

The approximate number of holders of record of our common stock as of March 9, 2009 was 48.

On March 9, 2009, the last reported sale price of our common stock on the NASDAQ Global Select Market was $6.63 per share.

Dividend Policy

We have never
declared or paid any dividends on our common stock since our initial public offering. We do not currently anticipate paying any cash dividends in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our
board of directors and will depend upon our financial condition, operating results, capital requirements and such other factors as our board of directors deems relevant.

Unregistered Sale of Equity Securities and Issuer Purchases of Equity Securities

We did not sell any
unregistered equity securities or purchase any of our securities during the period ended December 31, 2008.



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Equity Compensation Plans

The following table summarizes information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our compensation plans as of December 31, 2008:



|                                                           |  |                                                                                            |  |                                                                             |       |                                                                                                                                          |           |    
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------- | ----- | ---------------------------------------------------------------------------------------------------------------------------------------- | --------- | ---
|Plan Category                                              |  | Number of Securitiesto be Issued uponExercise ofOutstanding Options,Warrants and Rights(a) |  | Weighted AverageExercise Price ofOutstanding Options,Warrants and Rights(b) |       | Number of SecuritiesRemaining Availablefor Future Issuanceunder EquityCompensation Plans(Excluding SecuritiesReflected in Column (a))(c) |          
|Equity compensation plans approved by security holders     |  | 437,558                                                                                    |  | $                                                                           | 19.67 |                                                                                                                                          | 3,105,655 | (1)
|Equity compensation plans not approved by security holders |  | N/A                                                                                        |  |                                                                             | N/A   |                                                                                                                                          | N/A       |    
|                                                           |  |                                                                                            |  |                                                                             |       |                                                                                                                                          |           |    
|Total                                                      |  | 437,558                                                                                    |  | $                                                                           | 19.67 |                                                                                                                                          | 3,105,655 |    
|                                                           |  |                                                                                            |  |                                                                             |       |                                                                                                                                          |           |    



|(1) | Does not include the automatic increase of 487,487 shares of common stock on January 2, 2009 under the Amended and Restated 2005 Stock Incentive Plan.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------

We do not maintain any equity-based compensation plan that has not been approved by our stockholders or any employee stock purchase plan.



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Performance Graph1

The following graph shows a comparison of cumulative total returns for Volcom, the NASDAQ Stock Market Index and the
Standard & Poors Apparel, Accessories and Luxury Goods Index during the period commencing on June 30, 2005 (the date of our first day of trading) and ending on December 31, 2008. The comparison assumes $100 was invested on
June 30, 2005 in each of our common stock (at the initial offering price), the NASDAQ Stock Market Composite Index and the Standard & Poors Apparel, Accessories and Luxury Goods Index and assumes the reinvestment of all
dividends, if any. The comparisons in the table are required by the SEC and are not intended to forecast or be indicative of possible future performance of our common stock.

COMPARISON OF 42 MONTH CUMULATIVE TOTAL RETURN*

Among Volcom, Inc, The NASDAQ
Composite Index

And The S&P Apparel, Accessories & Luxury Goods Index

LOGO



|* | $100 invested on 6/29/05 in stock & 5/31/05 in index-including reinvestment of dividends. Fiscal year ending December 31.
|- | -------------------------------------------------------------------------------------------------------------------------

Copyright © 2009 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.

Annual Percentage Return



|                                        |  |          |  |          |  |          |  |          |  |         
|--------------------------------------- |  | -------- |  | -------- |  | -------- |  | -------- |  | --------
|                                        |  | 06/29/05 |  | 12/31/05 |  | 12/31/06 |  | 12/31/07 |  | 12/31/08
|Volcom, Inc                             |  | 100.00   |  | 179.00   |  | 155.63   |  | 115.95   |  | 57.37   
|NASDAQ Composite                        |  | 100.00   |  | 107.79   |  | 120.81   |  | 131.90   |  | 76.85   
|S&P Apparel,
Accessories & Luxury Goods |  | 100.00   |  | 105.53   |  | 136.92   |  | 95.22    |  | 63.07   





(1)This section is not soliciting
material, is not deemed filed with the SEC and is not to be incorporated by reference in any of our filings under the Securities Act or the Exchange Act whether made before or after the date hereof and irrespective of any general
incorporation language in any such filing.



27



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|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------

The
following selected consolidated financial data should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and the related notes
to those statements included elsewhere in this Form 10-K. The consolidated statements of operations data for the years ended December 31, 2008, 2007 and 2006 and the balance sheet data as of December 31, 2008 and 2007 are derived from
our audited consolidated financial statements included elsewhere in this Form 10-K. The consolidated statements of operations data for the years ended December 31, 2005 and 2004 and the balance sheet data as of December 31, 2006, 2005
and 2004 are derived from our audited consolidated financial statements not included herein. Historical results are not necessarily indicative of the results to be expected in the future, and the results for the years presented should not be
considered indicative of our future results of operations.



|                                             |  |                                                 |            |   |      |   |            |  |      |            |      |   |            |  |   |            |  
|-------------------------------------------- |  | ----------------------------------------------- | ---------- | - | ---- | - | ---------- |  | ---- | ---------- | ---- | - | ---------- |  | - | ---------- | -
|                                             |  | Year Ended December 31,                         |           
|                                             |  | 2008                                            |            |   | 2007 |   | 2006       |  | 2005 |            | 2004 |  
|                                             |  | (In thousands, except share and per share data) |           
|Consolidated Statements of Operations Data:  |  |                                                 |            |   |      |   |            |  |      |            |      |   |            | 
|Revenues:                                    |  |                                                 |            |   |      |   |            |  |      |            |      |   |            |  |   |            |  
|Product revenues                             |  | $                                               | 332,110    |   |      | $ | 265,193    |  | $    | 201,186    |      | $ | 156,716    |  | $ | 110,601    |  
|Licensing revenues                           |  |                                                 | 2,194      |   |      |   | 3,420      |  |      | 4,072      |      |   | 3,235      |  |   | 2,574      |  
|                                             |  |                                                 |            |   |      |   |            |  |      |            |      |   |            |  |   |            |  
|Total revenues                               |  |                                                 | 334,304    |   |      |   | 268,613    |  |      | 205,258    |      |   | 159,951    |  |   | 113,175    |  
|Cost of goods sold                           |  |                                                 | 171,208    |   |      |   | 138,570    |  |      | 103,237    |      |   | 78,632     |  |   | 58,205     |  
|                                             |  |                                                 |            |   |      |   |            |  |      |            |      |   |            |  |   |            |  
|Gross profit                                 |  |                                                 | 163,096    |   |      |   | 130,043    |  |      | 102,021    |      |   | 81,319     |  |   | 54,970     |  
|Operating expenses:                          |  |                                                 |            |   |      |   |            |  |      |            |      |   |            |  |   |            |  
|Selling, general and administrative expenses |  |                                                 | 112,464    |   |      |   | 79,411     |  |      | 58,417     |      |   | 42,939     |  |   | 30,585     |  
|Asset impairments                            |  |                                                 | 16,230     |   |      |   |           |  |      |           |      |   |           |  |   |           |  
|                                             |  |                                                 |            |   |      |   |            |  |      |            |      |   |            |  |   |            |  
|Total operating expenses                     |  |                                                 | 128,694    |   |      |   | 79,411     |  |      | 58,417     |      |   | 42,939     |  |   | 30,585     |  
|                                             |  |                                                 |            |   |      |   |            |  |      |            |      |   |            |  |   |            |  
|Operating income                             |  |                                                 | 34,402     |   |      |   | 50,632     |  |      | 43,604     |      |   | 38,380     |  |   | 24,385     |  
|Other income (expense)                       |  |                                                 | (906       | ) |      |   | 4,374      |  |      | 4,069      |      |   | 1,101      |  |   | (6         | )
|                                             |  |                                                 |            |   |      |   |            |  |      |            |      |   |            |  |   |            |  
|Income before provision for income taxes     |  |                                                 | 33,496     |   |      |   | 55,006     |  |      | 47,673     |      |   | 39,481     |  |   | 24,379     |  
|Provision for income taxes(1)                |  |                                                 | 11,787     |   |      |   | 21,671     |  |      | 18,920     |      |   | 10,475     |  |   | 374        |  
|                                             |  |                                                 |            |   |      |   |            |  |      |            |      |   |            |  |   |            |  
|Income before equity in earnings of investee |  |                                                 | 21,709     |   |      |   | 33,335     |  |      | 28,753     |      |   | 29,006     |  |   | 24,005     |  
|Equity in earnings of investee               |  |                                                 |           |   |      |   |           |  |      |           |      |   | 331        |  |   | 588        |  
|                                             |  |                                                 |            |   |      |   |            |  |      |            |      |   |            |  |   |            |  
|Net income                                   |  | $                                               | 21,709     |   |      | $ | 33,335     |  | $    | 28,753     |      | $ | 29,337     |  | $ | 24,593     |  
|                                             |  |                                                 |            |   |      |   |            |  |      |            |      |   |            |  |   |            |  
|Net income per share:                        |  |                                                 |            |   |      |   |            |  |      |            |      |   |            |  |   |            |  
|Basic                                        |  | $                                               | 0.89       |   |      | $ | 1.37       |  | $    | 1.19       |      | $ | 1.36       |  | $ | 1.28       |  
|Diluted                                      |  | $                                               | 0.89       |   |      | $ | 1.37       |  | $    | 1.18       |      | $ | 1.34       |  | $ | 1.26       |  
|Weighted average shares outstanding:         |  |                                                 |            |   |      |   |            |  |      |            |      |   |            |  |   |            |  
|Basic                                        |  |                                                 | 24,337,923 |   |      |   | 24,302,893 |  |      | 24,227,845 |      |   | 21,627,821 |  |   | 19,142,275 |  
|Diluted                                      |  |                                                 | 24,357,652 |   |      |   | 24,419,802 |  |      | 24,304,627 |      |   | 21,839,626 |  |   | 19,534,945 |  



|(1) | For Federal and state income tax purposes we had elected to be treated as an S corporation from January 1, 2002 until our initial public offering on June 29, 2005, and
during that period we were not subject to Federal or state income taxes, other than California franchise taxes of 1.5% on our corporate income. For all periods from and after June 29, 2005, we have become subject to the Federal and state income
taxes applicable to a C corporation. As a result, our provision for income taxes, net income and net income per share data for 2004 are not comparable to our provision for income taxes, net income and net income per share data for 2008, 2007, 2006
and 2005.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|                                                       |  |                                      |            |      |   |           
|------------------------------------------------------ |  | ------------------------------------ | ---------- | ---- | - | ----------
|                                                       |  | Year Ended December 31,             
|                                                       |  | 2005                                 |            | 2004
|                                                       |  | (In thousands, except per sharedata)
|Pro Forma Net Income Data(1):                          |  |                                      |            |      |   |           
|Income before provision for income taxes, as reported  |  | $                                    | 39,481     |      | $ | 24,379    
|Pro forma provision for income taxes                   |  |                                      | 16,223     |      |   | 10,178    
|                                                       |  |                                      |            |      |   |           
|Pro forma income before equity in earnings of investee |  |                                      | 23,258     |      |   | 14,201    
|Equity in earnings of investee                         |  |                                      | 331        |      |   | 588       
|                                                       |  |                                      |            |      |   |           
|Pro forma net income                                   |  | $                                    | 23,589     |      | $ | 14,789    
|                                                       |  |                                      |            |      |   |           
|Pro forma net income per share:                        |  |                                      |            |      |   |           
|Basic                                                  |  | $                                    | 1.09       |      | $ | 0.77      
|Diluted                                                |  | $                                    | 1.08       |      | $ | 0.76      
|Pro forma weighted average shares outstanding:         |  |                                      |            |      |   |           
|Basic                                                  |  |                                      | 21,627,821 |      |   | 19,142,275
|Diluted                                                |  |                                      | 21,839,626 |      |   | 19,534,945



|                                                          |  |                    |         |      |   |         |  |      |         |      |   |         |  |   |       
|--------------------------------------------------------- |  | ------------------ | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | ------
|                                                          |  | As of December 31,
|                                                          |  | 2008               |         | 2007 |   | 2006    |  | 2005 |         | 2004
|                                                          |  | (In thousands)    
|Consolidated Balance Sheet Data:                          |  |                    |         |      |   |         |  |      |         |      |   |         |  |   |       
|Cash and cash equivalents                                 |  | $                  | 79,613  |      | $ | 92,962  |  | $    | 85,414  |      | $ | 71,712  |  | $ | 10,359
|Working capital                                           |  |                    | 151,076 |      |   | 147,347 |  |      | 121,069 |      |   | 98,470  |  |   | 27,041
|Total assets                                              |  |                    | 221,623 |      |   | 202,494 |  |      | 149,748 |      |   | 111,381 |  |   | 35,886
|Long-term capital lease obligations, less current portion |  |                    | 23      |      |   | 33      |  |      | 106     |      |   | 183     |  |   | 256   
|Total stockholders equity                                |  |                    | 193,703 |      |   | 172,855 |  |      | 133,997 |      |   | 102,680 |  |   | 29,502



|(1) | Pro forma net income data reflects the provision for income taxes that would have been recorded had we been subject to Federal and state income taxes as a C corporation, and not
been exempt from paying income taxes other than California franchise taxes due to our S corporation election, from January 1, 2002 to June 29, 2005.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|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 consolidated financial statements
and related notes included elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking
statements due to known and unknown risks, uncertainties and other factors, including those risks discussed in Item 1A. Risk Factors and elsewhere in this Form 10-K. Those risk factors expressly qualify all subsequent oral and
written forward-looking statements attributable to us or persons acting on our behalf. We do not have any intention or obligation to update forward-looking statements included in this Form 10-K after the date of this Form 10-K, except as
required by law.

Overview

We are
an innovative designer, marketer and distributor of premium quality young mens and young womens clothing, footwear, accessories and related products under the Volcom brand name. We seek to offer products that appeal to participants in skateboarding,
snowboarding and surfing, and those who affiliate themselves with the broader action sports lifestyle. Our products, which include, among others, t-shirts, fleece, bottoms, tops, jackets, boardshorts, denim, outerwear, sandals, girls swimwear and a
complete collection of kids and boys clothing, combine fashion, functionality and athletic performance. We develop and introduce products that we believe set the industry standard for style and quality in each of our product categories.

On January 17, 2008, we acquired all of the outstanding membership interests of Electric Visual Evolution LLC, or Electric, for
$26.3 million plus transaction costs of $1.2 million. Known for its Volt logo, Electric is a core action sports lifestyle brand. Electrics growing product line includes sunglasses, goggles, t-shirts, bags, hats, belts and other
accessories. The company was founded in 2000 by industry veterans Kip Arnette and Bruce Beach and is headquartered in Orange County, California.

As part of our strategy to take direct control of our European operations, we constructed a new European headquarters in Anglet, France, which was completed in February 2007, and delivered our first full season product line during the third
quarter of 2007. In 2008, we entered into an agreement to take direct control of the Volcom brand in the UK. We furthered our international expansion in 2008 by completing the acquisition of our distributor of Volcom branded products in Japan.
Domestically, in 2008, we acquired the assets of Laguna Surf & Sport, a California based retail chain currently operating two retail stores.

Volcom branded products are currently sold throughout the United States and in over 40 countries internationally by either us or international licensees. We serve the United States, Europe, Canada, Latin America, Asia
Pacific and Puerto Rico through our in-house sales personnel, independent sales representatives and distributors. In these areas, Volcom branded products are sold to retailers that we believe merchandise our products in an environment that supports
and reinforces our brand image and provide a superior in-store experience. Our retail customers are primarily specialty boardsports retailers and several retail chains.

In Australia, Indonesia, South Africa and Brazil, we license the Volcom brand to entities that we believe have local market insight and strong relationships with retailers in their respective territories. We receive
royalties on the sales of Volcom branded products sold by our licensees. Our license agreements specify design and quality standards for the Volcom branded products distributed by our licensees. Our licensees are not controlled and operated by us,
and the amount of our licensing revenues could decrease in the future. As these license agreements expire, we may assume direct responsibility for serving these licensed territories. We established our own operations in Europe in anticipation of the
expiration of the licensing agreement with our European licensee on December 31, 2006. Pursuant to an agreement between us and Volcom Europe (our former European licensee), Volcom Europe produced and distributed the Spring 2007 Volcom line in
Europe and paid us our same royalty rate as required under the license agreement. As a result, we experienced a decrease in our



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licensing revenues and an increase in our selling, general and administrative expense while we built the necessary infrastructure and hired employees to
establish and support our own operations in Europe. Our product revenues have increased in Europe as we now recognize revenue from the direct sale of our products in this territory.

Our revenues increased from $113.2 million in 2004 to $334.3 million in 2008. In June 2007, we began direct distribution of our product in
Europe, which has contributed to our increase in sales. The operations of our newly acquired subsidiary, Electric, are included in our operating results since January 17, 2008, which also contributed to our increase in revenues. Additionally,
based upon our experience and consumer reaction to our products and brand image, we believe that the increase in our revenues during these periods resulted primarily from increased brand recognition and growing acceptance of our products at existing
retail accounts. We believe that our marketing programs, product designs and product quality, and our relationships with our retailers contributed to this increased demand and market penetration. In addition, several of our largest retailers have
opened additional stores and those store openings likely have contributed to an increase in our product revenues; however, period-over-period increases in our product revenues as judged solely by additional store openings by our largest retailers
may not be a useful or accurate measure of revenue increases because our products may not be carried in every new store. Growth of our revenues will depend in part on the demand for our products by consumers, our ability to effectively distribute
our products and our ability to design products consistent with the changing fashion interests of boardsports participants and those who affiliate themselves with the broader action sports youth lifestyle.

Sales to Pacific Sunwear increased 7%, or $3.4 million, for 2008 compared to 2007. Our sales to Pacific Sunwear may decrease in the future and we
currently expect a decrease in 2009 revenue from Pacific Sunwear compared to 2008. Pacific Sunwear remains an important customer for us and we are working both internally and with Pacific Sunwear to maximize our business with them. We believe our
brand continues to be an important part of the Pacific Sunwear business. We also recognize that any customer concentration creates risks and we are, therefore, assessing strategies to lessen our concentration with Pacific Sunwear.

Our gross margins are affected by our ability to accurately forecast demand and avoid excess inventory by matching purchases of finished goods to
pre-season orders, which decreases our percentage of sales at discount or close-out prices. Gross margins are also impacted by our ability to control our sourcing costs and, to a lesser extent, by changes in our product mix and geographic
distribution channel. If the current economic downturn persists or worsens in 2009, we may determine it to be necessary to offer additional discounts, which may reduce our gross margins and could adversely impact our financial performance and
results of operations. Our gross margins have also historically been seasonal, with the first quarter having the highest margin. However, with the introduction of our direct European business and our Electric subsidiary, the seasonality of our gross
margin may change. If we misjudge forecasting inventory levels or our sourcing costs increase and we are unable to raise our prices, our gross margins may decline.

We currently source the substantial majority of our products from third-party manufacturers located primarily in China and Mexico. As a result, we may be adversely affected by the disruption of trade with these
countries, the imposition of new regulations related to imports, duties, taxes and other charges on imports, and significant decreases in the value of the U.S. dollar against foreign currencies. We seek to mitigate the possible disruption in
product flow by diversifying our manufacturing across numerous manufacturers and by using manufacturers in countries that we believe to be politically stable. We do not enter into long-term contracts with our third-party manufacturers. Rather, we
typically enter into contracts with each manufacturer to produce one or more product line for a particular selling season. This strategy has enabled us to maintain flexibility in our sourcing.

Our products manufactured abroad are subject to U.S. customs laws, which impose tariffs as well as import quota restrictions for textiles and
apparel. Quota represents the right, pursuant to bilateral or other international trade arrangements, to export amounts of certain categories of merchandise into a country or territory pursuant to



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a visa or license. Pursuant to the Agreement on Textiles and Clothing, quota on textile and apparel products was eliminated for World Trade Organization, or
WTO, member countries, including the United States, Canada and European countries, on January 1, 2005. During 2005, the United States and China agreed to a new quota arrangement, which imposed quotas on certain textile products that impacted
our business through 2008. Additionally, China offers a rebate tax on exports to control the amount of exports from China, which can affect our cost either positively or negatively. These potential cost increases, along with the rising currency and
labor shortages in China, will have an impact on our business. While we do not believe the limitations on imports from China will have a material effect on our operations, there will be increased pressure on costs and we intend to closely monitor
our sourcing in China to avoid disruptions.

With the passage of the Consumer Product Safety Improvement Act of 2008, there are new
requirements mandated for the textiles and apparel industries. These requirements relate to all metal and painted trim items and certain other raw materials used in childrens age 12 and under apparel. The Consumer Product Safety
Commission, or CPSC, will require certification and testing for lead in paint and metal trims, pointed or sharp edge items, Phthalates, and fabric flammability to meet the CPSCs limits. Volcom is working with an accredited third party
testing service to comply with all CPSC requirements and testing to ensure product safety. We will continue to monitor the situation and intend to abide by all rules and changes made by the CPSC. This could have a negative impact on the cost of
our goods and poses a potential risk if we do not adhere to these requirements.

Over the past five years, our selling, general and
administrative expenses have increased on an absolute dollar basis as we have increased our spending on marketing, advertising and promotions, strengthened our management team and hired additional personnel. As a percentage of revenues, our selling,
general and administrative expenses have increased from 27.0% in 2004 to 33.6% in 2008. This increase was primarily due to additional expenses in the United States segment associated with growth and brand building initiatives, including costs
associated with our transition to a new warehouse facility in Irvine, California. These increased expenses were anticipated and this allocation of resources was made despite revenue growth for the year being projected at lower than historical
levels. In addition, this increase is due to approximately $2.3 million of non-cash amortization of intangible assets associated with the 2008 acquisitions of Electric, Laguna Surf & Sport and our Japanese distributor.

Critical Accounting Policies

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

Revenue Recognition

Revenues are recognized upon shipment, at which time transfer of title occurs and risk of
ownership passes to the customer. Generally, we extend credit to our customers and do not require collateral. Our payment terms are typically net-30 with terms up to net-120 for snow category products. None of our sales agreements with any of our
customers provides for any rights of return. However, we do approve returns on a case-by-case basis at our sole discretion to protect our brand and our image. Allowances for estimated returns are provided when product revenues are recorded based on
historical experience and are reported as reductions in product revenues. Allowances for doubtful accounts are reported as a component of selling, general and administrative expenses.

Licensing revenues are recorded when earned based on a stated percentage of the licensees sales of Volcom branded products.



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Accounts Receivable

Throughout the year, we perform credit evaluations of our customers, and we adjust credit limits based on payment history and the customers current
creditworthiness. We continuously monitor our collections and maintain an allowance for doubtful accounts based on our historical experience and any specific customer collection issues that have been identified. Historically, our losses associated
with uncollectible accounts have been consistent with our estimates, but we cannot assure you that we will continue to experience the same credit loss rates that we have experienced in the past. Unforeseen, material financial difficulties of our
customers could have an adverse impact on our profits.

Inventories

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



| |  |  | weakened economic conditions;
| | - |  | -----------------------------



| |  |  | changes in consumer preferences;
| | - |  | --------------------------------



| |  |  | buying patterns of our retailers;
| | - |  | ---------------------------------



| |  |  | retailers cancelling orders; and
| | - |  | --------------------------------



| |  |  | unseasonable weather.
| | - |  | ---------------------

Some events,
including terrorist acts or threats and trade restrictions and safeguards, could also interrupt the production and importation of our products or otherwise increase the cost of our products. As a result, our operations and financial performance
could be negatively affected. Additionally, our estimates of product demand and market value could be inaccurate, which could result in excess and obsolete inventory.

Goodwill and Intangible Assets

We account for goodwill and intangible assets in accordance
with Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Intangible Assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are not amortized but are tested for
impairment annually and also in the event of an impairment indicator. As required by SFAS No. 142, we evaluate the recoverability of goodwill 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 the 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 our cost of capital. Such estimates are subject to change and we may be required to recognize an impairment loss in the future. Any impairment losses are reflected in operating income. In
2008, the Company recorded an impairment loss associated with the goodwill and non-amortizing intangible assets related to the 2008 acquisitions of Electric and Laguna Surf & Sport. In 2007, the Company recorded an impairment loss
associated with the goodwill related to its subsidiary, Welcom Distribution SARL. See Note 7 to the Consolidated Financial Statements for further discussion.

Long-Lived Assets

We acquire assets in the normal course of our business. We evaluate the
recoverability of the carrying amount of these long-lived assets (including fixed assets and other amortizable intangible assets) whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An
impairment loss is recognized when the carrying value exceeds the undiscounted future cash flows estimated to



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result from the use and eventual disposition of the asset. Impairments are recognized in operating earnings. We continually use judgment when applying these
impairment rules to determine the timing of the impairment tests, the undiscounted cash flows used to assess impairments and the fair value of a potentially impaired asset. The reasonableness of our judgment could significantly affect the carrying
value of our long-lived assets. In 2008, the Company recorded an impairment loss associated with its amortizing intangible assets related to the 2008 acquisitions of Electric and Laguna Surf & Sport. See Note 7 to the Consolidated
Financial Statements for further discussion.

Investments in Unconsolidated Investees

We account for our investments in unconsolidated investees using the cost method if we do not have the ability to exercise significant influence over the
operating and financial policies of the investee. We assess such investments for impairment when there are events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. If, and when, an event or
change in circumstances that may have a significant adverse effect on the fair value of the investment is identified, we estimate the fair value of the investment and, if the reduction in value is determined to be other than temporary, we record an
impairment loss on the investment.

We account for our investments in unconsolidated investees using the equity method of accounting if we
have the ability to exercise significant influence over the operating and financial policies of the investee. We evaluate such investments for impairment if an event or change in circumstances occurs that may have a significant adverse effect on the
fair value of the investment. If, and when, an event is identified, we estimate the fair value of the investment and, if the reduction in value is determined to be other than temporary, we record an impairment loss on the investment.

Athlete Sponsorships

We
establish relationships with professional athletes in order to promote our products and brand. We have entered into endorsement agreements with professional skateboarding, snowboarding, surfing and motocross athletes. Many of these contracts provide
incentives for magazine exposure and competitive victories while wearing or using our products. It is not possible to determine the precise amounts we will be required to pay under these agreements, as they are subject to many variables. The actual
amounts paid under these agreements may be higher or lower than expected due to the variable nature of these obligations. We expense these amounts as they are incurred.

Income Taxes

We adopted the provisions of Financial Accounting Standards Board Interpretation
No. 48, Accounting for Uncertainty in Income Taxes, or FIN No. 48, on January 1, 2007. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. Under FIN No. 48, we must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being
realized upon ultimate resolution. As a result of the implementation of FIN No. 48, we recognized a $0.1 million increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1,
2007 balance of retained earnings. See Note 14 to the Consolidated Financial Statements for further discussion.

We record a provision
and liability for Federal, state and foreign income taxes using an annual effective tax rate. Deferred income taxes are recorded at our effective tax rate. Managements judgment is required in assessing the realizability of our deferred tax
assets. We consider future taxable income and ongoing prudent and



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feasible tax planning strategies in assessing the value of our deferred tax assets. If we determine that it is more likely than not that these assets will
not be realized, we would reduce the value of these assets to their expected realizable value, thereby decreasing net income. Evaluating the value of these assets is necessarily based on our judgment. If we subsequently determined that the deferred
tax assets that had been written down would, in our judgment, be realized in the future, the value of the deferred tax assets would be increased, thereby increasing net income in the period when that determination was made.

Stock-Based Compensation

We
account for stock-based compensation in accordance with SFAS No. 123 (revised 2004), Share-Based Payment,or SFAS No. 123(R). SFAS No. 123R requires that we account for all stock-based compensation transactions using
a fair-value method and recognize the fair value of each award as an expense over the service period. The fair value of restricted stock awards is based upon the market price of our common stock at the grant date. We estimate the fair value of stock
option awards, as of the grant date, using the Black-Scholes option-pricing model. The use of the Black-Scholes model requires that we make a number of estimates, including the expected option term, the expected volatility in the price of our common
stock, the risk-free rate of interest and the dividend yield on our common stock. If our expected option term and stock-price volatility assumptions were different, the resulting determination of the fair value of stock option awards could be
materially different. In addition, judgment is also required in estimating the number of share-based awards that we expect will ultimately vest upon the fulfillment of service conditions (such as time-based vesting). If the actual number of awards
that ultimately vest differs significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.

Foreign Currency Translation

We own international subsidiaries that operate with the local
currency as their functional currency. Our international subsidiaries generate revenues and collect receivables at future dates in the customers local currencies, and purchase inventory primarily in U.S. dollars. Accordingly, we are
exposed to gains and losses that result from the effect of changes in foreign currency exchange rates on foreign currency denominated transactions. We have not historically entered into foreign currency exchange contracts to hedge this risk, however
during 2008 we entered into forward exchange contracts to hedge a portion of our European operations U.S. dollar denominated inventory purchases. For all contracts that qualify as cash flow hedges, we record the changes in the fair value of the
derivatives in other comprehensive income. Our assets and liabilities that are denominated in foreign currencies are translated at the rate of exchange on the balance sheet date. Revenues and expenses are translated using the average exchange rate
for the period. Gains and losses from translation of foreign subsidiary financial statements are included in accumulated other comprehensive income or loss.

A portion of our domestic sales are made in Canadian dollars. In addition, our recently acquired Electric subsidiary purchases sunglass inventory in Euros. As a result, our domestic operations are exposed to
transaction gains and losses that result from movements in foreign currency exchange rates. Changes in our assets and liabilities that are denominated in foreign currencies are translated into U.S. dollars at the rate of exchange on the balance
sheet date, and are reflected in our statement of operations.

General

Our revenues consist of both our product revenues and our licensing revenues. Our product revenues are derived primarily from the sale of young mens and young womens clothing, accessories and related products under
the Volcom brand name. We offer Volcom branded apparel and accessory products in six main categories: mens, girls, boys, footwear, girls swim and snow. Product revenues also include revenues from music and film sales. Beginning in January 2008, we
added the full product line from Electric, which includes sunglasses, goggles, soft goods and other accessories sold under the Electric brand name. Amounts billed to customers for shipping and handling are included in product revenues. Licensing
revenues consist of royalties on product sales



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by our international licensees in Europe (through delivery of our Spring 2007 line), Australia, Indonesia, South Africa and Brazil.

Our cost of goods sold consists primarily of product costs, retail packaging, freight costs associated with shipping goods to customers, quality control
and inventory shrinkage. There are no cost of goods sold associated with our licensing revenues.

Our selling, general and administrative
expenses consist primarily of wages and related payroll and employee benefit costs, handling costs, sales and marketing expenses, advertising costs, legal and accounting professional fees, insurance, utilities and other facility related costs, such
as rent and depreciation.

Results of Operations

The following table sets forth selected items in our consolidated statements of operations for the periods presented, expressed as a percentage of revenues:



|                                             |  |                         |   |  |       |   |  |       |  
|-------------------------------------------- |  | ----------------------- | - |  | ----- | - |  | ----- | -
|                                             |  | Year Ended December 31, |  
|                                             |  | 2008                    |   |  | 2007  |   |  | 2006  |  
|Revenues                                     |  | 100.0                   | % |  | 100.0 | % |  | 100.0 | %
|Cost of goods sold                           |  | 51.2                    |   |  | 51.6  |   |  | 50.3  |  
|                                             |  |                         |   |  |       |   |  |       |  
|Gross profit                                 |  | 48.8                    |   |  | 48.4  |   |  | 49.7  |  
|Operating expenses:                          |  |                         |   |  |       |   |  |       |  
|Selling, general and administrative expenses |  | 33.6                    |   |  | 29.6  |   |  | 28.5  |  
|Asset impairments                            |  | 4.9                     |   |  |      |   |  |      |  
|                                             |  |                         |   |  |       |   |  |       |  
|Total operating expenses                     |  | 38.5                    |   |  | 29.6  |   |  | 28.5  |  
|                                             |  |                         |   |  |       |   |  |       |  
|Operating income                             |  | 10.3                    |   |  | 18.8  |   |  | 21.2  |  
|Other income (expense)                       |  | (0.3                    | ) |  | 1.7   |   |  | 2.0   |  
|                                             |  |                         |   |  |       |   |  |       |  
|Income before provision for income taxes     |  | 10.0                    |   |  | 20.5  |   |  | 23.2  |  
|Provision for income taxes                   |  | 3.5                     |   |  | 8.1   |   |  | 9.2   |  
|                                             |  |                         |   |  |       |   |  |       |  
|Net income                                   |  | 6.5                     | % |  | 12.4  | % |  | 14.0  | %
|                                             |  |                         |   |  |       |   |  |       |  

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Revenues

Consolidated revenues
in 2008 were $334.3 million, an increase of $65.7 million, or 24.5%, compared to $268.6 million in 2007. Revenues from our European operations were $73.0 million in 2008, an increase of $32.9 million, compared to
$40.1 million in 2007. The increase in revenues from our European operations was a result of the transition of our European operations from a licensee model to a direct control model during the third quarter of 2007. The operations of Electric
have been included in our operating results since January 17, 2008, and contributed $24.2 million in revenues in 2008. Revenues from our five largest customers were $94.1 million in 2008, an increase of $5.3 million, or 5.9%, compared to
$88.8 million in 2007. Excluding revenues from Pacific Sunwear, which increased $3.4 million, or 6.9%, to $52.0 million, total revenues from our remaining five largest customers increased $1.9 million, or 4.7%, to
$42.1 million in 2008 from $40.2 million in 2007. Our sales to Pacific Sunwear may decrease in the future and we currently expect a decrease in 2009 revenue from Pacific Sunwear compared to 2008. We believe our overall domestic revenue
growth was driven primarily by the increasing popularity of our brand across our target markets and increasing acceptance of our products at retail as a result of marketing and advertising programs that effectively promoted our brand, a compelling
product offering, high-quality standards and strong relationships with our retailers. Further, several of our largest retailers have opened additional stores over the last year and those store openings likely have



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contributed to an increase in our product revenues; however, period-over-period increases in our product revenues as judged solely by additional store
openings by our largest retailers may not be a useful or accurate measure of revenue increases because our products may not be carried in every new store.

Consolidated product revenues increased $66.9 million, or 25.2%, in 2008 to $332.1 million from $265.2 million in 2007. Revenues from mens products increased $29.2 million, or 22.0%, to
$162.3 million in 2008, compared to $133.1 million in 2007. Revenues from snow products increased $6.0 million, or 26.9%, to $28.2 million in 2008 compared to $22.2 million in 2007. Revenues from girls products increased
$3.2 million, or 4.1%, to $80.5 million in 2008 compared to $77.3 million in 2007. Revenues from our girls swim line increased $2.4 million, or 64.1%, to $6.1 million in 2008 compared to $3.7 million in 2007. Revenues from boys
products, which include our line of kids clothing for young boys ages 4 to 7, increased $1.9 million, or 9.2%, to $21.9 million in 2008 compared to $20.0 million in 2007. Revenues from our new Electric subsidiary were $24.2
million in 2008.

Licensing revenues decreased 35.8% to $2.2 million in 2008 from $3.4 million in 2007 as a result of the
transition of our European operations from a licensee model to a direct control model.

Product revenues by geographic region include
revenues from our Electric operating segment, and are allocated based on customer location. Such product revenues in the United States were $195.9 million, or 59.0% of our product revenues, and $174.3 million, or 65.7% of our product
revenues, in 2008 and 2007, respectively. Product revenues in Europe were $77.9 million, or 23.5% of our product revenues, and $40.1 million, or 15.1% of our product revenues, in 2008 and 2007, respectively. Product revenues in the rest of
the world consist primarily of product revenues from sales in Canada and Asia Pacific, and do not include sales by our international licensees. Such product revenues in the rest of the world were $58.3 million, or 17.5% of our product revenues,
and $50.8 million, or 19.2% of our product revenues, in 2008 and 2007, respectively.

Gross Profit

In 2008, consolidated gross profit increased $33.1 million, or 25.4%, to $163.1 million compared to $130.0 million in 2007. Gross profit as
a percentage of revenues, or gross margin, increased 40 basis points to 48.8% in 2008 compared to 48.4% in 2007. Gross margin related specifically to product revenues increased 70 basis points to 48.4% in 2008 compared to 47.7% in 2007. Gross margin
from the U.S. segment decreased 230 basis points to 46.0% in 2008 compared to 48.3% in 2007, primarily due to additional discounts that we believe were the result of the soft domestic retail environment. These U.S. segment gross margin pressures
were partially offset by our European segment delivering gross margin on product of 55.6% due to strong full-price sell through and foreign currency gains during 2008. This compares to a gross margin on product of 48.9% in 2007, when our European
segment was undergoing its transition from a licensee model to a direct control model in the third quarter of 2007. If the current economic downturn persists or worsens in 2009, we may determine it to be necessary to offer additional discounts,
which may reduce our gross margins and could adversely impact our financial performance and results of operations.

Operating
Expenses

In 2008, consolidated operating expenses increased $49.3 million, or 62.1%, to $128.7 million compared to
$79.4 million in 2007. This increase includes the $16.2 million non-cash asset impairment charge on goodwill and intangible assets related to the 2008 acquisitions of Electric and Laguna Surf & Sport. These impairment charges were
driven by the recent economic downturn, whereby our estimated future cash flows expected from these reporting units were significantly reduced causing decreases in their estimated fair market values. The remaining $33.1 million increase in selling,
general and administrative expenses was due primarily to increased expenses of $8.0 million related to the transition of our European operations from a licensee model to a direct control model, expenses of $14.7 million from our newly acquired
subsidiary, Electric, and expenses of $1.0 million from our recently acquired Japanese operations. We also had increased payroll and payroll-related



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expenses of $2.6 million due to expenditures on infrastructure and personnel, increased rent expense of $2.1 million due to our additional retail
store leases and Irvine warehouse location, increased depreciation expense of $1.2 million, increased bad debt expense of $0.9 million, and a net increase of $2.6 million in various other expense categories. As a percentage of revenues,
selling, general and administrative expenses increased to 33.6% in 2008 from 29.6% in 2007. The 4.0% increase in selling, general and administrative expenses as a percentage of revenues was due primarily to the factors mentioned above.

Operating Income

As a
result of the factors above, consolidated operating income in 2008 decreased $16.2 million to $34.4 million compared to $50.6 million in 2007. Operating income as a percentage of revenues decreased to 10.3% in 2008 from 18.8% in 2007.

Other Income

Other income primarily includes net interest income and foreign currency gains and losses. Interest income in 2008 was $0.9 million compared to $4.0 million in 2007. This decrease in interest income was due to lower cash balances
and lower returns on invested cash. Foreign currency gain (loss) decreased to a $1.8 million loss in 2008 compared to a $0.4 million gain in 2007, which was due primarily to foreign exchange losses associated with our Canadian accounts
receivables, as the U.S. dollar strengthened significantly against the Canadian dollar in 2008.

Provision for Income Taxes

We computed our provision for income taxes for 2008 using an annual effective tax rate of 35.2%, which is a decrease of 420 basis points
from 39.4% in 2007 due primarily to the effect of the foreign tax rate differential, which was partially offset by the income tax effect of the goodwill and intangible asset impairment recorded in 2008. The provision for income taxes decreased
$9.9 million to $11.8 million in 2008 compared to $21.7 million in 2007.

Net Income

As a result of the factors above, net income decreased $11.6 million, or 34.9%, to $21.7 million in 2008 from $33.3 million in 2007.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Revenues

Consolidated revenues
in 2007 were $268.6 million, an increase of $63.3 million, or 30.9%, compared to $205.3 million in 2006. Revenues from our European operations were $40.1 million in 2007, an increase of $35.6 million, compared to
$4.5 million in 2006. The increase in revenues from our European operations was a result of the transition of the European operations from a licensee model to a direct control model. Revenues from our top five customers were $88.8 million
in 2007, which was flat compared to $88.8 million in 2006. Excluding revenues from Pacific Sunwear, which decreased $4.7 million, or 8.8%, to $48.6 million, total revenues from our remaining top five customers increased
$4.7 million, or 13.3%, to $40.2 million in 2007 from $35.5 million in 2006. We believe our overall domestic revenue growth was driven primarily by the increasing popularity of our brand across our target markets and increasing
acceptance of our products at retail as a result of marketing and advertising programs that effectively promoted our brand, a compelling product offering, high-quality standards and strong relationships with our retailers. In addition, the increase
in revenues can be attributed to sales of our Creedlers, girls swim and kids product lines, as well as additional distribution. Further, several of our largest retailers opened additional stores during 2007 and those store openings likely
contributed to



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an increase in our product revenues; however, period-over-period increases in our product revenues as judged solely by additional store openings by our
largest retailers may not be a useful or accurate measure of revenue increases because our products may not be carried in every new store.

Consolidated product revenues increased $64.0 million, or 31.8%, in 2007 to $265.2 million from $201.2 million in 2006. Of the $64.0 million increase in product revenues, increases in mens products and girls products
accounted for $40.4 million of that increase. Revenues from mens products increased $30.4 million, or 29.5%, to $133.1 million in 2007, compared to $102.7 million in 2006, and revenues from girls products increased $10.0 million,
or 15.0%, to $77.3 million in 2007 compared to $67.3 million in 2006. Revenues from boys products, which includes our new line of kids clothing for young boys ages 4 to 7, increased $8.1 million, or 68.8%, to $20.0 million
in 2007 compared to $11.9 million in 2006. Revenues from snow products increased $6.8 million, or 44.4%, to $22.2 million in 2007 compared to $15.4 million in 2006. Revenues from our Creedler footwear line increased
$4.5 million or 267.9%, to $6.1 million in 2007 compared to $1.6 million in 2006. Revenues from our girls swim line were $3.7 million in 2007. There were no sales of this product line in 2006.

Licensing revenues decreased 16.0% to $3.4 million in 2007 from $4.1 million in 2006 as a result of the transition of our European operations
from a licensee model to a direct control model.

Product revenues in the United States were $174.3 million, or 65.7% of our product
revenues, and $157.6 million, or 78.3% of our product revenues, in 2007 and 2006, respectively. Product revenues in Europe were $40.1 million, or 15.1% of our product revenues, and $4.5 million, or 2.2% of our product revenues, in
2007 and 2006, respectively. Product revenues in the rest of the world consist primarily of product revenues from sales in Canada and Japan and do not include sales by our international licensees. Such product revenues in the rest of the world were
$50.8 million, or 19.2% of our product revenues, and $39.1 million, or 19.5% of our product revenues, in 2007 and 2006, respectively.

Gross Profit

In 2007, consolidated gross profit increased $28.0 million, or 27.5%, to $130.0 million
compared to $102.0 million in 2006. Gross profit as a percentage of revenues, or gross margin, decreased 1.3% to 48.4% in 2007 compared to 49.7% in 2006. Gross margin related specifically to product revenues decreased 1.0% to 47.7% in 2007
compared to 48.7% in 2006. The gross margin decreased primarily due to larger than expected inventory liquidations and shipping samples to the European sales teams and distributors at very low gross margins. These margin pressures were partially
offset by strong full-price sell through and foreign currency gains associated with our European operations shipping their first full season of product in the third quarter of 2007.

Operating Expenses

In 2007,
consolidated operating expenses increased $21.0 million, or 35.9%, to $79.4 million compared to $58.4 million in 2006. The increase in absolute dollars was due primarily to increased expenses of $11.2 million related to the
transition of our European operations from a licensee model to a direct control model. We also had increased payroll and payroll-related expenses of $3.8 million due to expenditures on infrastructure and personnel, increased advertising and
marketing expenses of $2.1 million, increased rent expense of $1.3 million due to our additional retail store leases and Irvine warehouse location, increased depreciation and amortization expense of $1.0 million, increased sales
commission expenses of $0.7 million resulting from our increased product revenues, and an increase of $0.9 million in various other expense categories. As a percentage of revenues, selling, general and administrative expenses increased to
29.6% in 2007 from 28.5% in 2006. The 1.1% increase in selling, general and administrative expenses as a percentage of revenues was due primarily to the factors mentioned above.



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Operating Income

As a result of the factors above, consolidated operating income in 2007 increased $7.0 million to $50.6 million compared to $43.6 million
in 2006. Operating income as a percentage of revenues decreased to 18.8% in 2007 from 21.2% in 2006.

Other Income

Other income primarily includes net interest income and foreign currency gains and losses. Interest income in 2007 was
$4.0 million compared to $3.8 million in 2006. This increase in interest income was due to higher returns on invested cash. Foreign currency gain increased to $0.4 million in 2007 compared to $0.2 million in 2006 due primarily to
the effect of changes in foreign currency exchange rates on foreign currency denominated transactions.

Provision for Income Taxes

We adopted the provisions of FIN No. 48 on January 1, 2007. As a result of the implementation of
FIN No. 48, we recognized a $0.1 million increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings. See Note 14 to the Consolidated
Financial Statements for further discussion.

We computed our provision for income taxes for 2007 using an annual effective tax rate of
39.4%. The provision for income taxes increased $2.8 million to $21.7 million in 2007 compared to $18.9 million in 2006.

Net Income

As a result of the factors above, net income increased $4.5 million, or 15.9%, to $33.3 million
in 2007 from $28.8 million in 2006.

Liquidity and Capital Resources

Our primary cash needs are working capital and capital expenditures. These sources of liquidity may be impacted by fluctuations in demand for our
products, ongoing investments in our infrastructure and expenditures on marketing and advertising.

The following table sets forth, for the
periods indicated, our beginning balance of cash and cash equivalents, net cash flows from operating, investing and financing activities and our ending balance of cash and cash equivalents:



|                                                 |  |                         |         |   |      |   |         |      |  |   |        |  
|------------------------------------------------ |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                 |  | Year Ended December 31, |        
|                                                 |  | 2008                    |         |   | 2007 |   |         | 2006 | 
|                                                 |  | (In thousands)          |        
|Cash and cash equivalents at beginning of period |  | $                       | 92,962  |   |      | $ | 85,414  |      |  | $ | 71,712 |  
|Cash flow from operating activities              |  |                         | 24,672  |   |      |   | 19,279  |      |  |   | 20,956 |  
|Cash flow from investing activities              |  |                         | (38,659 | ) |      |   | (14,973 | )    |  |   | (9,229 | )
|Cash flow from financing activities              |  |                         | 635     |   |      |   | 1,623   |      |  |   | 1,703  |  
|Effect of exchange rate changes on cash          |  |                         | 3       |   |      |   | 1,619   |      |  |   | 272    |  
|                                                 |  |                         |         |   |      |   |         |      |  |   |        |  
|Cash and cash equivalents at end of period       |  | $                       | 79,613  |   |      | $ | 92,962  |      |  | $ | 85,414 |  
|                                                 |  |                         |         |   |      |   |         |      |  |   |        |  

As of December 31, 2008, we had $79.6 million in cash and cash equivalents compared to
$93.0 million in cash and cash equivalents as of December 31, 2007.



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Cash from operating activities consists primarily of net income adjusted for certain non-cash items
including asset impairments, depreciation, deferred income taxes, provision for doubtful accounts, excess tax benefits related to the exercise of stock options, loss on disposal of property and equipment, stock-based compensation and the effect of
changes in working capital and other activities. In 2008 and 2007, cash from operating activities was $24.7 million and $19.3 million, respectively. The $5.4 million increase in cash from operating activities between the periods was
attributable to the following:



|              |         |   |                 |                                                                                                                                                                                                                                                                                                            
|------------- | ------- | - | --------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(Inthousands) |         |   | Attributable to
|              |        
|$             | 20,622  |   |                 | Increase in cash flows from accounts receivable due to the timing of sales and collections                                                                                                                                                                                                                 
|              |        
|              | 16,069  |   |                 | Increase in non-cash asset impairment charges due to the impairment of goodwill and intangible assets associated with the acquisitions of Electric and Laguna Surf and Sport                                                                                                                               
|              |        
|              | 5,921   |   |                 | Increase in non-cash depreciation and amortization, and provision for doubtful accounts                                                                                                                                                                                                                    
|              |        
|              | 4,945   |   |                 | Increase in cash flows from inventory as the cash used related to the increase in inventory during 2008 was lower than the previous period, as the previous period increase in inventory
contemplated higher inventory levels in Europe as a result of the direct distribution of product beginning in 2007
|              |        
|              | (21,708 | ) |                 | Decrease in cash flows from accounts payable and accrued expenses due to timing of payments, and a decrease in payroll accruals and other liabilities between periods                                                                                                                                      
|              |        
|              | (11,626 | ) |                 | Decrease in net income                                                                                                                                                                                                                                                                                     
|              |        
|              | (8,840  | ) |                 | Decrease in cash flows due to fluctuations in the income tax receivable/payable balance and deferred income tax balance between periods                                                                                                                                                                    
|              |        
|              | 10      |   |                 | Net increase in cash flows from all other operating activities                                                                                                                                                                                                                                             
|              |         |   |                 |                                                                                                                                                                                                                                                                                                            
|              |        
|$             | 5,393   |   |                 | Total                                                                                                                                                                                                                                                                                                      
|              |         |   |                 |                                                                                                                                                                                                                                                                                                            

Cash from investing activities was a use of cash of $38.7 million and $15.0 million in
2008 and 2007, respectively. During 2008, the cash used in investing activities was primarily for the acquisitions of Electric, Laguna Surf & Sport and our Japanese distributor, which were purchased for $32.1 million, net of cash acquired.
Capital expenditures during 2008 included the ongoing purchase of investments in computer equipment, warehouse equipment, marketing initiatives and in-store buildouts at customer retail locations. During 2007, the cash used in investing activities
was primarily for the completion of construction of our European headquarters in Anglet, France, the purchase of real property on the North Shore of Oahu, or the Pipe House, for $4.2 million, capital expenditures pertaining to our new off-site
distribution center and the implementation of the new warehouse management system, and the ongoing purchase of investments in computer equipment, warehouse equipment, marketing initiatives and in-store buildouts at customer retail locations.

Cash from financing activities was $0.6 million and $1.6 million in 2008 and 2007, respectively, and is primarily due to the proceeds
and excess tax benefits related to the exercise of stock options, principal payment on capital lease obligations and cash received from government grants.

We currently have no material cash commitments, except for the maximum consideration of 600,000 GBP (or approximately $0.9 million based on a 1 GBP to 1.4479 U.S. dollar exchange rate at 12/31/08) related to our
agreement for the transition and sale of certain assets of our UK distributor, our normal recurring trade payables, expense accruals, operating leases, capital leases and athlete endorsement agreements. We believe that our cash and cash equivalents,
cash flow from operating activities and available borrowings under our credit facility will be sufficient to meet our capital requirements for at least the next twelve months.



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Credit Facilities

In September 2008, we amended our unsecured credit agreement with Bank of the West, to increase our line of credit from $20.0 million to $40.0 million
(which includes a line of credit, foreign exchange facility and letter of credit sub-facilities). The amended credit agreement, which expires on August 31, 2010, may be used to fund our working capital requirements. Borrowings under this
agreement bear interest, at our option, either at the banks prime rate (3.25% at December 31, 2008) or LIBOR plus 1.25%. Under this credit facility, we had $0.5 million outstanding in letters of credit at December 31, 2008. At
December 31, 2008 there were no outstanding borrowings under this credit facility, and $39.5 million was available under the credit facility. The credit agreement requires compliance with conditions precedent that must be satisfied prior to any
borrowing, as well as ongoing compliance with specified affirmative and negative covenants, including covenants related to our financial condition, including requirements that we maintain a minimum net profit after tax and a minimum EBITDA. At
December 31, 2008, we were in compliance with all restrictive covenants.

Contractual Obligations and Commitments

We did not have any off-balance sheet arrangements or outstanding balances on our credit facility as of December 31, 2008. The
following table summarizes, as of December 31, 2008, the total amount of future payments due in various future periods:



|                                  |  |                        |        |      |   |        |  |      |       |      |   |       |  |            |       |  |   |       |  |   |       
|--------------------------------- |  | ---------------------- | ------ | ---- | - | ------ |  | ---- | ----- | ---- | - | ----- |  | ---------- | ----- |  | - | ----- |  | - | ------
|                                  |  | Payments Due by Period
|                                  |  | Total                  |        | 2009 |   | 2010   |  | 2011 |       | 2012 |   | 2013  |  | Thereafter
|                                  |  | (In thousands)        
|Operating lease obligations       |  | $                      | 34,002 |      | $ | 4,960  |  | $    | 4,756 |      | $ | 4,495 |  | $          | 3,834 |  | $ | 2,965 |  | $ | 12,992
|Capital lease obligations         |  |                        | 98     |      |   | 75     |  |      | 23    |      |   |      |  |            |      |  |   |      |  |   |      
|Professional athlete sponsorships |  |                        | 16,658 |      |   | 6,581  |  |      | 4,235 |      |   | 1,730 |  |            | 1,340 |  |   | 800   |  |   | 1,972 
|Contractual letters of credit     |  |                        | 510    |      |   | 510    |  |      |      |      |   |      |  |            |      |  |   |      |  |   |      
|                                  |  |                        |        |      |   |        |  |      |       |      |   |       |  |            |       |  |   |       |  |   |       
|Total                             |  | $                      | 51,268 |      | $ | 12,126 |  | $    | 9,014 |      | $ | 6,225 |  | $          | 5,174 |  | $ | 3,765 |  | $ | 14,964
|                                  |  |                        |        |      |   |        |  |      |       |      |   |       |  |            |       |  |   |       |  |   |       

We lease certain land and buildings under non-cancelable operating leases. The leases expire at
various dates through 2023, excluding extensions at our option, and contain provisions for rental adjustments, including in certain cases, adjustments based on increases in the Consumer Price Index. The leases generally contain renewal provisions
for varying periods of time.

In June 2008, we entered into a lease agreement for a new warehouse facility located in close proximity to
our existing European headquarters in France. The warehouse is currently being constructed by the landlord, and is expected to be completed in Fall 2009. The lease runs for a period of nine years, with an option to terminate after six
years.

We lease computer and office equipment pursuant to capital lease obligations. These leases bear interest at rates ranging from 2.9%
to 7.8% per year, and expire at various dates through July 2010.

We establish relationships with professional athletes in order to
promote our products and brand. We have entered into endorsement agreements with professional skateboarding, snowboarding, surfing and motocross athletes. Many of these contracts provide incentives for magazine exposure and competitive victories
while wearing or using our products. It is not possible to determine the precise amounts that we will be required to pay under these agreements as they are subject to many variables. The amounts listed above are the approximate amounts of the
minimum obligations required to be paid under these contracts. The additional estimated maximum amount that could be paid under our existing contracts, assuming that all bonuses, victories and similar incentives are achieved during the five year
period ending December 31, 2013, is approximately $4.1 million. The actual amounts paid under these agreements may be higher or lower than the amounts discussed above as a result of the variable nature of these obligations.



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Our contractual letters of credit have maturity dates of less than one year. We use these letters of
credit to purchase finished goods.

We adopted the provisions of FIN No. 48 on January 1, 2007. At December 31, 2008,
we had $94,000 of total unrecognized tax benefits recorded as liabilities in accordance with FIN No. 48 and we are uncertain as to if or when such amounts may be settled.

Seasonality

Historically, we have experienced greater revenue in the second half of the year than in
the first half due to a concentration of shopping around the fall and holiday seasons and pricing differences between our products sold during the first and second half of the year, as products we sell in the fall and holiday seasons generally have
higher prices per unit than products we sell in the spring and summer seasons. We typically sell more of our summer products (boardshorts, t-shirts and sunglasses) in the first half of the year and a majority of our winter products (pants, long
sleeve shirts, sweaters, fleece, jackets, outerwear and goggles) in the second half of the year. We anticipate that this seasonal impact on our revenues is likely to continue. In addition, our direct European operations began shipping product during
the second half of 2007 which caused a slightly higher concentration of revenues in the second half of 2007 over historical levels. Our business in Europe is extremely seasonal with revenues concentrated primarily in the first and third quarters,
shipment of low margin samples concentrated in the second and fourth quarters, and a relatively steady pace of selling, general and administrative expenses throughout the year. As 2008 was the first year that our European business was fully
operational throughout the entire year, we may experience a shift in our historical revenue, gross profit and operating income trends. During the two-year period ended December 31, 2008, approximately 57% of our revenues, 55% of our gross
profit and 62% of our operating income (excluding non-cash asset impairment charges) were generated in the second half of the year, with the third quarter generally generating most of our operating income due to fall, holiday and snow shipments.
Accordingly, our results of operations for the first and second quarters of any year are not indicative of the results we expect for the full year.

As a result of the effects of seasonality, particularly in preparation for the fall and holiday shopping seasons, our inventory levels and other working capital requirements generally begin to increase during the second quarter and into the
third quarter of each year. Based on our current cash position, we do not anticipate borrowing under our credit facility in the near term.

Backlog

We typically receive the bulk of our orders for each of our seasons up to four months prior to the date the products are shipped to
customers. Generally, these orders are not subject to cancellation prior to the date of shipment. At December 31, 2008, our order backlog was approximately $75.6 million, compared to approximately $65.0 million at December 31,
2007. For a variety of reasons, including the timing of release dates for our seasonal product collections, the timing of shipments, timing of order deadlines, timing of receipt of orders, product mix of customer orders and the amount of in-season
orders, backlog may not be a reliable measure of future sales for any succeeding period. For these reasons, backlog figures in one year may not be directly comparable to backlog figures in another year when measured at the same date.

Inflation

We do not believe inflation has had a
material impact on our results of operations in the past. There can be no assurance that our business will not be affected by inflation in the future.



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Vulnerability Due to Concentrations

One customer, Pacific Sunwear, accounted for approximately 16% and 18% of our product revenues in 2008 and 2007, respectively. No other customer accounted for more than 10% of our product revenues in 2008 or 2007.

Sales to Pacific Sunwear increased 7%, or $3.4 million, for 2008 compared to 2007. Our sales to Pacific Sunwear may decrease in the
future and we currently expect a decrease in 2009 revenue from Pacific Sunwear when compared to 2008. Pacific Sunwear remains an important customer for us and we are working both internally and with Pacific Sunwear to maximize our business with
them. We believe our brand continues to be an important part of the Pacific Sunwear business. We also recognize that any customer concentration creates risks and we are, therefore, assessing strategies to lessen our concentration with Pacific
Sunwear.

We do not own or operate any manufacturing facilities and source our products from independently-owned manufacturers. During
2008, we contracted for the manufacture of our products with approximately 49 foreign manufacturers. We also contract with several domestic screen printers. Purchases from Dragon Crowd and Ningbo Jehson Textiles totaled approximately 18% and 14%,
respectively, of our product costs in 2008, and 19% and 14%, respectively, of our product costs in 2007.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board, or FASB, issued SFAS No. 157, Fair Value Measurements, which
defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance
is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. We adopted the provisions of SFAS No. 157 as of January 1, 2008. The adoption of SFAS
No. 157 did not have a material impact on our financial position.

In February 2008, the FASB issued FASB Staff Position
No. 157-2, which deferred the effective date for certain portions of SFAS No. 157 related to nonrecurring measurements of nonfinancial assets and liabilities. That provision of SFAS No. 157 will be effective for our fiscal year 2009.
We are currently evaluating the effect, if any, that the adoption of SFAS No. 157-2 will have on our consolidated results of operations, financial position and cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of SFAS No. 115. SFAS No. 159 provides reporting entities an option to measure certain financial assets and liabilities and other eligible items at fair value on an
instrument-by-instrument basis. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. SFAS No. 159 was adopted on January 1, 2008. The
adoption of SFAS No. 159 did not have a significant impact on our consolidated financial position or results of operations.

In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS No. 141(R) requires reporting entities to record fair value estimates of contingent consideration and certain other potential liabilities during
the original purchase price allocation, expense acquisition costs as incurred and does not permit certain restructuring activities previously allowed under EITF 95-3 to be recorded as a component of purchase accounting.
SFAS No. 141(R) is effective for fiscal periods beginning after December 15, 2008 and should be applied prospectively for all business acquisitions entered into after the date of adoption. We are currently evaluating the impact the
adoption of SFAS No. 141(R) will have on our consolidated financial position or results of operations.



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In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in Consolidated
Financial Statements  an amendment of ARB No. 51. SFAS No. 160 requires (i) that noncontrolling (minority) interests be reported as a component of shareholders equity, (ii) that net income
attributable to the parent and to the noncontrolling interest be separately identified in the consolidated statement of operations, (iii) that changes in a parents ownership interest while the parent retains its controlling interest be
accounted for as equity transactions, (iv) that any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value, and (v) that sufficient disclosures are provided that clearly
identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal periods beginning after December 15, 2008. We are currently evaluating the impact the
adoption of SFAS No. 160 will have on our consolidated financial position or results of operations.

In March 2008, the FASB
issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities  an amendment of FASB Statement No. 133, or SFAS No. 161. SFAS No. 161 requires expanded disclosures about an entitys
derivative instruments and hedging activities. It is effective for fiscal years beginning after November 15, 2008, including interim periods within those fiscal periods. We are currently evaluating the impact the adoption of SFAS No. 161
will have on our consolidated financial position or results of operations.

In April 2008, the FASB issued FASB Staff Position 142-3,
Determination of the Useful Lives of Intangible Assets, or FSP 142-3, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under
SFAS No. 142, Goodwill and Other Intangible Assets. The intent of FSP 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to
measure the fair value of the asset under SFAS No. 141(R) and other U.S. generally accepted accounting principles. FSP 142-3 is effective for fiscal years beginning after December 15, 2008 and for interim periods within those fiscal years.
We do not expect the adoption of FSP 142-3 to have a material effect on our consolidated financial position or results of operations.

In
June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, which addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method described in paragraphs 60 and 61 of FASB Statement No. 128, Earnings per
Share. We do not expect the adoption of FSP EITF 03-6-1 to have a material effect on our consolidated financial position or results of operations.



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|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------

Foreign Currency Risk and Derivatives

We are exposed to gains and losses resulting from
fluctuations in foreign currency exchange rates relating to certain sales, royalty income and product purchases of our international subsidiaries that are denominated in currencies other than their functional currencies. We are also exposed to
foreign currency gains and losses resulting from domestic transactions that are not denominated in U.S. dollars. Furthermore, we are exposed to gains and losses resulting from the effect that fluctuations in foreign currency exchange rates have on
the reported results in our consolidated financial statements due to the translation of the operating results and financial position of our international subsidiaries.

A portion of our domestic sales are made in Canadian dollars. In 2008, 2007 and 2006, we derived 9.6%, 11.7% and 11.9% of our product revenues, respectively, from sales in Canada. As a result, we are exposed to
fluctuations in the value of Canadian dollar denominated receivables and payables, foreign currency investments, primarily consisting of Canadian dollar deposits, and cash flows related to repatriation of those investments. A weakening of the
Canadian dollar relative to the U.S. dollar could negatively impact the profitability of our products sold in Canada and the value of our Canadian receivables, as well as the value of repatriated funds we may bring back to the
United States from Canada. Account balances denominated in Canadian dollars are marked-to-market every period using current exchange rates and the resulting changes in the account balance are included in our income statement as other income. We
do not believe that a 10% movement in all applicable foreign currency exchange rates would have a material effect on our financial position. However, recent foreign currency market volatility may continue whereby the Canadian dollar has weakened by
more than 10% compared to the U.S. dollar. Based on the balance of Canadian dollar receivables of $4.9 million at December 31, 2008, an assumed 10%, 15% and 20% strengthening of the U.S. dollar would result in foreign currency losses of
$0.6 million, $0.9 million and $1.2 million, respectively.

During 2008 we entered into forward exchange contracts to hedge a portion of
our European operations U.S. dollar denominated inventory purchases (forward currency exchange contracts) as part of our overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates. All of our
forward currency exchange contracts qualified for hedge accounting and the changes in the fair value of the derivatives are recorded in other comprehensive income. As of December 31, 2008, we were hedging forecasted transactions expected to
occur through March 2009. Assuming exchange rates at December 31, 2008 remain constant, $0.2 million of losses, net of tax, related to hedges of these transactions are expected to be reclassified into earnings during the first quarter
of 2009.

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



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



| |  |  | when the derivative expires or is sold, terminated or exercised;
| | - |  | ----------------------------------------------------------------



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



| |  |  | if a hedged firm commitment no longer meets the definition of a firm commitment; or
| | - |  | -----------------------------------------------------------------------------------



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



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We have entered into forward exchange contracts with a bank and are exposed to foreign currency losses in
the event of nonperformance by this bank. We anticipate, however, that this bank will be able to fully satisfy its obligations under the contracts. Accordingly, we do not obtain collateral or other security to support the contracts.

We generally purchase Volcom branded finished goods from our manufacturers in U.S. dollars. However, we source substantially all of these finished
goods abroad and their cost may be affected by changes in the value of the relevant currencies. Price increases caused by currency exchange rate fluctuations could increase our costs. If we are unable to increase our prices to a level sufficient to
cover the increased costs, it could adversely affect our margins and we may become less price competitive with companies who manufacture their products in the United States.

As discussed above, we are exposed to financial statement gains and losses as a result of translating the operating results and financial position of our
international subsidiaries. We translate the local currency statements of operations of our foreign subsidiaries into U.S. dollars using the average exchange rate during the reporting period. Changes in foreign exchange rates affect our reported
profits and can distort comparisons from year to year. We do not enter into foreign currency exchange contracts to hedge the profit and loss effects of such exposure. Due to the recent foreign currency market volatility, whereby the U.S. dollar has
strengthened compared to foreign currencies, revenues and operating income of our international subsidiaries may be negatively impacted upon their translation back into U.S. dollars.

Interest Rate Risk

We
maintain a $40.0 million unsecured credit agreement (which includes a line of credit, foreign exchange facility and letter of credit sub-facilities) with no balance outstanding at December 31, 2008. The credit agreement, which expires on
August 31, 2010, may be used to fund our working capital requirements. Borrowings under this agreement bear interest, at our option, either at the banks prime rate (3.25% at December 31, 2008) or LIBOR plus 1.25%. Based on the
average interest rate on our credit facility during 2008, and to the extent that borrowings were outstanding, we do not believe that a 10% change in interest rates would have a material effect on our results of operations or financial condition.



|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------

Information with respect to this item is set forth in Index to Consolidated Financial Statements under Part IV, Item 15 of this report.



|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------

None



|ITEM 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------

Disclosure Controls and
Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to our management,
including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect
that our disclosure controls or procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Further, the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances



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of fraud, if any, within Volcom have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and
that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system
of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

We carried out an
evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of
December 31, 2008, the end of the annual period covered by this report. The evaluation of our disclosure controls and procedures included a review of the disclosure controls and procedures objectives, design, implementation and the
effect of the controls and procedures on the information generated for use in this report. In the course of our evaluation, we sought to identify data errors, control problems or acts of fraud and to confirm the appropriate corrective actions,
including process improvements, were being undertaken.

Based on the foregoing, our Chief Executive Officer and our Chief Financial Officer
concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective and were operating at the reasonable assurance level.

Internal Control Over Financial Reporting

There has been no change in the Companys internal
controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Companys most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect,
the Companys internal controls over financial reporting.

Managements Report on Internal Control Over Financial Reporting

The Companys management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined
in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, the Company has conducted an
evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2008, based on the framework in Internal Control  Integrated Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on managements evaluation under the framework in Internal Control  Integrated Framework, management concluded that the Companys internal control over financial reporting was effective as of
December 31, 2008.

The Companys independent registered public accounting firm that audited the financial statements included in
the annual report containing the disclosure required by this Item has issued an attestation report on managements assessment of the Companys internal control over financial reporting. This report appears under the Report of Independent
Registered Public Accounting Firm On Internal Control Over Financial Reporting, which is included below.

Richard R. Woolcott

Chairman and Chief Executive Officer

(Principal Executive Officer)

Douglas P. Collier

Executive Vice President, Chief
Financial Officer, Secretary and Treasurer

(Principal Financial and Accounting Officer)

March 16, 2009



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Volcom, Inc.

We have audited the internal control over financial reporting of Volcom, Inc. and subsidiaries (the Company) as of December 31, 2008,
based on criteria established in Internal Control  Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control Over Financial Reporting. Our responsibility is
to express an opinion on the Companys internal control over financial reporting based on our audit.

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

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

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

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based
on the criteria established in Internal Control  Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2008 of the
Company and our report dated March 16, 2009 expressed an unqualified opinion on those financial statements.

/s/ Deloitte & Touche LLP

Costa Mesa, California

March 16, 2009



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|ITEM 9B. | OTHER INFORMATION
|-------- | -----------------

None

PART III



|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|-------- | ------------------------------------------------------

Information with respect to this item is incorporated by reference from our definitive Proxy Statement.



|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------

Information
with respect to this item is incorporated by reference from our definitive Proxy Statement.



|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------

Information with respect to this item is incorporated by reference from our definitive Proxy Statement.



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|-------- | -------------------------------------------------------------------------

Information with respect to this item is incorporated by reference from our definitive Proxy Statement.



|ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES
|-------- | --------------------------------------

Information with respect to this item is incorporated by reference from our definitive Proxy Statement.

PART IV



|ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES
|-------- | ---------------------------------------

(a)    1. The financial statements listed in the Index to Consolidated Financial Statements at page F-1 are filed as a part of this report.

2. Financial statement schedules are omitted because they are not applicable or the required information is shown in the financial statements or
notes thereto.

3. Exhibits included or incorporated herein. See Exhibit Index.



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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                               |  |     
|------------------------------------------------------------------------------------------------------------------------------ |  | ----
|                                                                                                                               |  | Page
|Report of Independent Registered Public Accounting Firm                                                                        |  | F-2 
|Consolidated Balance Sheets as of December 31, 2008 and 2007                                                                   |  | F-3 
|Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006                                     |  | F-4 
|Consolidated Statements of Stockholders Equity and Comprehensive Income for the years ended December 
31, 2008, 2007 and 2006 |  | F-5 
|Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006                                     |  | F-6 
|Notes to Consolidated Financial Statements                                                                                     |  | F-8 



F-1



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Volcom, Inc

We have audited the accompanying consolidated balance sheets of Volcom, Inc. and subsidiaries (the Company) as of December 31, 2008 and
2007, and the related consolidated statements of operations, stockholders equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2008. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Volcom, Inc. and subsidiaries
as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States
of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 16, 2009 expressed an unqualified opinion on the Companys internal control over financial reporting.

/s/
Deloitte & Touche LLP

Costa Mesa, California

March 16, 2009



F-2



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##### Table of Contents

VOLCOM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                    |  |                                  |         |      |   |        
|----------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | ---- | - | -------
|                                                                                                                                    |  | As of December 31,              
|                                                                                                                                    |  | 2008                             |         | 2007
|                                                                                                                                    |  | (In thousands,except share data)
|Assets                                                                                                                              |  |                                  |         |      |   |        
|Current assets:                                                                                                                     |  |                                  |         |      |   |        
|Cash and cash equivalents                                                                                                           |  | $                                | 79,613  |      | $ | 92,962 
|Accounts receivable  net of allowances of $6,998 (2008) and $2,783 (2007)                                                          |  |                                  | 60,914  |      |   | 58,270 
|Inventories                                                                                                                         |  |                                  | 27,086  |      |   | 20,440 
|Prepaid expenses and other current assets                                                                                           |  |                                  | 2,596   |      |   | 1,720  
|Income taxes receivable                                                                                                             |  |                                  | 3,309   |      |   | 326    
|Deferred income taxes                                                                                                               |  |                                  | 4,947   |      |   | 2,956  
|                                                                                                                                    |  |                                  |         |      |   |        
|Total current assets                                                                                                                |  |                                  | 178,465 |      |   | 176,674
|                                                                                                                                    |  |                                  |         |      |   |        
|Property and equipment  net                                                                                                        |  |                                  | 26,716  |      |   | 24,427 
|Investments in unconsolidated investees                                                                                             |  |                                  | 330     |      |   | 298    
|Deferred income taxes                                                                                                               |  |                                  | 4,028   |      |   | 268    
|Intangible assets  net                                                                                                             |  |                                  | 10,578  |      |   | 363    
|Goodwill                                                                                                                            |  |                                  | 665     |      |   |       
|Other assets                                                                                                                        |  |                                  | 841     |      |   | 464    
|                                                                                                                                    |  |                                  |         |      |   |        
|Total assets                                                                                                                        |  | $                                | 221,623 |      | $ | 202,494
|                                                                                                                                    |  |                                  |         |      |   |        
|Liabilities and Stockholders Equity                                                                                                |  |                                  |         |      |   |        
|Current liabilities:                                                                                                                |  |                                  |         |      |   |        
|Accounts payable                                                                                                                    |  | $                                | 15,291  |      | $ | 18,694 
|Accrued expenses and other current liabilities                                                                                      |  |                                  | 12,027  |      |   | 10,561 
|Current portion of capital lease obligations                                                                                        |  |                                  | 71      |      |   | 72     
|                                                                                                                                    |  |                                  |         |      |   |        
|Total current liabilities                                                                                                           |  |                                  | 27,389  |      |   | 29,327 
|                                                                                                                                    |  |                                  |         |      |   |        
|Long-term capital lease obligations                                                                                                 |  |                                  | 23      |      |   | 33     
|Other long-term liabilities                                                                                                         |  |                                  | 414     |      |   | 190    
|Income taxes payable  non-current                                                                                                  |  |                                  | 94      |      |   | 89     
|Commitments and contingencies (Note 10)                                                                                             |  |                                  |         |      |   |        
|Stockholders equity:                                                                                                               |  |                                  |         |      |   |        
|Common stock, $.001 par value  60,000,000 shares authorized; 24,374,362 (2008) and 24,349,520 (2007) shares
issued and outstanding |  |                                  | 24      |      |   | 24     
|Additional paid-in capital                                                                                                          |  |                                  | 90,456  |      |   | 89,185 
|Retained earnings                                                                                                                   |  |                                  | 101,935 |      |   | 80,226 
|Accumulated other comprehensive income                                                                                              |  |                                  | 1,288   |      |   | 3,420  
|                                                                                                                                    |  |                                  |         |      |   |        
|Total stockholders equity                                                                                                          |  |                                  | 193,703 |      |   | 172,855
|                                                                                                                                    |  |                                  |         |      |   |        
|Total liabilities and stockholders equity                                                                                          |  | $                                | 221,623 |      | $ | 202,494
|                                                                                                                                    |  |                                  |         |      |   |        



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##### Table of Contents

VOLCOM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS



|                                             |  |                                                 |            |   |      |   |            |  |   |           
|-------------------------------------------- |  | ----------------------------------------------- | ---------- | - | ---- | - | ---------- |  | - | ----------
|                                             |  | Year Ended December 31,                        
|                                             |  | 2008                                            |            |   | 2007 |   | 2006      
|                                             |  | (In thousands, except share and per share data)
|Revenues:                                    |  |                                                 |            |   |      |   |            |  |   |           
|Product revenues                             |  | $                                               | 332,110    |   |      | $ | 265,193    |  | $ | 201,186   
|Licensing revenues                           |  |                                                 | 2,194      |   |      |   | 3,420      |  |   | 4,072     
|                                             |  |                                                 |            |   |      |   |            |  |   |           
|Total revenues                               |  |                                                 | 334,304    |   |      |   | 268,613    |  |   | 205,258   
|Cost of goods sold                           |  |                                                 | 171,208    |   |      |   | 138,570    |  |   | 103,237   
|                                             |  |                                                 |            |   |      |   |            |  |   |           
|Gross profit                                 |  |                                                 | 163,096    |   |      |   | 130,043    |  |   | 102,021   
|Operating expenses:                          |  |                                                 |            |   |      |   |            |  |   |           
|Selling, general and administrative expenses |  |                                                 | 112,464    |   |      |   | 79,411     |  |   | 58,417    
|Asset impairments                            |  |                                                 | 16,230     |   |      |   |           |  |   |          
|                                             |  |                                                 |            |   |      |   |            |  |   |           
|Total operating expenses                     |  |                                                 | 128,694    |   |      |   | 79,411     |  |   | 58,417    
|                                             |  |                                                 |            |   |      |   |            |  |   |           
|Operating income                             |  |                                                 | 34,402     |   |      |   | 50,632     |  |   | 43,604    
|Other income:                                |  |                                                 |            |   |      |   |            |  |   |           
|Interest income, net                         |  |                                                 | 901        |   |      |   | 3,973      |  |   | 3,833     
|Dividend income from cost method investee    |  |                                                 |           |   |      |   |           |  |   | 3         
|Foreign currency (loss) gain                 |  |                                                 | (1,807     | ) |      |   | 401        |  |   | 233       
|                                             |  |                                                 |            |   |      |   |            |  |   |           
|Total other (expense) income                 |  |                                                 | (906       | ) |      |   | 4,374      |  |   | 4,069     
|                                             |  |                                                 |            |   |      |   |            |  |   |           
|Income before provision for income taxes     |  |                                                 | 33,496     |   |      |   | 55,006     |  |   | 47,673    
|Provision for income taxes                   |  |                                                 | 11,787     |   |      |   | 21,671     |  |   | 18,920    
|                                             |  |                                                 |            |   |      |   |            |  |   |           
|Net income                                   |  | $                                               | 21,709     |   |      | $ | 33,335     |  | $ | 28,753    
|                                             |  |                                                 |            |   |      |   |            |  |   |           
|Net income per share:                        |  |                                                 |            |   |      |   |            |  |   |           
|Basic                                        |  | $                                               | 0.89       |   |      | $ | 1.37       |  | $ | 1.19      
|Diluted                                      |  | $                                               | 0.89       |   |      | $ | 1.37       |  | $ | 1.18      
|Weighted average shares outstanding:         |  |                                                 |            |   |      |   |            |  |   |           
|Basic                                        |  |                                                 | 24,337,923 |   |      |   | 24,302,893 |  |   | 24,227,845
|Diluted                                      |  |                                                 | 24,357,652 |   |      |   | 24,419,802 |  |   | 24,304,627



See the accompanying notes
to consolidated financial statements.



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##### Table of Contents

VOLCOM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME



|                                                                 |  |                                   |  |                          |    |                  |   |        |                          |   |         |                     |  |   |        |   |  |   |        |   |  |   |         |  
|---------------------------------------------------------------- |  | --------------------------------- |  | ------------------------ | -- | ---------------- | - | ------ | ------------------------ | - | ------- | ------------------- |  | - | ------ | - |  | - | ------ | - |  | - | ------- | -
|                                                                 |  |                                   |  |                          |    |                  |   |        | Accumulated              |   |         |                     |  |   |        |  
|                                                                 |  | Common Stock                      |  | AdditionalPaid-InCapital |    | RetainedEarnings |   |        | OtherComprehensiveIncome |   |         | ComprehensiveIncome |  |   | Total  |  
|                                                                 |  | Shares                            |  | Amount                   |    |                  |   |        |                         
|                                                                 |  | (In thousands, except share data) | 
|Balance at January 1, 2006                                       |  | 24,214,120                        |  | $                        | 24 |                  | $ | 84,418 |                          | $ | 18,266  |                     |  | $ | (28    | ) |  |   |        |   |  | $ | 102,680 |  
|Stock-based compensation                                         |  |                                  |  |                          |   |                  |   | 812    |                          |   |        |                     |  |   |       |   |  |   |        |   |  |   | 812     |  
|Issuance of restricted stock                                     |  | 15,000                            |  |                          |   |                  |   |       |                          |   |        |                     |  |   |       |   |  |   |        |   |  |   |        |  
|Exercise of stock options                                        |  | 66,300                            |  |                          |   |                  |   | 1,261  |                          |   |        |                     |  |   |       |   |  |   |        |   |  |   | 1,261   |  
|Tax benefits related to exercise of stock options                |  |                                  |  |                          |   |                  |   | 282    |                          |   |        |                     |  |   |       |   |  |   |        |   |  |   | 282     |  
|Comprehensive income:                                            |  |                                   |  |                          |    |                  |   |        |                          |   |         |                     |  |   |        |   |  |   |        |   |  |   |         |  
|Net income                                                       |  |                                  |  |                          |   |                  |   |       |                          |   | 28,753  |                     |  |   |       |   |  | $ | 28,753 |   |  |   | 28,753  |  
|Foreign currency translation adjustment                          |  |                                  |  |                          |   |                  |   |       |                          |   |        |                     |  |   | 209    |   |  |   | 209    |   |  |   | 209     |  
|                                                                 |  |                                   |  |                          |    |                  |   |        |                          |   |         |                     |  |   |        |   |  |   |        |   |  |   |         |  
|Comprehensive income                                             |  |                                   |  |                          |    |                  |   |        |                          |   |         |                     |  |   |        |   |  | $ | 28,962 |   |  |   |         |  
|                                                                 |  |                                   |  |                          |    |                  |   |        |                          |   |         |                     |  |   |        |   |  |   |        |   |  |   |         |  
|Balance at December 31, 2006                                     |  | 24,295,420                        |  | $                        | 24 |                  | $ | 86,773 |                          | $ | 47,019  |                     |  | $ | 181    |   |  |   |        |   |  | $ | 133,997 |  
|FIN No. 48 Adjustment                                            |  |                                  |  |                          |   |                  |   |       |                          |   | (128    | )                   |  |   |       |   |  |   |        |   |  |   | (128    | )
|Stock-based compensation                                         |  |                                  |  |                          |   |                  |   | 934    |                          |   |        |                     |  |   |       |   |  |   |        |   |  |   | 934     |  
|Exercise of stock options                                        |  | 54,100                            |  |                          |   |                  |   | 1,028  |                          |   |        |                     |  |   |       |   |  |   |        |   |  |   | 1,028   |  
|Tax benefits related to exercise of stock options                |  |                                  |  |                          |   |                  |   | 450    |                          |   |        |                     |  |   |       |   |  |   |        |   |  |   | 450     |  
|Comprehensive income:                                            |  |                                   |  |                          |    |                  |   |        |                          |   |         |                     |  |   |        |   |  |   |        |   |  |   |         |  
|Net income                                                       |  |                                  |  |                          |   |                  |   |       |                          |   | 33,335  |                     |  |   |       |   |  | $ | 33,335 |   |  |   | 33,335  |  
|Foreign currency translation adjustment, net of tax              |  |                                  |  |                          |   |                  |   |       |                          |   |        |                     |  |   | 3,239  |   |  |   | 3,239  |   |  |   | 3,239   |  
|                                                                 |  |                                   |  |                          |    |                  |   |        |                          |   |         |                     |  |   |        |   |  |   |        |   |  |   |         |  
|Comprehensive income                                             |  |                                   |  |                          |    |                  |   |        |                          |   |         |                     |  |   |        |   |  | $ | 36,574 |   |  |   |         |  
|                                                                 |  |                                   |  |                          |    |                  |   |        |                          |   |         |                     |  |   |        |   |  |   |        |   |  |   |         |  
|Balance at December 31, 2007                                     |  | 24,349,520                        |  | $                        | 24 |                  | $ | 89,185 |                          | $ | 80,226  |                     |  | $ | 3,420  |   |  |   |        |   |  | $ | 172,855 |  
|Stock-based compensation                                         |  |                                  |  |                          |   |                  |   | 985    |                          |   |        |                     |  |   |       |   |  |   |        |   |  |   | 985     |  
|Issuance of restricted stock                                     |  | 10,000                            |  |                          |   |                  |   |       |                          |   |        |                     |  |   |       |   |  |   |        |   |  |   |        |  
|Exercise of stock options                                        |  | 14,842                            |  |                          |   |                  |   | 273    |                          |   |        |                     |  |   |       |   |  |   |        |   |  |   | 273     |  
|Tax benefits related to exercise of stock options                |  |                                  |  |                          |   |                  |   | 13     |                          |   |        |                     |  |   |       |   |  |   |        |   |  |   | 13      |  
|Comprehensive income:                                            |  |                                   |  |                          |    |                  |   |        |                          |   |         |                     |  |   |        |   |  |   |        |   |  |   |         |  
|Net income                                                       |  |                                  |  |                          |   |                  |   |       |                          |   | 21,709  |                     |  |   |       |   |  | $ | 21,709 |   |  |   | 21,709  |  
|Unrealized loss on foreign currency cash flow hedges, net of tax |  |                                   |  |                          |    |                  |   |        |                          |   |         |                     |  |   | (223   | ) |  |   | (223   | ) |  |   | (223    | )
|Foreign currency translation adjustment, net of tax              |  |                                  |  |                          |   |                  |   |       |                          |   |        |                     |  |   | (1,909 | ) |  |   | (1,909 | ) |  |   | (1,909  | )
|                                                                 |  |                                   |  |                          |    |                  |   |        |                          |   |         |                     |  |   |        |   |  |   |        |   |  |   |         |  
|Comprehensive income                                             |  |                                   |  |                          |    |                  |   |        |                          |   |         |                     |  |   |        |   |  | $ | 19,577 |   |  |   |         |  
|                                                                 |  |                                   |  |                          |    |                  |   |        |                          |   |         |                     |  |   |        |   |  |   |        |   |  |   |         |  
|Balance at December 31, 2008                                     |  | 24,374,362                        |  | $                        | 24 |                  | $ | 90,456 |                          | $ | 101,935 |                     |  | $ | 1,288  |   |  |   |        |   |  | $ | 193,703 |  
|                                                                 |  |                                   |  |                          |    |                  |   |        |                          |   |         |                     |  |   |        |   |  |   |        |   |  |   |         |  

See the accompanying notes to consolidated financial statements.



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##### Table of Contents

VOLCOM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                  |  |                         |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                  |  | Year Ended December 31, |        
|                                                                                  |  | 2008                    |         |   | 2007 |   |         | 2006 | 
|                                                                                  |  | (In thousands)          |        
|Cash flows from operating activities:                                             |  |                         |         |   |      |   |         |      |  |   |         |  
|Net income                                                                        |  | $                       | 21,709  |   |      | $ | 33,335  |      |  | $ | 28,753  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                         |         |   |      |   |         |      |  |   |         |  
|Depreciation and amortization                                                     |  |                         | 7,315   |   |      |   | 2,895   |      |  |   | 1,423   |  
|Provision for doubtful accounts                                                   |  |                         | 2,332   |   |      |   | 831     |      |  |   | 588     |  
|Loss on disposal of property and equipment                                        |  |                         | 1       |   |      |   | 24      |      |  |   | 64      |  
|Asset impairments                                                                 |  |                         | 16,230  |   |      |   | 161     |      |  |   |        |  
|Excess tax benefits related to exercise of stock options                          |  |                         | (34     | ) |      |   | (444    | )    |  |   | (303    | )
|Stock-based compensation                                                          |  |                         | 985     |   |      |   | 934     |      |  |   | 812     |  
|Deferred income taxes                                                             |  |                         | (6,349  | ) |      |   | (191    | )    |  |   | (1,983  | )
|Changes in operating assets and liabilities:                                      |  |                         |         |   |      |   |         |      |  |   |         |  
|Accounts receivable                                                               |  |                         | (3,114  | ) |      |   | (23,736 | )    |  |   | (13,248 | )
|Inventories                                                                       |  |                         | (1,844  | ) |      |   | (6,789  | )    |  |   | (2,335  | )
|Prepaid expenses and other current assets                                         |  |                         | (499    | ) |      |   | (311    | )    |  |   | 12      |  
|Income taxes receivable/payable                                                   |  |                         | (3,021  | ) |      |   | (339    | )    |  |   | 1,186   |  
|Other assets                                                                      |  |                         | (306    | ) |      |   | (242    | )    |  |   | (97     | )
|Accounts payable                                                                  |  |                         | (8,096  | ) |      |   | 9,396   |      |  |   | 2,912   |  
|Accrued expenses                                                                  |  |                         | (425    | ) |      |   | 3,791   |      |  |   | 2,977   |  
|Other long-term liabilities                                                       |  |                         | (212    | ) |      |   | (36     | )    |  |   | 195     |  
|                                                                                  |  |                         |         |   |      |   |         |      |  |   |         |  
|Net cash provided by operating activities                                         |  |                         | 24,672  |   |      |   | 19,279  |      |  |   | 20,956  |  
|                                                                                  |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash flows from investing activities:                                             |  |                         |         |   |      |   |         |      |  |   |         |  
|Purchase of property and equipment                                                |  |                         | (5,915  | ) |      |   | (14,989 | )    |  |   | (9,063  | )
|Business acquisitions, net of cash acquired                                       |  |                         | (32,138 | ) |      |   |        |      |  |   | (168    | )
|Purchase of intangible assets                                                     |  |                         | (589    | ) |      |   |        |      |  |   |        |  
|Purchase of short-term investments                                                |  |                         | (278    | ) |      |   |        |      |  |   |        |  
|Sale of short-term investments                                                    |  |                         | 278     |   |      |   |        |      |  |   |        |  
|Purchase of additional shares in cost method investee                             |  |                         | (32     | ) |      |   |        |      |  |   |        |  
|Proceeds from sale of property and equipment                                      |  |                         | 15      |   |      |   | 16      |      |  |   | 2       |  
|                                                                                  |  |                         |         |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                                             |  |                         | (38,659 | ) |      |   | (14,973 | )    |  |   | (9,229  | )
|                                                                                  |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash flows from financing activities:                                             |  |                         |         |   |      |   |         |      |  |   |         |  
|Principal payments on capital lease obligations                                   |  |                         | (127    | ) |      |   | (78     | )    |  |   | (71     | )
|Proceeds from government grants                                                   |  |                         | 455     |   |      |   | 229     |      |  |   | 210     |  
|Proceeds from the exercise of stock options                                       |  |                         | 273     |   |      |   | 1,028   |      |  |   | 1,261   |  
|Excess tax benefits related to exercise of stock options                          |  |                         | 34      |   |      |   | 444     |      |  |   | 303     |  
|                                                                                  |  |                         |         |   |      |   |         |      |  |   |         |  
|Net cash provided by financing activities                                         |  |                         | 635     |   |      |   | 1,623   |      |  |   | 1,703   |  
|Effect of exchange rate changes on cash                                           |  |                         | 3       |   |      |   | 1,619   |      |  |   | 272     |  
|                                                                                  |  |                         |         |   |      |   |         |      |  |   |         |  
|Net (decrease) increase in cash and cash equivalents                              |  |                         | (13,349 | ) |      |   | 7,548   |      |  |   | 13,702  |  
|Cash and cash equivalents Beginning of period                                    |  |                         | 92,962  |   |      |   | 85,414  |      |  |   | 71,712  |  
|                                                                                  |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents End of period                                          |  | $                       | 79,613  |   |      | $ | 92,962  |      |  | $ | 85,414  |  
|                                                                                  |  |                         |         |   |      |   |         |      |  |   |         |  
|Supplemental disclosures of cash flow information:                                |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash paid during the period for:                                                  |  |                         |         |   |      |   |         |      |  |   |         |  
|Interest                                                                          |  | $                       | 110     |   |      | $ | 35      |      |  | $ | 14      |  
|Income taxes                                                                      |  |                         | 20,804  |   |      |   | 22,799  |      |  |   | 19,619  |  

See the accompanying notes to consolidated financial statements.



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Supplemental disclosures of noncash investing and financing activities:

At December 31, 2008 and 2007, the Company accrued for $63,000 and $266,000 of property and equipment purchases, respectively.

Upon adoption of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1,
2007, the Company recorded a $128,000 increase to income taxes payable and a reduction to retained earnings.



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##### Table of Contents

VOLCOM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1. Organization and Summary of Significant Accounting Policies

Volcom, Inc. and subsidiaries (the Company or Volcom) is a designer, marketer and distributor of young mens and womens clothing,
footwear, accessories and related products under the Volcom brand name. The Company initially incorporated in the state of California in 1991 as Stone Boardwear, Inc. and has been doing business as Volcom since June 1991. The Company was
reincorporated in Delaware in April 2005 and changed its name to Volcom, Inc. The Company is based in Costa Mesa, California. In 2008, the Company acquired all of the outstanding membership interests of Electric Visual Evolution LLC
(Electric). Known for its Volt logo, Electric is a core action sports lifestyle brand. Electric was founded in 2000 and is headquartered in Orange County, California.

Principles of Consolidation The accompanying consolidated financial statements include the accounts of Volcom, Inc. and its wholly
owned subsidiaries. All intercompany accounts and transactions have been eliminated.

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

Cash and Cash Equivalents  The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Concentration of Credit Risks  The Company is subject to significant concentrations of credit risk, primarily from its cash and cash
equivalents and accounts receivable. The Company invests its cash equivalents with financial institutions with high credit standing. At December 31, 2008 and 2007, the majority of the Companys cash and cash equivalents were held at
financial institutions in the United States that are insured by the Federal Deposit Insurance Corporation up to $250,000. Uninsured balances aggregate approximately $54.4 million (including foreign accounts) as of December 31, 2008.

The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the
customers current creditworthiness. The Company continually monitors customer collections and maintains an allowance for estimated credit losses based on historical experience and any specific customer collection issues that have been
identified. Historically, such credit losses have generally been within the Companys estimates. At December 31, 2008 and 2007, approximately 13% and 12%, respectively, of the Companys outstanding accounts receivable balance was from
one customer.

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

Property and Equipment  The Companys property and equipment are stated at cost and depreciated on a straight-line basis over
their estimated useful lives, which generally range from three to thirty years. Leasehold improvements are depreciated over the shorter of the estimated useful life of the asset or the lease term. Maintenance and repairs on the Companys
property and equipment are charged to operations when incurred. Depreciable lives by fixed asset category are as follows:



|                       |  |               
|---------------------- |  | --------------
|Furniture and fixtures |  | 3 to 5 years  
|Office equipment       |  | 3 to 5 years  
|Computer equipment     |  | 3 years       
|Leasehold improvements |  | 3 to 10 years 
|Building               |  | 15 to 30 years



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##### Table of Contents

VOLCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Investments in Unconsolidated Investees  The Company accounts for its investments
in unconsolidated investees using the cost method if the Company does not have the ability to exercise significant influence over the operating and financial policies of the investee. The Company assesses such investments for impairment when there
are events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. If, and when, an event or change in circumstances that may have a significant adverse effect on the fair value of the investment
is identified, the Company estimates the fair value of the investment and, if the reduction in value is determined to be other than temporary, records an impairment loss on the investment.

The Company accounts for its investments in unconsolidated investees using the equity method of accounting if the Company has the ability to exercise
significant influence over the operating and financial policies of the investee. The Company evaluates such investments for impairment if an event or change in circumstances occurs that may have a significant adverse effect on the fair value of the
investment. If, and when, an event is identified, the Company estimates the fair value of the investment and, if the reduction in value is determined to be other than temporary, records an impairment loss on the investment.

Long-Lived Assets  The Company accounts for the impairment and disposition of long-lived assets in accordance with Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposition of Long-Lived Assets.In accordance with SFAS No. 144, the Company assesses its long-lived assets for potential impairment
whenever events or changes in circumstances indicate that the assets carrying value may not be recoverable. The carrying amount of a long-lived asset (asset group) is not recoverable if it exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the asset (asset group). Once the carrying amount of a long-lived asset (asset group) is deemed to no longer be recoverable, an impairment loss would be recognized equal to the difference
between the current carrying amount and the fair value of the long-lived asset (asset group). In 2008, the Company determined that there was an impairment loss associated with its amortizing intangible assets related to the 2008 acquisitions of
Electric and Laguna Surf & Sport. See Note 7 to the Consolidated Financial Statements for further discussion.

Goodwill
and Intangible Assets  The Company accounts for goodwill and intangible assets in accordance with SFAS No. 142, Goodwill and Intangible Assets. Under SFAS No. 142, goodwill and intangible assets with
indefinite lives are not amortized but are tested for impairment annually and also in the event of an impairment indicator. As required by SFAS No. 142, the Company evaluates the recoverability of goodwill 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 the 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 an
impairment loss in the future. Impairment losses are reflected in operating income. In 2008, the Company determined that there was an impairment loss associated with the goodwill and non-amortizing intangible assets related to the 2008 acquisitions
of Electric and Laguna Surf & Sport. In 2007, the Company determined that there was an impairment loss associated with the goodwill related to its subsidiary, Welcom Distribution SARL. See Note 7 to the Consolidated Financial
Statements for further discussion.

Fair Value of Financial Instruments  SFAS No. 107, Disclosures about
Fair Value of Financial Instruments,requires management to disclose the estimated fair value of certain assets and liabilities defined by SFAS No. 107 as financial instruments. At December 31, 2008, the Company believes that the
carrying amount of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of these financial instruments.



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VOLCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Revenue Recognition  Product revenues are recognized upon shipment, at which time
transfer of title occurs, risk of ownership passes to the customer and collectibility is reasonably assured. Taxes collected from the Companys customers are and have been recorded on a net basis. Allowances for estimated returns are provided
when product revenues are recorded based on historical experience and are reported as reductions in product revenues. Allowances for doubtful accounts are reported as a component of selling, general and administrative expenses.

Licensing revenues are recorded when earned based on a stated percentage of the licensees sales of Company branded products.

Shipping and Handling  Amounts billed to customers for shipping and handling are recorded as revenues. Freight costs associated with
shipping goods to customers are included in cost of sales. Handling costs of $6.8 million, $4.7 million and $3.3 million are included in selling, general and administrative expenses for the years ended December 31, 2008, 2007 and
2006, respectively.

Significant Concentrations  During the years ended December 31, 2008, 2007 and 2006, sales to a
single customer totaled approximately 16%, 18% and 26%, respectively, of product revenues. No other single customer represented over 10% of product revenues.

During each of the years ended December 31, 2008, 2007 and 2006, the Company made purchases from two suppliers that totaled more than 10% of total product costs. For the years ended December 31, 2008, 2007
and 2006, purchases from those two suppliers were approximately 32%, 33% and 27% of total product costs, respectively.

Advertising and
Promotion  The Companys promotion and advertising programs include athlete sponsorships, Volcom branded events, print advertisements, music, films and online marketing. Costs of advertising, promotion and point-of-sale materials
are expensed as incurred and included in selling, general and administrative expenses. For the years ended December 31, 2008, 2007 and 2006, these expenses totaled $21.7 million, $14.5 million and $12.4 million, respectively. As
of December 31, 2008, 2007 and 2006, the Company had no deferred advertising costs.

Income Taxes The Company
records a provision and liability for Federal, state and foreign income taxes using an annual effective tax rate. Deferred income taxes are recorded at the Companys effective tax rate. Managements judgment is required in assessing the
realizability of its deferred tax assets. The Company considers future taxable income and ongoing prudent and feasible tax planning strategies in assessing the value of the Companys deferred tax assets. If the Company determines that it is
more likely than not that these assets will not be realized, the Company would reduce the value of these assets to their expected realizable value, thereby decreasing net income. Evaluating the value of these assets is necessarily based on our
judgment. If we subsequently determined that the deferred tax assets that had been written down would, in our judgment, be realized in the future, the value of the deferred tax assets would be increased, thereby increasing net income in the period
when that determination was made. As of December 31, 2008, the Company recorded a valuation allowance of approximately $178,000 against deferred tax assets that the Company believes are not more likely than not to be realized. As of
December 31, 2007, the Company determined that no valuation allowance was required.

Financial Accounting Standards Board
Interpretation No. 48 (FIN No. 48), Accounting for Uncertainty in Income Taxes prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. Under FIN No. 48,



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VOLCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



the Company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate resolution. As a result of the implementation of FIN No. 48, the Company recognized a $128,000 increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to
the January 1, 2007 balance of retained earnings. See Note 14 for further discussion.

Foreign Currency and
Derivatives  The Company owns subsidiaries that operate with the local currency as their functional currency. The Companys international subsidiaries generate revenues and collect receivables at future dates in the
customers local currencies, and purchase inventory primarily in U.S. dollars. Accordingly, the Company is exposed to gains and losses that result from the effect of changes in foreign currency exchange rates on foreign currency
denominated transactions. The Companys assets and liabilities that are denominated in foreign currencies are translated at the rate of exchange on the balance sheet date. Revenues and expenses are translated using the average exchange rate for
the period. Gains and losses from translation of foreign subsidiary financial statements are included in accumulated other comprehensive income or loss.

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

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

A portion of the Companys domestic sales are made in Canadian dollars. In addition, our recently acquired Electric subsidiary purchases sunglass
inventory in Euros. As a result, the Company is exposed to transaction gains and losses that result from movements in foreign currency exchange rates. Changes in the Companys assets and liabilities that are denominated in these foreign
currencies are translated into U.S. dollars at the rate of exchange on the balance sheet date, and are reflected in the Companys statement of operations.

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



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VOLCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The components of comprehensive income for the Company include net income, unrealized gains or losses
on foreign currency cash flow hedges and foreign currency adjustments that arise from the translation of the Companys international subsidiaries financial statements into U.S. dollars. The components of accumulated other comprehensive
income, net of tax, are as follows:



|                                                                 |  |                    |       |   |      |   |      
|---------------------------------------------------------------- |  | ------------------ | ----- | - | ---- | - | -----
|                                                                 |  | As of December 31,
|                                                                 |  | 2008               |       |   | 2007
|                                                                 |  | (In thousands)    
|Unrealized loss on foreign currency cash flow hedges, net of tax |  | $                  | (223  | ) |      | $ |     
|Foreign currency translation adjustment                          |  |                    | 1,511 |   |      |   | 3,420
|                                                                 |  |                    |       |   |      |   |      
|                                                                 |  | $                  | 1,288 |   |      | $ | 3,420
|                                                                 |  |                    |       |   |      |   |      

Net Income Per Share  The Company calculates net income per share in accordance
with SFAS No. 128, Earnings Per Share. Under SFAS No. 128, basic net income per common share is calculated by dividing net income by the weighted-average number of common shares outstanding during the reporting
period. Diluted net income per common share reflects the effects of potentially dilutive securities, which consists solely of restricted stock and stock options using the treasury stock method. A reconciliation of the numerator and denominator used
in the calculation of basic and diluted net income per share is as follows:



|                                                                                              |  |                                   |            |      |   |            |  |   |           
|--------------------------------------------------------------------------------------------- |  | --------------------------------- | ---------- | ---- | - | ---------- |  | - | ----------
|                                                                                              |  | Year Ended December 31,          
|                                                                                              |  | 2008                              |            | 2007 |   | 2006      
|                                                                                              |  | (In thousands, except share data)
|Numerator  Net income applicable to common stockholders                                      |  | $                                 | 21,709     |      | $ | 33,335     |  | $ | 28,753    
|                                                                                              |  |                                   |            |      |   |            |  |   |           
|Denominator:                                                                                  |  |                                   |            |      |   |            |  |   |           
|Weighted average common stock outstanding for basic earnings per share                        |  |                                   | 24,337,923 |      |   | 24,302,893 |  |   | 24,227,845
|Effect of dilutive securities:                                                                |  |                                   |            |      |   |            |  |   |           
|Stock options and restricted stock                                                            |  |                                   | 19,729     |      |   | 116,909    |  |   | 76,782    
|                                                                                              |  |                                   |            |      |   |            |  |   |           
|Adjusted weighted average common stock and assumed conversions for diluted earnings per share |  |                                   | 24,357,652 |      |   | 24,419,802 |  |   | 24,304,627
|                                                                                              |  |                                   |            |      |   |            |  |   |           

For the years ended December 31, 2008 and 2007, stock options of 437,558 and 10,000,
respectively, were excluded from the weighted-average number of shares outstanding because their effect would be antidilutive.



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VOLCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Stock-Based Compensation  The Company accounts for stock-based compensation under
the fair value recognition provisions of SFAS No. 123 (revised 2004), Share-Based Payment(SFAS No. 123R). SFAS No. 123R requires that the Company account for all stock-based compensation using a
fair-value method and recognize the fair value of each award as an expense over the service period. See Note 11 to the Consolidated Financial Statements for further discussion.

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

Recent Accounting Pronouncements In September 2006, the Financial Accounting Standards Board, or FASB, issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. The Company adopted the provisions of SFAS No. 157 as of January 1, 2008. The adoption of SFAS No. 157 did
not have a material impact on the Companys financial position.

In February 2008, the FASB issued FASB Staff Position No. 157-2,
which deferred the effective date for certain portions of SFAS No. 157 related to nonrecurring measurements of nonfinancial assets and liabilities. That provision of SFAS No. 157 will be effective for the Companys fiscal year 2009.
The Company is currently evaluating the effect, if any, that the adoption of SFAS No. 157-2 will have on its consolidated results of operations, financial position and cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of SFAS No. 115. SFAS No. 159 provides reporting entities an option to measure certain financial assets and liabilities and other eligible items at fair value on an
instrument-by-instrument basis. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. SFAS No. 159 was adopted on January 1, 2008. The
adoption of SFAS No. 159 did not have a significant impact on the Companys consolidated financial position or results of operations.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS No. 141(R) requires reporting entities to record fair value estimates of contingent consideration and certain
other potential liabilities during the original purchase price allocation, expense acquisition costs as incurred and does not permit certain restructuring activities previously allowed under EITF 95-3 to be recorded as a component of purchase
accounting. SFAS No. 141(R) is effective for fiscal periods beginning after December 15, 2008 and should be applied prospectively for all business acquisitions entered into after the date of adoption. The Company is currently
evaluating the impact the adoption of SFAS No. 141(R) will have on its consolidated financial position or results of operations.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in Consolidated Financial Statements  an amendment of ARB No. 51. SFAS No. 160 requires (i) that noncontrolling
(minority) interests be reported as a component of shareholders equity, (ii) that net income attributable to the parent and to the noncontrolling interest be separately identified in the consolidated statement of operations,
(iii) that changes in a parents ownership interest while the parent retains its controlling interest be accounted for as equity transactions,



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VOLCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(iv) that any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value, and (v) that
sufficient disclosures are provided that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal periods beginning after December 15,
2008. The Company is currently evaluating the impact the adoption of SFAS No. 160 will have on its consolidated financial position or results of operations.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities  an amendment of FASB Statement No. 133, or SFAS No. 161. SFAS No. 161
requires expanded disclosures about an entitys derivative instruments and hedging activities. It is effective for fiscal years beginning after November 15, 2008, including interim periods within those fiscal periods. The Company is
currently evaluating the impact the adoption of SFAS No. 161 will have on its consolidated financial position or results of operations.

In April 2008, the FASB issued FASB Staff Position 142-3, Determination of the Useful Lives of Intangible Assets, or FSP 142-3, which amends the factors that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. The intent of FSP 142-3 is to improve the consistency between the useful life of a recognized intangible asset under
SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R) and other U.S. generally accepted accounting principles. FSP 142-3 is effective for fiscal years beginning after
December 15, 2008 and for interim periods within those fiscal years. The Company does not expect the adoption of FSP 142-3 to have a material effect on its consolidated financial position or results of operations.

In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities, which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the
two-class method described in paragraphs 60 and 61 of FASB Statement No. 128, Earnings per Share. The Company does not expect the adoption of FSP EITF 03-6-1 to have a material effect on its consolidated financial position or results of
operations.

2. Acquisitions

Effective January 17, 2008, the Company acquired all of the outstanding membership interests of Electric, a core action sports lifestyle brand with growing product lines including sunglasses, goggles, t-shirts, bags, hats, belts and
other accessories. The operations of Electric have been included in the Companys results since January 17, 2008. The purchase price of approximately $26.3 million, excluding transaction costs, consisted of cash consideration of $25.3
million and a working capital adjustment of $1.0 million in cash, and is subject to certain indemnities. Transaction costs totaled $1.2 million. The sellers also will be eligible to earn up to an additional $18.0 million in cash over the next two
years upon achieving certain financial milestones. Electric operates as a wholly-owned subsidiary of the Company. Goodwill arises from the synergies the Company believes can be achieved by the integration of certain aspects of Electrics
production of softgoods and accessories. No goodwill associated with this acquisition is deductible for tax purposes. Amortizing intangible assets consist of customer relationships, non-compete agreements, backlog and athlete contracts with
estimated useful lives of 20 years, 4 years, 3 months and 15 months, respectively. These intangible assets are amortized in a manner that reflects the pattern in which the economic benefits of the intangible assets are consumed.



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VOLCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The assets and liabilities of Electric were recorded at estimated fair value as of the date of
acquisition under the purchase method of accounting. The following table summarizes the allocation of the purchase price to the fair values of the assets acquired and the liabilities assumed at the date of acquisition:



|                             |  |                |        |  
|---------------------------- |  | -------------- | ------ | -
|                             |  | (In thousands) |       
|Current assets               |  | $              | 10,277 |  
|Property and equipment       |  |                | 1,110  |  
|Other assets                 |  |                | 19     |  
|Amortizing intangible assets |  |                | 13,310 |  
|Non-amortizing trademarks    |  |                | 10,500 |  
|Goodwill                     |  |                | 935    |  
|                             |  |                |        |  
|Total assets acquired        |  |                | 36,151 |  
|Liabilities assumed          |  |                | (8,680 | )
|                             |  |                |        |  
|Net assets acquired          |  | $              | 27,471 |  
|                             |  |                |        |  

The results of operations for the acquisition are included in the Condensed Consolidated
Statements of Operations from the acquisition date. Assuming the acquisition had occurred as of the beginning of each of the following periods, proforma consolidated results would be as follows:



|                                     |  |                        |         |      |   |        
|------------------------------------ |  | ---------------------- | ------- | ---- | - | -------
|                                     |  | Year EndedDecember 31,
|                                     |  | 2008                   |         | 2007
|Proforma consolidated total revenues |  | $                      | 334,607 |      | $ | 291,889
|Proforma consolidated net income     |  | $                      | 20,988  |      | $ | 32,393 
|Proforma diluted earnings per share  |  | $                      | 0.86    |      | $ | 1.33   

In October 2008, the Company recorded a $14.8 million impairment charge on the goodwill and
intangible assets of Electric. See Note 7 to the Consolidated Financial Statements for further discussion.

Effective August 1, 2008,
the Company acquired certain assets and liabilities of Laguna Surf & Sport. The assets and liabilities were recorded at estimated fair value as of the date of acquisition under the purchase method of accounting. Total net tangible assets
acquired were $342,000 with $305,000 of the remaining purchase price allocated to amortizing intangible assets including trademarks and favorable leases, and $1.4 million allocated to goodwill. The operations of the retail chain have been included
in the Companys results since August 1, 2008. The effects of this acquisition are not considered material. Accordingly, pro forma information reflecting this acquisition has been omitted. In December 2008, the Company recorded a $1.4
million impairment charge on the goodwill related to this acquisition. See Note 7 to the Consolidated Financial Statements for further discussion.

Effective November 1, 2008, the Company acquired certain assets of its distributor of Volcom branded products in Japan for $3.6 million, excluding transaction costs. Transaction costs totaled $240,000. The acquired assets were recorded
at estimated fair value as of the date of acquisition under the purchase method of accounting. Total net tangible assets acquired were $1.5 million with $1.7 million of the remaining purchase price allocated to amortizing intangible assets including
customer relationships, backlog and non-compete agreements, and $611,000 allocated to goodwill. The operations of this entity have been included in the Companys results since November 1, 2008. The effects of this acquisition are not
considered material. Accordingly, pro forma information reflecting this acquisition has been omitted.

Effective September 2008, the
Company entered into an agreement for the transition and sale of certain assets of its UK distributor, whereby the Company will take direct control of the UK territory beginning with the



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VOLCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



delivery of the Spring 2009 product line, which began shipping in January 2009. The acquisition is contingent upon the UK distributor delivering certain
assets, including the Spring 2009 order file, customer information, certain inventory stock and other sales and marketing tools in January 2009. The consideration related to this transition and acquisition agreement shall not exceed 600,000 GBP (or
approximately $869,000 USD based on a 1 GBP to 1.4479 U.S. dollar exchange rate as of December 31, 2008).

3. Allowances for Doubtful Accounts and
Product Returns



|                           |  |                                |       |   |                              |   |         |       |  |   |      
|-------------------------- |  | ------------------------------ | ----- | - | ---------------------------- | - | ------- | ----- |  | - | -----
|                           |  | Allowance forDoubtful Accounts |       |   | Allowance forProduct Returns |   |         | Total
|                           |  | (In thousands)                
|Balance, January 1, 2006   |  | $                              | 190   |   |                              | $ | 540     |       |  | $ | 730  
|Provision                  |  |                                | 588   |   |                              |   | 4,196   |       |  |   |      
|Deductions                 |  |                                | (283  | ) |                              |   | (3,908  | )     |  |   |      
|                           |  |                                |       |   |                              |   |         |       |  |   |      
|Balance, December 31, 2006 |  |                                | 495   |   |                              |   | 828     |       |  |   | 1,323
|Provision                  |  |                                | 831   |   |                              |   | 5,903   |       |  |   |      
|Deductions                 |  |                                | (67   | ) |                              |   | (5,207  | )     |  |   |      
|                           |  |                                |       |   |                              |   |         |       |  |   |      
|Balance, December 31, 2007 |  |                                | 1,259 |   |                              |   | 1,524   |       |  |   | 2,783
|Provision                  |  |                                | 2,332 |   |                              |   | 12,642  |       |  |   |      
|Deductions                 |  |                                | (135  | ) |                              |   | (10,624 | )     |  |   |      
|                           |  |                                |       |   |                              |   |         |       |  |   |      
|Balance, December 31, 2008 |  | $                              | 3,456 |   |                              | $ | 3,542   |       |  | $ | 6,998
|                           |  |                                |       |   |                              |   |         |       |  |   |      

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



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VOLCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



4. Inventories

Inventories are as follows:



|                |  |                    |        |      |   |       
|--------------- |  | ------------------ | ------ | ---- | - | ------
|                |  | As of December 31,
|                |  | 2008               |        | 2007
|                |  | (In thousands)    
|Finished goods  |  | $                  | 25,277 |      | $ | 19,849
|Work-in-process |  |                    | 269    |      |   | 214   
|Raw materials   |  |                    | 1,540  |      |   | 377   
|                |  |                    |        |      |   |       
|                |  | $                  | 27,086 |      | $ | 20,440
|                |  |                    |        |      |   |       

5. Property and Equipment

Property and equipment are as follows:



|                              |  |                    |         |   |      |   |        |  
|----------------------------- |  | ------------------ | ------- | - | ---- | - | ------ | -
|                              |  | As of December 31, |        
|                              |  | 2008               |         |   | 2007 |  
|                              |  | (In thousands)     |        
|Furniture and fixtures        |  | $                  | 6,714   |   |      | $ | 3,547  |  
|Office equipment              |  |                    | 2,666   |   |      |   | 1,724  |  
|Computer equipment            |  |                    | 6,405   |   |      |   | 4,959  |  
|Leasehold improvements        |  |                    | 9,608   |   |      |   | 7,379  |  
|Building                      |  |                    | 7,215   |   |      |   | 7,489  |  
|Land                          |  |                    | 4,723   |   |      |   | 4,723  |  
|Construction in progress      |  |                    | 225     |   |      |   | 30     |  
|                              |  |                    |         |   |      |   |        |  
|                              |  |                    | 37,556  |   |      |   | 29,851 |  
|Less accumulated depreciation |  |                    | (10,840 | ) |      |   | (5,424 | )
|                              |  |                    |         |   |      |   |        |  
|Property and equipment  net  |  | $                  | 26,716  |   |      | $ | 24,427 |  
|                              |  |                    |         |   |      |   |        |  

Depreciation and amortization expense related to property and equipment was approximately
$5.1 million, $2.8 million and $1.3 million for the years ended December 31, 2008, 2007 and 2006, respectively.

In February
2007, the Company completed the construction of its European headquarters in Anglet, France. Costs incurred related to such construction totaled approximately 4.6 million Euros (approximately $6.5 million based on a 1 to 1.4097 exchange
rate as of December 31, 2008).

The Company has applied for and received local government grants totaling approximately 800,000 Euros
(approximately $1.1 million based on a 1 Euro to 1.4097 U.S. dollar exchange rate as of December 31, 2008). Such grants have been paid to the Company at various times during and after the European headquarters construction period and
generally require the Company to maintain and operate the European headquarters for five years. To the extent that the Company does not maintain and operate the European headquarters for a five year period, certain amounts of the grants will have to
be repaid to the local government at that time. As of December 31, 2008, the Company has received all of the grant money from the local government. The Company has recorded $472,000 of the cash received for these grants against property and
equipment, as these grants support the construction of the European headquarters and will offset depreciation expense over the estimated useful life of the European headquarters, and $654,000 as an other long-term liability, as this grant relates to
the Companys employment requirements over the next five years, and will be amortized against operating expenses on a straight-line basis over the five-year period of the employment requirements.



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VOLCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



6. Investment in Unconsolidated Investees

Since 1998, the Company has held an ownership interest in the common stock of Volcom Australia, a licensee of the Companys products located in
Australia. In February 2008, the Company purchased an additional .4% ownership in Volcom Australia for $32,000, which brought the Companys total ownership interest to 13.9%. The investment is accounted for under the cost method, as the Company
does not have the ability to exercise significant influence over the financial and operating policies of the investee. At December 31, 2008 and 2007, the Companys investment in Volcom Australia was $330,000 and $298,000, respectively.

7. Goodwill and Intangible Assets

A summary of intangible assets is as follows:



|                                       |  |                         |        |                         |   |                      |  |                         |     |  |   |    
|-------------------------------------- |  | ----------------------- | ------ | ----------------------- | - | -------------------- |  | ----------------------- | --- |  | - | ---
|                                       |  | As of December 31, 2008 |        | As of December 31, 2007
|                                       |  | Gross CarryingAmount    |        | AccumulatedAmortization |   | Gross CarryingAmount |  | AccumulatedAmortization
|                                       |  | (In thousands)         
|Amortizing intangible assets           |  | $                       | 6,363  |                         | $ | 2,649                |  | $                       | 463 |  | $ | 100
|Non-amortizing trademarks              |  |                         | 6,300  |                         |   |                     |  |                         |    |  |   |   
|Other non-amortizing intangible assets |  |                         | 564    |                         |   |                     |  |                         |    |  |   |   
|                                       |  |                         |        |                         |   |                      |  |                         |     |  |   |    
|                                       |  | $                       | 13,227 |                         | $ | 2,649                |  | $                       | 463 |  | $ | 100
|                                       |  |                         |        |                         |   |                      |  |                         |     |  |   |    

At December 31, 2008, as part of the Companys annual impairment test in accordance with
SFAS No. 142, Goodwill and Intangible Assets, it was determined that the goodwill and non-amortizing intangible assets associated with the 2008 acquisitions of Electric and Laguna Surf & Sport were impaired, as the carrying
amount of the reporting units, including goodwill, exceeded the fair value of the reporting units. The fair value of assets was estimated using a combination of a discounted cash flow and market approach. The value implied by the test was affected
by (1) reduced future cash flows expected for the Electric segment, (2) the discount rates which were applied to future cash flows, and (3) current market estimates of value. The discount rates applied and current estimates of market
values have been affected by the recent macro-economic conditions, contributing to the estimated decline in value. Additionally, certain amortizing intangible assets associated with these acquisitions were determined to be impaired in accordance
with SFAS No. 144, Accounting for the Impairment or Disposition of Long-Lived Assets. Total impairment charges of $16.2 million were incurred for the year ended December 31, 2008 and relate to $6.5 million for goodwill and
non-amortizing intangible assets and $9.7 million for amortizing intangible assets. At December 31, 2007, it was determined that the goodwill associated with Welcom Distribution SARL was impaired and the Company recorded a $161,000 impairment
charge. All impairment losses are reflected in operating income.

Amortizing intangible assets include customer relationships, trademarks,
non-compete agreements, backlog, leasehold rights, athlete contracts and reacquired license rights. Other non-amortizing intangible assets consist of trademarks and land use rights. Amortizable intangible assets are amortized by the Company using
estimated useful lives of 3 months to 20 years with no residual values. Fluctuations in the gross carrying amounts of intangible assets associated with the Companys international subsidiaries are due to the effect of changes in foreign
currency exchange rates. Intangible amortization expense for the years ended December 31, 2008, 2007 and 2006, was approximately $2.3 million, $47,000 and $148,000, respectively. The Companys annual amortization expense is estimated to be
approximately $893,000, $517,000, $423,000, $362,000 and $313,000 in the fiscal years ending December 31, 2009, 2010, 2011, 2012 and 2013, respectively.



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##### Table of Contents

VOLCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Goodwill of $665,000 associated with the acquisition of our Japanese distributor is included in the
United States operating segment.

8. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:



|                             |  |                    |        |      |   |       
|---------------------------- |  | ------------------ | ------ | ---- | - | ------
|                             |  | As of December 31,
|                             |  | 2008               |        | 2007
|                             |  | (In thousands)    
|Payroll and related accruals |  | $                  | 5,045  |      | $ | 4,000 
|Deferred rent                |  |                    | 649    |      |   | 348   
|Other                        |  |                    | 6,333  |      |   | 6,213 
|                             |  |                    |        |      |   |       
|                             |  | $                  | 12,027 |      | $ | 10,561
|                             |  |                    |        |      |   |       

9. Line of Credit

In September 2008, the Company amended its unsecured credit agreement with a bank, to increase its line of credit from $20.0 million to $40.0 million (which includes a line of credit, foreign exchange facility and
letter of credit sub-facilities). The amended credit agreement, which expires on August 31, 2010, may be used to fund the Companys working capital requirements. Borrowings under this agreement bear interest, at the Companys option,
either at the banks prime rate (3.25% at December 31, 2008) or LIBOR plus 1.25%. Under this credit facility, the Company had $510,000 outstanding in letters of credit at December 31, 2008. At December 31, 2008 there were no
outstanding borrowings under this credit facility, and $39.5 million was available under the credit facility. The credit agreement requires compliance with conditions precedent that must be satisfied prior to any borrowing, as well as ongoing
compliance with specified affirmative and negative covenants, including covenants related to the Companys financial condition, including requirements that the Company maintain a minimum net profit after tax and a minimum earnings before
interest, taxes, depreciation and amortization (EBITDA). At December 31, 2008, the Company was in compliance with all restrictive covenants.

10. Commitments and Contingencies

Operating Leases  The Company leases certain office, warehouse and
retail facilities under long-term operating lease agreements. Total rent expense for the years ended December 31, 2008, 2007 and 2006, was $4.6 million, $2.4 million and $1.1 million, respectively.

The following is a schedule of future minimum lease payments required under such leases as of December 31, 2008 (in thousands):



|                         |  |   |       
|------------------------ |  | - | ------
|Year Ending December 31, |  |  
|2009                     |  | $ | 4,960 
|2010                     |  |   | 4,756 
|2011                     |  |   | 4,495 
|2012                     |  |   | 3,834 
|2013                     |  |   | 2,965 
|Thereafter               |  |   | 12,992
|                         |  |   |       
|                         |  | $ | 34,002
|                         |  |   |       



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##### Table of Contents

VOLCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Capital Leases  The Company has leased computer and office equipment pursuant to
capital lease obligations. These leases bear interest at rates ranging from 2.9% to 7.8% per year, and expire at various dates through July 2010. The gross amount of capital lease assets was $483,000 at December 31, 2008 and 2007, and
accumulated amortization was $452,000 and $388,000 at December 31, 2008 and 2007, respectively. Future commitments under capital lease obligations at December 31, 2008 are as follows (in thousands):



|                                                        |  |   |    |  
|------------------------------------------------------- |  | - | -- | -
|Year Ending December 31,                                |  |   |   
|2009                                                    |  | $ | 75 |  
|2010                                                    |  |   | 23 |  
|                                                        |  |   |    |  
|Total payments including interest                       |  |   | 98 |  
|Less interest portion                                   |  |   | (4 | )
|                                                        |  |   |    |  
|Total principal payments remaining at December 31, 2008 |  | $ | 94 |  
|                                                        |  |   |    |  
|Current portion of capital lease obligation             |  | $ | 71 |  
|Long-term portion of capital lease obligation           |  |   | 23 |  
|                                                        |  |   |    |  
|Total capital lease obligation at December 31, 2008     |  | $ | 94 |  
|                                                        |  |   |    |  

Professional Athlete Sponsorships  The Company establishes relationships with
professional athletes in order to promote its products and brands. The Company has entered into endorsement agreements with professional athletes in skateboarding, snowboarding, surfing and motocross. Many of these contracts provide incentives for
magazine exposure and competitive victories while wearing or using the Companys products. Such expenses are an ordinary part of the Companys operations and are expensed as incurred. The following is a schedule of future estimated minimum
payments required under such endorsement agreements as of December 31, 2008 (in thousands):



|                         |  |   |       
|------------------------ |  | - | ------
|Year Ending December 31, |  |  
|2009                     |  | $ | 6,581 
|2010                     |  |   | 4,235 
|2011                     |  |   | 1,730 
|2012                     |  |   | 1,340 
|2013                     |  |   | 800   
|Thereafter               |  |   | 1,972 
|                         |  |   |       
|                         |  | $ | 16,658
|                         |  |   |       

The amounts listed above are the approximate amounts of the minimum obligations required to be
paid under these contracts. The additional estimated maximum amount that could be paid under the Companys existing contracts, assuming that all bonuses, victories and similar incentives are achieved during the five-year period ending
December 31, 2011, is approximately $4.1 million. The actual amounts paid under these agreements may be higher or lower than the amounts discussed above as a result of the variable nature of these obligations.

Litigation  The Company is involved from time to time in litigation incidental to its business. In the opinion of management, the
resolution of any such matter currently pending will not have a material adverse effect on the Companys consolidated financial position or results of operations.

Indemnities and Guarantees  During its normal course of business, the Company has made certain indemnities and guarantees under which it may be required to make payments in relation to certain
transactions.



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##### Table of Contents

VOLCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



These include (i) intellectual property indemnities to the Companys customers and licensees in connection with the use, sale and license of
Company products, (ii) indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease, (iii) indemnities to vendors and service providers pertaining to claims based on the
negligence or willful misconduct of the Company, and (iv) indemnities involving the accuracy of representations and warranties in certain contracts. The duration of these indemnities, commitments and guarantees varies, and in certain cases, may
be indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation on the maximum potential future payments the Company could be obligated to make. The Company has not been required to record nor has it
recorded any liability for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets.

11. Stockholders
Equity

The Company accounts for stock-based compensation under the fair value recognition provisions of SFAS No. 123R.
SFAS No. 123R requires that the Company account for all stock-based compensation using a fair-value method and recognize the fair value of each award as an expense over the service period. The Company is using the Black-Scholes
option-pricing model to value compensation expense. Forfeitures are estimated at the date of grant based on historical employee turnover rates and reduce the compensation expense recognized. The expected option term is estimated based upon
historical industry data on employee exercises and managements expectation of exercise behavior. For options granted concurrently with the Companys initial public offering of common stock, the expected volatility of the Companys
stock price was based upon the historical volatility of similar entities whose share prices were publicly available. For options granted subsequent to the Companys offering, expected volatility is based on the historical volatility of the
Companys stock. The risk-free interest rate is based upon the current yield on U.S. Treasury securities having a term similar to the expected option term. Dividend yield is estimated at zero because the Company does not anticipate paying
dividends in the foreseeable future. The fair value of employee stock-based awards is amortized using the straight-line method over the vesting period.

During the years ended December 31, 2008, 2007 and 2006, the Company recognized approximately $985,000, or $638,000 net of tax, $934,000, or $566,000 net of tax, and $812,000 or $490,000 net of
tax, respectively, in stock-based compensation expense which includes the impact of all stock-based awards and is included in selling, general and administrative expenses. The adoption of SFAS No. 123R resulted in incremental stock-based
compensation expense of $629,000 for the year ended December 31, 2006. The incremental stock-based compensation expense caused income before provision for income taxes to decrease by $629,000, net income to decrease by $379,000, and basic and
diluted earnings per share to decrease by $0.02 per share.

Stock Compensation Plans  In 1996, the Company adopted the
1996 Stock Option Plan (the 1996 Plan), which authorized the Company to grant or issue options to purchase up to a total of 4,663,838 shares of the Companys common stock. In June 2005, the Companys Board of Directors and
stockholders approved the 2005 Incentive Award Plan (the Incentive Plan), as amended in February 2007. A total of 2,300,000 shares of common stock were initially authorized and reserved for issuance under the Incentive Plan for
incentives such as stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance shares and deferred stock awards. The actual number of awards reserved for issuance under the Incentive Plan automatically
increases on the first trading day in January of each calendar year by an amount equal to 2% of the total number of shares of common stock outstanding on the last trading day in December of the preceding calendar year, but in no event will any such
annual increase exceed 750,000 shares. As of December 31, 2008, there were 3,105,655 shares available for issuance pursuant to new stock option grants or other equity awards. Under the Incentive Plan, stock options have been granted
at an exercise price equal to the fair market value of the Companys stock at the time of grant. The vesting period for stock options is determined by the Board of



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##### Table of Contents

VOLCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Directors or the Compensation Committee of the Board of Directors, as applicable, and the stock options generally expire ten years from the date of grant or
90 days after employment or services are terminated.

Stock Option Awards  In June 2005, the Companys Board of
Directors approved the grant of 586,526 options to purchase the Companys common stock. The Company granted these options under the Incentive Plan at the effective date of the Companys initial public offering at an exercise price of
$19.00, which was equal to the initial public offering price. The stock options have vesting terms whereby 10,526 options vested immediately, 210,000 options vested on December 15, 2005 and the remaining 366,000 options vest 20% per annum
over 5 years. The fair value of these awards was calculated through the use of the Black-Scholes option-pricing model assuming an exercise price equal to the fair market value of the Companys stock and the following additional significant
weighted average assumptions: expected life of 4.2 years; volatility of 47.5%; risk-free interest rate of 3.73%; and no dividends during the expected term.

In May 2007, the Companys Board of Directors approved the grant of 2,000 options to purchase the Companys common stock to each independent member of the Companys Board of Directors (10,000 options in
total). The Company granted these options at the fair market value of the Companys common stock on the date of grant. The stock options vest one year from the date of grant. The fair value of these awards was calculated through the use of the
Black-Scholes option-pricing model assuming an exercise price equal to the fair market value of the Companys stock and the following additional significant weighted average assumptions: expected life of 2.0 years; volatility of 55.7%;
risk-free interest rate of 4.68%; and no dividends during the expected term.

In May 2008, the Companys Board of Directors approved
the grant of 2,000 options to purchase the Companys common stock to each independent member of the Companys Board of Directors (10,000 options in total). The Company granted these options at the fair market value of the Companys
common stock on the date of grant. The stock options vest one year from the date of grant. The fair value of these awards was calculated through the use of the Black-Scholes option-pricing model assuming an exercise price equal to the fair market
value of the Companys stock and the following additional significant weighted average assumptions: expected life of 2.0 years; volatility of 61.9%; risk-free interest rate of 2.38%; and no dividends during the expected term.

A summary of the Companys stock option activity under the Incentive Plan is as follows:



|                                                               |  |                          |   |      |                               |       |                  |         |   |                               |   |                  |  |         |                               |  |   |      
|-------------------------------------------------------------- |  | ------------------------ | - | ---- | ----------------------------- | ----- | ---------------- | ------- | - | ----------------------------- | - | ---------------- |  | ------- | ----------------------------- |  | - | -----
|                                                               |  | Years Ended December 31,
|                                                               |  | 2008                     |   | 2007 |                               | 2006 
|                                                               |  | Number ofOptions         |   |      | Weighted-AverageExercisePrice |       | Number ofOptions |         |   | Weighted-AverageExercisePrice |   | Number ofOptions |  |         | Weighted-AverageExercisePrice
|Outstanding, beginning of year                                 |  | 442,400                  |   |      | $                             | 19.52 |                  | 487,700 |   |                               | $ | 19.00            |  | 576,000 |                               |  | $ | 19.00
|Granted                                                        |  | 10,000                   |   |      |                               | 25.42 |                  | 10,000  |   |                               |   | 42.07            |  |        |                               |  |   |     
|Exercised                                                      |  | (14,842                  | ) |      |                               | 19.00 |                  | (54,100 | ) |                               |   | 19.00            |  | (66,300 | )                             |  |   | 19.00
|Canceled or forfeited                                          |  |                         |   |      |                               |      |                  | (1,200  | ) |                               |   | 19.00            |  | (22,000 | )                             |  |   | 19.00
|                                                               |  |                          |   |      |                               |       |                  |         |   |                               |   |                  |  |         |                               |  |   |      
|Outstanding, end of year                                       |  | 437,558                  |   |      | $                             | 19.67 |                  | 442,400 |   |                               | $ | 19.52            |  | 487,700 |                               |  | $ | 19.00
|                                                               |  |                          |   |      |                               |       |                  |         |   |                               |   |                  |  |         |                               |  |   |      
|Options exercisable, end of year                               |  | 291,758                  |   |      | $                             | 19.79 |                  | 228,700 |   |                               | $ | 19.00            |  | 214,900 |                               |  | $ | 19.00
|                                                               |  |                          |   |      |                               |       |                  |         |   |                               |   |                  |  |         |                               |  |   |      
|Weighted average fair value of options granted during the year |  |                          |   |      | $                             | 9.00  |                  |         |   |                               | $ | 14.25            |  |         |                               |  | $ |     
|                                                               |  |                          |   |      |                               |       |                  |         |   |                               |   |                  |  |         |                               |  |   |      



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##### Table of Contents

VOLCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Additional information regarding stock options outstanding as of December 31, 2008, is as
follows:



|       |  |                     |  |                                     |  |                               |       |                  |         |                               |   |      
|------ |  | ------------------- |  | ----------------------------------- |  | ----------------------------- | ----- | ---------------- | ------- | ----------------------------- | - | -----
|       |  | Options Outstanding |  | Options Exercisable                
|       |  | Number ofOptions    |  | Weighted-AverageRemainingLife (yrs) |  | Weighted-AverageExercisePrice |       | Number ofOptions |         | Weighted-AverageExercisePrice
|$19.00 |  | 417,558             |  | 6.5                                 |  | $                             | 19.00 |                  | 281,758 |                               | $ | 19.00
|$25.42 |  | 10,000              |  | 9.4                                 |  | $                             | 25.42 |                  |        |                               |   |     
|$42.07 |  | 10,000              |  | 8.4                                 |  | $                             | 42.07 |                  | 10,000  |                               | $ | 42.07

As of December 31, 2008, there was unrecognized compensation expense of $1.0 million
related to unvested stock options, which the Company expects to recognize over a weighted-average period of 1.4 years. The aggregate intrinsic value of options exercised during the years ended December 31, 2008, 2007 and 2006 was $104,000,
$1.1 million and $765,000, respectively. The aggregate intrinsic value of options outstanding and options exercisable as of December 31, 2008 was zero, as the Companys share price at December 31, 2008 was below the exercise price of
all options outstanding and exercisable. The Company issues new shares upon the exercise of options or granting of restricted stock.

As of
December 31, 2008, the total number of outstanding options vested or expected to vest (based on anticipated forfeitures) was 429,410 which had a weighted-average exercise price of $19.69. The average remaining life of these options was
6.6 years and the aggregate intrinsic value was zero at December 31, 2008 as the Companys share price was below the exercise price of the options.

Restricted Stock Awards  The Companys Incentive Plan provides for awards of restricted shares of common stock. Restricted stock awards have time-based vesting and are subject to forfeiture if
employment terminates prior to the end of the service period. Restricted stock awards are valued at the grant date based upon the market price of the Companys common stock and the fair value of each award is charged to expense over the service
period.

In 2005, the Company granted a total of 20,000 shares of restricted stock to employees. The restricted stock awards have a
purchase price of $.001 per share and vest 20% per year over a five-year period. The total fair value of the restricted stock awards is $660,000, of which $132,000 was amortized to expense during each of the years ended December 31, 2008,
2007 and 2006, respectively.

In 2006, the Company granted a total of 15,000 shares of restricted stock to employees. The restricted
stock awards have a purchase price of $.001 per share and vest 20% per year over a 5 year period. The total value of the restricted stock awards is $405,000, of which $81,000, $81,000 and $55,000 was amortized to expense during the years
ended December 31, 2008, 2007 and 2006, respectively.

In May 2008, the Company granted 10,000 shares of restricted stock to a service
provider. The restricted stock award has a purchase price of $.001 per share and vests 20% per year over a five-year period. The total value of the restricted stock award is $254,000, of which $34,000 was amortized to expense during the year
ended December 31, 2008.



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##### Table of Contents

VOLCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Restricted stock activity for the year ended December 31, 2008 is as follows:



|                                                  |  |                           |   |  |                                      |      
|------------------------------------------------- |  | ------------------------- | - |  | ------------------------------------ | -----
|                                                  |  | Shares ofRestricted Stock |   |  | Weighted-AverageGrant-DateFair Value
|Outstanding restricted stock at January 1, 2008   |  | 24,000                    |   |  | $                                    | 30.00
|Granted                                           |  | 10,000                    |   |  |                                      | 25.42
|Vested                                            |  | (7,000                    | ) |  |                                      | 30.44
|Canceled or forfeited                             |  |                          |   |  |                                      |     
|                                                  |  |                           |   |  |                                      |      
|Outstanding restricted stock at December 31, 2008 |  | 27,000                    |   |  | $                                    | 28.20
|                                                  |  |                           |   |  |                                      |      

As of December 31, 2008, there was unrecognized compensation expense of $617,000 related to
all unvested restricted stock awards, which the Company expects to recognize on a straight-line basis over a weighted average period of approximately 2.5 years.

12. Retirement Savings Plan

The Company has a 401(k) profit sharing plan (the 401(k)
Plan) covering all eligible full-time employees over age 21 with six months of service. The Companys contributions to the 401(k) Plan are made at the discretion of management. Contributions by the Company amounted to $121,000,
$82,000 and $67,000 for the years ended December 31, 2008, 2007 and 2006, respectively.

13. Licensing

In addition to the Companys licensing arrangement with its investee in Australia described in Note 6, the Company has entered into licensing
arrangements with independent licensees in Brazil, South Africa and Indonesia. Pursuant to the license agreements, the Company is paid a royalty based on a stated percentage of the net sales of its licensees.

The Companys license agreement with its European licensee expired on December 31, 2006. Pursuant to an arrangement between the Company and its
European licensee, the European licensee produced and distributed the Spring 2007 Volcom line in Europe and paid the Company its same royalty rate as required under the license agreement. Included in licensing revenues is $1.2 million and $2.3
million from Volcom Europe for the years ended December 31, 2007 and 2006, respectively. In anticipation of the expiration of this license agreement, the Company has established its own operations in Europe in order to take direct control of
the Volcom brand in Europe.

Certain of the Companys existing license agreements may be extended at the option of the licensee for an
additional five-year term after the initial expiration of the agreement. The Companys international license agreements expire as follows:



|             |  |                   |  |                          
|------------ |  | ----------------- |  | -------------------------
|Licensee     |  | Expiration Date   |  | ExtensionTermination Date
|Australia    |  | June 30, 2012     |  | N/A                      
|Brazil       |  | December 31, 2013 |  | N/A                      
|South Africa |  | December 31, 2011 |  | N/A                      
|Indonesia    |  | December 31, 2009 |  | December 31, 2014        



F-24



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##### Table of Contents

VOLCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



14. Income Taxes

The Company and its subsidiaries file tax returns in the U.S. Federal jurisdiction and in many state and foreign jurisdictions. The Company is no longer subject to U.S. Federal income tax examinations for
years before 2005 and is no longer subject to state and local or foreign income tax examinations by tax authorities for years before 2004. The Company is currently not undergoing any audits.

The provision for income taxes consists of the following:



|                           |  |                          |        |   |      |   |        |      |  |   |        |  
|-------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                           |  | Years Ended December 31, |       
|                           |  | 2008                     |        |   | 2007 |   |        | 2006 | 
|                           |  | (In thousands)           |       
|Current:                   |  |                          |        |   |      |   |        |      |  |   |        |  
|Federal                    |  | $                        | 12,903 |   |      | $ | 18,372 |      |  | $ | 17,231 |  
|State                      |  |                          | 3,189  |   |      |   | 3,811  |      |  |   | 3,599  |  
|Foreign                    |  |                          | 2,004  |   |      |   | (301   | )    |  |   | 73     |  
|                           |  |                          |        |   |      |   |        |      |  |   |        |  
|Total current              |  |                          | 18,096 |   |      |   | 21,882 |      |  |   | 20,903 |  
|                           |  |                          |        |   |      |   |        |      |  |   |        |  
|Deferred:                  |  |                          |        |   |      |   |        |      |  |   |        |  
|Federal                    |  |                          | (4,564 | ) |      |   | (729   | )    |  |   | (1,155 | )
|State                      |  |                          | (1,181 | ) |      |   | (222   | )    |  |   | (89    | )
|Foreign                    |  |                          | (564   | ) |      |   | 740    |      |  |   | (739   | )
|                           |  |                          |        |   |      |   |        |      |  |   |        |  
|Total deferred             |  |                          | (6,309 | ) |      |   | (211   | )    |  |   | (1,983 | )
|                           |  |                          |        |   |      |   |        |      |  |   |        |  
|Provision for income taxes |  | $                        | 11,787 |   |      | $ | 21,671 |      |  | $ | 18,920 |  
|                           |  |                          |        |   |      |   |        |      |  |   |        |  

A reconciliation of income tax expense computed at U.S. Federal statutory rates to income tax
expense for the years ended December 31, 2008, 2007 and 2006 is shown below.



|                                                      |  |                          |   |  |      |   |  |      |  
|----------------------------------------------------- |  | ------------------------ | - |  | ---- | - |  | ---- | -
|                                                      |  | Years Ended December 31, |  
|                                                      |  | 2008                     |   |  | 2007 |   |  | 2006 |  
|Provision for taxes at U.S. Federal statutory rate    |  | 35.0                     | % |  | 35.0 | % |  | 35.0 | %
|State income taxes, net of Federal income tax benefit |  | 3.9                      |   |  | 4.2  |   |  | 4.8  |  
|Foreign tax rate differential                         |  | (6.8                     | ) |  |     |   |  |     |  
|Goodwill and intangible asset impairment              |  | 3.0                      |   |  |     |   |  |     |  
|Foreign tax credit                                    |  | (0.5                     | ) |  | (0.4 | ) |  | (0.7 | )
|Other                                                 |  | 0.6                      |   |  | 0.6  |   |  | 0.6  |  
|                                                      |  |                          |   |  |      |   |  |      |  
|Effective income tax rate                             |  | 35.2                     | % |  | 39.4 | % |  | 39.7 | %
|                                                      |  |                          |   |  |      |   |  |      |  



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##### Table of Contents

VOLCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The components of deferred tax assets and liabilities are as follows at December 31:



|                                                     |  |                |        |   |      |   |       |  
|---------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ----- | -
|                                                     |  | 2008           |        |   | 2007 |  
|                                                     |  | (In thousands) |       
|Deferred tax assets:                                 |  |                |        |   |      |   |       |  
|Accrued liabilities                                  |  | $              | 749    |   |      | $ | 475   |  
|State income taxes                                   |  |                | 577    |   |      |   | 1,062 |  
|Allowances for doubtful accounts and product returns |  |                | 2,147  |   |      |   | 795   |  
|Foreign net operating losses                         |  |                | 256    |   |      |   | 107   |  
|Inventory costs                                      |  |                | 266    |   |      |   |      |  
|Intangible assets                                    |  |                | 5,029  |   |      |   |      |  
|Stock based compensation                             |  |                | 901    |   |      |   | 597   |  
|Other                                                |  |                | 245    |   |      |   | 243   |  
|                                                     |  |                |        |   |      |   |       |  
|Total deferred tax assets                            |  |                | 10,170 |   |      |   | 3,279 |  
|Deferred tax liabilities:                            |  |                |        |   |      |   |       |  
|Intangible assets                                    |  |                | (167   | ) |      |   | (55   | )
|Depreciation                                         |  |                | (662   | ) |      |   |      |  
|Other                                                |  |                | (188   | ) |      |   |      |  
|                                                     |  |                |        |   |      |   |       |  
|Total deferred tax liabilities                       |  |                | (1,017 | ) |      |   | (55   | )
|                                                     |  |                |        |   |      |   |       |  
|Deferred income taxes                                |  |                | 9,153  |   |      |   | 3,224 |  
|                                                     |  |                |        |   |      |   |       |  
|Valuation allowance                                  |  |                | (178   | ) |      |   |      |  
|                                                     |  |                |        |   |      |   |       |  
|Net deferred income taxes                            |  | $              | 8,975  |   |      | $ | 3,224 |  
|                                                     |  |                |        |   |      |   |       |  

For the years ended December 31, 2008 and 2007, excess tax benefits from the exercise of
stock options of $4,000 and $450,000, respectively, were recorded as an addition to paid-in capital.

The Company has a foreign net
operating loss of approximately $904,000, of which $185,000 expires in 2015, $60,000 expires in 2023 and the remaining $659,000 does not expire as it carries forward indefinitely. The Company does not provide for U.S. Federal, state or
additional foreign taxes on certain foreign earnings that management intends to permanently reinvest.

As of December 31, 2008, the
Company recorded a valuation allowance of approximately $178,000 against deferred tax assets that the Company believes are not more likely than not to be realized. As of December 31, 2007, the Company determined that no valuation allowance was
required.

The Company adopted the provisions of FIN No. 48 on January 1, 2007. Upon the adoption of FIN No. 48,
the Company recognized a $128,000 increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings.

At December 31, 2008, the Company had $94,000 of total unrecognized tax benefits, all of which, if recognized, would favorably affect the effective
income tax rate in any future periods. It is reasonably possible that a change in the unrecognized tax benefits could occur within the next 12 months. However, the Company anticipates that any change would not be significant and would not have
a material impact on the consolidated statement of operations or consolidated balance sheet.

The Company recognizes interest and/or
penalties related to unrecognized tax benefits in income tax expense. During each of the years ended December 31, 2008 and 2007, the Company recognized approximately



F-26



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##### Table of Contents

VOLCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



$6,000 of interest and penalties associated with uncertain tax positions. At December 31, 2008 and 2007, the Company had $14,000 and $8,000,
respectively, accrued for interest and penalties. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits (excluding the liability for interest and
penalties) for the year:



|                                                       |  |   |         |  
|------------------------------------------------------ |  | - | ------- | -
|Unrecognized tax benefits balance at January 1, 2007   |  | $ | 126,000 |  
|Gross increases  tax positions in prior years         |  |   | 23,000  |  
|Gross decreases  tax positions in prior years         |  |   | (66,000 | )
|                                                       |  |   |         |  
|Unrecognized tax benefits balance at December 31, 2007 |  |   | 83,000  |  
|Gross increases  tax positions in prior years         |  |   |        |  
|Gross decreases  tax positions in prior years         |  |   |        |  
|Lapse of statute of limitations                        |  |   | (3,000  | )
|                                                       |  |   |         |  
|Unrecognized tax benefits balance at December 31, 2008 |  | $ | 80,000  |  
|                                                       |  |   |         |  

15. Segment Information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, in deciding how to allocate
resources and in assessing performance. The Company operates exclusively in the consumer products industry in which the Company designs, produces and distributes clothing, accessories, eyewear and related products. Based on the nature of the
financial information that is received by the chief operating decision maker, the Company operates in three operating and reportable segments, the United States, Europe and Electric. The United States segment primarily includes Volcom product
revenues generated from customers in the United States, Canada, Asia Pacific, Central America and South America that are served by the Companys United States and Japanese operations, as well as licensing revenues and revenues generated from
Company-owned domestic retail stores, including Laguna Surf & Sport, Inc. The European segment primarily includes Volcom product revenues generated from customers in Europe that are served by the Companys European operations. The
Electric segment includes Electric product revenues generated from customers worldwide, primarily in the United States, Canada, Europe and Asia Pacific. All intercompany revenues, expenses, payables and receivables are eliminated in consolidation
and are not reviewed when evaluating segment performance. Each segments performance is evaluated based on revenues, gross profit and operating income. The accounting policies of the segments are the same as those described in the summary of
significant accounting policies in Note 1.



F-27



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##### Table of Contents

VOLCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                         |  |                |         |   |      |   |         |  |   |         |  
|------------------------ |  | -------------- | ------- | - | ---- | - | ------- |  | - | ------- | -
|                         |  | 2008           |         |   | 2007 |   | 2006    | 
|                         |  | (In thousands) |        
|Total revenues:          |  |                |         |   |      |   |         |  |   |         |  
|United States            |  | $              | 237,109 |   |      | $ | 228,494 |  | $ | 200,735 |  
|Europe                   |  |                | 73,005  |   |      |   | 40,119  |  |   | 4,523   |  
|Electric                 |  |                | 24,190  |   |      |   |        |  |   |        |  
|                         |  |                |         |   |      |   |         |  |   |         |  
|Consolidated             |  | $              | 334,304 |   |      | $ | 268,613 |  | $ | 205,258 |  
|                         |  |                |         |   |      |   |         |  |   |         |  
|Gross profit:            |  |                |         |   |      |   |         |  |   |         |  
|United States            |  | $              | 109,028 |   |      | $ | 110,412 |  | $ | 100,879 |  
|Europe                   |  |                | 40,582  |   |      |   | 19,631  |  |   | 1,142   |  
|Electric                 |  |                | 13,486  |   |      |   |        |  |   |        |  
|                         |  |                |         |   |      |   |         |  |   |         |  
|Consolidated             |  | $              | 163,096 |   |      | $ | 130,043 |  | $ | 102,021 |  
|                         |  |                |         |   |      |   |         |  |   |         |  
|Operating income (loss): |  |                |         |   |      |   |         |  |   |         |  
|United States            |  | $              | 33,019  |   |      | $ | 45,790  |  | $ | 45,918  |  
|Europe                   |  |                | 17,470  |   |      |   | 4,842   |  |   | (2,314  | )
|Electric                 |  |                | (16,087 | ) |      |   |        |  |   |        |  
|                         |  |                |         |   |      |   |         |  |   |         |  
|Consolidated             |  | $              | 34,402  |   |      | $ | 50,632  |  | $ | 43,604  |  
|                         |  |                |         |   |      |   |         |  |   |         |  
|Identifiable assets:     |  |                |         |   |      |   |         |  |   |         |  
|United States            |  | $              | 143,776 |   |      | $ | 187,780 |  | $ | 137,581 |  
|Europe                   |  |                | 55,997  |   |      |   | 14,714  |  |   | 12,167  |  
|Electric                 |  |                | 21,850  |   |      |   |        |  |   |        |  
|                         |  |                |         |   |      |   |         |  |   |         |  
|Consolidated             |  | $              | 221,623 |   |      | $ | 202,494 |  | $ | 149,748 |  
|                         |  |                |         |   |      |   |         |  |   |         |  

Although the Company operates within three reportable segments, it has several different product
categories within the segments, for which the revenues attributable to the each product category are as follows:



|                            |  |                         |         |      |   |         |  |   |        
|--------------------------- |  | ----------------------- | ------- | ---- | - | ------- |  | - | -------
|                            |  | Year Ended December 31,
|                            |  | 2008                    |         | 2007 |   | 2006   
|                            |  | (In thousands)         
|Mens                        |  | $                       | 162,340 |      | $ | 133,073 |  | $ | 102,734
|Girls                       |  |                         | 80,461  |      |   | 77,326  |  |   | 67,250 
|Snow                        |  |                         | 28,217  |      |   | 22,243  |  |   | 15,408 
|Boys                        |  |                         | 21,867  |      |   | 20,023  |  |   | 11,860 
|Footwear                    |  |                         | 5,676   |      |   | 6,127   |  |   | 1,573  
|Girls swim                  |  |                         | 6,126   |      |   | 3,734   |  |   |       
|Electric                    |  |                         | 24,190  |      |   |        |  |   |       
|Other                       |  |                         | 3,233   |      |   | 2,667   |  |   | 2,361  
|                            |  |                         |         |      |   |         |  |   |        
|Subtotal product categories |  |                         | 332,110 |      |   | 265,193 |  |   | 201,186
|Licensing revenues          |  |                         | 2,194   |      |   | 3,420   |  |   | 4,072  
|                            |  |                         |         |      |   |         |  |   |        
|Total consolidated revenues |  | $                       | 334,304 |      | $ | 268,613 |  | $ | 205,258
|                            |  |                         |         |      |   |         |  |   |        



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##### Table of Contents

VOLCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Other includes revenues primarily relate to the Companys Volcom Entertainment division, films
and related accessories.

The table below summarizes product revenues by geographic regions, which includes revenues generated worldwide by
our Electric operating segment and are allocated based on customer location:



|              |  |                         |         |      |   |         |  |   |        
|------------- |  | ----------------------- | ------- | ---- | - | ------- |  | - | -------
|              |  | Year Ended December 31,
|              |  | 2008                    |         | 2007 |   | 2006   
|              |  | (In thousands)         
|United States |  | $                       | 195,846 |      | $ | 174,254 |  | $ | 157,581
|Canada        |  |                         | 31,993  |      |   | 31,041  |  |   | 23,925 
|Asia Pacific  |  |                         | 13,245  |      |   | 8,434   |  |   | 7,230  
|Europe        |  |                         | 77,897  |      |   | 40,119  |  |   | 4,523  
|Other         |  |                         | 13,129  |      |   | 11,345  |  |   | 7,927  
|              |  |                         |         |      |   |         |  |   |        
|              |  | $                       | 332,110 |      | $ | 265,193 |  | $ | 201,186
|              |  |                         |         |      |   |         |  |   |        

16. Derivative Financial Instruments

The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to certain sales, royalty income, and
product purchases of its international subsidiaries that are denominated in currencies other than their functional currencies. The Company is also exposed to foreign currency gains and losses resulting from domestic transactions that are not
denominated in U.S. dollars. Furthermore, the Company is exposed to gains and losses resulting from the effect that fluctuations in foreign currency exchange rates have on the reported results in the Companys consolidated financial statements
due to the translation of the operating results and financial position of the Companys international subsidiaries. As part of its overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates,
during 2008 the Company entered into forward exchange contracts to hedge a portion of its European operations U.S. dollar denominated inventory purchases.

All of the Companys forward currency exchange contracts qualified for hedge accounting and the changes in the fair value of the derivatives are recorded in other comprehensive income. As of December 31,
2008, the Company was hedging forecasted transactions expected to occur through March 2009. Assuming exchange rates at December 31, 2008 remain constant, $223,000 of losses, net of tax, related to hedges of these transactions are expected
to be reclassified into earnings in the first quarter of 2009. The Company did not have any derivative contracts that expired, settled, or terminated in 2008 and thus there was no direct earnings/losses recognized during the year ended
December 31, 2008.

The Company has entered into forward exchange contracts with a bank and is exposed to credit losses in the event
of nonperformance by this bank. The Company anticipates, however, that this bank will be able to fully satisfy its obligations under the contracts. Accordingly, the Company does not obtain collateral or other security to support the contracts.

As of December 31, 2008, the Company had U.S. dollar denominated forward foreign currency contracts outstanding with a notional
amount of $3.2 million and a fair value of $(344,000) which mature from January 2009 through March 2009. The $344,000 liability is included in accrued liabilities in the accompanying consolidated balance sheet.



F-29



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##### Table of Contents

VOLCOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



17. Quarterly Financial Data (Unaudited)

A summary of quarterly financial data (unaudited) is as follows (in thousands, except per share data):



|                                     |  |               |        |         |   |              |  |             |         |  |   |         |  
|------------------------------------ |  | ------------- | ------ | ------- | - | ------------ |  | ----------- | ------- |  | - | ------- | -
|                                     |  | Quarter Ended |       
|                                     |  | March 31      |        | June 30 |   | September 30 |  | December 31 |        
|Year ended December 31, 2008         |  |               |        |         |   |              |  |             |         |  |   |         |  
|Total revenues                       |  | $             | 80,554 |         | $ | 72,456       |  | $           | 111,669 |  | $ | 69,625  |  
|Gross profit                         |  |               | 42,175 |         |   | 34,766       |  |             | 55,211  |  |   | 30,943  |  
|Operating income (loss)              |  |               | 14,398 |         |   | 6,863        |  |             | 24,906  |  |   | (11,765 | )
|Net income (loss)                    |  |               | 9,340  |         |   | 4,846        |  |             | 16,272  |  |   | (8,749  | )
|Net income (loss) per share, basic   |  | $             | 0.38   |         | $ | 0.20         |  | $           | 0.67    |  | $ | (0.36   | )
|Net income (loss) per share, diluted |  | $             | 0.38   |         | $ | 0.20         |  | $           | 0.67    |  | $ | (0.36   | )
|                                     |  |               |        |        
|Year ended December 31, 2007         |  |               |        |         |   |              |  |             |         |  |   |         |  
|Total revenues                       |  | $             | 50,818 |         | $ | 57,681       |  | $           | 91,045  |  | $ | 69,069  |  
|Gross profit                         |  |               | 26,407 |         |   | 27,793       |  |             | 45,867  |  |   | 29,976  |  
|Operating income                     |  |               | 8,062  |         |   | 8,849        |  |             | 23,027  |  |   | 10,694  |  
|Net income                           |  |               | 5,482  |         |   | 6,220        |  |             | 14,518  |  |   | 7,115   |  
|Net income per share, basic          |  | $             | 0.23   |         | $ | 0.25         |  | $           | 0.60    |  | $ | 0.29    |  
|Net income per share, diluted        |  | $             | 0.22   |         | $ | 0.25         |  | $           | 0.59    |  | $ | 0.29    |  

Earnings per basic and diluted share are computed independently for each of the quarters presented
based on diluted shares outstanding per quarter and, therefore, may not sum to the totals for the year.



F-30



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##### Table of Contents

SIGNATURES

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



VOLCOM, INC.By:

/S/    RICHARD R. WOOLCOTTRichard R. Woolcott Chairman and Chief
Executive Officer


Date: March 16, 2009

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



|                        |  |                                              |  |               
|----------------------- |  | -------------------------------------------- |  | --------------
|Signature               |  | Title                                        |  | Date          
|                        |  |                                             
|/s/ Richard R. Woolcott |  | Chairman and Chief Executive Officer         |  | March 16, 2009
|Richard R. Woolcott     |  | (Principal Executive Officer)                |  |               
|                        |  |                                             
|/s/ Douglas P. Collier  |  | Chief Financial Officer                      |  | March 16, 2009
|Douglas P. Collier      |  | (Principal Financial and Accounting Officer) |  |               
|                        |  |                                             
|/s/ René R. Woolcott    |  | Director                                     |  | March 16, 2009
|René R. Woolcott        |  |                                              |  |               
|                        |  |                                             
|/s/ Douglas S. Ingram   |  | Director                                     |  | March 16, 2009
|Douglas S. Ingram       |  |                                              |  |               
|                        |  |                                             
|/s/ Anthony M. Palma    |  | Director                                     |  | March 16, 2009
|Anthony M. Palma        |  |                                              |  |               
|                        |  |                                             
|/s/ Joseph B. Tyson     |  | Director                                     |  | March 16, 2009
|Joseph B. Tyson         |  |                                              |  |               
|                        |  |                                             
|/s/ Carl W. Womack      |  | Director                                     |  | March 16, 2009
|Carl W. Womack          |  |                                              |  |               
|                        |  |                                             
|/s/ Kevin G. Wulff      |  | Director                                     |  | March 16, 2009
|Kevin G. Wulff          |  |                                              |  |               



F-31



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##### Table of Contents

EXHIBIT INDEX



|       |  |                                                                                                                                                                                                                                                                                                                     
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Description                                                                                                                                                                                                                                                                                                         
|3.1*   |  | Restated Certificate of Incorporation of Volcom, Inc.                                                                                                                                                                                                                                                               
|       | 
|3.2*   |  | Amended and Restated Bylaws of Volcom, Inc.                                                                                                                                                                                                                                                                         
|       | 
|3.3*   |  | Certificate of Amendment of Restated Certificate of Incorporation of Volcom, Inc.                                                                                                                                                                                                                                   
|       | 
|4.1*   |  | Specimen Common Stock certificate.                                                                                                                                                                                                                                                                                  
|       | 
|10.1* |  | Form of Indemnification Agreement between Volcom and each of its directors and officers.                                                                                                                                                                                                                            
|       | 
|10.2   |  | Credit Agreement by and between Bank of the West and Volcom, Inc., dated as of July 20, 2006 (incorporated by reference in the Companys Current Report on Form 8-K filed on July 24, 2006).                                                                                                                        
|       | 
|10.3*  |  | Third Amendment to Credit Agreement by and between Bank of the West and Volcom, Inc., dated as of September 30, 2008 (incorporated by reference in the Companys Current Report on Form 8-K
filed on November 10, 2008).                                                                                            
|       | 
|10.4*  |  | Lease dated as of May 19, 1999 by and between Griswold Industries and Stone Boardwear, Inc. (the predecessor entity to Volcom, Inc.) for the real property known as 1740 Monrovia Avenue, Costa
Mesa.                                                                                                               
|       | 
|10.5*  |  | Volcom, Inc. 2005 Incentive Award Plan.                                                                                                                                                                                                                                                                             
|       | 
|10.6*  |  | Volcom, Inc. Amended and Restated 2005 Incentive Award Plan (incorporated by reference in the Companys Annual Report on Form 10-K filed on March 14, 2007).                                                                                                                                                        
|       | 
|10.7*  |  | Form of Restricted Stock Award Grant Notice and Agreement.                                                                                                                                                                                                                                                          
|       | 
|10.8*  |  | Form of Stock Option Grant Notice and Agreement.                                                                                                                                                                                                                                                                    
|       | 
|10.9*  |  | Software License Agreement by and between Innovative Systems, LLC and Volcom Stone Board Wear, Inc., made and effective September 1, 2002.                                                                                                                                                                          
|       | 
|10.10  |  | Real Estate Development Agreement dated May 5, 2006 between Volcom SAS and Société dEquipement des Pays de lAdour (English Translation) (incorporated by reference in
the Companys Current Report on Form 8-K filed on May 9, 2006).                                                                             
|       | 
|10.11  |  | Agreement of Purchase and Sale, dated as of January 15, 2008, by and among Volcom, Inc., Skelly Acquisition Corp., Electric Visual Evolution LLC, and each of the members of Electric Visual
Evolution LLC (incorporated herein by reference to the Companys Current Report on Form 8-K filed on January 18, 2008).
|       | 
|10.12  |  | First Amendment to lease between Griswold Industries and Stone Boardwear, Inc. (the predecessor entity to Volcom, Inc.) for the real property known as 1740 Monrovia Avenue dated October 6, 2008.                                                                                                                  
|       | 
|21.1   |  | Subsidiaries of Volcom, Inc.                                                                                                                                                                                                                                                                                        
|       | 
|23.1   |  | Consent of Independent Registered Public Accounting Firm (Deloitte & Touche LLP).                                                                                                                                                                                                                                   
|       | 
|31.1   |  | Certification of the Principal Executive Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                            
|       | 
|31.2   |  | Certification of the Principal Financial and Accounting Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                             
|       | 
|32     |  | Certifications of the Principal Executive Officer and Principal Financial and Accounting Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                            



|* | Incorporated by reference to Volcom, Inc.s Registration Statement on Form S-1 (File Number: 333-124498)
|- | --------------------------------------------------------------------------------------------------------

| | All current directors and executive officers of Volcom, Inc. have entered into the Indemnity Agreement with Volcom, Inc.
|- | ------------------------------------------------------------------------------------------------------------------------