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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

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

For the quarterly period ended September 30, 2010

or



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

For the transition period from
 to

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.)

Volcom, Inc.

1740 Monrovia Avenue

Costa Mesa, CA 92627

(Address of principal executive offices, including
zip code)

(949) 646-2175

(Registrants telephone number, including area code)





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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

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   |  |  ̈  (Do not check if a Smaller reporting company) |  | Smaller reporting company |  |  ̈

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

As of
November 1, 2010, there were 24,409,180 shares of the registrants common stock, par value $0.001, outstanding.









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VOLCOM, INC.

FORM 10-Q

INDEX



|                              |  |                                                                                                                             |    |      |    | 
|----------------------------- |  | --------------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                              |  |                                                                                                                             |    | Page |   
|PART I. FINANCIAL INFORMATION |  |                                                                                                                             |    |     
|                              |  |                                                                                                                            
|Item 1.                       |  | Financial Statements                                                                                                        |    |      | 3  | 
|                              |  | Condensed Consolidated Balance Sheets (unaudited) as of September 30, 2010 and December 31,
2009                            |    |      | 3  | 
|                              |  | Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2010 and 2009 |    |      | 4  | 
|                              |  | Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2010 and 2009           |    |      | 5  | 
|                              |  | Notes to Condensed Consolidated Financial Statements (unaudited)                                                            |    |      | 6  | 
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations                                       |    |      | 16 | 
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                  |    |      | 24 | 
|Item 4.                       |  | Controls and Procedures                                                                                                     |    |      | 25 | 
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                             | 26 |     
|                              |  |                                                                                                                            
|Item 1.                       |  | Legal Proceedings                                                                                                           |    |      | 26 | 
|Item 1A.                      |  | Risk Factors                                                                                                                |    |      | 26 | 
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                 |    |      | 27 | 
|Item 3.                       |  | Defaults Upon Senior Securities                                                                                             |    |      | 27 | 
|Item 4.                       |  | Removed and Reserved                                                                                                        |    |      | 27 | 
|Item 5.                       |  | Other Information                                                                                                           |    |      | 27 | 
|Item 6.                       |  | Exhibits                                                                                                                    |    |      | 27 | 
|                              | 
|SIGNATURES                    |  |                                                                                                                             | 29 |     



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PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

VOLCOM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except share and per share data)



|                                                                                                                                     |  |                   |         |  |                  |   |         | 
|------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | ------- |  | ---------------- | - | ------- | 
|                                                                                                                                     |  | September 30,2010 |         |  | December 31,2009 |  
|Assets                                                                                                                               |  |                   |         |  |                  |   |         | 
|Current assets:                                                                                                                      |  |                   |         |  |                  |   |         | 
|Cash and cash equivalents                                                                                                            |  | $                 | 104,950 |  |                  | $ | 76,180  | 
|Short-term investments                                                                                                               |  |                   |        |  |                  |   | 35,000  | 
|Accounts receivable  net of allowances of $8,082 (2010) and $8,626 (2009)                                                           |  |                   | 81,821  |  |                  |   | 53,792  | 
|Inventories                                                                                                                          |  |                   | 37,024  |  |                  |   | 33,250  | 
|Prepaid expenses and other current assets                                                                                            |  |                   | 9,404   |  |                  |   | 4,353   | 
|Income taxes receivable                                                                                                              |  |                   |        |  |                  |   | 725     | 
|Deferred income taxes                                                                                                                |  |                   | 8,212   |  |                  |   | 7,700   | 
|                                                                                                                                     |  |                   |         |  |                  |   |         | 
|Total current assets                                                                                                                 |  |                   | 241,411 |  |                  |   | 211,000 | 
|                                                                                                                                     |  |                   |         |  |                  |   |         | 
|Property and equipment  net                                                                                                         |  |                   | 26,543  |  |                  |   | 26,348  | 
|Investment in unconsolidated investee                                                                                                |  |                   |        |  |                  |   | 330     | 
|Deferred income taxes                                                                                                                |  |                   | 3,535   |  |                  |   | 3,545   | 
|Intangible assets  net                                                                                                              |  |                   | 10,235  |  |                  |   | 9,784   | 
|Goodwill                                                                                                                             |  |                   | 1,341   |  |                  |   | 1,291   | 
|Other assets                                                                                                                         |  |                   | 1,134   |  |                  |   | 735     | 
|                                                                                                                                     |  |                   |         |  |                  |   |         | 
|Total assets                                                                                                                         |  | $                 | 284,199 |  |                  | $ | 253,033 | 
|                                                                                                                                     |  |                   |         |  |                  |   |         | 
|Liabilities and Stockholders Equity                                                                                                 |  |                   |         |  |                  |   |         | 
|Current liabilities:                                                                                                                 |  |                   |         |  |                  |   |         | 
|Accounts payable                                                                                                                     |  | $                 | 24,328  |  |                  | $ | 22,788  | 
|Accrued expenses and other current liabilities                                                                                       |  |                   | 15,168  |  |                  |   | 9,957   | 
|Income taxes payable                                                                                                                 |  |                   | 3,422   |  |                  |   |        | 
|Current portion of capital lease obligations                                                                                         |  |                   | 17      |  |                  |   | 50      | 
|                                                                                                                                     |  |                   |         |  |                  |   |         | 
|Total current liabilities                                                                                                            |  |                   | 42,935  |  |                  |   | 32,795  | 
|                                                                                                                                     |  |                   |         |  |                  |   |         | 
|Long-term capital lease obligations                                                                                                  |  |                   | 27      |  |                  |   |        | 
|Other long-term liabilities                                                                                                          |  |                   | 1,257   |  |                  |   | 1,203   | 
|Income taxes payable  non-current                                                                                                   |  |                   | 23      |  |                  |   | 68      | 
|Commitments and contingencies (Note 8)                                                                                               |  |                   |         |  |                  |   |         | 
|Stockholders equity:                                                                                                                |  |                   |         |  |                  |   |         | 
|Common stock, $0.001 par value  60,000,000 shares authorized; 24,408,900 (2010) and 24,374,362 (2009) shares
issued and outstanding |  |                   | 24      |  |                  |   | 24      | 
|Additional paid-in capital                                                                                                           |  |                   | 94,279  |  |                  |   | 92,192  | 
|Retained earnings                                                                                                                    |  |                   | 144,334 |  |                  |   | 123,679 | 
|Accumulated other comprehensive income                                                                                               |  |                   | 1,320   |  |                  |   | 3,072   | 
|                                                                                                                                     |  |                   |         |  |                  |   |         | 
|Total stockholders equity                                                                                                           |  |                   | 239,957 |  |                  |   | 218,967 | 
|                                                                                                                                     |  |                   |         |  |                  |   |         | 
|Total liabilities and stockholders equity                                                                                           |  | $                 | 284,199 |  |                  | $ | 253,033 | 
|                                                                                                                                     |  |                   |         |  |                  |   |         | 

See accompanying notes to condensed consolidated financial statements



3



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VOLCOM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share data)



|                                              |  |                                 |            |  |                                |   |            |      |  |   |            |  |  |   |            | 
|--------------------------------------------- |  | ------------------------------- | ---------- |  | ------------------------------ | - | ---------- | ---- |  | - | ---------- |  |  | - | ---------- | 
|                                              |  | Three Months EndedSeptember 30, |            |  | Nine Months EndedSeptember 30, |  
|                                              |  | 2010                            |            |  | 2009                           |   |            | 2010 |  |   | 2009       | 
|Revenues:                                     |  |                                 |            |  |                                |   |            |      |  |   |            |  |  |   |            | 
|Product revenues                              |  | $                               | 104,213    |  |                                | $ | 93,356     |      |  | $ | 243,196    |  |  | $ | 215,103    | 
|Licensing revenues                            |  |                                 | 445        |  |                                |   | 560        |      |  |   | 1,426      |  |  |   | 1,348      | 
|                                              |  |                                 |            |  |                                |   |            |      |  |   |            |  |  |   |            | 
|Total revenues                                |  |                                 | 104,658    |  |                                |   | 93,916     |      |  |   | 244,622    |  |  |   | 216,451    | 
|Cost of goods sold                            |  |                                 | 52,797     |  |                                |   | 45,433     |      |  |   | 120,933    |  |  |   | 107,232    | 
|                                              |  |                                 |            |  |                                |   |            |      |  |   |            |  |  |   |            | 
|Gross profit                                  |  |                                 | 51,861     |  |                                |   | 48,483     |      |  |   | 123,689    |  |  |   | 109,219    | 
|Selling, general and administrative expenses  |  |                                 | 33,884     |  |                                |   | 28,825     |      |  |   | 94,657     |  |  |   | 82,710     | 
|                                              |  |                                 |            |  |                                |   |            |      |  |   |            |  |  |   |            | 
|Operating income                              |  |                                 | 17,977     |  |                                |   | 19,658     |      |  |   | 29,032     |  |  |   | 26,509     | 
|Other income:                                 |  |                                 |            |  |                                |   |            |      |  |   |            |  |  |   |            | 
|Interest income, net                          |  |                                 | 66         |  |                                |   | 127        |      |  |   | 272        |  |  |   | 229        | 
|Gain on investment in unconsolidated investee |  |                                 | 39         |  |                                |   |           |      |  |   | 39         |  |  |   |           | 
|Foreign currency gain                         |  |                                 | 1,256      |  |                                |   | 222        |      |  |   | 1,179      |  |  |   | 991        | 
|                                              |  |                                 |            |  |                                |   |            |      |  |   |            |  |  |   |            | 
|Total other income                            |  |                                 | 1,361      |  |                                |   | 349        |      |  |   | 1,490      |  |  |   | 1,220      | 
|                                              |  |                                 |            |  |                                |   |            |      |  |   |            |  |  |   |            | 
|Income before provision for income taxes      |  |                                 | 19,338     |  |                                |   | 20,007     |      |  |   | 30,522     |  |  |   | 27,729     | 
|Provision for income taxes                    |  |                                 | 6,285      |  |                                |   | 6,750      |      |  |   | 9,868      |  |  |   | 9,381      | 
|                                              |  |                                 |            |  |                                |   |            |      |  |   |            |  |  |   |            | 
|Net income                                    |  | $                               | 13,053     |  |                                | $ | 13,257     |      |  | $ | 20,654     |  |  | $ | 18,348     | 
|                                              |  |                                 |            |  |                                |   |            |      |  |   |            |  |  |   |            | 
|Net income per share:                         |  |                                 |            |  |                                |   |            |      |  |   |            |  |  |   |            | 
|Basic                                         |  | $                               | 0.54       |  |                                | $ | 0.54       |      |  | $ | 0.85       |  |  | $ | 0.75       | 
|Diluted                                       |  | $                               | 0.53       |  |                                | $ | 0.54       |      |  | $ | 0.85       |  |  | $ | 0.75       | 
|Weighted average shares outstanding:          |  |                                 |            |  |                                |   |            |      |  |   |            |  |  |   |            | 
|Basic                                         |  |                                 | 24,396,899 |  |                                |   | 24,354,208 |      |  |   | 24,377,222 |  |  |   | 24,350,725 | 
|Diluted                                       |  |                                 | 24,431,095 |  |                                |   | 24,367,464 |      |  |   | 24,421,970 |  |  |   | 24,361,034 | 

See accompanying notes
to condensed consolidated financial statements



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VOLCOM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)



|                                                                                  |  |                                |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Nine Months EndedSeptember 30, |        
|                                                                                  |  | 2010                           |         |   | 2009 |  
|Cash flows from operating activities:                                             |  |                                |         |   |      |   |         |  
|Net income                                                                        |  | $                              | 20,654  |   |      | $ | 18,348  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                |         |   |      |   |         |  
|Depreciation and amortization                                                     |  |                                | 4,645   |   |      |   | 5,034   |  
|Gain on investment in unconsolidated investee                                     |  |                                | (39     | ) |      |   |        |  
|Provision for doubtful accounts                                                   |  |                                | 173     |   |      |   | 2,434   |  
|Excess tax benefits related to exercise of stock options                          |  |                                | (51     | ) |      |   |        |  
|Loss on disposal of property and equipment                                        |  |                                | 35      |   |      |   | 3       |  
|Stock-based compensation                                                          |  |                                | 1,514   |   |      |   | 1,246   |  
|Deferred income taxes                                                             |  |                                | (487    | ) |      |   | (963    | )
|Changes in operating assets and liabilities, net of effects of acquisition:       |  |                                |         |   |      |   |         |  
|Accounts receivable                                                               |  |                                | (24,562 | ) |      |   | (13,574 | )
|Inventories                                                                       |  |                                | 376     |   |      |   | 5,032   |  
|Prepaid expenses and other current assets                                         |  |                                | (4,149  | ) |      |   | (407    | )
|Income taxes receivable/payable                                                   |  |                                | 4,182   |   |      |   | 6,683   |  
|Other assets                                                                      |  |                                | (351    | ) |      |   | 31      |  
|Accounts payable                                                                  |  |                                | 800     |   |      |   | (5,445  | )
|Accrued expenses and other current liabilities                                    |  |                                | 4,035   |   |      |   | 1,040   |  
|Other long-term liabilities                                                       |  |                                | 72      |   |      |   | (96     | )
|                                                                                  |  |                                |         |   |      |   |         |  
|Net cash provided by operating activities                                         |  |                                | 6,847   |   |      |   | 19,366  |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Cash flows from investing activities:                                             |  |                                |         |   |      |   |         |  
|Purchase of property and equipment                                                |  |                                | (4,286  | ) |      |   | (3,406  | )
|Business acquisitions, net of cash acquired                                       |  |                                | (2,304  | ) |      |   | (897    | )
|Purchase of short-term investments                                                |  |                                | (20,000 | ) |      |   | (64,933 | )
|Sale of short-term investments                                                    |  |                                | 55,000  |   |      |   | 24,944  |  
|Proceeds from sale of property and equipment                                      |  |                                | 38      |   |      |   | 6       |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Net cash provided by/(used in) investing activities                               |  |                                | 28,448  |   |      |   | (44,286 | )
|                                                                                  |  |                                |         |   |      |   |         |  
|Cash flows from financing activities:                                             |  |                                |         |   |      |   |         |  
|Principal payments on capital lease obligations                                   |  |                                | (12     | ) |      |   | (65     | )
|Proceeds from exercise of stock options                                           |  |                                | 523     |   |      |   |        |  
|Excess tax benefits related to exercise of stock options                          |  |                                | 51      |   |      |   |        |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Net cash provided by/(used in) financing activities                               |  |                                | 562     |   |      |   | (65     | )
|                                                                                  |  |                                |         |   |      |   |         |  
|Effect of exchange rate changes on cash                                           |  |                                | (7,087  | ) |      |   | 4,701   |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Net increase/(decrease) in cash and cash equivalents                              |  |                                | 28,770  |   |      |   | (20,284 | )
|Cash and cash equivalents Beginning of period                                    |  |                                | 76,180  |   |      |   | 79,613  |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Cash and cash equivalents End of period                                          |  | $                              | 104,950 |   |      | $ | 59,329  |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Supplemental disclosures of cash flow information:                                |  |                                |         |   |      |   |         |  
|Cash paid during the period for:                                                  |  |                                |         |   |      |   |         |  
|Interest                                                                          |  | $                              | 2       |   |      | $ | 3       |  
|Income taxes                                                                      |  | $                              | 6,692   |   |      | $ | 3,945   |  

Supplemental disclosures of
noncash investing and financing activities:

At September 30, 2010 and 2009, the Company accrued for $118 and $56 of
property and equipment purchases, respectively.

See accompanying notes to condensed consolidated financial statements



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VOLCOM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Note 1  Basis
of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements.

In the opinion of management, the unaudited
condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the condensed consolidated balance sheet as of September 30, 2010, the condensed consolidated
statements of operations for the three and nine months ended September 30, 2010 and 2009, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2010 and 2009. The results of operations for the
three and nine months ended September 30, 2010 are not necessarily indicative of the results to be expected for the year ending December 31, 2010. The condensed consolidated financial statements and notes thereto should be read in
conjunction with the Companys consolidated annual financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Note 2  Stock-Based Compensation

The Company accounts for stock-based compensation under the provisions of Accounting Standards Codification (ASC) 718, Compensation  Stock Compensation (ASC 718). The
Company accounts for all stock-based compensation using a fair-value method and recognizes the fair value of each award as an expense over the service period. The Company uses 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. Depending upon the option grant, the expected option term is based upon historical industry data on employee
exercises and managements expectation of exercise behavior, or is estimated based on the simplified method as prescribed in ASC 718. 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 nine months ended September 30, 2010 and 2009, the Company recognized approximately $1.5 million, or $938,000 net of tax,
and $1.2 million, or $822,000 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.

Stock Compensation Plans In June 2005, the Companys Board of Directors and stockholders approved the 2005
Incentive Award Plan (the Incentive Plan), as amended and restated in February 2007, and re-approved by the stockholders in May 2009. 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 September 30, 2010, there were 3,398,629 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 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 of the Companys common stock. 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 vested 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.



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VOLCOM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(Continued)





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 vested 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 vested 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.

In May 2009, the Companys Board of Directors approved the grant of 670,000 options to purchase the Companys common stock. The
Company granted these options at the fair market value of the Companys common stock on the date of grant. The stock option vesting periods range from one to five years 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 ranging from 1.0 to
6.5 years; volatility ranging from 69.7% to 90.7%; risk-free interest rate ranging from 0.53% to 3.22%; and no dividends during the expected term.

In May 2010, the Companys Board of Directors approved the grant of 2,000 options to purchase the Companys common stock to each non-employee member of the Companys Board of Directors
(12,000 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 5.5 years;
volatility of 65.2%; 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 for the nine months ended September 30, 2010 is as follows:



|                                  |  |                  |           |   |                               |   |       |                                           |  |  |           | 
|--------------------------------- |  | ---------------- | --------- | - | ----------------------------- | - | ----- | ----------------------------------------- |  |  | --------- | 
|                                  |  | Number ofOptions |           |   | Weighted-AverageExercisePrice |   |       | Weighted-AverageRemainingContractual Term | 
|Outstanding at January 1, 2010    |  |                  | 1,103,158 |   |                               | $ | 16.52 |                                           |  |  |           | 
|Granted                           |  |                  | 12,000    |   |                               |   | 23.80 |                                           |  |  |           | 
|Exercised                         |  |                  | (34,538   | ) |                               |   | 16.33 |                                           |  |  |           | 
|Canceled or forfeited             |  |                  | (39,620   | ) |                               |   | 16.30 |                                           |  |  |           | 
|                                  |  |                  |           |   |                               |   |       |                                           |  |  |           | 
|Outstanding at September 30, 2010 |  |                  | 1,041,000 |   |                               | $ | 16.61 |                                           |  |  | 7.2 years | 
|                                  |  |                  |           |   |                               |   |       |                                           |  |  |           | 
|Exercisable at September 30, 2010 |  |                  | 540,720   |   |                               | $ | 18.40 |                                           |  |  | 5.8 years | 
|                                  |  |                  |           |   |                               |   |       |                                           |  |  |           | 

As of September 30, 2010, there was unrecognized compensation expense of $4.1 million related
to unvested stock options, which the Company expects to recognize over a weighted-average period of 3.4 years. The aggregate intrinsic value of options exercised during the nine months ended September 30, 2010 and 2009 was $192,000 and zero,
respectively. The aggregate intrinsic value of options outstanding and options exercisable as of September 30, 2010 was $3.0 million and $679,000, respectively.



7



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##### Table of Contents

VOLCOM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(Continued)





Additional
information regarding stock options outstanding as of September 30, 2010 is as follows:



|               |  |                     |         |  |                                     |  |     |                               |  |   |                  |  |  |                               |         |  |  |   |       | 
|-------------- |  | ------------------- | ------- |  | ----------------------------------- |  | --- | ----------------------------- |  | - | ---------------- |  |  | ----------------------------- | ------- |  |  | - | ----- | 
|               |  | Options Outstanding |         |  | Options Exercisable                 | 
|Exercise price |  | Number ofOptions    |         |  | Weighted-AverageRemainingLife (yrs) |  |     | Weighted-AverageExercisePrice |  |   | Number ofOptions |  |  | Weighted-AverageExercisePrice |        
|$13.43         |  |                     | 8,000   |  |                                     |  | 8.7 |                               |  | $ | 13.43            |  |  |                               | 1,600   |  |  | $ | 13.43 | 
|$14.47         |  |                     | 616,100 |  |                                     |  | 8.6 |                               |  | $ | 14.47            |  |  |                               | 134,220 |  |  | $ | 14.47 | 
|$19.00         |  |                     | 384,900 |  |                                     |  | 4.8 |                               |  | $ | 19.00            |  |  |                               | 384,900 |  |  | $ | 19.00 | 
|$23.80         |  |                     | 12,000  |  |                                     |  | 9.6 |                               |  | $ | 23.80            |  |  |                               |        |  |  |   |      | 
|$25.42         |  |                     | 10,000  |  |                                     |  | 7.6 |                               |  | $ | 25.42            |  |  |                               | 10,000  |  |  | $ | 25.42 | 
|$42.07         |  |                     | 10,000  |  |                                     |  | 6.6 |                               |  | $ | 42.07            |  |  |                               | 10,000  |  |  | $ | 42.07 | 

As of
September 30, 2010, the total number of outstanding options vested or expected to vest (based on anticipated forfeitures) was 1,013,203, which had a weighted-average exercise price of $16.39. The weighted-average remaining life of these options
was 7.1 years and the aggregate intrinsic value was $2.8 million at September 30, 2010.

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 vested 20% per year over a five-year period. The total fair value of the restricted stock awards is $660,000, of which $77,000 and $99,000 was amortized to expense during the nine month periods ended September 30,
2010 and 2009, 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 five-year period. The total value of the restricted stock awards is $405,000, of which $61,000 was amortized to expense during each of the nine month
periods ended September 30, 2010 and 2009.

In 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 $38,000 was amortized to expense during each of the
nine month periods ended September 30, 2010 and 2009.

Restricted stock activity for the nine months ended
September 30, 2010 is as follows:



|                                                |  |                           |        |   |                                      |   |       | 
|----------------------------------------------- |  | ------------------------- | ------ | - | ------------------------------------ | - | ----- | 
|                                                |  | Shares ofRestricted Stock |        |   | Weighted-AverageGrant-DateFair Value |  
|Unvested restricted stock at January 1, 2010    |  |                           | 18,000 |   |                                      | $ | 27.64 | 
|Granted                                         |  |                           |       |   |                                      |   |      | 
|Vested                                          |  |                           | (9,000 | ) |                                      |   | 29.32 | 
|Canceled or forfeited                           |  |                           |       |   |                                      |   |      | 
|                                                |  |                           |        |   |                                      |   |       | 
|Unvested restricted stock at September 30, 2010 |  |                           | 9,000  |   |                                      | $ | 25.95 | 
|                                                |  |                           |        |   |                                      |   |       | 

As of September 30, 2010, there was unrecognized compensation expense of $177,000 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 1.9 years.

Note 3  New Accounting Pronouncements

In October 2009, the Financial
Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2009-13, which amends the guidance in ASC 605, Revenue Recognition (ASC 605). ASU No. 2009-13 eliminates the
residual method of accounting for revenue on undelivered products and instead, requires companies to allocate revenue to each of the deliverable products based on their relative selling price. In addition, this ASU expands the disclosure
requirements surrounding multiple-deliverable arrangements. ASU No. 2009-13 will be effective for revenue arrangements



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##### Table of Contents

VOLCOM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(Continued)



entered into for fiscal years beginning on or after June 15, 2010. The adoption of ASU No. 2009-13 will not have an impact on the Companys consolidated financial position and
results of operations.

Note 4  Inventories

Inventories are as follows:



|                |  |                    |        |  |                   |   |        | 
|--------------- |  | ------------------ | ------ |  | ----------------- | - | ------ | 
|                |  | September 
30,2010 |        |  | December 
31,2009 |  
|                |  | (In thousands)     |       
|Finished goods  |  | $                  | 34,809 |  |                   | $ | 31,348 | 
|Work-in-process |  |                    | 121    |  |                   |   | 297    | 
|Raw materials   |  |                    | 2,094  |  |                   |   | 1,605  | 
|                |  |                    |        |  |                   |   |        | 
|                |  | $                  | 37,024 |  |                   | $ | 33,250 | 
|                |  |                    |        |  |                   |   |        | 

Note 5  Property and Equipment

Property and equipment are as follows:



|                              |  |                    |         |   |                   |   |         |  
|----------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|                              |  | September 
30,2010 |         |   | December 
31,2009 |  
|                              |  | (In thousands)     |        
|Furniture and fixtures        |  | $                  | 11,727  |   |                   | $ | 8,750   |  
|Office equipment              |  |                    | 3,273   |   |                   |   | 2,392   |  
|Computer equipment            |  |                    | 8,198   |   |                   |   | 7,130   |  
|Leasehold improvements        |  |                    | 11,650  |   |                   |   | 11,112  |  
|Buildings                     |  |                    | 7,316   |   |                   |   | 7,614   |  
|Land                          |  |                    | 4,723   |   |                   |   | 4,723   |  
|Construction in progress      |  |                    | 152     |   |                   |   | 308     |  
|                              |  |                    |         |   |                   |   |         |  
|                              |  |                    | 47,039  |   |                   |   | 42,029  |  
|Less accumulated depreciation |  |                    | (20,496 | ) |                   |   | (15,681 | )
|                              |  |                    |         |   |                   |   |         |  
|Property and equipment  net  |  | $                  | 26,543  |   |                   | $ | 26,348  |  
|                              |  |                    |         |   |                   |   |         |  

Note 6  Intangible Assets

Intangible assets are as follows:



|                                       |  |                          |        |  |                         |   |       |                       |  |   |                         |  |  |   |       | 
|-------------------------------------- |  | ------------------------ | ------ |  | ----------------------- | - | ----- | --------------------- |  | - | ----------------------- |  |  | - | ----- | 
|                                       |  | As of September 30, 2010 |        |  | As of December 31, 2009 |  
|                                       |  | Gross 
CarryingAmount    |        |  | AccumulatedAmortization |   |       | Gross 
CarryingAmount |  |   | AccumulatedAmortization | 
|                                       |  | (In thousands)           |       
|Amortizing intangible assets           |  | $                        | 7,401  |  |                         | $ | 3,902 |                       |  | $ | 6,422                   |  |  | $ | 3,396 | 
|Non-amortizing trademarks              |  |                          | 6,300  |  |                         |   |      |                       |  |   | 6,300                   |  |  |   |      | 
|Other non-amortizing intangible assets |  |                          | 436    |  |                         |   |      |                       |  |   | 458                     |  |  |   |      | 
|                                       |  |                          |        |  |                         |   |       |                       |  |   |                         |  |  |   |       | 
|                                       |  | $                        | 14,137 |  |                         | $ | 3,902 |                       |  | $ | 13,180                  |  |  | $ | 3,396 | 
|                                       |  |                          |        |  |                         |   |       |                       |  |   |                         |  |  |   |       | 

Amortizing intangible assets include customer relationships, trademarks, non-compete agreements, backlog,
leasehold rights, and athlete contracts. 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 nine months ended September 30, 2010 and 2009, was approximately $479,000 and $1.0 million, respectively. The Companys annual amortization expense is estimated to be approximately $654,000, $768,000, $715,000, $398,000 and $289,000 in
the fiscal years ending December 31, 2010, 2011, 2012, 2013 and 2014, respectively.



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VOLCOM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(Continued)





Note 7  Accrued Expenses
and Other Current Liabilities

Accrued expenses and other current liabilities are as follows:



|                             |  |                    |        |  |                   |   |       | 
|---------------------------- |  | ------------------ | ------ |  | ----------------- | - | ----- | 
|                             |  | September 
30,2010 |        |  | December 
31,2009 |  
|                             |  | (In thousands)     |       
|Payroll and related accruals |  | $                  | 8,004  |  |                   | $ | 4,708 | 
|Other                        |  |                    | 7,164  |  |                   |   | 5,249 | 
|                             |  |                    |        |  |                   |   |       | 
|                             |  | $                  | 15,168 |  |                   | $ | 9,957 | 
|                             |  |                    |        |  |                   |   |       | 

Note 8  Commitments and Contingencies

Litigation The Company is involved from time to time in litigation incidental to its business.

During the three months ended September 30, 2010, the French tax authorities began an investigation into the appropriateness of the Companys tax positions associated with its European
operations for tax years beginning in 2007. The investigation specifically relates to intercompany transactions between certain of the Companys wholly-owned European subsidiaries. Conclusion of this matter could result in payment of a
different amount than the Company has accrued as uncertain tax benefits. If a position for which the Company concluded was more likely than not is subsequently not upheld, then the Company would need to accrue and ultimately pay an additional
amount, which may or may not be significant. The Company has recorded a tax liability of approximately $100,000 associated with this uncertain tax position as of September 30, 2010.

The Company is subject to various other claims, complaints and legal actions in the normal course of business from time to time. These
other matters are, in the opinion of management, immaterial both individually and in the aggregate with respect to the Companys consolidated financial position, liquidity 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. 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 condensed consolidated balance sheets.

Note 9
 Earnings Per Share

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:



|                                                                                              |  |                                   |            |  |                                   |   |            |      |  |   |            |  |  |   |            | 
|--------------------------------------------------------------------------------------------- |  | --------------------------------- | ---------- |  | --------------------------------- | - | ---------- | ---- |  | - | ---------- |  |  | - | ---------- | 
|                                                                                              |  | Three Months EndedSeptember
30,   |            |  | Nine Months EndedSeptember
30,    |  
|                                                                                              |  | 2010                              |            |  | 2009                              |   |            | 2010 |  |   | 2009       | 
|                                                                                              |  | (In thousands, except share data) |            |  | (In thousands, except share data) |  
|Numerator  Net income                                                                        |  | $                                 | 13,053     |  |                                   | $ | 13,257     |      |  | $ | 20,654     |  |  | $ | 18,348     | 
|                                                                                              |  |                                   |            |  |                                   |   |            |      |  |   |            |  |  |   |            | 
|Denominator: Weighted average common stock outstanding for basic earnings per share           |  |                                   | 24,396,899 |  |                                   |   | 24,354,208 |      |  |   | 24,377,222 |  |  |   | 24,350,725 | 
|Effect of dilutive securities:                                                                |  |                                   |            |  |                                   |   |            |      |  |   |            |  |  |   |            | 
|Stock options and restricted stock                                                            |  |                                   | 34,196     |  |                                   |   | 13,256     |      |  |   | 44,748     |  |  |   | 10,309     | 
|                                                                                              |  |                                   |            |  |                                   |   |            |      |  |   |            |  |  |   |            | 
|Adjusted weighted average common stock and assumed conversions for diluted earnings per share |  |                                   | 24,431,095 |  |                                   |   | 24,367,464 |      |  |   | 24,421,970 |  |  |   | 24,361,034 | 
|                                                                                              |  |                                   |            |  |                                   |   |            |      |  |   |            |  |  |   |            | 



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VOLCOM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(Continued)





For the three
months ended September 30, 2010 and 2009, 594,100 and 1,105,158 stock options, respectively, were excluded from the weighted-average number of shares outstanding because their effect would be antidilutive. For the nine months ended
September 30, 2010 and 2009, 610,127 and 1,105,158 stock options, respectively, were excluded from the weighted-average number of shares outstanding because their effect would be antidilutive.

Note 10  Fair Value Measurements of Financial Instruments

The Companys financial assets and liabilities are measured and reported on a fair value basis in accordance with ASC 820, Fair Value Measurements and Disclosures (ASC 820). ASC
820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosure about fair value measurements. It also establishes a three-level hierarchy of fair value
measurements for ranking the quality and reliability of the information used to determine fair values. ASC 820 requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:



| |  |  | Level 1  Quoted market prices in active markets for identical instruments
| | - |  | --------------------------------------------------------------------------



| |  |  | Level 2  Quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments that are not active;
and model-derived valuations in which all significant inputs are observable in active markets; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3  Valuations derived from valuation techniques in which one or more significant inputs are unobservable.
| | - |  | ----------------------------------------------------------------------------------------------------------------

The Companys financial assets and liabilities include cash and cash equivalents, short-term investments, accounts receivable,
accounts payable and foreign currency exchange contracts. The Company believes the carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to their short term maturities. The fair value of
the Companys short-term investments is determined based on quoted market prices in active markets. The fair value of the Companys foreign currency exchange contracts is determined based on observable inputs that are corroborated by
market data.

The following table presents information on the Companys financial instruments (in thousands):



|                                    |                |                    |         |                         |                   |         |                |  |         |                         |     |  |         |   |   |         |  |   |         |  |  |   |        |  |  |   |        |  |  |   |   | 
|----------------------------------- | -------------- | ------------------ | ------- | ----------------------- | ----------------- | ------- | -------------- |  | ------- | ----------------------- | --- |  | ------- | - | - | ------- |  | - | ------- |  |  | - | ------ |  |  | - | ------ |  |  | - | - | 
|                                    |                | September 30, 2010 |         |                         | December 31, 2009 |        
|                                    | CarryingAmount |                    |         | Fair Value Measurements |                   |         | CarryingAmount |  |         | Fair Value Measurements |    
|                                    |                |                    | Level 1 |                         |                   | Level 2 |                |  | Level 3 |                         |     |  | Level 1 |   |   | Level 2 |  |   | Level 3 | 
|Financial assets:                   |                |                    |         |                         |                   |         |                |  |         |                         |     |  |         |   |   |         |  |   |         |  |  |   |        |  |  |   |        |  |  |   |   | 
|Short-term investments              |                | $                  |        |                         |                   | $       |               |  |         | $                       |    |  |         | $ |  |         |  | $ | 35,000  |  |  | $ | 25,000 |  |  | $ | 10,000 |  |  | $ |  | 
|Foreign currency exchange contracts |                | $                  | 515     |                         |                   | $       |               |  |         | $                       | 515 |  |         | $ |  |         |  | $ | 79      |  |  | $ |       |  |  | $ | 79     |  |  | $ |  | 
|Financial liabilities:              |                |                    |         |                         |                   |         |                |  |         |                         |     |  |         |   |   |         |  |   |         |  |  |   |        |  |  |   |        |  |  |   |   | 
|Foreign currency exchange contracts |                | $                  |        |                         |                   | $       |               |  |         | $                       |    |  |         | $ |  |         |  | $ | 48      |  |  |   |       |  |  | $ | 48     |  |  | $ |  | 

Note 11  Derivative
Financial Instruments

The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange
rates relating to certain sales, licensing revenues, 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, the Company enters into forward foreign currency exchange contracts to hedge
a portion of its European operations U.S. dollar denominated inventory purchases. All of the Companys forward foreign 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 September 30, 2010, the Company was hedging forecasted transactions expected to occur through September 2011.



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VOLCOM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(Continued)



Assuming exchange rates at September 30, 2010 remain constant, $464,000 of gains, net of tax, related to hedges of these transactions are expected to be reclassified into earnings during the
next 12 months.

On the date the Company enters into a derivative contract, the Company designates the derivatives 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. The Company identifies in
this documentation 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 the Companys risk management policy. The Company will discontinue hedge accounting prospectively:



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

The Company has entered into forward foreign currency exchange contracts with a bank and is exposed to foreign currency 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 September 30, 2010, the Company had U.S. dollar denominated forward foreign currency contracts outstanding to
hedge a portion of its European operations U.S. dollar denominated inventory purchases with a notional amount of $6.4 million and a fair value of $515,000, which mature from November 2010 through September 2011. All outstanding contracts were in a
gain position and the $515,000 asset is included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheet.

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income
(OCI) and reclassified into earnings in the same period or periods which the hedged transaction affects earnings. The following table summarizes the effective portions of gains (losses) of foreign exchange derivative instruments in the
condensed consolidated statement of operations:



|                                                              |  |                    |  |                                 |      |   |                                |   |     |      |  |   |      |  |  |   |      |  
|------------------------------------------------------------- |  | ------------------ |  | ------------------------------- | ---- | - | ------------------------------ | - | --- | ---- |  | - | ---- |  |  | - | ---- | -
|                                                              |  |                    |  | Three Months EndedSeptember 30, |      |   | Nine Months EndedSeptember 30, |  
|                                                              |  |                    |  | (In thousands)                  |     
|                                                              |  | Location           |  | 2010                            |      |   | 2009                           |   |     | 2010 |  |   | 2009 | 
|Gain (loss) recognized in OCI on foreign currency derivatives |  | OCI                |  | $                               | (672 | ) |                                | $ | (89 | )    |  | $ | 195  |  |  | $ | 143  |  
|Gain (loss) reclassified from accumulated OCI into income     |  | Cost of goods sold |  |                                 | 304  |   |                                |   | (77 | )    |  |   | 741  |  |  |   | (537 | )

Note 12  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 and the Companys internal reporting structure, the Company operates in
four operating and reportable segments, the United States, Europe, Australia 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. The European segment
primarily includes Volcom product revenues generated from customers in Europe that are served by the Companys European operations. The Australian segment primarily includes Volcom product revenues generated from customers in Australia and New
Zealand that are served by the Companys Australian 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



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VOLCOM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(Continued)



income. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Companys Annual Report on Form 10-K for the year
ended December 31, 2009.

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



|                  |  |                                 |         |  |      |   |        | 
|----------------- |  | ------------------------------- | ------- |  | ---- | - | ------ | 
|                  |  | Three Months EndedSeptember 30, |        
|                  |  | 2010                            |         |  | 2009 |  
|                  |  | (In thousands)                  |        
|Total revenues:   |  |                                 |         |  |      |   |        | 
|United States     |  | $                               | 64,487  |  |      | $ | 56,769 | 
|Europe            |  |                                 | 28,672  |  |      |   | 30,250 | 
|Electric          |  |                                 | 8,911   |  |      |   | 6,897  | 
|Australia         |  |                                 | 2,588   |  |      |   |       | 
|                  |  |                                 |         |  |      |   |        | 
|Consolidated      |  | $                               | 104,658 |  |      | $ | 93,916 | 
|                  |  |                                 |         |  |      |   |        | 
|Gross profit:     |  |                                 |         |  |      |   |        | 
|United States     |  | $                               | 29,261  |  |      | $ | 28,350 | 
|Europe            |  |                                 | 15,971  |  |      |   | 16,016 | 
|Electric          |  |                                 | 5,466   |  |      |   | 4,117  | 
|Australia         |  |                                 | 1,163   |  |      |   |       | 
|                  |  |                                 |         |  |      |   |        | 
|Consolidated      |  | $                               | 51,861  |  |      | $ | 48,483 | 
|                  |  |                                 |         |  |      |   |        | 
|Operating income: |  |                                 |         |  |      |   |        | 
|United States     |  | $                               | 6,354   |  |      | $ | 9,017  | 
|Europe            |  |                                 | 9,653   |  |      |   | 9,730  | 
|Electric          |  |                                 | 1,885   |  |      |   | 911    | 
|Australia         |  |                                 | 85      |  |      |   |       | 
|                  |  |                                 |         |  |      |   |        | 
|Consolidated      |  | $                               | 17,977  |  |      | $ | 19,658 | 
|                  |  |                                 |         |  |      |   |        | 



|                         |  |                                |         |  |      |   |         |  
|------------------------ |  | ------------------------------ | ------- |  | ---- | - | ------- | -
|                         |  | Nine Months EndedSeptember 30, |        
|                         |  | 2010                           |         |  | 2009 |  
|                         |  | (In thousands)                 |        
|Total revenues:          |  |                                |         |  |      |   |         |  
|United States            |  | $                              | 163,513 |  |      | $ | 142,839 |  
|Europe                   |  |                                | 57,420  |  |      |   | 57,814  |  
|Electric                 |  |                                | 21,101  |  |      |   | 15,798  |  
|Australia                |  |                                | 2,588   |  |      |   |        |  
|                         |  |                                |         |  |      |   |         |  
|Consolidated             |  | $                              | 244,622 |  |      | $ | 216,451 |  
|                         |  |                                |         |  |      |   |         |  
|Gross profit:            |  |                                |         |  |      |   |         |  
|United States            |  | $                              | 77,409  |  |      | $ | 69,874  |  
|Europe                   |  |                                | 32,611  |  |      |   | 30,457  |  
|Electric                 |  |                                | 12,506  |  |      |   | 8,888   |  
|Australia                |  |                                | 1,163   |  |      |   |        |  
|                         |  |                                |         |  |      |   |         |  
|Consolidated             |  | $                              | 123,689 |  |      | $ | 109,219 |  
|                         |  |                                |         |  |      |   |         |  
|Operating income (loss): |  |                                |         |  |      |   |         |  
|United States            |  | $                              | 11,624  |  |      | $ | 13,801  |  
|Europe                   |  |                                | 14,725  |  |      |   | 13,306  |  
|Electric                 |  |                                | 2,598   |  |      |   | (598    | )
|Australia                |  |                                | 85      |  |      |   |        |  
|                         |  |                                |         |  |      |   |         |  
|Consolidated             |  | $                              | 29,032  |  |      | $ | 26,509  |  
|                         |  |                                |         |  |      |   |         |  



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##### Table of Contents

VOLCOM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(Continued)





|                     |  |                   |         |  |                  |   |         | 
|-------------------- |  | ----------------- | ------- |  | ---------------- | - | ------- | 
|                     |  | September 30,2010 |         |  | December 31,2009 |  
|                     |  | (In thousands)    |        
|Identifiable assets: |  |                   |         |  |                  |   |         | 
|United States        |  | $                 | 185,945 |  |                  | $ | 170,463 | 
|Europe               |  |                   | 63,084  |  |                  |   | 61,351  | 
|Electric             |  |                   | 24,704  |  |                  |   | 21,219  | 
|Australia            |  |                   | 10,466  |  |                  |   |        | 
|                     |  |                   |         |  |                  |   |         | 
|Consolidated         |  | $                 | 284,199 |  |                  | $ | 253,033 | 
|                     |  |                   |         |  |                  |   |         | 

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



|                            |  |                                 |         |  |                                |   |        |      |  |   |         |  |  |   |         | 
|--------------------------- |  | ------------------------------- | ------- |  | ------------------------------ | - | ------ | ---- |  | - | ------- |  |  | - | ------- | 
|                            |  | Three Months EndedSeptember 30, |         |  | Nine Months EndedSeptember 30, |  
|                            |  | 2010                            |         |  | 2009                           |   |        | 2010 |  |   | 2009    | 
|                            |  | (In thousands)                  |         |  | (In thousands)                 |  
|Mens                        |  | $                               | 48,670  |  |                                | $ | 40,149 |      |  | $ | 128,022 |  |  | $ | 103,749 | 
|Girls                       |  |                                 | 16,368  |  |                                |   | 16,518 |      |  |   | 41,611  |  |  |   | 46,935  | 
|Snow                        |  |                                 | 21,389  |  |                                |   | 23,148 |      |  |   | 21,799  |  |  |   | 23,903  | 
|Boys                        |  |                                 | 7,417   |  |                                |   | 5,619  |      |  |   | 18,514  |  |  |   | 14,353  | 
|Footwear                    |  |                                 | 369     |  |                                |   | 238    |      |  |   | 4,356   |  |  |   | 3,676   | 
|Girls swim                  |  |                                 | 265     |  |                                |   | 156    |      |  |   | 5,910   |  |  |   | 4,948   | 
|Electric                    |  |                                 | 8,911   |  |                                |   | 6,897  |      |  |   | 21,101  |  |  |   | 15,798  | 
|Other                       |  |                                 | 824     |  |                                |   | 631    |      |  |   | 1,883   |  |  |   | 1,741   | 
|                            |  |                                 |         |  |                                |   |        |      |  |   |         |  |  |   |         | 
|Subtotal product categories |  |                                 | 104,213 |  |                                |   | 93,356 |      |  |   | 243,196 |  |  |   | 215,103 | 
|Licensing revenues          |  |                                 | 445     |  |                                |   | 560    |      |  |   | 1,426   |  |  |   | 1,348   | 
|                            |  |                                 |         |  |                                |   |        |      |  |   |         |  |  |   |         | 
|Total revenues              |  | $                               | 104,658 |  |                                | $ | 93,916 |      |  | $ | 244,622 |  |  | $ | 216,451 | 
|                            |  |                                 |         |  |                                |   |        |      |  |   |         |  |  |   |         | 

The Electric product category includes revenues from all Electric branded products including sunglasses,
goggles and related clothing and accessories. Other includes revenues primarily related to the Companys Volcom Entertainment division, films and related accessories.

During the nine months ended September 30, 2010 and 2009, approximately 10% and 11%, respectively, of product revenues were attributable to one customer.

The table below summarizes product revenues by geographic regions, which includes revenues generated worldwide by the Companys
Electric operating segment and are allocated based on customer location. Revenues generated by the Companys Australian subsidiary are included in the Asia Pacific geographic region.



|              |  |                                 |         |  |                                |   |        |      |  |   |         |  |  |   |         | 
|------------- |  | ------------------------------- | ------- |  | ------------------------------ | - | ------ | ---- |  | - | ------- |  |  | - | ------- | 
|              |  | Three Months EndedSeptember 30, |         |  | Nine Months EndedSeptember 30, |  
|              |  | 2010                            |         |  | 2009                           |   |        | 2010 |  |   | 2009    | 
|              |  | (In thousands)                  |         |  |                                |   |        |      | 
|United States |  | $                               | 45,939  |  |                                | $ | 41,058 |      |  | $ | 121,802 |  |  | $ | 105,979 | 
|Europe        |  |                                 | 30,804  |  |                                |   | 31,836 |      |  |   | 61,264  |  |  |   | 61,127  | 
|Canada        |  |                                 | 13,083  |  |                                |   | 9,617  |      |  |   | 29,522  |  |  |   | 23,270  | 
|Asia Pacific  |  |                                 | 11,392  |  |                                |   | 8,359  |      |  |   | 19,943  |  |  |   | 16,472  | 
|Other         |  |                                 | 2,995   |  |                                |   | 2,486  |      |  |   | 10,665  |  |  |   | 8,255   | 
|              |  |                                 |         |  |                                |   |        |      |  |   |         |  |  |   |         | 
|              |  | $                               | 104,213 |  |                                | $ | 93,356 |      |  | $ | 243,196 |  |  | $ | 215,103 | 
|              |  |                                 |         |  |                                |   |        |      |  |   |         |  |  |   |         | 



14



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##### Table of Contents

VOLCOM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(Continued)





Long-lived assets
(excluding deferred income tax assets) by geographic region are as follows:



|              |  |                   |        |  |                  |   |        | 
|------------- |  | ----------------- | ------ |  | ---------------- | - | ------ | 
|              |  | September 30,2010 |        |  | December 31,2009 |  
|              |  | (In thousands)    |       
|United States |  | $                 | 24,124 |  |                  | $ | 24,535 | 
|Europe        |  |                   | 10,094 |  |                  |   | 10,739 | 
|Asia Pacific  |  |                   | 5,035  |  |                  |   | 3,214  | 
|              |  |                   |        |  |                  |   |        | 
|              |  | $                 | 39,253 |  |                  | $ | 38,488 | 
|              |  |                   |        |  |                  |   |        | 

Note 13  Acquisitions

Effective August 1, 2010, the Company completed the acquisition of Volcom Australia, a licensee of the Companys products located in Australia. The purchase price, excluding transaction costs,
was approximately $2.9 million in cash, of which approximately $2.3 million relates to net assets acquired, for the purchase of all of the outstanding common stock of Volcom Australia, subject to certain indemnities and post-closing
adjustments. Prior to the closing of the transaction, the Company held a 13.9% ownership interest in Volcom Australia. The operations of Volcom Australia have been included in the Companys financial results since August 1, 2010. Due to
the recent closing of the acquisition, the Company has not completed the allocation of its purchase price to the fair value of the assets acquired and liabilities assumed. At September 30, 2010, approximately $833,000 in net intangible assets
associated with the Australia acquisition is included in the Companys condensed consolidated balance sheet.

Note 14 
Subsequent Events

On October 11, 2010, the Company entered into an agreement for the transition and sale of certain
assets of its distributor of Volcom branded products in Spain, whereby the Company will take direct control of the Spain territory beginning with the delivery of the Fall 2011 product line, which will begin shipping in approximately July 2011. The
acquisition is contingent upon the Spain distributor delivering certain assets, including the Fall 2011 order file, customer information, certain inventory stock and other sales and marketing tools. Total consideration related to this transition and
acquisition agreement is 1.9 million Euro (or approximately $2.6 million based on a 1 Euro to 1.3612 U.S. dollar exchange rate at September 30, 2010), of which 1.2 million Euro (or approximately $1.6 million based on a 1 Euro to
1.3612 U.S. dollar exchange rate at September 30, 2010) will be paid upon the expected closing date of July 1, 2011.

On October 27, 2010, the Companys Board of Directors approved a special cash dividend of $1.00 per share payable on each share
of the Companys outstanding common stock, including any unvested shares of restricted common stock. The special dividend will be payable on November 19, 2010 to stockholders of record at the close of business on November 8, 2010. The
aggregate amount of payments to be made in connection with the special dividend will be approximately $24.4 million.



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|Item 2. | 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 condensed consolidated financial
statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. 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. The section entitled Risk Factors set forth in Part II, Item 1A in this Quarterly Report on Form 10-Q, and similar discussions in our other
Securities and Exchange Commission, or SEC, filings, discuss some of the important risk factors that may affect our business, results of operations and financial condition. You should carefully consider those risks, in addition to the information in
this report and in our other filings with the SEC, before deciding to purchase, hold or sell our securities. We do not have any intention or obligation to update forward-looking statements included in this Quarterly Report on Form 10-Q after the
date of this Quarterly Report on Form 10-Q, except as required by law. In addition, the following discussion should be read in conjunction with the information presented in our audited consolidated financial statements and related notes
contained in our Annual Report on Form 10-K for our fiscal year ended December 31, 2009.

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, surfing and motocross, and those who affiliate themselves with the broader action sports
youth 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. Our designs are infused with an artistic and creative element that we believe differentiates our products from those of many of our competitors. We develop and introduce products that we believe set the industry standard for
style and quality in each of our product categories.

In 2008, we acquired all of the outstanding membership interests of
Electric Visual Evolution LLC, or Electric. 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. Electric is
headquartered in Orange County, California. In 2008, we also acquired the assets of Laguna Surf & Sport, a California-based retail chain currently operating two retail stores.

As part of our strategy to take direct control of our European operations, we delivered our first full season product line in Europe
during the third quarter of 2007. We furthered our international expansion in 2008 by completing the acquisition of our distributor of Volcom branded products in Japan. In 2009, we took direct control of the Volcom brand in the United Kingdom.
Effective August 1, 2010, we acquired all of the outstanding common stock of Volcom Australia, a licensee of the Companys products located in Australia. On October 11, 2010, we entered into an agreement for the transition and sale of
certain assets of our distributor of Volcom branded products in Spain, whereby we will take direct control of the Spain territory beginning with the delivery of the Fall 2011 product line, which will begin shipping in approximately July 2011.

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, Australia, New Zealand, 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, several retail chains and select department stores.

In Indonesia, South Africa, Brazil and Argentina
(including Paraguay and Uruguay), 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 quality, design, marketing and distributing 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. With the completion of the acquisition of Volcom Australia (our former Australian
licensee) effective August 1, 2010, we will experience a decrease in our licensing revenues effective as of the date of the acquisition, and an increase in selling, general and administrative expenses attributable to the operations of Volcom
Australia. However, our product revenues should increase in Australia as we have begun to directly sell our products in this territory.

The global macroeconomic environment has put pressure on discretionary consumer spending worldwide. While we believe that Volcom is well positioned from a business and financial perspective, we are not
immune to global economic conditions. Continued economic uncertainty may affect our business in a number of direct and indirect ways, including lower revenues, reduced profit margins and increased costs, changes in interest and currency exchange
rates, lack of credit availability and business disruptions due to difficulties experienced by suppliers and customers.



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Our revenues increased
from $160.0 million in 2005 to $280.6 million in 2009. Our revenues were $244.6 million for the nine months ended September 30, 2010, an increase of $28.1 million, or 13.0%, compared to $216.5 million for the nine months ended
September 30, 2009. We believe our overall increase in revenues was driven primarily by strong sell-through of Volcom and Electric products at retail, improved focus on product marketing, increased in-store merchandising efforts, and additional
revenues associated with our recently acquired Australian licensee.

Sales to Pacific Sunwear, our largest customer, decreased
3.1%, or $0.7 million, for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. We currently expect revenues from Pacific Sunwear to increase approximately 17% in the fourth quarter of 2010
compared to the fourth quarter of 2009. It is unclear where our sales to Pacific Sunwear will trend in the longer term. 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.

Our gross margins
are affected by our ability to accurately forecast demand and avoid excess inventory by matching purchases of finished goods to 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. Our gross margins have also historically been seasonal, with the first quarter having the highest margin. 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 believe that as of September 30, 2010, we have excess inventory levels on hand and in order to align
these inventory levels with current in-season demand, we anticipate that we will experience higher inventory liquidation sales during the fourth quarter of 2010.

We currently source all 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 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 lines 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 and duties on products being imported from other countries. 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, raw material cost increases and labor shortages in China, may have an impact on our
business. Beginning in 2010, there have been widespread labor shortages in China, which have adversely impacted our product costs and deliveries. Additionally, wages and raw material costs have increased in China, which has caused price increases.
Recently, the price of cotton has risen significantly compared to the same period last year. We have addressed these issues by sourcing with other suppliers and adjusting our wholesale prices, where possible, to offset these increases. While we do
not believe the limitations on imports from China will have a material effect on our operations, we have begun sourcing more in other countries, such as India, Bangladesh, Vietnam and Mexico. There will be increased pressure on costs going forward,
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 and similar state laws, such as Californias Proposition 65, 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 apparel, as well as flammability standards in certain types of textiles. 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. We will continue to monitor the situation and intend to abide by all rules and changes made by the CPSC and similar state laws. 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, hired additional personnel and made
investments in new territories and initiatives. As a percentage of revenues, our selling, general and administrative expenses have increased from 26.8% in 2005 to 39.5% in 2009. 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. In addition, we have made investments in our acquired distributors in Japan and
the UK, which has increased our selling, general and administrative expenses as a percentage of revenue. Our selling, general and administrative expenses have increased on an absolute dollar basis from $82.7 million for the nine months ended
September 30, 2009 to $94.7 million for the nine months ended September 30, 2010. Our selling, general and administrative expenses as a percentage of revenues have increased from 38.3% for the nine



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##### Table of Contents

months ended September 30, 2009 to 38.7% for the nine months ended September 30, 2010. The increase in selling, general and administrative expenses, both in absolute dollars and as a
percentage of revenues, was due primarily to increased marketing and personnel costs, as well as other programs to increase market share. In addition, this increase was due to incremental expenses of $1.1 million associated with our recently
acquired licensee in Australia.

Critical Accounting Policies

The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We evaluate these estimates and assumptions
on an ongoing basis. We base our estimates on our historical experience and on various other factors which we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of
assets and liabilities and the amounts of certain expenses that are not readily apparent from other sources. The accounting policies that involve the most significant judgments, assumptions and estimates used in the preparation of our financial
statements are those related to revenue recognition, accounts receivable, inventories, goodwill and intangible assets, long-lived assets, income taxes, foreign currency and derivatives, and stock-based compensation. The judgments, assumptions and
estimates used in these areas by their nature involve risks and uncertainties, and in the event that any of them prove to be inaccurate in any material respect, it could have a material adverse effect on our reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. A summary of these critical accounting policies is included in Item 7 (Managements Discussion and Analysis
of Financial Condition and Results of Operations) of Part II, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. There have been no material changes to the critical accounting policies disclosed in our Annual
Report on Form 10-K.

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. We also offer
the full product line under the Electric brand name, including sunglasses, goggles, soft goods and other accessories. Amounts billed to customers for shipping and handling are included in product revenues. Licensing revenues consist of royalties on
Volcom product sales by our international licensees in Australia (through August 2010), Indonesia, South Africa, Brazil and Argentina (including Uruguay and Paraguay).

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 is 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 condensed consolidated statements of operations for the periods presented, expressed as a percentage of revenues:



|                                             |  |                                 |       |   |                                |  |       |      |  |  |       |   |  |  |       |  
|-------------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------ |  | ----- | ---- |  |  | ----- | - |  |  | ----- | -
|                                             |  | Three Months EndedSeptember 30, |       |   | Nine Months EndedSeptember 30, | 
|                                             |  | 2010                            |       |   | 2009                           |  |       | 2010 |  |  | 2009  |  
|Revenues                                     |  |                                 | 100.0 | % |                                |  | 100.0 | %    |  |  | 100.0 | % |  |  | 100.0 | %
|Cost of goods sold                           |  |                                 | 50.4  |   |                                |  | 48.4  |      |  |  | 49.4  |   |  |  | 49.5  |  
|                                             |  |                                 |       |   |                                |  |       |      |  |  |       |   |  |  |       |  
|Gross profit                                 |  |                                 | 49.6  |   |                                |  | 51.6  |      |  |  | 50.6  |   |  |  | 50.5  |  
|Selling, general and administrative expenses |  |                                 | 32.4  |   |                                |  | 30.7  |      |  |  | 38.7  |   |  |  | 38.3  |  
|                                             |  |                                 |       |   |                                |  |       |      |  |  |       |   |  |  |       |  
|Operating income                             |  |                                 | 17.2  |   |                                |  | 20.9  |      |  |  | 11.9  |   |  |  | 12.2  |  
|Other income                                 |  |                                 | 1.3   |   |                                |  | 0.4   |      |  |  | 0.6   |   |  |  | 0.6   |  
|                                             |  |                                 |       |   |                                |  |       |      |  |  |       |   |  |  |       |  
|Income before provision for income taxes     |  |                                 | 18.5  |   |                                |  | 21.3  |      |  |  | 12.5  |   |  |  | 12.8  |  
|Provision for income taxes                   |  |                                 | 6.0   |   |                                |  | 7.2   |      |  |  | 4.1   |   |  |  | 4.3   |  
|                                             |  |                                 |       |   |                                |  |       |      |  |  |       |   |  |  |       |  
|Net income                                   |  |                                 | 12.5  | % |                                |  | 14.1  | %    |  |  | 8.4   | % |  |  | 8.5   | %
|                                             |  |                                 |       |   |                                |  |       |      |  |  |       |   |  |  |       |  



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Three Months
Ended September 30, 2010 Compared to Three Months Ended September 30, 2009

Revenues

Consolidated revenues were $104.7 million for the three months ended September 30, 2010, an increase of $10.8 million, or 11.4%,
compared to $93.9 million for the three months ended September 30, 2009. Revenues from our United States segment were $64.5 million for the three months ended September 30, 2010, an increase of $7.7 million, or 13.6% compared to $56.8
million for the three months ended September 30, 2009. Revenues from our Europe segment were $28.7 million for the three months ended September 30, 2010, a decrease of $1.5 million, or 5.2% compared to $30.2 million for the three months
ended September 30, 2009. On a Euro to Euro basis, revenues in our European segment increased approximately 0.4% for the three months ended September 30, 2010 compared to the three months ended September 30, 2009. Revenues from our
Electric segment were $8.9 million for the three months ended September 30, 2010, an increase of $2.0 million, or 29.2% compared to $6.9 million for the three months ended September 30, 2009. Revenues from our Australian segment, which was
acquired on August 1, 2010, were $2.6 million for the three months ended September 30, 2010. We believe our overall increase in revenues was driven primarily by strong sell-through of Volcom and Electric products at retail, improved focus
on product marketing, increased in-store merchandising efforts, and additional revenues associated with our recently acquired Australian licensee.

Revenues from our five largest full-price customers were $13.7 million for the three months ended September 30, 2010, a decrease of $0.7 million, or 4.5%, compared to $14.4 million for the three
months ended September 30, 2009. Excluding revenues from Pacific Sunwear, which increased $0.4 million, or 5.3%, to $6.9 million, total revenues from our remaining five largest full-price customers decreased $1.0 million, or 12.8%, to $6.8
million for the three months ended September 30, 2010 from $7.8 million for the three months ended September 30, 2009. This decrease was driven primarily by lower revenues from girls products. We currently expect revenues from Pacific
Sunwear to increase approximately 17% in the fourth quarter of 2010 compared to the fourth quarter of 2009.

Consolidated
product revenues were $104.2 million for the three months ended September 30, 2010, an increase of $10.8 million, or 11.6%, compared to $93.4 million for the three months ended September 30, 2009. Revenues from mens products increased $8.6
million, or 21.2%, to $48.7 million for the three months ended September 30, 2010 compared to $40.1 million for the three months ended September 30, 2009. Revenues from our Electric subsidiary increased $2.0 million, or 29.2%, to $8.9
million for the three months ended September 30, 2010 compared to $6.9 million for the three months ended September 30, 2009. Revenues from boys products increased $1.8 million, or 32.0%, to $7.4 million for the three months ended
September 30, 2010 compared to $5.6 million for the three months ended September 30, 2009. Revenues from footwear products increased $0.2 million, or 55.5%, to $0.4 million for the three months ended September 30, 2010 compared to
$0.2 million for the three months ended September 30, 2009. Revenues from our girls swim line increased $0.1 million, or 69.6%, to $0.3 million for the three months ended September 30, 2010 compared to $0.2 million for the three months
ended September 30, 2009. Revenues from snow products decreased $1.7 million, or 7.6%, to $21.4 million for the three months ended September 30, 2010 compared to $23.1 million for the three months ended September 30, 2009. Revenues
from girls products decreased $0.1 million, or 0.9%, to $16.4 million for the three months ended September 30, 2010 compared to $16.5 million for the three months ended September 30, 2009.

Licensing revenues decreased 20.6% to $0.4 million for the three months ended September 30, 2010 from $0.6 million for the three
months ended September 30, 2009. The decrease in licensing revenues was primarily a result of the transition of our Australian operations from a licensee model to a direct control model. Licensing revenues will likely continue to decrease in
the near term as a result of this transition.

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 $45.9 million, or 44.1% of our product revenues, for the three months ended September 30, 2010, compared to $41.1 million, or 44.0%
of our product revenues, for the three months ended September 30, 2009. Product revenues in Europe were $30.8 million, or 29.6% of our product revenues, for the three months ended September 30, 2010, compared to $31.8 million, or 34.1% of
our product revenues, for the three months ended September 30, 2009. Product revenues in the rest of the world consist primarily of product revenues from sales in the Canadian and Asia Pacific regions, and do not include sales by our
international licensees. Such product revenues in the rest of the world were $27.5 million, or 26.3% of our product revenues, for the three months ended September 30, 2010 compared to $20.5 million, or 21.9% of our product revenues, for the
three months ended September 30, 2009.



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Gross Profit

Consolidated gross profit increased $3.4 million, or 7.0%, to $51.9 million for the three months ended September 30,
2010 compared to $48.5 million for the three months ended September 30, 2009. Gross profit as a percentage of revenues, or gross margin, decreased 200 basis points to 49.6% for the three months ended September 30, 2010 compared to 51.6%
for the three months ended September 30, 2009. Consolidated gross margin related specifically to product revenues decreased 200 basis points to 49.3% for the three months ended September 30, 2010 compared to 51.3% for the three months
ended September 30, 2009. Gross margin on product from the United States segment decreased 440 basis points to 45.0% for the three months ended September 30, 2010 compared to 49.4% for the three months ended September 30, 2009. This
decrease is primarily due to higher inventory liquidation during the three months ended September 30, 2010 compared to the same period last year as we sought to better align inventory levels with current in-season demand. Additionally, this
decrease is due to incentive pricing, which was part of our strategy designed to gain market share, as well as higher return and markdown allowances. Gross margin from the European segment increased 280 basis points to 55.7% for the three months
ended September 30, 2010 compared to 52.9% for the three months ended September 30, 2009, primarily reflecting better pricing on fall season product, combined with a larger portion of high margin fall season product in the product mix
during the three months ended September 30, 2010 compared to the same period last year. Gross margin from the Electric segment increased 160 basis points to 61.3% for the three months ended September 30, 2010 compared to 59.7% for the
three months ended September 30, 2009 primarily due to a larger portion of high margin goggles in the product mix, as well as significant improvement of gross margins on soft goods. Gross margin from the Australian segment was 45.0% for the
three months ended September 30, 2010.

Selling, General and Administrative Expenses

Consolidated selling, general and administrative expenses increased $5.1 million, or 17.5%, to $33.9 million for the three months ended
September 30, 2010 compared to $28.8 million for the three months ended September 30, 2009. The increase in absolute dollars was due primarily to increased payroll and payroll related costs of $1.5 million, incremental expenses of $1.1
million associated with our recently acquired Australian licensee, increased marketing and advertising costs of $1.0 million, and increased commissions expense of $0.6 million associated with an increase in revenues between periods. The net increase
in various other expense categories was $0.9 million. Selling, general and administrative expenses as a percentage of revenue increased 170 basis points to 32.4% for the three months ended September 30, 2010 compared to 30.7% for the three
months ended September 30, 2009.

Operating Income

As a result of the factors above, operating income for the three months ended September 30, 2010 decreased $1.7 million to $18.0
million compared to $19.7 million for the three months ended September 30, 2009. Operating income as a percentage of revenue decreased to 17.2% for the three months ended September 30, 2010 from 20.9% for the three months ended
September 30, 2009.

Other Income

Other income primarily includes net interest income and foreign currency gains and losses. Interest income for each of the three month periods ended September 30, 2010 and 2009 was $0.1 million.
Foreign currency gain increased to $1.3 million for the three months ended September 30, 2010 compared to $0.2 million for the three months ended September 30, 2009 due primarily to fluctuations in the Euro, Canadian dollar and Japanese
yen exchange rates against the U.S. dollar, as the U.S. dollar weakened significantly against these currencies during the three months ended September 30, 2010.

Provision for Income Taxes

We have computed our provision for income taxes
for the three months ended September 30, 2010 using an estimated effective annual tax rate of 32.0% plus the tax impact of discrete items in the quarter. The provision for income taxes decreased $0.5 million to $6.3 million for the three months
ended September 30, 2010 compared to $6.8 million for the three months ended September 30, 2009.

Net Income

As a result of the factors above, net income decreased $0.2 million, or 1.5%, to $13.1 million for the three months ended
September 30, 2010 from $13.3 million for the three months ended September 30, 2009.



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Nine Months
Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009

Revenues

Consolidated revenues were $244.6 million for the nine months ended September 30, 2010, an increase of $28.1 million, or 13.0%,
compared to $216.5 million for the nine months ended September 30, 2009. Revenues from our United States segment were $163.5 million for the nine months ended September 30, 2010, an increase of $20.7 million, or 14.5% compared to $142.8
million for the nine months ended September 30, 2009. Revenues from our Europe segment were $57.4 million for the nine months ended September 30, 2010, a decrease of $0.4 million, or 0.7% compared to $57.8 million for the nine months ended
September 30, 2009. On a Euro to Euro basis, revenues in our European segment increased approximately 2.3% for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. Revenues from our Electric
segment were $21.1 million for the nine months ended September 30, 2010, an increase of $5.3 million, or 33.6% compared to $15.8 million for the nine months ended September 30, 2009. Revenues from our Australian segment were $2.6 million
for the nine months ended September 30, 2010. We believe our overall increase in revenues was driven primarily by strong sell-through of Volcom and Electric products at retail, improved focus on product marketing, increased in-store
merchandising efforts, and additional revenues associated with our recently acquired Australian licensee.

Revenues from our
five largest full-price customers were $41.8 million for the nine months ended September 30, 2010, a decrease of $2.0 million, or 4.6%, compared to $43.8 million for the nine months ended September 30, 2009. Excluding revenues from Pacific
Sunwear, which decreased $0.7 million, or 3.1%, to $23.2 million, total revenues from our remaining five largest full-price customers decreased $1.3 million, or 6.4%, to $18.6 million for the nine months ended September 30, 2010 from $19.9
million for the nine months ended September 30, 2009. This decrease was driven primarily by lower revenues from girls products. We currently expect revenues from Pacific Sunwear to increase approximately 17% in the fourth quarter of 2010
compared to the fourth quarter of 2009.

Consolidated product revenues were $243.2 million for the nine months ended
September 30, 2010, an increase of $28.1 million, or 13.1%, compared to $215.1 million for the nine months ended September 30, 2009. Revenues from mens products increased $24.3 million, or 23.4%, to $128.0 million for the nine months ended
September 30, 2010 compared to $103.7 million for the nine months ended September 30, 2009. Revenues from our Electric subsidiary increased $5.3 million, or 33.6%, to $21.1 million for the nine months ended September 30, 2010 compared
to $15.8 million for the nine months ended September 30, 2009. Revenues from boys products increased $4.1 million, or 29.0%, to $18.5 million for the nine months ended September 30, 2010 compared to $14.4 million for the nine months ended
September 30, 2009. Revenues from our girls swim line increased $1.0 million, or 19.4%, to $5.9 million for the nine months ended September 30, 2010 compared to $4.9 million for the nine months ended September 30, 2009. Revenues from
footwear products increased $0.7 million, or 18.5%, to $4.4 million for the nine months ended September 30, 2010 compared to $3.7 million for the nine months ended September 30, 2009. Revenues from girls products decreased $5.3 million, or
11.3%, to $41.6 million for the nine months ended September 30, 2010 compared to $46.9 million for the nine months ended September 30, 2009. Revenues from snow products decreased $2.1 million, or 8.8%, to $21.8 million for the nine months
ended September 30, 2010 compared to $23.9 million for the nine months ended September 30, 2009.

Licensing revenues
increased 5.8% to $1.4 million for the nine months ended September 30, 2010 from $1.3 million for the nine months ended September 30, 2009. Licensing revenues will likely decrease in the near term as a result of the transition of our
Australian 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 $121.8 million, or 50.1% of our product revenues, for the nine months ended September 30, 2010, compared to
$106.0 million, or 49.3% of our product revenues, for the nine months ended September 30, 2009. Product revenues in Europe were $61.3 million, or 25.2% of our product revenues, for the nine months ended September 30, 2010, compared to
$61.1 million, or 28.4% of our product revenues, for the nine months ended September 30, 2009. Product revenues in the rest of the world consist primarily of product revenues from sales in the Canadian and Asia Pacific regions, and do not
include sales by our international licensees. Such product revenues in the rest of the world were $60.1 million, or 24.7% of our product revenues, for the nine months ended September 30, 2010 compared to $48.0 million, or 22.3% of our product
revenues, for the nine months ended September 30, 2009.

Gross Profit

Consolidated gross profit increased $14.5 million, or 13.2%, to $123.7 million for the nine months ended September 30, 2010 compared
to $109.2 million for the nine months ended September 30, 2009. Gross profit as a percentage of revenues, or gross margin, increased 10 basis points to 50.6% for the nine months ended September 30, 2010 compared to 50.5% for the nine
months ended September 30, 2009. Consolidated gross margin related specifically to product revenues increased 20 basis points to 50.3% for the nine months ended September 30, 2010 compared to 50.1% for the nine months ended
September 30, 2009. Gross margin on product from the United States segment decreased 150 basis points to 46.9% for the nine months ended September 30, 2010 compared to 48.4% for the nine months ended September 30, 2009. This decrease



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is primarily due to higher inventory liquidation during the nine months ended September 30, 2010 compared to the same period last year as we sought to better align inventory levels with
current in-season demand. Additionally, this decrease is due to incentive pricing, which was part of our strategy designed to gain market share, as well as higher return and markdown allowances. Gross margin from the European segment increased 410
basis points to 56.8% for the nine months ended September 30, 2010 compared to 52.7% for the nine months ended September 30, 2009, primarily due to strong demand for product combined with a greater percentage of sales directly to retailers
and a lesser percentage of sales to territory distributors during the nine months ended September 30, 2010 compared to the same period last year. The increase was also attributable to better pricing on fall season product, combined with a
larger portion of high margin fall season product in the product mix during the nine months ended September 30, 2010 compared to the same period last year. Gross margin from the Electric segment increased 300 basis points to 59.3% for the nine
months ended September 30, 2010 compared to 56.3% for the nine months ended September 30, 2009 primarily due to better margins achieved on off-price sales, and sales of sunglasses that were purchased at a more favorable Euro to U.S. dollar
exchange rate than last year. The increase was also due to a larger portion of high margin goggles in the product mix, as well as significant improvement of gross margins on soft goods.

Selling, General and Administrative Expenses

Consolidated selling, general and administrative expenses increased $12.0 million, or 14.4%, to $94.7 million for the nine months ended September 30, 2010 compared to $82.7 million for the nine
months ended September 30, 2009. The increase in absolute dollars was due primarily to increased payroll and payroll related costs of $5.4 million, increased marketing and advertising costs of $3.7 million, increased commissions expense of $1.3
million associated with an increase in revenues between periods, incremental expenses of $1.1 million associated with our recently acquired Australian licensee, increased rent expense of $0.4 million, and increased stock-based compensation expense
of $0.3 million. These increases were offset by a decrease in bad debt expense of $2.2 million. The net increase in various other expense categories was $2.0 million. Selling, general and administrative expenses as a percentage of revenue increased
40 basis points to 38.7% for the nine months ended September 30, 2010 compared to 38.3% for the nine months ended September 30, 2009.

Operating Income

As a result of the factors above, operating income for
the nine months ended September 30, 2010 increased $2.5 million to $29.0 million compared to $26.5 million for the nine months ended September 30, 2009. Operating income as a percentage of revenue decreased to 11.9% for the nine months
ended September 30, 2010 from 12.2% for the nine months ended September 30, 2009.

Other Income

Other income primarily includes net interest income and foreign currency gains and losses. Interest income for the nine months ended
September 30, 2010 and 2009 was $0.3 million and $0.2 million, respectively. The increase in interest income is due to higher returns on our cash and cash equivalents and short-term investments. Foreign currency gain increased to $1.2 million
for the nine months ended September 30, 2010 compared to $1.0 million for the nine months ended September 30, 2009 due primarily to fluctuations in the Euro, Canadian dollar and Japanese yen exchange rates against the U.S. dollar.

Provision for Income Taxes

We have computed our provision for income taxes for the nine months ended September 30, 2010 using an estimated effective annual tax rate of 32.0% plus the tax impact of discrete items in the
quarter. The provision for income taxes increased $0.5 million to $9.9 million for the nine months ended September 30, 2010 compared to $9.4 million for the nine months ended September 30, 2009.

Net Income

As a result of the factors above, net income increased $2.4 million, or 12.6%, to $20.7 million for the nine months ended September 30, 2010 from $18.3 million for the nine months ended
September 30, 2009.

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.



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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:



|                                                 |  |                                |         |   |      |   |         |  
|------------------------------------------------ |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                 |  | Nine Months EndedSeptember 30, |        
|                                                 |  | 2010                           |         |   | 2009 |  
|                                                 |  | (In thousands)                 |        
|Cash and cash equivalents at beginning of period |  | $                              | 76,180  |   |      | $ | 79,613  |  
|Cash flow from operating activities              |  |                                | 6,847   |   |      |   | 19,366  |  
|Cash flow from investing activities              |  |                                | 28,448  |   |      |   | (44,286 | )
|Cash flow from financing activities              |  |                                | 562     |   |      |   | (65     | )
|Effect of exchange rate on cash                  |  |                                | (7,087  | ) |      |   | 4,701   |  
|                                                 |  |                                |         |   |      |   |         |  
|Cash and cash equivalents at end of period       |  | $                              | 104,950 |   |      | $ | 59,329  |  
|                                                 |  |                                |         |   |      |   |         |  

Cash from operating activities consists primarily of net income adjusted for certain non-cash items
including depreciation and amortization, gain on investment of unconsolidated investee, 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. For the nine months ended September 30, 2010 and 2009, cash from operating activities was $6.8 million and $19.4 million, respectively. The $12.6
million decrease in cash from operating activities between the periods was attributable to the following:



|               |           |  |                 |                                                                                                                                                  
|-------------- | --------- |  | --------------- | -------------------------------------------------------------------------------------------------------------------------------------------------
|(In thousands) |           |  | Attributable to
|               | $(10,988) |  |                 | Decrease in cash flows from accounts receivable due to the timing of sales and collections                                                       
|               | (4,656)   |  |                 | Decrease in cash flows from inventories due to an increase in inventories between periods                                                        
|               | (3,742)   |  |                 | Decrease in cash flows due to an increase in payments for prepaid expenses and other current assets between
periods                              
|               | (2,701)   |  |                 | Decrease in non-cash provision for doubtful accounts, depreciation and amortization, and excess tax benefits related to
exercise of stock options
|               | (2,501)   |  |                 | Decrease in cash flow from income taxes receivable/payable due to the timing of payments between periods                                         
|               | 9,240     |  |                 | Increase in cash flow from accounts payable, accrued expenses and other current liabilities due to the timing of payments
between periods        
|               | 2,306     |  |                 | Increase in net income                                                                                                                           
|               | 523       |  |                 | Net increase in cash flows from all other operating activities                                                                                   
|               |           |  |                 |                                                                                                                                                  
|               | $(12,519) |  |                 | Total                                                                                                                                            
|               |           |  |                 |                                                                                                                                                  

Cash provided by investing activities was $28.4 million for the nine months ended
September 30, 2010 compared to cash used in investing activities of $44.3 million during the nine months ended September 30, 2009. During the nine months ended September 30, 2010, the cash provided by investing activities was
primarily due to the net sale of short-term investments of $35.0 million, offset by purchases of property and equipment of $4.3 million, and $2.3 million spent on the acquisition of our Australian licensee, net of cash acquired. During the nine
months ended September 30, 2009, the cash used in investing activities was primarily due to the net purchase of short-term investments of $40.0 million, purchases of property and equipment of $3.4 million, of which $1.1 million was related to
the purchase of equipment for the new European warehouse, and $0.9 million spent on taking direct control of the UK territory from our UK distributor. Capital expenditures during the nine months ended September 30, 2010 and 2009 included the
ongoing purchase of investments in computer equipment, warehouse equipment, marketing initiatives and in-store buildouts at customer retail locations.

Cash provided by financing activities was $0.6 million for the nine months ended September 30, 2010 compared to cash used in financing activities of $0.1 million for the nine months ended
September 30, 2009. Cash from financing activities is primarily due to proceeds and excess tax benefits related to the exercise of stock options, offset by principal payments on capital lease obligations.

On October 27, 2010, our Board of Directors approved a special cash dividend of $1.00 per share payable on each share of our
outstanding common stock, including any unvested shares of restricted common stock. The special dividend will be payable on November 19, 2010 to stockholders of record at the close of business on November 8, 2010. The aggregate amount of
payments to be made in connection with the special dividend will be approximately $24.4 million.



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Aside from the
aforementioned cash dividend, we currently have no material cash commitments, except for the maximum consideration of 1.2 million Euro (or approximately $1.6 million based on a 1 Euro to 1.3612 U.S. dollar exchange rate at September 30,
2010) related to our agreement for the transition and sale of certain assets of our Spain distributor, our normal recurring trade payables, expense accruals, operating leases, capital leases and athlete endorsement agreements. We believe that our
cash and cash equivalents, short-term investments, cash flow from operating activities and available borrowings under our credit facility will be sufficient to meet all requirements for at least the next twelve months.

Credit Facilities

We maintain a $40.0 million unsecured credit agreement with a bank (which includes a line of credit, foreign exchange facility and letter of credit sub-facilities). The amended credit agreement, which
expires on August 31, 2012, 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 September 30, 2010) or LIBOR plus 1.25%. Under
this credit facility, we had $2.1 million outstanding in letters of credit at September 30, 2010. At September 30, 2010, there were no outstanding borrowings under this credit facility, and $37.9 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 earnings before interest, taxes, depreciation and amortization, or EBITDA. At September 30, 2010, we were in compliance with all restrictive
covenants.

Contractual Obligations and Commitments

We lease certain land and buildings under non-cancelable operating leases. The leases expire at various dates through 2036, 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 the offices of our French
distributor in France. 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 8.0% to 10.7% per year and expire at various dates through July 2012.

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. Additionally, many of these contracts provide incentives for magazine exposure and competitive victories while wearing or using our products.

We did not have any off-balance sheet arrangements or outstanding balances on our credit facility as of September 30, 2010. Our
contractual letters of credit typically have maturity dates of less than one year. We use these letters of credit to purchase finished goods.

In connection with the 2008 acquisition of Electric, the sellers are eligible to receive $12.0 million in cash upon achieving certain financial milestones through December 31, 2010. Based on the
financial performance of Electric, it is not considered probable that these financial milestones will be met.

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.

Recent Accounting Pronouncements

See Note 3 to the Condensed Consolidated Financial Statements for a discussion of recent accounting pronouncements.



|Item 3. | Quantitative and Qualitative Disclosures about Market Risk.
|------- | -----------------------------------------------------------

Foreign Currency Risk

In the normal course of business, we are
exposed to foreign currency exchange rate risks (see Note 11 to the Condensed Consolidated Financial Statements) that could impact our results of operations. We are exposed to gains and losses resulting from fluctuations in foreign currency exchange
rates relating to certain sales, licensing revenues and product purchases of our international subsidiaries that are denominated in currencies other than their functional currencies. We are



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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. Changes in
foreign currency rates affect our results of operations and distort comparisons between periods. For example, when the U.S. dollar strengthens compared to the Euro, there is a negative effect on our reported results from our European operation
because it takes more profits in Euro to generate the same amount of profits in stronger U.S. dollars. We do not enter into foreign currency exchange contracts to hedge the translation of operating results and financial position of our international
subsidiaries.

A portion of our domestic sales are made in Canadian dollars. Sales in Canada accounted for approximately 10.7%
of our product revenues in 2009 and approximately 12.1% of our product revenues for the nine months ended September 30, 2010. 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. If recent foreign currency market volatility continues and the Canadian dollar weakens,
our results could be adversely affected. Based on the balance of Canadian dollar receivables of $13.0 million at September 30, 2010, an assumed 10% strengthening of the U.S. dollar would result in pretax foreign currency losses of $1.3
million.

We are exposed to foreign currency exchange rate risks between the Euro, Japanese yen and Australian dollar against
the U.S. dollar, as our foreign operations purchase a portion of their inventories in U.S. dollars. In addition, we are also exposed to foreign currency gains and losses resulting from various other foreign operations transactions that are
denominated in U.S. dollars. A weakening of these foreign currencies relative to the U.S. dollar could have a negative impact on our net exposure of these foreign currencies to the U.S. dollar. If recent foreign currency market volatility
continues and these foreign currencies weaken compared to the U.S. dollar, our results could be adversely affected. Based on our net foreign currency exposure at September 30, 2010, an assumed 10% strengthening of the U.S. dollar would
result in pre-tax foreign currency losses of $1.9 million.

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.

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 September 30,
2010. The credit agreement, which expires on August 31, 2012, 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 September 30,
2010) or LIBOR plus 1.25%. Based on the average interest rate on our credit facility during 2009, 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 4. | Controls and Procedures.
|------- | ------------------------

Evaluation of 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 of fraud, if any, within our company 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



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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 September 30, 2010, the end of the quarterly 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.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II.

OTHER INFORMATION



|Item 1. | Legal Proceedings.
|------- | ------------------

The
information set forth under Note 8 to the Condensed Consolidated Financial Statements (unaudited), included in Part I, Item 1 of this Quarterly Report, is incorporated herein by reference.



|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 Annual Report on Form 10-K for the year ended December 31, 2009 and subsequent reports on Forms 10-Q and 8-K. Risks that could affect our actual performance include, but are not limited to those
discussed in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2009 and Part II, Item 1A of our Quarterly Report on Form 10-Q for the periods ended March 31, 2010 and June 30, 2010. The
following are the material changes and updates from the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K and Part II, Item 1A of our Quarterly Report on Form 10-Q for the periods ended March 31,
2010 and June 30, 2010.

Our results of operations could be materially harmed if we are unable to accurately forecast demand
for our products.

We often place orders for products with independent manufacturers before our customers orders
are firm. Therefore, if we fail to accurately forecast customer demand, we may experience excess inventory levels or a shortage of product to deliver to our customers. Factors that could affect our ability to accurately forecast demand for our
products include:



| |  |  | An increase or decrease in consumer demand for our products or for products of our competitors;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | Our failure to accurately forecast customer acceptance of new season and new style products;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | New product introductions by competitors;
| | - |  | -----------------------------------------



| |  |  | Unanticipated changes in general market conditions or other factors, which may result in cancellations of orders or a reduction or increase in the rate
of reorders placed by retailers; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Weak economic conditions or consumer confidence, which could reduce our projected demand for our products.
| | - |  | ----------------------------------------------------------------------------------------------------------

Inventory levels in excess of customer demand may result in inventory write-downs and the sale of excess inventory at discounted prices,
which could have an adverse effect on our results of operations and financial condition. On the other hand, if we underestimate demand for our products, our third party manufacturers may not be able to produce products to meet



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customer requirements, and this could result in delays in the shipment of products and lost revenues, as well as damage to our reputation and customer relationships. There can be no assurance
that we will be able to successfully manage inventory levels to exactly meet future order and reorder requirements.

Our profitability
may decline as a result of increasing pressure on margins.

The apparel industry is subject to significant pricing
pressure caused by many factors, including increasing production costs, intense competition, consolidation in the retail industry, pressure from retailers to reduce the costs of products and changes in consumer demand. These factors may cause our
costs of goods sold to increase and could cause us to reduce our sales prices to retailers and consumers, which could each cause our gross margin to decline if we are unable to offset increased costs or price reductions. This could have a material
adverse effect on our results of operations and financial condition.

Fluctuations in the price, availability and quality of raw
materials and finished goods could increase costs and cause service delays.

Fluctuations in the price, availability
and quality of fabrics or other raw materials used to make our products could have a material adverse effect on our cost of goods sold and our ability to meet our customers demands. The prices for fabrics depend on demand and market prices for
the raw materials used to produce them, particularly cotton. The price and availability of such raw materials may fluctuate significantly, depending on many factors, including crop yields and weather patterns. We may not be able to pass higher costs
on to its customers, which could have a material adverse effect on our operations and financial condition.

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 11% of our product revenues in 2009 and approximately 10% of our product revenues for the nine
months ended September 30, 2010. We do not have a long-term contract with Pacific Sunwear, and all of its purchases from us have historically been on a purchase order basis. Sales to Pacific Sunwear decreased 42%, or $22.0 million, for 2009
compared to 2008, and decreased 3%, or $0.7 million, for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. 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 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.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds.
|------- | ------------------------------------------------------------

We did not sell any unregistered equity securities or purchase any of our securities during the period ended September 30, 2010.



|Item 3. | Defaults Upon Senior Securities.
|------- | --------------------------------

None



|Item 4. | Removed and Reserved
|------- | --------------------



|Item 5. | Other Information.
|------- | ------------------

None



|Item 6. | Exhibits.
|------- | ---------



|     |  |                                                                                                       
|---- |  | ------------------------------------------------------------------------------------------------------
|     | 
|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                                                                     
|     | 
|31.1 |  | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|     | 
|31.2 |  | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002



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|   |  |                                                                                                                                                                                      
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | 
|32 |  | Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted 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)
|- | --------------------------------------------------------------------------------------------------------



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SIGNATURE

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



|                       |  |                                                       
|---------------------- |  | ------------------------------------------------------
|                       |  | Volcom, Inc.                                          
|                       | 
|Date: November 9, 2010 |  | /s/    DOUGLAS P.
COLLIER                             
|                       |  | Douglas P. Collier                                    
|                       |  | Executive Vice President, Chief Financial Officer,    
|                       |  | Secretary and Treasurer                               
|                       |  | (Principal Financial Officer and Authorized Signatory)



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INDEX TO EXHIBITS



|            |      |   |             |                                                                                                                                                                                      
|----------- | ---- | - | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
No. |      |   | 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                                                                                                                                                    
|            |     
|            | 31.1 |   |             | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                               
|            |     
|            | 31.2 |   |             | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                               
|            |     
|            | 32   |   |             | Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted 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)
|- | --------------------------------------------------------------------------------------------------------



30