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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 June 30, 2009

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

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

As of July 31, 2009, there were 24,374,362 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 June 30, 2009 and December 31, 2008                            |  | 3      
|Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended June 
30, 2009 and 2008 |  | 4      
|Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2009 and
2008            |  | 5      
|Notes to Condensed Consolidated Financial Statements (unaudited)                                                       |  | 6  14 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations                          |  | 15  26
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                     |  | 27  28
|Item 4. Controls and Procedures                                                                                        |  | 28  29
|Item 4T. Controls and Procedures                                                                                       |  | 29     
|                                                                                                                       | 
|PART II. OTHER INFORMATION                                                                                             |  |        
|Item 1. Legal Proceedings                                                                                              |  | 30     
|Item 1A. Risk Factors                                                                                                  |  | 30     
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                                                    |  | 30     
|Item 3. Defaults Upon Senior Securities                                                                                |  | 30     
|Item 4. Submission of Matters to a Vote of Security Holders                                                            |  | 30     
|Item 5. Other Information                                                                                              |  | 31     
|Item 6. Exhibits                                                                                                       |  | 31     
|                                                                                                                       | 
|SIGNATURES                                                                                                             |  | 31     



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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 data)



|                                                                                                                       |  |              |         |                  |   |        
|---------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ---------------- | - | -------
|                                                                                                                       |  | June 30,2009 |         | December 31,2008
|Assets                                                                                                                 |  |              |         |                  |   |        
|Current assets:                                                                                                        |  |              |         |                  |   |        
|Cash and cash equivalents                                                                                              |  | $            | 51,244  |                  | $ | 79,613 
|Short-term investments                                                                                                 |  |              | 44,933  |                  |   |       
|Accounts receivable  net of allowances of $8,390 (2009) and $6,998 (2008)                                             |  |              | 48,487  |                  |   | 60,914 
|Inventories                                                                                                            |  |              | 30,160  |                  |   | 27,086 
|Prepaid expenses and other current assets                                                                              |  |              | 3,509   |                  |   | 2,596  
|Income taxes receivable                                                                                                |  |              | 4,037   |                  |   | 3,309  
|Deferred income taxes                                                                                                  |  |              | 5,275   |                  |   | 4,947  
|                                                                                                                       |  |              |         |                  |   |        
|Total current assets                                                                                                   |  |              | 187,645 |                  |   | 178,465
|                                                                                                                       |  |              |         |                  |   |        
|Property and equipment  net                                                                                           |  |              | 25,852  |                  |   | 26,716 
|Investments in unconsolidated investees                                                                                |  |              | 330     |                  |   | 330    
|Deferred income taxes                                                                                                  |  |              | 4,026   |                  |   | 4,028  
|Intangible assets  net                                                                                                |  |              | 10,575  |                  |   | 10,578 
|Goodwill                                                                                                               |  |              | 629     |                  |   | 665    
|Other assets                                                                                                           |  |              | 762     |                  |   | 841    
|                                                                                                                       |  |              |         |                  |   |        
|Total assets                                                                                                           |  | $            | 229,819 |                  | $ | 221,623
|                                                                                                                       |  |              |         |                  |   |        
|Liabilities and Stockholders Equity                                                                                   |  |              |         |                  |   |        
|Current liabilities:                                                                                                   |  |              |         |                  |   |        
|Accounts payable                                                                                                       |  | $            | 17,875  |                  | $ | 15,291 
|Accrued expenses and other current liabilities                                                                         |  |              | 12,213  |                  |   | 12,027 
|Current portion of capital lease obligations                                                                           |  |              | 62      |                  |   | 71     
|                                                                                                                       |  |              |         |                  |   |        
|Total current liabilities                                                                                              |  |              | 30,150  |                  |   | 27,389 
|                                                                                                                       |  |              |         |                  |   |        
|Long-term capital lease obligations                                                                                    |  |              | 1       |                  |   | 23     
|Other long-term liabilities                                                                                            |  |              | 347     |                  |   | 414    
|Income taxes payable  noncurrent                                                                                      |  |              | 96      |                  |   | 94     
|Commitments and contingencies (Note 9)                                                                                 |  |              |         |                  |   |        
|Stockholders equity:                                                                                                  |  |              |         |                  |   |        
|Common stock, $.001 par value  60,000,000 shares authorized; 24,374,362 (2009 and 2008) shares issued and
outstanding |  |              | 24      |                  |   | 24     
|Additional paid-in capital                                                                                             |  |              | 91,103  |                  |   | 90,456 
|Retained earnings                                                                                                      |  |              | 107,026 |                  |   | 101,935
|Accumulated other comprehensive income                                                                                 |  |              | 1,072   |                  |   | 1,288  
|                                                                                                                       |  |              |         |                  |   |        
|Total stockholders equity                                                                                             |  |              | 199,225 |                  |   | 193,703
|                                                                                                                       |  |              |         |                  |   |        
|Total liabilities and stockholders equity                                                                             |  | $            | 229,819 |                  | $ | 221,623
|                                                                                                                       |  |              |         |                  |   |        

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 EndedJune 30, |            | Six Months EndedJune 30,
|                                             |  | 2009                       |            | 2008                     |   | 2009       |  | 2008
|Revenues:                                    |  |                            |            |                          |   |            |  |      |            |  |   |           
|Product revenues                             |  | $                          | 53,804     |                          | $ | 71,917     |  | $    | 121,748    |  | $ | 151,904   
|Licensing revenues                           |  |                            | 412        |                          |   | 539        |  |      | 787        |  |   | 1,106     
|                                             |  |                            |            |                          |   |            |  |      |            |  |   |           
|Total revenues                               |  |                            | 54,216     |                          |   | 72,456     |  |      | 122,535    |  |   | 153,010   
|Cost of goods sold                           |  |                            | 27,862     |                          |   | 37,690     |  |      | 61,799     |  |   | 76,069    
|                                             |  |                            |            |                          |   |            |  |      |            |  |   |           
|Gross profit                                 |  |                            | 26,354     |                          |   | 34,766     |  |      | 60,736     |  |   | 76,941    
|Selling, general and administrative expenses |  |                            | 25,850     |                          |   | 27,903     |  |      | 53,884     |  |   | 55,680    
|                                             |  |                            |            |                          |   |            |  |      |            |  |   |           
|Operating income                             |  |                            | 504        |                          |   | 6,863      |  |      | 6,852      |  |   | 21,261    
|Other income:                                |  |                            |            |                          |   |            |  |      |            |  |   |           
|Interest income, net                         |  |                            | 69         |                          |   | 254        |  |      | 101        |  |   | 723       
|Foreign currency gain                        |  |                            | 651        |                          |   | 180        |  |      | 769        |  |   | 23        
|                                             |  |                            |            |                          |   |            |  |      |            |  |   |           
|Total other income                           |  |                            | 720        |                          |   | 434        |  |      | 870        |  |   | 746       
|                                             |  |                            |            |                          |   |            |  |      |            |  |   |           
|Income before provision for income taxes     |  |                            | 1,224      |                          |   | 7,297      |  |      | 7,722      |  |   | 22,007    
|Provision for income taxes                   |  |                            | 352        |                          |   | 2,451      |  |      | 2,631      |  |   | 7,821     
|                                             |  |                            |            |                          |   |            |  |      |            |  |   |           
|Net income                                   |  | $                          | 872        |                          | $ | 4,846      |  | $    | 5,091      |  | $ | 14,186    
|                                             |  |                            |            |                          |   |            |  |      |            |  |   |           
|Net income per share:                        |  |                            |            |                          |   |            |  |      |            |  |   |           
|Basic                                        |  | $                          | 0.04       |                          | $ | 0.20       |  | $    | 0.21       |  | $ | 0.58      
|Diluted                                      |  | $                          | 0.04       |                          | $ | 0.20       |  | $    | 0.21       |  | $ | 0.58      
|Weighted average shares outstanding:         |  |                            |            |                          |   |            |  |      |            |  |   |           
|Basic                                        |  |                            | 24,350,071 |                          |   | 24,333,482 |  |      | 24,348,972 |  |   | 24,329,771
|Diluted                                      |  |                            | 24,361,971 |                          |   | 24,387,605 |  |      | 24,359,564 |  |   | 24,359,323

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)



|                                                                                  |  |                          |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Six Months EndedJune 30, |        
|                                                                                  |  | 2009                     |         |   | 2008 |  
|Cash flows from operating activities:                                             |  |                          |         |   |      |   |         |  
|Net income                                                                        |  | $                        | 5,091   |   |      | $ | 14,186  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                          |         |   |      |   |         |  
|Depreciation and amortization                                                     |  |                          | 3,496   |   |      |   | 3,449   |  
|Provision for doubtful accounts                                                   |  |                          | 2,527   |   |      |   | 816     |  
|Excess tax benefits related to exercise of stock options                          |  |                          |        |   |      |   | (28     | )
|Loss on disposal of property and equipment                                        |  |                          | 3       |   |      |   | 27      |  
|Stock-based compensation                                                          |  |                          | 672     |   |      |   | 494     |  
|Deferred income taxes                                                             |  |                          | (318    | ) |      |   | (175    | )
|Changes in operating assets and liabilities, net of effects of acquisition:       |  |                          |         |   |      |   |         |  
|Accounts receivable                                                               |  |                          | 6,638   |   |      |   | 1,443   |  
|Inventories                                                                       |  |                          | (2,922  | ) |      |   | (11,614 | )
|Prepaid expenses and other current assets                                         |  |                          | (936    | ) |      |   | (946    | )
|Income taxes receivable/payable                                                   |  |                          | (724    | ) |      |   | (971    | )
|Other assets                                                                      |  |                          | 68      |   |      |   | 63      |  
|Accounts payable                                                                  |  |                          | 2,715   |   |      |   | 1,910   |  
|Accrued expenses and other current liabilities                                    |  |                          | 42      |   |      |   | (2,709  | )
|Other long-term liabilities                                                       |  |                          | (63     | ) |      |   | (150    | )
|                                                                                  |  |                          |         |   |      |   |         |  
|Net cash provided by operating activities                                         |  |                          | 16,289  |   |      |   | 5,795   |  
|                                                                                  |  |                          |         |   |      |   |         |  
|Cash flows from investing activities:                                             |  |                          |         |   |      |   |         |  
|Purchase of property and equipment                                                |  |                          | (1,717  | ) |      |   | (3,248  | )
|Business acquisitions, net of cash acquired                                       |  |                          | (824    | ) |      |   | (26,864 | )
|Purchase of intangible assets                                                     |  |                          |        |   |      |   | (306    | )
|Purchase of short-term investments                                                |  |                          | (44,933 | ) |      |   | (286    | )
|Sale of short-term investments                                                    |  |                          |        |   |      |   | 286     |  
|Purchase of additional shares in cost method investee                             |  |                          |        |   |      |   | (32     | )
|Proceeds from sale of property and equipment                                      |  |                          | 2       |   |      |   |        |  
|                                                                                  |  |                          |         |   |      |   |         |  
|Net cash used in investing activities                                             |  |                          | (47,472 | ) |      |   | (30,450 | )
|                                                                                  |  |                          |         |   |      |   |         |  
|Cash flows from financing activities:                                             |  |                          |         |   |      |   |         |  
|Principal payments on capital lease obligations                                   |  |                          | (37     | ) |      |   | (77     | )
|Cash received from government grants                                              |  |                          |        |   |      |   | 473     |  
|Proceeds from exercise of stock options                                           |  |                          |        |   |      |   | 219     |  
|Excess tax benefits related to exercise of stock options                          |  |                          |        |   |      |   | 28      |  
|                                                                                  |  |                          |         |   |      |   |         |  
|Net cash (used in)/provided by financing activities                               |  |                          | (37     | ) |      |   | 643     |  
|                                                                                  |  |                          |         |   |      |   |         |  
|Effect of exchange rate changes on cash                                           |  |                          | 2,851   |   |      |   | 1,639   |  
|                                                                                  |  |                          |         |   |      |   |         |  
|Net decrease in cash and cash equivalents                                         |  |                          | (28,369 | ) |      |   | (22,373 | )
|Cash and cash equivalents Beginning of period                                    |  |                          | 79,613  |   |      |   | 92,962  |  
|                                                                                  |  |                          |         |   |      |   |         |  
|Cash and cash equivalents End of period                                          |  | $                        | 51,244  |   |      | $ | 70,589  |  
|                                                                                  |  |                          |         |   |      |   |         |  
|Supplemental disclosures of cash flow information:                                |  |                          |         |   |      |   |         |  
|Cash paid during the period for:                                                  |  |                          |         |   |      |   |         |  
|Interest                                                                          |  | $                        | 2       |   |      | $ | 29      |  
|Income taxes                                                                      |  | $                        | 3,854   |   |      | $ | 8,977   |  

Supplemental disclosures of noncash investing and financing activities:

At June 30, 2009 and 2008, the Company accrued for $104,000 and $93,000 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 June 30, 2009, the
condensed consolidated statement of operations for the three and six months ended June 30, 2009 and 2008, and the condensed consolidated statement of cash flows for the six months ended June 30, 2009 and 2008. The results of operations for
the three and six months ended June 30, 2009 are not necessarily indicative of the results to be expected for the year ending December 31, 2009. 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, 2008.

Subsequent events The Company evaluates subsequent events through the date that the financial statements are issued. For the
quarterly period ended June 30, 2009, the Company has evaluated subsequent events through the time of filing these financial statements with the Securities and Exchange Commission (SEC) on August 10, 2009.

Note 2  Stock-Based Compensation

The Company
accounts for stock-based compensation under the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment(SFAS No. 123(R))
[Accounting Standards Codification (ASC) 718]. SFAS No. 123(R) requires that the Company account for all stock-based compensation using a fair-value method and recognize the fair value of each award as an expense over the service
period. The Company is using the Black-Scholes option-pricing model to value compensation expense. Forfeitures are estimated at the date of grant based on historical employee turnover rates and reduce the compensation expense recognized. The
expected option term is estimated based upon historical data on employee exercises and managements expectation of exercise behavior. For options granted concurrently with the Companys initial public offering of common stock, the expected
volatility of the Companys stock price was based upon the historical volatility of similar entities whose share prices were publicly available. For options granted subsequent to the Companys offering, expected volatility is based on the
historical volatility of the Companys stock. The risk-free interest rate is based upon the current yield on U.S. Treasury securities having a term similar to the expected option term. Dividend yield is estimated at zero because the Company
does not anticipate paying dividends in the foreseeable future. The fair value of employee stock-based awards is amortized using the straight-line method over the vesting period.

During the six months ended June 30, 2009 and 2008, the Company recognized approximately $672,000, or $444,000 net of tax, and $494,000, or $319,000
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 June 30, 2009, there were 2,923,142 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.



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The stock options have vesting terms whereby 10,526 options vested immediately, 210,000 options vested on December 15, 2005 and the remaining 366,000
options vest 20% per annum over 5 years. The fair value of these awards was calculated through the use of the Black-Scholes option-pricing model assuming an exercise price equal to the fair market value of the Companys stock and the
following additional significant weighted average assumptions: expected life of 4.2 years; volatility of 47.5%; risk-free interest rate of 3.73%; and no dividends during the expected term.

In May 2007, the Companys Board of Directors approved the grant of 2,000 options to purchase the Companys common stock to each independent
member of the Companys Board of Directors (10,000 options in total). The Company granted these options at the fair market value of the Companys common stock on the date of grant. The stock options 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.

A summary of the Companys stock option activity under the Incentive Plan for the six months ended June 30, 2009 is as follows:



|                               |  |                  |  |                               |       |                                           |          
|------------------------------ |  | ---------------- |  | ----------------------------- | ----- | ----------------------------------------- | ---------
|                               |  | Number ofOptions |  | Weighted-AverageExercisePrice |       | Weighted-AverageRemainingContractual Term
|Outstanding at January 1, 2009 |  | 437,558          |  | $                             | 19.67 |                                           |          
|Granted                        |  | 670,000          |  |                               | 14.46 |                                           |          
|Exercised                      |  |                 |  |                               |      |                                           |          
|Canceled or forfeited          |  |                 |  |                               |      |                                           |          
|                               |  |                  |  |                               |       |                                           |          
|Outstanding at June 30, 2009   |  | 1,107,558        |  | $                             | 16.52 |                                           | 8.4 years
|                               |  |                  |  |                               |       |                                           |          
|Exercisable at June 30, 2009   |  | 369,658          |  | $                             | 19.80 |                                           | 6.1 years
|                               |  |                  |  |                               |       |                                           |          

As of June 30, 2009, there was unrecognized compensation expense of $6.2 million related to
unvested stock options, which the Company expects to recognize over a weighted-average period of 3.2 years. The aggregate intrinsic value of options exercised during each of the six months ended June 30, 2009 and 2008 was zero. The aggregate
intrinsic value of options outstanding and options exercisable as of June 30, 2009 was zero, as the Companys share price at June 30, 2009 was below the exercise price of all options outstanding and exercisable.



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Additional information regarding stock options outstanding as of June 30, 2009 is as follows:



|                        |  |                     |  |                                     |  |                               |       |                  |         |                               |   |      
|----------------------- |  | ------------------- |  | ----------------------------------- |  | ----------------------------- | ----- | ---------------- | ------- | ----------------------------- | - | -----
|                        |  | Options Outstanding |  | Options Exercisable                
|Range of exercise price |  | Number ofOptions    |  | Weighted-AverageRemainingLife (yrs) |  | Weighted-AverageExercisePrice |       | Number ofOptions |         | Weighted-AverageExercisePrice
|$13.43                  |  | 8,000               |  | 9.9                                 |  | $                             | 13.43 |                  |        |                               |   |     
|$14.47                  |  | 662,000             |  | 9.9                                 |  | $                             | 14.47 |                  |        |                               |   |     
|$19.00                  |  | 417,558             |  | 6.0                                 |  | $                             | 19.00 |                  | 349,658 |                               | $ | 19.00
|$25.42                  |  | 10,000              |  | 8.9                                 |  | $                             | 25.42 |                  | 10,000  |                               | $ | 25.42
|$42.07                  |  | 10,000              |  | 7.9                                 |  | $                             | 42.07 |                  | 10,000  |                               | $ | 42.07

As of June 30, 2009, the total number of outstanding options vested or expected to vest
(based on anticipated forfeitures) was 1,067,004, which had a weighted-average exercise price of $16.58. The weighted-average remaining life of these options was 8.3 years and the aggregate intrinsic value was zero at June 30, 2009, as the
Companys share price was below the exercise price of the options.

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

In 2005, the Company granted a total of 20,000 shares of restricted stock to employees. The restricted stock awards have a purchase price of $.001 per share and vest 20% per year over a five-year period. The
total fair value of the restricted stock awards is $660,000, of which $66,000 was amortized to expense during each of the six month periods ended June 30, 2009 and 2008.

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 $41,000 was amortized to expense during each of the six month periods ended June 30, 2009 and 2008.

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 $25,000 and $8,000 was amortized to expense during the six month periods ended June 30, 2009 and 2008, respectively.

Restricted stock activity for the six months ended June 30, 2009 is as follows:



|                                             |  |                           |   |  |                                      |      
|-------------------------------------------- |  | ------------------------- | - |  | ------------------------------------ | -----
|                                             |  | Shares ofRestricted Stock |   |  | Weighted-AverageGrant-DateFair Value
|Unvested restricted stock at January 1, 2009 |  | 27,000                    |   |  | $                                    | 28.20
|Granted                                      |  |                          |   |  |                                      |     
|Vested                                       |  | (3,500                    | ) |  | $                                    | 29.38
|Canceled or forfeited                        |  |                          |   |  |                                      |     
|                                             |  |                           |   |  |                                      |      
|Unvested restricted stock at June 30, 2009   |  | 23,500                    |   |  | $                                    | 28.02
|                                             |  |                           |   |  |                                      |      

As of June 30, 2009, there was unrecognized compensation expense of $485,000 related to all
unvested restricted stock awards, which the Company expects to recognize on a straight-line basis over a weighted average period of approximately 2.0 years.

Note 3  New Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting Principles [ASC 105]. The ASC is expected to become the single source of authoritative GAAP in the United States. The current GAAP hierarchy consists of four levels of
authoritative accounting and reporting guidance levels. The ASC eliminates this hierarchy and replaces current GAAP with just two levels of literature: authoritative and nonauthoritative. The ASC is effective as of July 1, 2009.



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In May 2009, the FASB issued SFAS No. 165, Subsequent Events[ASC 855]. The objective of SFAS
No. 165 is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Entities are required to disclose the date
through which subsequent events were evaluated as well as the rationale for why that date was selected. SFAS No. 165 is effective for interim and annual periods ending after June 15, 2009. The Company adopted SFAS No. 165 during the
period ended June 30, 2009.

Note 4  Acquisitions

Effective January 17, 2008, the Company acquired all of the outstanding membership interests of Electric Visual Evolution LLC, or Electric, a core action sports lifestyle brand with growing product lines
including sunglasses, goggles, t-shirts, bags, hats, belts and other accessories. The operations of Electric have been included in the Companys results since January 17, 2008. The purchase price of approximately $26.3 million, excluding
transaction costs, consisted of cash consideration of $25.3 million and a working capital adjustment of $1.0 million in cash, and is subject to certain indemnities. Transaction costs totaled $1.2 million. The sellers also will be eligible to earn up
to an additional $18.0 million in cash upon achieving certain financial milestones through December 31, 2010. Electric operates as a wholly-owned subsidiary of the Company. Goodwill arises from the synergies the Company believes can be achieved
by the integration of certain aspects of Electrics production of softgoods and accessories. No goodwill associated with this acquisition is deductible for tax purposes. Amortizing intangible assets consist of customer relationships,
non-compete agreements, backlog and athlete contracts with estimated useful lives of 20 years, 4 years, 3 months and 15 months, respectively. These intangible assets are amortized in a manner that reflects the pattern in which the economic benefits
of the intangible assets are consumed.

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



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

The results of operations for the acquisition are included in the Condensed Consolidated
Statements of Operations from the acquisition date. Assuming the acquisition had occurred as of the beginning of the six months ended June 30, 2008, proforma consolidated results would be as follows:



|                                     |  |                                      |        
|------------------------------------ |  | ------------------------------------ | -------
|                                     |  | Six MonthsEndedJune 30, 2008        
|                                     |  | (In thousands, except pershare data)
|Proforma consolidated total revenues |  | $                                    | 153,313
|Proforma consolidated net income     |  | $                                    | 13,480 
|Proforma diluted earnings per share  |  | $                                    | 0.55   

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

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



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

Effective September 2008, the Company entered into an agreement for the transition and sale of certain assets of its UK distributor, whereby the Company
took direct control of the UK territory beginning with the delivery of the Spring 2009 product line, which began shipping in January 2009. The total purchase price was approximately 550,000 GBP and the assets were recorded at estimated fair
value as of the date of acquisition under the purchase method of accounting. The Company has made an estimated preliminary allocation of the purchase price to the fair values of the assets acquired as of the date of the acquisition, which is subject
to change upon finalization of the valuation of identified intangible assets. The effects of this acquisition are not considered material. Accordingly, pro forma information reflecting this acquisition has been omitted.

Note 5  Inventories

Inventories are as
follows:



|                |  |                |        |                  |   |       
|--------------- |  | -------------- | ------ | ---------------- | - | ------
|                |  | June 30,2009   |        | December 31,2008
|                |  | (In thousands)
|Finished goods  |  | $              | 27,836 |                  | $ | 25,277
|Work-in-process |  |                | 449    |                  |   | 269   
|Raw materials   |  |                | 1,875  |                  |   | 1,540 
|                |  |                |        |                  |   |       
|                |  | $              | 30,160 |                  | $ | 27,086
|                |  |                |        |                  |   |       

Note 6  Property and Equipment

Property and equipment are as follows:



|                              |  |                |         |   |                  |   |         |  
|----------------------------- |  | -------------- | ------- | - | ---------------- | - | ------- | -
|                              |  | June 30,2009   |         |   | December 31,2008 |  
|                              |  | (In thousands) |        
|Furniture and fixtures        |  | $              | 7,671   |   |                  | $ | 6,714   |  
|Office equipment              |  |                | 2,719   |   |                  |   | 2,666   |  
|Computer equipment            |  |                | 6,547   |   |                  |   | 6,405   |  
|Leasehold improvements        |  |                | 10,041  |   |                  |   | 9,608   |  
|Building                      |  |                | 7,531   |   |                  |   | 7,215   |  
|Land                          |  |                | 4,723   |   |                  |   | 4,723   |  
|Construction in progress      |  |                | 131     |   |                  |   | 225     |  
|                              |  |                |         |   |                  |   |         |  
|                              |  |                | 39,363  |   |                  |   | 37,556  |  
|Less accumulated depreciation |  |                | (13,511 | ) |                  |   | (10,840 | )
|                              |  |                |         |   |                  |   |         |  
|Property and equipment  net  |  | $              | 25,852  |   |                  | $ | 26,716  |  
|                              |  |                |         |   |                  |   |         |  

Note 7  Intangible Assets and Goodwill

Intangible assets are as follows:



|                                       |  |                      |        |                         |   |                      |  |                         |        |  |   |      
|-------------------------------------- |  | -------------------- | ------ | ----------------------- | - | -------------------- |  | ----------------------- | ------ |  | - | -----
|                                       |  | As of June 30, 2009  |        | As of December 31, 2008
|                                       |  | Gross CarryingAmount |        | AccumulatedAmortization |   | Gross CarryingAmount |  | AccumulatedAmortization
|                                       |  | (In thousands)      
|Amortizing intangible assets           |  | $                    | 7,164  |                         | $ | 3,451                |  | $                       | 6,363  |  | $ | 2,649
|Non-amortizing trademarks              |  |                      | 6,300  |                         |   |                     |  |                         | 6,300  |  |   |     
|Other non-amortizing intangible assets |  |                      | 562    |                         |   |                     |  |                         | 564    |  |   |     
|                                       |  |                      |        |                         |   |                      |  |                         |        |  |   |      
|                                       |  | $                    | 14,026 |                         | $ | 3,451                |  | $                       | 13,227 |  | $ | 2,649
|                                       |  |                      |        |                         |   |                      |  |                         |        |  |   |      



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In 2008, as part of the Companys annual impairment test in accordance with SFAS No. 142,
Goodwill and Intangible Assets [ASC 350], it was determined that the goodwill and non-amortizing intangible assets associated with the 2008 acquisitions of Electric and Laguna Surf & Sport were impaired, as the carrying amount of the
reporting units, including goodwill, exceeded the fair value of the reporting units. The fair value of assets was estimated using a combination of a discounted cash flow and market approach. The value implied by the test was affected by
(1) reduced future cash flows expected for the Electric segment, (2) the discount rates which were applied to future cash flows, and (3) current market estimates of value. The discount rates applied and current estimates of market
values have been affected by the recent macro-economic conditions, contributing to the estimated decline in value. Additionally, certain amortizing intangible assets associated with these acquisitions were determined to be impaired in accordance
with SFAS No. 144, Accounting for the Impairment or Disposition of Long-Lived Assets [ASC 360]. Total impairment charges of $16.2 million were incurred for the year ended December 31, 2008 and relate to $6.5 million for goodwill and
non-amortizing intangible assets and $9.7 million for amortizing intangible assets.

Amortizing intangible assets include customer
relationships, trademarks, non-compete agreements, backlog, leasehold rights, athlete contracts and reacquired license rights. Other non-amortizing intangible assets consist of trademarks and land use rights. Amortizable intangible assets are
amortized by the Company using estimated useful lives of 3 months to 20 years with no residual values. Fluctuations in the gross carrying amounts of intangible assets associated with the Companys international subsidiaries are due to the
effect of changes in foreign currency exchange rates. Intangible amortization expense for the six months ended June 30, 2009 and 2008, was approximately $804,000 and $1.2 million, respectively. The Companys annual amortization expense is
estimated to be approximately $1.1 million, $590,000, $495,000, $434,000 and $384,000 in the fiscal years ending December 31, 2009, 2010, 2011, 2012 and 2013, respectively.

Note 8  Accrued Expenses and Other Current Liabilities

Accrued expenses and other current
liabilities are as follows:



|                             |  |                |        |                  |   |       
|---------------------------- |  | -------------- | ------ | ---------------- | - | ------
|                             |  | June 30,2009   |        | December 31,2008
|                             |  | (In thousands)
|Payroll and related accruals |  | $              | 3,759  |                  | $ | 5,045 
|Deferred rent                |  |                | 939    |                  |   | 649   
|Other                        |  |                | 7,515  |                  |   | 6,333 
|                             |  |                |        |                  |   |       
|                             |  | $              | 12,213 |                  | $ | 12,027
|                             |  |                |        |                  |   |       

Note 9  Commitments and Contingencies

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

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



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Note 10  Earnings Per Share

The Company calculates net income per share in accordance with SFAS No. 128, Earnings Per Share, as amended by SFAS No. 123(R) (SFAS No. 128) [ASC 260]. Under SFAS No. 128, basic
net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the reporting period. Diluted net income per common share reflects the effects of potentially dilutive securities,
which consists solely of restricted stock and stock options using the treasury stock method. A reconciliation of the numerator and denominator used in the calculation of basic and diluted net income per share is as follows:



|                                                                                              |  |                                  |            |                                   |   |            |  |      |            |  |   |           
|--------------------------------------------------------------------------------------------- |  | -------------------------------- | ---------- | --------------------------------- | - | ---------- |  | ---- | ---------- |  | - | ----------
|                                                                                              |  | Three Months EndedJune 30,       |            | Six Months EndedJune 30,         
|                                                                                              |  | 2009                             |            | 2008                              |   | 2009       |  | 2008
|                                                                                              |  | (In thousands, except sharedata) |            | (In thousands, except share data)
|Numerator  Net income                                                                        |  | $                                | 872        |                                   | $ | 4,846      |  | $    | 5,091      |  | $ | 14,186    
|                                                                                              |  |                                  |            |                                   |   |            |  |      |            |  |   |           
|Denominator: Weighted average common stock outstanding for basic earnings per share           |  |                                  | 24,350,071 |                                   |   | 24,333,482 |  |      | 24,348,972 |  |   | 24,329,771
|Effect of dilutive securities:                                                                |  |                                  |            |                                   |   |            |  |      |            |  |   |           
|Stock options and restricted stock                                                            |  |                                  | 11,900     |                                   |   | 54,123     |  |      | 10,592     |  |   | 29,552    
|                                                                                              |  |                                  |            |                                   |   |            |  |      |            |  |   |           
|Adjusted weighted average common stock and assumed conversions for diluted earnings per share |  |                                  | 24,361,971 |                                   |   | 24,387,605 |  |      | 24,359,564 |  |   | 24,359,323
|                                                                                              |  |                                  |            |                                   |   |            |  |      |            |  |   |           

For the three and six months ended June 30, 2009, 1,107,558 stock options were excluded from
the weighted-average number of shares outstanding because their effect would be antidilutive.

Note 11  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 three operating and reportable
segments, the United States, Europe and Electric. The United States segment primarily includes Volcom product revenues generated from customers in the United States, Canada, Asia Pacific, Central America and South America that are served by the
Companys United States and Japanese operations, as well as licensing revenues and revenues generated from Company-owned domestic retail stores, including Laguna Surf & Sport, Inc. The European segment primarily includes Volcom product
revenues generated from customers in Europe that are served by the Companys European operations. The Electric segment includes Electric product revenues generated from customers worldwide, primarily in the United States, Canada, Europe and
Asia Pacific. All intercompany revenues, expenses, payables and receivables are eliminated in consolidation and are not reviewed when evaluating segment performance. Each segments performance is evaluated based on revenues, gross profit and
operating income. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Companys Annual Report on Form 10-K for the year ended December 31, 2008.



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



|                         |  |                            |         |   |      |   |         |  
|------------------------ |  | -------------------------- | ------- | - | ---- | - | ------- | -
|                         |  | Three Months EndedJune 30, |        
|                         |  | 2009                       |         |   | 2008 |  
|                         |  | (In thousands)             |        
|Total revenues:          |  |                            |         |   |      |   |         |  
|United States            |  | $                          | 43,650  |   |      | $ | 60,175  |  
|Europe                   |  |                            | 5,886   |   |      |   | 5,910   |  
|Electric                 |  |                            | 4,680   |   |      |   | 6,371   |  
|                         |  |                            |         |   |      |   |         |  
|Consolidated             |  | $                          | 54,216  |   |      | $ | 72,456  |  
|                         |  |                            |         |   |      |   |         |  
|Gross profit:            |  |                            |         |   |      |   |         |  
|United States            |  | $                          | 21,249  |   |      | $ | 27,747  |  
|Europe                   |  |                            | 2,634   |   |      |   | 3,401   |  
|Electric                 |  |                            | 2,471   |   |      |   | 3,618   |  
|                         |  |                            |         |   |      |   |         |  
|Consolidated             |  | $                          | 26,354  |   |      | $ | 34,766  |  
|                         |  |                            |         |   |      |   |         |  
|Operating income (loss): |  |                            |         |   |      |   |         |  
|United States            |  | $                          | 3,313   |   |      | $ | 9,199   |  
|Europe                   |  |                            | (2,215  | ) |      |   | (2,247  | )
|Electric                 |  |                            | (594    | ) |      |   | (89     | )
|                         |  |                            |         |   |      |   |         |  
|Consolidated             |  | $                          | 504     |   |      | $ | 6,863   |  
|                         |  |                            |         |   |      |   |         |  
|                         | 
|                         |  | Six Months EndedJune 30,   |        
|                         |  | 2009                       |         |   | 2008 |  
|                         |  | (In thousands)             |        
|Total revenues:          |  |                            |         |   |      |   |         |  
|United States            |  | $                          | 86,070  |   |      | $ | 109,400 |  
|Europe                   |  |                            | 27,564  |   |      |   | 31,063  |  
|Electric                 |  |                            | 8,901   |   |      |   | 12,547  |  
|                         |  |                            |         |   |      |   |         |  
|Consolidated             |  | $                          | 122,535 |   |      | $ | 153,010 |  
|                         |  |                            |         |   |      |   |         |  
|Gross profit:            |  |                            |         |   |      |   |         |  
|United States            |  | $                          | 41,523  |   |      | $ | 51,654  |  
|Europe                   |  |                            | 14,442  |   |      |   | 18,070  |  
|Electric                 |  |                            | 4,771   |   |      |   | 7,217   |  
|                         |  |                            |         |   |      |   |         |  
|Consolidated             |  | $                          | 60,736  |   |      | $ | 76,941  |  
|                         |  |                            |         |   |      |   |         |  
|Operating income (loss): |  |                            |         |   |      |   |         |  
|United States            |  | $                          | 4,784   |   |      | $ | 14,178  |  
|Europe                   |  |                            | 3,577   |   |      |   | 6,792   |  
|Electric                 |  |                            | (1,509  | ) |      |   | 291     |  
|                         |  |                            |         |   |      |   |         |  
|Consolidated             |  | $                          | 6,852   |   |      | $ | 21,261  |  
|                         |  |                            |         |   |      |   |         |  
|                         | 
|                         |  | June 30,                   |        
|                         |  | 2009                       |         |   | 2008 |  
|                         |  | (In thousands)             |        
|Identifiable assets:     |  |                            |         |   |      |   |         |  
|United States            |  | $                          | 152,017 |   |      | $ | 127,848 |  
|Europe                   |  |                            | 56,382  |   |      |   | 61,866  |  
|Electric                 |  |                            | 21,420  |   |      |   | 39,676  |  
|                         |  |                            |         |   |      |   |         |  
|Consolidated             |  | $                          | 229,819 |   |      | $ | 229,390 |  
|                         |  |                            |         |   |      |   |         |  



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##### Table of Contents

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 EndedJune 30, |        | Six Months EndedJune 30,
|                            |  | 2009                       |        | 2008                     |   | 2009   |  | 2008
|                            |  | (In thousands)             |        | (In thousands)          
|Mens                        |  | $                          | 27,916 |                          | $ | 39,136 |  | $    | 63,600  |  | $ | 79,953 
|Girls                       |  |                            | 13,602 |                          |   | 17,592 |  |      | 30,417  |  |   | 37,459 
|Snow                        |  |                            | 411    |                          |   | 87     |  |      | 755     |  |   | 395    
|Boys                        |  |                            | 4,444  |                          |   | 5,451  |  |      | 8,734   |  |   | 10,189 
|Footwear                    |  |                            | 997    |                          |   | 1,080  |  |      | 3,439   |  |   | 4,438  
|Girls swim                  |  |                            | 1,224  |                          |   | 1,685  |  |      | 4,792   |  |   | 5,743  
|Electric                    |  |                            | 4,680  |                          |   | 6,372  |  |      | 8,901   |  |   | 12,546 
|Other                       |  |                            | 530    |                          |   | 514    |  |      | 1,110   |  |   | 1,181  
|                            |  |                            |        |                          |   |        |  |      |         |  |   |        
|Subtotal product categories |  |                            | 53,804 |                          |   | 71,917 |  |      | 121,748 |  |   | 151,904
|Licensing revenues          |  |                            | 412    |                          |   | 539    |  |      | 787     |  |   | 1,106  
|                            |  |                            |        |                          |   |        |  |      |         |  |   |        
|Total revenues              |  | $                          | 54,216 |                          | $ | 72,456 |  | $    | 122,535 |  | $ | 153,010
|                            |  |                            |        |                          |   |        |  |      |         |  |   |        

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.

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



|              |  |                            |        |                          |   |        |  |      |         |  |   |        
|------------- |  | -------------------------- | ------ | ------------------------ | - | ------ |  | ---- | ------- |  | - | -------
|              |  | Three Months EndedJune 30, |        | Six Months EndedJune 30,
|              |  | 2009                       |        | 2008                     |   | 2009   |  | 2008
|              |  | (In thousands)             |        |                          |   |       
|United States |  | $                          | 33,661 |                          | $ | 51,514 |  | $    | 64,921  |  | $ | 90,837 
|Canada        |  |                            | 6,817  |                          |   | 6,809  |  |      | 13,653  |  |   | 15,301 
|Asia Pacific  |  |                            | 3,666  |                          |   | 2,866  |  |      | 8,113   |  |   | 5,136  
|Europe        |  |                            | 6,594  |                          |   | 6,934  |  |      | 29,292  |  |   | 33,805 
|Other         |  |                            | 3,066  |                          |   | 3,794  |  |      | 5,769   |  |   | 6,825  
|              |  |                            |        |                          |   |        |  |      |         |  |   |        
|              |  | $                          | 53,804 |                          | $ | 71,917 |  | $    | 121,748 |  | $ | 151,904
|              |  |                            |        |                          |   |        |  |      |         |  |   |        

During the three months ended June 30, 2009 and 2008, approximately 17% and 22%,
respectively, of product revenues were attributable to one customer. During the six months ended June 30, 2009 and 2008, approximately 14% and 15%, respectively, of product revenues were attributable to one customer.



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##### Table of Contents

|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 Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008, 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, 2008.

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.

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

As part of our strategy to take direct control of our European
operations, we constructed a new European headquarters in Anglet, France, which was completed in February 2007, and delivered our first full season product line during the third quarter of 2007. 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. Domestically, in 2008, we acquired the assets of Laguna Surf & Sport, a
California-based retail chain currently operating two retail stores.

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

In Australia, Indonesia, South Africa,
Brazil and Argentina, we license the Volcom brand to entities that we believe have local market insight and strong relationships with retailers in their respective territories. We receive royalties on the sales of Volcom branded products sold by our
licensees. Our license agreements specify design and quality standards for the Volcom branded products distributed by our licensees. Our licensees are not controlled and operated by us, and the amount of our licensing revenues could decrease in the
future. As these license agreements expire, we may assume direct responsibility for serving these licensed territories.

The deteriorating
global macroeconomic environment has continued to put significant 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. In the future, these conditions could affect our business in a number of direct and indirect ways, including lower revenues from slowing demand for our products, 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 $113.2 million in 2004 to $334.3 million in 2008. Our revenues were $122.5
million for the six months ended June 30, 2009, a decrease of $30.5 million, or 19.9%, compared to $153.0 million for the six months ended June 30, 2008. We believe our overall decline in revenues was driven primarily by the deteriorating
global macroeconomic environment and the decline in discretionary consumer spending worldwide.

Sales to Pacific Sunwear decreased 23.7%,
or $5.4 million, for the six months ended June 30, 2009 compared to the six months ended June 30, 2008. We currently expect a decrease in 2009 revenue from Pacific Sunwear compared to 2008. 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. We also recognize that any customer concentration creates risks and we are, therefore, assessing strategies to lessen our concentration with Pacific Sunwear.

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

We currently source the substantial majority of our products from third-party manufacturers located primarily in China and Mexico. As a result, we may be
adversely affected by the disruption of trade with these countries, the imposition of new regulations related to imports, duties, taxes and other charges on imports, and significant decreases in the value of the U.S. dollar against foreign
currencies. We seek to mitigate the possible disruption in product flow by diversifying our manufacturing across numerous manufacturers and by using manufacturers in countries that we believe to be politically stable. We do not enter into long-term
contracts with our third-party manufacturers. Rather, we typically enter into contracts with each manufacturer to produce one or more product 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 as well as import quota restrictions for
textiles and apparel. Quota represents the right, pursuant to bilateral or other international trade arrangements, to export amounts of certain categories of merchandise into a country or territory pursuant to a visa or license. Pursuant to the
Agreement on Textiles and Clothing, the quota on textile and apparel products was eliminated for World Trade Organization, or WTO, member countries, including the United States, Canada and European countries, on January 1, 2005. During 2005,
the United States and China agreed to a new quota arrangement, which imposed quotas on certain textile products that impacted our business through 2008. Additionally, China offers a rebate tax on exports to control the amount of exports from China,
which can affect our cost either positively or negatively. These potential cost increases, along with the rising currency and labor shortages in China, may have an impact on our business. While we do not believe the limitations on imports from China
will have a material effect on our operations, there may be increased pressure on costs, and we intend to closely monitor our sourcing in China to avoid disruptions.

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

Over the past five years, our selling, general and administrative expenses have increased on an absolute dollar basis as we have increased our spending
on marketing, advertising and promotions, strengthened our management team and hired additional personnel. As a percentage of revenues, our selling, general and administrative expenses have increased from 27.0% in 2004 to 33.6% in 2008. This
increase was primarily due to additional expenses in the United States segment associated with growth and brand building initiatives, including costs associated with our transition to a new warehouse facility in Irvine, California. In addition, this
increase is due to approximately $2.3 million of non-cash amortization of intangible assets associated with the 2008 acquisitions of Electric, Laguna Surf & Sport and our Japanese distributor. Our selling, general and administrative
expenses have decreased on an absolute dollar basis from $55.7 million for the six months ended June 30, 2008 to $53.9 million for the six months ended June 30, 2009. This



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decrease in absolute dollars was due primarily to our company-wide expense reduction initiatives. Our selling, general and administrative expenses as a
percentage of revenues have increased from 36.4% for the six months ended June 30, 2008 to 44.0% for the six months ended June 30, 2009. This increase in selling, general and administrative expenses as a percentage of revenues was due
primarily to the deleveraging of certain fixed costs over a lower revenue base as well as incremental expenses associated with our recently acquired distributor in Japan, additional bad debt write-offs and incremental expenses associated with our
additional retail stores.

Critical Accounting Policies

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

Revenue Recognition

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

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

Accounts Receivable

Throughout the year, we perform credit evaluations of our customers, and we adjust credit limits based on payment history and the customers current creditworthiness. We continuously monitor our collections and maintain an allowance
for doubtful accounts based on our historical experience and any specific customer collection issues that have been identified. Historically, our losses associated with uncollectible accounts have been consistent with our estimates, but there can be
no assurance that we will continue to experience the same credit loss rates that we have experienced in the past. Unforeseen, material financial difficulties of our customers could have an adverse impact on our profits.

Inventories

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



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



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



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



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



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



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

Goodwill and Intangible Assets

We account for goodwill and intangible assets in accordance with SFAS No. 142, Goodwill and Intangible Assets,or SFAS No. 142
[Accounting Standards Codification, or ASC, 350]. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are not amortized but are tested for impairment annually and also in the event of an impairment indicator. As required by
SFAS No. 142, we evaluate the recoverability of goodwill based on a two-step impairment test. The first step compares the fair value of each reporting unit with its carrying amount, including goodwill. If the carrying amount exceeds the fair
value, then the second step of the impairment test is performed to measure the amount of any impairment loss. Fair value is determined based on estimated future cash flows, discounted at a rate that approximates our cost of capital. Such estimates
are subject to change and we may be required to recognize an impairment loss in the future. Any impairment losses are reflected in operating income. In 2008, the Company recorded an impairment loss associated with the goodwill and non-amortizing
intangible assets related to the 2008 acquisitions of Electric and Laguna Surf & Sport. See Note 7 to the Condensed Consolidated Financial Statements for further discussion.

Long-Lived Assets

We acquire assets in the
normal course of our business. We evaluate the recoverability of the carrying amount of these long-lived assets (including fixed assets) whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.
An impairment loss would be recognized when the carrying value exceeds the undiscounted future cash flows estimated to result from the use and eventual disposition of the asset. Impairments, if any, would be recognized in operating earnings. We
continually use judgment when applying these impairment rules to determine the timing of the impairment tests, the undiscounted cash flows used to assess impairments and the fair value of a potentially impaired asset. The reasonableness of our
judgment could significantly affect the carrying value of our long-lived assets. In 2008, the Company recorded an impairment loss associated with its amortizing intangible assets related to the 2008 acquisitions of Electric and Laguna
Surf & Sport. See Note 7 to the Condensed Consolidated Financial Statements for further discussion.

Investments in Unconsolidated
Investees

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

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

Athlete Sponsorships

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



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Income Taxes

Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, or FIN No. 48 [ASC 740], prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under FIN No. 48, we must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a
greater than fifty percent likelihood of being realized upon ultimate resolution.

We record a provision and liability for Federal and
state income taxes using an annual effective tax rate. Deferred income taxes are recorded at our effective tax rate. Managements judgment is required in assessing the realizability of our deferred tax assets. We consider future taxable income
and ongoing prudent and feasible tax planning strategies in assessing the value of our deferred tax assets. If we determine that it is more likely than not that these assets will not be realized, we would reduce the value of these assets to their
expected realizable value, thereby decreasing net income. Evaluating the value of these assets is necessarily based on our judgment. If we subsequently determined that the deferred tax assets that had been written down would, in our judgment, be
realized in the future, the value of the deferred tax assets would be increased, thereby increasing net income in the period when that determination was made.

Stock-Based Compensation

We account for stock-based compensation in accordance with SFAS No. 123 (revised
2004), Share-Based Payment,or SFAS No. 123(R) [ASC 718]. SFAS No. 123(R) requires that we account for all stock-based compensation transactions using a fair-value method and recognize the fair value of each award as an expense over
the service period. The fair value of restricted stock awards is based upon the market price of our common stock at the grant date. We estimate the fair value of stock option awards, as of the grant date, using the Black-Scholes option-pricing
model. The use of the Black-Scholes model requires that we make a number of estimates, including the expected option term, the expected volatility in the price of our common stock, the risk-free rate of interest and the dividend yield on our common
stock. If our expected option term and stock-price volatility assumptions were different, the resulting determination of the fair value of stock option awards could be materially different. In addition, judgment is also required in estimating the
number of share-based awards that we expect will ultimately vest upon the fulfillment of service conditions (such as time-based vesting). If the actual number of awards that ultimately vest differs significantly from these estimates, stock-based
compensation expense and our results of operations could be materially impacted.

Foreign Currency Translation

We own international subsidiaries that operate with the local currency as their functional currency. Our international subsidiaries generate revenues and
collect receivables at future dates in the customers local currencies, and purchase inventory primarily in U.S. dollars. Accordingly, we are exposed to gains and losses that result from the effect of changes in foreign currency exchange
rates on foreign currency denominated transactions. We have not historically entered into foreign currency exchange contracts to hedge this risk, however during 2008 and 2009, we entered into forward exchange contracts to hedge a portion of our
European operations U.S. dollar denominated inventory purchases. For all contracts that qualify as cash flow hedges, we record the changes in the fair value of the derivatives in other comprehensive income. Our assets and liabilities that are
denominated in foreign currencies are translated at the rate of exchange on the balance sheet date. Revenues and expenses are translated using the average exchange rate for the period. Gains and losses from translation of foreign subsidiary
financial statements are included in accumulated other comprehensive income or loss.

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



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General

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

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



|                                             |  |                            |   |  |                          |   |  |       |   |  |       |  
|-------------------------------------------- |  | -------------------------- | - |  | ------------------------ | - |  | ----- | - |  | ----- | -
|                                             |  | Three Months EndedJune 30, |   |  | Six Months EndedJune 30, |  
|                                             |  | 2009                       |   |  | 2008                     |   |  | 2009  |   |  | 2008  |  
|Revenues                                     |  | 100.0                      | % |  | 100.0                    | % |  | 100.0 | % |  | 100.0 | %
|Cost of goods sold                           |  | 51.4                       |   |  | 52.0                     |   |  | 50.4  |   |  | 49.7  |  
|                                             |  |                            |   |  |                          |   |  |       |   |  |       |  
|Gross profit                                 |  | 48.6                       |   |  | 48.0                     |   |  | 49.6  |   |  | 50.3  |  
|Selling, general and administrative expenses |  | 47.7                       |   |  | 38.5                     |   |  | 44.0  |   |  | 36.4  |  
|                                             |  |                            |   |  |                          |   |  |       |   |  |       |  
|Operating income                             |  | 0.9                        |   |  | 9.5                      |   |  | 5.6   |   |  | 13.9  |  
|Other income                                 |  | 1.3                        |   |  | 0.6                      |   |  | 0.7   |   |  | 0.5   |  
|                                             |  |                            |   |  |                          |   |  |       |   |  |       |  
|Income before provision for income taxes     |  | 2.2                        |   |  | 10.1                     |   |  | 6.3   |   |  | 14.4  |  
|Provision for income taxes                   |  | 0.6                        |   |  | 3.4                      |   |  | 2.1   |   |  | 5.1   |  
|                                             |  |                            |   |  |                          |   |  |       |   |  |       |  
|Net income                                   |  | 1.6                        | % |  | 6.7                      | % |  | 4.2   | % |  | 9.3   | %
|                                             |  |                            |   |  |                          |   |  |       |   |  |       |  

Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008

Revenues

Consolidated revenues were $54.2
million for the three months ended June 30, 2009, a decrease of $18.3 million, or 25.2%, compared to $72.5 million for the three months ended June 30, 2008. Revenues from our five largest customers were $15.6 million for the three months
ended June 30, 2009, a decrease of $11.9 million, or 43.3%, compared to $27.5 million for the three months ended June 30, 2008. Excluding revenues from Pacific Sunwear, which decreased $6.8 million, or 43.4%, to $8.9 million, total
revenues from our remaining five largest customers decreased $5.1 million, or 43.1%, to $6.6 million for the three months ended June 30, 2009 from $11.7 million for the three months ended June 30, 2008. We currently expect a decrease in
2009 revenue from Pacific Sunwear compared to 2008. We believe our overall decline in revenues was driven primarily by the deteriorating global macroeconomic environment and the decline in discretionary consumer spending worldwide.

Consolidated product revenues were $53.8 million for the three months ended June 30, 2009, a decrease of $18.1 million, or 25.2%, compared to $71.9
million for the three months ended June 30, 2008. Revenues from mens products decreased $11.2 million, or 28.7%, to $27.9 million for the three months ended June 30, 2009 compared to $39.1 million for the three months ended
June 30, 2008. Revenues from girls products decreased $4.0 million, or 22.7%, to $13.6 million for the three months ended June 30, 2009 compared to $17.6 million for the three months ended June 30, 2008. Revenues from boys
products, which include our line of kids clothing for young boys ages 4 to 7, decreased $1.1 million, or 18.5%, to $4.4 million for the three months ended June 30, 2009 compared to $5.5 million for the three months ended June 30, 2008.



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Revenues from girls swim products decreased $0.5 million, or 27.4%, to $1.2 million for the three months ended June 30, 2009 compared to $1.7 million
for the three months ended June 30, 2008. Revenues from our Electric subsidiary decreased $1.7 million, or 26.5%, to $4.7 million for the three months ended June 30, 2009 compared to $6.4 million for the three months ended June 30,
2008.

Licensing revenues decreased 23.4% to $0.4 million for the three months ended June 30, 2009 from $0.5 million for the three
months ended June 30, 2008.

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 $33.7 million, or 62.6% of our product revenues, for the three months ended June 30, 2009, compared to $51.5 million, or 71.6% of our product revenues, for
the three months ended June 30, 2008. Product revenues in Europe were $6.6 million, or 12.3% of our product revenues, for the three months ended June 30, 2009, compared to $6.9 million, or 9.6% of our product revenues, for the three months
ended June 30, 2008. 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 $13.5 million, or 25.1% of our product revenues, for the three months ended June 30, 2009 compared to $13.5 million, or 18.8% of our product revenues, for the three months ended June 30, 2008.

Gross Profit

Consolidated gross profit
decreased $8.4 million, or 24.2%, to $26.4 million for the three months ended June 30, 2009 compared to $34.8 million for the three months ended June 30, 2008. Gross profit as a percentage of revenues, or gross margin, increased 60 basis
points to 48.6% for the three months ended June 30, 2009 compared to 48.0% for the three months ended June 30, 2008. Consolidated gross margin related specifically to product revenues increased 60 basis points to 48.2% for the three months
ended June 30, 2009 compared to 47.6% for the three months ended June 30, 2008. Gross margin on product from the U.S. segment increased 260 basis points to 48.2% for the three months ended June 30, 2009 compared to 45.6% for the three
months ended June 30, 2008. This increase is primarily due to limited discounting, despite the poor economic environment, combined with a reduction in season-end liquidation sales. Gross margin from the European segment decreased 1,280 basis
points to 44.8% for the three months ended June 30, 2009 compared to 57.6% for the three months ended June 30, 2008, primarily due to currency fluctuations related to the strengthening of the U.S. dollar to the Euro, and to lesser extent,
the continued weakening of the UK pound compared to the Euro. Further, some additional discounts were granted during the three months ended June 30, 2009 due to the difficult retail environment. Gross margin from the Electric segment decreased
400 basis points to 52.8% for the three months ended June 30, 2009 compared to 56.8% for the three months ended June 30, 2008 primarily due to higher inventory liquidation and the more promotional selling environment during the three
months ended June 30, 2009.

Selling, General and Administrative Expenses

Consolidated selling, general and administrative expenses decreased $2.0 million, or 7.4%, to $25.9 million for the three months ended June 30, 2009
compared to $27.9 million for the three months ended June 30, 2008. The decrease in absolute dollars was due primarily to our company-wide expense reduction initiatives, which resulted in decreased marketing and advertising expenses of $1.1
million and decreased payroll and payroll related expenses of $0.9 million. In addition, we had decreased commissions expense of $0.9 million associated with a decrease in revenues between periods and decreased amortization expense of $0.3 million
associated with the impairment of amortizing intangible assets during the fourth quarter of 2008. These decreases were offset by an increase in selling, general and administrative expenses due to incremental expenses of $1.4 million associated with
our recently acquired Japanese distributor, and increased bad debt expense of $0.7 million. The net decrease in various other expense categories was $0.9 million. Selling, general and administrative expenses as a percentage of revenue increased 920
basis points to 47.7% for the three months ended June 30, 2009 compared to 38.5% for the three months ended June 30, 2008. This increase was due primarily to the deleveraging of certain fixed costs over a lower revenue base as well as
incremental expenses associated with our recently acquired distributor in Japan, additional bad debt write-offs and incremental expenses associated with our additional retail stores.

Operating Income

As a result of the factors above, operating income for the three months
ended June 30, 2009 decreased $6.4 million to $0.5 million compared to $6.9 million for the three months ended June 30, 2008. Operating income as a percentage of revenue decreased to 0.9% for the three months ended June 30, 2009 from
9.5% for the three months ended June 30, 2008.



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Other Income

Other income primarily includes net interest income and foreign currency gains and losses. Interest income for the three months ended June 30, 2009 and 2008 was $0.1 million and $0.3 million, respectively. The
decrease in interest income is due to lower returns on our cash and cash equivalents and short-term investments. Foreign currency gain increased to $0.7 million for the three months ended June 30, 2009 compared to $0.2 million for the three
months ended June 30, 2008 due primarily to fluctuations in the Euro and Canadian dollar exchange rates against the U.S. dollar.

Provision for
Income Taxes

We have computed our provision for income taxes for the three months ended June 30, 2009 using an estimated
effective annual tax rate of 34.0% plus the tax impact of discrete items in the quarter. The provision for income taxes decreased $2.1 million to $0.4 million for the three months ended June 30, 2009 compared to $2.5 million for the three
months ended June 30, 2008.

Net Income

As a result of the factors above, net income decreased $3.9 million, or 82.0%, to $0.9 million for the three months ended June 30, 2009 from $4.8 million for the three months ended June 30, 2008.

Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008

Revenues

Consolidated revenues were $122.5 million for the six months ended June 30,
2009, a decrease of $30.5 million, or 19.9%, compared to $153.0 million for the six months ended June 30, 2008. Revenues from our five largest customers were $29.5 million for the six months ended June 30, 2009, a decrease of $13.8
million, or 32.0%, compared to $43.3 million for the six months ended June 30, 2008. Excluding revenues from Pacific Sunwear, which decreased $5.4 million, or 23.7%, to $17.3 million, total revenues from our remaining five largest customers
decreased $8.5 million, or 41.2%, to $12.1 million for the six months ended June 30, 2009 from $20.6 million for the six months ended June 30, 2008. We currently expect a decrease in 2009 revenue from Pacific Sunwear compared to 2008. We
believe our overall decline in revenues was driven primarily by the deteriorating global macroeconomic environment and the decline in discretionary consumer spending worldwide.

Consolidated product revenues were $121.8 million for the six months ended June 30, 2009, a decrease of $30.1 million, or 19.9%, compared to $151.9
million for the six months ended June 30, 2008. Revenues from mens products decreased $16.4 million, or 20.5%, to $63.6 million for the six months ended June 30, 2009 compared to $80.0 million for the six months ended June 30,
2008. Revenues from girls products decreased $7.1 million, or 18.8%, to $30.4 million for the six months ended June 30, 2009 compared to $37.5 million for the six months ended June 30, 2008. Revenues from boys products, which
include our line of kids clothing for young boys ages 4 to 7, decreased $1.5 million, or 14.3%, to $8.7 million for the six months ended June 30, 2009 compared to $10.2 million for the six months ended June 30, 2008. Revenues from footwear
products decreased $1.0 million, or 22.5%, to $3.4 million for the six months ended June 30, 2009 compared to $4.4 million for the six months ended June 30, 2008. Revenues from girls swim products decreased $0.9 million, or 16.6%, to $4.8
million for the six months ended June 30, 2009 compared to $5.7 million for the six months ended June 30, 2008. Revenues from our Electric subsidiary decreased $3.6 million, or 29.1%, to $8.9 million for the six months ended June 30,
2009 compared to $12.5 million for the six months ended June 30, 2008.

Licensing revenues decreased 28.8% to $0.8 million for the six
months ended June 30, 2009 from $1.1 million for the six months ended June 30, 2008.

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 $64.9 million, or 53.3% of our product revenues, for the six months ended June 30, 2009,
compared to $90.8 million, or 59.8% of our product revenues, for the six months ended June 30, 2008. Product revenues in Europe were $29.3 million, or 24.1% of our product revenues, for the six months ended June 30, 2009, compared to $33.8
million, or 22.3% of our product revenues, for the six months ended June 30, 2008. 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 $27.6 million, or 22.6% of our product revenues, for the six months ended June 30, 2009 compared to $27.3 million, or 17.9% of our product revenues, for the six
months ended June 30, 2008.



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Gross Profit

Consolidated gross profit decreased $16.2 million, or 21.1%, to $60.7 million for the six months ended June 30, 2009 compared to $76.9 million for the six months ended June 30, 2008. Gross profit as a
percentage of revenues, or gross margin, decreased 70 basis points to 49.6% for the six months ended June 30, 2009 compared to 50.3% for the six months ended June 30, 2008. Consolidated gross margin related specifically to product revenues
decreased 70 basis points to 49.2% for the six months ended June 30, 2009 compared to 49.9% for the six months ended June 30, 2008. Gross margin on product from the U.S. segment increased 110 basis points to 47.8% for the six months ended
June 30, 2009 compared to 46.7% for the six months ended June 30, 2008. This increase is primarily due to limited discounting, despite the poor economic environment, combined with a reduction in season-end liquidation sales. Gross margin
from the European segment decreased 580 basis points to 52.4% for the six months ended June 30, 2009 compared to 58.2% for the six months ended June 30, 2008, primarily due to currency fluctuations related to the strengthening of the U.S.
dollar to the Euro, and to lesser extent, the continued weakening of the UK pound compared to the Euro. Further, some additional discounts were granted during the six months ended June 30, 2009 due to the difficult retail environment. Gross
margin from the Electric segment decreased 390 basis points to 53.6% for the six months ended June 30, 2009 compared to 57.5% for the six months ended June 30, 2008 primarily due to higher inventory liquidation and the more promotional
selling environment during the six months ended June 30, 2009.

Selling, General and Administrative Expenses

Consolidated selling, general and administrative expenses decreased $1.8 million, or 3.2%, to $53.9 million for the six months ended June 30, 2009
compared to $55.7 million for the six months ended June 30, 2008. The decrease in absolute dollars was due primarily to our company-wide expense reduction initiatives, which resulted in decreased marketing and advertising expenses of $1.9
million and decreased payroll and payroll related expenses of $1.0 million. In addition, we had decreased commissions expense of $1.9 million associated with a decrease in revenues between periods and decreased amortization expense of $0.8 million
associated with the impairment of amortizing intangible assets during the fourth quarter of 2008. These decreases were offset by an increase in selling, general and administrative expenses due to incremental expenses of $2.9 million associated with
our recently acquired Japanese distributor, and increased bad debt expense of $1.7 million. The net decrease in various other expense categories was $0.8 million. Selling, general and administrative expenses as a percentage of revenue increased 760
basis points to 44.0% for the six months ended June 30, 2009 compared to 36.4% for the six months ended June 30, 2008. This increase was due primarily to the deleveraging of certain fixed costs over a lower revenue base as well as
incremental expenses associated with our recently acquired distributor in Japan, additional bad debt write-offs and incremental expenses associated with our additional retail stores.

Operating Income

As a result of the factors above, operating income for the six months ended
June 30, 2009 decreased $14.4 million to $6.9 million compared to $21.3 million for the six months ended June 30, 2008. Operating income as a percentage of revenue decreased to 5.6% for the six months ended June 30, 2009 from 13.9%
for the six months ended June 30, 2008.

Other Income

Other income primarily includes net interest income and foreign currency gains and losses. Interest income for the six months ended June 30, 2009 and 2008 was $0.1 million and $0.7 million, respectively. The
decrease in interest income is due to lower returns on our cash and cash equivalents and short-term investments. Foreign currency gain increased to $0.8 million for the six months ended June 30, 2009 compared to $23,000 for the six months ended
June 30, 2008 due primarily to fluctuations in the Euro and Canadian dollar exchange rates against the U.S. dollar.

Provision for Income Taxes

We have computed our provision for income taxes for the six months ended June 30, 2009 using an estimated effective annual tax
rate of 34.0% plus the tax impact of discrete items in the quarter. The provision for income taxes decreased $5.2 million to $2.6 million for the six months ended June 30, 2009 compared to $7.8 million for the six months ended June 30,
2008.

Net Income

As a result
of the factors above, net income decreased $9.1 million, or 64.1%, to $5.1 million for the six months ended June 30, 2009 from $14.2 million for the six months ended June 30, 2008.

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:



|                                                 |  |                          |         |   |      |   |         |  
|------------------------------------------------ |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                                                 |  | Six Months EndedJune 30, |        
|                                                 |  | 2009                     |         |   | 2008 |  
|                                                 |  | (In thousands)           |        
|Cash and cash equivalents at beginning of period |  | $                        | 79,613  |   |      | $ | 92,962  |  
|Cash flow from operating activities              |  |                          | 16,289  |   |      |   | 5,795   |  
|Cash flow from investing activities              |  |                          | (47,472 | ) |      |   | (30,450 | )
|Cash flow from financing activities              |  |                          | (37     | ) |      |   | 643     |  
|Effect of exchange rate on cash                  |  |                          | 2,851   |   |      |   | 1,639   |  
|                                                 |  |                          |         |   |      |   |         |  
|Cash and cash equivalents at end of period       |  | $                        | 51,244  |   |      | $ | 70,589  |  
|                                                 |  |                          |         |   |      |   |         |  

Cash from operating activities consists primarily of net income adjusted for certain non-cash
items including depreciation and amortization, 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 six months ended June 30, 2009 and 2008, cash from operating activities was $16.3 million and $5.8 million, respectively. The $10.5 million increase in cash from operating activities
between the periods was attributable to the following:



|               |        |   |                 |                                                                                                                                                                                                                                                                                    
|-------------- | ------ | - | --------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(In thousands) |        |   | Attributable to
|$              | 8,692  |   |                 | Increase in cash flows from inventories due to less inventory growth between periods as we have adjusted inventory levels accordingly to
reflect the current economic environment. Inventories at June 30, 2009 are approximately 18% lower than inventory levels at June 30, 2008.
|               | 5,195  |   |                 | Increase in cash flows from accounts receivable due to the timing of sales and collections                                                                                                                                                                                         
|               | 3,556  |   |                 | Increase in cash flows from accrued expenses and accounts payable due to the timing of payments between periods                                                                                                                                                                    
|               | 1,964  |   |                 | Increase in non-cash depreciation and amortization, provision for doubtful accounts, tax benefits related to stock option exercises, and
stock-based compensation                                                                                                                  
|               | (9,095 | ) |                 | Decrease in net income                                                                                                                                                                                                                                                             
|               | 182    |   |                 | Net increase in cash flows from all other operating activities                                                                                                                                                                                                                     
|               |        |   |                 |                                                                                                                                                                                                                                                                                    
|$              | 10,494 |   |                 | Total                                                                                                                                                                                                                                                                              
|               |        |   |                 |                                                                                                                                                                                                                                                                                    

Cash used in investing activities was $47.5 million and $30.5 million for the six months ended
June 30, 2009 and 2008, respectively. During the six months ended June 30, 2009, the cash used in investing activities was primarily due to the purchase of short-term investments of $44.9 million and $0.8 million spent on the acquisition
of our UK distributor. During the six months ended June 30, 2008, the cash used in investing activities was primarily due to the $26.9 million spent on the acquisition of Electric, net of cash acquired. Capital expenditures during the six
months ended June 30, 2009 and 2008 included the ongoing purchase of investments in computer equipment, warehouse equipment, marketing initiatives and in-store buildouts at customer retail locations.

Cash used in financing activities was $37,000 for the six months ended June 30, 2009 compared to cash provided by activities of $0.6 million for the
six months ended June 30, 2008. Cash from financing activities is primarily due to cash received from government grants, principal payments on capital lease obligations and the proceeds and excess tax benefits related to the exercise of stock
options.

We currently have no material cash commitments, except for our normal recurring trade payables, expense accruals, operating
leases, capital leases and athlete endorsement agreements. We believe that our cash and cash equivalents, cash flow from operating activities and available borrowings under our credit facility will be sufficient to meet all requirements for at least
the next twelve months.

Credit Facilities

In September 2008, we amended our unsecured credit agreement with a bank, to increase our line of credit from $20.0 million to $40.0 million (which includes a line of credit, foreign exchange facility and letter of
credit sub-facilities). The amended credit agreement, which expires on August 31, 2010, may be used to fund our working capital requirements.



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Borrowings under this agreement bear interest, at our option, either at the banks prime rate (3.25% at June 30, 2009) or LIBOR plus 1.25%. Under
this credit facility, we had $1.6 million outstanding in letters of credit at June 30, 2009. At June 30, 2009 there were no outstanding borrowings under this credit facility, and $38.4 million was available under the credit facility. The
credit agreement requires compliance with conditions precedent that must be satisfied prior to any borrowing, as well as ongoing compliance with specified affirmative and negative covenants, including covenants related to our financial condition,
including requirements that we maintain a minimum net profit after tax and a minimum EBITDA. At June 30, 2009, we were not in compliance with the EBITDA restrictive covenant; however, we have received a waiver from the bank pertaining to such
non-compliance.

Contractual Obligations and Commitments

We did not have any off-balance sheet arrangements or outstanding balances on our credit facility as of June 30, 2009. The following table summarizes, as of June 30, 2009, the total amount of future payments
due in various future periods:



|                                  |  |                                      |        |                       |   |       |  |      |        |      |   |       |  |            |       |  |   |       |  |   |       
|--------------------------------- |  | ------------------------------------ | ------ | --------------------- | - | ----- |  | ---- | ------ | ---- | - | ----- |  | ---------- | ----- |  | - | ----- |  | - | ------
|                                  |  | Payments Due by Period(in thousands)
|                                  |  | Total                                |        | Jul. 1  Dec. 31,2009 |   | 2010  |  | 2011 |        | 2012 |   | 2013  |  | Thereafter
|Operating lease obligations       |  | $                                    | 32,156 |                       | $ | 2,537 |  | $    | 4,933  |      | $ | 4,565 |  | $          | 3,904 |  | $ | 3,036 |  | $ | 13,181
|Capital lease obligations         |  |                                      | 65     |                       |   | 40    |  |      | 25     |      |   |      |  |            |      |  |   |      |  |   |      
|Professional athlete sponsorships |  |                                      | 14,779 |                       |   | 3,790 |  |      | 4,500  |      |   | 1,982 |  |            | 1,530 |  |   | 1,005 |  |   | 1,972 
|Contractual letters of credit     |  |                                      | 1,644  |                       |   | 510   |  |      | 1,134  |      |   |      |  |            |      |  |   |      |  |   |      
|                                  |  |                                      |        |                       |   |       |  |      |        |      |   |       |  |            |       |  |   |       |  |   |       
|Total                             |  | $                                    | 48,644 |                       | $ | 6,877 |  | $    | 10,592 |      | $ | 6,547 |  | $          | 5,434 |  | $ | 4,041 |  | $ | 15,153
|                                  |  |                                      |        |                       |   |       |  |      |        |      |   |       |  |            |       |  |   |       |  |   |       

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

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

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

We establish relationships with professional athletes in order to
promote our products and brand. We have entered into endorsement agreements with professional skateboarding, snowboarding, surfing and motocross athletes. Many of these contracts provide incentives for magazine exposure and competitive victories
while wearing or using our products. It is not possible to determine the precise amounts that we will be required to pay under these agreements as they are subject to many variables. The amounts listed above are the approximate amounts of the
minimum obligations required to be paid under these contracts. The additional estimated maximum amount that could be paid under our existing contracts, assuming that all bonuses, victories and similar incentives are achieved during a five-year
period ending June 30, 2014, is approximately $4.2 million. The actual amounts paid under these agreements may be higher or lower than the amounts discussed above as a result of the variable nature of these obligations.

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

Seasonality

Historically, we have
experienced greater revenues in the second half of the year than those in the first half due to a concentration of shopping around the fall and holiday seasons and pricing differences between our products sold during the first and second half of the
year, as products we sell in the fall and holiday seasons generally have higher prices per unit than products we sell in the spring and summer seasons. We typically sell more of our summer products (boardshorts, t-shirts and sunglasses) in the first
half of the year and a majority of our winter products (pants, long sleeve shirts, sweaters, fleece, jackets, outerwear and goggles) in the second half of the year. We anticipate that this seasonal impact on our revenues is likely to continue. Our
business in Europe is extremely seasonal with revenues concentrated primarily in the first and third quarters, shipment of low margin samples concentrated in the second and fourth quarters, and a relatively steady pace of selling, general and
administrative expenses throughout the year. As 2008 was the first year that our European business was fully operational throughout the entire year, we may experience a shift in our



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historical revenue, gross profit and operating income trends. During the two-year period ended December 31, 2008, approximately 57% of our revenues, 55%
of our gross profit and 62% of our operating income (excluding non-cash impairment charges) were generated in the second half of the year, with the third quarter generally generating most of our operating income due to fall, holiday and snow
shipments. Accordingly, our results of operations for the first and second quarters of any year are not indicative of the results we expect for the full year.

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

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.

Vulnerability Due to Concentrations

One customer, Pacific Sunwear, accounted for approximately 16% of our product revenues in 2008 and approximately 14% of our product revenues for the
six months ended June 30, 2009. No other customer accounted for more than 10% of our product revenues in 2009 or 2008.

Sales to
Pacific Sunwear decreased 23.7%, or $5.4 million, for the six months ended June 30, 2009 compared to the six months ended June 30, 2008. We currently expect a decrease in 2009 revenue from Pacific Sunwear when compared to 2008. Pacific
Sunwear remains an important customer for us and we are working both internally and with Pacific Sunwear to maximize our business with them. We believe our brand continues to be an important part of the Pacific Sunwear business. We also recognize
that any customer concentration creates risks and we are, therefore, assessing strategies to lessen our concentration with Pacific Sunwear.

We do not own or operate any manufacturing facilities and source our products from independently-owned manufacturers. During 2008, we contracted for the manufacture of our products with approximately 49 foreign manufacturers. We also
contract with several domestic screen printers. Purchases from Dragon Crowd and Ningbo Jehson Textiles totaled approximately 18% and 14%, respectively, of our product costs in 2008, and approximately 17% and 19%, respectively, of our product costs
for the six months ended June 30, 2009.

Recent Accounting Pronouncements

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



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

Foreign Currency Risk

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

A portion
of our domestic sales are made in Canadian dollars. Sales in Canada accounted for approximately 9.6% of our product revenues in 2008 and approximately 11.2% of our product revenues for the six months ended June 30, 2009. As a result, we are
exposed to fluctuations in the value of Canadian dollar denominated receivables and payables, foreign currency investments, primarily consisting of Canadian dollar deposits, and cash flows related to repatriation of those investments. A weakening of
the Canadian dollar relative to the U.S. dollar could negatively impact the profitability of our products sold in Canada and the value of our Canadian receivables, as well as the value of repatriated funds we may bring back to the
United States from Canada. Account balances denominated in Canadian dollars are marked-to-market every period using current exchange rates and the resulting changes in the account balance are included in our income statement as other income. We
do not believe that a 10% movement in all applicable foreign currency exchange rates would have a material effect on our financial position. However, recent foreign currency market volatility may continue whereby the Canadian dollar has weakened by
more than 10% compared to the U.S. dollar. Based on the balance of Canadian dollar receivables of $6.3 million at June 30, 2009, an assumed 10%, 15% and 20% strengthening of the U.S. dollar would result in foreign currency losses of $0.6
million, $0.9 million and $1.3 million, respectively.

During 2008 and 2009, we entered into forward exchange contracts to hedge a portion
of our European operations U.S. dollar denominated inventory purchases (forward currency exchange contracts) as part of our overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates. All of our
forward currency exchange contracts qualified for hedge accounting and the changes in the fair value of the derivatives are recorded in other comprehensive income. As of June 30, 2009, we were hedging forecasted transactions expected to occur
through September 2009. Assuming exchange rates at June 30, 2009 remain constant, $0.1 million of losses, net of tax, related to hedges of these transactions are expected to be reclassified into earnings during the third quarter of 2009.

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



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



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



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



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



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

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



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

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

Interest Rate Risk

We maintain a $40.0 million unsecured credit agreement (which includes a
line of credit, foreign exchange facility and letter of credit sub-facilities) with no balance outstanding at June 30, 2009. The credit agreement, which expires on August 31, 2010, may be used to fund our working capital requirements.
Borrowings under this agreement bear interest, at our option, either at the banks prime rate (3.25% at June 30, 2009) or LIBOR plus 1.25%. Based on the average interest rate on our credit facility during 2008, and to the extent that
borrowings were outstanding, we do not believe that a 10% change in interest rates would have a material effect on our results of operations or financial condition.



|Item 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 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 June 30, 2009, 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.



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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.



|Item 4T. | Controls and Procedures.
|-------- | ------------------------

Not applicable.



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##### Table of Contents

PART II.

OTHER INFORMATION



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

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



|Item 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, 2008 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, 2008 and Part II, Item 1A of our Quarterly Report on Form 10-Q for the period ended March 31, 2009. 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 period ended March 31, 2009.

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

Pacific Sunwear accounted for approximately 16% of our product revenues in 2008
and approximately 14% of our product revenues for the six months ended June 30, 2009. 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 increased 7%, or $3.4 million, for 2008 compared to 2007, and decreased 24%, or $5.4 million, for the six months ended June 30, 2009 compared to the six months ended June 30, 2008. We currently expect a decrease in 2009 revenue
from Pacific Sunwear compared to 2008. We recognize that any customer concentration creates risks and we are, therefore, assessing strategies to lessen our concentration with Pacific Sunwear. We cannot predict whether such strategies will reduce, in
whole or in part, our sales concentration with Pacific Sunwear in the near or long term. Because Pacific Sunwear has represented such a significant amount of our product revenues, our results of operations are likely to be adversely affected by any
Pacific Sunwear decision to decrease its rate of purchases of our products. A continuing decrease in its purchases of our products, a cancellation of orders of our products or a change in the timing of its orders will have an additional adverse
affect on our operating results.



|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 June 30, 2009.



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

None



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

We held our Annual Meeting of Stockholders on May 5, 2009 to vote on three proposals. At our Annual Meeting, there were present in person or by proxy 22,579,618 votes representing 92.6% of the total outstanding eligible votes. The
proposals considered at the Annual Meeting were voted on as follows:

1. Re-election of Directors

Each of the seven incumbent members of our Board of Directors  Douglas S. Ingram, Anthony M. Palma, Joseph B. Tyson, Carl W. Womack, René R.
Woolcott, Richard R. Woolcott and Kevin G. Wulff  was re-elected to serve on the Board until the next annual meeting of stockholders and/or until his or her successor is duly elected and qualified. The following are the voting results for the
re-election:



|                    |  |            |  |         
|------------------- |  | ---------- |  | --------
|Director Name       |  | For        |  | Withheld
|Douglas S. Ingram   |  | 22,456,680 |  | 122,938 
|Anthony M. Palma    |  | 22,451,763 |  | 127,855 
|Joseph B. Tyson     |  | 22,461,393 |  | 118,225 
|Carl W. Womack      |  | 22,452,649 |  | 126,969 
|René R. Woolcott    |  | 22,438,381 |  | 141,237 
|Richard R. Woolcott |  | 22,251,310 |  | 328,308 
|Kevin G. Wulff      |  | 22,454,570 |  | 125,048 



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##### Table of Contents

2. Re-Approve the Amended and Restated 2005 Incentive Award Plan

The stockholders re-approved our Amended and Restated 2005 Incentive Award. The following are the voting results:



|           |  |         |  |         |  |          
|---------- |  | ------- |  | ------- |  | ---------
|For        |  | Against |  | Abstain |  | Non-Votes
|14,401,356 |  | 356,828 |  | 941,497 |  | 6,879,937

3. Ratification of Appointment of Deloitte & Touche LLP

The stockholders ratified the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the year ending
December 31, 2009.



|           |  |         |  |        
|---------- |  | ------- |  | -------
|For        |  | Against |  | Abstain
|22,542,904 |  | 25,284  |  | 11,430 



|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                                                                               
|     | 
|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)
|- | --------------------------------------------------------------------------------------------------------

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: August 10, 2009 |  |  |  | /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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##### Table of Contents

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)
|- | --------------------------------------------------------------------------------------------------------



32