SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

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FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

For the fiscal year ended December 31, 2003
Commission File Number: 1-13848

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

Washington(State or other jurisdiction of incorporation or organization)

95-3194947(IRS Employer ID No.)One Icon
Foothill Ranch, California(Address of principal executive offices)

92610(ZIP Code)


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

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

Title of each class

Name of each exchange on which registeredCommon Stock, par value $.01 per share

New York Stock Exchange


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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o

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

Aggregate market value of the Registrants common stock held by non-affiliates of the Registrant computed by reference to the closing price as reported on the New
York Stock Exchange on June 30, 2003:    $296,121,253

Number
of shares of common stock, $.01 par value, outstanding as of the close of business on March 8, 2004:    68,029,827 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the registrant's 2004 Annual Shareholders Meeting are incorporated by reference into Part II and Part III
herein.



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Oakley, Inc.  TABLE OF CONTENTS

|PART I   |  |                                                                                      
|-------- |  | -------------------------------------------------------------------------------------
|Item 1.  |  | Business                                                                             
|Item 2.  |  | Properties                                                                           
|Item 3.  |  | Legal Proceedings                                                                    
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                  
|PART II  |  |                                                                                      
|Item 5.  |  | Market for Registrant's Common Equity and Related Shareholder Matters                
|Item 6.  |  | Selected Financial Data                                                              
|Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations
|Item 7a. |  | Quantitative and Qualitative Disclosures about Market Risk                           
|Item 8.  |  | Financial Statements and Supplementary Data                                          
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|Item 9A. |  | Controls and Procedures                                                              
|PART III |  |                                                                                      
|Item 10. |  | Directors and Executive Officers of the Registrant                                   
|Item 11. |  | Executive Compensation                                                               
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                       
|Item 13. |  | Certain Relationships and Related Transactions                                       
|Item 14. |  | Controls and Procedures                                                              
|PART IV  |  |                                                                                      
|Item 15. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                      

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Part I

Business

General

Oakley, Inc. (referenced here as the "Company" or "Oakley") is a Washington corporation formed in March 1994 to succeed to the assets and
liabilities of Oakley, Inc., a California corporation that commenced operations in 1977 and began to sell sunglasses in 1984. The Company is an innovation-driven designer, manufacturer and
distributor of consumer products that include high-performance eyewear, footwear, watches, apparel and accessories. The Company believes its principal strength is its ability to develop
products that demonstrate superior performance and aesthetics through proprietary technology and styling. The Company holds 545 patents and 976 trademarks worldwide that protect its designs and
innovations.

Forward-Looking Statements

When used in this document, the words "believes," "anticipates," "expects," "estimates," "intends," "may," "plans," "predicts," "will" or
the negative thereof and similar expressions are intended to identify, in certain circumstances, forward-looking statements. Such statements are subject to a number of risks and uncertainties that
could cause actual results to differ materially from those projected, including: risks related to the company's ability to manage rapid growth; the ability to identify qualified manufacturing
partners; the ability to coordinate product development and production processes with those partners; the ability of those manufacturing partners and the company's internal production operations to
increase production volumes on raw materials and finished goods in a timely fashion in response to increasing demand and enable the company to achieve timely delivery of finished goods to its retail
customers; the ability to provide adequate
fixturing to existing and future retail customers to meet anticipated needs and schedules; the dependence on eyewear sales to Sunglass Hut which is owned by a major competitor and, accordingly, could
materially alter or terminate its relationship with the company; the company's ability to expand distribution channels and its own retail operations in a timely manner; unanticipated changes in
general market conditions or other factors, which may result in cancellations of advance orders or a reduction in the rate of reorders placed by retailers; continued weakness of economic conditions
could continue to reduce or further reduce demand for products sold by the company and could adversely affect profitability, especially of the company's retail operations; further terrorist acts, or
the threat thereof, could continue to adversely affect consumer confidence and spending, could interrupt production and distribution of product and raw materials and could, as a result, adversely
affect the company's operations and financial performance; the ability of the company to integrate acquisitions without adversely affecting operations; the ability to continue to develop and produce
innovative new products and introduce them in a timely manner; the acceptance in the marketplace of the company's new products and changes in consumer preferences; reductions in sales of products,
either as the result of economic or other conditions or reduced consumer acceptance of a product, could result in a buildup of inventory; the ability to source raw materials and finished products at
favorable prices to the company; the potential effect of periodic power crises on the company's operations including temporary blackouts at the company's facilities; foreign currency exchange rate
fluctuations; earthquakes or other natural disasters concentrated in Southern California where substantially all of the companies operations are based and the company's ability to identify and execute
successfully cost control initiatives. Because of these uncertainties, prospective investors are cautioned not to place undue reliance on such statements. The Company undertakes no obligation to
update these forward-looking statements.

The
company makes available through its corporate website at www.oakley.com, free of charge, its annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after such reports are filed or furnished to the
Securities and Exchange Commission.

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Also
available at our website are the following corporate governance materials: Code of Business Conduct and Ethics; Code of Ethics for Chief Executive and Senior Financial Officers;
Corporate Governance Guidelines; and Charters of the Audit Committee, Compensation and Stock Option Committee and Nominating and Corporate Governance Committee. Any of the foregoing materials may also
be obtained, free of charge, by written request to: Corporate Secretary, Oakley, Inc., One Icon, Foothill Ranch, California 92610.

Product Design and Development

Oakley is a consumer products company that uses innovative technology for the design and development of sunglasses, prescription eyewear, apparel, footwear,
watches, goggles and accessories. To date, the Company has designed these categories using its own resources in order to preserve brand
image, which the Company believes will bring greater respect and demand for Oakley's products over the long term.

State-of-the-art
technology maintains efficiency, precision and speed in the Company's product development cycle. Stereolithographic computer modeling
is combined with CAD/CAM liquid-laser prototyping to create fully detailed prototypes of eyewear, footwear and accessories. Rapid iteration of working models allows for extensive design testing before
final production. After the development stage is complete, the finalized sculpture can be used directly in preparation of production tooling.

The
Company's products undergo extensive testing throughout development. The American National Standards Institute (ANSI) and the American Society for Testing and Materials (ASTM) have
established specific testing criteria for eyewear. These tests analyze product safety and provide quantitative measure of optical quality, UV protection, light transmission and impact resistance. In
addition, the Company performs a broad range of eyewear coatings durability testing and mechanical integrity testing that includes extremes of UV, heat, condensation and humidity. With strict
guidelines from the ASTM and other industry authorities, Oakley footwear and apparel are tested to ensure quality, performance and durability that meet or exceed these standards. Research and
development expense during the years ended December 31, 2003, 2002 and 2001 were $14,308,000, $16,016,000 and $11,318,000 respectively.

Eyewear Technology and Products

Among the Company's most important patents are those which guard its achievements in dual-spherical lens technology and the associated optical
advances, and innovations in frame design and functionality. The proprietary technologies employed in lens cutting, etching and coating, as well as the Company's significant investment in specialized
equipment, are matched with exclusive formulations of production materials to achieve the superior optical quality, safety and performance of Oakley eyewear.

Oakley's
patentedXYZ Optics® represents a major breakthrough in lens technology. Precise geometric orientation provides
optical correction on three axes, not just two. The resulting lens allows light to be received over essentially the full angular range of vision while minimizing distortion caused by disparate
refraction along that rangean advance that increases clarity for all angles of view. This allows for wrapped, raked-back lens configurations that enhance peripheral vision and
protection against sun, wind and side impact.

High-performance
sports application eyewear featuring Oakley's patentedPOLARIC ELLIPSOID lens geometry (M Frame®, Pro M Frame®andZeros®) have demonstrated superior
optical clarity when compared to similar products of principal competitors. Developed specifically for toroidal lenses (which use different measurements for top-to-bottom vs.
side-to-side curvature), this proprietary geometry allows the Company to produce single-lens sports shields that provide enhanced coverage and protection while
reducing distortion at all angles of vision. Although the Company's patent relating to

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this
proprietary geometry will expire in 2004, the expiration of this patent is not expected to have a material impact on the Company. See "Intellectual Property" below.

Plutonite® lens material andIridium® lens coatings are among the
Company's most prominent advances in eyewear.Plutonite® is a proprietary material used to produce lenses of exceptional optical clarity.
The material inherently blocks 100% of all UVA, UVB, UVC and harmful blue light. Rendered as lenses of extremely high durability and low weight, it offers superior impact protection when matched with
the Company's eyewear frames.Iridium® is a metallic oxide that improves contrast and thereby enhances perception of detail. A full spectrum
of availableIridium® lens coatings allows the wearer to tune transmission for any given light condition. The coating has become very
popular for eyewear used in demanding sports such as skiing and cycling, and in high altitude use.

In
1999 the Company introduced a polarized lens choice for consumers. Unlike most polarized lenses, which stack multiple layers together using adhesive which compromises optical clarity,
durability and lens integrity, Oakley uses a patented lens technology to maintain precision optics by molecular fusing of the polarized filter between thin Plutonite® surfaces. Oakley then injection
molds liquidPlutonite® onto the
filter to create a true polarized lens with patentedXYZ Optics® and superior optical clarity.

The
Company continues to raise the bar of performance with innovative engineering in frame design. A proprietary three-point fit serves to retain optical alignment while eliminating the
discomfort of ordinary frames that mount with unbalanced pressure points. TheWire® frames are rendered from C-5a durable, lightweight alloy of
five metallic compounds.O
Matter® frames are composed of a lightweight synthetic that retains durability while allowing critical flex. As the only 3-D sculptured, hypoallergenic,
all-metal frames on earth,X Metal® is a family of eyewear named for a proprietary metal blend that exhibits an extraordinary
strength-to-weight ratio.X Metal® frames are produced with a unique metallurgical process and are designed to
utilize breakthroughs in architectural mechanics that allow the consumer to tailor the fit.

Gross
sunglass sales for 2003 were $310.4 million. Retail pricing for the Company'sO Matter®sunglass ranged from $55
to $240; theWire® styles ranged from
$120 to $315; theMagnesium styles ranged from $215 to $235 and the X-Metal® styles ranged in retail price from $275 to $400.

Prescription Eyewear Technology and Products

In March 2001, the Company released its first line of ophthalmic-specific frames and currently has a comprehensive prescription program encompassing both
ophthalmic frames and corrective lenses. The ophthalmic specific frame collection is a combination of sculpture, fit and function. There are several shapes and sizes for the consumer to choose from
and a variety of materials usedMagnesium, C-5,X
Metal®and RxO Matter®.As part of the Company's Plutonite® prescription lens offering, the Company sells a single
lens product that is ideally suited for the sports enthusiast. The Rx M Frame®utilizes a proprietary technology that enables the wearer to have the ultimate protection and widest range of visual
acuity. To
complement the single lens product, the Company also offers a dual lens program that is an ideal choice for the consumer who is interested in a more traditional eyewear frame or one of Oakley's many
high-wrap sunglass frames. OakleyPlutonite®prescription lenses are surfaced and finished in the Company's prescription lens
processing labs in the United States and Ireland. This control over the lens processing operation allows the Company to control the quality of the lens and process it within tolerances that exceed
industry standards.

The
Company's sunglass and clear prescription lenses are offered for any prescription ready or sunglass frame that eye care professionals have on display in their stores. The lenses are
not limited to use with Oakley prescription ready and Oakley sunglass frames. The Company offers 19 colors from which the consumer may choose, including polarized, Iridium®and clear options. Single
vision and progressive lens designs are also offered. Prescription eyewear gross sales were
$42.7 million for 2003.

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Approximately
78 percent of the company's prescription eyewear sales were generated by the prescription eyewear frame line, which now consists of 23 styles with retail prices ranging from
$120-$295. The company's prescription lenses accounted for the remaining 22 percent of prescription eyewear sales with retail prices ranging from $120-$380.

Apparel Technology and Products

Addressing the apparel needs of men and women, the Company has invested in a world-class lab that allows for 100% in-house testing during research and
development of garment products. Digital technologies allow the Company to design and create in three dimensions. All pieces are
engineered to fit the body as contoured spatial formsnot flat cutoutsso articulation and fit can be optimized. The Company utilizes core technologies to build technical
apparel for professional competition, and thereby achieves crossover into technical lifestyle. Innovations that enhance product durability, performance and comfort for professional athletes are then
made available to the general public.

The
Company released 535 apparel styles and accessories during 2003. Spring apparel releases for 2003, totaling 223 new styles, included an introduction of Oakley denim for men and the
launch of board shorts for women. Fall 2003 apparel releases totaled 312 new styles, which included an increased focus in technical outerwear with 46 new designs. The Company's key styles incorporated
AirVantage technology, a self regulating insulation system invented by Gore. The Company expanded its lifestyle product line and its women's product line. The women's line totaled 116 pieces and men's
totaled 196 pieces. Categories include: golf, mountain bike, surf, lifestyle, lifestyle athletic, fleece and tees.

Gross
sales of apparel and apparel accessories were $76.0 million for the full year, with the largest components being fleece, lifestyle and outerwear products, together with
substantial sales of the company's accessories line.

Footwear Technology and Products

With continued advancement in the design and manufacturing of footwear, the Company is utilizing proprietaryNet
Shape technology to create shoes with superior fit throughout the full range of motion. Instead of creating parts separately and forcing their consolidation, true
unibody construction is achieved with CAD/CAM engineering, allowing components to form an integrated system. A design change in any part of the shoe is seamlessly integrated into other components and
finalized data is passed directly to production equipment. This translates to improved functionality and comfort, as well as enhanced durability by preventing weaknesses that could result from
misaligned or mismatched components.

Twenty-one
new footwear styles were released in the year 2003. Introductions included theElite Special Forces Standard Issue Assault
Boot/Shoe,part of the Company's military/industrial product line, three new sandal lines, four new golf shoes and twelve new lifestyle shoes.

Footwear
gross sales were $36.5 million for the full year, with product retail prices ranging from $50-$400.

Wristwatch Technology and Products

The Company offers a comprehensive line of premium wristwatches. The range of performance accuracy extends to the level of six-jewel high precision
Swiss movement. The Company currently produces self-powering wristwatches, true analog quartz systems and a precision analog chronograph. In 2003, the Company terminated further
development of digital watch models to focus on analog watch products allowing for more sculpture and styling to be designed into the watches.

Watch
gross sales were $9.9 million for the full year as the Company realigned its product development and sales efforts to focus on premium analog watch designs and distribution.
The

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Company
achieved strong sales of the new GMT watch introduced in the second half of 2003 and continued strength of theDetonator®, Crush2.0andCrush 2.5analog
product lines. Retail pricing for the Company's watch products ranged from $120-$1,500.

Goggle Technology and Products

The culmination of more than 20 years in the goggle business has resulted in what the Company believes to be the world's most optically correct goggles for
motocross, mountain bike, snow and water recreation. Available in a number of styles, the Company's goggles include features such as scratch-resistant Lexan lenses, conical frames and multi-layered
face foams. Updated in 2000, the Company'sMX O Frame® continues to improve upon its championship legacy in motocross. The A Frame® was the world's
first optically correct dual-lens snow goggle and is engineered to optimize protection, as well as the
clarity and range of peripheral and downward vision. A triple layer of face foam insulates and cushions the contact surface for the ultimate in thermal shielding and comfort. In 2002, the Company
introduced theWisdom goggle, featuring increased lens sizing for greater visual range and interchangeable strap connections to accommodate
helmets.

The
Company's goggle products as of December 31, 2003 target snow, motocross and water sports with retail prices ranging from $30-$140. Goggle gross sales were
$36.2 million for the full year, driven by continued momentum of theWisdomsnow goggle line and increased military sales.

Face Shields and Hockey Gloves

In June 1997, Oakley acquired One Xcel, Inc., a company that designed what the Company believed to be the only optically correct protective face
shield available for use with hockey and football helmets. In 2001, the Company discontinued the One Xcel brand name for football shields and began marketing those products under the Oakley name. The
Company transitioned its hockey shield products to the Oakley name in 2002 and also began marketing hockey gloves featuring the Oakley logo. Oakley continues to maintain a licensing relationship with
the National Hockey League (NHL) for both of these product lines.

Product Line and Brand Extension

Oakley intends to introduce product line extensions and new product lines in the future and develop innovations targeted to attract additional consumers to its
global brand. To take advantage of unique opportunities, the Company may, from time to time, manufacture private-label or other sunglasses for other companies. The Company may also market and sell
sunglasses under brand names other than "Oakley." The Company may also consider acquisition opportunities that will enhance or complement the brand or add breadth to Oakley's product offerings. In
addition, the Company has licensed, and may determine to further license, its intellectual property rights to others in optical or other industries.

Manufacturing

The Company's headquarters and principal manufacturing facility is located in Foothill Ranch, Orange County, California, where it assembles and produces most of
its eyewear products. The Company uses state of the art manufacturing practices, such as cellular eyewear production, which allow for quick response to customer demand. The Company owns, operates and
maintains most of the equipment used in manufacturing its eyewear products. In-house production can contribute significantly to gross profit margins and offers protection against piracy.
It further enables the Company to produce products in accordance with its strict quality-control standards. Components and processes that are unlikely to add significant value are contracted to
outside vendors. The Company utilizes third party manufacturers to produce its internally designed footwear, apparel, timepieces and certain goggles.

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Much
of the equipment used in the manufacture of Oakley products has been specially designed and adapted for the processes used by the Company. By manufacturing its own products, the
Company has the opportunity to experiment with new materials and technologies which can lead to important discoveries, such as its patented Iridium® coating technology (which the Company believes is
one of the most sophisticated coating processes in the industry). Proprietary
manufacturing equipment and methodologies are protected by special security measures employed at the Company's manufacturing facilities. The Company has a second manufacturing facility located in
Dayton, Nevada, where it produces all of itsX-Metal® eyewear products.

In
January 2001, the Company began surfacing prescription lenses at the Foothill Ranch, California facility with a prescription lens lab designed to achieve quick turnarounds,
better quality control and higher optical standards. In June 2002, a second prescription lens manufacturing facility was opened in Ireland, which provides prescription lenses to Europe.

The
Company has built strong relationships with its major suppliers. With most suppliers, it maintains agreements that prohibit disclosure of any of the Company's proprietary information
or technology to third parties. Although the Company relies on outside suppliers for most of the specific molded components of its glasses, goggles, timepieces and footwear, the Company retains
substantial ownership of all molds used in the production of the components. The Company believes that most components can be obtained from one or more alternative sources within a relatively short
period of time. In addition, to further mitigate risk, the Company has developed an in-house injection molding capability for sunglass frames.

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

In
March 1997, the Company entered into a reciprocal exclusive dealing agreement with Gentex, its lens blank supplier, under which Oakley has the exclusive right to purchase, from
such supplier, decentered sunglass lenses and a scratch-resistant coating developed for use with such lenses. In return, Oakley has agreed to purchase all of its decentered lens requirements, subject
to certain exceptions, from such supplier. This agreement has been renewed and continues in force through March 2006. The Company's business interruption policy reimburses the Company for
certain losses incurred by the Company as a result of an interruption in the supply of raw materials, including uncoated lens blanks, resulting from direct physical loss or damage to a supplier's
premises. Subject to certain exceptions, the amount of coverage available for each affected supplier ranges from $3 million to $20 million. However, there can be no assurance that such
policy will be sufficient to compensate the Company for all losses resulting from an interruption in the supply of raw materials.

Distribution

The Company sells Oakley eyewear in the United States through a carefully selected account base that fluctuates between 8,400 and 9,200 accounts, and 14,500 to
15,600 doors, depending on the seasonality of the Company's summer and winter products. The store base is comprised of optical stores, sunglass retailers and specialty sports stores, including bike,
surf, snow and golf shops, and motorcycle, athletic footwear and sporting goods stores and department stores. Unlike many of its competitors, the Company has elected not to sell its current season
products through discount stores, drug stores or traditional mail-order companies.

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The
Company's products are currently sold in over 100 countries outside the United States. In most of continental Europe, marketing and distribution are handled directly by the Company's
subsidiary Oakley Europe, located in Paris, France, which is staffed by approximately 211 employees who perform sales, sports marketing, advertising, customer service, shipping and accounting
functions. Since 1995, the Company has been selling Oakley products to Mexico and Central America on a direct basis through its subsidiary Oakley Mexico. In 1996, the Company acquired its exclusive
distributor in the United Kingdom ("Oakley UK") and established an office in South Africa ("Oakley Africa") and began selling to those markets on a direct basis in the fourth quarter of 1996. In
May 1997, the Company began selling to Japan ("Oakley Japan") on a direct basis through its own operation. In April 1998, the Company acquired the Oakley division of its exclusive
Canadian distributor, enabling the Company to market and sell its products on a direct basis in Canada. In November 1999, the Company acquired its exclusive Australian distributor and thereby
assumed direct responsibility for distribution of Oakley products in that market and in New Zealand. In June 2000, the Company assumed direct responsibility for distribution of Oakley products
in the Austrian market and opened a new office known as Oakley GmbH in Munich, Germany to serve the German marketplace. In February 2002, the Company established an office in Brazil and began
shipping products to retailers there in the third quarter of 2002.

In
those parts of the world not serviced by the Company or its subsidiaries, Oakley products are sold through distributors who possess local expertise. These distributors sell the
Company's products either exclusively or with complementary products. They agree to respect the marketing philosophy and practices of the Company and to receive extensive training regarding such
philosophies and practices. For information regarding the Company's operations by geographic region, see Note 13 inNotes to Consolidated Financial
Statements.

The
Company requires its retailers and distributors to agree not to resell or divert Oakley products through unauthorized channels of distribution. Products shipped from Oakley's
headquarters are marked with a tracking code that allows the Company to determine the source of diverted products sold by unauthorized retailers or distributors. When Oakley products are found at
undesirable locations or unauthorized retailers, the Company purchases samples and, using the tracking device, determines
the source of the diversion. The Company then estimates the potential damage to the Company's retail franchise and image and may require that the offending account repurchase the diverted product. In
certain instances, the Company may terminate the account. When an existing account has been terminated, the Company may repurchase its own products from the retailer to protect the Oakley image and
the exclusivity enjoyed by the Company's retail account base. The Company employs similar anti-diversion techniques in overseas markets.

In
August 2001, the Company established theOakley Premium Dealerprogram to identify and reward retailers that demonstrate
superior support of the Oakley brand by, among other things, consistently maintaining a broad assortment of products and quickly embracing the Company's latest innovations. Retailers earning the Oakley Premium
Dealerdesignation are eligible for cooperative marketing and advertising support, exclusive products, dealer locator prioritization on
Oakley's website and favorable tagging in Oakley's annual print and outdoor advertising campaigns.

At
December 31, 2003, the Company operated 86 department store concept shops throughout the country at retailers Dillards, Parisian, Macy's East, Macy's West, Marshall Fields and
Carsons Pirie Scott. In addition to these locations, the company sells its footwear through Nordstrom and select Saks Fifth Avenue locations.

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Advertising and Promotion

Oakley retains significant control over its promotional and advertising programs and believes it is able to deliver a more targeted consistent and
well-recognized advertising message at substantial cost savings compared to complete reliance on outside agencies. The Company's print advertising consists of lifestyle, technical and
athlete association campaigns highlighting its products.

While
the Company uses traditional marketing methods in some instances, it attributes much of its success to the use of less conventional methods, including sports marketing, grassroots
sports events, targeted product allocation and in-store display aids. The Company has used sports marketing extensively to achieve consistent, authentic exposure that equates to strong
brand recognition on a global level. Oakley utilizes the exposure generated by its athletes as an "editorial" endorsement of product performance and style, as opposed to a commercial endorsement.

The
sports marketing division consists of 23 sports marketing managers domestically, with an additional 30 managers positioned in direct offices and with distributors internationally.
These experts specialize in multiple sport and entertainment market segments and niches. The mission of the Company's sports marketing experts is to identify and develop relationships with top
athletes and opinion leaders in the sports and entertainment industry, negotiate their endorsement agreements and help them serve as ambassadors by educating them on the performance functions and
benefits of Oakley products. This strategy has proven to gain editorial exposure that ultimately brings awareness and authenticity to the brand. The diverse knowledge of Oakley's sports marketing
experts earns the respect of pro athletes especially in youth lifestyle sports such as surf, skate, motocross and snowboard, yet continues to successfully maintain leadership in more mainstream sports
such as golf.

Another
level of marketing is brand marketing. The Company will continue to support its products through targeted consumer efforts. Advertising will be leveraged to drive eyewear,
footwear, apparel and watch sales and will be used to introduce consumers to the Company's other product categories. The 2004 campaign will include an integration of print media, outdoor media,
in-mall billboards and point-of-sale displays.

Direct
marketing programs will focus onO Store®,Iacon and Oakley Premium Dealers (OPD) and will overlay the base advertising
plans used to engage consumers during key selling periods. These efforts are complemented by multiple brand catalogs, enhancements to the Company's website and Internet tie-ins. Public
relations programs are designed to complement advertising
campaigns and are centered on securing editorial exposure for new product inventions and technologies.

Internationally
the Company retained BJK&E Media in London, England in 2001 to perform similar services for the Company's United Kingdom subsidiary. In 2002 the Company extended this
relationship to include its German subsidiary. For the remainder of the Company's foreign offices, media services are retained in-house.

Retail Operations

At December 31, 2003, the Company operated 20 Oakley retail stores under theO Storename that offer a full
range of Oakley products and feature marketing enhancements to support the brand. In addition to these full priced retail venues, the Company operated sevenOakley
Vaults®, the Company's outlet store concept, featuring discontinued and excess seasonal merchandise in addition to newer products priced at full retail. The
Company's retail stores comprise high profile locations positioned in some of the top malls throughout the country. The current roster includes stores located in the states of Florida, Texas,
Colorado, California, Arizona, North Carolina, Hawaii, Minnesota, Nevada, Illinois and Virginia. The average size of each store is approximately 2,700 square feet. The Company prides itself on
educating the retail staff with extensive product and sales knowledge that marries the quality of its inventions. For 2004, the Company intends to open a comparable number of stores that were opened
in 2003.

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On
October 31, 2001, the Company completed the acquisition of Iacon, Inc. ("Iacon"), a sunglass retailing chain headquartered in Scottsdale, Arizona. Iacon operates a chain
of mall-based sunglass specialty stores, using four separate retail concepts, under the namesSunglass Designs, Sporting Eyes, Occhiali da SoleandOakley Iconlocated throughout the United States, with a
concentration primarily in the sunbelt regions. Oakley is the leading brand sold in these multi-brand specialty sunglass boutiques. As of December 31, 2003, Iacon had 76 retail stores. The
Company intends to expand these retail concepts across the United States.

In
December 2003, the Company opened its first licensedO Store®,located in Santiago Chile, making it the sixth
international Oakley retail location. In addition to this latest store opening, Oakley currently operates, through its South Pacific subsidiary, anO
Store®in Torquay, Australia opened in November 2001 near the company's headquarters there; two Oakley Vaults®that opened under licensing agreements in
March 2002 in Portsmouth and in April 2003 in York, United Kingdom; an
OakleyVault®that opened in December 2003 under license in Calais, France; and an Oakley Vault®opened in April 2002 that is
operated by Oakley's South African subsidiary and is located near the company's South African headquarters there in Port Elizabeth, South Africa.

Internet Strategy and Systems

The Company continues to execute a comprehensive Internet channel strategy designed to allow more consumers to purchase Oakley products as efficiently as
possible. The program utilizes the World Wide Web as a complementary channel to retail and international distributors. Ultimate goals include increased consumer awareness of the Oakley brand, improved
customer service and increased sales through retail and E-commerce channels by harnessing the unique interactive capabilities of the Internet.

The
Company's corporate Web site (www.oakley.com)is fully E-commerce capable. The site features a broad selection of Oakley
eyewear, footwear, apparel, accessories and watches for delivery to U.S. and Canadian customers. The site also features a prominent dealer-locator function, including mapping, that directs consumers
to local retailers and highlightsOakley Premium Dealersthat showcase the widest selection of Oakley products.

The
Company generated approximately $11.5 million of direct internet gross sales and associated telesales in 2003, an increase of $1.9 million, or 19.8 percent, over
2002.

The
Company has implemented SAP's order processing, manufacturing, inventory management, distribution and finance modules in its key worldwide locations in the United States and most
major international offices. This has created an efficient, streamlined supply-chain process capable of providing same-day or next-day shipping of in-stock orders.

Principal Customers

During 2003, net sales to the Company's largest ten customers, which included three international distributors, accounted for approximately 17.6% of the Company's
total net sales. Net sales to one customer, Luxottica Group S.p.A. and its affiliates ("Luxottica")owner of Sunglass Hut International, the largest sunglass specialty retailer in the
world (referred to herein as "Sunglass Hut" or "Watch Station")accounted for 9.0% of the Company's 2003 net sales.

Luxottica
acquired Sunglass Hut in April 2001 and implemented changes which adversely affected the Company's net sales to Sunglass Hut in 2001. In December 2001, the
Company and Luxottica entered into a new three-year commercial agreement for the distribution of Oakley products through Sunglass Hut retail stores which marked the resumption of the
business relationship between the two companies after a short disruption that began in August 2001. The arrangements between the companies do not obligate Luxottica to order product from the
Company, and there can be no assurances as to the future of the relationship between the Company and Luxottica. In September 2003,

11

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Luxottica
completed the acquisition of all the shares of Australian eyewear retailer OPSM Group Ltd ("OPSM"). OPSM operates in the South Pacific and Southeast Asia regions with approximately
600 retail locations, a portion of which currently offer some of the Company's products. For 2003, the Company's net sales to OPSM prior to the acquisition were approximately AUD $1.1 million
(or approximately $0.7 million in U.S. dollars based on the average exchange rate for 2003). For 2002, the Company's net sales to OPSM were approximately AUD $2.8 million (or
approximately $1.5 million in U.S. dollars based on the average exchange rate for 2002). These sales exclude a limited amount of sales generated through the Company's international
distributors. In November 2003, Luxottica completed the acquisition of New Zealand eyewear retailer Sunglass Store New Zealand ("SSNZ"), the Company's largest customer in New Zealand. SSNZ
operates in New Zealand with 16 retail locations which offer some of the Company's products. In January 2004, Luxottica entered into a definitive merger agreement with Cole National Corporation
("Cole"), one of the largest optical retailers and largest chain providers of managed vision care services worldwide. This merger is expected to close in the second half of 2004 pending the approval
of Cole's stockholders and its compliance with applicable antitrust requirements. The Company currently sells to a small portion of Cole's retail locations and sales to the customer have been
immaterial. There can be no assurance that the recent acquisitions or future acquisitions by Luxottica will not have a material adverse impact on the Company's financial position or results of
operations.

Intellectual Property

The Company aggressively asserts its rights under patent, trade secret, unfair competition, trademark and copyright laws to protect its intellectual property,
including product designs, proprietary manufacturing processes and technologies, product research and concepts and recognized trademarks. These rights are protected through patents and trademark
registrations, the maintenance of trade secrets, the development of trade dress, and where appropriate, litigation against those who are, in the Company's opinion, infringing these rights. The Company
has filed suit against a number of its competitors to enforce certain of the Company's patents and trademarks. While there are no guarantees in a litigation setting, the Company's legal team
aggressively seeks to protect the Company's patents and trademarks in an attempt to fully protect the Company's proprietary information and technologies. The Company intends to continue asserting its
intellectual property rights against infringers. The Company has developed a reputation in the sunglass industry as a vigorous defender of its intellectual property rights; this reputation acts as a
deterrent against the introduction of potentially infringing products by its competitors and others.

The
following table reflects data as of December 31, 2003 concerning the Company's intellectual property:

Number of Utility/Design Patents

Number of TrademarksIssued

Pending

Issued

PendingUnited States

172

20

144

30International

373

109

832

210


Over
the next four years, 23 U.S. patents and 47 international patents that the Company currently holds will expire, including the Company's Toroidal Lens (POLARIC
ELLIPSOID) patent. Although the Company may continue to use the technology underlying some of these patents, the expiration of these patents is not expected to have a material impact on
the Company for a variety of reasons, including that many of the patents relate to the design or production of products that are either no longer produced by the Company or do not represent a
significant portion of the Company's revenues. In the case of the Toroidal Lens (POLARIC ELLIPSOID) patent, advancements in optical properties arising from the Company's XYZ
Optics® patents, the Company's dominant position in the sports

12

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eyewear
segment and the adoption of alternative lens geometries by the Company's competitors reduce the likelihood of any negative financial consequences from the expiration of this patent. In
addition, the Company utilizes other proprietary technologies and precision manufacturing processes in the production of its products which also reduce the risks associated with the expiration of the
Company's patents. The remainder of the Company's patents will expire on dates from 2008 and after.

The
Company dissuades counterfeiting through the active monitoring of the marketplace by its anti-counterfeiting personnel and other employees and through the services
provided by outside firms that specialize in anti-counterfeiting measures. The Company's sales representatives, distributors and retailers have also proved to be effective watchdogs
against infringing products, frequently notifying the Company of any suspicious products and assisting law enforcement agencies. The Company's sales representatives are educated on Oakley's patents
and trade dress, and assist in preventing infringers from obtaining retail shelf space.

Competition

The Company is a leading designer, manufacturer and distributor of eyewear in the sports segment of the nonprescription eyewear market. Within this segment, the
Company competes with mostly smaller sunglass and goggle companies in various niches of the sports market and a limited number of larger competitors, some of whom have greater financial and other
resources than the Company. Some of these niche markets are susceptible to rapid changes in consumer preferences, which could affect acceptance of the Company's products. Oakley believes the vigorous
protection of its intellectual property rights has limited the ability of others to compete in this segment. Accordingly, the Company believes that it is the established leader in this segment of the
market, although several companies, including Luxottica, Marchon, Safilo and various smaller niche brands, compete with the Company for shelf space.

The
Company also competes in the broader non-sports, or recreational, segment of the sunglass market, which is fragmented and highly competitive. The major competitive
factors include fashion trends, brand recognition, marketing strategies, distribution channels and the number and range of products offered. A number of established companies, including Luxottica,
compete in this wider market. In order to retain its market share, the Company must continue to be competitive in quality and performance, technology, method of distribution, style, brand image,
intellectual property protection and customer service. In April 2001, Luxottica acquired Sunglass Hut, the Company's largest customer. See "Principal Customers."

The
Company-owned Iacon chain of specialty sunglass stores competes primarily with mall-based sunglass specialty retailers, the largest being Sunglass Hut, which is owned by
competitor Luxottica.

Within
the athletic footwear market, the Company competes with large, established brands such as Nike, FootJoy, Reebok, Adidas and Timberland, among others which have greater financial
and other resources than the Company. In addition to these dominant brands, the Company also competes with smaller niche brands, such as Vans, Reef and Teva, among others. The Company's technical
apparel outerwear competes primarily with Burton, North Face, Columbia Sportswear and Patagonia. The Company's sports and lifestyle apparel competes primarily with Nike, Quiksilver, Billabong,
Ashworth and various smaller niche brands.

The
Company's luxury timepiece products compete in the upper-middle and luxury segments of the watch market (respectively categorized by the retail price points $300-$900 and
$1,000 plus) which is dominated by established Swiss brands, including Rolex, Breitling, Omega, TAG-Heuer, Movado, Rado and Hamilton. The Company's performance watches compete in the
middle segment of the watch market which is characterized by sports watches from Nike, Adidas, Timex and Casio. In addition, the Company's performance watches compete with other fashion brands from
the Swatch Group, Swiss Army and Fossil with retail price points of $50-$299.

13

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Domestic and Foreign Operations

See Note 13 inNotes to the Consolidated Financial Statementsfor discussion regarding domestic and foreign
operations.

Employees

The Company believes that its employees are among its most valuable resources and have been a key factor in the success of Oakley's products. As of
December 31, 2003, the total count of worldwide full-time regular employees was 2,456. In addition, the Company may utilize as many as 500 temporary personnel from time to time,
especially during peak summer months.

The
Company is not a party to any labor agreements and none of its employees is represented by a labor union. The Company considers its relationship with its employees to be good and has
never experienced a work stoppage.

Item 2. Properties

The Company's principal corporate and manufacturing facility is located in Foothill Ranch, Orange County, California. The facility, which is owned by the Company,
is approximately 500,000 square feet, with potential to expand into an additional 100,000 square feet. In June 1996, the Company purchased a
facility in Nevada of approximately 63,000 square feet for the production of itsX Metal®eyewear. In addition, the Company leases office
and warehouse space as necessary to support its operations worldwide, including offices in the United Kingdom, Germany, France, Italy, Australia, South Africa, Japan, Canada, New Zealand, Brazil and
the state of Washington. The Company owns a business office and warehouse of approximately 18,000 square feet in Mexico City for its operations in Mexico and Central America. The facility was first
occupied in late 1998. Since late 2000, the Company has leased approximately 150,000 square feet of space in Ontario, California to support the expanding distribution needs of its footwear and apparel
lines. The new facility began shipping the Company's spring footwear and apparel lines to retailers in early 2001. In June 2002, a third manufacturing facility which provides prescription
lenses to Europe was opened in Ireland. In 2003, the Company established a centralized footwear and apparel third-party warehouse arrangement in the Netherlands. The Company believes its current and
planned facilities are adequate to carry on its business as currently contemplated.

The
Company is subject to federal, state and local environmental laws, regulations and ordinances that (i) govern activities or operations that may have adverse environmental
effects (such as emissions to air, discharges to water, and the generation, handling, storage and disposal of solid and hazardous wastes) or (ii) impose liability for the cost of cleanup or
other remediation of contaminated property, including damages from spills, disposals or other releases of hazardous substances or wastes, in certain circumstances without regard to fault. The
Company's manufacturing operations routinely involve the handling of chemicals and wastes, some of which are or may become regulated as hazardous substances. The Company has not incurred, and does not
expect to incur, any significant expenditures or liabilities for environmental matters. As a result, the Company believes that its environmental obligations will not have a material adverse effect on
its operations or financial position.

Item 3. Legal Proceedings

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

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

None.

14

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Part II

Item 5. Market for Registrant's Common Equity and Related Shareholder Matters

The Company's common stock, par value $.01 per share ("Common Stock"), began trading on the New York Stock Exchange on August 10, 1995 upon completion of
the Company's initial public offering (trading symbol "OO"). As of March 8, 2004, the closing sales price for the Common Stock was $15.45. The following table sets forth the high and low sales
prices for the Common Stock for each quarter of 2003 and 2002 on the New York Stock Exchange Composite Tape:

High

Low2003First Quarter

$
10.62

$
7.37Second Quarter

$
12.13

$
7.81Third Quarter

$
12.28

$
10.00Fourth Quarter

$
14.10

$
10.112002First Quarter

$
18.95

$
14.32Second Quarter

$
19.99

$
17.10Third Quarter

$
16.57

$
9.70Fourth Quarter

$
13.93

$
9.13


The
number of shareholders of record of the Company's Common Stock on March 8, 2004 was 501.

Dividend Policy

On August 12, 2003, the Company's Board of Directors announced the initiation of an annual dividend policy and declared an initial annual cash dividend of
$0.14 per share. This dividend, totaling $9.5 million, was paid on October 31, 2003 to shareholders of record as of the close of business on October 15, 2003. Any future dividends
are at the discretion, and subject to the approval, of the Company's Board of Directors and will depend upon the Company's results of operations, financial condition, contractual restrictions and
other factors deemed relevant by the Board of Directors.

Securities Authorized for Issuance Under Equity Compensation Plans

Securities authorized for issuance under the Company's equity compensation plans are as follows:

|Plan Category                                              |  | (a)
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights |  | (b)
Weighted-average
exercise price of
outstanding options,
warrants and rights |  | (c)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
|---------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensation plans approved by security holders     |  | 4,808,020                                                                                       |  | $12.14                                                                          |  | 2,095,398                                                                                                                                      
|Equity compensation plans not approved by security holders |  | Not applicable                                                                                  |  | Not applicable                                                                  |  | Not applicable                                                                                                                                 

Item 6. Selected Financial Data

The following table sets forth certain selected financial data regarding the Company which is qualified by reference to, and should be read in conjunction with,
the Consolidated Financial Statements and Notes thereto. SeeIndex to Consolidated Financial StatementsandItem 7. Management's

15

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Discussion and Analysis of Financial Condition and Results of Operations.The income statement data and balance sheet data presented below have been derived from the Company's
consolidated financial statements. The Company's consolidated income statements for the fiscal years ended December 31, 2003, 2002 and 2001 and consolidated balance sheets as of
December 31, 2003 and 2002 included herein have been audited by Deloitte & Touche LLP, the Company's independent auditors, as indicated in their report included elsewhere herein. The
selected income statement data set forth herein are for informational purposes only and may not necessarily be indicative of the Company's future results of operations.

|                                         |                            | Year Ended December 31, 
|---------------------------------------- | -------------------------- | ------------------------
|
|
|Income Statement Data:                   |                            |                         
|Net sales                                |                            | $                       
|Cost of goods sold                       |                            |                         
|                                         |                            |                         
|Gross profit                             |                            |                         
|Operating expenses:                      |                            |                         
|                                         | Research and development   |                         
|                                         | Selling                    |                         
|                                         | Shipping and warehousing   |                         
|                                         | General and administrative |                         
|                                         |                            |                         
|                                         |                            | Total operating expenses
|Operating income                         |                            |                         
|Interest expense, net                    |                            |                         
|                                         |                            |                         
|Income before provision for income taxes |                            |                         
|Provision for income taxes               |                            |                         
|                                         |                            |                         
|Net income                               |                            | $                       
|                                         |                            |                         
|Basic net income per share               |                            | $                       
|                                         |                            |                         
|Basic weighted average common shares     |                            |                         
|                                         |                            |                         
|Diluted net income per share             |                            | $                       
|                                         |                            |                         
|Diluted weighted average common shares   |                            |                         
|                                         |                            |                         
|Dividend per share                       |                            | $                       
|                                         |                            |                         

|                     |  | At December31,
|-------------------- |  | --------------
|
|Balance Sheet Data:  |  |               
|Working capital      |  | $             
|Total assets         |  |               
|Total debt           |  |               
|Shareholders' equity |  |               

16

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

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

Overview

Oakley is an innovation-driven designer, manufacturer and distributor of consumer products that include high-performance eyewear, footwear, watches,
apparel and accessories. The Company's products are sold in the United States through a carefully selected base of accounts which fluctuates between 8,400 and 9,200 with approximately 14,500 to 15,600
locations depending on seasonality of summer and winter products. The store base is comprised of optical stores, sunglass retailers and specialty sports stores, including bike, surf, snow and golf
shops, and motorcycle, athletic footwear and sporting goods stores and limited department store distribution. The Company also operates 27 Oakley retail stores in the United States that offer a full
range of Oakley products. Additionally, the Company owns Iacon, Inc., a sunglass retailing chain headquartered in Scottsdale, Arizona, with 76 sunglass specialty retail stores at
December 31, 2003.

Internationally,
the Company sells its products in over 100 countries outside the United States, with direct offices in France, Germany, United Kingdom, Italy, Japan, Mexico, South
Africa, Canada, Australia, New Zealand and Brazil. In those parts of the world not serviced by the Company or its subsidiaries, Oakley products are sold through distributors who possess local
expertise. These distributors sell the Company's products either exclusively or with complementary products and agree to respect the marketing philosophy and practices of the Company. Sales to the
Company's distributors are denominated in U.S. dollars. The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to transactions of its
international subsidiaries. The Company and its subsidiaries use foreign exchange contracts in the form of forward contracts to manage the level of exposure to the risk of fluctuations in foreign
currency exchange rates.

Significant Accounting Policies and Certain Risks and Uncertainties

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

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

17

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Revenue Recognition

The Company recognizes wholesale revenue when merchandise is shipped to a customer and the risks and rewards of ownership have passed based on the terms of sale.
Revenue from the Company's retail store operations is recognized upon purchase by customers at the point of sale. Generally, the Company extends credit to its wholesale customers and does not require
collateral. The Company performs ongoing credit evaluations of those customers and historic credit losses have been within management's expectations. Sales agreements with dealers and distributors
normally provide general payment terms of 30 to 120 days, depending on the product category. The Company's standard sales agreements with its customers do not provide for any rights of return
by the customer other than returns for product warranty related issues. In addition to these product warranty related returns, the Company occasionally accepts other returns at its discretion. The
Company records a provision for sales returns and claims based upon historical experience. Actual returns and claims in any future period may differ from the Company's estimates.

Accounts Receivable

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

Inventories

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

Long-Lived Assets

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

18

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

Goodwill

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

Warranties

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

Income Taxes

Current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax asset or liability is established for
the expected future consequences of temporary differences in the financial reporting and tax bases of assets and liabilities. The Company considers future taxable income and ongoing, prudent and
feasible tax planning strategies in assessing the value of its deferred tax assets. If the Company determines that it is more likely than not that these assets will not be realized, the Company will
reduce the value of these assets to their expected realizable value, thereby decreasing net income. Evaluating the value of these assets is necessarily based on the Company's judgment. If the Company
subsequently determined that the deferred tax assets, which had been written down, would be realized in the future, the value of the deferred tax assets would be increased, thereby increasing net
income in the period when that determination was made. See Note 7 inNotes to Consolidated Financial Statements.

Insurance Coverage

The Company is partially self-insured for its workers' compensation insurance coverage. Under this insurance program, the Company is liable for a
deductible of $250,000 for each individual claim and an aggregate annual liability of $1,368,000. The Company records a liability for the estimated cost of claims both reported and incurred but not
reported based upon its historical experience. The estimated costs include the estimated future cost of all open claims. The Company will continue to adjust the estimates as the actual experience
dictates. A significant change in the number or dollar amount of claims could cause the Company to revise its estimate of potential losses and affect its reported results.

19

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Foreign Currency Translation

The Company has direct operations in Continental Europe, United Kingdom, Japan, Canada, Mexico, South Africa, Australia, New Zealand and Brazil which collect at
future dates in the customers' local currencies and purchase finished goods in U.S. dollars. Accordingly, the Company is exposed to transaction gains and losses that could result from changes in
foreign currency. Assets and liabilities of the Company denominated in foreign currencies are translated at the rate of exchange on the balance sheet date. Revenues and expenses are translated using
the average exchange rate for the period. Gains and losses from translation of foreign subsidiary financial statements are included in accumulated other comprehensive income (loss). Gains and losses
on short-term intercompany foreign currency transactions are recognized as incurred. As part of the Company's overall strategy to manage its level of exposure to the risk of fluctuations
in foreign currency exchange rates, the Company and its subsidiaries have entered into various foreign exchange contracts in the form of forward contracts. See Note 10 in Notes to Consolidated Financial
Statements.

Vulnerability Due to Supplier Concentrations

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

Vulnerability Due to Customer Concentrations

Net sales to the retail group of Luxottica S.p.A ("Luxottica"), which include Sunglass Hut locations worldwide, were approximately 9.0%, 12.2% and 12.0% of the
Company's net sales for the years ended December 31, 2003, 2002 and 2001, respectively. Luxottica is also one of the Company's largest competitors in the sunglass and optical frame
markets. Luxottica acquired Sunglass Hut in April 2001 and implemented changes which adversely affected the Company's net sales to Sunglass Hut in 2001. In December 2001, the Company and
Luxottica entered into a new three-year commercial agreement for the distribution of Oakley products through Sunglass Hut retail stores which marked the resumption of the business
relationship between the two companies after a short disruption that began in August 2001. The arrangements between the companies do not obligate Luxottica to order product from the Company,
and there can be no assurances as to the future of the relationship between the Company and Luxottica. In September 2003, Luxottica completed the acquisition of all the shares of Australian
eyewear retailer OPSM Group Ltd ("OPSM"). OPSM operates in the South Pacific and Southeast Asia regions with approximately 600 retail locations, a portion of which currently offer some of the
Company's products. For 2003, the Company's net sales to OPSM prior to the acquisition were approximately AUD $1.1 million (or approximately $0.7 million in U.S. dollars based on the
average exchange rate for 2003). For 2002, the Company's net sales to OPSM were approximately AUD $2.8 million (or approximately $1.5 million in U.S. dollars based on the average
exchange rate for 2002). These sales exclude a limited amount of sales generated through the Company's international distributors. In November 2003, Luxottica completed the acquisition of New
Zealand eyewear retailer Sunglass Store New Zealand ("SSNZ"), the Company's largest customer in New Zealand. SSNZ operates in New Zealand with 16 retail locations which offer some of the Company's
products. In January 2004, Luxottica entered into a definitive merger agreement with Cole National Corporation ("Cole"), one of the largest optical retailers and largest chain providers of
managed vision care services worldwide. This merger is expected to close in the second half of 2004

20

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pending
the approval of Cole's stockholders and its compliance with applicable antitrust requirements. The Company currently sells to a small portion of Cole's retail locations and sales to this
customer have been immaterial. There can be no assurance that the recent acquisitions or future acquisitions by Luxottica will not have a material adverse impact on the Company's financial position or
results of operations.

Commitments and Contingencies

The Company has entered into operating leases, primarily for facilities and retail stores, and has commitments under endorsement contracts with selected athletes
and others who endorse the Company's products. Minimum future payments under these leases and endorsement contracts are identified in Note 9 inNotes to Consolidated
Financial Statements.

Restructure Charge

A restructure charge of $2.8 million ($1.8 million, or $0.02 per diluted share, on an after-tax basis) was recorded during the fourth
quarter of fiscal 2002 to restructure (the "Restructuring Plan") the Company's European operations with significant changes to the regional sales and distribution organization. Pursuant to an approval
of the Company's Board of Directors in December 2002, relationships with several outside sales agents have been modified or terminated, and changes have been implemented to rationalize other
warehousing and distribution functions within the European markets. During 2003, the Company paid or settled almost all of the expenses associated with the Restructuring Plan. As of
December 31, 2003, the Company had finalized all the restructuring charges and management believes the amount originally recorded will be sufficient to cover any remaining restructure
liabilities. See Note 14 inNotes to Consolidated Financial Statements.

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

|                                                                             |  | Accrued
restructure
liability
balance at
Dec. 31, 2002 |       | Amounts paid |   | Changes due
to foreign
exchange rates
and
adjustments |   | Balance as of
Dec. 31, 2003
|---------------------------------------------------------------------------- |  | ------------------------------------------------------ | ----- | ------------ | - | ----------------------------------------------------- | - | ---------------------------
|Termination and modification of sales agent contracts and employee contracts |  | $                                                      | 2,249 |              | $ | (1,960                                                | ) | $                          
|Rationalization of warehousing and distribution                              |  |                                                        | 539   |              |   | (864                                                  | ) |                            
|                                                                             |  |                                                        |       |              |   |                                                       |   |                            
|                                                                             |  | $                                                      | 2,788 |              | $ | (2,824                                                | ) | $                          
|                                                                             |  |                                                        |       |              |   |                                                       |   |                            

Results of Operations

The following tables set forth operating results in dollars and as a percentage of net sales for the periods indicated.

21

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OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands)

|                                         |                            | Year Ended December 31, 
|---------------------------------------- | -------------------------- | ------------------------
|
|Net sales                                |                            | $                       
|Cost of goods sold                       |                            |                         
|                                         |                            |                         
|                                         | Gross profit               |                         
|Operating expenses:                      |                            |                         
|                                         | Research and development   |                         
|                                         | Selling                    |                         
|                                         | Shipping and warehousing   |                         
|                                         | General and administrative |                         
|                                         |                            |                         
|                                         |                            | Total operating expenses
|                                         |                            |                         
|Operating income                         |                            |                         
|Interest expense, net                    |                            |                         
|                                         |                            |                         
|Income before provision for income taxes |                            |                         
|Provision for income taxes               |                            |                         
|                                         |                            |                         
|Net income                               |                            | $                       
|                                         |                            |                         

|                                         |                            | Year Ended December 31,  |     
|---------------------------------------- | -------------------------- | ------------------------ | ----
|
|Net sales                                |                            | 100.0                    | %   
|Cost of goods sold                       |                            | 43.5                     |     
|                                         |                            |                          |     
|                                         | Gross profit               |                          | 56.5
|Operating expenses:                      |                            |                          |     
|                                         | Research and development   |                          | 2.7 
|                                         | Selling                    |                          | 27.3
|                                         | Shipping and warehousing   |                          | 3.7 
|                                         | General and administrative |                          | 11.3
|                                         |                            |                          |     
|                                         |                            | Total operating expenses |     
|                                         |                            |                          |     
|Operating income                         |                            | 11.5                     |     
|Interest expense, net                    |                            | 0.2                      |     
|                                         |                            |                          |     
|Income before provision for income taxes |                            | 11.3                     |     
|Provision for income taxes               |                            | 4.0                      |     
|                                         |                            |                          |     
|Net income                               |                            | 7.3                      | %   
|                                         |                            |                          |     

The
Company's gross sunglass sales, before discounts and defective returns, were $310.4 million, $330.2 million and $301.6 million for the years ended
December 31, 2003, 2002 and 2001, respectively. Sunglass unit sales were 4,199,916; 4,707,822; and 4,721,387 for the years ended December 31, 2003, 2002 and 2001, respectively.

22

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Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Net sales

Net sales increased to $521.5 million for the year ended December 31, 2003 from $489.6 million for the year ended December 31, 2002,
an increase of $31.9 million, or 6.5%. Gross sales were $560.6 million in 2003 compared to $528.8 million for 2002. Gross sunglass sales decreased $19.8 million to
$310.4 million for the year ended December 31, 2003 compared to $330.2 million for the year ended December 31, 2002. Sunglass unit shipments declined 10.8% due to a number
of adverse factors including weak consumer spending related in part to the events in Iraq during the first part of the year, a reduction in sales contribution from new sunglass introductions, wet
weather patterns in key markets during the peak sunglass selling season and competitive pressures from strong fashion brands in the southern European markets. The decrease in sunglass unit shipments
was partially offset by a 5.4% increase in average selling price primarily as a result of favorable foreign exchange rates and a greater contribution from the Company's retail store operations. The
Company experienced declines in sales of more mature products, which were partially offset by increased sales from theHalf Jacket, Half WireandSplice®, introduced in 2002, as well as sales of the Company's
new 2003 sunglass styles including theValve, Big Square Wire®, Monster Dogand Teaspoon. In addition, the Company experienced
increased sales of the Company's polarized styles for 2003. Gross sales from the
Company's newer product categories, comprised of footwear, apparel, watches and prescription eyewear, increased 23.5%, or $31.4 million, to $165.1 million for 2003 from
$133.7 million for 2002. As a percentage of gross sales, these new product categories accounted for 29.5% of total gross sales for 2003 compared to 25.3% for 2002. The strongest results were
from the apparel and prescription eyewear categories where strong line introductions drove sales increases. Gross sales of the Company's goggles increased 30.2%, driven by the success of Wisdom,
the Company's most advanced snow goggle, introduced in the fourth quarter of 2002. While gross sales of the Company's footwear
increased 17.0%, or $5.3 million, to $36.5 million for 2003 from $31.2 million for 2002, the Company experienced poor sell-through of its fall line of footwear products which the
Company believes could have an adverse effect on its 2004 footwear business. Management believes these sales increases are a result of its expanded product lines, expanded distribution and retail
initiatives, including its greater dealer base and increasing consumer acceptance of the Company's newer categories.

The
Company's U.S. net sales, excluding retail store operations, decreased 7.9% for the year ended December 31, 2003 to $203.8 million from $221.4 million in 2002 as
a result of a 26.2% decrease in sales to the Company's largest U.S. customer, Sunglass Hut and its affiliates, coupled with a 2.6% decrease in net sales to the Company's broad specialty store account
base and other domestic sales. Sales to Sunglass Hut decreased $13.2 million to $37.1 million for the year ended December 31, 2003 from $50.3 million for the year ended
December 31, 2002. The decline in U.S. net sales reflects the generally depressed retail environment during the first half of 2003, which had a more pronounced effect on the Company's mature
sunglass category and contributed to the decline in sunglass sales. Additionally, unusual cooler weather conditions during the second quarter of 2003 adversely affected the Company's summer product
sales, particularly sunglasses, sandals, the summer apparel line and the Company's prescription sunglasses which led to lower than expected U.S. sales. The decrease in the Company's U.S. sales was
partially offset by a higher contribution from its retail store operations. In addition, the Company's U.S. net sales in 2003 benefited from strong growth in military sales and increased department
store concept shop locations over 2002.

Net
sales from the Company's retail store operations increased to $53.2 million for the year ended December 31, 2003 as a result of increased store locations, compared to
$32.6 million for the year ended December 31, 2002, an increase of $20.6 million, or 63.2%. During 2003, the Company opened 13 new Oakley stores and 17 Iacon stores, including the
acquisition ofCelebrity Eyeworks Studiolocated at Downtown Disney in Orlando, Florida. At December 31, 2003, the Company operated 27 Oakley
stores and 76 Iacon stores.

23

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During
the year ended December 31, 2003, the Company's international net sales increased 12.3%, or $29.0 million, to $264.5 million from $235.5 million for
2002. The weaker U.S. dollar accounted for 11.3 percentage points, or $26.5 million, of this increase. All product categories experienced growth with the largest growth occurring in
apparel and prescription eyewear. Europe, Latin America, Japan, Canada and South Africa each achieved growth, partially offset by declines in the rest of Asia where concerns related to the SARS crisis
affected travel and related retail businesses during the first part of 2003 and the Company's transition to new distribution adversely impacted sales in the fourth quarter.
The Company's sales in Australia declined on a constant dollar basis in the fourth quarter of 2003 and the total year. These declines were due primarily to disruptions associated with Luxottica's
acquisition of OPSM in Australia along with declining market share in the surf distribution channel. In addition, the Company's 2003 European sunglass sales were impacted by competitive pressures from
strong fashion brands. Latin America experienced a large decrease in net sales in the 2002 period due to delays in the transition to direct distribution in Brazil from the previous independent
distributor and overall weak economic conditions in the region. Sales from the Company's direct international offices represented 87.9% of total international sales for 2003, compared to 84.9% for
2002.

Gross profit

Gross profit increased to $294.7 million, or 56.5% of net sales, for the year ended December 31, 2003 from $277.6 million, or 56.7% of net
sales, for the year ended December 31, 2002, an increase of $17.1 million, or 6.2%. The decrease in gross profit as a percent of net sales was due to lower sunglass margins due to the
decline in sunglass unit volume, partially offset by the positive effects of improved footwear and apparel margins and the positive effect of a weaker U.S. dollar.

Operating expenses

A restructure charge of $2.8 million ($1.8 million, or $0.02 per diluted share, on an after-tax basis) was recorded during the fourth
quarter of fiscal 2002 to restructure the Company's European operations with significant changes made to the regional sales and distribution organization. This charge, included in selling and shipping
and warehousing expenses, was completed during the fourth quarter of 2003 with no revisions to the original charge recorded. See Note 14 inNotes to Consolidated
Financial Statements. Operating expenses for the year ended December 31, 2003 increased to $234.7 million from $213.4 million for the year ended
December 31, 2002, an increase of $21.3 million, or 10.0%. As a percentage of net sales, operating expenses increased to 45.0% of net sales for the year ended December 31, 2003
compared to 43.6% of net sales for 2002. Excluding the $2.8 million European restructuring charge recorded in 2002, operating expenses increased to $234.7 million, or 45.0% of net sales,
for the year ended December 31, 2003 from $210.6 million, or 43.0% of net sales, for the year ended December 31, 2002, an increase of $24.1 million, or 11.4%. The increase
is primarily due to higher foreign operating expenses resulting from a weaker U.S. dollar and higher selling expenses related to the Company's expanded retail store operations. The weakening of the
U.S. dollar, compared to most other currencies in which the Company transacts, contributed approximately $10.4 million, or 43.2%, of the increase. Operating expenses included
$19.2 million of expenses for the Company's retail store operations, an increase of $6.9 million from $12.3 million for the year ended December 31, 2002. Total increase in
retail store operating expenses for 2003 represented 28.6% of the increase in total operating expenses over 2002 due to the increased store locations.

Research
and development expenses decreased $1.7 million to $14.3 million, or 2.7% of net sales, for the year ended December 31, 2003, from $16.0 million, or
3.3% of net sales, for the year ended December 31, 2002, primarily due to leverage on footwear and apparel design expenses and reduced product design expenses in 2003. Selling expenses
increased $15.4 million to $142.4 million, or 27.3% of net sales, for the year ended December 31, 2003 from $127.0 million, or 25.9% of net sales, for the year ended
December 31, 2002. Excluding $2.3 million relating to the European restructuring charge,

24

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selling
expenses were $142.4 million for the year ended December 31, 2003, compared to $124.7 million for the year ended December 31, 2002, an increase of
$17.7 million. This increase was a result of increased retail selling expenses, including sales personnel expenses, displays and display depreciation, sports marketing, sales promotion and
sales commissions. As a percentage of net sales, selling expenses excluding the restructure charge was 27.3% in 2003 compared to 25.5% for 2002. Shipping and warehousing expenses as a percentage of
net sales remained at 3.7% of net sales for the year ended December 31, 2003 and 2002. Excluding $0.5 million related to the 2002 European restructuring charge, shipping and warehousing
expenses as a percentage of sales increased to 3.7% of net sales in 2003 from 3.6% of net sales in 2002 due to increased freight costs and footwear and apparel distribution costs, including the
establishment of the Company's centralized European distribution facility in 2003. General and administrative expenses increased $6.6 million to $58.9 million, or 11.3% of net sales, for
the year ended December 31, 2003, from $52.3 million, or 10.7% of net sales, for the year ended December 31, 2002. This increase in general and administrative expenses was
principally a result of greater personnel-related costs, greater facility related costs, such as property taxes and insurance, depreciation, professional fees associated with tax audit support and the
Company's Sarbanes-Oxley compliance, increases in provision for non-income taxes, as well as increased general and administrative expenses for retail store operations.

Operating income

The Company's operating income decreased to $60.0 million, or 11.5% of net sales, for the year ended December 31, 2003 from $64.2 million, or
13.1% of net sales, a decrease of $4.2 million. Excluding the European restructuring charge of $2.8 million in 2002, the Company's operating income decreased $7.0 million to
$60.0 million for the year ended December 31, 2003 from $67.0 million for the year ended December 31, 2002. As a percentage of net sales, operating income, prior to the
restructure charge, decreased to 11.5% for the year ended December 31, 2003 from 13.7% for the year ended December 31, 2002. For 2003, the net effect on operating income from foreign
exchange was significantly positive as the beneficial effect on international sales from the weakening dollar more than offset the growth in international operating expenses and cost of goods sold
items from stronger foreign currencies as well as losses on foreign exchange contracts, except in limited cases when the Company reduced pricing in foreign currencies.

Interest expense, net

The Company had net interest expense of $1.3 million for the year ended December 31, 2003, as compared with net interest expense of
$1.6 million for the year ended December 31, 2002. The decrease in interest expense is primarily due to lower interest rates during 2003 and reduced short-term borrowing
balances resulting from strong operating cash flows.

Income taxes

The Company recorded a provision for income taxes of $20.6 million for the year ended December 31, 2003, compared to $21.9 million for the
year ended December 31, 2002. Excluding the tax effect of the 2002 restructuring charge, the Company's provision for income taxes was $20.6 million in 2003 compared to
$22.9 million for 2002. The Company's effective tax rate for the years ended December 31, 2003 and 2002 was 35%. The Company expects its tax rate for 2004 to be 34%.

Net income

The Company's net income decreased to $38.2 million for the year ended December 31, 2003 from $40.6 million for the year ended
December 31, 2002, a decrease of $2.4 million or 5.9%. Excluding the 2002 European restructuring after-tax charge of $1.8 million, net income decreased to
$38.2 million for the year ended December 31, 2003 from $42.4 million for the year ended December 31, 2002, a decrease of $4.2 million, or 9.9%.

25

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Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Net sales

Net sales increased to $489.6 million for the year ended December 31, 2002 from $429.3 million for the year ended December 31, 2001,
an increase of $60.3 million, or 14.0%. One factor contributing to the growth in net sales was a 9.5% increase in gross sunglass sales. Gross sunglass sales were $330.2 million for the
year ended December 31, 2002 compared to $301.6 million for the year ended December 31, 2001. The growth in gross sunglass sales is composed of a 9.8% increase in average selling
price slightly offset by a 0.3% decrease in sunglass unit volume. The increase in average selling price is attributable to the continued shift in product mix to more technical and premium-priced
items, the weakening of the U.S. dollar, increasing contribution from the Company's retail stores and the impact of a $5 retail price increase in North America on most sunglasses in July 2001.
Several factors contributed to the unit decline including soft consumer spending and reduced demand attributable to the weak retail environment, especially in the latter half of the year. In addition,
delayed deliveries of 2002 summer sunglass introductions to retailers resulted in fewer inventory turns during the summer selling season and a reduction of the level of reorders during the holiday
season. The delayed deliveries were a result of key raw material shortages caused in part by greater increases in summer demand than originally anticipated. In addition, Sunglass Hut's return as a
customer negatively impacted demand from the Company's other retailers in the fourth quarter, compared to the prior year period when Sunglass Hut was not purchasing Oakley products. The increase in
gross sunglass sales was driven by strong sunglass sales of the Company's newer sunglasses such as theHalf Jacket, Splice, Wire Tap,and Half Wire,introduced in 2002, theSwitchandE-Wire
2.1, introduced in 2001,and theSquare Wire 2.0introduced in 2000, offsetting
declines in sales of more mature products. Sales of the Company's polarized styles for the year ended December 31, 2002 also contributed to the increase in gross sales with a 32.2%, or
$5.8 million, increase over the year ended December 31, 2001. Gross sales from the Company's newer product categories, comprised of footwear, apparel, watches and prescription eyewear,
represented 25.3% of the Company's total gross sales for 2002, compared to 22.4% in 2001. Sales from these newer product categories increased 32.7%, or $32.9 million, to $133.7 million
for the year ended December 31, 2002 from $100.8 million for the year ended December 31, 2001. Apparel gross sales increased 49.3% to $56.6 million in 2002, compared with
$37.9 million in 2001. Prescription eyewear revenue doubled in each of the three years prior to 2002. In 2002, prescription eyewear gross sales grew 38.5% to $34.3 million in
2002, compared to $24.7 million in 2001. Footwear gross sales grew 4.0% to $31.2 million in 2002 over $30.0 million in 2001. The growth rate for the Company's footwear business
was more modest when compared to the other newer categories due to reduced orders and limited distribution for the Company's fall footwear line. Watch gross sales increased 41.5% to
$11.6 million in 2002, compared to $8.2 million in 2001. Management believes these increases are a result of its
expanded product lines, expanded distribution and retail initiatives, including its greater dealer base, and increasing consumer acceptance of the Company's newer categories.

The
Company's total U.S. net sales increased 19.2% for the year ended December 31, 2002 to $254.0 million from $213.2 million in 2001. Excluding the Company's retail
store operations, U.S. net sales increased 8.4% to $221.4 million in the year ended December 31, 2002 from $204.3 million in 2001, as a result of a 15.4% increase in sales to the
Company's largest U.S. customer, Sunglass Hut and its affiliates, coupled with a 6.5% increase in net sales to the Company's broad specialty store account base and other domestic sales. Sales to
Sunglass Hut increased $6.7 million to $50.3 million for the year ended December 31, 2002 from $43.6 million for the year ended December 31, 2001. In
April 2001, Luxottica, one of the Company's largest competitors, acquired Sunglass Hut, and implemented changes which adversely affected the Company's net sales to Sunglass Hut in the latter
half of 2001. In December 2001, the Company and Luxottica entered into a new three-year commercial agreement for the distribution of Oakley products through Sunglass Hut retail
stores which marked the resumption of the business relationship between the two companies.

26

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Net
sales from the Company's retail store operations, including Iacon acquired on October 31, 2001, were $32.6 million for the year ended December 31, 2002, up from
$8.9 million for the year ended December 31, 2001, an increase of $23.7 million. During the year ended December 31, 2002, the Company added 21 new Iacon stores, bringing
the total stores to 64 at December 31, 2002, and eight new Oakley stores, bringing the total to 14. Retail sales represented 6.7% of total net sales for 2002.

During
the year ended December 31, 2002, the Company's international net sales increased 9.0%, or $19.4 million, to $235.5 million from $216.1 million during
the year ended December 31, 2001. On a constant dollar basis, international sales grew 7.5% for the year ended December 31, 2002 when compared to the year ended December 31, 2001.
Although the Company's international sales during the year have been impacted by weak retail environments, especially in Europe and Japan, all major markets other than Latin America experienced growth
during the year. During the second quarter of 2002, international net sales were more adversely affected than U.S. net sales by the sunglass delivery issues discussed above due to the longer lead
times required for delivery outside the United States. In addition, the Company's 2002 European sunglass sales were impacted by competitive pressures from strong fashion brands. Latin America
experienced a large decrease in net sales in the 2002 period due to delays in the transition to direct distribution in Brazil from the previous independent distributor and overall weak economic
conditions in the region. Sales from the Company's direct international offices represented 84.9% of total international sales for 2002, compared to 82.0% for 2001.

Gross profit

Gross profit increased to $277.6 million, or 56.7% of net sales, for the year ended December 31, 2002 from $254.9 million, or 59.4% of net
sales, for the year ended December 31, 2001, an increase of $22.7 million, or 8.9%. The decrease in gross profit as a percentage of net sales reflects higher overall sales discounts,
coupled with a lower concentration of sunglass and prescription eyewear products relative to sales of lower gross margin product categories. Iacon sales of sunglass brands other than Oakley, as well
as the associated occupancy costs, have also had a negative impact on the Company's year over year gross margin comparison due to Iacon being included for only two months of the comparable 2001
period. Foreign exchange had a favorable impact on gross margin relative to the comparable period. The Company's footwear margins were lower in 2002 when compared to 2001 due to successful efforts to
reduce inventory levels of prior season close-out products at reduced margins, increased tooling costs per unit and provisions for slow-moving inventory.

Operating expenses

In December 2002, the Company announced plans to restructure its European operations with significant changes to the regional sales and distribution
organization. As part of this plan, relationships with several outside sales agents have been modified or terminated, and changes are being implemented to rationalize other warehousing and
distribution functions within the European markets which resulted in a $2.8 million pre-tax charge to selling and shipping and warehousing expenses. See Note 14 in Notes to Consolidated Financial
Statements. Operating expenses for the year ended December 31, 2002 increased to $213.4 million from
$180.9 million for the year ended December 31, 2001, an increase of $32.5 million, or 18.0%. As a percentage of net sales, operating expenses increased to 43.6% of net sales for
the year ended December 31, 2002 compared to 42.1% of net sales for 2001. Excluding the $2.8 million European restructuring charge, operating expenses increased to $210.6 million,
or 43.0% of net sales, for the year ended December 31, 2002 from $180.9 million, or 42.1%, for the year ended December 31, 2001, an increase of $29.7 million, or 16.4%.
Operating expenses included $12.3 million of expenses for the Company's retail store operations, an increase of $8.9 million from $3.4 million for the year ended
December 31, 2001. Research and development expenses increased $4.7 million to $16.0 million, or 3.3% of net sales, for the year ended December 31, 2002, from
$11.3 million, or 2.6% of net sales, for the year ended December 31, 2001, primarily as a

27

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result
of greater new product development efforts in all product categories. Selling expenses increased $18.1 million to $127.0 million, or 25.9% of net sales, for the year ended
December 31, 2002 from $108.9 million, or 25.4% of net sales, for the year ended December 31, 2001. Excluding $2.3 million relating to the European restructuring charge,
selling expenses were $124.7 million for the year ended December 31, 2002, compared to $108.9 million for the year ended December 31, 2001, an increase of
$15.8 million. This increase was a result of (i) increased sales salaries primarily due to the increased retail operations, (ii) increased sports marketing expenses primarily for
footwear and apparel and (iii) displays and display depreciation to support the new distribution initiatives, partially offset by reduced commissions due to a realigned commission structure. As
a percentage of net sales, selling expenses excluding the restructure charge remained at 25.5% of net sales for the year ended December 31, 2002. Shipping and warehousing expenses as a
percentage of net sales decreased to 3.7% of net sales for the year ended December 31, 2002 from 4.0% of net sales for the year ended December 31, 2001. Excluding $0.5 million
related to the European restructuring charge, shipping and warehousing expenses as a percentage of sales decreased to 3.6% of net sales for the year ended December 31, 2002 from 4.0% of net
sales for the year ended December 31, 2001 as the Company leveraged its shipping expenses over higher sales. This leverage resulted from labor and freight cost efficiencies offsetting increased
international third party distribution costs. General and administrative expenses increased $8.7 million to $52.3 million, or 10.7% of net sales, for the year ended December 31,
2002, from $43.6 million, or 10.2% of net sales, for the year ended December 31, 2001. The increase in general and administrative expenses was principally a result of greater
personnel-related and administrative costs and information technology costs necessary to support and manage the Company's growth, as well as increased retail store expenses. These increases were
partially offset by the reduction of amortization expense for the year ended December 31, 2002 of approximately $1.2 million primarily due to the adoption of SFAS No. 142. See
Note 5 inNotes to Consolidated Financial Statements.

Operating income

The Company's operating income decreased to $64.2 million, or 13.1% of net sales, for the year ended December 31, 2002 from $74.1 million, or
17.3% of net sales, a decrease of $9.9 million. Excluding the European restructuring charge of $2.8 million, the Company's operating income decreased $7.1 million to
$67.0 million for the year ended December 31, 2002 from $74.1 million for the year ended December 31, 2001. As a percentage of net sales, operating income, prior to the
restructure charge, decreased to 13.7% for the year ended December 31, 2002 from 17.3% for the year ended December 31, 2001.

Interest expense, net

The Company had net interest expense of $1.6 million for the year ended December 31, 2002, as compared with net interest expense of
$3.1 million for the year ended December 31, 2001. The decrease in interest expense is due to lower interest rates during 2002, reduced short-term borrowing balances
resulting from the improved balance sheet trends and a nonrecurring credit to interest expense of approximately $350,000 resulting from the favorable settlement of a treasury hedge entered into by the
Company in connection with the previously announced long-term debt financing, which the Company elected not to pursue in the quarter ended June 30, 2002.

Income taxes

The Company recorded a provision for income taxes of $21.9 million for the year ended December 31, 2002 compared to $20.6 million for the
year ended December 31, 2001. Excluding the tax effect of the restructuring charge, the Company's provision for income taxes was $22.9 million in 2002 compared to $20.6 million
for 2001. The Company's effective tax rate for the year ended

28

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December 31,
2002 was 35%, compared to 29% for the comparable period in 2001 which resulted from a one-time tax benefit associated with the Company's foreign operations in 2001.

Net income

The Company's net income decreased to $40.6 million for the year ended December 31, 2002 from $50.4 million for the year ended
December 31, 2001, a decrease of $9.8 million or 19.4%. Excluding the European restructuring after-tax charge of $1.8 million, net income decreased to
$42.4 million for the year ended December 31, 2002 from $50.4 million for the year ended December 31, 2001, a decrease of $8.0 million, or 15.9%.

Liquidity and Capital Resources

The Company historically has financed its operations almost entirely with cash flow generated from operations and borrowings from its credit facilities. Cash
provided by operating activities totaled $76.1 million for the year ended December 31, 2003 compared to $87.6 million for the year ended December 31, 2002. The Company's
cash balance was $49.2 million at December 31, 2003 compared to $22.2 million at December 31, 2002. At December 31, 2003, working capital was $154.5 million
compared to $129.0 million at December 31, 2002, a 19.8% increase. Working capital may vary from time to time as a result of seasonality, new product category introductions and changes
in accounts receivable and inventory levels. Accounts receivable balances, less allowance for doubtful accounts, totaled $78.0 million at December 31, 2003, compared to
$68.1 million at December 31, 2002, with accounts receivable days outstanding for the year ended December 31, 2003 of 51, compared to 53 for the year ended
December 31, 2002. Inventories increased to $98.7 million at December 31, 2003, compared to $87.0 million at December 31, 2002. This inventory reflects the expanded
Company-owned retail operations and increased apparel and footwear inventory to support the new spring releases. Inventory turns were 2.4 at December 31, 2003, compared to 2.6 at
December 31, 2002.

Credit Facilities

In January 2001, the Company amended its unsecured line of credit with a bank syndicate which allows for borrowings up to $75 million and matures in
August 2004. The amended line of credit bears interest at either LIBOR or IBOR plus 0.75% (1.86% at December 31, 2003) or the bank's prime lending rate minus 0.25% (3.75% at
December 31, 2003). At December 31, 2003, the Company did not have any balance outstanding under such facility. The credit agreement contains various restrictive covenants including the
maintenance of certain financial ratios. At December 31, 2003, the Company was in compliance with all restrictive covenants and financial ratios. The Company believes that it will be able to
extend or replace its existing credit facility prior to its maturity without significant changes in terms. Certain of the Company's foreign subsidiaries have negotiated local lines of credit to
provide working capital financing. The aggregate U.S. dollar borrowing limit on the foreign lines of credit is approximately $24.1 million, of which $14.0 million was outstanding at
December 31, 2003. The Company also has a real estate term loan, which is collateralized by the Company's corporate headquarters and requires quarterly principal payments of approximately
$380,000 plus interest based on LIBOR plus 1.00% (2.17% at December 31, 2003). In January 1999, the Company entered into an interest rate swap
agreement that results in fixing the interest rate over the term of the loan at 6.31%. At December 31, 2003, the outstanding balance on the term loan was $13.3 million. The term loan is
due in September 2007.

Note Payable

The Company also has a note in the amount of $1.4 million, net of discounts, as of December 31, 2003, payable as a result of an acquisition.
Payments under the note are due in annual installments of $500,000 ending in 2006, with such payments contingent upon certain conditions.

29

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Capital Expenditures

Capital expenditures, net of retirements, for the year ended December 31, 2003 were $28.2 million, which included $7.1 million for retail
store operations. Included in 2003 capital expenditures, excluding capital expenditures for retail operations, were $5.7 million for production equipment and new product tooling,
$5.3 million for information technology infrastructure, including software, computers and related equipment, $7.9 million for in-store displays and $6.3 million for
facility building improvements, furniture and fixtures and autos.

Stock Repurchase

In September 2002, the Company's Board of Directors authorized the repurchase of $20 million of the Company's common stock to occur from time to
time as market conditions warrant. Under this program, as of December 31, 2003, the Company had purchased 829,600 shares of its common stock at an aggregate cost of approximately
$8.6 million, or an average cost of $10.37 per share. Approximately $11.4 million remains available for repurchases under the current authorization with total common shares outstanding
of 67,948,482 as of December 31, 2003.

Dividends

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

Contractual Obligations and Commitments

The following table gives additional guidance related to the Company's future obligations and commitments as of December 31, 2003:

|(in thousands)        |  | 2004 |        | 2005 |   | 2006   |  | 2007 |        | 2008 |   | Thereafter
|--------------------- |  | ---- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ----------
|Lines of credit       |  | $    | 14,039 |      | $ |       |  | $    |       |      | $ |          
|Long-term debt        |  |      | 1,519  |      |   | 1,519  |  |      | 1,519  |      |   | 8,731     
|Note payable          |  |      | 500    |      |   | 500    |  |      | 500    |      |   |          
|Letters of credit     |  |      | 4,591  |      |   |       |  |      |       |      |   |          
|Operating leases      |  |      | 14,788 |      |   | 14,020 |  |      | 12,862 |      |   | 11,583    
|Endorsement contracts |  |      | 6,853  |      |   | 2,844  |  |      | 3      |      |   | 2         
|                      |  |      |        |      |   |        |  |      |        |      |   |           
|                      |  | $    | 42,290 |      | $ | 18,883 |  | $    | 14,884 |      | $ | 20,316    
|                      |  |      |        |      |   |        |  |      |        |      |   |           

Additionally,
the Company expects 2004 capital expenditures to be approximately $33.0 million, including approximately $8.0 million for expansion of both Oakley and Iacon
retail operations. As of December 31, 2003, the Company had commitments of approximately $1.1 million for future capital purchases.

30

---

Warranty Provision

The Company provides warranties against manufacturer's defects for all of its products and maintains a reserve for its product warranty liability based on
estimates calculated using historical warranty experience. Warranty liability activity for the years ended December 31, was as follows:

(in thousands)

2003

2002

2001Balance as of January 1,

$
3,537

$
3,503

$
3,992Warranty claims and expenses


(3,511
)

(4,224
)

(3,444
)Provisions for warranty expense


2,851


4,224


2,962Changes due to foreign currency translation


44


34


(7
)Balance as of December 31,

$
2,921

$
3,537

$
3,503


The
Company believes that existing capital, anticipated cash flow from operations, and current and anticipated borrowings under its current or future credit facilities will be sufficient
to meet operating needs and capital expenditures for the foreseeable future. The Company's short-term funding comes from its current revolving line of credit which contains various
restrictive covenants
including the maintenance of certain financial ratios. At December 31, 2003, the Company was in compliance with all restrictive covenants and financial ratios.

Seasonality

The following table sets forth certain unaudited quarterly data for the periods shown:

|             |  | 2003 |         | 2002
|------------ |  | ---- | ------- | ----
|
|
|Net sales    |  | $    | 111,190 |     
|Gross profit |  |      | 59,415  |     

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

Backlog

Historically, the Company has generally shipped most eyewear orders within one day of receipt, with longer lead times for its other pre-booked product
categories. At December 31, 2003, the Company had a backlog of $51.9 million, including backorders (merchandise remaining unshipped beyond its scheduled shipping date) of
$5.3 million, compared to a backlog of $42.7 million, including backorders of $5.7 million, at December 31, 2002. Included in this backlog are orders for the Company's
footwear and apparel lines, which totaled $43.8 million at December 31, 2003, up 22.0% compared with $35.9 million at December 31, 2002.

31

---

Inflation

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

New Accounting Pronouncements

Information regarding new accounting pronouncements is contained in Note 1 to the Consolidated Financial Statements for the year ended December 31,
2003, which note is incorporated herein by this reference.

GAAP and Non-GAAP Financial Measures

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

Reconciliation of Gross Sales to Net Sales:

Year ended December 31,2003

2002

2001(in thousands)Gross sales

$
560,592

$
528,781

$
450,363Discounts and returns


(39,043
)

(39,229
)

(21,096
)Net sales

$
521,549

$
489,552

$
429,267


Forward-Looking Statements

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

32

---

marketplace
of the Company's new products and changes in consumer preferences; reductions in sales of products, either as the result of economic or other conditions or reduced consumer acceptance of a
product, could result in a buildup of inventory; the ability to source raw materials and finished products at favorable prices to the Company; the potential effect of periodic power crises on the
Company's operations including temporary blackouts at the Company's facilities; foreign currency exchange rate fluctuations; earthquakes or other natural disasters concentrated in Southern California
where substantially all of the companies operations are based; the Company's ability to identify and execute successfully cost control initiatives; and other risks outlined herein and other filings
made periodically by the Company. The Company cautions prospective investors not to place undue reliance of such statements and undertakes no obligation to update this forward-looking information.

Item 7a. Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to a variety of risks, including foreign currency fluctuations and changes in interest rates affecting the cost of its debt.

Foreign currency

The Company has direct operations in Continental Europe, United Kingdom, Japan, Canada, Mexico, South Africa, Australia, New Zealand and Brazil which collect at
future dates in the customers' local currencies and purchase finished goods in U.S. dollars. Accordingly, the Company is exposed to transaction gains and losses that could result from changes in
foreign currency exchange rates. (See Note 10 inNotes to Consolidated Financial Statements). As part of its overall strategy to manage the level
of exposure to the risk of fluctuations in foreign currency exchange rates, the Company and its subsidiaries use foreign exchange contracts in the form of forward contracts. All of the Company's
derivatives were designated and qualified as cash flow hedges at December 31, 2003.

On
the date the Company enters into a derivative contract, management designates the derivative as a hedge of the identified exposure. The Company only enters into derivative instruments
that qualify as cash flow hedges as described in SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." For all instruments qualifying as highly effective cash flow
hedges, the changes in the fair value of the derivative are recorded in other comprehensive income. The following is a summary of the Company's foreign exchange contracts by currency at
December 31, 2003 (in thousands):

U.S. Dollar
Equivalent

Maturity

Fair
Value (loss)Forward Contracts:Australian dollar

$
8,238

Jan. 2004 - Sep. 2004

$
(1,252
)British pound


26,369

Feb. 2004 - Dec. 2004


(2,160
)Canadian dollar


16,382

Jan. 2004 - Dec. 2004


(2,034
)Euro


33,983

Jan. 2004 - Dec. 2004


(4,246
)Japanese yen


14,009

Mar. 2004 - Dec. 2004


(1,227
)South African rand


4,071

Mar. 2004 - Dec. 2004


(897
)$
103,052



$
(11,816
)


The
Company is exposed to credit losses in the event of nonperformance by counterparties to its forward exchange contracts but has no off-balance sheet credit risk of
accounting loss. The Company anticipates, however, that the counterparties will be able to fully satisfy their obligations under the contracts. The Company does not obtain collateral or other security
to support the forward exchange contracts subject to credit risk but monitors the credit standing of the counterparties. As of December 31, 2003, outstanding contracts were recorded at fair
value and the resulting gains and losses were recorded in the consolidated financial statements pursuant to the policy set forth above.

33

---

Interest rates

The Company's principal line of credit, with no balance outstanding at December 31, 2003, bears interest at either LIBOR or IBOR plus 0.75% (1.86% at
December 31, 2003) or the bank's prime lending rate minus 0.25% (3.75% at December 31, 2003). Based on the weighted average interest rate of 3.83% on the line of credit during the year
ended December 31, 2003, if interest rates on the line of credit were to increase by 10%, and to the extent that borrowings were outstanding, for every $1.0 million outstanding on the
Company's line of credit, net income would be reduced by approximately $2,000 per year.

The
Company's ten-year real estate term loan, with a balance of $13.3 million outstanding at December 31, 2003, bears interest at LIBOR plus 1.0% (2.17% at
December 31, 2003) and is due in September 2007. In January 1999, the Company entered into an interest rate swap agreement that eliminates the Company's risk of fluctuations in
the variable rate of its long-term loan by fixing the rate at 6.31%. As of December 31, 2003, the fair value of the Company's interest rate swap agreement was a loss of
approximately $1.0 million.

Item 8. Financial Statements and Supplementary Data

SeeIndex to Consolidated Financial Statementsfor a listing of the consolidated financial statements submitted as
part of this report.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

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

Internal Control Over Financial Reporting

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

34

---



Part III

Item 10. Directors and Executive Officers of the Registrant

The information required by this item will be contained in the Company's Proxy Statement for its Annual Shareholders Meeting to be held on June 4, 2004, to
be filed with the Securities and Exchange Commission within 120 days after December 31, 2003, and is incorporated herein by reference.

Item 11. Executive Compensation

The information required by this item will be contained in the Company's Proxy Statement for its Annual Shareholders Meeting to be held on June 4, 2004, to
be filed with the Securities and Exchange Commission within 120 days after December 31, 2003, and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by this item will be contained in the Company's Proxy Statement for its Annual Shareholders Meeting to be held on June 4, 2004, to
be filed with the Securities and Exchange Commission within 120 days after December 31, 2003, and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

The information required by this item will be contained in the Company's Proxy Statement for its Annual Shareholders Meeting to be held on June 4, 2004, to
be filed with the Securities and Exchange Commission within 120 days after December 31, 2003, and is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

The information required by this item will be contained in the Company's Proxy Statement for its Annual Shareholders Meeting to be held on June 4, 2004, to
be filed with the Securities and Exchange Commission within 120 days after December 31, 2003, and is incorporated herein by reference.

35

---



Part IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

|3.1   |  | (1 | ) | Articles of Incorporation of the Company                                                                                                                                                                                                                       
|----- |  | -- | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.2   |  | (8 | ) | Amended and Restated Bylaws of the Company                                                                                                                                                                                                                     
|3.3   |  | (3 | ) | Amendment No. 1 to the Articles of Incorporation as filed with the Secretary of State of the State of Washington on September 26, 1996                                                                                                                         
|3.4   |  | (8 | ) | Amendment No. 1 to Section 1 and Sections 3a through 3f of Article IV of the Amended and Restated Bylaws of Oakley, Inc.                                                                                                                                       
|10.1  |  | (2 | ) | Agreement, dated July 17, 1995, between Oakley, Inc. and Michael Jordan                                                                                                                                                                                        
|10.2  |  | (4 | ) | Reciprocal Exclusive Dealing Agreement dated March 11, 1997 among Oakley, Inc., Gentex Optics, Inc. and Essilor International Compagnie Generale D'Optique, S.A. (portions of this document have been omitted pursuant to a request for
confidential treatment)
|10.3  |  | (4 | ) | Promissory Note, dated March 20, 1997, between Oakley, Inc. and Bank of America National Trust and Savings Association                                                                                                                                         
|10.4  |  | (5 | ) | Promissory Note, dated August 7, 1997, between Oakley, Inc. and Bank of America National Trust and Savings Association                                                                                                                                         
|10.5  |  | (5 | ) | Amendment No. 1 to Promissory Note, dated August 14, 1997, between Oakley, Inc. and Bank of America National Trust and Savings Association                                                                                                                     
|10.6  |  | (5 | ) | Amendment No. 2 to Promissory Note, dated August 14, 1997, between Oakley, Inc. and Bank of America National Trust and Savings Association                                                                                                                     
|10.7  |  | (5 | ) | Deed of Trust with Assignment of Rents, Security Agreement and Fixture Filing, dated August 7, 1997, between Oakley, Inc. and Bank of America National Trust and Savings Association                                                                           
|10.8  |  | (6 | ) | Amended and Restated Consultant Agreement, dated May 12, 1998, between Jim Jannard and Oakley, Inc.                                                                                                                                                            
|10.9  |  | (7 | ) | Second Amended and Restated Credit Agreement, dated August 25, 1998, among Oakley, Inc. and Bank of America National Trust and Savings Association, as agent, and the Lenders named therein                                                                    
|10.10 |  | (7 | ) | Modification Agreement (Short Form), dated August 10, 1998, between Oakley, Inc. and Bank of America National Trust and Savings Association                                                                                                                    
|10.11 |  | (7 | ) | Modification Agreement (Long Form), dated August 10, 1998, between Oakley, Inc. and Bank of America National Trust and Savings Association                                                                                                                     
|10.12 |  | (9 | ) | Amended and Restated Employment Agreement, dated May 1, 1999, between Link Newcomb and Oakley, Inc.                                                                                                                                                            
|      |  |    |   |                                                                                                                                                                                                                                                                

36

---

|10.13 |  | (9  | ) | Oakley, Inc. Amended and Restated 1995 Stock Incentive Plan                                                                                                                                                       
|----- |  | --- | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.14 |  | (9  | ) | Oakley, Inc. Amended and Restated Executive Officers Performance Bonus Plan                                                                                                                                       
|10.15 |  | (10 | ) | Amendment No. 1 to Amended and Restated Employment Agreement, dated December 31, 1999, between Link Newcomb and Oakley, Inc.                                                                                      
|10.16 |  | (10 | ) | Second Amended and Restated Employment Agreement, dated January 1, 2000, between Thomas George and Oakley, Inc.                                                                                                   
|10.17 |  | (11 | ) | First Amendment to Second Amended and Restated Credit Agreement, dated as of March 6, 2000, among Oakley, Inc. and Bank of America National Trust and Savings Association, as agent, and the Lenders named therein
|10.18 |  | (12 | ) | Employment Agreement, dated October 1, 2000, between Tomas Rios and Oakley, Inc.                                                                                                                                  
|10.19 |  | (13 | ) | Second Amendment to Second Amended and Restated Credit Agreement, dated October 16, 2000, among Oakley, Inc. and Bank of America National Trust and Savings Association, as agent, and the Lenders named therein  
|10.20 |  | (13 | ) | Third Amendment to Second Amended and Restated Credit Agreement, dated January 18, 2001, among Oakley, Inc. and Bank of America National Trust and Savings Association, as agent, and the Lenders named therein   
|10.21 |  | (13 | ) | Lease Agreement, dated November 10, 2000, between Haven Gateway LLC and Oakley, Inc.                                                                                                                              
|10.22 |  | (13 | ) | Trademark License Agreement and Assignment of Rights, dated March 31, 2000, between Y, LLC and Oakley, Inc.                                                                                                       
|10.23 |  | (14 | ) | Amendment to Trademark License Agreement, dated June 1, 2002, between Y, LLC and Oakley, Inc.                                                                                                                     
|10.24 |  | (15 | ) | Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Jim Jannard.                                                                                                                          
|10.25 |  | (15 | ) | Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Link Newcomb.                                                                                                                         
|10.26 |  | (15 | ) | Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Colin Baden.                                                                                                                          
|10.27 |  | (15 | ) | Indemnification Agreement, dated February 14, 2003, between Oakley, Inc. and Tommy Rios.                                                                                                                          
|10.28 |  | (15 | ) | Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Tom George.                                                                                                                           
|10.29 |  | (15 | ) | Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Donna Gordon.                                                                                                                         
|10.30 |  | (15 | ) | Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Scott Bowers.                                                                                                                         
|10.32 |  | (15 | ) | Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Jon Krause.                                                                                                                           
|10.33 |  | (15 | ) | Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Kent Lane.                                                                                                                            
|10.35 |  | (15 | ) | Indemnification Agreement, dated February 14, 2003, between Oakley, Inc. and Carlos Reyes.                                                                                                                        
|      |  |     |   |                                                                                                                                                                                                                   

37

---

|10.36 |  | (16 | ) | Indemnification Agreement, dated March 26, 2003, between Oakley, Inc. and Irene Miller.                                              
|----- |  | --- | - | -------------------------------------------------------------------------------------------------------------------------------------
|10.37 |  | (16 | ) | Indemnification Agreement, dated March 26, 2003, between Oakley, Inc. and Abbott Brown.                                              
|10.38 |  | (16 | ) | Indemnification Agreement, dated March 26, 2003, between Oakley, Inc. and Lee Clow.                                                  
|10.39 |  | (17 | ) | Aircraft Lease Agreement, dated December 18, 2003, between Oakley, Inc. and N2T, Inc.                                                
|10.40 |  | (17 | ) | Indemnification Agreement, dated February 12, 2004, between Oakley, Inc. and Thomas Davin.                                           
|21.1  |  | (17 | ) | List of Material Subsidiaries                                                                                                        
|23.1  |  | (17 | ) | Consent of Deloitte & Touche LLP, independent auditors                                                                               
|31.1  |  | (17 | ) | Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                       
|31.2  |  | (17 | ) | Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                       
|32.1  |  | (17 | ) | Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

---



38

---



Index To Consolidated Financial Statements

|                                                                                                                                           |  | Page 
|------------------------------------------------------------------------------------------------------------------------------------------ |  | -----
|Independent Auditors' Report                                                                                                               |  | 40   
|Consolidated Balance Sheets as of December 31, 2003 and 2002                                                                               |  | 41   
|Consolidated Statements of Income and Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2003, 2002 and 2001 |  | 42   
|Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2003, 2002 and 2001                                       |  | 43   
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001                                                 |  | 44   
|Notes to Consolidated Financial Statements                                                                                                 |  | 45-69

39

---



Independent Auditors' Report

To
the Board of Directors and Shareholders of Oakley, Inc.:

We
have audited the accompanying consolidated balance sheets of Oakley, Inc. and subsidiaries (the "Company") as of December 31, 2003 and 2002, and the related consolidated
statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial
statement schedule listed in the Index at Item 15(a)(2). These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.

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

In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Oakley, Inc. and subsidiaries as of December 31,
2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth therein.

As
discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets during 2002 in accordance
with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."

/s/
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 4, 2004

40

---



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

|                                       |                                                                                                                                       | December 31, 2003          |         | December 31, 2002 |        
|-------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | ----------------- | -------
|ASSETS                                 |                                                                                                                                       |                            |         |                   |        
|CURRENT ASSETS:                        |                                                                                                                                       |                            |         |                   |        
|                                       | Cash and cash equivalents                                                                                                             |                            | $       | 49,211            |        
|                                       | Accounts receivable, less allowances of $9,672 (2003) and $8,431 (2002)                                                               |                            |         | 77,989            |        
|                                       | Inventories, net (Note 3)                                                                                                             |                            |         | 98,691            |        
|                                       | Other receivables                                                                                                                     |                            |         | 3,368             |        
|                                       | Deferred and prepaid income taxes                                                                                                     |                            |         | 9,965             |        
|                                       | Prepaid expenses and other assets                                                                                                     |                            |         | 8,062             |        
|                                       |                                                                                                                                       |                            |         |                   |        
|                                       |                                                                                                                                       | Total current assets       |         |                   | 247,286
|Property and equipment, net            |                                                                                                                                       |                            | 153,583 |                   |        
|Deposits                               |                                                                                                                                       |                            | 2,139   |                   |        
|Deferred income taxes                  |                                                                                                                                       |                            | 781     |                   |        
|Goodwill                               |                                                                                                                                       |                            | 24,609  |                   |        
|Other assets                           |                                                                                                                                       |                            | 6,486   |                   |        
|                                       |                                                                                                                                       |                            |         |                   |        
|TOTAL ASSETS                           |                                                                                                                                       | $                          | 434,884 |                   | $      
|                                       |                                                                                                                                       |                            |         |                   |        
|LIABILITIES AND SHAREHOLDERS' EQUITY   |                                                                                                                                       |                            |         |                   |        
|CURRENT LIABILITIES:                   |                                                                                                                                       |                            |         |                   |        
|                                       | Line of credit (Note 8)                                                                                                               |                            | $       | 14,039            |        
|                                       | Accounts payable                                                                                                                      |                            |         | 26,837            |        
|                                       | Accrued expenses and other current liabilities (Note 6)                                                                               |                            |         | 36,984            |        
|                                       | Accrued warranty (Note 1)                                                                                                             |                            |         | 2,921             |        
|                                       | Income taxes payable                                                                                                                  |                            |         | 9,954             |        
|                                       | Current portion of long-term debt (Note 8)                                                                                            |                            |         | 2,019             |        
|                                       |                                                                                                                                       |                            |         |                   |        
|                                       |                                                                                                                                       | Total current liabilities  |         |                   | 92,754 
|Deferred income taxes                  |                                                                                                                                       |                            | 2,884   |                   |        
|Long-term debt, net of current portion |                                                                                                                                       |                            | 12,642  |                   |        
|COMMITMENTS AND CONTINGENCIES (Note 9) |                                                                                                                                       |                            |         |                   |        
|SHAREHOLDERS' EQUITY:                  |                                                                                                                                       |                            |         |                   |        
|                                       | Preferred stock, par value $.01 per share; 20,000,000 shares authorized; no shares issued                                             |                            |         |                  |        
|                                       | Common stock, par value $.01 per share; 200,000,000 shares authorized; 67,948,000 (2003) and 68,332,000 (2002) issued and outstanding |                            |         | 679               |        
|                                       | Additional paid-in capital                                                                                                            |                            |         | 31,126            |        
|                                       | Retained earnings                                                                                                                     |                            |         | 296,970           |        
|                                       | Accumulated other comprehensive loss                                                                                                  |                            |         | (2,171            | )      
|                                       |                                                                                                                                       |                            |         |                   |        
|                                       |                                                                                                                                       | Total shareholders' equity |         |                   | 326,604
|                                       |                                                                                                                                       |                            |         |                   |        
|                                       | TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                            |                            | $       | 434,884           |        
|                                       |                                                                                                                                       |                            |         |                   |        

See
accompanyingNotes to Consolidated Financial Statements

41

---

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

|                                         |                            | Year ended December 31, 
|---------------------------------------- | -------------------------- | ------------------------
|
|Net sales                                |                            | $                       
|Cost of goods sold                       |                            |                         
|                                         |                            |                         
|                                         | Gross profit               |                         
|Operating expenses:                      |                            |                         
|                                         | Research and development   |                         
|                                         | Selling                    |                         
|                                         | Shipping and warehousing   |                         
|                                         | General and administrative |                         
|                                         |                            |                         
|                                         |                            | Total operating expenses
|                                         |                            |                         
|Operating income                         |                            |                         
|Interest expense, net                    |                            |                         
|                                         |                            |                         
|Income before provision for income taxes |                            |                         
|Provision for income taxes               |                            |                         
|                                         |                            |                         
|Net income                               |                            | $                       
|                                         |                            |                         
|Basic net income per common share        |                            | $                       
|                                         |                            |                         
|Basic weighted average common shares     |                            |                         
|                                         |                            |                         
|Diluted net income per common share      |                            | $                       
|                                         |                            |                         
|Diluted weighted average common shares   |                            |                         
|                                         |                            |                         

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME        (in thousands)

|                                   |                                                                  | Year ended December 31, |       
|---------------------------------- | ---------------------------------------------------------------- | ----------------------- | ------
|
|Net income                         |                                                                  | $                       | 38,196
|Other comprehensive income (loss): |                                                                  |                         |       
|                                   | Net unrealized (loss) gain on derivative instruments, net of tax |                         |       
|                                   | Foreign currency translation adjustment, net of tax              |                         |       
|                                   |                                                                  |                         |       
|                                   | Other comprehensive income (loss), net of tax                    |                         |       
|                                   |                                                                  |                         |       
|Comprehensive income               |                                                                  | $                       | 46,259
|                                   |                                                                  |                         |       

See
accompanyingNotes to Consolidated Financial Statements

42

---



OAKLEY, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY        (in thousands, except share data)

|                                |                                                  | Common Stock |          |   |     |    |   | Accumulated
Other
Comprehensive
Loss |        |   |        
|------------------------------- | ------------------------------------------------ | ------------ | -------- | - | --- | -- | - | ------------------------------------ | ------ | - | -------
|
|
|Balance as of January 1, 2001   |                                                  | 68,612,000   |          | $ | 686 |    | $ | 36,484                               |        | $ | 177,277
|                                | Repurchase of common shares (Note 11)            |              | (350,000 | ) |     | (3 | ) |                                      | (4,474 | ) |        
|                                | Exercise of stock options (Note 11)              |              | 559,000  |   |     | 5  |   |                                      | 5,481  |   |        
|                                | Compensatory stock options                       |              |         |   |     |   |   |                                      | 98     |   |        
|                                | Tax benefit related to exercise of stock options |              |         |   |     |   |   |                                      | 3,216  |   |        
|                                | Net income                                       |              |         |   |     |   |   |                                      |       |   |        
|                                | Other comprehensive loss                         |              |         |   |     |   |   |                                      |       |   |        
|                                |                                                  |              |          |   |     |    |   |                                      |        |   |        
|Balance as of December 31, 2001 |                                                  | 68,821,000   |          |   | 688 |    |   | 40,805                               |        |   | 227,648
|                                | Repurchase of common shares (Note 11)            |              | (666,000 | ) |     | (7 | ) |                                      | (7,986 | ) |        
|                                | Exercise of stock options (Note 11)              |              | 177,000  |   |     | 2  |   |                                      | 1,827  |   |        
|                                | Compensatory stock options                       |              |         |   |     |   |   |                                      | 3      |   |        
|                                | Tax benefit related to exercise of stock options |              |         |   |     |   |   |                                      | 448    |   |        
|                                | Net income                                       |              |         |   |     |   |   |                                      |       |   |        
|                                | Other comprehensive loss                         |              |         |   |     |   |   |                                      |       |   |        
|                                |                                                  |              |          |   |     |    |   |                                      |        |   |        
|Balance as of December 31, 2002 |                                                  | 68,332,000   |          |   | 683 |    |   | 35,097                               |        |   | 268,285
|                                | Repurchase of common shares (Note 11)            |              | (436,000 | ) |     | (4 | ) |                                      | (4,487 | ) |        
|                                | Exercise of stock options (Note 11)              |              | 52,000   |   |     |   |   |                                      | 470    |   |        
|                                | Compensatory stock options                       |              |         |   |     |   |   |                                      | 11     |   |        
|                                | Tax benefit related to exercise of stock options |              |         |   |     |   |   |                                      | 35     |   |        
|                                | Dividends paid                                   |              |         |   |     |   |   |                                      |       |   |        
|                                | Net income                                       |              |         |   |     |   |   |                                      |       |   |        
|                                | Other comprehensive income                       |              |         |   |     |   |   |                                      |       |   |        
|                                |                                                  |              |          |   |     |    |   |                                      |        |   |        
|Balance as of December 31, 2003 |                                                  | 67,948,000   |          | $ | 679 |    | $ | 31,126                               |        | $ | 296,970
|                                |                                                  |              |          |   |     |    |   |                                      |        |   |        

See
accompanyingNotes to Consolidated Financial Statements

43

---

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

|                                               |                                                                                                         | Year ended December 31,                                                     |                                               
|---------------------------------------------- | ------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ----------------------------------------------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:          |                                                                                                         |                                                                             |                                               
|                                               | Net income                                                                                              |                                                                             | $                                             
|                                               | Adjustments to reconcile net income to net cash provided by operating activities:                       |                                                                             |                                               
|                                               |                                                                                                         | Depreciation and amortization                                               |                                               
|                                               |                                                                                                         | Provision for bad debt expense                                              |                                               
|                                               |                                                                                                         | Compensatory stock options and capital contributions                        |                                               
|                                               |                                                                                                         | Loss on disposition of equipment                                            |                                               
|                                               |                                                                                                         | Deferred income taxes, net                                                  |                                               
|                                               |                                                                                                         | Changes in assets and liabilities, net of effects of business acquisitions: |                                               
|                                               |                                                                                                         |                                                                             | Accounts receivable                           
|                                               |                                                                                                         |                                                                             | Inventories                                   
|                                               |                                                                                                         |                                                                             | Other receivables                             
|                                               |                                                                                                         |                                                                             | Income taxes receivable                       
|                                               |                                                                                                         |                                                                             | Prepaid expenses and other assets             
|                                               |                                                                                                         |                                                                             | Deposits                                      
|                                               |                                                                                                         |                                                                             | Accounts payable                              
|                                               |                                                                                                         |                                                                             | Accrued expenses and other current liabilities
|                                               |                                                                                                         |                                                                             | Accrued warranty                              
|                                               |                                                                                                         |                                                                             | Income taxes payable                          
|                                               |                                                                                                         |                                                                             |                                               
|                                               |                                                                                                         |                                                                             | Net cash provided by operating activities     
|CASH FLOWS FROM INVESTING ACTIVITIES:          |                                                                                                         |                                                                             |                                               
|                                               | Acquisitions of property and equipment                                                                  |                                                                             |                                               
|                                               | Proceeds from sale of property and equipment                                                            |                                                                             |                                               
|                                               | Acquisitions of businesses                                                                              |                                                                             |                                               
|                                               | Other assets                                                                                            |                                                                             |                                               
|                                               |                                                                                                         |                                                                             |                                               
|                                               |                                                                                                         |                                                                             | Net cash used in investing activities         
|CASH FLOWS FROM FINANCING ACTIVITIES:          |                                                                                                         |                                                                             |                                               
|                                               | Proceeds from bank borrowings                                                                           |                                                                             |                                               
|                                               | Repayments of bank borrowings                                                                           |                                                                             |                                               
|                                               | Dividends                                                                                               |                                                                             |                                               
|                                               | Net proceeds from issuance of common shares                                                             |                                                                             |                                               
|                                               | Repurchase of common shares                                                                             |                                                                             |                                               
|                                               |                                                                                                         |                                                                             |                                               
|                                               |                                                                                                         |                                                                             | Net cash used in financing activities         
|Effect of exchange rate changes on cash        |                                                                                                         |                                                                             | (95                                           
|                                               |                                                                                                         |                                                                             |                                               
|Net increase in cash and cash equivalents      |                                                                                                         |                                                                             | 26,963                                        
|Cash and cash equivalents, beginning of period |                                                                                                         |                                                                             | 22,248                                        
|                                               |                                                                                                         |                                                                             |                                               
|Cash and cash equivalents, end of period       |                                                                                                         | $                                                                           | 49,211                                        
|                                               |                                                                                                         |                                                                             |                                               
|Supplemental cash flow information:            |                                                                                                         |                                                                             |                                               
|                                               | Cash paid during the year for:                                                                          |                                                                             |                                               
|                                               |                                                                                                         | Interest                                                                    |                                               
|                                               |                                                                                                         |                                                                             |                                               
|                                               |                                                                                                         | Income taxes (net of refunds received)                                      |                                               
|                                               |                                                                                                         |                                                                             |                                               
|Non-cash investing and financing activities:   |                                                                                                         |                                                                             |                                               
|                                               | During 2002, the Company acquired certain assets through the settlement of accounts receivable (Note 2) |                                                                             |                                               
|                                               |                                                                                                         |                                                                             |                                               

See accompanyingNotes to Consolidated Financial Statements

44

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OAKLEY, INC. and SUBSIDIARIES        Notes to Consolidated Financial Statements        For the Years Ended December 31, 2003, 2002, 2001

Note 1Significant Accounting Policies and Description of Business

Description of Business

The Company is an innovation-driven designer, manufacturer and distributor of consumer products that include high-performance eyewear, footwear,
watches, apparel and accessories. The Company believes its principal strength is its ability to develop products that demonstrate superior performance and aesthetics through proprietary technology and
styling. Its designs and innovations are protected by 545 legal patents and 976 trademarks worldwide. The Company operates in two segments: wholesale and U.S. retail with over 100 retail stores at
December 31, 2003.

Basis of Presentation

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

Principles of Consolidation

The consolidated financial statements include the accounts of Oakley, Inc. and its subsidiaries (collectively, the "Company"). Intercompany balances and
transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles necessarily requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the balance sheet dates and the reported amounts of revenue and
expense during the reporting periods. Actual results could significantly differ from such estimates.

Cash and Cash Equivalents

For purposes of the consolidated financial statements, investments purchased with an original maturity of three months or less are considered cash
equivalents.

Inventories

Inventories are stated at the lower of cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. The Company
regularly reviews its inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on the Company's estimated forecast of product demand and production
requirements.

Long-Lived Assets

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are provided for using the
straight-line method over the estimated useful lives (generally two to seven years for property and equipment and 39 years for buildings) of the respective assets or, as to
leasehold improvements, the term of the related lease if less than the estimated useful service life.

45

---

Effective
January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" (SFAS No. 144), which did not have a material impact on the Company's consolidated financial position or results of
operations. In accordance with SFAS No. 144, the Company estimates the future undiscounted cash flows derived from an asset to assess whether or not a potential impairment exists when events or
circumstances indicate the carrying value of a long-lived asset may differ. An impairment loss is recognized when the undiscounted future cash flows are less than its carrying amount.

Goodwill and Intangible Assets

The Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible Assets,"
(SFAS No. 142), which revises the accounting for purchased goodwill and intangible assets effective January 1, 2002. Under SFAS No. 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are tested for impairment annually and also in the event of an impairment indicator. The Company completed the required transitional impairment test and
the annual tests through 2003 and determined that no impairment loss was necessary. Any subsequent impairment losses will be reflected in operating income. With the adoption of SFAS No. 142,
the Company discontinued amortization of goodwill with indefinite lives in 2002. (See Note 5)

Revenue Recognition

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

Financial Instruments

The carrying amounts of financial instruments, consisting of cash and cash equivalents, trade accounts receivable and accounts payable, approximate fair value due
to the short period of time between origination of the instruments and their expected realization. Management also believes the carrying amount of balances outstanding under the credit agreements
approximates fair value as the underlying interest rates reflect market rates.

46

---

Accounts Receivable

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

Insurance Coverage

The Company is partially self-insured for its worker's compensation insurance coverage. Under this insurance program, the Company is liable for a
deductible of $250,000 for each individual
claim and an aggregate annual liability of $1,368,000. The Company records a liability for the estimated cost of claims both reported and incurred but not reported based upon its historical
experience. The estimated costs include the estimated future cost of all open claims. The Company will continue to adjust the estimates as the actual experience dictates. A significant change in the
number or dollar amount of claims could cause the Company to revise its estimate of potential losses and affect its reported results.

Warranties

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

Warranty
liability activity for the years ended December 31, was as follows:

(in thousands)

2003

2002

2001Balance as of January 1,

$
3,537

$
3,503

$
3,992Warranty claims and expenses


(3,511
)

(4,224
)

(3,444
)Provisions for warranty expense


2,851


4,224


2,962Changes due to foreign currency translation


44


34


(7
)Balance as of December 31,

$
2,921

$
3,537

$
3,503


47

---

Income Taxes

The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" (SFAS No. 109). Current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax asset or
liability is established for the expected future consequences of temporary differences in the financial reporting and tax bases of assets and liabilities. The Company considers future taxable income
and ongoing, prudent and feasible tax planning strategies in assessing the value of its deferred tax assets. If the Company determines that it is more likely than not that these assets will not be
realized, the Company will reduce the value of these assets to their expected realizable value, thereby decreasing net income. Evaluating the value of these assets is necessarily based on the
Company's judgment. If the Company subsequently determined that the deferred tax assets, which had been written down, would be realized in the future, the value of the deferred tax assets would be
increased, thereby increasing net income in the period when that determination was made.

Foreign Currency Translation

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

Comprehensive Income

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

The
components of comprehensive income for the Company include net income, unrealized gains or losses on foreign currency cash flow hedges, unrealized gains or losses on an interest rate
swap, and

48

---

foreign
currency translation adjustments. The components of accumulated other comprehensive loss, net of tax, are as follows:

Years ended December 31,(in thosands)2003

2002Unrealized loss on foreign currency cash flow hedges, net of tax

$
(7,609
)
$
(3,205
)Unrealized loss on interest rate swap, net of tax


(606
)

(922
)Equity adjustment from foreign currency translation, net of tax


6,044


(6,107
)$
(2,171
)
$
(10,234
)


Stock-Based Compensation

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

SFAS
No. 123 requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method in accounting for stock-based awards as of the
beginning of fiscal 1995.

Under
SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option-pricing models, even though such models were developed to estimate
the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes
option-pricing model with the following weighted average assumptions:

2003

2002

2001Stock volatility

47.1%-58.2%

44.1%-81.1%

58.1%-83.7%Risk-free interest rate

2.1%

2.8%

3.8%Expected dividend yield

1.4%

0%

0%Expected life of option

1-4 years

1-4 years

1-4 years


49

---

If
the computed fair value of the 2003, 2002 and 2001 awards had been amortized to expense over the vesting period of the awards, net income would have been as follows:

|(in thousands)                |                                                                                                                                     | 2003 |   | 2002   |   | 2001 |       
|----------------------------- | ----------------------------------------------------------------------------------------------------------------------------------- | ---- | - | ------ | - | ---- | ------
|Net income:                   |                                                                                                                                     |      |   |        |   |      |       
|                              | As reported                                                                                                                         |      | $ | 38,196 |   | $    | 40,637
|                              | Deduct: Total stock based employee compensation expense determined under fair value based method for all awards, net of tax effects |      |   | (3,071 | ) |      | (3,639
|                              |                                                                                                                                     |      |   |        |   |      |       
|                              | Pro forma                                                                                                                           |      | $ | 35,125 |   | $    | 36,998
|                              |                                                                                                                                     |      |   |        |   |      |       
|Basic net income per share:   |                                                                                                                                     |      |   |        |   |      |       
|                              | As reported                                                                                                                         |      | $ | 0.56   |   | $    | 0.59  
|                              | Pro forma                                                                                                                           |      | $ | 0.52   |   | $    | 0.54  
|Diluted net income per share: |                                                                                                                                     |      |   |        |   |      |       
|                              | As reported                                                                                                                         |      | $ | 0.56   |   | $    | 0.59  
|                              | Pro forma                                                                                                                           |      | $ | 0.51   |   | $    | 0.54  

Earnings Per Share

Basic earnings per share is computed using the weighted average number of common shares outstanding during the reporting period. Earnings per share assuming
dilution is computed using the weighted average number of common shares outstanding and the dilutive effect of potential common shares outstanding. For the years ended December 31, 2003, 2002
and 2001, the diluted weighted average common shares outstanding includes diluted shares for stock options totaling 276,000, 601,000 and 895,000, respectively.

Advertising Costs

The Company advertises primarily through print media, catalogs and in-house mailers. The Company's policy is to expense advertising costs associated
with print media on the date the print media is released to the public. Costs associated with catalogs and direct mail materials are expensed as they are shipped to the Company's customers.
Advertising costs also include posters and other point-of-purchase materials which are expensed as incurred. Advertising expenses for 2003, 2002 and 2001 were $17,612,000,
$18,432,000 and $17,922,000, respectively.

New Accounting Pronouncements

In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" (SFAS No. 146), which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes
Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in EITF Issue 94-3 is recognized on the date of an entity's commitment to an exit plan. SFAS
No. 146 also establishes that

50

---

the
liability should initially be measured and recorded at fair value. The adoption of SFAS No. 146 on January 1, 2003 did not have a material impact on the Company's financial position
or results of operation.

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

In
December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
CompensationTransition and Disclosure" (SFAS No. 148). SFAS No. 148 amends Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation"(SFAS No. 123), to provide new guidance concerning the transition when a company voluntarily elects to
change from the intrinsic-value method to SFAS No. 123's fair value method of accounting for stock-based employee compensation (the "fair value method"). In addition, SFAS No. 148 amends
the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The Company has elected not to voluntarily change to the fair value method of accounting for stock-based employee compensation and has followed
the prescribed disclosure format and additional disclosures required by SFAS No. 148 under "Stock-Based Compensation."

In
January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities"(FIN No. 46)
and in December 2003, issued Interpretation No. 46 (revised December 2003) "Consolidation of Variable Interest EntitiesAn Interpretation of
APB No. 51." In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either
(a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN
No. 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46
(R) clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements" (APB No. 51), to certain
entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without
subordinated financial support from other parties. The consolidation requirements of FIN No. 46 applies immediately to variable interest entities created after January 31, 2003. The
consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable interest entity was

51

---

established.
FIN No. 46 (R) applies immediately to variable interest entities created after December 31, 2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies no later than the first reporting period ending after December 15, 2004, to variable interest entities in which an enterprise holds a variable interest
(other than special purpose) that it acquired before January 1, 2004. FIN No. 46 (R) applies to public enterprises as of the beginning of the applicable interim or annual period.
The Company believes that the adoption of FIN No. 46 and FIN No. 46 (R) will not have a material impact on its financial position or results of operations because the Company has
no variable interest entities.

Reclassifications

Certain reclassifications have been made to prior period financial statements to conform to the presentation for the financial statements for the period ended
December 31, 2003.

Certain Significant Risks and Uncertainties

General Business

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

In
addition, the Company has experienced significant growth under several measurements which has placed, and could continue to place, a significant strain on its employees and
operations. If management is unable to anticipate or manage growth effectively, the Company's operating results could be materially adversely affected.

Inventories

Demand for the Company's products can fluctuate significantly. Factors which could affect demand for the Company's products include unanticipated changes in
general market conditions or other factors, which may result in cancellations of advance orders or a reduction in the rate of reorders placed by retailers; continued weakening of economic conditions,
which could reduce demand for products sold by the Company and which could adversely affect profitability; and future terrorist acts or war, or the threat thereof, which could adversely affect
consumer confidence and spending, interrupt production and distribution of product and raw materials and, as a result, adversely affect the Company's operations and financial performance.
Additionally, management's estimates of future product demand may be inaccurate, which could result in an understated or overstated provision required for excess and obsolete inventory.

52

---

Vulnerability Due to Supplier Concentrations

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

Vulnerability Due to Customer Concentrations

Net sales to the retail group of Luxottica S.p.A ("Luxottica"), which include Sunglass Hut locations worldwide, were approximately 9.0%, 12.2% and 12.0% of the
Company's net sales for the years ended December 31, 2003, 2002 and 2001, respectively. Luxottica is also one of the Company's largest competitors in the sunglass and optical frame
markets. Luxottica acquired Sunglass Hut in April 2001 and implemented changes which adversely affected the Company's net sales to Sunglass Hut in 2001. In December 2001, the Company and
Luxottica entered into a new three-year commercial agreement for the distribution of Oakley products through Sunglass Hut retail stores which marked the resumption of the business
relationship between the two companies after a short disruption that began in August 2001. The arrangements between the companies do not obligate Luxottica to order product from the Company,
and there can be no assurances as to the future of the relationship between the Company and Luxottica. In September 2003, Luxottica completed the acquisition of all the shares of Australian
eyewear retailer OPSM Group Ltd ("OPSM"). OPSM operates in the South Pacific and Southeast Asia regions with approximately 600 retail locations, a portion of which currently offer some of the
Company's products. For 2003, the Company's net sales to OPSM prior to the acquisition were approximately AUD $1.1 million (or approximately $0.7 million in U.S. dollars based on the
average exchange rate for 2003). For 2002, the Company's net sales to OPSM were approximately AUD $2.8 million (or approximately $1.5 million in U.S. dollars based on the average
exchange rate for 2002). These sales exclude a limited amount of sales generated through the Company's international distributors. In November 2003, Luxottica completed the acquisition of New
Zealand eyewear retailer Sunglass Store New Zealand ("SSNZ"), the Company's largest customer in New Zealand. SSNZ operates in New Zealand with 16 retail locations which offer some of the Company's
products. In January 2004, Luxottica entered into a definitive merger agreement with Cole National Corporation ("Cole"), one of the largest optical retailers and largest chain providers of
managed vision care services worldwide. This merger is expected to close in the second half of 2004 pending the approval of Cole's stockholders and its compliance with applicable antitrust
requirements. The Company currently sells to a small portion of Cole's retail locations and sales to this customer have been immaterial. There can be no assurance that the recent acquisitions or
future acquisitions by Luxottica will not have a material adverse impact on the Company's financial position or results of operations.

53

---

Note 2Acquisitions

During 2002, the Company transitioned its operations in Brazil to direct distribution from the previous independent distributor and acquired certain intangible
assets on May 29, 2002. On October 31, 2001, the Company acquired one of its largest U.S. customers, Iacon, Inc., a sunglass specialty retailer. These acquisitions have been
recorded using the purchase method of accounting and the results of operations from the date of acquisitions have been included in the Company's consolidated financial statements. The purchase price
for these acquisitions were allocated on the respective date of acquisitions as follows:

(in thousands)

Brazil
2002

Iacon
2001Inventories, net

$
187

$
2,747Other current assets





448Property and equipment, net


500


2,276Identified intangible assets


2,000


574Goodwill





7,760Assumed liabilities





(4,986
)$
2,687

$
8,819


The
excess of the purchase prices over the fair values of the net assets acquired have been allocated to intangible assets and goodwill. Had the acquisitions occurred at the beginning of
the fiscal year in which they were completed, or the beginning of the immediately preceding year, combined pro forma net sales, net income and net income per common share would not have been
materially different from that currently being reported.

Note 3Inventories

Inventories at December 31, consist of the following:

(in thousands)

2003

2002Raw materials

$
21,310

$
22,188Finished goods


77,381


64,819$
98,691

$
87,007


54

---



Note 4Property and Equipment

Property and equipment at December 31, consist of the following:

(in thousands)

2003

2002Land

$
8,953

$
8,979Buildings and leasehold improvements


92,537


84,471Equipment and furniture


184,688


163,556Tooling


24,024


23,883310,202


280,889Less accumulated depreciation and amortization


(156,619
)

(128,435
)$
153,583

$
152,454


Note 5Goodwill and Intangible Assets

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

Included
in other assets in the accompanying consolidated balance sheets are the following amortizing intangible assets.

|                                   |       | As of December 31, 2003 |       | As of December 31, 2002
|---------------------------------- | ----- | ----------------------- | ----- | -----------------------
|
|Covenants not to compete           |       | $                       | 4,284 |                        
|Distribution rights                |       |                         | 3,567 |                        
|Patents                            |       |                         | 3,740 |                        
|Other identified intangible assets |       |                         | 877   |                        
|                                   |       |                         |       |                        
|                                   | Total |                         | $     | 12,468                 
|                                   |       |                         |       |                        

With
the adoption of SFAS No. 142, the Company discontinued amortization of goodwill and other intangibles that were determined to have indefinite lives. Had amortization of
goodwill and such other intangibles not been recorded in the fiscal year ended December 31, 2001, net income would have increased by $0.9 million, net of taxes, and diluted earnings per
share would have increased by $0.01.

Intangible
assets other than goodwill will continue to be amortized by the Company using estimated useful lives of 5 to 15 years and no residual values. Intangible amortization
expense for the years ended December 31, 2003, 2002 and 2001 was approximately $1,267,000, $1,119,000 and

55

---

$840,000,
respectively. Annual estimated amortization expense, based on the Company's intangible assets at December 31, 2003, is as follows:

Estimated Amortization Expense:

(in thousands)Fiscal 2004

$
1,267Fiscal 2005


1,267Fiscal 2006


1,207Fiscal 2007


851Fiscal 2008


669


Changes
in goodwill is as follows:

|                           |                                       | Wholesale |       | Retail |   |  
|-------------------------- | ------------------------------------- | --------- | ----- | ------ | - | -
|
|Balance, December 31, 2002 |                                       | $         | 1,574 |        | $ | 
|Additions/adjustments:     |                                       |           |       |        |   |  
|                           | Goodwill additions                    |           |       |       |   |  
|                           | Changes due to foreign exchange rates |           |       |       |   |  
|                           |                                       |           |       |        |   |  
|Balance, December 31, 2003 |                                       | $         | 1,574 |        | $ | 
|                           |                                       |           |       |        |   |  

Note 6Accrued Liabilities

Accrued liabilities consist of the following:

Years ended December 31,(in thousands)2003

2002Accrued employee compensation and benefits

$
14,188

$
9,708Derivative liability


12,784


5,060Other liabilities


10,012


9,569$
36,984

$
24,337


Note 7Income Taxes

The
Company's income before income tax provision was subject to taxes in the following jurisdictions for the years ended December 31:

(in thousands)

2003

2002

2001United States

$
50,101

$
59,153

$
59,382Foreign


8,662


3,365


11,576$
58,763

$
62,518

$
70,958


56

---

The
provision for income taxes for the years ended December 31, consists of the following:

(in thousands)

2003

2002

2001Current:Federal

$
12,871

$
20,075

$
12,738State


1,554


2,051


4,001Foreign


4,469


1,390


4,73418,894


23,516


21,473Deferred:Federal


2,322


(1,120
)

(448
)State


3


79


(108
)Foreign


(652
)

(594
)

(330
)1,673


(1,635
)

(886
)$
20,567

$
21,881

$
20,587


No
provision has been made for U.S. Federal, state or additional foreign income taxes which would be due upon the actual or deemed distribution of approximately $26.3 million of
undistributed earnings of
foreign subsidiaries as of December 31, 2003, which have been or are intended to be permanently reinvested.

A
reconciliation of income tax expense computed at U.S. Federal statutory rates to income tax expense for the years ended December 31, is as follows:

(in thousands)

2003

2002

2001Tax at U.S. Federal statutory rates

$
20,567

$
21,881

$
24,835State income taxes, net


1,012


1,384


2,530U.S. export benefit, net of foreign tax rate differential


(1,256
)

(1,268
)

(6,957
)Other, net


244


(116
)

179$
20,567

$
21,881

$
20,587


There
were no prepaid taxes included in deferred and prepaid income taxes at December 31, 2003. At December 31, 2002, deferred and prepaid income taxes included prepaid
taxes of $74,000. The deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes.

57

---

Significant
components of the Company's deferred tax assets and liabilities at December 31, are as follows:

(in thousands)

2003

2002Current deferred tax assets:Warranty reserve

$
1,038

$
1,123Uniform capitalization


1,177


1,131Sales returns reserve


2,016


1,706State taxes


63


325Inventory


1,932


1,864Allowance for doubtful accounts


481


439Accrued fringe benefits and compensation


1,720


1,301Foreign tax credit


1,375


3,587Other


944


(394
)Total current deferred tax assets


10,746


11,082Long-term deferred tax liabilities:Depreciation and amortization


(7,788
)

(5,853
)Other comprehensive income


3,884


(276
)Other


1,020


914Total long-term deferred tax liability


(2,884
)

(5,215
)Net deferred tax assets

$
7,862

$
5,867


Note 8Debt

Line of Credit

In January 2001, the Company amended its unsecured line of credit with a bank syndicate which allows for borrowings up to $75 million and matures in
August 2004. The amended line of credit bears interest at either LIBOR or IBOR plus 0.75% (1.86% at December 31, 2003) or the bank's prime lending rate minus 0.25% (3.75% at
December 31, 2003). At December 31, 2003, the Company did not have any balance outstanding under such facility. The credit agreement contains various restrictive covenants including the
maintenance of certain financial ratios. At December 31, 2003, the Company was in compliance with all restrictive covenants and financial ratios. The Company believes that it will be able to
extend or replace its existing credit facility prior to its maturity without significant changes in terms. Certain of the Company's foreign subsidiaries have negotiated local lines of credit to
provide working capital financing. These foreign lines of credit bear interest from 0.74% to 6.41%. Some of the Company's foreign subsidiaries have bank overdraft accounts that renew annually and bear
interest from 2.66% to 13.5%. The aggregate borrowing limit on the foreign lines of credit and overdraft accounts is $24.1 million, of which $14.0 million was outstanding at
December 31, 2003.

Long-Term Debt

The Company has a real estate term loan with an outstanding balance of $13.3 million at December 31, 2003, which expires in September 2007.
The term loan, which is collateralized by the

58

---

Company's
corporate headquarters, requires quarterly principal payments of approximately $380,000 ($1,519,000 annually), plus interest based upon LIBOR plus 1.00% (2.17% at December 31, 2003).
In January 1999, the Company entered into an interest rate swap agreement that hedges the Company's risk of fluctuations in the variable rate of its long-term debt by fixing the
interest rate over the term of the note at 6.31%. As of December 31, 2003, the fair value of the Company's interest rate swap agreement was a loss of approximately $1.0 million.

As
of December 31, 2003, the Company also has a note payable in the amount of $1.4 million, net of discounts, in connection with the Iacon acquisition. Payments under the
note are due in annual installments of $500,000 ending in 2006, with such payments contingent upon certain conditions.

The
following schedule lists the Company's minimum annual principal payments on its long-term debt:

Year Ending December 31,

(in thousands)2004

$
2,0192005


2,0192006


1,8922007


8,7312008


Thereafter


$
14,661


Note 9Commitments and Contingencies

Operating Leases

The Company is committed under noncancelable operating leases expiring at various dates through 2014 for certain offices, warehouse facilities, retail stores,
production facilities and distribution centers. The following is a schedule of future minimum lease payments required under such leases as of December 31, 2003:

Year Ending December 31,

(in thousands)2004

$
14,7882005


14,0202006


12,8622007


11,5832008


10,490Thereafter


30,228Total

$
93,971


Substantially
all of the retail segment leases require the Company to pay maintenance, insurance, property taxes and percentage rent ranging from 5% to 8% based on sales volumes over
certain minimum sales levels.

59

---

Rent
expense for the years ended December 31, is summarized as follows:

(in thousands)

2003

2002

2001Related Party

$
90

$
60

$
48Other


14,741


8,570


3,838Total

$
14,831

$
8,630

$
3,886


Additionally,
during the years ended December 31, 2003, 2002 and 2001, the Company paid an officer and shareholder of the Company approximately $142,000, $42,000 and
$170,000, respectively, for the placement of the Company's trademarks on, and related marketing activities in connection with, an automobile owned by the officer and shareholder that competes on the
National Hot Rod Association drag racing circuit.

Purchase Commitments

The Company has an exclusive agreement through 2006, with its lens blank supplier and the supplier's French parent, pursuant to which the Company has the
exclusive right to purchase decentered sunglass lenses, in return for the Company's agreement to fulfill all of its lens requirements, subject to certain exceptions, from such supplier.

Employment and Consulting Agreements

The Company has notified its officers of its decision not to extend the term of any existing employment agreement with its officers. In lieu of paying severance
benefits pursuant to individual employment agreements, the Company has adopted two severance plans for the benefit of its officers that provide for, among other things, upon the termination of
employment by the Company, (i) payment of a designated percentage of base salary and pro rata bonus; (ii) extension of Company-paid medical and benefits; and
(iii) limited acceleration of vesting with respect to options. In addition, the Company entered into a severance agreement with one of its officers to provide for certain benefits in exchange
for the cancellation of his employment agreement.

Endorsement Contracts

The Company has entered into several endorsement contracts with selected athletes and others who endorse the Company's products. The contracts are primarily of
short duration. Under the

60

---

contracts,
the Company has agreed to pay certain incentives based on performance and is required to pay minimum annual payments as follows:

Year Ending December 31,

(in thousands)2004

$
6,8532005


2,8442006


32007


22008


Thereafter


$
9,702


Included
in such amounts is an annual retainer of $0.5 million through 2005 for a former director of the Company.

Indemnities, Commitments and Guarantees

During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in
relation to certain transactions. These indemnities include indemnities to the Company's customers in connection with the sales of its products, indemnities to various lessors in connection with
facility leases for certain claims arising from such facility or lease, and indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of
Washington. The Company has also issued a guarantee in the form of a standby letter of credit as security for contingent liabilities under certain workers' compensation insurance policies. The
durations of these indemnities, commitments and guarantees vary. Some of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments the
Company could be obligated to make. The Company has not recorded any liability for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets.

Litigation

The Company is currently involved in litigation incidental to the Company's business. In the opinion of management, the ultimate resolution of such litigation, in
the aggregate, will not likely have a material adverse effect on the accompanying consolidated financial statements.

Note 10Derivative Financial Instruments

The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to transactions of its international
subsidiaries as well as fluctuations in its variable rate debt. As part of its overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, the
Company and its subsidiaries use foreign exchange contracts in the form of forward contracts. In addition, as part of its overall strategy to manage the level of exposure to the risk of fluctuations
in interest rates, in January 1999, the Company entered into an interest rate swap agreement that results in fixing the interest rate over the term of the Company's

61

---

ten-year
real estate term loan. As of December 31, 2003, the fair value of the Company's interest rate swap agreement was a loss of approximately $1.0 million. At
December 31, 2003, all of the Company's derivative were designated and qualified as cash flow hedges. For all qualifying and highly effective cash flow hedges, the changes in the fair value of
the derivative are recorded in other comprehensive income. The Company is currently hedging forecasted foreign currency transactions that could result in reclassifications of $11.8 million of
losses to earnings over the next twelve months. The Company hedges forecasted transactions that are determined probable to occur before the end of the subsequent fiscal year.

On
the date the Company enters into a derivative contract, management designates the derivative as a hedge of the identified exposure. The Company does not enter into derivative
instruments that do not qualify as cash flow hedges as described in SFAS No. 133. The Company formally documents all relationships between hedging instruments and hedged items, as well as the
risk-management objective and strategy for undertaking various hedge transactions. In this documentation, the Company specifically identifies the asset, liability, firm commitment or
forecasted transaction that has been designated as a hedged item and states how the hedging instrument is expected to hedge the risks related to the hedged item. The Company formally measures
effectiveness of its hedging relationships both at the hedge inception and on an ongoing basis in accordance with its risk management policy. The Company would discontinue hedge accounting
prospectively (i) if it is determined that the derivative is no longer effective in offsetting change in the cash flows of a hedged item, (ii) when the derivative expires or is sold,
terminated, or exercised, (iii) when the derivative is designated as a hedge instrument, because it is probable that the forecasted transaction will not occur, (iv) because a hedged firm
commitment no longer meets the definition of a firm commitment or (v) if management determines that designation of the derivative as a hedge
instrument is no longer appropriate. During the twelve months ended December 31, 2003, the Company recognized losses of $9.6 million, net of taxes, resulting from the expiration,
sale, termination, or exercise of foreign currency exchange contracts.

The
following is a summary of the foreign currency contracts outstanding by currency at December 31, 2003 (in thousands):

U.S. Dollar
Equivalent

Maturity

Fair
Value (loss)Forward Contracts:Australian dollar

$
8,238

Jan. 2004 - Sep. 2004

$
(1,252
)British pound


26,369

Feb. 2004 - Dec. 2004


(2,160
)Canadian dollar


16,382

Jan. 2004 - Dec. 2004


(2,034
)Euro


33,983

Jan. 2004 - Dec. 2004


(4,246
)Japanese yen


14,009

Mar. 2004 - Dec. 2004


(1,227
)South African rand


4,071

Mar. 2004 - Dec. 2004


(897
)$
103,052



$
(11,816
)


The
Company is exposed to credit losses in the event of nonperformance by counterparties to its forward exchange contracts but has no off-balance-sheet credit risk of
accounting loss. The Company anticipates, however, that the counterparties will be able to fully satisfy their obligations under the

62

---

contracts.
The Company does not obtain collateral or other security to support the forward exchange contracts subject to credit risk but monitors the credit standing of the counterparties. As of
December 31, 2003, outstanding contracts were recorded at fair value and the resulting gains and losses were recorded in the consolidated financial statements pursuant to the policy set forth
above.

Note 11Shareholders' Equity

Stock Repurchase

In September 2002, the Company's Board of Directors authorized the repurchase of $20 million of the Company's common stock to occur from time to
time as market conditions warrant. Under this program, as of December 31, 2003, the Company had purchased 829,600 shares of its common stock at an aggregate cost of approximately
$8.6 million, or an average cost of $10.37 per share. Approximately $11.4 million remains available for repurchases under the current authorization.

Stock Incentive Plan

The Company's Amended and Restated 1995 Stock Incentive Plan (the "Plan") provides for stock-based incentive awards, including incentive stock options,
nonqualified stock options, restricted stock, performance shares, stock appreciation rights and deferred stock to Company officers, employees, advisors and consultants. These shares are, in most
cases, granted at an exercise price equal to the fair market value of the Company's stock at the time of grant. Options vest over periods ranging from one to four years and expire
ten years after the grant date. A total of 8,712,000 shares have been reserved for issuance under the Plan. At December 31, 2003, stock options for 2,778,479 shares were exercisable and
2,095,398 shares were available for issuance pursuant to new stock option grants or other equity awards.

63

---

The
following table summarizes information with respect to the Plan:

|                                                                      |           | Year ended December 31, |          
|--------------------------------------------------------------------- | --------- | ----------------------- | ---------
|
|Outstanding shares at January 1                                       |           |                         | 3,905,227
|                                                                      | Granted   |                         |          
|                                                                      | Cancelled |                         |          
|                                                                      | Exercised |                         |          
|                                                                      |           |                         |          
|Outstanding shares at December 31                                     |           |                         | 4,808,020
|                                                                      |           |                         |          
|Exercisable shares at December 31                                     |           |                         | 2,778,479
|                                                                      |           |                         |          
|Average exercise price at January 1                                   |           | $                       | 13.16    
|                                                                      | Granted   |                         |          
|                                                                      | Cancelled |                         |          
|                                                                      | Exercised |                         |          
|Average exercise price at December 31                                 |           | $                       | 12.14    
|Weighted average exercise price of exercisable options at December 31 |           | $                       | 12.25    
|Weighted average fair value of options granted during the year        |           | $                       | 3.07     

Additional
information regarding options outstanding as of December 31, 2003 is as follows:

|             |  |           |  | Options Outstanding |  | Options Exercisable
|------------ |  | --------- |  | ------------------- |  | -------------------
|
|$5.56-8.63   |  | 1,309,006 |  | 8.09                |  | $                  
|$9.06-11.00  |  | 948,561   |  | 5.14                |  | $                  
|$11.29-13.32 |  | 1,290,840 |  | 4.41                |  | $                  
|$14.04-25.10 |  | 1,259,613 |  | 7.54                |  | $                  

During
the years ended December 31, 2003, 2002 and 2001, the Company recorded stock compensation expense of $11,000, $3,000 and $98,000, respectively, associated with the
fair value of stock options issued to non-employees.

64

---



Note 12Employee Benefit Plan

The Company maintains a voluntary employee savings plan under Section 401(k) of the Internal Revenue Code (the "401(k) Plan") for all
domestic employees with at least six months of service. The Plan is funded by employee contributions with the Company matching a portion of the employee contribution. Company contributions to
the Plan were $0.8 million, $0.7 million and $0.7 million for the years ended December 31, 2003, 2002 and 2001, respectively, and are included in general and
administrative expenses.

Note 13Segment and Geographic Information

In the fourth quarter of 2003, the Company's retail business met the quantitative threshold for segment disclosure. As a result, the Company has revised its
segment disclosure for the current and prior periods to reflect two reportable segments: wholesale and U.S. retail. The wholesale segment consists of the design, manufacture and distribution of the
Company's products to wholesale customers in the U.S. and internationally, together with all direct consumer sales other than U.S. retail. The U.S. retail segment reflects the operations of the
Company's specialty retail stores located throughout the United States, including the operations of its Iacon subsidiary. The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance and allocates resources of segments based on net sales and operating income, which represents income before interest and
income taxes. Segment net sales and operating income for the Company's wholesale operations include Oakley product sales to its subsidiaries at transfer price and other intercompany corporate charges.
Segment net sales and operating income for the Company's U.S. retail operations include Oakley product sales to its Iacon subsidiary at transfer price, and sales to Oakley retail stores at cost. The
U.S. retail segment operating income excludes any allocations for corporate operating expenses as these expenses are included in the wholesale segment.

Financial
information for the Company's reportable segments is as follows:

2003(in thousands)

Wholesale

U.S. Retail

Inter-segment
transactions

Total
consolidatedNet sales

$
481,282

$
53,206

$
(12,939
)
$
521,549Operating income


55,917


4,266


(148
)

60,035Identifiable assets


405,688


40,280


(11,084
)

434,884Acquisitions of property and equipment


22,670


7,102





29,772Depreciation and amortization


28,551


2,239





30,790


65

---

2002Wholesale

U.S. Retail

Inter-segment transactions

Total
consolidatedNet sales

$
464,953

$
32,623

$
(8,024
)
$
489,552Operating income


63,301


1,706


(846
)

64,161Identifiable assets


364,581


29,805


(10,436
)

383,950Acquisitions of property and equipment


25,796


7,196





32,992Depreciation and amortization


27,140


1,438





28,578


2001Wholesale

U.S. Retail

Inter-segment transactions

Total consolidatedNet sales

$
420,756

$
8,885

$
(374
)
$
429,267Operating income


72,992


1,346


(272
)

74,066Identifiable assets


351,844


20,026


(9,090
)

362,780Acquisitions of property and equipment


41,887


2,815





44,702Depreciation and amortization


23,145


399





23,544


The
following table sets forth sales by segment:

2003Wholesale

U.S. Retail

Total
consolidatedSales to third parties

$
468,343

$
53,206

$
521,549Inter-segment revenue


12,939





12,939Gross sales


481,282


53,206


534,488Less: eliminations


(12,939
)




(12,939
)Total consolidated net sales


468,343


53,206

$
521,549


66

---

2002Wholesale

U.S. Retail

Total
consolidatedSales to third parties

$
456,929

$
32,623

$
489,552Inter-segment revenue


8,024





8,024Gross sales


464,953


32,623


497,576Less: eliminations


(8,024
)




(8,024
)Total consolidated net sales


456,929


32,623

$
489,552


2001Wholesale

U.S. Retail

Total
consolidatedSales to third parties

$
420,382

$
8,885

$
429,267Inter-segment revenue


374





374Gross sales


420,756


8,885


429,641Less: eliminations


(374
)




(374
)Total consolidated net sales


420,382


8,885

$
429,267


Geographical
regions representing 10% or more of consolidated net sales are summarized as follows:

Year ended December 31,(in thousands)2003

2002

2001United States

$
257,050

$
254,024

$
213,142Continental Europe


91,473


81,879


72,301Other international


173,026


153,649


143,824Consolidated total net sales

$
521,549

$
489,552

$
429,267


The
Company's identifiable assets by geographical region are as follows:

Year ended December 31,(in thousands)2003

2002United States

$
294,663

$
263,472Continental Europe


44,233


38,834Other international


95,988


81,644Consolidated total identifiable assets

$
434,884

$
383,950


67

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The
Company derives revenues from different product lines within its segments. Gross sales from external customers for each product line are as follows:

Year ended December 31,(in thousands)2003

2002

2001Sunglasses

$
310,410

$
330,154

$
301,623Apparel and accessories


76,018


56,625


37,886Footwear


36,520


31,245


29,981Watches


9,862


11,620


8,229Prescription eyewear


42,669


34,253


24,726Goggles


36,156


27,776


25,655Other


48,957


37,108


22,263Total gross sales


560,592


528,781


450,363Discounts and returns


(39,043
)

(39,229
)

(21,096
)Total consolidated net sales

$
521,549

$
489,552

$
429,267


Other
consists of revenue derived from the sales of equipment, sunglass and goggle accessories and Iacon sales of sunglass brands other than the Company's.

Note 14Restructure Charge

A restructure charge of $2.8 million ($1.8 million, or $0.02 per diluted share, on an after-tax basis) was recorded during the fourth
quarter of fiscal 2002 to restructure (the "Restructuring Plan") the Company's European operations with significant changes to the regional sales and distribution organization. Pursuant to an approval
of the Company's Board of Directors in December 2002, relationships with several outside sales agents have been modified or terminated, and changes have been implemented to rationalize other
warehousing and distribution functions within the European markets. During 2003, the Company paid or settled almost all of the expenses associated with the Restructuring Plan. As of
December 31, 2003, the Company had finalized all the restructuring charges and management believes the amount originally recorded will be sufficient to cover any remaining restructure
liabilities.

68

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

|(in thousands)                                                               |  | Accrued
restructure
liability
balance at
Dec. 31, 2002 |       | Amounts paid |   | Changes due to foreign exchange rates and adjustments |   | Balance as of
Dec. 31, 2003
|---------------------------------------------------------------------------- |  | ------------------------------------------------------ | ----- | ------------ | - | ----------------------------------------------------- | - | ---------------------------
|Termination and modification of sales agent contracts and employee contracts |  | $                                                      | 2,249 |              | $ | (1,960                                                | ) | $                          
|Rationalization of warehousing and distribution                              |  |                                                        | 539   |              |   | (864                                                  | ) |                            
|                                                                             |  |                                                        |       |              |   |                                                       |   |                            
|                                                                             |  | $                                                      | 2,788 |              | $ | (2,824                                                | ) | $                          
|                                                                             |  |                                                        |       |              |   |                                                       |   |                            

Note 15Quarterly Financial Data (unaudited)

|                              |                                          | First
Quarter |   | Second
Quarter |  | Third
Quarter |         | Fourth
Quarter
|----------------------------- | ---------------------------------------- | ------------- | - | -------------- |  | ------------- | ------- | --------------
|
|Year ended December 31, 2003: |                                          |               |   |                |  |               |         |               
|                              | Net sales                                |               | $ | 111,190        |  | $             | 143,841 |               
|                              | Gross profit                             |               |   | 59,415         |  |               | 87,970  |               
|                              | Income before provision for income taxes |               |   | 4,935          |  |               | 28,049  |               
|                              | Net income                               |               |   | 3,208          |  |               | 18,232  |               
|                              | Basic net income per share               |               | $ | 0.05           |  | $             | 0.27    |               
|                              | Diluted net income per share             |               | $ | 0.05           |  | $             | 0.27    |               
|Year ended December 31, 2002: |                                          |               |   |                |  |               |         |               
|                              | Net sales                                |               | $ | 109,572        |  | $             | 145,144 |               
|                              | Gross profit                             |               |   | 57,683         |  |               | 91,067  |               
|                              | Income before provision for income taxes |               |   | 9,217          |  |               | 34,545  |               
|                              | Net income                               |               |   | 5,562          |  |               | 22,334  |               
|                              | Basic net income per share               |               | $ | 0.08           |  | $             | 0.32    |               
|                              | Diluted net income per share             |               | $ | 0.08           |  | $             | 0.32    |               

69

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Oakley, Inc. and Subsidiaries

Schedule IIValuation and Qualifying Accounts  For the Years Ended December 31, 2003, 2002, 2001

|(in thousands)                        |                                 | Balance at
beginning
of period |   | Additions
charged to
costs and
expense |  | Deductions |       | Adjustments |   | Balance
at end of
period
|------------------------------------- | ------------------------------- | ------------------------------ | - | -------------------------------------- |  | ---------- | ----- | ----------- | - | ------------------------
|For the year ended December 31, 2003: |                                 |                                |   |                                        |  |            |       |             |   |                         
|                                      | Allowance for doubtful accounts |                                | $ | 2,606                                  |  | $          | 1,738 |             | $ | (1,721                  
|                                      | Sales return reserve            |                                | $ | 5,825                                  |  | $          | 4,707 |             | $ | (3,483                  
|                                      | Inventory reserve               |                                | $ | 7,158                                  |  | $          | 1,501 |             | $ | (1,409                  
|For the year ended December 31, 2002: |                                 |                                |   |                                        |  |            |       |             |   |                         
|                                      | Allowance for doubtful accounts |                                | $ | 1,844                                  |  | $          | 1,877 |             | $ | (1,115                  
|                                      | Sales return reserve            |                                | $ | 4,111                                  |  | $          | 5,108 |             | $ | (3,394                  
|                                      | Inventory reserve               |                                | $ | 8,074                                  |  | $          | 1,630 |             | $ | (2,546                  
|For the year ended December 31, 2001: |                                 |                                |   |                                        |  |            |       |             |   |                         
|                                      | Allowance for doubtful accounts |                                | $ | 1,512                                  |  | $          | 894   |             | $ | (562                    
|                                      | Sales return reserve            |                                | $ | 2,261                                  |  | $          | 4,789 |             | $ | (2,939                  
|                                      | Inventory reserve               |                                | $ | 6,756                                  |  | $          | 2,009 |             | $ | (691                    

70

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Signatures

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

|OAKLEY, INC. |  |                                                                            
|------------ |  | ---------------------------------------------------------------------------
|By:          |  | /s/JIM JANNARDJim Jannard Chairman of the Board and Chief Executive Officer

Date:
March 5, 2004

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

|Signature                     |  | Title                                                       |  | Date         
|----------------------------- |  | ----------------------------------------------------------- |  | -------------
|                              |  |                                                             |  |              
|/s/JIM JANNARDJim Jannard     |  | Chairman of the Board and CEO
(Principal Executive Officer) |  | March 5, 2004
|/s/LINK NEWCOMBLink Newcomb   |  | Chief Operating Officer and Director                        |  | March 5, 2004
|/s/THOMAS GEORGEThomas George |  | Chief Financial Officer
(Principal Accounting Officer)      |  | March 5, 2004
|/s/ABBOTT BROWNAbbott Brown   |  | Director                                                    |  | March 5, 2004
|/s/LEE CLOWLee Clow           |  | Director                                                    |  | March 5, 2004
|/s/THOMAS DAVINThomas Davin   |  | Director                                                    |  | March 5, 2004
|/s/IRENE MILLERIrene Miller   |  | Director                                                    |  | March 5, 2004

71

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