##### Table of Contents



UNITED
    STATES  SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
    20549
      Form 10-K
  ANNUAL
    REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2006
    Commission file number: 1-13848
  
  OAKLEY,
    INC. (Exact
    name of registrant as specified in its charter)
  Washington(State of
    incorporation)

95-3194947(I.R.S. Employer
    Identification 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, $0.01 par value
    per share


New York Stock Exchange   Securities registered pursuant to Section 12(g) of the
    Act:
    None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
  o þ o
  Rule 12b-2 o þ
      Documents
    Incorporated by Reference
  Form 10-K.




---



##### 



Oakley,
    Inc.
  TABLE OF
    CONTENTS
  PagePART IItem 1.

Business


3Item 1A.

Risk
    Factors


12Item 1B.

Unresolved Staff
    Comments


17Item 2.

Properties


17Item 3.

Legal
    Proceedings


18Item 4.

Submission of
    Matters to a Vote of Security Holders


18PART IIItem 5.

Market for
    Registrants Common Equity, Related Shareholder Matters and
    Issuer Purchases of Equity Securities


18Item 6.

Selected Financial
    Data


20Item 7.

Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


21Item 7A.

Quantitative and
    Qualitative Disclosures about Market Risk


36Item 8.

Financial
    Statements and Supplementary Data


38Item 9.

Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


69Item 9A.

Controls and
    Procedures


69Item 9B.

Other
    Information


71PART IIIItem 10.

Directors,
    Executive Officers and Corporate Governance


71Item 11.

Executive
    Compensation


71Item 12.

Security Ownership
    of Certain Beneficial Owners and Management and Related
    Shareholder Matters


71Item 13.

Certain
    Relationships and Related Transactions, and Director
    Independence


71Item 14.

Principal
    Accountant Fees and Services


71PART IVItem 15.

Exhibits and
    Financial Statement Schedules


71EXHIBIT 10.34EXHIBIT 21EXHIBIT 23EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1   i




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##### Table of Contents



Special
    Note Regarding Forward-Looking Statements
  Form 10-K Form 10-K
  
    competition and the factors we believe provide a competitive
    advantage;
    the importance of our ability to develop new
    and/or
    innovative products;
    the effects of business acquisitions;
    product line extensions and new product lines;
    the importance of our research and development efforts;
    the competitive advantage of our ability to build and deliver
    customized eyewear;
    the availability of raw materials, parts and supplies;
    the importance and effectiveness of endorsement arrangements and
    our Web site in marketing our products;
    the effect of seasonality on our business;
    the importance of our intellectual property and the impact of
    the expiration of patents and trademarks;
    our efforts to protect our intellectual property;
    labor relations and the importance of attracting and retaining
    qualified personnel;
    the potential impact of environmental obligations;
    the adequacy of our facilities for the conduct of our business;
    our footwear restructuring, and the expected costs and payments
    in connection therewith;
    anticipated increases in interest expense and amortization of
    intangible assets;
    the effects of income taxes on our results of operations and
    financial position, including the resolution of certain income
    tax matters and changes in our effective income tax rate;
    our expectations regarding future performance by the
    counterparties to foreign exchange contracts we have entered
    into;
    the amount and timing of future payments under contractual
    obligations;
    the sufficiency of our existing sources of liquidity and
    anticipated cash flows from operations to fund our operations,
    capital expenditures and other working capital requirements for
    the next twelve months;
    the circumstances under which we may seek additional financing,
    our ability to obtain any such financing and any consideration
    of acquisition opportunities; and
    the impact of recent accounting pronouncements, including
    FIN 48.   1




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
    the highly competitive markets for our products and our ability
    to develop innovative new products and introduce them in a
    timely manner;
    consumer acceptance of our new products and our ability to
    respond to changing consumer preferences;
    order and demand uncertainty, which may result in cancellations
    of advance orders, or a reduction in the rate of reorders placed
    by retailers, or result in a buildup of inventory;
    our ability to attract and retain qualified personnel;
    intellectual property infringement claims by others and our
    ability to protect our intellectual property;
    our dependence on key suppliers for materials we use in our
    products, including lens blanks;
    our ability to successfully integrate acquired businesses into
    our operations;
    our dependence on athletes and personalities for the endorsement
    of our products; and
    risks associated with our international operations, including
    foreign currency exchange rate fluctuations and the impact of
    quotas, tariffs, or other restrictions on the importation or
    exportation of our products.    ® ® ® ® ® ® ® ® ® tm tm tm ® ® ® ® ® ®
 2




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##### Table of Contents



PART I  Item 1.
    Business    ® ® ® ® ® ® ® ® ® tm tm
    Recent
    Developments
  Credit
    Agreement
    Acquisitions
   3




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##### Table of Contents



Optics
    Products
    Oakley-Branded
    Optics Products
  ® ®
  Clarity Test
  Refractive Power Test
  Prismatic Power/Imbalance Tests
    XYZ
    Optics®
 4




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##### Table of Contents



Polaric
    Ellipsoidtm top-to-bottom side-to-side
  Plutonite®
  Iridium®
  Polarized Lenses
  ®
  and/or
  Prescription
    Frames and Lenses
    Goggles,
    Shields and Visors
  per-unit
  Electronically
    Enabled Eyewear
  ®
 5




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Oakley
    Optics Portfolio Brands
    Dragon
  Eye Safety Systems, Inc.
  Fox
  Oliver Peoples modern-day
  Apparel,
    Footwear and Accessories Products
        Product
    Line and Brand Extensions
   6




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Product
    Design and Development
  concept-to-market
    Manufacturing
    and Sourcing
  ®
  state-of-the-art
        Marketing
    and Promotions
   7




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point-of-sale
  Product
    Distribution
  Wholesale
    Sales
          Retail
    Sales
   8




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##### Table of Contents



As of December 31,2006


2005


2004Oakley Stores:United States


65



44



36International


15



7



5Sunglass Icon


121



105



83Oliver Peoples


2







The Optical Shop of Aspen


20







223



156



124   Oakley Stores
  Sunglass Icon
  The Optical Shop of Aspen
  Other Retail Operations
  Internet and Telesales Operations www.oakley.com e-commerce e-commerce
  Seasonality
   9




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Backlog
    Intellectual
    Property
    Number of


Number ofUtility/Design Patents


TrademarksIssued


Pending


Issued


PendingUnited States


185



59



170



96International


394



129



1,006



165        10




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Employees
    Competition
              Environmental
    Matters
    Segment
    Information
   11




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Available
    Information
  http://www.oakley.com. Form 10-K, Form 10-Q, Form 8-K Form 10-K.
  Form 10-K Form 10-Q
  Item 1A.
    Risk
    Factors    The
    markets for our products are highly competitive. We may not be
    successful in developing products that enable us to compete
    effectively.
    Our
    success depends on our ability to anticipate and respond to
    changing consumer preferences.
    Our
    business could be harmed if we fail to maintain proper inventory
    levels.
  and/or
 12




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We
    could be significantly harmed if any of our key personnel were
    to depart.
    We may
    not be successful in protecting our intellectual property
    rights, which may harm our ability to compete and could increase
    our enforcement costs.
    
    the actions we take to protect our proprietary rights will be
    adequate to prevent imitation of our products;
    that our proprietary information will not become known to our
    competitors;
    that we can meaningfully protect our rights to unpatented
    proprietary information; or
    that our competitors or others will not independently develop
    substantially equivalent or better products that do not infringe
    on our intellectual property rights.       13




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
    pay substantial damages;
    discontinue the use of a particular patent, trademark, copyright
    or trade secret;
    cease the manufacture and sale of infringing products; or
    license intellectual property rights from the third party
    claiming infringement, which license may not be available on
    commercially reasonable terms, or at all.    We are
    dependent upon a single source for the supply of lens blanks.
    The loss of this or other important suppliers could harm our
    business.
    Our
    principal shareholder may exercise control over the
    Company.
    We
    have recently acquired, and may in the future acquire, other
    businesses. We could be negatively impacted if we fail to
    successfully integrate the businesses we acquire.
    
    issuances of equity securities dilutive to our existing
    shareholders;
    the incurrence of substantial debt and assumption of unknown
    liabilities;
    large one-time write-offs;
    amortization expenses related to intangible assets;
    the diversion of managements attention from other business
    concerns; and
    the potential loss of key employees from the acquired business.   14




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We are
    subject to the risks of doing business
    internationally.
    
    currency exchange rate fluctuations;
    local economic and political conditions;
    disruptions of capital and trading markets;
    accounts receivable collection and longer payment cycles;
    difficulties in staffing and managing foreign operations;
    potential hostilities and changes in diplomatic and trade
    relationships;
    restrictive governmental actions (such as restrictions on the
    transfer or repatriation of funds and trade protection measures,
    including export duties and quotas and customs duties and
    tariffs);
    changes in legal or regulatory requirements;
    the laws and policies of the United States and other countries
    affecting trade, foreign investment and loans, and import or
    export licensing requirements;
    tax laws; and
    limitations on our ability under local laws to protect our
    intellectual property.  and/or
     15




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We are
    dependent upon endorsement contracts with athletes and
    personalities, the loss of whom may affect our ability to market
    our products.
  and/or
  The
    price of our common stock may fluctuate
    significantly.
    
    our operating and financial performance and prospects;
    the depth and liquidity of the market for our common stock;
    investor perception of us and the industry in which we operate;
    the level of research coverage of our common stock;
    changes in earnings estimates or buy/sell recommendations of
    securities analysts;
    general financial and other market conditions; and
    domestic and international economic conditions.    Changes
    in our effective tax rate may have an adverse effect on our
    results of operations.
    
    the jurisdictions in which profits are determined to be earned
    and taxed;
    the repatriation of
    non-U.S. earnings
    for which we have not previously provided for U.S. taxes;
    adjustments to estimated taxes upon finalization of various tax
    returns;
    increases in expenses not deductible for tax purposes;
    changes in available tax credits;
    changes in share-based compensation expense;
    changes in the valuation of our deferred tax assets and
    liabilities;
    changes in accounting standards or tax laws and regulations, or
    interpretations thereof;
    the resolution of issues arising from uncertain positions and
    tax audits with various tax authorities; and 16




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##### Table of Contents




    penalties
    and/or
    interest expense that we must recognize on liabilities
    associated with uncertain tax positions.      Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties         17




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##### Table of Contents



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, Related Shareholder Matters
    and Issuer Purchases of Equity Securities    High


Low2005First quarter

$
13.85


$
11.23Second quarter

$
18.12


$
12.05Third quarter

$
19.63


$
16.01Fourth quarter

$
17.88


$
13.252006First quarter

$
17.25


$
14.18Second quarter

$
18.47


$
15.75Third quarter

$
17.70


$
14.86Fourth quarter

$
20.58


$
16.67    18




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##### Table of Contents



Shareholder
    Return Performance Graph
  line-of-business
   COMPARISON OF CUMULATIVE TOTAL RETURN
    AMONG OAKLEY, INC.,
    RUSSELL 2000 INDEX AND S&P 500 INDEX
  
  As of December 31,2001

2002

2003

2004

2005

2006Oakley, Inc. common stock

$
100.00


$
63.16


$
86.24


$
80.45


$
93.61


$
128.98Russell 2000 Index


100.00



78.42



114.00



133.94



138.40



162.02S&P 500 Composite Index


100.00



77.90



100.25



111.15



116.61



135.03   Dividend
    Policy
    Recent
    Sales of Unregistered Securities
    Issuer
    Purchases of Equity Securities
     19




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##### Table of Contents



Item 6.
    Selected
    Financial Data  Form 10-K.
  Year Ended December 31,2006


2005


2004


2003


2002(In thousands, except per share amounts)Income Statement DataNet sales

$
761,865


$
648,131


$
585,468


$
528,034


$
496,091Cost of goods sold


349,114



277,230



262,483



245,578



228,299Gross profit


412,751



370,901



322,985



282,456



267,792Operating expenses:Research and development


22,911



17,851



15,962



14,308



16,016Selling


205,880



174,641



160,946



143,549



127,725Shipping and warehousing


20,190



17,485



17,087



14,620



13,739General and administrative


93,934



71,426



63,648



58,017



51,605Total operating expenses


342,915



281,403



257,643



230,494



209,085Operating income


69,836



89,498



65,342



51,962



58,707Interest expense (income), net


1,457



(446
)


1,037



1,272



1,643Income before provision for income
    taxes


68,379



89,944



64,305



50,690



57,064Provision for income taxes


23,591



30,284



20,790



17,741



19,972Net income

$
44,788


$
59,660


$
43,515


$
32,949


$
37,092Basic net income per share

$
0.65


$
0.88


$
0.64


$
0.48


$
0.54Basic weighted-average common
    shares


68,421



68,101



67,953



68,006



68,732Diluted net income per share

$
0.65


$
0.87


$
0.63


$
0.48


$
0.53Diluted weighted-average common
    shares


69,043



68,930



68,610



68,282



69,333Dividends declared per common share

$
0.16


$
0.16


$
0.15


$
0.14


$
   As of December 31,2006


2005


2004


2003


2002(In thousands)Balance Sheet DataWorking capital

$
179,746


$
250,815


$
199,475


$
160,207


$
130,152Total assets


633,834



521,714



483,108



439,765



385,081Total debt


46,848



22,080



30,248



28,700



30,757Shareholders equity


458,891



421,205



365,398



326,573



294,676  20




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##### Table of Contents



Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Form 10-K.
  Overview
        As of December 31,2006


2005


2004Oakley Stores:United States


65



44



36International


15



7



5Sunglass Icon


121



105



83Oliver Peoples


2







The Optical Shop of Aspen


20







223



156



124   Recent
    Developments
  Credit
    Agreement
   21




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Acquisitions
        Footwear
    Restructuring
      Critical
    Accounting Policies
   22




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##### Table of Contents



Revenue
    Recognition
          Inventory
    Sale and Purchase Transactions with the Same Third
    Party
      Inventories
  first-in,
 23




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##### Table of Contents



Impairment
    of Goodwill and Long-Lived Assets
      Warranties
    Income
    Taxes
      Change in
    Accounting for Uncertain Tax Positions
   24




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##### Table of Contents



Recent
    Accounting Pronouncements
     25




---



##### Table of Contents



Results
    of Operations
    Year Ended December 31,2006


2005


2004(In thousands)Net sales

$
761,865


$
648,131


$
585,468Cost of goods sold


349,114



277,230



262,483Gross profit


412,751



370,901



322,985Operating expenses:Research and development


22,911



17,851



15,962Selling


205,880



174,641



160,946Shipping and warehousing


20,190



17,485



17,087General and administrative


93,934



71,426



63,648Total operating expenses


342,915



281,403



257,643Operating income


69,836



89,498



65,342Interest expense (income), net


1,457



(446
)


1,037Income before provision for income
    taxes


68,379



89,944



64,305Provision for income taxes


23,591



30,284



20,790Net income

$
44,788


$
59,660


$
43,515   Year Ended December 31,2006


2005


2004Net sales


100.0
%


100.0
%


100.0
%Cost of goods sold


45.8



42.8



44.8Gross profit


54.2



57.2



55.2Operating expenses:Research and development


3.0



2.8



2.7Selling


27.0



26.9



27.5Shipping and warehousing


2.7



2.7



2.9General and administrative


12.3



11.0



10.9Total operating expenses


45.0



43.4



44.0Operating income


9.2



13.8



11.2Interest expense (income), net


0.2



(0.1
)


0.2Income before provision for income
    taxes


9.0



13.9



11.0Provision for income taxes


3.1



4.7



3.6Net income


5.9
%


9.2
%


7.4
%   Year
    Ended December 31, 2006 Compared to Year Ended
    December 31, 2005
  Net
    sales
   26




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##### Table of Contents



Net
    sales by product category
        Net
    sales by geographic region
      (non-U.S.)
 27




---



##### Table of Contents



Gross
    profit
      Operating
    expenses
         28




---



##### Table of Contents



Operating
    income
    Interest
    expense and interest income
        Income
    taxes
    and/or
   29




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##### Table of Contents



Net
    income
    Year
    Ended December 31, 2005 Compared to Year Ended
    December 31, 2004
  Net
    sales
    electronically-enabled
      Net
    sales by geographic region
      (non-U.S.)
 30




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##### Table of Contents



Gross
    profit
      Operating
    expenses
      e-commerce
     31




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##### Table of Contents



Operating
    income
    Interest
    expense and interest income
        Income
    taxes
    Net
    income
    Liquidity
    and Capital Resources
   32




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##### Table of Contents



Stock
    Repurchase
   33




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##### Table of Contents



Credit
    Agreement
          Contractual
    Obligations and Commitments
    Less Than








More ThanTotal


1 Year


1-3 Years


3-5 Years


5 YearsLines of credit

$
38,116


$
38,116


$



$



$
Long-term debt


8,732



8,732











Interest payable on long-term debt


413



413











Letters of credit


1,957



1,957











Operating leases


162,674



22,541



55,933



47,824



36,376Endorsement contracts(1)


10,692



6,691



3,426



559



16Product purchase commitments(2)


96,588



61,438



17,600



17,550



Capital purchase commitments


1,640



1,640











Additional consideration for
    business acquisitions(3)


2,000







2,000







$
322,812


$
141,528


$
78,959


$
65,933


$
36,392     (1)
    
    We have entered into endorsement contracts with selected
    athletes and others who endorse our products. Under these
    contracts, we have agreed to pay certain incentives based on
    specific achievements in addition to minimum annual payments.
    The amounts listed above for endorsement contracts represent
    approximate amounts of minimum payments required under these
    contracts. Actual amounts paid under these contracts may differ
    from the amounts listed as a result of the conditional
    components of these obligations.(2)
    
    Amounts listed for purchase obligations represent contractual
    agreements, letters of credit and open purchase orders for raw
    materials, finished goods and services to be incurred in the
    ordinary course of business, which are enforceable and legally
    binding and specify all significant terms.(3)
    
    Additional cash consideration totaling up to $7.5 million
    will be payable if OP and OSA achieve certain financial
    performance targets over specified periods following the
    respective dates of acquisition. 34




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Seasonality
    Backlog
    Inflation
    Non-GAAP Financial
    Measures
       35




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##### Table of Contents



Change in FairFootwear


Value of Foreign


Calculation ofReported


Restructuring


Currency


Non-GAAP GrossUnder GAAP


Charges


Derivatives


Margin(1)Year ended December 31,
    2006Net sales

$
761,865


$
(559
)

$



$
762,424Cost of goods sold


349,114



1,770



4,329



343,015Gross profit

$
412,751


$
(2,329
)

$
(4,329
)

$
419,409Gross profit as a % of net sales


54.2
%Non-GAAP gross margin














55.0
%Year ended December 31,
    2005Net sales

$
648,131


$



$



$
648,131Cost of goods sold


277,230







(12,988
)


290,218Gross profit

$
370,901


$



$
12,988


$
357,913Gross profit as a % of net sales


57.2
%Non-GAAP gross margin














55.2
%Year ended December 31,
    2004Net sales

$
585,468


$



$



$
585,468Cost of goods sold


262,483







(2,621
)


265,104Gross profit

$
322,985


$



$
2,621


$
320,364Gross profit as a % of net sales


55.2
%Non-GAAP gross margin














54.7
%     (1)
    
    We do not use non-GAAP net sales or non-GAAP cost of goods sold
    separately as non-GAAP financial measures. Non-GAAP net sales
    and non-GAAP cost of goods sold are presented herein solely for
    the purpose of illustrating the computation of non-GAAP gross
    margin.  Item 7A.
    Quantitative
    and Qualitative Disclosures about Market Risk  Foreign
    Currency Exchange Rate Risk
   36




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##### Table of Contents



Weighted-AverageU.S. Dollar


Rate per





Fair ValueCurrency

Equivalent


US $1.00


Maturity Dates


Gain (Loss)Australian dollar

$
5,980



1.2793



Jan. 2007  Sept. 2007


$
(26
)British pound


15,766



0.5392



Feb. 2007  Dec. 2007



(850
)Canadian dollar


11,702



1.1194



Jan. 2007  Dec. 2007



399Euro


31,769



0.7756



Jan. 2007  Dec. 2007



(913
)Japanese yen


17,175



110.6248



Jan. 2007  Mar. 2008



716$
82,392










$
(674
)       Interest
    Rate Risk
     37




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##### Table of Contents



Item 8.
    Financial
    Statements and Supplementary Data  OAKLEY,
    INC.
  CONSOLIDATED
    BALANCE SHEETS
 (In thousands, except per share data)
  December 31,2006


2005ASSETSCurrent AssetsCash and cash equivalents

$
31,313


$
82,157Accounts receivable, less
    allowances of $15,262 (2006) and $10,639 (2005)


109,168



99,430Inventories


155,377



119,035Other receivables


6,375



4,656Deferred income taxes


17,933



11,707Income taxes receivable






3,059Prepaid expenses and other current
    assets


13,947



14,132Total current assets


334,113



334,176Property and equipment, net


177,400



153,218Deposits


2,799



2,197Goodwill


64,652



27,146Intangible assets


52,302



4,530Other assets


2,568



447Total assets

$
633,834


$
521,714LIABILITIES AND
    SHAREHOLDERS EQUITYCurrent LiabilitiesLines of credit

$
38,116


$
11,349Accounts payable


45,955



30,772Accrued expenses and other current
    liabilities


57,244



36,173Accrued warranty


3,153



3,068Income taxes payable


1,167



Current portion of long-term debt


8,732



1,999Total current liabilities


154,367



83,361Long-term debt, net of current
    portion






8,732Deferred income taxes


17,457



8,156Other long-term liabilities


3,119



260Total liabilities


174,943



100,509Commitments and contingencies
    (Note 6)Shareholders
    EquityPreferred stock, par value
    $.01 per share; 10,000 shares authorized; no shares
    issued






Common stock, par value
    $.01 per share, 200,000 shares authorized; 68,972
    (2006) and 69,153 (2005) issued and outstanding


690



686Additional paid-in capital


41,711



48,026Deferred compensation






(6,082
)Retained earnings


405,120



371,333Accumulated other comprehensive
    income


11,370



7,242Total shareholders equity


458,891



421,205Total liabilities and
    shareholders equity

$
633,834


$
521,714    38




---



##### Table of Contents



OAKLEY,
    INC.
  CONSOLIDATED
    STATEMENTS OF INCOME
 (In thousands, except per share data)
  Year Ended December 31,2006


2005


2004Net sales

$
761,865


$
648,131


$
585,468Cost of goods sold


349,114



277,230



262,483Gross profit


412,751



370,901



322,985Operating expenses:Research and development


22,911



17,851



15,962Selling


205,880



174,641



160,946Shipping and warehousing


20,190



17,485



17,087General and administrative


93,934



71,426



63,648Total operating expenses


342,915



281,403



257,643Operating income


69,836



89,498



65,342Interest expense


3,117



1,508



1,565Interest income


(1,660
)


(1,954
)


(528
)Income before provision for income
    taxes


68,379



89,944



64,305Provision for income taxes


23,591



30,284



20,790Net income

$
44,788


$
59,660


$
43,515Basic net income per common share

$
0.65


$
0.88


$
0.64Basic weighted-average common
    shares


68,421



68,101



67,953Diluted net income per common share

$
0.65


$
0.87


$
0.63Diluted weighted-average common
    shares


69,043



68,930



68,610    39




---



##### Table of Contents



OAKLEY,
    INC.
  CONSOLIDATED
    STATEMENTS OF COMPREHENSIVE INCOME
 (In thousands)
   Year Ended December 31,2006


2005


2004Net income

$
44,788


$
59,660


$
43,515Other comprehensive income (loss):Net unrealized gain (loss) on cash
    flow hedges, net of tax


(752
)


259



289Foreign currency translation
    adjustments


4,880



(4,953
)


6,314Other comprehensive income (loss)


4,128



(4,694
)


6,603Comprehensive income

$
48,916


$
54,966


$
50,118    40




---



##### Table of Contents



OAKLEY,
    INC.
  CONSOLIDATED
    STATEMENTS OF SHAREHOLDERS EQUITY
 (In thousands)
  AccumulatedOther


TotalCommon Stock


Additional


Deferred


Retained


Comprehensive


ShareholdersShares


Amount


Paid-In Capital


Compensation


Earnings


Income


EquityBalance at December 31, 2003


67,948


$
679


$
31,126


$



$
289,435


$
5,333


$
326,573Net income


















43,515







43,515Other comprehensive income






















6,603



6,603Repurchase of common shares


(515
)


(5
)


(5,918
)














(5,923
)Cash dividends declared


















(10,208
)






(10,208
)Exercise of stock options


352



4



3,454















3,458Tax benefit related to exercise of
    stock options










603















603Issuance of restricted stock


313







4,681



(4,681
)










Restricted stock forfeited


(21
)






(303
)


303











Stock-based compensation expense










16



761











777Balance at December 31, 2004


68,077



678



33,659



(3,617
)


322,742



11,936



365,398Net income


















59,660







59,660Other comprehensive loss






















(4,694
)


(4,694
)Repurchase of common shares


(865
)


(9
)


(11,779
)














(11,788
)Cash dividends declared


















(11,069
)






(11,069
)Exercise of stock options


1,684



17



18,627















18,644Tax benefit related to exercise of
    stock options










3,426















3,426Issuance of restricted stock


296







4,673



(4,673
)










Restricted stock forfeited


(39
)






(597
)


597











Stock-based compensation expense










17



1,611











1,628Balance at December 31, 2005


69,153



686



48,026



(6,082
)


371,333



7,242



421,205Net income


















44,788







44,788Other comprehensive income






















4,128



4,128Repurchase of common shares


(683
)


(7
)


(10,733
)














(10,740
)Cash dividends declared


















(11,001
)






(11,001
)Exercise of stock options


436



4



4,942















4,946Tax benefit related to exercise of
    stock options










1,242















1,242Reclassification upon adoption of
    SFAS 123R










(6,082
)


6,082











Issuance of restricted stock


68



7



(7
)














Restricted stock forfeited


(2
)






















Stock-based compensation expense










4,323















4,323Balance at December 31, 2006


68,972


$
690


$
41,711


$



$
405,120


$
11,370


$
458,891    41




---



##### Table of Contents



OAKLEY,
    INC.
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
 (In thousands)
  Year Ended December 31,2006


2005


2004Cash Flows from Operating
    ActivitiesNet income

$
44,788


$
59,660


$
43,515Adjustments to reconcile net
    income to net cash provided by operating activities:Depreciation


32,875



31,930



30,592Amortization of intangible assets


4,696



1,339



1,287Changes in fair value of
    derivative instruments


4,329



(13,186
)


(2,959
)Provision for bad debts


2,095



2,850



1,601Stock-based compensation expense


4,323



1,628



777Excess tax benefits related to
    stock-based compensation


(1,242
)


3,426



603Loss on disposition of equipment


460



831



639Deferred income taxes, net


(11,222
)


576



3,349Changes in assets and liabilities,
    net of effects of business acquisitions:Accounts receivable


(2,602
)


(2,667
)


(23,717
)Inventories


(23,177
)


(7,194
)


(13,779
)Other receivables


(1,104
)


(774
)


(533
)Prepaid expenses and other current
    assets


(1,453
)


(946
)


(919
)Deposits and other assets


(815
)


(530
)


362Accounts payable


10,135



(2,301
)


6,521Accrued expenses and other current
    liabilities


14,886



7,130



5,949Income taxes payable/receivable


4,937



(5,301
)


(7,659
)Net cash provided by operating
    activities


81,909



76,471



45,629Cash Flows from Investing
    ActivitiesAcquisitions of businesses, net of
    cash acquired


(86,751
)


(1,929
)


(450
)Purchases of property and equipment


(52,527
)


(35,079
)


(30,385
)Proceeds from sales of property
    and equipment


221



1,207



311Other assets


(705
)


(181
)


(491
)Net cash used in investing
    activities


(139,762
)


(35,982
)


(31,015
)Cash Flows from Financing
    ActivitiesProceeds from bank borrowings


254,211



1,442



3,416Repayment of bank borrowings


(231,673
)


(8,045
)


(2,853
)Exercise of stock options


4,946



18,644



3,458Excess tax benefits related to
    stock-based compensation


1,242







Repurchase of common shares


(10,351
)


(11,788
)


(5,923
)Payment of cash dividends


(10,952
)


(10,990
)


(10,208
)Net cash provided by (used in)
    financing activities


7,423



(10,737
)


(12,110
)Effect of exchange rate changes on
    cash


(414
)


667



23Net increase (decrease) in cash
    and cash equivalents


(50,844
)


30,419



2,527Cash and cash equivalents,
    beginning of period


82,157



51,738



49,211Cash and cash equivalents, end of
    period

$
31,313


$
82,157


$
51,738    42




---



##### Table of Contents



Oakley,
    Inc.
  Notes to
    Consolidated Financial Statements
  Note 1 
    Basis of Presentation and Significant Accounting
    Policies
    Basis
    of Presentation
    Use of
    Estimates
    Fair
    Values of Financial Instruments
  and/or
  Cash
    and Cash Equivalents
    Accounts
    Receivable and Allowance for Doubtful Accounts
    Inventories
  first-in,
 43




---



##### Table of Contents



Oakley,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Property
    and Equipment
    Derivative
    Financial Instruments
    Impairment
    of Goodwill and Long-Lived Assets
      Warranties
   44




---



##### Table of Contents



Oakley,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    2006


2005


2004Warranty liability, beginning of
    year

$
3,068


$
3,107


$
2,921Provision for warranty expense


3,863



3,712



4,124Warranty claims and costs


(3,800
)


(3,751
)


(3,959
)Changes due to foreign currency
    translation


22







21Warranty liability, end of year

$
3,153


$
3,068


$
3,107   Foreign
    Currency Translation
    Revenue
    Recognition
          Inventory
    Sale and Purchase Transactions with the Same Third
    Party
   45




---



##### Table of Contents



Oakley,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
      Leases
    Shipping
    and Handling Costs
    Advertising
    Costs
  point-of-purchase
  Insurance
    Coverage
   46




---



##### Table of Contents



Oakley,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Stock-Based
    Compensation
    Net
    Income Per Share
    Income
    Taxes
    Uncertain
    Tax Positions
     47




---



##### Table of Contents



Oakley,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Recent
    Accounting Pronouncements
      Reclassifications
    Note 2 
    Acquisitions
  Oliver
    Peoples, Inc.
   48




---



##### Table of Contents



Oakley,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
     Accounts receivable

$
7,485Inventory


5,122Other current assets


1,551Property and equipment


758Goodwill


19,681Identified intangible assets


36,000Other assets


1,032Total assets acquired


71,629Current liabilities


6,601Deferred tax liabilities


11,929Total liabilities assumed


18,530Net assets acquired

$
53,099   sub-licensing
  The
    Optical Shop of Aspen
     49




---



##### Table of Contents



Oakley,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Inventory

$
3,987Other current assets


977Property and equipment


1,211Goodwill


13,789Identified intangible assets


13,700Other assets


81Total assets acquired


33,745Current liabilities


3,533Total liabilities assumed


3,533Net assets acquired

$
30,212   sub-licensing
  Other
    Acquisitions
    Supplemental
    Pro Forma Information (Unaudited)
    2006


2005Pro forma net sales

$
770,764


$
698,274Pro forma net income


40,900



60,279Pro forma basic net income per
    share

$
0.60


$
0.88Pro forma diluted net income per
    share

$
0.59


$
0.87    50




---



##### Table of Contents



Oakley,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Note 3 
    Supplemental Financial Statement Information
  Inventories
    2006


2005Raw materials

$
24,223


$
28,776Finished goods


131,154



90,259$
155,377


$
119,035   Property
    and equipment
    2006


2005Land

$
8,953


$
8,953Buildings and improvements


72,251



70,778Leasehold improvements


64,183



41,115Equipment and furniture


232,484



207,517Tooling


36,320



29,998414,191



358,361Accumulated depreciation and
    amortization


(236,791
)


(205,143
)$
177,400


$
153,218   Intangible
    Assets
    2006


2005Gross Carrying


Accumulated


Gross Carrying


AccumulatedAmount


Amortization


Amount


AmortizationDefinite-lived intangible assets:Covenants not to compete

$
7,102


$
(4,943
)

$
4,319


$
(3,450
)Distribution rights


3,567



(2,532
)


3,567



(2,226
)Patents


4,359



(2,849
)


4,339



(2,423
)Customer relationships


16,020



(728
)






Sub-licenses


1,300



(119
)






Trade name


1,235



(240
)






Other


9,234



(1,904
)


923



(519
)$
42,817


$
(13,315
)

$
13,148


$
(8,618
)Indefinite-lived intangible assets:Trade name

$
22,800






$
    51




---



##### Table of Contents



Oakley,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    EstimatedAmortizationExpense2007

$
4,2652008


3,3642009


2,9852010


2,6702011


2,133Thereafter


14,085   Goodwill
    Wholesale


U.S. RetailSegment


Segment


TotalBalance, December 31, 2004

$
16,702


$
8,997


$
25,699Goodwill additions






1,771



1,771Foreign currency translation
    adjustments


(324
)






(324
)Balance, December 31, 2005


16,378



10,768



27,146Goodwill additions


20,385



16,540



36,925Foreign currency translation
    adjustments


581







581Balance, December 31, 2006

$
37,344


$
27,308


$
64,652   Accrued
    Liabilities
    2006


2005Accrued employee compensation and
    benefits

$
24,197


$
18,226Derivative financial instruments


674



91Other liabilities


32,373



17,856$
57,244


$
36,173   Comprehensive
    Income
    2006


2005Unrealized gains (losses) on
    derivative financial instruments

$
(810
)

$
(58
)Foreign currency translation
    adjustments


12,180



7,300$
11,370


$
7,242  52




---



##### Table of Contents



Oakley,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  Supplemental
    Cash Flow Information
    Note 4 
    Income Taxes
    2006


2005


2004United States

$
54,940


$
64,690


$
57,993Foreign


13,439



25,254



6,312$
68,379


$
89,944


$
64,305     2006


2005


2004Current:Federal

$
26,585


$
22,565


$
13,550State


3,477



2,173



1,154Foreign


4,751



4,725



2,67034,813



29,463



17,374Deferred:Federal


(8,251
)


(3,071
)


2,428State


(1,411
)


(151
)


236Foreign


(1,560
)


4,043



752(11,222
)


821



3,416$
23,591


$
30,284


$
20,790      53




---



##### Table of Contents



Oakley,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    2006


2005


2004Tax at U.S. federal statutory
    rates

$
23,933


$
31,480


$
22,508State income taxes, net of federal
    effect


1,343



1,309



904U.S. export benefit, net of
    foreign tax rate differential


(867
)


(1,746
)


(1,668
)Other, net


(818
)


(759
)


(954
)$
23,591


$
30,284


$
20,790       2006


2005Deferred tax assets:Warranty reserve

$
1,169


$
1,126Uniform capitalization


1,219



1,564Sales returns


3,566



1,578Inventories


6,723



3,405Allowance for doubtful accounts


912



675Accrued compensation and benefits


4,103



2,458Stock-based compensation


1,430



840Deferred revenue


616



2,224Foreign net operating losses


1,295



5,049Other


2,901



2,135Gross deferred tax assets


23,934



21,054Valuation allowance


(1,295
)


(5,049
)Total deferred tax assets


22,639



16,005Deferred tax liabilities:Depreciation and amortization


(20,519
)


(9,327
)Other comprehensive income


(1,035
)


(652
)Foreign unrealized gains/losses


(215
)


(1,810
)Other


(394
)


(665
)Total deferred tax liabilities


(22,163
)


(12,454
)Net deferred tax assets

$
476


$
3,551  54




---



##### Table of Contents



Oakley,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    and/or
    Note 5 
    Debt
  Line
    of Credit
         55




---



##### Table of Contents



Oakley,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Long-Term
    Debt
    Note 6 
    Commitments and Contingencies
  Operating
    Leases
    Endorsement
    Contracts
   56




---



##### Table of Contents



Oakley,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Purchase
    Commitments
    Operating


Endorsement


PurchaseLeases


Contracts


Commitments2007

$
22,541


$
6,691


$
61,4382008


28,260



2,820



8,8002009


27,673



606



8,8002010


24,592



278



8,8002011


23,232



281



8,750Thereafter


36,376



16



Total future minimum lease payments

$
162,674


$
10,692


$
96,588   Employment
    and Severance Arrangements
    Indemnities,
    Commitments and Guarantees
    Litigation
   57




---



##### Table of Contents



Oakley,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Note 7 
    Derivative Financial Instruments
      Cash
    Flow Hedges
      Weighted-AverageU.S. Dollar


Rate per





Fair ValueCurrency

Equivalent


US $1.00


Maturity Dates


Gain (Loss)Australian dollar

$
5,980



1.2793



Jan. 2007  Sept. 2007


$
(26
)British pound


15,766



0.5392



Feb. 2007  Dec. 2007



(850
)Canadian dollar


11,702



1.1194



Jan. 2007  Dec. 2007



399Euro


31,769



0.7756



Jan. 2007  Dec. 2007



(913
)Japanese yen


17,175



110.6248



Jan. 2007  Mar. 2008



716$
82,392










$
(674
)  58




---



##### Table of Contents



Oakley,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Other
    Derivatives
        Note 8 
    Shareholders Equity
    Stock
    Repurchase Programs
      Note 9 
    Stock-Based Compensation
   59




---



##### Table of Contents



Oakley,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
         2006


2005


2004Cost of goods sold

$
416


$



$
Research and development


493



221



134Selling


637



239



229Shipping and warehousing


11







General and administrative


2,766



1,168



414$
4,323


$
1,628


$
777     2005


2004Net income:As reported

$
59,660


$
43,515Add: Stock-based employee
    compensation expense included in the determination of reported
    net income, net of tax effects


1,030



489Deduct: Stock-based employee
    compensation expense determined under fair value based method,
    net of tax effects


(1,925
)


(3,582
)Pro forma

$
58,765


$
40,422Basic net income per share:As reported

$
0.88


$
0.64Pro forma

$
0.86


$
0.59Diluted net income per share:As reported

$
0.87


$
0.63Pro forma

$
0.85


$
0.59    60




---



##### Table of Contents



Oakley,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Stock
    Option Valuation
      2006

2005

2004Weighted-average fair value of
    options granted

$5.77

$5.20

$4.53Weighted-average assumptions:Expected volatility

34.6%

35.2%

36.0%Expected term

6.5 years

5.6 years

5.0 yearsRisk-free interest rate

5.0%

3.8%

3.1%Dividend yield

1.0%

1.1%

1.1%   1995
    Stock Incentive Plan
   61




---



##### Table of Contents



Oakley,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  Stock
    Option Awards
    Weighted-AverageWeighted-


RemainingNumber


Average


Contractual Termof Shares


Exercise Price


(Years)Outstanding at January 1, 2006


3,345


$
13.58Granted


953


$
15.87Exercised


(436
)

$
11.35Forfeited/expired


(129
)

$
14.78Outstanding at December 31,
    2006


3,733


$
14.37



6.6Vested at December 31, 2006
    or expected to vest


3,530


$
14.33



6.3Exercisable at December 31,
    2006


1,935


$
13.92



4.5       Restricted
    Stock Awards
    Weighted-AverageNumber


Grant Dateof Shares


Fair ValueNonvested shares at
    January 1, 2006


520


$
15.49Granted


68


$
16.47Vested


(123
)

$
14.99Forfeited


(2
)

$
15.15Nonvested shares at
    December 31, 2006


463


$
15.76    62




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##### Table of Contents



Oakley,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
     Note 10 
    Employee Benefit Plan
    Note 11 
    Related Party Information
  Aircraft
    Lease
    Trademark
    License Agreement
    Reimbursable
    Costs
   63




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##### Table of Contents



Oakley,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  and/or
  Note 12 
    Segment and Geographic Information
      Intersegment


TotalWholesale


U.S. Retail


Transactions


ConsolidatedYear ended December 31, 2006:Net sales

$
627,799


$
171,289


$
(37,223
)

$
761,865Operating income


39,169



31,612



(945
)


69,836Identifiable assets


617,134



124,948



(108,248
)


633,834Purchases of property and equipment


32,583



19,944







52,527Depreciation and amortization


29,135



8,436







37,571Year ended December 31, 2005:Net sales

$
553,409


$
119,219


$
(24,497
)

$
648,131Operating income


63,721



25,842



(65
)


89,498Identifiable assets


473,503



60,875



(12,664
)


521,714Purchases of property and equipment


23,761



11,318







35,079Depreciation and amortization


29,230



4,039







33,269Year ended December 31, 2004:Net sales

$
517,307


$
85,691


$
(17,530
)

$
585,468Operating income


48,961



16,488



(107
)


65,342Purchases of property and equipment


24,158



6,227







30,385Depreciation and amortization


28,855



3,024







31,879  64




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##### Table of Contents



Oakley,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    TotalWholesale


U.S. Retail


ConsolidatedYear ended December 31, 2006:Segment net sales

$
627,799


$
171,289


$
799,088Less: Intersegment sales


(37,223
)






(37,223
)Net sales to external customers

$
590,576


$
171,289


$
761,865Year ended December 31, 2005:Segment net sales

$
553,409


$
119,219


$
672,628Less: Intersegment sales


(24,497
)






(24,497
)Net sales to external customers

$
528,912


$
119,219


$
648,131Year ended December 31, 2004:Segment net sales

$
517,307


$
85,691


$
602,998Less: Intersegment sales


(17,530
)






(17,530
)Net sales to external customers

$
499,777


$
85,691


$
585,468     2006


2005


2004United States

$
423,863


$
342,847


$
304,955Other Americas


77,599



62,458



50,025Europe, Middle East and Africa


177,392



161,827



159,848Asia-Pacific


83,011



80,999



70,640$
761,865


$
648,131


$
585,468     2006


2005United States

$
159,319


$
135,773Other Americas


5,110



3,741Europe, Middle East and Africa


12,229



11,499Asia-Pacific


6,458



4,849$
183,116


$
155,862     2006


2005


2004Optics

$
552,922


$
465,050


$
422,878Apparel, footwear and accessories


156,701



148,452



137,579Other


52,242



34,629



25,011$
761,865


$
648,131


$
585,468  65




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##### Table of Contents



Oakley,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  Note 13 
    Footwear Restructuring Plan
      Note 14 
    Subsequent Events
      Note 15
    
    Quarterly Financial Data (Unaudited)    Three Months EndedMar. 31,


June 30,


Sept. 30,


Dec. 31,2006


2006


2006


2006Net sales

$
151,698


$
203,584


$
210,219


$
196,364Gross profit


80,585



114,653



113,099



104,414Income before provision for income
    taxes


2,934



27,494



25,814



12,137Net income


1,907



17,871



17,342



7,668Basic net income per share

$
0.03


$
0.26


$
0.25


$
0.11Diluted net income per share

$
0.03


$
0.26


$
0.25


$
0.11Shares used in computing diluted
    loss per share


69,583



69,163



68,827



69,123   66




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##### Table of Contents



Oakley,
    Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  Three Months EndedMar. 31,


June 30,


Sept. 30,


Dec. 31,2005


2005


2005


2005Net sales

$
141,795


$
170,475


$
173,447


$
162,414Gross profit


81,590



106,831



94,450



88,030Income before provision for income
    taxes


15,107



35,086



24,351



15,400Net income


9,971



24,041



16,072



9,576Basic net income per share

$
0.15


$
0.36


$
0.24


$
0.14Diluted net income per share

$
0.15


$
0.35


$
0.23


$
0.14Shares used in computing diluted
    loss per share


68,318



68,361



69,323



69,362  67




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##### Table of Contents



Report of
    Independent Registered Public Accounting Firm
          Internal Control 
    Integrated Framework
  
    68




---



##### Table of Contents



Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  Disclosure
    Controls and Procedures
    Managements
    Report on Internal Control over Financial Reporting
    Internal Control  Integrated Framework
   69




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##### Table of Contents



Report of
    Independent Registered Public Accounting Firm
                
    70




---



##### Table of Contents



Item 9B.
    Other
    Information    PART III  Form 10-K
  Item 10.
    Directors,
    Executive Officers and Corporate Governance    Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Shareholder Matters    Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence    Item 14.
    Principal
    Accountant Fees and Services    PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules  Financial Statements
    Supplemental Schedules
      Exhibits
  Form 10-K.
 71




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##### Table of Contents



OAKLEY,
    INC.
  Schedule II 
    Valuation and Qualifying Accounts
  Balance at


Additions Charged


Additions Charged





BalanceBeginning of


to Costs and


to Other





at End ofYear


Expenses


Accounts(1)


Deductions


YearYear ended December 31, 2006:Allowance for doubtful accounts

$
3,609


$
2,095


$
198


$
(1,760
)

$
4,142Sales return reserve


6,683



7,547



952



(7,945
)


7,237Provision for markdowns and
    concessions


347



4,651







(1,115
)


3,883Inventory reserve


13,004



9,705



1,260



(3,596
)


20,373Year ended December 31, 2005:Allowance for doubtful accounts

$
2,622


$
2,850


$



$
(1,863
)

$
3,609Sales return reserve


8,423



2,434







(4,174
)


6,683Provision for markdowns and
    concessions






347











347Inventory reserve


10,321



3,757







(1,074
)


13,004Year ended December 31, 2004:Allowance for doubtful accounts

$
2,623


$
1,601


$



$
(1,602
)

$
2,622Sales return reserve


7,049



3,964







(2,590
)


8,423Inventory reserve


7,250



3,652







(581
)


10,321     (1)
    
    Amounts reflect acquisition date balances of acquired businesses. 72




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##### Table of Contents



Signatures
      Date: March 9, 2007

By:

/s/  D.
    Scott OlivetD.
    Scott Olivet
    Chief Executive Officer     Signature

Title

Date/s/  D.
    Scott OlivetD.
    Scott Olivet

Chief Executive Officer and
    Director (Principal Executive Officer)

March 9, 2007/s/  Richard
    ShieldsRichard
    Shields

Chief Financial Officer (Principal
    Financial and Accounting Officer)

March 9, 2007/s/  Jim
    JannardJim
    Jannard

Chairman of the Board of Directors

March 9, 2007/s/  Tom
    DavinTom
    Davin

Director

March 9, 2007/s/  Mary
    GeorgeMary
    George

Director

March 9, 2007/s/  Jeff
    MooradJeff
    Moorad

Director

March 9, 2007/s/  Colombe
    NicholasColombe
    Nicholas

Director

March 9, 2007/s/  Michael
    PuntorieroMichael
    Puntoriero

Director

March 9, 2007/s/  Greg
    TrojanGreg
    Trojan

Director

March 9, 2007/s/  Frits
    van PaasschenFrits
    van Paasschen

Director

March 9, 2007  73




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##### Table of Contents



EXHIBIT INDEX
  2
.1

Purchase Agreement and Agreement
    and Plan of Merger, dated February 8, 2006, by and among
    Oakley, Merger Sub, KLO Merger Sub, Oliver Peoples and KLO,
    filed as Exhibit 2.1 to the Registrants Annual Report
    on
    Form 10-K
    for the year ended December 31, 2005, is incorporated
    herein by reference.2
.2

Asset Purchase Agreement, dated
    November 21, 2006, by and among Oakley, Inc., a Washington
    corporation, Merlita Acquisition Corporation, a Delaware
    corporation and wholly owned subsidiary of Oakley, Eye Safety
    Systems, Inc., a Delaware corporation, the stockholders of Eye
    Safety Systems, Inc., and John D. Dondero, an individual, as
    stockholders representative, filed as Exhibit 2.1 to
    the Registrants Current Report on
    Form 8-K
    dated November 22, 2006, is incorporated herein by
    reference.3
.1

Amended and Restated Articles of
    Incorporation of the Company, previously filed with the
    Registration Statement on
    Form S-1
    of Oakley, Inc. (Registration
    No. 33-93080),
    is incorporated herein by reference.3
.2

Amendment No. 1 to the
    Amended and Restated Articles of Incorporation, as filed with
    the Secretary of State of the State of Washington on
    September 26, 1996, filed as Exhibit 3.3 to the
    Registrants Annual Report on
    Form 10-K
    for the year ended December 31, 1996, is incorporated
    herein by reference.3
.3

Amended and Restated Bylaws of the
    Company (includes complete text of Bylaws; amends Section 1
    and Sections 3a through 3f of Article IV of the Bylaws
    of the Company), filed as Exhibit 10.66 to
    Registrants Annual Report on
    Form 10-K
    for the year ended December 31, 1998, is incorporated
    herein by reference.10
.1

Promissory Note, dated
    March 20, 1997, between Oakley, Inc. and Bank of America
    National Trust and Savings Association, filed as
    Exhibit 10.51 to the Registrants Quarterly Report on
    Form 10-Q
    for the quarter ended March 31, 1997, is incorporated
    herein by reference.10
.2

Promissory Note, dated
    August 7, 1997, between Oakley, Inc. and Bank of America
    National Trust and Savings Association, filed as
    Exhibit 10.58 to the Registrants Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 1997, is incorporated
    herein by reference.10
.3

Amendment No. 1 to Promissory
    Note, dated August 14, 1997, between Oakley, Inc. and Bank
    of America National Trust and Savings Association, filed as
    Exhibit 10.61 to the Registrants Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 1997, is incorporated
    herein by reference.10
.4

Amendment No. 2 to Promissory
    Note, dated August 14, 1997, between Oakley, Inc. and Bank
    of America National Trust and Savings Association, filed as
    Exhibit 10.62 to the Registrants Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 1997, is incorporated
    herein by reference.10
.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, filed as
    Exhibit 10.59 to the Registrants Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 1997, is incorporated
    herein by reference.10
.6

Modification Agreement (Short
    Form), dated August 10, 1998, between Oakley, Inc. and Bank
    of America National Trust and Savings Association, filed as
    Exhibit 10.72 to the Registrants Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 1998, is incorporated
    herein by reference.10
.7

Modification Agreement (Long
    Form), dated August 10, 1998, between Oakley, Inc. and Bank
    of America National Trust and Savings Association, filed as
    Exhibit 10.73 to the Registrants Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 1998, is incorporated
    herein by reference.10
.8

Third Amended and Restated Credit
    Agreement, dated August 19, 2004 among Oakley, Inc., as
    borrower, and Bank of America, N.A., as agent, Swing Line Lender
    and the lenders named therein, filed as Exhibit 10.1 to the
    Registrants Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2004, is incorporated
    herein by reference.10
.9

First Amendment to Third Amended
    and Restated Credit Agreement, dated January 18, 2006 among
    Oakley, Inc., as borrower, and Bank of America, N.A., as agent,
    and the lenders named therein, filed as Exhibit 10.42 to
    the Registrants Annual Report on
    Form 10-K
    for the year ended December 31, 2005, is incorporated
    herein by reference.10
.10

Credit Agreement, dated as of
    September 22, 2006, among Oakley, Inc., the Borrowing
    Subsidiaries, the Lenders and JPMorgan Chase Bank, N.A., as
    Administrative Agent, filed as Exhibit 10.1 to the
    Registrants Current Report on
    Form 8-K
    dated September 25, 2006, is incorporated herein by
    reference. 74




---



##### Table of Contents



10
.11

Domestic Subsidiary Guaranty,
    dated as of September 22, 2006, for the benefit of JPMorgan
    Chase Bank, N.A., as Administrative Agent under the Credit
    Agreement and the Lenders from time to time party to the Credit
    Agreement, filed as Exhibit 10.2 to the Registrants
    Current Report on
    Form 8-K
    dated September 25, 2006, is incorporated herein by
    reference.10
.12

Amendment No. 1 to Credit
    Agreement, dated as of December 20, 2006, among Oakley,
    Inc., the Lenders and JPMorgan Chase Bank, N.A., as
    Administrative Agent, filed as Exhibit 10.1 to the
    Registrants Current Report on
    Form 8-K
    dated December 21, 2006, is incorporated herein by
    reference.10
.13 *

Amended and Restated Consultant
    Agreement, dated May 12, 1998, between Jim Jannard and
    Oakley, Inc., filed as Exhibit 10.67 to the
    Registrants Quarterly Report on
    Form 10-Q
    for the quarter ended June 30, 1998, is incorporated herein
    by reference.10
.14 *

Employment Agreement, dated
    September 19, 2005, between Oakley, Inc. and D. Scott
    Olivet, filed as Exhibit 10.1 to the Registrants
    Current Report on
    Form 8-K
    dated September 21, 2005, is incorporated herein by
    reference.10
.15 *

Severance Agreement, dated
    November 3, 2005, between Richard Shields and Oakley, Inc.,
    filed as Exhibit 10.1 to the Registrants Current
    Report on
    Form 8-K
    dated October 20, 2005, is incorporated herein by reference.10
.16 *

Letter agreement, dated
    October 1, 2006, between Oakley, Inc. and Link Newcomb,
    filed as Exhibit 10.1 to the Registrants Current
    Report on
    Form 8-K
    dated September 22, 2006, is incorporated herein by
    reference.10
.17 *

Severance Agreement, dated
    October 1, 2006, between Oakley, Inc. and Link Newcomb,
    filed as Exhibit 10.2 to the Registrants Current
    Report on
    Form 8-K
    dated September 22, 2006, is incorporated herein by
    reference.10
.18 *

Indemnification Agreement, dated
    February 7, 2003, between Oakley, Inc. and Jim Jannard,
    filed as Exhibit 10.26 to the Registrants Annual
    Report on
    Form 10-K
    for the year ended December 31, 2002, is incorporated
    herein by reference.10
.19 *

Indemnification Agreement, dated
    February 7, 2003, between Oakley, Inc. and Link Newcomb,
    filed as Exhibit 10.27 to the Registrants Annual
    Report on
    Form 10-K
    for the year ended December 31, 2002, is incorporated
    herein by reference.10
.20 *

Indemnification Agreement, dated
    February 7, 2003, between Oakley, Inc. and Colin Baden,
    filed as Exhibit 10.28 to the Registrants Annual
    Report on
    Form 10-K
    for the year ended December 31, 2002, is incorporated
    herein by reference.10
.21 *

Indemnification Agreement, dated
    February 7, 2003, between Oakley, Inc. and Donna Gordon,
    filed as Exhibit 10.31 to the Registrants Annual
    Report on
    Form 10-K
    for the year ended December 31, 2002, is incorporated
    herein by reference.10
.22 *

Indemnification Agreement, dated
    February 7, 2003, between Oakley, Inc. and Scott Bowers,
    filed as Exhibit 10.32 to the Registrants Annual
    Report on
    Form 10-K
    for the year ended December 31, 2002, is incorporated
    herein by reference.10
.23 *

Indemnification Agreement, dated
    February 7, 2003, between Oakley, Inc. and Jon Krause,
    filed as Exhibit 10.34 to the Registrants Annual
    Report on
    Form 10-K
    for the year ended December 31, 2002, is incorporated
    herein by reference.10
.24 *

Indemnification Agreement, dated
    February 7, 2003, between Oakley, Inc. and Kent Lane, filed
    as Exhibit 10.35 to the Registrants Annual Report on
    Form 10-K
    for the year ended December 31, 2002, is incorporated
    herein by reference.10
.25 *

Indemnification Agreement, dated
    February 12, 2004, between Oakley, Inc. and Thomas Davin,
    filed as Exhibit 10.40 to the Registrants Annual
    Report on
    Form 10-K
    for the year ended December 31, 2003, is incorporated
    herein by reference.10
.26 *

Indemnification Agreement, dated
    September 29, 2004, between Oakley, Inc. and Cosmas N.
    Lykos, filed as Exhibit 10.2 to the Registrants
    Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2004, is incorporated
    herein by reference.10
.27 *

Indemnification Agreement, dated
    September 29, 2004, between Oakley, Inc. and Mary George,
    filed as Exhibit 10.3 to the Registrants Quarterly
    Report on
    Form 10-Q
    for the quarter ended September 30, 2004, is incorporated
    herein by reference. 75




---



##### Table of Contents



10
.28 *

Indemnification Agreement, dated
    January 1, 2005, between Oakley, Inc. and Michael J.
    Puntoriero, filed as Exhibit 10.40 to the Registrants
    Annual Report on
    Form 10-K
    for the year ended December 31, 2004 , is incorporated
    herein by reference.10
.29 *

Indemnification Agreement, dated
    June 3, 2005, between Oakley, Inc. and Greg Trojan, filed
    as Exhibit 10.2 to the Registrants Quarterly Report
    on
    Form 10-Q
    for the quarter ended June 30, 2005, is incorporated herein
    by reference.10
.30 *

Indemnification Agreement, dated
    June 3, 2005, between Oakley, Inc. and Colombe Nicholas,
    filed as Exhibit 10.3 to the Registrants Quarterly
    Report on
    Form 10-Q
    for the quarter ended June 30, 2005, is incorporated herein
    by reference.10
.31 *

Indemnification Agreement, dated
    September 19, 2005, between Oakley, Inc. and D. Scott
    Olivet, filed as Exhibit 10.3 to the Registrants
    Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2005, is incorporated
    herein by reference.10
.32 *

Indemnification Agreement, dated
    September 26, 2005, between Oakley, Inc. and Frits van
    Paasschen, filed as Exhibit 10.4 to the Registrants
    Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2005, is incorporated
    herein by reference.10
.33 *

Indemnification Agreement, dated
    November 3, 2005, between Oakley, Inc. and Richard Shields,
    filed as Exhibit 10.41 to the Registrants Annual
    Report on
    Form 10-K
    for the year ended December 31, 2005, is incorporated
    herein by reference.10
.34 *

Indemnification Agreement, dated
    December 15, 2006, between Oakley, Inc. and Jeff Moorad.10
.35 *

Oakley, Inc. 1995 Stock Incentive
    Plan, as amended, filed as Appendix A to the
    Registrants Proxy Statement filed with the SEC on
    April 25, 2006, is incorporated herein by reference.10
.36 *

Form of Restricted Stock Agreement
    under the Oakley, Inc. 1995 Stock Incentive Plan, as amended,
    filed as Exhibit 10.7 to the Registrants Quarterly
    Report on
    Form 10-Q
    for the quarter ended September 30, 2006, is incorporated
    herein by reference.10
.37 *

Form of Restricted Stock Agreement
    for members of the Board of Directors under the Oakley, Inc.
    1995 Stock Incentive Plan, as amended, filed as
    Exhibit 10.8 to the Registrants Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2006, is incorporated
    herein by reference.10
.38 *

Form of Combined Employee
    Incentive Stock Option and Non-Qualified Stock Option Agreement
    under the Oakley, Inc. 1995 Stock Incentive Plan, as amended,
    filed as Exhibit 10.9 to the Registrants Quarterly
    Report on
    Form 10-Q
    for the quarter ended September 30, 2006, is incorporated
    herein by reference.10
.39 *

Oakley, Inc. Executive Officer
    Performance Bonus Plan, as amended and restated through
    April 17, 1999, filed as Appendix B to the
    Registrants Proxy Statement filed with the SEC on
    April 25, 2006, is incorporated herein by reference.10
.40 *

Amended and Restated Oakley, Inc.
    Executive Severance Plan effective as of June 3, 2004,
    filed as Exhibit 10.5 to the Registrants Quarterly
    Report on
    Form 10-Q
    for the quarter ended September 30, 2006, is incorporated
    herein by reference.10
.41 *

Amended and Restated Oakley, Inc.
    Officer Severance Plan effective as of June 3, 2004, filed
    as Exhibit 10.6 to the Registrants Quarterly Report
    on
    Form 10-Q
    for the quarter ended September 30, 2006, is incorporated
    herein by reference.10
.42

Lease Agreement, dated
    November 10, 2000, between Haven Gateway LLC and Oakley,
    Inc., filed as Exhibit 10.33 to the Registrants
    Annual Report on
    Form 10-K
    for the year ended December 31, 2000, is incorporated
    herein by reference.10
.43

Trademark License Agreement and
    Assignment of Rights, dated March 31, 2000, between Y, LLC
    and Oakley, Inc., filed as Exhibit 10.34 to the
    Registrants Annual Report on
    Form 10-K
    for the year ended December 31, 2000, is incorporated
    herein by reference.10
.44

Amendment to Trademark License
    Agreement, dated June 1, 2002, between Y, LLC and Oakley,
    Inc., filed as Exhibit 10.29 to the Registrants
    Quarterly Report on
    Form 10-Q
    for the quarter ended June 30, 2002, is incorporated herein
    by reference.10
.45

Reciprocal Exclusive Dealing
    Agreement, entered into effective March 12, 2005 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), filed as Exhibit 10.1 to the
    Registrants Quarterly Report on
    Form 10-Q
    for the quarter ended June 30, 2005, is incorporated herein
    by reference. 76




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##### Table of Contents



10
.46

Agreement and Mutual Release,
    dated March 5, 2004, between N2T, Inc. and Oakley, Inc.,
    filed as Exhibit 10.1 to the Registrants Quarterly
    Report on
    Form 10-Q
    for the quarter ended March 31, 2004, is incorporated
    herein by reference.10
.47

Time Sharing Agreement, dated
    January 30, 2006, between Oakley, Inc. and Jim Jannard,
    filed as Exhibit 10.1 to the Registrants Quarterly
    Report on
    Form 10-Q
    for the quarter ended March 31, 2006, is incorporated
    herein by reference.10
.48

Time Sharing Agreement, dated
    January 30, 2006, between Oakley, Inc. and RED.COM, INC.,
    filed as Exhibit 10.2 to the Registrants Quarterly
    Report on
    Form 10-Q
    for the quarter ended March 31, 2006, is incorporated
    herein by reference.10
.49

Time Sharing Agreement, dated
    January 30, 2006, between Oakley, Inc. and Y LLC, filed as
    Exhibit 10.3 to the Registrants Quarterly Report on
    Form 10-Q
    for the quarter ended March 31, 2006, is incorporated
    herein by reference.10
.50

Time Sharing Agreement, dated
    January 30, 2006, between Oakley, Inc. and X LLC, filed as
    Exhibit 10.4 to the Registrants Quarterly Report on
    Form 10-Q
    for the quarter ended March 31, 2006, is incorporated
    herein by reference.10
.51

Lease Agreement, effective as of
    January 30, 2006, between N2T, Inc. and Oakley, Inc.,
    executed on November 17, 2006 filed as Exhibit 10.1 to
    the Registrants Current Report on
    Form 8-K
    dated November 21, 2006, is incorporated herein by
    reference.10
.52

Termination Agreement, effective
    as of January 30, 2006, between N2T, Inc. and Oakley, Inc.,
    executed on November 17, 2006 filed as Exhibit 10.2 to
    the Registrants Current Report on
    Form 8-K
    dated November 21, 2006, is incorporated herein by
    reference.21


Subsidiaries of Oakley, Inc.23


Consent of independent registered
    public accounting firm.31
.1

Certification of Chief Executive
    Officer pursuant to Section 302 of the Sarbanes-Oxley Act
    of 200231
.2

Certification of Chief Financial
    Officer pursuant to Section 302 of the Sarbanes-Oxley Act
    of 200232
.1

Certification of Chief Executive
    Officer and Chief Financial Officer pursuant to
    Section 1350 of Chapter 63 of Title 18 of the
    United States Code, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002     *
    
    Management contract or compensatory plan or arrangement. 77