DECKERS OUTDOOR CORP (Form: 10-K, Received: 03/16/2005 15:17:45)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark one)


	x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004


	o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 0-22446

DECKERS OUTDOOR CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		95-3015862
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

495-A South Fairview Avenue, Goleta, California		93117
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (805) 967-7611

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


Title of each class		Name of each exchange on which registered

None		None

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

Common Stock, $.01 par value

(Title of Class)

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 past 90 days. Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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.

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

Aggregate market value of the Common Stock of the registrant held by non-affiliates of the registrant on June 30, 2004 based on the closing price of the Common Stock on the NASDAQ National Market System on such date was $278,083,416.

The number of shares of the registrant’s Common Stock outstanding at March 8, 2005 was 12,303,458.

Portions of registrant’s definitive proxy statement relating to registrant’s 2005 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days after the end of registrant’s fiscal year ended December 31, 2004, are incorporated by reference in Part III of this Form 10-K.

DECKERS OUTDOOR CORPORATION

For the Fiscal Year Ended December 31, 2004

Index to Annual Report on Form 10-K


		Page

PART I
Item 1.	Business		3
Item 2.	Properties		15
Item 3.	Legal Proceedings		16
Item 4.	Submission of Matters to a Vote of Security Holders		16

PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		17
Item 6.	Selected Financial Data		18
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		47
Item 8.	Financial Statements and Supplementary Data		47
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		47
Item 9A.	Controls and Procedures		47
Item 9B.	Other Information		48

PART III
Item 10.	Directors and Executive Officers of the Registrant		79
Item 11.	Executive Compensation		79
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		79
Item 13.	Certain Relationships and Related Transactions		79
Item 14.	Principal Accountant Fees and Services		79

PART IV
Item 15.	Exhibits and Financial Statement Schedules		79
Signatures			83
EX-10.36
EX-10.37
EX-10.38
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1

PART I


Item 1.	*Business*

General

We are a leading designer, producer and brand manager of innovative, high-quality footwear and the category creator in the sport sandal and luxury sheepskin footwear segments. Our footwear is distinctive and appeals broadly to men, women and children. We sell our products through quality domestic retailers and international distributors and directly to end-user consumers through our websites and catalogs. Our primary objective is to build our footwear lines into global lifestyle brands with market leadership positions.

We market our products under three proprietary brands:


	*Teva.* Teva is our outdoor lifestyle brand and the category creator for the sport sandal segment. Teva was created in the 1980’s to serve the demanding footwear needs of the professional river guide community, and this authentic heritage and commitment to function and performance remain core elements of the Teva brand. We have expanded Teva’s sport sandal line to include casual open-toe footwear, as well as hiking boots, trail running shoes, amphibious footwear and other rugged outdoor footwear styles.

	*UGG.* UGG is our luxury brand and the category creator for luxury sheepskin footwear. Our UGG line has enjoyed several years of strong growth and positive consumer receptivity, driven by consistent introductions of new styles, introductions of UGG products in the fall and spring seasons and geographic expansion of distribution. We carefully manage the distribution of our UGG line within high-end specialty and department store retailers in order to best reach our target consumers, preserve UGG’s retail channel positioning and maintain UGG’s position as a mid- to upper-price luxury brand.

	*Simple.* Simple is our moderately priced “anti-brand,” serving the needs of a youthful, irreverent consumer base seeking the comfort of athletic footwear but the styling of more traditional, understated, “back-to-basics” footwear. We have recently revised the Simple line to focus on its successful legacy models, including sneakers, clogs, sandals and other casual footwear. In addition, Simple enables us to selectively leverage our core footwear design and production competencies for channels of distribution not served by Teva or UGG.

We believe our ability to continue to grow our future sales, earnings and market share has been significantly enhanced through achievement of three key recent initiatives:

Teva Rights Acquisition. From 1985 until November 2002, we sold our Teva products under a license arrangement with Teva’s founder, Mark Thatcher. In November 2002, we acquired all of the Teva Rights from Mr. Thatcher and his wholly-owned corporation, Teva Sport Sandals, Inc. The acquisition enabled us to gain ownership of the Teva Internet and catalog business and allowed our brand managers to broaden the Teva line into attractive casual open-toe lines and rugged outdoor closed-toe footwear. This expansion of the Teva product line has increased the appeal of the brand and expanded our overall retail placement. The acquisition also enabled us to:


	•	eliminate significant royalties and other license costs;

	•	eliminate product line expansion constraints under our former license agreement;

	•	realize license opportunities for the Teva brand into additional brand-appropriate outdoor categories; and

	•	enhance our ability to recruit and retain key senior management.

Organizational Restructuring. In the last several years, we have reorganized our management infrastructure and developed a decentralized approach that gives our brand managers greater control over product development, marketing, and distribution for their respective brands. This approach strengthens our product development efforts and enables each brand manager to react quickly to important market

trends and concentrate on the footwear demands of our customers and end-user consumers. Our brand teams are highly focused on developing new products and marketing programs that drive strong sales growth but remain true to each brand’s heritage. As a result, we have generated gross margins of 42.4% in 2003 and 42.1% in 2004 and achieved compound annual sales growth of approximately 47.2% since 2002. Our central management team provides important expertise in disciplines common to each of our brands, including sourcing, time-to-market, quality control, credit, information systems technology and overall management of our capital resources.

UGG Repositioning. UGG gained brand recognition in the U.S. beginning in 1979 and was adopted as a favored brand by the California surf community. We acquired UGG in 1995 and have carefully re-positioned the brand as the luxury sheepskin collection sold through high-end retailers. While our sales have grown steadily over the past seven years, over the past few years UGG has benefited from significant national media attention and celebrity endorsement through our marketing programs and product seeding activities, further raising the profile of UGG as a luxury sheepskin brand. We intend to further support UGG’s market positioning by carefully expanding the selection of styles available in order to build consumer interest in our UGG collection. We also remain committed to limiting distribution of UGG through high-end retail channels.

Largely as a result of these three recent initiatives, our net sales have increased by 77.4%, from $121,055,000 in 2003 to $214,787,000 in 2004 and our income from operations has increased by 118.4% from $19,438,000 in 2003 to $42,462,000 in 2004. For 2004, wholesale shipments of Teva, UGG and Simple represented 38.9%, 47.4% and 4.5% of our total net sales, respectively. Sales of our brands through our Internet and catalog division are in addition to our wholesale shipments and generated 9.2% of total net sales in 2004.

History

We were founded by Doug Otto in 1973 as a domestic manufacturer of sandals. We originally manufactured a single line of sandals under the Deckers’ brand name in a small factory in Carpinteria, California. Since then, we have grown through the development and licensing of proprietary technology, targeted marketing and selective acquisitions. In 1985, we entered into our first license agreement for Teva sport sandals with Teva’s founder, Mark Thatcher. In 1986, we developed the Universal Strapping System, establishing Teva as the sport sandal category-creator and generating significant national attention for the Teva brand.

We experienced a period of rapid growth during the late 1980’s and completed our initial public offering in 1993. As our sales grew, we terminated our manufacturing operations in the U.S., Mexico and Costa Rica, and today independent manufacturers in the Far East, Australia and New Zealand manufacture all of our footwear products for us. We maintain our own offices in China and Macau to monitor the operations of our Far East manufacturers.

In order to diversify our sales and leverage our product development and sourcing capabilities, we completed the acquisition of Simple from its founder in a series of transactions between 1993 and 1996. In 1995, we acquired UGG from its founders. After our acquisition of UGG, we initiated a re-positioning of the line, focusing on comfort, luxury and premium distribution channels and developing products that appeal to consumers in a variety of climates.

From 1985 until November 2002, we sold our Teva products under a licensing arrangement with Teva’s founder, Mark Thatcher. In November 2002, we acquired all of the Teva Rights from Mr. Thatcher and his wholly owned corporation, Teva Sport Sandals, Inc. The Teva Rights include the Teva Internet and catalog business and all patents, trade names, trademarks and other intellectual property associated with the acquired Teva assets.

Business Strategies

We seek to differentiate our brands by offering diverse lines that emphasize authenticity, functionality, quality and comfort and products tailored to a variety of activities and demographic groups. Key elements of our business strategies are:


	*Build Leading Global Brands.* Our mission is to build niche footwear lines into global brands with market leadership positions. Our Teva and UGG brands began as footwear lines appealing to a narrow core enthusiast market. We have since built these lines into substantial global lifestyle brands with significant potential for further growth and line extension. Across our brands, our styles remain true to the brands’ heritage but have been selectively extended over time to broaden their appeal to men, women and children seeking high quality, comfortable styles for everyday use. Furthermore, we actively manage our brands to ensure that we reach brand appropriate retail distribution channels. We believe that building our domestic and international brand image is best accomplished through a decentralized management structure that empowers a single brand manager to coordinate all aspects of brand image, from product development to marketing and retail channel management.

	*Sustain Brand Authenticity.* We believe our ability to grow our brands, sustain strong gross margins and maintain strong market share results, in part, from consumer loyalty to the heritage of our brands. We believe Teva consumers are passionate and serious about the outdoors, and our marketing programs feature national advertising in outdoor-oriented media as well as grass roots marketing through sponsorship of outdoor events and professional athletes. These marketing efforts reinforce the river-guide heritage of Teva and Teva’s positioning as a highly technical, performance-oriented footwear leader. Our UGG marketing strategy highlights the brand’s positioning as functional footwear, but also as a premium, luxury collection. UGG is primarily marketed through national print advertising in major women’s magazines and through our retailers and their catalogs and advertising. We promote our Simple brand by emphasizing Simple’s heritage sneaker and clog businesses in marketing targeted to youth-oriented markets in major U.S. cities. Our key marketing objective for Simple is to reintroduce the brand to the marketplace using a grass roots approach in our marketing and media plan. We have focused our advertising on our “we clog” and “we sneaker” campaigns in alternative weekly publications and other non-mainstream media.

	*Drive Demand Through Innovation and Technical Leadership.* We believe our reputation for innovation and technical leadership distinguishes our Teva and UGG products from those of our competitors and provides us with significant competitive advantages. Our proprietary Universal Strapping System launched Teva’s popularity in the mid-1980’s. Recent technical advances in our Teva footwear include our Liquid Frame Technology, our Wraptor technology and our Wraptor-Lite technology, all designed to provide maximum stability, support and comfort under rugged usage. We recently introduced closed-toe footwear, which represented approximately 12.5% of Teva’s net sales in 2004. In the Fall 2004 season, we introduced new Teva styles that incorporate Vibram® soles and Gore-Tex® fabrics. We continue to develop innovative styles, products and product categories for our UGG collection in order to support UGG’s positioning as a functional lifestyle brand, which can be worn in a variety of climates and weather conditions. UGG has benefited from expansion into non-boot casuals, sheepskin-trimmed footwear and styles combining sheepskin with fine-grade suede and leathers, all designed to expand our market share in new categories and increase our sales in the fall and spring.

	*Maintain Efficient Development and Production Process.* We believe our product development processes enable us to produce leading edge products on a timely and a cost effective basis. We design our products domestically. We maintain on-site supervisory offices in Pan Yu City, China and Macau that serve as local links to our independent manufacturers in the Far East, enabling us to carefully monitor the production process, from receipt of the design brief to production of interim and final samples and shipment of finished product. We believe this local presence provides greater predictability of material availability, product flow and adherence to final design specifications than we could otherwise achieve through an agency arrangement.

Growth Strategies

Our growth will depend upon our broadening of the products offered under each brand, expanding domestic and international distribution, licensing our brand names and developing or acquiring new brands. Specifically, we intend to:


	*Introduce New Categories and Styles under Existing Brands.* We intend to increase our sales by developing and introducing additional footwear products under our existing brands that meet our high standards of performance, practicality, authenticity, comfort and quality. We have expanded Teva’s open-toe footwear category by launching new casual styles. We have also introduced several closed-toe lines under the Teva brand, including amphibious footwear, hikers, trail runners and other rugged outdoor footwear. We plan further expansion into the hiking, trail running and rugged outdoor arenas, where the aggregate market is considerably greater than the market size for Teva’s core sport sandals. We have expanded our UGG collection to incorporate additional styles and fabrications in order to further penetrate the fall, spring and winter seasons. We have expanded our men’s and kids’ business for 2005 and have introduced a cold-weather series featuring sheepskin and Gore-Tex®, which will be delivered in Fall 2005. We expect to grow our Simple brand with the re-focus on our heritage clog and sneaker categories for both men and women. Simple has introduced “comfy” sandals, leveraging another of our core competencies. By introducing new categories under our brands, in particular, the closed-toe footwear under Teva and the Spring product offerings under UGG, we believe we have expanded the selling seasons for our brands which has resulted in increased sales and has contributed to a more balanced year round business for each of these brands.

	*Expand Domestic Distribution.* We believe that we have significant opportunities to increase our sales by expanding domestic distribution of our products. Our Teva brand has generally been distributed through the outdoor specialty and sporting goods retail channels. We have identified the potential for expansion into additional retail channels through the development of special make-up styles for retailers who have limited store overlap with our core specialty outdoor and sporting goods customers. UGG has historically realized a substantial portion of its sales in California. Over the past several years we have experienced increasing demand for UGG distribution outside California, and we expect to capitalize on significant demand in the Midwest and East Coast markets. For Simple, we are repositioning the brand by focusing on our legacy styles in order to re-connect with our consumer base and by broadening the appeal of Simple to new channels of distribution. The legacy products are primarily clogs, athletic-inspired sneakers and comfort sandals.

	*Expand International Distribution.* In 2004, our international net sales totaled $39,368,000, representing approximately 18.3% of total net sales. We believe significant opportunities exist to market our products abroad, and we intend to selectively expand their distribution worldwide. We have entered into an agency agreement with a firm in the United Kingdom for the coordination of our sales, distribution, marketing and advertising efforts in the European markets. For UGG, in particular, we have greatly expanded our international efforts, increasing the number of international distributors from six at December 31, 2002 to 13 at December 31, 2004.

	*Pursue Licensing of Brands in Complementary Product Lines.* We are pursuing selective licensing of our brand names in product categories beyond footwear. In 2004, we hired a Vice President of Corporate Licensing, who has extensive licensing experience at several leading companies in our industry, to coordinate the efforts for the licensing of products that complement our trademark-protected products. We successfully launched UGG handbags and outerwear in 2004 and have signed a license for UGG cold weather accessories, which are expected to begin deliveries in the Fall 2005 season. We have also initiated a domestic Teva licensing program, consisting of U.S. licenses for men’s sportswear, headwear, eyewear, timepieces and socks, and have signed a Canadian sportswear license. We expect to begin deliveries for all of these items in 2005. We are developing additional licensing programs carefully to ensure that licensed goods remain consistent with our brands’ heritage. Because this licensing strategy is in its early stages, and due to the lead times required to bring the products to market, we have only recently begun to recognize license revenues and we do not expect significant incremental net sales and profits from

licensing in the near future. However, we believe licensing revenues may become a more significant portion of our net sales and profits over time if our licensees can sell the licensed products in the quantities they have promised. For the year ended December 31, 2004, our licensees began to ship their products and, accordingly, we recognized net license revenues of $950,000, primarily related to our UGG handbag and outerwear licenses.

Build New Brands. We intend to continue to focus on identifying, developing or acquiring, and building new brands. We have been successful previously in identifying entrepreneurial concepts for innovative, fashionable footwear targeted at niche markets and building these concepts into viable brands utilizing our expertise in product development, production and marketing. We intend to continue to identify and build new brands that demonstrate potential for significant future growth.

Products

Our primary product lines are:

Teva Sport Sandals and Footwear. “The brand of choice for the new outdoor athlete.” We believe there has been a general shift in consumer preferences and lifestyles to include more outdoor recreational activities, including hiking, trail running, bouldering, kayaking, kite boarding and whitewater river rafting. These consumers typically seek footwear specifically designed with the same quality and high performance attributes they have come to expect from traditional athletic footwear. The first Teva sport sandal was developed in the 1980’s to meet the demanding needs of professional rafting guides navigating the Colorado River and the rugged Grand Canyon terrain. As our core consumers’ pursuits have evolved, we have retained our outdoor heritage while adding new products to our line, including slides, thongs, amphibious footwear, trail running shoes, hiking boots and rugged closed-toe footwear. Our brand remains popular among professional and amateur outdoorsmen seeking authentic, performance-oriented footwear, as well as general footwear consumers seeking high quality, durable and comfortable styles for everyday use.

Our Teva line comprises six core footwear collections:


	*Originals.* The Originals Series is a collection of sandals and thongs utilizing Teva’s classic rugged architecture. The Originals Series leverages the Teva brand heritage as the inventor of the sport sandal and remains a distinctive choice for both performance-oriented users and casual buyers. Our Originals feature our proprietary Universal Strapping System or Wraptor technology as well as cellular rubber, molded EVA or polyurethane mid-soles and high-quality nylon webbing or leather designed to hold the foot firmly in place. Our U.S. patent on our Universal Strapping System, which we utilize in most of our Teva sandals, expires in September 2007.

	*Hydro.* The Hydro Series builds upon our legacy as the category leader in whitewater-designed footwear. Hydro consists of sandals and closed-toe amphibious footwear built for high performance and rugged outdoor use. This series includes men and women’s sport sandals and other outdoor footwear ideal for professional and amateur outdoor enthusiasts and adventurers. Our Hydro Series incorporates many proprietary technologies including our Wraptor, Universal, or Liquid Frame technologies as well as quick draining monofilament mesh, specially formulated sticky rubber outsoles designed to adhere to slippery rocks, form fitting neoprene and water-repelling leathers.

	*Terrain.* The Terrain Series is a line of sandals and closed-toe footwear that incorporates Teva technologies and is designed for use in rugged outdoor environments such as hiking trails and canyons. The Terrain Series includes performance walking sandals and running sandals, as well as hiking boots and trail running shoes. To meet our consumers’ expanded needs and to provide them with the best product possible, we have partnered with many of the world’s leading providers of footwear technology for specialty component materials, including Vibram®, Five Ten® and Gore-Tex®.

	*Nomadic.* Our Nomadic Series is a collection of leather casual sandals and closed-toe footwear true to Teva’s performance-oriented outdoor heritage but designed for more casual use. The Nomadic Series consists of men’s and women’s leather and suede sandals, closed toe shoes, slides and clogs

featuring rugged, contemporary styles for the traveler and adventurer. Our 2005 line includes several closed-toe styles featuring our patent-pending flipsole ^tm , a removable insole that can be easily converted to a flip-flop.

Sun and Moon. Our Sun and Moon Series features fun, youthful and colorful slides and thongs in a variety of materials including waterproof leather, nylon, suede and air mesh. The Sun and Moon Series is designed to leverage our sandal-making capabilities and to appeal to fashion-oriented consumers seeking pre-activity and post-activity footwear alternatives that express a casual lifestyle and individual spirit.

Kids and Infants. Our children’s series is an assortment of sandals incorporating a variety of materials including leather, waterproof suede, nylon, neoprene and mesh, as well as slip-on water shoes, hikers and other styles of amphibious footwear. In addition, for the 2005 season, we have expanded our product offering with a variety of styles of sandals and closed-toe footwear, including an assortment of styles that are reflective of our adult offerings.

We intend to continue to build upon Teva’s broad and deep line of performance and casual footwear. Our Spring 2005 line features 126 different product styles with manufacturer’s suggested domestic retail prices for adult sizes ranging from $20.00 to $120.00.

UGG Footwear. “The premier brand in luxury and comfort sheepskin.” Beginning in 1979, UGG gained brand recognition in the U.S. for sheepskin boots and slippers and was later adopted as a favored brand by the California surf community. We acquired the brand in 1995 and expanded the collection, offering consumers a luxurious and distinctive look in sheepskin fabrications.

Our UGG product line comprises seven core footwear collections:


	*Classic Collection.* We offer a complete line of sheepskin boots built on the heritage and distinctive look of our first product, the Classic Sheepskin boot. Our Classic Collection products are distinctive in styling, featuring an array of neutral and fashion colors. Our Classic Collection includes styles for men, women and children.

	*Ultra Collection.* The Ultra Collection builds upon the heritage of our original Classic. These boots are designed with our comfort system, featuring a multi-surfaced lugged bottom with a heel-cushioning insert that offers enhanced traction, support and comfort. Our Ultra Collection also features a three-part insole designed to provide all-day comfort and support and a reflective barrier that captures body heat to create a natural foot warming mechanism. Our sheepskin products are naturally thermostatic, keeping feet comfortable across a wide range of temperatures. This collection features styles for men, women and children.

	*Casual Collection.* This women’s collection features a more tailored and refined look with sheepskin combined with smooth leather uppers and suede in distinctive patterns and styles. This collection features a variety of shoes, clogs and boots and provides UGG consumers with the versatility to utilize sheepskin styling for a wider variety of occasions and outfits.

	*Metropolitan Collection.* This is a new collection of women’s styles for the Fall 2005 season. The Metropolitan Collection features styles that combine high quality suede uppers with sheepskin linings, including models with high fashion, bohemian and other casual stylings.

	*Cold Weather Collection.* This collection is designed for men and women seeking more rugged styling. The Cold Weather line features a Vibram® outsole and waterproof Gore-Tex® uppers designed to withstand colder, wetter climates.

	*Fluff Momma Collection.* This is our most playful and distinctive style for women. The Fluff Momma features untrimmed and colored sheepskin fleece exposed on the entire boot.

	*Slipper Collection.* Our popular Slipper Collection builds upon the UGG reputation for comfort, warmth and luxury. We offer a wide selection of styles and colors for men, women and children.

We have expanded our UGG collection from the Classic Sheepskin boot to a broad footwear line for men, women and children in a variety of styles, colors and materials designed for wear in a variety of climates and occasions. Over the last few years, our line expansion strategies have resulted in significantly increased exposure for our UGG collection and have contributed to the growth of UGG’s year round business. The manufacturer’s suggested domestic retail prices for adult sizes for the UGG collection range from $55.00 to $300.00.

Simple Casual Footwear. “The brand of choice for a simple, uncomplicated lifestyle.” The Simple line of casual shoes combines the comfort of athletic footwear construction with the simple, understated styling of “back-to-basics” casual footwear. Simple was launched in the 1990’s as an anti-brand that catered to 21-35 year old consumers who were looking for an alternative to the flashy athletic footwear brands that were saturating the market. Since then, we’ve expanded into a full line of clogs, sneakers, and sandals; and in 2005, we are introducing our new Unclog and Green Toe ^tm segments to the line.

Our product line is comprised of these five key categories, which range in price from $20.00 to $80.00:


	*Sneakers.* We’ve evolved our classic sneaker collection with successful styles like the Sugar. We continue to keep this segment fresh by updating colors and materials seasonally. We’ve introduced several new sneaker styles that incorporate a sneaker specific pedbed ^tm , durable rubber outsoles, and leather and suede uppers.

	*Clogs.* Building on the heritage of our original clogs, our current clog series features the pedbed ^tm and updated material and color options.

	*Unclogs:* This collection is our twist on the traditional casual segment. It features oxfords, loafers, and boots that incorporate our comfortable pedbed ^tm with suede and leather uppers.

	*Sandals:* We offer a range of warm weather footwear for men and women in rich leathers and colorful nubucks. We also offer a flip-flop program that caters to the surf channel of distribution.

	*Green Toe* ^tm : The Green Toe ^tm segment represents an effort on the part of Simple to reduce the ecological footprint made by shoes around the world. All Green Toe products are made with 100% natural materials (textiles and rubbers), use water-based glues, and soy-based dyes. This collection is currently comprised of two styles for men and women.

Licensing

To capitalize on the strength of our brands, we are pursuing the licensing of our brand names for use in complementary product categories beyond footwear. As part of this approach, in 2004, we hired a Vice President of Corporate Licensing, who has extensive licensing experience at several leading companies in our industry, to coordinate the efforts for the licensing of the Teva, UGG and Simple trademarks on products ranging from sportswear and outerwear to bags, packs and other accessories. Products sold under license began selling at retail in the third quarter of 2004. For the year ended December 31, 2004, we recognized net license revenues of approximately $950,000.

We have initiated a Teva licensing program with strategic partners, which currently consist of U.S. licenses for men’s sportswear, headwear, eyewear, timepieces, and socks, as well as a Canadian license for men’s sportswear. We are selectively developing additional licensing programs to ensure that licensed goods remain consistent with Teva’s brand heritage. In addition, we have signed license agreements for UGG handbags and related small leather goods, outerwear, and cold weather accessories, and have several other UGG related licensing opportunities under consideration, including “at home” apparel, home accessories and other categories to complement our UGG business. We are also planning to expand our licensing program to the international markets.

BHPC Global Licensing, Inc. is a full service licensing agency that we initially used to assist us in identifying licensing candidates and coordinating our licensing business until August 2004, when we hired our Vice President of Corporate Licensing to coordinate these efforts for us. We pay BHPC a commission on royalty income that we receive related to licensing agreements that BHPC coordinated on our behalf. In 2004, we paid BHPC approximately $168,000. BHPC is owned by one of our directors, Daniel L. Terheggen.

Products made under license are sold primarily through the same retail channels as our footwear product offering. Our licensing agreements generally give us the right to terminate the license if specified sales targets are not achieved.

Sales and Distribution

We distribute our products in the U.S. through a dedicated network of approximately 40 independent sales representatives. Our sales representatives are organized geographically and visit retail stores to communicate the features, styling and technology of our products. In addition, we have five employee sales representatives who serve as key account executives for several of our largest customers.

Our sales force is divided into two teams, one for Teva and one for UGG and Simple, as the UGG and Simple brands are generally sold through non-outdoor specialty and non-sporting goods distribution channels and are targeted toward a different consumer than our Teva brand. The sales manager for each brand recruits and manages his or her networks of sales representatives and coordinates sales to national accounts. We believe this approach for the U.S. market maximizes the selling efforts to our national retail accounts on a cost-effective basis.

Internationally, we distribute our products through 35 independent distributors. Shipments to Europe are primarily facilitated through third party distribution in the Netherlands. All other international shipments are made directly from our independent manufacturers.

Our principal customers include specialty retailers, selected department stores, outdoor retailers, sporting goods retailers and shoe stores. Our five largest customers accounted for approximately 25.2% of our net sales for 2004, compared to 20.5% for 2003. No single customer accounted for more than 10.0% of our net sales in 2004 or 2003, except that a West Coast based upscale department store, which is a significant customer for each of our three brands, accounted for 14.1% of net sales in 2004.

Teva. We sell our Teva products primarily through specialty outdoor and sporting goods retailers such as REI, Eastern Mountain Sports, L.L. Bean, Dick’s Sporting Goods and The Sports Authority. We believe this retail channel is the first choice for athletes, enthusiasts and adventurers seeking technical and performance-oriented footwear. Furthermore, we believe that our Teva products are best sold by retailers who appreciate and can fully market the technical attributes of our products to the consumer. We also sell a limited selection of styles and special make-up Teva products through selected retailers in order to reach consumers who are less outdoor-oriented but who seek out our products due to their durability, comfort and fit.

UGG. We sell our UGG products primarily through high-end department stores such as Nordstrom, Neiman Marcus and Marshall Field’s, as well as independent specialty retailers such as Fred Segal, David Z. and Sport Chalet. We believe these retailers support the luxury positioning of our brand and are the destination shopping choice for the consumer who seeks out the fashion and functional elements of our UGG products.

Simple. Our Simple products are targeted primarily towards independent specialty retailers and select department stores that target consumers seeking comfortable, high quality footwear at a fair price. Key accounts such as J. Jill, Nordstrom, Journeys, and REI cater to consumers in our demographic — men and women between the ages of 21 and 35.

In 2004, we distributed products sold in the U.S. through our 126,000 square foot distribution center in Ventura, California. In 2005, we are also distributing products from an additional 175,000 square foot U.S. distribution center in Camarillo, California. Our distribution centers feature an inventory management system that enables us to efficiently pick and pack products for direct shipment to retailers across the country. For certain customers requiring special handling, each shipment is pre-labeled and packed to the retailer’s specifications, enabling the retailer to easily unpack our product and immediately display it on the sales floor. All incoming and outgoing shipments must meet our rigorous quality inspection process.

See the discussion of the cash flow cycle, inventories and other items of working capital under “Liquidity and Capital Resources”.

Consumer Direct

We acquired the Internet and catalog business as part of the acquisition of the Teva Rights. The consumer direct business enables us to reach consumers through our Internet business under the Teva.com , UGGs.com , UGGAustralia.com and SimpleShoes.com Internet addresses and through direct mailings. Our mailing list includes approximately 300,000 consumers who have purchased at least once in the past 36 months. We currently average approximately 600 direct orders daily. In late 2003 we moved our order fulfillment operations from Flagstaff, Arizona to our distribution center in Ventura, California in order to reduce the cost of order cancellation, minimize out of stock positions and further leverage our distribution center occupancy costs. We generally sell our products through our direct channels at approximate retail prices, enabling us to capture the full retail margin on each direct transaction.

Marketing and Advertising

Our brands are generally advertised and promoted through a variety of consumer print advertising campaigns. We benefit from highly visible editorial coverage in both consumer and trade publications. Each brand’s dedicated marketing team works closely with targeted accounts to maximize advertising and promotional effectiveness. We incurred approximately $7,456,000, $6,594,000 and $8,687,000 in advertising, marketing and promotion expenses in 2002, 2003 and 2004, respectively.

Teva. We use several marketing methods to promote the Teva brand, including:


	•	a targeted print advertising campaign;

	•	promotions at a variety of festivals, events and competitions;

	•	sponsorship of local athletes and national athletes such as the Teva Whitewater Team, the Teva U.S. Mountain Running Team and the Cannondale Mountain Bike Team;

	•	discount programs to professional river guides, kayakers, mountain bikers and rock climbers;

	•	product seeding with professional athletes; and

	•	in-store promotions.

We advertise the Teva brand through the placement of print advertisements in leading outdoor magazines such as Backpacker, Outside, National Geographic Adventurer, Hooked on the Outdoors and Paddler . As we have added new product categories to the Teva brand, we have broadened our advertising presence to reach new consumers. To support our introduction of Teva trail running shoes, we advertise in Trail Runner and Running Times , among other publications. We also advertise in more mainstream publications such as Men’s Journal, Sports Illustrated , and Organic Style in order to support our casual footwear lines.

The Teva brand is closely associated with outdoor lifestyle pursuits such as river rafting, kayaking, mountain biking, hiking and trail running. We sponsor outdoor events in the U.S. including the Teva Mountain Games at Vail, the Teva Vail Trail Running Series, the Santa Cruz Surf Kayak Festival in Santa Cruz, California, the Telluride Bluegrass Festival in Telluride, Colorado and the Reggae on the River event in Garberville, California, among others. We believe our sponsorship of these events further links our Teva brand with its outdoor heritage and generates increased product exposure and brand awareness. Internationally, we sponsor outdoor events in France, Switzerland and Italy in order to increase our brand visibility to the core European outdoor consumer.

We sponsor some of the world’s best male and female professional and amateur athletes across several sports. Our Teva promotional team attends events across the U.S. in dedicated, state-of-the-art promotional vehicles prominently featuring our Teva logo. The promotions team showcases Teva products at events and provides consumers with the opportunity to see and sample our latest styles. We recently initiated a partnership with Volkswagen whereby the Teva technical representatives and Team Teva athletes are outfitted in seven Teva branded Volkswagen Eurovans and seven Volkswagen Touaregs for travels across the U.S. We believe by outfitting and sponsoring these highly visible athletes and teams, we create brand and product awareness among our targeted consumers at a relatively low cost.

UGG. We seek to build upon the success of our UGG national print advertising campaign. We currently advertise in upscale national magazines such as Vogue, ELLE , and O Magazine . We believe such advertising is an effective means to target our intended consumers and to convey the high quality and luxurious appeal of UGG products. We also benefit from editorial coverage of the UGG collection. Articles have appeared in such magazines as Glamour, InStyle, Cosmopolitan, Marie Claire, People, US Weekly, Maxim, Shape, Self, O Magazine and Real Simple . In 2003, UGG was awarded “Brand of the Year” by Footwear News , a leading industry trade publication. In 2004, UGG was awarded “Brand of the Year” by Footwear Plus , another leading trade publication, and was recognized with the ACE Award for the “it” accessory of the year by the Accessories Council.

We also actively seek to place UGG products at selected events. During the 2002 Winter Olympic Games we outfitted all of the children in the Children of the Light performance with UGG boots. During the Medal Ceremonies, Olympic staff presenting medals to the Olympic athletes also wore UGG boots. We believe this product placement further strengthened the consumer’s image of UGG products as high quality, luxurious sheepskin goods well-suited for use in cold weather.

We also have improved visibility of the UGG brand through placement of the product in selected television shows and feature films. UGG products have appeared on numerous shows, including Entourage, Six Feet Under, The Oprah Winfrey Show, Judging Amy, The King of Queens, Still Standing, Will and Grace, Everwood, The George Lopez Show, Jeopardy and Saturday Night Live . Our marketing efforts have also resulted in UGG product appearances in the following recent and upcoming feature films: Fever Pitch starring Drew Barrymore and Jimmy Fallon, White Chicks starring the Wayans Brothers, Surviving Christmas starring Ben Affleck and Christina Applegate, Raising Helen starring Kate Hudson and Wicker Park starring Josh Hartnett. In addition, UGG has been embraced by Hollywood celebrities, who are often seen and photographed wearing UGG boots. This celebrity exposure for UGG has been the subject of recent publicity including articles in US Weekly, USA Today, People and People.com . UGG boots have been a featured item on the Oprah Winfrey gift show in 2000 and 2003 and her surprise baby shower for military families in 2004. We believe our target consumer identifies with celebrities and that greater exposure further heightens awareness of the brand and stimulates sales.

Simple. The Simple consumer identifies with a certain irreverent culture, and we seek to reach that consumer through a focused grassroots marketing approach that will introduce the brand to influential communities around the country. These marketing efforts will focus on the following cities: Los Angeles, San Francisco, New York City, Chicago, Boulder, Austin and Nashville. In support of our grassroots initiatives, we will focus on advertising in alternative weekly publications, which will provide us with the opportunity to reach a large number of people through a cost efficient, non-mainstream medium.

Simple will continue to work with its public relations agency to get editorial placement of key styles in youth and trend magazines, television shows, independent films and with cutting-edge influential artists and musicians. Our efforts have resulted in product appearances in Teen People, Maxim, Nylon, Lucky and Surfing Girl , and product appearances on VH1 and MTV.

Product Design and Development

The design and product development staff for each of our brands creates and introduces new innovative footwear products that combine our standards of high quality, comfort and functionality. The design function for all of our brands is performed by a combination of our internal design and development staff plus outside design firms. By introducing outside firms to the design process, we believe we are able to review a variety of different design perspectives on a cost-efficient basis and anticipate color and style trends more quickly.

To ensure that Teva’s high performance technical products continue to satisfy the requirements of our historical consumer base of performance-oriented “core enthusiasts,” our design staff solicits input from our Team Teva whitewater athletes, the Teva U.S. Mountain Running Team and other professional outdoorsmen, as well as several of our retailers, including REI, Eastern Mountain Sports, Dick’s Sporting Goods and L.L. Bean. We regularly add new innovations, components and styles to our product line based on their input. For example, our Fall 2005 Teva offering features several styles of casual closed toe footwear with our new

Flipsole ^tm technology, a removable midsole that can be easily removed and converted to a thong, making it two shoes in one. We have also incorporated our proprietary Wraptor technology into performance running sandals, an assortment of hikers and certain styles of our high performance guide sport sandals specifically targeted at professional outdoorsmen and adventurers. In addition, for added traction and durability, we have incorporated various materials in our Teva sandals, including Spider Rubber — a sticky, non-slip rubber outsole material for use across wet and dry terrain, Traction Rubber — a highly durable and abrasion resistant material designed specifically for the extra rigors of land use, and River Rubber — a non-slip material designed to offer superior grip on smooth wet surfaces such as rocks, fiberglass and raft rubber.

Our UGG and Simple products are designed to appeal to consumers seeking our distinctive and innovative styling. We strive to be a leader in product uniqueness and appearance by regularly updating our UGG and Simple lines, which also generates further awareness and interest in the UGG and Simple collections. We believe our ability to incorporate up-to-date styles without deviating from UGG’s classic look, combined with performance-oriented features consumers have come to expect, results in continued enthusiasm for our brand in the marketplace.

In order to ensure quality, consistency and efficiency in our design and product development process, we continually evaluate the availability and cost of raw materials, the capabilities and capacity of our independent contract manufacturers and the target retail price of new models and lines. The design and development staff works closely with brand management to develop new styles of footwear for their various product lines. We develop detailed drawings and prototypes of our new products to aid in the conceptualization and to ensure our contemplated new products meet the standards for innovation and performance our consumers demand. Throughout the development process, members of the design staff coordinate internally and with our domestic and overseas product development, manufacturing and sourcing personnel toward a common goal of developing and producing a high quality product to be delivered on a timely basis.

Manufacturing

We do not manufacture our footwear. We outsource the manufacturing of our Teva, Simple, and UGG footwear to independent manufacturers in the Far East. We also outsource the manufacturing of our UGG footwear to independent manufacturers in Australia and New Zealand. We have no long-term contracts with our manufacturers. As we grow, we expect to continue to rely exclusively on independent manufacturers for our sourcing needs.

The production of footwear by our independent manufacturers is performed in accordance with our detailed specifications and is subject to our quality control standards. To ensure the production of high quality products, many of the materials and components used in production of our products by the independent manufacturers are purchased from independent suppliers designated by us. Excluding sheepskin, we believe that substantially all the various raw materials and components used in the manufacture of our footwear, including rubber, leather and nylon webbing are generally available from multiple sources at competitive prices. We outsource our manufacturing requirements on the basis of individual purchase orders rather than maintaining long-term purchase commitments with our independent manufacturers.

At our direction, our manufacturers currently purchase the majority of the sheepskin used in our products from one tannery in New Zealand and three in China. We maintain a constant dialog with the tanneries to monitor the supply of sufficient high quality sheepskin available for our projected UGG footwear production. To ensure adequate supplies for our manufacturers, we forecast our usage of top grade sheepskin one year in advance at a forward price. We believe supplies are sufficient to meet our needs in the near future but we continue to search for alternate suppliers in order to accommodate any unexpected future growth.

We have instituted pre-production and post-production inspections to meet or exceed the high quality demanded by consumers of our products. Our quality assurance program includes on-site inspectors at our independent manufacturers who oversee the production process and perform quality assurance inspections. We also inspect our products upon arrival at our U.S. distribution center.

Patents and Trademarks

We now hold 16 U.S. patents, two patents in each of Australia and China and one patent in each of Canada, New Zealand, South Korea, Germany, France, Japan and the United Kingdom for Teva footwear. In addition, we have pending patent applications in Australia, Hong Kong, Mexico, Germany, France, Belgium, Luxembourg, the Netherlands, Italy, Switzerland, the United Kingdom and the U.S. Our U.S. patent for the Teva Universal Strapping System, which is used in most of our Teva sandals, expires in 2007. As a result of the expiration of the applicable period during which foreign patent applications were required to have been filed by the former licensor, we do not and cannot hold certain patent rights for Teva footwear in certain countries. We also currently hold Teva trademark registrations in the U.S. and in many other countries, including France, Germany, the United Kingdom, Japan and Australia. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties. Deckers and its predecessor, Mark Thatcher, have successfully enforced their intellectual property rights in the courts and other forums, obtaining numerous judgments, consent judgments and settlement agreements that uphold the validity of Deckers’ patent, trademark and trade dress rights.

We currently hold UGG trademark registrations in the U.S. and in more than 40 other countries, including the countries in the European Community, Canada, Japan and Australia, among others. We also hold various Simple trademark registrations around the world, including registrations in the U.S. and in more than 40 foreign countries worldwide. We have also selectively registered style category names and marketing slogans. In addition, we hold two design patents for our Simple footwear products and have two pending design patent applications for UGG footwear products.

Seasonality

Our business is seasonal, with the highest percentage of Teva net sales occurring in the first and second quarters of each year and the highest percentage of UGG net sales occurring in the third and fourth quarters, while the quarter with the highest percentage of annual net sales for Simple has varied from year to year. With the dramatic growth in UGG in recent years, combined with the introduction of a fall Teva line, net sales in the last half of the year have exceeded that for the first half of the year. Given our expectations for each of our brands in 2005, we currently expect this trend to continue. Nonetheless, actual results could differ materially depending upon consumer preferences, availability of product, competition and our customers continuing to carry and promote our various product lines, among other risks and uncertainties. See “Risk Factors.”

Backlog

Historically, we have encouraged our customers to place, and we have received, a significant portion of orders as pre-season orders, generally four to eight months prior to shipment date. We provide customers with incentives to participate in such pre-season programs to enable us to better plan our production schedule, inventory and shipping needs. Unfilled customer orders as of any date, which we refer to as backlog, represent orders scheduled to be shipped at a future date and do not represent firm orders. The backlog as of a particular date is affected by a number of factors, including seasonality, manufacturing schedule and the timing of shipments of products as well as variations in the quarter-to-quarter and year-to-year preseason incentive programs. The mix of future and immediate delivery orders can vary significantly from quarter to quarter and year to year. As a result, comparisons of the backlog from period to period may be misleading.

Competition

The casual, outdoor, athletic and fashion footwear markets are highly competitive. We compete with numerous domestic and foreign footwear designers, manufacturers and marketers. Our Teva footwear line primarily competes with Nike, adidas-Salomon, Timberland, Merrell and Columbia Sportswear. Our UGG footwear line primarily competes with Merrell, Acorn, Aussie Dogs, LB Evans and Timberland, as well as retailers’ own private label footwear. In addition, due to the popularity of our UGG products, we face increasing competition from a significant number of competitors selling “knock-off “products. Our Simple footwear line primarily competes with Steve Madden, Dr. Marten, Camper, Kenneth Cole, Skechers, Diesel,

Guess? and Puma. Some of our competitors are significantly larger and have significantly greater resources than we do.

Our three footwear lines compete primarily on the basis of brand recognition and authenticity, product quality and design, functionality and performance, fashion appeal and price. Our ability to successfully compete depends on our ability to:


	•	shape and stimulate consumer tastes and preferences by offering innovative, attractive and exciting products;

	•	anticipate and respond to changing consumer demands in a timely manner;

	•	maintain brand authenticity;

	•	develop high quality products that appeal to consumers;

	•	appropriately price our products;

	•	provide strong and effective marketing support; and

	•	ensure product availability.

We believe we are particularly well positioned to compete in the footwear industry. Our diversified portfolio of footwear brands and products allows us to operate a business that does not depend on any one demographic group, merchandise preference or product trend. We have developed a portfolio of brands that appeals to a broad spectrum of consumers. We continually look to acquire or develop more footwear brands to complement our existing portfolio and grow our existing consumer base.

Employees

At December 31, 2004, we employed approximately 156 full-time employees in our U.S. facilities and 31 full-time employees located in China and Macau, none of whom is represented by a union. We believe our relationships with our employees are good.

Available Information

Our internet address is www.deckers.com . We post links to our website to the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”): annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendment to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. All such filings are available through our website free of charge. Our filings may also be read and copied at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is www.sec.gov .


Item 2.	*Properties*

Our corporate headquarters is located in Goleta, California. We have two distribution centers in Ventura and Camarillo, California, and our Internet and catalog operations are located in Flagstaff, Arizona. We also have a small office in China to oversee the quality and manufacturing standards of our products and a small office in Macau to coordinate logistics. We have no manufacturing facilities, as all of our products are manufactured by independent manufacturers in the Far East, Australia and New Zealand. We lease, rather than own, all of our facilities. Our facilities are leased from unrelated parties. We consider our facilities to be suitable for our needs.


	The following table reflects the location, use and approximate size of our significant real properties:


		Approximate
Facility Location	Description	Square Footage

Camarillo, California	Warehouse Facility		175,000
Ventura, California	Warehouse Facility		126,000
Goleta, California	Corporate Offices		30,000
China	Office Facility		4,200
Flagstaff, Arizona	Internet/Catalog Vacant Warehouse		3,000
Flagstaff, Arizona	Internet/Catalog Office Facility		2,400
Macau	Office Facility		2,000


Item 3.	*Legal Proceedings*

We are involved in routine litigation arising in the ordinary course of business. Such routine matters, if decided adversely to us, would not, in the opinion of management, have a material adverse effect on our financial condition or results of operations. Additionally, we have many pending disputes in the U.S. Patent and Trademark Office, foreign trademark offices and U.S. federal and foreign courts regarding unauthorized use or registration of our Teva, UGG and Simple trademarks. We also are aware of many instances throughout the world in which a third party is using our UGG trademark within its Internet domain name, and we have discovered and are investigating several manufacturers and distributors of counterfeit Teva and UGG products. We have contacted a majority of these unauthorized users and counterfeiters and in some instances may have to escalate the enforcement of our rights by filing suit against the unauthorized users and counterfeiters. Any decision or settlement in any of these matters that allowed a third party to continue to use our Teva, UGG or Simple trademarks or a domain name with our UGG trademark in connection with the sale of products similar to our products or to continue to manufacture or distribute counterfeit products could have an adverse effect on our sales and on our intellectual property, which could have a material adverse effect on our results of operations and financial condition.


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

None.

PART II


Item 5.	*Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities*

Our common stock is traded on the NASDAQ National Market under the symbol “DECK.” The following table shows the range of low and high closing sale prices per share of our common stock as reported by the NASDAQ National Market for the periods indicated.


		Common Stock
		Price Per Share

		Low		High

Year ended December 31, 2003:
	First Quarter		$3.45		$4.99
	Second Quarter		$4.20		$6.69
	Third Quarter		$6.40		$10.13
	Fourth Quarter		$11.22		$20.81
Year ended December 31, 2004:
	First Quarter		$17.70		$27.68
	Second Quarter		$22.94		$30.28
	Third Quarter		$26.93		$34.76
	Fourth Quarter		$32.05		$48.02

As of March 8, 2005, there were approximately 110 record holders of our common stock.

DIVIDEND POLICY

We have not declared or paid any cash dividends on our common stock since our inception. We currently anticipate that we will retain all of our earnings for the continued development and expansion of our business and do not anticipate declaring or paying any cash dividends in the foreseeable future. Moreover, our debt facilities contain covenants expressly prohibiting us from paying cash dividends.


Item 6.	*Selected Consolidated Financial Data*

We derived the following selected consolidated financial data from our consolidated financial statements, which have been audited by KPMG LLP, independent registered public accounting firm. Historical results are not necessarily indicative of the results to be expected in the future. You should read the following consolidated financial information together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”


		Years Ended December 31,

		2000		2001			2002			2003			2004

		(In thousands, except per share data)
Statement of Operations Data
Net sales:
	Teva wholesale	$	79,732	$	61,221		$	64,849		$	72,783		$	83,477
	UGG wholesale		15,310		19,185			23,491			34,561			101,806
	Simple wholesale		16,328		10,853			10,159			7,210			9,633
	Internet/catalog		—		—			608			6,501			19,871
	Other		2,368		202			—			—			—

Net sales			113,738		91,461			99,107			121,055			214,787
Cost of sales			63,540		52,903			57,577			69,710			124,354

	Gross profit		50,198		38,558			41,530			51,345			90,433
Selling, general and administrative expenses			37,168		33,940			34,954			32,407			47,971
Litigation expense (income) ⁽¹⁾			400		2,280			3,228			(500	)		—

	Income from operations		12,630		2,338			3,348			19,438			42,462
Other expense (income)			295		(473	)		504			4,554			2,239

	Income before income taxes and cumulative effect of accounting change		12,335		2,811			2,844			14,884			40,223
Income taxes			5,320		1,185			1,224			5,730			14,684

	Income before cumulative effect of accounting change		7,015		1,626			1,620			9,154			25,539
Cumulative effect of accounting change, net of $843,000 income tax benefit ⁽²⁾			—		—			(8,973	)		—			—

	Net income (loss)	$	7,015	$	1,626		$	(7,353	)	$	9,154		$	25,539

Per common share:
Basic net income before cumulative effect of accounting change		$	0.77	$	0.18		$	0.17		$	0.91		$	2.32
Cumulative effect of accounting change ⁽²⁾			—		—			(0.96	)		—			—

	Basic net income (loss)	$	0.77	$	0.18		$	(0.79	)	$	0.91		$	2.32

Diluted income before cumulative effect of accounting change		$	0.74	$	0.17		$	0.17		$	0.77		$	2.10
Cumulative effect of accounting change ⁽²⁾			—		—			(0.92	)		—			—

	Diluted net income (loss)	$	0.74	$	0.17		$	(0.75	)	$	0.77		$	2.10

Weighted average common shares outstanding:
	Basic		9,093		9,247			9,328			9,610			11,005
	Diluted		9,476		9,661			9,806			11,880			12,142


	As of December 31,

	2000		2001		2002		2003		2004

	(In thousands)
Balance Sheet Data
Cash and cash equivalents	$	9,057	$	16,689	$	3,941	$	6,662	$	10,379
Working capital	$	40,482	$	41,387	$	22,453	$	22,803	$	69,854
Total assets	$	77,712	$	85,884	$	122,412	$	121,026	$	176,551
Long-term debt, including current installments	$	1,495	$	449	$	39,028	$	30,287	$	—
Total stockholders’ equity	$	64,095	$	66,532	$	65,227	$	70,524	$	140,996


⁽¹⁾	The litigation expense (income) includes: (i) expenses of $2,180,000 in 2001 and $3,228,000 in 2002 related to a lawsuit filed against us in Montana in 1995 which we settled and paid in full in 2002, and (ii) expenses of $400,000 in 2000, expenses of $100,000 in 2001 and income of $500,000 in 2003 related to a European anti-dumping duties matter that was ultimately resolved in our favor in 2003.

⁽²⁾	Our adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets , on January 1, 2002 resulted in a goodwill impairment charge of $8,973,000 (net of the related income tax benefit of $843,000), or $0.92 per diluted share, during 2002.


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

FORWARD-LOOKING STATEMENTS

This report and the information incorporated by reference in this report contain forward-looking statements. We sometimes use words such as “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “project,” “will” and similar expressions, as they relate to us, our management and our industry, to identify forward-looking statements. Forward-looking statements relate to our expectations, beliefs, plans, strategies, prospects, future performance, anticipated trends and other future events. Specifically, this report and the information incorporated by reference in this report contain forward-looking statements relating to, among other things:


	•	our business, growth, operating and financing strategies;

	•	our product mix;

	•	the success of new products;

	•	our licensing strategy;

	•	the impact of seasonality on our operations;

	•	expectations regarding our net sales and earnings growth;

	•	expectations regarding our liquidity;

	•	our future financing plans; and

	•	trends affecting our financial condition or results of operations.

We have based our forward-looking statements largely on our current expectations and projections about future events and financial trends affecting our business. Actual results may differ materially. Some of the risks, uncertainties and assumptions that may cause actual results to differ from these forward-looking statements are described in “Risk Factors.” In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report and the information incorporated by reference in this report might not happen.

You should completely read this report, the documents that we filed as exhibits to this report and the documents that we incorporate by reference in this report with the understanding that our future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements and we assume no obligation to update such forward-looking statements publicly for any reason.

Overview

We are a leading producer and brand manager of innovative high-quality footwear and the category creator in the sport sandal and luxury sheepskin footwear segments. Our products are marketed under three recognized brand names that we own:


	•	Teva: High performance sport sandals and rugged outdoor footwear;

	•	UGG: Authentic luxury sheepskin boots and other footwear; and

	•	Simple: Innovative shoes that combine the comfort elements of athletic footwear with casual styling.

We sell our three brands through our retail customers and directly to our end-user consumers through our Internet and catalog retailing business. We sell our footwear in both the domestic market and the international markets. Independent third parties manufacture all of our footwear.

Our business has been impacted by several important trends affecting our end markets:


	•	The markets for casual, outdoor and athletic footwear have grown significantly during the last decade. We believe this growth is a result of the trend toward casual dress in the workplace, increasingly active outdoor lifestyles and a growing emphasis on comfort.

	•	Consumers are more often seeking footwear designed to address a broader array of activities with the same quality, comfort, and high performance attributes they have come to expect from traditional athletic footwear.

	•	Our customers have narrowed their footwear product breadth, focusing on brands with a rich heritage and authenticity as market creators and leaders.

By emphasizing our brand image and our focus on comfort, performance and authenticity, we believe we can better maintain a loyal consumer following that is less susceptible to fluctuations caused by changing fashions and changes in consumer preferences.

Set forth below is an overview of the various components of our business, including some of the important factors that affect each business and some of our strategies for growing each business.


	*Teva Overview*

Our Teva lines experienced strong market acceptance in recent years. Teva’s products have benefited recently from several factors, but most prominently a general shift in consumer preferences and lifestyles to include more outdoor recreational activities. At the same time, our consumers are increasingly purchasing our Teva products for everyday wear, and our Teva brand now includes several closed-toe footwear lines. As a result, our brand remains popular among professional and amateur outdoorsmen seeking authentic, performance-oriented footwear, as well as general footwear consumers seeking high quality, durable and comfortable styles for everyday use.

To capitalize on the growth of outdoor recreational activities and the acceptance of certain footwear products for everyday use, we have selectively expanded the distribution of our Teva product lines outside our core outdoor specialty and sporting goods channels. Through effective channel management, we believe we can continue to expand into new distribution channels without diluting our outdoor heritage and our appeal to outdoor enthusiasts. Through channel appropriate product line expansion, we plan to continue to broaden our product offerings beyond sport sandals to new products that meet the style and functional needs of our consumers.

We initially produced Teva products under license from the inventor of the Teva technology, Mark Thatcher. In November 2002, we purchased from Mr. Thatcher the Teva worldwide assets, including the Teva Internet and catalog business and all patents, trade names, trademarks and other intellectual property associated with the acquired Teva assets, or Teva Rights. As a result of our purchase of the Teva Rights, we have adopted a strategy to expand the Teva brand and more fully develop its potential.


	*UGG Overview*

Since early 2003, our UGG brand received increased media exposure, which contributed to broader public awareness of the UGG brand and significantly increased demand for the collection. We believe that the increased media focus on UGG was driven by the product’s unique styling and resulting brand name identification, Australian heritage and adoption by high-profile film and television celebrities as a favored footwear brand. We believe this increased media attention has enabled us to introduce the brand to consumers much faster than we would have ordinarily been able to. As a result of the subsequent rapid growth in demand, we were sold out of key UGG products throughout much of 2004, and given the long lead times required to replenish our inventory, we have been unable to fill many retailer reorders and many direct Internet and catalog orders. Continuing a strategy utilized with our UGG casual line, we have been shifting a portion of our UGG sheepskin boot production from factories in Australia to three factories in China where the production capacity is much greater and quality standards are comparable.

We believe the fundamental comfort and functionality of UGG products will continue to drive long-term consumer demand. Recognizing that there is a significant fashion element to UGG and that footwear fashions fluctuate, our strategy seeks to prolong the longevity of the brand by offering a broader product line suitable for wear in a variety of climates and occasions and by limiting distribution to selected higher-end retailers. As part of this strategy, we have expanded our product line over time from 52 models in 2002 to 86 models in 2005.

Increased media exposure has also broadened appeal for our UGG products. UGG has been a well-known brand in California for many years and has only recently become a recognized brand across the remainder of the country. We believe that a portion of UGG’s increased demand is due to our continued geographical expansion across the U.S. In addition, we have recently begun to expand our distribution and marketing overseas in order to satisfy virtually untapped international markets. We believe the international markets represent an attractive opportunity to grow UGG’s sales.

We depend on a limited number of key resources for sheepskin, the principal raw material for our UGG products. Four suppliers currently provide all of the sheepskin purchased by our independent manufacturers. The top grade sheepskin used in UGG footwear is in high demand and limited supply. In addition, sheep are susceptible to hoof and mouth disease, which can result in the extermination of the infected herd and could have a material adverse effect on the availability of sheepskin for our products. The supply of sheepskin can also be adversely impacted by drought conditions. Our potential inability to obtain top grade sheepskin for UGG products could impair our ability to meet our production requirements for UGG in a timely manner and could lead to inventory shortages, which can result in lost potential sales, delays in shipments to customers, strain on our relationships with customers and diminished brand loyalty. There have also been significant increases in the prices of footwear quality sheepskin as the demand for this material has increased. Any further price increases will likely raise our costs, increase our costs of sales and decrease our profitability unless we are able to pass higher prices on to our customers. While we believe the supply of top quality sheepskin has improved for the 2005 season, we still expect the demand for this material to continue to outpace supply, leading to shortages and our inability to produce as much of certain styles as our customers would like to order. Looking beyond the next year, if demand continues to be strong, we would expect the supply of top grade sheepskin to continue to increase in response to the demand. However, we have little control over the supply or the overall demand for top grade sheepskin and, accordingly, can provide no assurances about the sufficiency of future supplies of top grade sheepskin.


	*Simple Overview*

Following three consecutive years of net sales declines in our Simple product line through 2003, we recently implemented a strategy to improve Simple’s results of operations and generate renewed interest in the Simple brand. As a result, net sales for Simple increased 34% in 2004 leading to slightly positive earnings from operations for the brand, a significant improvement over the 2003 loss from operations for Simple of $1,176,000. Instrumental in this turnaround has been the renewed emphasis on product, where we began a process of repositioning our Simple product line by focusing on our successful legacy collections, including clogs and sneakers, and narrowing the number of styles available. At the same time, we have refocused our sales and distribution efforts. While Simple products are sold through many of the same retailers that carry our Teva and UGG lines, the Simple products will also, in some cases, be sold through distribution channels that are precluded from offering our Teva and UGG brands. We expect our Simple brand to experience growth as we successfully implement our product line rationalization and channel management strategies.


	*Internet and Catalog Retailing Overview*

We acquired our Internet and catalog retailing business in November 2002 as part of the acquisition of the Teva Rights. Our Internet and catalog retailing business, which today sells all three of our brands, enables us to meet the growing demand for all of these products and, because this business sells its products at retail prices, it also provides us with an opportunity to add significant incremental operating income. Managing our Internet business requires us to focus on generating Internet traffic to our websites, effectively convert website visits into orders and maximize average order sizes. To drive our catalog order business, we distribute approximately 550,000 catalogs every six months. Overall, our consumer direct business benefits from the

strength of our brands and, as we grow our brands over time, we expect our Internet and catalog retailing business to increase.


	*Licensing Overview*

We have recently embarked on a strategy to license our well-known and respected footwear brands to complementary products outside of footwear, generally in the apparel and accessories categories. To date, we have entered into six licensing agreements for Teva, including domestic licenses for men’s sportswear, timepieces, eyewear, headwear and socks and a Canadian license for sportswear. We also have three licensing arrangements for UGG for handbags and other small leather goods, outerwear and cold weather accessories. We are pursuing additional licensing opportunities for our brands both in the U.S. and abroad. Because this licensing strategy is in its early stages, and due to the lead times required to bring the products to market, we have only recently begun to recognize license revenues and we do not expect significant incremental net sales and profits from licensing in the near future. However, we believe licensing revenues may become a more significant portion of our net sales and profits over time if our licensees can sell the licensed products in the quantities they have promised. For the year ended December 31, 2004, our licensees began to ship their products and, accordingly, we recognized net license revenues of $950,000, primarily related to our UGG handbag and outerwear licenses. The minimum net annual royalties that we are scheduled to receive under the nine existing licensing agreements, assuming renewal options are exercised, are $453,000 in 2005, $978,000 in 2006, $1,281,000 in 2007, $1,344,000 in 2008 and $1,391,000 in 2009. The activity within the licensing segment is very small in relation to the consolidated operations and, therefore, separate segment information is not presented.

Seasonality


	2003

	First Quarter		Second Quarter		Third Quarter		Fourth Quarter

Net sales	$	36,102,000	$	24,342,000	$	24,894,000	$	35,717,000
Income from operations	$	8,087,000	$	4,678,000	$	1,782,000	$	4,891,000


	2004

	First Quarter		Second Quarter		Third Quarter		Fourth Quarter

Net sales	$	44,272,000	$	40,546,000	$	55,797,000	$	74,172,000
Income from operations	$	9,628,000	$	9,274,000	$	9,358,000	$	14,202,000

With the dramatic growth in UGG in recent years, combined with the introduction of a fall Teva line, net sales in the last half of the year exceeded that for the first half of the year. Given our expectations for each of our brands in 2005, we currently expect this trend to continue. Nonetheless, actual results could differ materially depending upon consumer preferences, availability of product, competition and our customers continuing to carry and promote our various product lines, among other risks and uncertainties. See “Risk Factors.”

Results of Operations

The following table sets forth certain operating data for the periods indicated.


				Years Ended December 31,

				2002			2003			2004

Net sales by location:
United States				$	78,278,000		$	98,710,000		$	175,419,000
International					20,829,000			22,345,000			39,368,000

		Total		$	99,107,000		$	121,055,000		$	214,787,000

Net sales by product line and consumer direct business:
Teva:
	Wholesale			$	64,849,000		$	72,783,000		$	83,477,000
	Internet/catalog				255,000			3,687,000			4,759,000

		Total			65,104,000			76,470,000			88,236,000

UGG:
	Wholesale				23,491,000			34,561,000			101,806,000
	Internet/catalog				310,000			2,300,000			14,415,000

		Total			23,801,000			36,861,000			116,221,000

Simple:
	Wholesale				10,159,000			7,210,000			9,633,000
	Internet/catalog				43,000			514,000			697,000

		Total			10,202,000			7,724,000			10,330,000

			Total	$	99,107,000		$	121,055,000		$	214,787,000

Income (loss) from operations by product line and consumer direct business:
Teva wholesale				$	12,011,000		$	21,739,000		$	24,901,000
UGG wholesale					6,589,000			10,002,000			31,674,000
Simple wholesale					279,000			(1,176,000	)		45,000
Internet/catalog					194,000			1,148,000			5,533,000
Unallocated overhead costs					(15,725,000	)		(12,275,000	)		(19,691,000	)

		Total		$	3,348,000		$	19,438,000		$	42,462,000

The following table sets forth certain operating data as a percentage of net sales for the periods indicated, and the increase (decrease) in each item of operating data between the periods.


		Years Ended December 31,									Percent Increase (Decrease)

		2002			2003			2004			2002 to 2003			2003 to 2004

Net sales			100.0	%		100.0	%		100.0	%		22.1	%		77.4	%
Cost of sales			58.1			57.6			57.9			21.1			78.4

	Gross profit		41.9			42.4			42.1			23.6			76.1
Selling, general and administrative expenses			35.3			26.8			22.3			(7.3	)		48.0
Litigation expense (income)			3.2			(0.4	)		—			*			(100.0	)

	Income from operations		3.4			16.0			19.8			480.6			118.4
Interest expense and other			0.5			3.7			1.1			803.6			(50.8	)

	Income before income taxes and cumulative effect of a change in accounting principle		2.9			12.3			18.7			423.3			170.2
Income taxes			1.2			4.7			6.8			368.1			156.3

	Income before cumulative effect of a change in accounting principle		1.7			7.6			11.9			465.1			179.0
Cumulative effect of a change in accounting principle			(9.1	)		—			—			*			0.0

	Net income (loss)		(7.4	)%		7.6	%		11.9	%		*			179.0


*	Calculation of percentage change is not meaningful.


	*Year Ended December 31, 2003 Compared to Year Ended December 31, 2004*

Overview. In 2004, we had net sales of $214,787,000 and income from operations of $42,462,000 compared to net sales of $121,055,000 and income from operations of $19,438,000 in 2003. These results were primarily due to increased demand for all three of our product lines during the year.

Net Sales. Net sales increased by $93,732,000, or 77.4%, from $121,055,000 in 2003 to $214,787,000 in 2004. Net sales increased in 2004 due primarily to: (1) an increase in the number of units sold for each of our three brands, resulting in a 51.6% overall increase in the volume of footwear sold from 5,063,000 pairs in 2003 to 7,678,000 pairs in 2004, and (2) the expansion of the Internet and catalog retailing business. In addition, the weighted average wholesale selling price per unit increased 13.3% from $23.03 in 2003 to $26.10 in 2004, caused by an increase in sales of UGG products, which generally carry higher average selling prices, partially offset by increased sales of Teva thongs, which generally carry a lower average selling price than sales of our other products, and lower average selling prices on the closeout sales in 2004 compared to 2003.

Net wholesale sales of Teva increased by $10,694,000, or 14.7%, from $72,783,000 in 2003 to $83,477,000 in 2004. This increase was primarily due to increased sales volume of sport sandals resulting from an improvement in retail sell-through, increased sales in the international markets, selective addition of new distribution channels in our domestic market, increased sales volume of thongs and slides and increased sales volume of certain styles of the recently introduced closed-toe footwear offerings. See “— Overview — Teva Overview” above.

Net wholesale sales of UGG increased by $67,245,000, or 194.6%, from $34,561,000 in 2003 to $101,806,000 in 2004. This was largely as a result of the growing popularity of the brand, significantly increased brand awareness and considerable celebrity exposure, as well as the fulfillment of the pent-up demand for the UGG product in the first half of 2004. We also increased our sales of UGG products to the international markets, resulting in an increase in international UGG sales of $12,326,000, or 1269.4%, from $971,000 in 2003 to $13,297,000 in 2004. The UGG sales volume increase was also due to strong retail sell-through, expansion of the product line to include more women’s and kids’ boot styles and continued geographical expansion across the U.S. See “— Overview — UGG Overview” above.

Net wholesale sales of Simple increased by $2,423,000, or 33.6%, from $7,210,000 in 2003 to $9,633,000 in 2004. This increase was due to several factors, including strong initial sales to retailers (sell-in) of the Simple shearling boots in the third quarter of 2004. The increase in Simple sales in 2004 was also due to a renewed interest in the Simple brand, including continued growth in the sales of the Sugar and other sneaker styles, and the successful introduction of the new line of Simple clogs. The Simple sneaker and clog styles have continued to retail well; however, while initial sell-in of the Simple shearling boots was strong, the sell-through to consumers of this type of boot at these price points, including sell-through of similarly-priced products offered by competitors, was slow and accordingly these shearling styles will not be carried forward in the 2005 Simple product line. The sell-through of these shearling boots, as well as similar products offered by competitors, was not strong as the boots were mid-priced boots with retail selling prices in the $50 to $80 range, which was too close to the $110 selling price of the similar Classic boot offering from UGG, which was by far the preferred brand by consumers. See “— Overview — Simple Overview” above.

Net sales of the Internet and catalog retailing business increased by $13,370,000, or 205.7%, from $6,501,000 in 2003 to $19,871,000 in 2004. In 2003, net sales of the Internet and catalog retailing business included retail sales of Teva of $3,687,000, UGG of $2,300,000 and Simple of $514,000. In 2004, net sales of the Internet and catalog retailing business included retail sales of Teva of $4,759,000, UGG of $14,415,000 and Simple of $697,000. The increase in net sales of the Internet and catalog retailing business was due to the increased demand for the underlying brands, increased awareness of the Internet site and increased consumer acceptance of online purchasing. Our Internet sales for UGG were especially strong, increasing 526.7% in 2004 compared to 2003, as consumers who were unable to find the UGG products at their local retailers frequently searched the Internet for availability of the UGG products, which further contributed to increased sales for our Internet and catalog retailing business. See “— Overview — Internet and Catalog Retailing Overview” above.

International sales for all of our products increased by $17,023,000, or 76.2%, from $22,345,000 in 2003 to $39,368,000 in 2004, representing 18.5% of net sales in 2003 and 18.3% of net sales in 2004. The higher dollar amount of international sales resulted from our sales of more UGG product to the international markets in order to begin to expand in those territories, our international expansion strategy and the lower relative pricing to European customers due to the strength of the Euro.

Gross Profit. Gross profit increased by $39,088,000, or 76.1%, from $51,345,000 in 2003 to $90,433,000 in 2004. As a percentage of net sales, gross profit margin decreased slightly from 42.4% in 2003 to 42.1% in 2004. The decrease in gross profit margin was due in part to the significant increase in UGG sales during 2004, which generally carry a lower gross margin than Teva, an increase in airfreight costs in our efforts to improve deliveries of UGG products, and the non-recurrence of last year’s gain caused by the favorable impact of selling in Euros in the European markets in 2003, whereas all sales were denominated in U.S. dollars in 2004. These factors were partially offset by a higher volume of Internet sales, which carry a higher gross margin than items sold at wholesale prices, a reduced impact of closeout sales, lower overhead costs per pair, and the addition of approximately $950,000 of net license revenues, primarily related to UGG handbags and outerwear.

Selling, General and Administrative Expenses. Selling, general and administrative expenses, or SG&A, increased by $15,564,000, or 48.0%, from $32,407,000 in 2003 to $47,971,000 in 2004. As a percentage of net sales, SG&A decreased from 26.8% in 2003 to 22.3% in 2004 largely due to the continued leverage of operating costs on the increased sales volume. The increase in the dollar amount of SG&A expenses was due to a combination of factors, including increased sales commissions of $3,817,000 on the higher sales volume; increased payroll costs of $3,764,000 attributed to increased performance compensation on the significantly improved operating results combined with an increase in headcount to support the substantial growth; increased warehouse and distribution costs of $1,563,000; higher legal costs associated with increased efforts to protect our intellectual property rights of $1,523,000; increased costs of our growing Internet and catalog retailing business of $1,442,000; increased marketing and advertising costs of $1,067,000; and, other general increases in costs to support the increased sales.

Litigation Income. In 2003, we received a favorable resolution in a European anti-dumping duties matter in the amount of $500,000.

Income from Operations. Income from operations increased by $23,024,000, or 118.4%, from $19,438,000 in 2003 to $42,462,000 in 2004. This was due primarily to the factors discussed above.

Income from operations of Teva wholesale increased by $3,162,000, or 14.5%, from $21,739,000 in 2003 to $24,901,000 in 2004. This increase was largely due to the $10,694,000, or 14.7%, increase in net sales and a reduction in bad debt expense of $547,000. These were partially offset by increases in Teva selling commissions of $593,000 on the higher sales volume, increased payroll costs of $256,000 and the non-recurrence of last year’s gain caused by the favorable impact of selling in Euros in the European markets in 2003, whereas all sales were denominated in U.S. dollars in 2004.

Income from operations of UGG wholesale increased by $21,672,000, or 216.7%, from $10,002,000 in 2003 to $31,674,000 in 2004. This was largely due to the $67,245,000, or 194.6% increase in net sales, partially offset by a $3,190,000 increase in sales commissions on the higher sales volume, increased airfreight costs of $3,374,000, increased payroll costs of $985,000 and increased advertising and marketing costs of $1,161,000.

Income from operations of Simple wholesale increased by $1,221,000 from a loss from operations of $1,176,000 in 2003 to income from operations of $45,000 in 2004. This was primarily due to a $2,423,000, or 33.6%, increase in net sales during the period combined with an increase in gross margin resulting from a reduced impact of inventory write-downs and closeout sales in 2004 compared to 2003.

Income from operations of our Internet and catalog business increased by $4,385,000, or 382.0%, from $1,148,000 in 2003 to $5,533,000 in 2004. This was largely due to the $13,370,000, or 205.7%, increase in sales during the period, partially offset by a corresponding increase in related costs.

Unallocated overhead costs increased by $7,416,000, or 60.4%, from $12,275,000 in 2003 to $19,691,000 in 2004. These costs included increased payroll costs, increased warehouse and distribution costs and increased legal costs associated with protection of our intellectual property rights that support our business segments.

Other Expense (Income). Net interest expense was $4,557,000 in 2003 compared with $2,236,000 in 2004. The interest expense resulted principally from the borrowings incurred to finance our purchase of the Teva Rights in November 2002. The decrease in interest expense for 2004 reflects the repayment of outstanding borrowings, partially through the equity offering in May 2004, offset by the prepayment penalties and the write-off of a pro rata share of the previously capitalized loan costs incurred as a result of paying down our debt early. Other expense (income) exclusive of net interest expense was not material in either period.

Income Taxes. In 2003, income tax expense was $5,730,000, representing an effective income tax rate of 38.5%. In 2004, income tax expense was $14,684,000 representing an effective income tax rate of 36.5%. The decrease in the effective tax rate was primarily due to the restructuring our international operations, which resulted in a reduced effective tax rate.

Net Income. In 2003, net income was $9,154,000, or $0.77 per diluted share. In 2004, net income was $25,539,000, or $2.10 per diluted share. The dramatic increases in net income and earnings per diluted share resulted from the factors discussed above.


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

Overview. In 2003, we had net sales of $121,055,000 and income from operations of $19,438,000 compared to net sales of $99,107,000 and income from operations of $3,348,000 in 2002. These results were due in part to increased demand for our Teva and UGG product lines, partially offset by a decline in net sales of our Simple product line. In addition, 2003 was the first full year of operations following our acquisition in November 2002 of the Teva Rights, which resulted in the elimination of royalty and other license costs of $4,495,000 and resulted in net sales of $6,501,000 attributed to our Internet and catalog retailing business that was a part of the Teva Rights acquisition. The acquisition of the Teva Rights resulted in significant new borrowings and incremental interest expense in 2003 of $4,557,000.

Net Sales. Net sales increased by $21,948,000, or 22.1%, from $99,107,000 in 2002 to $121,055,000 in 2003. Net sales increased in 2003 due primarily to: (1) an increase in the number of units sold of Teva and UGG offset in part by a decline in the number of units sold of Simple, resulting in a 22.9% overall increase in the volume of footwear sold from 4,120,000 pairs in 2002 to 5,063,000 pairs in 2003, and (2) the inclusion of the Internet and catalog retailing business obtained as part of the Teva Rights acquisition. This increase in unit sales volume was partially offset by a 2.7% decline in average selling price per unit from $23.66 in 2002 to $23.03 in 2003.

Net wholesale sales of Teva increased by $7,934,000, or 12.2%, from $64,849,000 in 2002 to $72,783,000 in 2003. This increase was primarily due to increased sales volume of sport sandals resulting from an improvement in retail sell-through, the favorable impact of the strong Euro on European sales, selective addition of new distribution channels in our domestic market, increased sales volume of thongs and slides and increased sales volume of certain styles of the recently introduced closed-toe footwear offerings. See “— Overview — Teva Overview” above.

Net wholesale sales of UGG increased by $11,070,000, or 47.1%, from $23,491,000 in 2002 to $34,561,000 in 2003. This was largely as a result of heightened demand in 2003 caused by the growing popularity of the brand, significantly increased brand awareness and considerable celebrity exposure. The UGG sales volume increase was also due to strong retail sell-through, expansion of the product line to include more casual footwear styles and continued geographical expansion across the U.S. See “— Overview — UGG Overview” above.

Net wholesale sales of Simple decreased by $2,949,000, or 29.0%, from $10,159,000 in 2002 to $7,210,000 in 2003. This decline was caused by a variety of factors, including competition in the casual footwear market and a $668,000 decline in sales volume in the international markets. These volume declines were partially offset by a $469,000 increase in sales volume of the moderately priced Simple suede, fleece-lined boot, which we introduced in the fourth quarter of 2003. See “— Overview — Simple Overview” above.

For the period from the November 25, 2002 acquisition date through December 31, 2002, net sales of the Internet and catalog retailing business totaled $608,000, including retail sales of Teva of $255,000, UGG of $310,000 and Simple of $43,000. In 2003, net sales of the Internet and catalog retailing business aggregated $6,501,000, including retail sales of Teva of $3,687,000, UGG of $2,300,000 and Simple of $514,000. See “— Overview — Internet and Catalog Retailing Overview” above.

International sales for all of our products increased by $1,516,000, or 7.3%, from $20,829,000 in 2002 to $22,345,000 in 2003, representing 21.0% of net sales in 2002 and 18.5% of net sales in 2003. The higher dollar amount of international sales resulted from our international expansion strategy in 2003 combined with the favorable impact of the strong Euro while the lower percentage of international sales to net sales for 2003 reflects the growth of our domestic business.

Gross Profit. Gross profit increased by $9,815,000, or 23.6%, from $41,530,000 in 2002 to $51,345,000 in 2003. As a percentage of net sales, gross profit margin increased from 41.9% in 2002 to 42.4% in 2003. The increase in gross margin was due to several factors, including an above average gross margin at the newly acquired Internet and catalog retailing business, the favorable impact of the strong Euro and lower production overhead costs per pair, partially offset by an increase in closeout sales.

Selling, General and Administrative Expenses. Selling, general and administrative expenses, or SG&A, decreased by $2,547,000, or 7.3%, from $34,954,000 in 2002 to $32,407,000 in 2003. As a percentage of net sales, SG&A decreased from 35.3% in 2002 to 26.8% in 2003. The decrease in the dollar amount of SG&A expenses was primarily due to the elimination of Teva royalty expenses and related Teva license cost amortization of $4,495,000. In addition, we had a $1,281,000 decrease in bad debt expense which was largely due to improvements in our credit and collections staff, improvements in our credit and collections policies and procedures and the non-recurrence of the 2002 collections difficulties encountered during the initial stages of the implementation of a new enterprise resource planning, or ERP, computer system. While we believe these improvements will continue to benefit our future collections efforts, we can provide no assurances about the levels of future bad debt expenses, as many other factors contribute to our overall bad debt risk including

the future financial strength of our customers, which is difficult to predict. We also experienced a reduction in overall advertising expenses of $862,000. These cost reductions were partially offset by increased operating expenses related to the newly acquired Internet and catalog retailing business of $1,715,000. SG&A expenses as a percentage of net sales decreased in 2003 due to the overall reduction in SG&A expenses as discussed above as well as the leverage of our fixed costs over a larger revenue base.

Litigation Expense (Income). In 2002, we recorded special litigation charges of $3,228,000 related to a lawsuit filed against us in the state of Montana in 1995. The case was settled and paid in full in November 2002. In 2003, we received a favorable $500,000 resolution in a European anti-dumping duties matter.

Income from Operations. Income from operations increased by $16,090,000, or 480.6%, from $3,348,000 in 2002 to $19,438,000 in 2003. This was due primarily to: (1) increased gross profit contribution of $9,815,000, (2) elimination of the Teva royalty expenses and related Teva license cost amortization of $4,495,000, (3) the non-recurrence of the 2002 litigation costs of $3,228,000 and (4) improved profitability resulting from the acquisition of the Internet and catalog retailing business in November 2003 of approximately $954,000.

Income from operations of Teva wholesale increased by $9,728,000, or 81.0%, from $12,011,000 in 2002 to $21,739,000 in 2003. This increase was largely due to the $7,934,000 increase in net sales, the elimination of $3,739,000 of Teva royalty expense and $756,000 of Teva license cost amortization, a decrease in Teva advertising and marketing costs, and a reduction in bad debt expense of $965,000. These were partially offset by increases in Teva selling commissions on the higher sales volume and increased payroll costs of $783,000.

Income from operations of UGG wholesale increased by $3,413,000, or 51.8%, from $6,589,000 in 2002 to $10,002,000 in 2003. This was largely due to the $11,070,000 increase in net sales, partially offset by a $583,000 increase in sales commissions on the higher sales volume, increased payroll costs of $232,000, increased advertising and marketing costs and the non-recurrence of a $300,000 chargeback received from a factory in 2002.

Income from operations of Simple wholesale decreased by $1,455,000 from income from operations of $279,000 in 2002 to a loss from operations of $1,176,000 in 2003. This was primarily due to a $2,949,000 decline in net sales during the period attributed to both the domestic and international markets. In addition, the Simple brand was negatively affected by the increased impact of closeout sales and increased payroll costs in 2003.

Income from operations of our Internet and catalog business increased by $954,000, or 491.8%, from $194,000 for the period from the November 25, 2002 acquisition date through December 31, 2002 to $1,148,000 in 2003. This was largely due to the full year impact during 2003 and the general continued growth in popularity of online sales.

Unallocated overhead costs decreased by $3,450,000, or 21.9%, from $15,725,000 in 2002 to $12,275,000 in 2003. This was largely due to the net change in litigation expense (income) of $3,728,000 between 2002 and 2003.

Other Expense (Income). Net interest expense was $406,000 in 2002 compared with a net interest expense of $4,557,000 in 2003. This was primarily due to our significantly increased borrowings in order to finance our purchase of the Teva Rights in November 2002. In addition, in connection with early repayments of $2,000,000 of subordinated notes in June 2003 and $2,000,000 in December 2003, we incurred approximately $380,000 of expenses, including prepayment penalties and the write-off of a pro rata share of the previously capitalized loan costs. Other expense (income) exclusive of interest expense (income) was not material in either year.

Income Taxes. In 2002, income tax expense was $1,224,000, representing an effective income tax rate of 43.0%. In 2003, income tax expense was $5,730,000 representing an effective income tax rate of 38.5%. The decrease in the effective tax rate was primarily due to two factors. First, the rate reduction occurred as certain non-deductible Teva license amortization costs were eliminated in connection with the Teva Rights

acquisition. Second, we restructured our international operations, which resulted in a reduced effective tax rate.

Net Income. On January 1, 2002, we implemented Statement of Financial Accounting Standards, or SFAS, No. 142, Goodwill and Other Intangible Assets , which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized to earnings but instead be reviewed periodically for impairment. The implementation of SFAS No. 142 resulted in a goodwill impairment charge of $8,973,000 (net of the related income tax benefit of $843,000), or $0.92 per diluted share, during 2002. This non-cash impairment charge included a write down of approximately $1,200,000, on an after tax basis, for Simple goodwill and approximately $7,800,000 for UGG goodwill. We recorded the impairment charge as a cumulative effect of a change in accounting principle in the accompanying consolidated statement of operations for 2002. In 2002, net income before cumulative effect of a change in accounting principle was $1,620,000, or $0.17 per diluted share, and the net loss after the cumulative effect of a change in accounting principle was $7,353,000, or $0.75 per diluted share. In 2003, net income was $9,154,000, or $0.77 per diluted share.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements other than operating leases. See “— Contractual Obligations” below. We do not believe that these operating leases are material to our current or future financial condition, results of operations, liquidity, capital resources or capital expenditures.

Liquidity and Capital Resources

In May 2004, we completed a follow-on public stock offering and used a portion of the proceeds to repay all outstanding borrowings, including all debt associated with the acquisition of the Teva Rights. We finance our working capital and operating needs using a combination of the proceeds from the 2004 stock offering, cash generated from operations and the credit availability under our $20,000,000 revolving credit facility.

The seasonality of our business requires us to build inventory levels in anticipation of the sales for the coming season. Teva generally begins to build inventory levels beginning in the fourth quarter and first quarter in anticipation of the spring selling season that occurs in the first and second quarters, whereas UGG generally begins to build its inventories in the second quarter and third quarter to support sales for the fall and winter selling seasons, which historically occur during the third and fourth quarters. However, given the currently increased demand for UGG products, we have also built our December 31, 2004 inventory levels to support the increased sales expectations for UGG’s Spring 2005 season. Our Simple product line is less seasonal and less significant to total inventory than our Teva and UGG lines.

Our cash flow cycle includes the purchase of these inventories, the subsequent sale of the inventories and the eventual collection of the resulting accounts receivable. As a result, our working capital requirements begin when we purchase the inventories and continue until we ultimately collect the resulting receivables. Given the seasonality of our Teva and UGG brands, our working capital requirements fluctuate significantly throughout the year. The cash required to fund these working capital fluctuations is generally provided using a combination of our internal cash flows and borrowings under our revolving credit facility.

Cash from Operating Activities. Net cash provided by operating activities decreased from $17,627,000 in 2003 to $12,416,000 in 2004. The decrease in net cash provided by operating activities in 2004 was largely due to a larger increase in trade accounts receivable of $25,394,000 resulting from significant year end sales and a larger increase in inventory of $16,420,000 in 2004, partially offset by an improvement in net earnings of $16,385,000, a larger increase in trade accounts payable and accrued expenses of $10,328,000 and the $6,030,000 income tax benefit attributable to the exercise of stock options in 2004. Net working capital at December 31, 2004 improved by $47,051,000, or 206.3%, from $22,803,000 in 2003 to $69,854,000 in 2004, primarily as a result of the sale of common stock in our follow-on public stock offering in May 2004.

Cash from Investing Activities. Net cash used in investing activities was $705,000 in 2003 and $16,873,000 in 2004. Net cash used in investing activities in 2004 was primarily a result of $15,475,000 of net purchases of short-term investments in order to improve the yield on available cash, and $1,441,000 of

purchases of property and equipment. In 2003, net cash used in investing activities was comprised almost entirely of purchases of property and equipment. The increase in purchases of property and equipment in 2004 compared to 2003 occurred as we replaced tradeshow booths and our phone system in 2004 and we began the expansion and build out of our distribution center.

Cash from Financing Activities. In 2003, net cash used in financing activities aggregated $14,091,000, including the repayment of long-term debt of $8,934,000 and the repurchase of all outstanding convertible preferred stock for $5,938,000, offset by proceeds from stock issuances of $781,000. In 2004, net cash provided by financing activities aggregated $8,213,000, including cash received from the issuances of common stock of $38,500,000, primarily in connection with the follow-on public stock offering in May 2004, which was used, in part, to pay off all remaining long-term debt.

Our liquidity consists primarily of cash, short-term investments, trade accounts receivable, inventories and a revolving credit facility. At December 31, 2004, working capital was $69,854,000 including $10,379,000 of cash and $15,475,000 of short-term investments. Cash provided by operating activities aggregated $12,416,000 in 2004. Trade accounts receivable increased by 123.8% from $18,745,000 at December 31, 2003 to $41,957,000 at December 31, 2004 largely due to the 107.7% increase in net sales during the fourth quarter ended December 31, 2004 compared to the fourth quarter of last year. In addition, the fourth quarter sales were weighted more heavily toward the end of the fourth quarter, with a 130.5% increase in sales in the month of December of 2004 compared to December 2003, which further contributed to the increase in trade accounts receivable at year end. Accounts receivable turnover improved from 6.1 times in 2003 to 7.7 times in 2004. This improvement resulted from the hiring of more qualified credit and collections staff, the improvement in collections policies and procedures and the strength of our brands, which provides strong incentive for customers to pay us timely so that we can avoid placing then on credit hold, which would delay shipments of their future orders.

During the same period, inventories increased by 68.1% from $18,004,000 at December 31, 2003 to $30,260,000 at December 31, 2004, reflecting a $1,703,000 increase in Teva inventory, an $11,083,000 increase in UGG inventory and a $530,000 decrease in Simple inventory at year end. Overall, inventory turnover improved from 3.6 times in 2003 to 5.5 times in 2004. The $1,703,000 increase in Teva inventory occurred because the factories delivered more Teva products in 2004 for the 2005 season than they did in 2003 for the 2004 season, due to our efforts to improve our on-time deliveries of complete orders to our customers earlier for the 2005 spring season. The increase in Teva inventory was also needed to support an expected increase in Teva sales for the first quarter of 2005 compared to actual sales for the first quarter of 2004. The $11,083,000 increase in UGG inventory at December 31, 2004 is in support of our expectations for significantly higher UGG sales in the first quarter of 2005, resulting from the carryover of holiday sales as well as the deliveries of the first Spring product offering for UGG. The $530,000 decrease in Simple inventory at December 31, 2004 reflects our continuing efforts to reduce the levels of our closeout inventories, to bring our Simple inventory into stock closer to when we expect it to be shipped to our customers, and to refocus the line and the related inventory levels on a fewer number of core styles.

Our revolving credit facility with Comerica Bank-California provides for a maximum availability of $20,000,000 subject to a borrowing base. In general, the borrowing base is equal to 75% of eligible accounts receivable, as defined, and 50% of eligible inventory, as defined. Up to $10,000,000 of borrowings may be in the form of letters of credit. The facility bears interest at the lender’s prime rate (5.25% at December 31, 2004) or, at our option, at LIBOR (2.40% at December 31, 2004) plus 1.00% to 2.50%, depending on our ratio of liabilities to earnings before interest, taxes, depreciation and amortization, or EBITDA, and is secured by substantially all of our assets. The facility includes annual commitment fees, which were $100,000 for 2004 and $60,000 for 2005. The facility expires on June 1, 2006. At December 31, 2004, we had no outstanding borrowings under the facility, no foreign currency reserves for outstanding forward contracts and no outstanding letters of credit. We had credit availability under the facility of $20,000,000 at December 31, 2004.

On November 25, 2002, we completed the acquisition of the Teva Rights from Mark Thatcher and his wholly owned company, Teva Sport Sandals, Inc., for approximately $62,300,000, including transaction costs

of approximately $300,000. We paid cash in the amount of $43,000,000 and issued to Mr. Thatcher a junior subordinated note in the principal amount of $13,000,000, convertible preferred stock of $5,500,000, 100,000 shares of common stock valued at approximately $368,000 and options to purchase 100,000 shares of common stock valued at approximately $187,000. The $13,000,000 junior subordinated note included a coupon interest rate of 7.00% and an additional interest rate of 2.00%, which was to be accrued and paid at the maturity date in 2008. The note allowed prepayment without penalty. Concurrent with the acquisition, we entered into an employment agreement for advice on Teva matters with Mr. Thatcher through November 2007, which provides for an annual base salary of $276,875, and we received a non-compete agreement from Mr. Thatcher, which expires two years after termination of employment.

In connection with the Teva Rights acquisition, we entered into two additional financing arrangements, including a $7,000,000 term loan from Comerica Bank-California and a $14,000,000 subordinated note from The Peninsula Fund III Limited Partnership, both unrelated parties.

As mentioned above, in May 2004 we completed a follow-on public offering of our common stock in which we sold 1,500,000 shares of newly issued common stock and 2,000,000 shares of our common stock were sold by selling stockholders. Using a portion of the proceeds from this stock offering, as well as the cash flow from operations, between January 2003 and June 2004 we repurchased all of the outstanding convertible preferred stock and repaid all of the outstanding debt incurred for the acquistion of the Teva Rights.

Upon the completion of the public offering and repayment of our outstanding debt, the borrowing availability under our revolving credit facility became the full $20,000,000 amount of the facility, subject to the borrowing base lending requirements.

The agreements underlying the bank credit facility contain several financial covenants including a quick ratio requirement, profitability requirements and a tangible net worth requirement, among others, as well as a prohibition on the payment of dividends. We were in compliance with all covenants at December 31, 2004, and remain so as of the date of this report.

Capital expenditures totaled $1,441,000 in 2004 and related primarily to the replacement of certain computer equipment and trade show booths, the upgrade of our phone system and the build out of our newly leased distribution center. We currently have no material commitments for future capital expenditures but estimate that the capital expenditures for 2005 will range from $2,500,000 to $3,500,000 and will include further distribution center expansion, a new UGG trade show booth and upgrades of certain other computer equipment. The actual amount of capital expenditures for 2005 may differ from this estimate, largely depending on any unforeseen needs to replace existing assets.

Contractual Obligations. The following table summarizes our contractual obligations at December 31, 2004 and the effects such obligations are expected to have on liquidity and cash flow in future periods.


	Payments Due by Period

			Less than						More than
	Total		1 Year		1-3 Years		3-5 Years		5 Years

Operating lease obligations	$	8,144,000	$	2,274,000	$	3,690,000	$	2,180,000		—

We previously had significant interest payment requirements on the long-term debt obligations discussed above. However, since we paid off all the outstanding balances on our long-term debt, we have no future interest payments scheduled.

We believe that internally generated funds, the available borrowings under our existing credit facilities and cash on hand will provide sufficient liquidity to enable us to meet our current and foreseeable working capital requirements. However, risks and uncertainties that could impact our ability to maintain our cash position include our growth rate, the continued strength of our brands, our ability to respond to changes in consumer preferences, our ability to collect our receivables in a timely manner, our ability to effectively manage our inventories and the volume of letters of credit used to purchase product, among others. See “Risk Factors” for a discussion of additional factors that may affect our working capital position.

Impact of Inflation

We believe that the relatively moderate rates of inflation in recent years have not had a significant impact on our net sales or profitability.

Critical Accounting Policies

Revenue Recognition. We recognize revenue when products are shipped and the customer takes title and assumes risk of loss, collection of relevant receivable is probable, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. Allowances for estimated returns, discounts, and bad debts are provided for when related revenue is recorded. Amounts billed for shipping and handling costs are recorded as a component of net sales, while the related costs paid to third-party shipping companies are recorded as a cost of sales.

In addition, the preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures about contingent liabilities and the reported amounts of net sales and expenses during the reporting period. Management bases these estimates and assumptions upon historical experience, existing, known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable under the circumstances. Management reasonably could use different estimates and assumptions, and changes in estimates and assumptions could occur from period to period, with the result in each case being a potential material change in the financial statement presentation of our financial condition or results of operations. We have historically been accurate in our estimates used for the reserves and allowances below. We believe that the estimates and assumptions below are among those most important to an understanding of our consolidated financial statements contained in this report.

Allowance for Doubtful Accounts. We provide a reserve against trade accounts receivable for estimated losses that may result from customers’ inability to pay. We determine the amount of the reserve by analyzing known uncollectible accounts, aged trade accounts receivables, economic conditions, historical experience and the customers’ credit-worthiness. Trade accounts receivable that are subsequently determined to be uncollectible are charged or written off against this reserve. The reserve includes specific reserves for accounts, which are identified as potentially uncollectible, plus a general reserve for the balance of accounts. Reserves have been fully established for all expected or probable losses of this nature. The gross trade accounts receivable balance was $45,238,000 and the allowance for doubtful accounts was $1,796,000 at December 31, 2004, compared to gross trade accounts receivable of $20,871,000 and allowance for doubtful accounts of $1,581,000 at December 31, 2003. Our use of different estimates and assumptions could produce different financial results. For example, a 1.0% change in the rate used to estimate the reserve for the accounts not specifically identified as uncollectible would change the allowance for doubtful accounts at December 31, 2004 by $390,000.

Reserve for Sales Discounts. A significant portion of our domestic net sales and resulting trade accounts receivable reflects a discount that the customers may take, generally based upon meeting certain order, shipment and payment timelines. We estimate the amount of the discounts that are expected to be taken against the period-end trade accounts receivable and we record a corresponding reserve for sales discounts. We determine the amount of the reserve for sales discounts considering the amounts of available discounts in the period-end accounts receivable aging and historical discount experience, among other factors. The reserve for sales discounts was approximately $1,485,000 at December 31, 2004 and $545,000 at December 31, 2003. Our use of different estimates and assumptions could produce different financial results. For example a 10.0% change in the estimate of the percentage of accounts that will ultimately take their discount would change the reserve for sales discounts at December 31, 2004 by $148,000.

Allowance for Estimated Returns. We record an allowance for anticipated future returns of goods shipped prior to period-end. In general, we accept returns for damaged or defective products but discourage returns for other reasons. We base the amount of the allowance on any approved customer requests for returns, historical returns experience and any recent events that could result in a change in historical returns rates, among other factors. The allowance for returns was $1,731,000 at December 31, 2004 and $1,245,000 at

December 31, 2003. Our use of different estimates and assumptions could produce different financial results. For example, a 1.0% change in the rate used to estimate the percentage of sales expected to ultimately be returned would change the reserve for returns at December 31, 2004 by approximately $595,000.

Inventory Write-Downs. Inventories are stated at lower of cost or market. We review the various items in inventory on a regular basis for excess, obsolete and impaired inventory. In doing so, we write the inventory down to the lower of cost or estimated future net selling prices. At December 31, 2004, inventories were stated at $30,260,000, net of inventory write-downs of $1,176,000. At December 31, 2003, inventories were stated at $18,004,000, net of inventory write-downs of $882,000. Our use of different estimates and assumptions could produce different financial results. For example, a 10.0% change in the estimated selling prices of our potentially obsolete inventory would change the inventory write-down amount at December 31, 2004 by approximately $310,000.

Valuation of Goodwill, Intangible and Other Long-Lived Assets. We periodically assess the impairment of goodwill, intangible and other long-lived assets based on assumptions and judgments regarding the carrying value of these assets. We test goodwill and nonamortizable intangible assets for impairment on an annual basis based on the fair value of the reporting unit (goodwill) or assets (nonamortizable intangibles) compared to its carrying value. We consider other long-lived assets to be impaired if we determine that the carrying value may not be recoverable. Among other considerations, we consider the following factors:


	•	the assets’ ability to continue to generate income from operations and positive cash flow in future periods;

	•	our future plans regarding utilization of the assets;

	•	any changes in legal ownership of rights to the assets; and

	•	changes in consumer demand or acceptance of the related brand names, products or features associated with the assets.

If we consider the assets to be impaired, we recognize an impairment loss equal to the amount by which the carrying value of the assets exceeds the estimated fair value of the assets. In addition, as it relates to long-lived assets, we base the useful lives and related amortization or depreciation expense on the estimate of the period that the assets will generate sales or otherwise be used by us.

In 2002, SFAS No. 142, “Goodwill and Other Intangible Assets,” became effective and as a result, we recorded a goodwill impairment charge in the first quarter of 2002. See note 13 to the accompanying consolidated financial statements.

Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation, or FIN No. 46, Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin, or ARB No. 51. FIN No. 46 addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. FIN No. 46 generally applies immediately to variable interests in variable interest entities created after January 31, 2003 and to variable interests in variable interest entities obtained after January 31, 2003. The application of FIN No. 46 did not have a material effect on our consolidated financial statements. In December 2003, the FASB revised FIN No. 46 to exempt certain entities from its requirements and to clarify certain issues arising during the implementation of FIN No. 46. The adoption of this revised interpretation in the first quarter of 2004 did not have any impact on our consolidated financial statements.

we will not be able to complete our evaluation until after Congress or the Treasury Department provides additional clarifying language on key elements of the provision. We expect to complete our evaluation of the effects of the repatriation provision within a reasonable period of time following the publication of the additional clarifying language.

In November 2004, the FASB issued Statement of Financial Accounting Standards, or SFAS No. 151, “Inventory Costs — An Amendment of ARB No. 43, Chapter 4”. SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing”, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 is effective for fiscal years beginning after June 15, 2005 and is required to be adopted in the first quarter of fiscal 2006. We do not expect the adoption of SFAS No. 151 to have a material impact on our consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123R (revised 2004), “Share-Based Payment”. SFAS No. 123R supersedes APB Opinion No. 25, and requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after June 15, 2005. The pro forma disclosure permitted under SFAS No. 123 will no longer be an alternative to financial statement recognition. SFAS No. 123R requires the determination of the fair value of the share-based compensation at the grant date and the recognition of the related expense over the period in which the share-based compensation vests. We are required to adopt the provisions of SFAS No. 123R effective July 1, 2005. The adoption of this Statement is expected to result in an additional expense for the year ending December 31, 2005 of approximately $400,000, which will be recorded in the third and fourth quarters of 2005.

RISK FACTORS

Our short- and long-term success is subject to many factors beyond our control. Stockholders and potential stockholders should carefully consider the following risk factors in addition to the other information contained in this report and the information incorporated by reference in this report. If any of the following risks occur, our business, financial condition or results of operations could be adversely affected. In that case, the value of our common stock could decline and stockholders and potential stockholders may lose all or part of their investment.

Risks Relating to Our Business


	Our success depends on our ability to anticipate fashion trends.

Our success depends largely on the continued strength of our Teva, UGG and Simple brands and on our ability to anticipate, understand and react to the rapidly changing fashion tastes of footwear consumers and to provide appealing merchandise in a timely manner. Our products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to rapid change. We are also dependent on customer receptivity to our products and marketing strategy. There can be no assurance that consumers will continue to prefer our brands, that we will respond quickly enough to changes in consumer preferences or that we will successfully introduce new models and styles of footwear. Achieving market acceptance for new products also will likely require us to exert substantial marketing and product development efforts and expend significant funds to create consumer demand. A failure to introduce new products that gain market acceptance would erode our competitive position, which would reduce our profits and could adversely affect the image of our brands, resulting in long-term harm to our business.


	Our UGG brand may not continue to grow at the same rate it has experienced in the recent past.

Our UGG brand has experienced strong growth over the past few years, with net wholesale sales of UGG products having increased from $23,491,000 in 2002 to $101,806,000 in 2004, representing a compound annual growth rate of 108.2%. We do not expect to sustain this growth rate in the future. UGG may be a fashion item that could go out of style at any time. UGG represents a significant portion of our business, and if UGG sales were to decline or to fail to increase in the future, our overall financial performance would be adversely affected.


	We may experience shortages of top grade sheepskin, which could interrupt product manufacturing and increase product costs.

We depend on a limited number of key resources for sheepskin, the principal raw material for our UGG products. In 2004, four suppliers provided all of the sheepskin purchased by our independent manufacturers. The top grade sheepskin used in UGG footwear is in high demand and limited supply. In addition, sheep are susceptible to hoof and mouth disease, which can result in the extermination of an infected herd and could have a material adverse effect on the availability of top grade sheepskin for our products. Additionally, the supply of sheepskin can be adversely impacted by drought conditions. Our potential inability to obtain top grade sheepskin for UGG products could impair our ability to meet our production requirements for UGG in a timely manner and could lead to inventory shortages, which can result in lost potential sales, delays in shipments to customers, strain on our relationships with customers and diminished brand loyalty. Additionally, there have been significant increases in the prices of top grade sheepskin as the demand for this material has increased. Any further price increases will likely raise our costs, increase our costs of sales and decrease our profitability unless we are able to pass higher prices on to our customers.


	If we do not accurately forecast consumer demand, we may have excess inventory to liquidate or have difficulty filling our customers’ orders.

Because the footwear industry has relatively long lead times for design and production, we must commit to production tooling and production volumes many months before consumer tastes become apparent. The

footwear industry is subject to fashion risks and rapid changes in consumer preferences, as well as the effects of weather, general market conditions and other factors affecting demand. Our large number of models, colors and sizes in our three product lines exacerbates these risks. As a result, we may fail to accurately forecast styles and features that will be in demand. If we overestimate demand for our products, we may be forced to liquidate excess inventories at a discount to customers, resulting in higher markdowns and lower gross margins. Further, the excess inventories may prolong our cash flow cycle, resulting in reduced cash flow and increased liquidity risks. Conversely, if we underestimate consumer demand, we could have inventory shortages, which can result in lost potential sales, delays in shipments to customers, strains on our relationships with customers and diminished brand loyalty. This may be particularly true with regard to our UGG product line, which continues to experience strong consumer demand and rapid sales growth.


	We may not succeed in implementing our growth strategy.

As part of our growth strategy, we seek to enhance the positioning of our brands, extend our brands into complementary product categories and markets through licensing, expand geographically and improve our operational performance. Another element of our growth strategy is our licensing initiatives. We may not be able to successfully implement any or all of these strategies. If we fail to do so, our rate of growth may slow or our results of operations may decline, which in turn could have a negative effect on the value of our stock.


	Our financial success is limited to the success of our customers.

Our financial success is directly related to the success of our customers and the willingness of our customers to continue to buy our products. We do not have long-term contracts with any of our customers. Sales to our customers are generally on an order-by-order basis and are subject to rights of cancellation and rescheduling by our customers. If we cannot fill our customers’ orders in a timely manner, our relationships with our customers may suffer, and this could have a material adverse effect on us. Furthermore, if any of our major customers experiences a significant downturn in its business, or fails to remain committed to our products or brands, then these customers may reduce or discontinue purchases from us, which could have a material adverse effect on our business, results of operations and financial condition.


	Establishing and protecting our trademarks, patents and other intellectual property is costly and difficult. If our efforts to do so are unsuccessful, the value of our brands could suffer.

We believe that our trade names, copyrights, trade secrets, trademarks, patents, trade dress and designs are of value and are integral to our success and our competitive position. Some countries’ laws do not protect proprietary intellectual property rights to the same extent as do U.S. laws. From time to time, we discover products in the marketplace that infringe upon our trade name, trademark, patent, trade dress, design rights and other intellectual property. If we are unsuccessful in challenging a third party’s products on the basis of patent and trade dress rights, continued sales of such competing products by third parties could adversely impact our business, financial condition and results of operations. Furthermore, our efforts to enforce our trademark and other intellectual property rights are typically met with defenses and counterclaims attacking the validity and enforceability of our trademark and other intellectual property rights. Similarly, from time to time we may be the subject of litigation challenging our ownership of intellectual property. Loss of our Teva, UGG or Simple trade name, trademark, patent, trade dress or other intellectual property rights could have a material adverse effect on our business.

We face particularly strong challenges to our UGG trademark in Australia, where many Australian manufacturers sell competitive footwear on the Internet. Our trademark registrations in Australia are subject to challenge, which we are contesting. In addition, certain Australian sheepskin boot manufacturers are alleging that the UGH, UGG-BOOT and the UGG Australia trademarks are not valid as being generic terms for sheepskin boots. If the challenges are successful, our rights in the trademarks, including our ability to prevent Australian competitors from using these trademarks in commerce in Australia, will be adversely affected. Although we derived less than 1% of our revenue in the UGG product line from Australian sales in 2004, our ability to prevent Australian competitors from using the marks on the Internet and in other channels

of trade that may reach consumers in other countries, including the United States, could also be adversely affected and the integrity of our UGG brand could be harmed by the association with inferior products.


	We may lose pending litigation and the rights to certain of our intellectual property.

We are currently involved in several informal disputes, disputes in the U.S. Patent and Trademark Office and foreign trademark offices, and disputes in U.S. federal and foreign courts regarding infringement by third parties of our trade names, trademarks, trade dress, copyrights, patents and other intellectual property and the validity of our intellectual property. Any decision or settlement in any of these disputes that renders our intellectual property invalid or unenforceable, or that allows a third party to continue to use our intellectual property in connection with products that are similar to ours could have an adverse effect on our sales and on our intellectual property, which could have a material adverse effect on our results of operations and financial condition.


	Counterfeiting of our brands can divert sales and damage our brand image.

Our brands and designs are constantly at risk for counterfeiting and infringement of our intellectual property rights, and we frequently find counterfeit products and products that infringe on our intellectual property rights in our markets as well as domain names that use our trade names or trademarks without our consent. We have not always been successful, particularly in some foreign countries, in combating counterfeit products and stopping infringement of our intellectual property rights. Counterfeit and infringing products not only cause us to lose significant sales, but also can harm the integrity of our brands by associating our trademarks or designs with lesser quality or defective goods.

In particular, we are experiencing more infringers of our UGG trademark and more counterfeit products seeking to benefit from the consumer demand for our UGG products. Enforcement of our rights to the UGG trademarks faces many challenges due in part to the proliferation of the term UGG in third party domain names that promote counterfeit products or otherwise use the trademark UGG without our permission. In spite of our enforcement efforts, we expect such unauthorized use to continue, which could result in a loss of sales for authorized UGG products and a diminution in the goodwill associated with the UGG trademarks.


	As our patents expire, our competitors will be able to copy our technology or incorporate it in their products without paying royalties.

Patents generally have a life of 20 years from filing, and some of our patents will expire in the next ten years. For example, the patent for our Universal Strapping System used in Teva sandals will expire in September 2007. Our Universal Strapping System is currently used in most of our Teva sandals. Once patent protection has expired, our competitors can copy our products or incorporate our innovations in their products without paying royalties. To combat this, we must continually create new designs and technology, obtain patent protection and incorporate the new technology or design in our footwear. We cannot provide assurance that we will be able to do so. Sales of our Teva sandals may decline significantly if we incorporate substitute technologies in lieu of our Universal Strapping System for our Teva sandals.


	Because we depend on independent manufacturers, we face challenges in maintaining a continuous supply of goods that meet our quality standards.

We use independent manufacturers to produce all of our products, with almost all of the production occurring among four manufacturers in China. We depend on these manufacturers’ ability to finance the production of goods ordered and to maintain manufacturing capacity. The manufacturers in turn depend upon their suppliers of raw materials. We do not exert direct control over either the independent manufacturers or their raw materials suppliers, so we may be unable to obtain timely delivery of acceptable products.

In addition, we do not have long-term contracts with these independent manufacturers, and any of them may unilaterally terminate their relationship with us at any time or seek to increase the prices they charge us. As a result, we are not assured of an uninterrupted supply of products of an acceptable quality from our independent manufacturers. If there is an interruption, we may not be able to substitute suitable alternative

manufacturers because substitutes may not be available or they may not be able to provide us with products or services of a comparable quality, at an acceptable price or on a timely basis. If a change in our independent manufacturers becomes necessary, we would likely experience increased costs, as well as substantial disruption of our business and a resulting loss of sales.

Similarly, if we experience a significant increase in demand and a manufacturer is unable to ship orders of our products in accordance with our timing demands and our quality standards, we could miss customer delivery date requirements. This in turn could result in cancellation of orders, customer refusals of shipments or a reduction in purchase prices, any of which could have a material adverse effect on our sales and financial condition. We compete with other companies for the production capacity and the import quota capacity of our manufacturers. Accordingly, our independent manufacturers may not produce and ship some or all of any orders placed by us.


	If raw materials do not meet our specifications or if the prices of raw materials increase, we could experience a high return rate, a loss of sales or a reduction in our gross margins.

Our independent manufacturers use various raw materials in the manufacture of our footwear that must meet our specifications generally and, in some cases, additional technical requirements for performance footwear. If these raw materials and the end product do not perform to our specifications or consumer satisfaction, we could experience a higher rate of customer returns and a diminution in the image of our brands, which could have a material adverse effect on our business, financial condition and results of operations.

There may be significant increases in the prices of the raw materials used in our footwear, which would increase the cost of our products from our independent manufacturers. Our gross profit margins are adversely affected to the extent that the selling prices of our products do not increase proportionately with increases in their costs. Any significant unanticipated increase in the prices of raw materials could materially affect our results of operations. No assurances can be given that we will be protected from future changes in the prices of such raw materials.


	Our independent manufacturers are located outside the U.S., where we are subject to the risks of international commerce.

All of our third party manufacturers are in the Far East, Australia and New Zealand, with the vast majority of production performed by four manufacturers in China. Foreign manufacturing is subject to numerous risks, including the following:


	•	tariffs, import and export controls and other non-tariff barriers such as quotas and local content rules;

	•	increasing transportation costs due to energy prices or other factors;

	•	poor infrastructure and shortages of equipment, which can delay or interrupt transportation and utilities;

	•	foreign currency fluctuations;

	•	restrictions on the transfer of funds;

	•	changing economic conditions;

	•	changes in governmental policies;

	•	environmental regulation;

	•	labor unrest, which can lead to work stoppages and interruptions in transportation or supply;

	•	political unrest, which can interrupt commerce and make travel dangerous; and

	•	expropriation and nationalization.

In particular, because most of our products are manufactured in China, adverse change in trade or political relations with China or political instability in the Far East could severely interfere with the manufacture of our products and could materially adversely affect our results of operations. Uncertainty regarding the short-term and long-term effects of the severe acute respiratory syndrome, or SARS, and the outbreak of avian influenza in China and elsewhere in the Far East could disrupt the manufacture and transportation of our products, which would harm our results of operations.

We are also subject to general risks associated with managing foreign operations effectively and efficiently from the U.S. and understanding and complying with local laws, regulations and customs in foreign jurisdictions. These factors and the failure to properly respond to them could make it difficult to obtain adequate supplies of quality products when we need them, resulting in reduced sales and harm to our business.


	Our business could suffer if our independent manufacturers, their suppliers or our licensees violate labor laws or fail to conform to our ethical standards.

We require our independent contract manufacturers, their suppliers and our licensees to meet our standards for working conditions, environmental protection and other matters before we are willing to place business with them. As a result, we do not always obtain the lowest cost production. We do not control our independent manufacturers, their suppliers or their respective labor practices. If one of our independent contract manufacturers or one of their suppliers violates our labor standards by, for example, using convicted, forced or indentured labor or child labor, fails to pay compensation in accordance with local law or fails to operate its factories in compliance with local safety regulations, we likely would immediately cease dealing with that manufacturer (or, in the case of a supplier, we would likely require our manufacturer to immediately cease using that supplier), and we could suffer an interruption in our product supply. In addition, the manufacturers’ or their suppliers’ actions could damage our reputation and the value of our brands, resulting in negative publicity and discouraging customers and consumers from buying our products.

Similarly, we do not control our licensees or any of their suppliers or their respective labor practices. If one of our licensees violates our labor standards or local laws, we would immediately terminate the license agreement, which would reduce our license revenue. In addition, the licensee’s actions could damage our reputation and the value of our brands. We also may not be able to replace the licensee.


	If our licensing partners are unable to meet our expectations regarding the quality of their products or the conduct of their business, the value of our brands could suffer.

One element of our growth strategy depends on our ability to successfully enter into and maintain license agreements with manufacturers and distributors of products in complementary categories. We will be relying on our licensees to maintain our standards with their manufacturers in the future, and any failure to do so could harm our reputation and the value of the licensed brand. The interruption of the business of any one of our material licensing partners due to any of the factors discussed immediately below could also adversely affect our future licensing sales and net income. The risks associated with our own products will also apply to our licensed products in addition to any number of possible risks specific to a licensing partner’s business, including, for example, risks associated with a particular licensing partner’s ability to:


	•	obtain capital;

	•	manage manufacturing and product sourcing activities;

	•	manage labor relations;

	•	maintain relationships with suppliers;

	•	manage credit risk effectively; and

	•	maintain relationships with customers.

Our licensing agreements generally do not preclude our licensing partners from offering, under other brands, products similar to those covered by their license agreements with us, which could reduce the sales of

our licensed products. In addition, if we cannot replace existing licensing partners who fail to perform adequately, our net sales, both directly from reduced licensing revenue and indirectly from reduced sales of our other products, will suffer.


	If our brand managers cannot properly manage the licensees of their respective brands, our growth strategy could be impaired.

Our growth strategy and future profits depend upon each of our brand managers finding and successfully managing licensees for each of their respective brands. Our brand managers may not be able to successfully implement the licensing aspect of our growth strategy and to develop and manage profitable license arrangements. We compete for opportunities to license our brands with other companies who have greater resources than we do and who may have more valuable brands and more licensing experience than we do. As a result, even if we do identify a suitable licensee, we may lose the opportunity to a competitor. Our brand managers’ failure to execute our licensing strategy successfully could negatively impact our results from operations.


	We may be unable to successfully identify, develop or acquire, and build new brands.

We intend to continue to focus on identifying, developing or acquiring and building new brands. Our search may not yield any complementary brands, and even if we do find a suitable brand we may not be able to obtain sufficient financing to fund the development or acquisition of the brand. We may not be able to successfully integrate the management of a new brand into our existing operations, and we cannot assure you that any developed or acquired brand will achieve the results we expect. We compete with other companies who have greater resources than we do for the opportunities to license brands or buy other brands. As a result, even if we do identify a suitable license or acquisition, we may lose the opportunity to a competitor who offers a more attractive price. In such event, we may incur significant costs in pursuing a license or an acquisition without success.


	Our quarterly sales and operating results may fluctuate in future periods, and if we fail to meet expectations the price of our common stock may decline.

Our quarterly sales and operating results have fluctuated significantly in the past and are likely to do so in the future due to a number of factors, many of which are not within our control. If our quarterly sales or operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Factors that might cause quarterly fluctuations in our sales and operating results include the following:


	•	variation in demand for our products, including variation due to changing consumer tastes and seasonality;

	•	our ability to develop, introduce, market and gain market acceptance of new products and product enhancements in a timely manner;

	•	our ability to manage inventories, accounts receivable and cash flows;

	•	our ability to control costs;

	•	the size, timing, rescheduling or cancellation of orders from customers;

	•	the introduction of new products by competitors;

	•	the availability and reliability of raw materials used to manufacture our products;

	•	changes in our pricing policies or those of our independent manufacturers and competitors, as well as increased price competition in general;

	•	the mix of our domestic and international sales, and the risks and uncertainties associated with our international business;


	•	our ability to forecast future sales and operating results and subsequently attain them;

	•	developments concerning the protection of our intellectual property rights; and

	•	general global economic and political conditions, including international conflicts and acts of terrorism.

In addition, our expenses depend, in part, on our expectations regarding future sales. In particular, we expect to continue incurring substantial expenses relating to the marketing and promotion of our products. Since many of our costs are fixed in the short term, if we have a shortfall in sales, we may be unable to reduce expenses quickly enough to avoid losses. Accordingly, you should not rely on quarter-to-quarter comparisons of our operating results as an indication of our future performance.


	Loss of the services of our key personnel could adversely affect our business.

Our future success and growth depend on the continued services of Doug Otto, our Chairman of the Board, Chief Executive Officer and President, Scott Ash, our Chief Financial Officer, Bob Orlando, the President of the Teva Division, Connie Rishwain, the President of the UGG and Simple Divisions, Pat Devaney, Senior Vice President of Global Sourcing, Production and Development, Janice Howell, Vice President of Operations, John Kalinich, Vice President of Consumer Direct, and Tracey Nelson, Vice President of Corporate Licensing, as well as other key officers and employees. The loss of the services of any of these individuals or any other key employee could materially affect our business. Our future success also depends on our ability to identify, attract and retain additional qualified personnel. Competition for employees in our industry is intense and we may not be successful in attracting or retaining them.


	We conduct business outside the U.S., which exposes us to foreign currency and other risks.

Our products are manufactured outside the U.S., and our independent manufacturers procure most of their supplies outside the U.S. We sell our products in the U.S. and internationally. Although we pay for the purchase and manufacture of our products primarily in U.S. dollars and we sell our products primarily in U.S. dollars, we are routinely subject to currency rate movements on non-U.S. denominated assets, liabilities and income since our foreign distributors sell in local currencies, which impacts the price to foreign customers. We currently do not use currency hedges since substantially all our transactions are in U.S. dollars. Future changes in foreign currency exchange rates may cause changes in the dollar value of our purchases or sales and materially affect our results of operations.


	Our most popular products are seasonal, and our sales are sensitive to weather conditions.

Sales of our products, particularly those under the Teva and UGG brands, are highly seasonal and are sensitive to weather conditions. Extended periods of unusually cold weather during the spring and summer can reduce demand for Teva footwear. Likewise, unseasonably warm weather during the fall and winter months may reduce demand for our UGG products. The effect of favorable or unfavorable weather on sales can be significant enough to affect our quarterly results, with a resulting effect on our common stock price.


	We depend on independent distributors to sell our products in international markets.

We sell our products in international markets through independent distributors. If a distributor fails to meet annual sales goals, it may be difficult and costly to locate an acceptable substitute distributor. If a change in our distributors becomes necessary, we may experience increased costs, as well as substantial disruption and a resulting loss of sales.


	Our sales in international markets are subject to a variety of laws and political and economic risks that may adversely impact our sales and results of operations in certain regions.

Our ability to capitalize on growth in new international markets and to maintain the current level of operations in our existing international markets is subject to risks associated with international sales operations. These include:


	•	changes in currency exchange rates which impact the price to international consumers;

	•	the burdens of complying with a variety of foreign laws and regulations;

	•	unexpected changes in regulatory requirements; and

	•	the difficulties associated with promoting products in unfamiliar cultures.

We are also subject to general political and economic risks in connection with our international sales operations, including:


	•	political instability;

	•	changes in diplomatic and trade relationships; and

	•	general economic fluctuations in specific countries or markets.

Any of the abovementioned factors could adversely affect our sales and results of operations in international markets.

International trade regulations may impose unexpected duty costs or other non-tariff barriers to markets while the increasing number of free trade agreements has the potential to stimulate increased competition; security procedures may cause significant delays.

Products manufactured overseas and imported into the U.S. and other countries are subject to import duties. While we have implemented internal measures to comply with applicable customs regulations and to properly calculate the import duties applicable to imported products, customs authorities may disagree with our claimed tariff treatment for certain products, resulting in unexpected costs that may not have been factored into the sales price of the products.

We cannot predict whether future domestic laws, regulations or trade remedy actions or international agreements may impose additional duties or other restrictions on the importation of products from one or more of our sourcing venues. Such changes could increase the cost of our products, require us to withdraw from certain restricted markets or change our business methods, and could generally make it difficult to obtain products of our customary quality at a desired price. Meanwhile, the continued negotiation of bilateral and multilateral free trade agreements by the U.S. and our other market countries with countries other than our principal sourcing venues may stimulate competition from manufacturers in these other sourcing venues, which now export, or may seek to export, footwear to our market countries at preferred rates of duty, though we are uncertain precisely what effect these new agreements may have on our operations.

Finally, the increased threat of terrorist activity and the law enforcement responses to this threat have required greater levels of inspection of imported goods and have caused delays in bringing imported goods to market. Any tightening of security procedures, for example, in the aftermath of a terrorist incident, could worsen these delays.

We depend on our computer and communications systems.

We extensively utilize computer and communications systems to operate our Internet and catalog business and manage our internal operations. Any interruption of this service from power loss, telecommunications failure, failure of our computer system, failure due to weather, natural disasters or any similar event could disrupt our operations and result in lost sales. In addition, hackers and computer viruses have disrupted operations at many major companies. We may be vulnerable to similar acts of sabotage, which could have a material adverse effect on our business and operations.

We rely on our management information systems to operate our business and to track our operating results. Our management information systems will require modification and refinement as we grow and our business needs change. If we experience a significant system failure or if we are unable to modify our management information systems to respond to changes in our business needs, then our ability to properly run our business could be adversely affected.

Risks Related to Our Industry

Because the footwear market is sensitive to decreased consumer spending and slow economic cycles, if general economic conditions deteriorate many of our customers may significantly reduce their purchases from us or may not be able to pay for our products in a timely manner.

The footwear industry historically has been subject to cyclical variation and decline in performance when consumer spending decreases or softness appears in the retail market. Many factors affect the level of consumer spending in the footwear industry, including:


	•	general business conditions;

	•	interest rates;

	•	the availability of consumer credit;

	•	weather;

	•	taxation; and

	•	consumer confidence in future economic conditions.

Consumer purchases of discretionary items, including our products, may decline during recessionary periods and also may decline at other times when disposable income is lower. A downturn in economies where our licensing partners or we sell products, whether in the U.S. or abroad, may reduce sales.

In addition, we extend credit to our customers based on an evaluation of each customer’s financial condition. Many retailers, including some of our customers, have experienced financial difficulties during the past several years, thereby increasing the risk that such customers may not be able to pay for our products in a timely manner. Our bad debt expense may increase relative to net sales in the future. Any significant increase in our bad debt expense relative to net sales would adversely impact our net income and cash flow and could affect our ability to pay our own obligations as they become due.

We face intense competition, including competition from companies with significantly greater resources than ours, and if we are unable to compete effectively with these companies, our market share may decline and our business could be harmed.

The footwear industry is highly competitive, and the recent growth in the market for sport sandals, casual footwear and other products manufactured by our licensees has encouraged the entry of many new competitors into the marketplace as well as increased competition from established companies. A number of our competitors have significantly greater financial, technological, engineering, manufacturing, marketing and distribution resources than we do, as well as greater brand awareness in the footwear market. Our competitors include athletic and footwear companies, branded apparel companies and retailers with their own private labels. Their greater capabilities in these areas may enable them to better withstand periodic downturns in the footwear industry, compete more effectively on the basis of price and production and more quickly develop new products. In addition, access to offshore manufacturing has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear industry.

Additionally, efforts by our competitors to dispose of their excess inventories may significantly reduce prices that we can expect to receive for the sale of our competing products and may cause our customers to shift their purchases away from our products.

We believe that our ability to compete successfully depends on a number of factors, including the quality, style and authenticity of our products and the strength of our brands, as well as many factors beyond our control. Maintaining our competitiveness depends on our ability to defend our products from infringement, our continued ability to anticipate and react to consumer tastes and our continued ability to deliver quality products at an acceptable price. If we fail to compete successfully in the future, our sales and profits will decline, as will the value of our business, financial condition and common stock.

Consolidations, restructurings and other ownership changes in the retail industry could affect the ability of our wholesale customers to purchase and market our products.

In the future, retailers in the U.S. and in foreign markets may undergo changes that could decrease the number of stores that carry our products or increase the concentration of ownership within the retail industry, including:


	•	consolidating their operations;

	•	undergoing restructurings;

	•	undergoing reorganizations; or

	•	realigning their affiliations.

These consolidations could result in a shift of bargaining power to the retail industry and in fewer outlets for our products. Further consolidations could result in price and other competition that could reduce our margins and our net sales.

Terrorism, government response to terrorism and other world events could affect our ability to do business.

We market and sell our products and services throughout the world. The September 11, 2001 terrorist attacks disrupted commerce across the U.S. and in many other parts of the world. World events, including the threat of similar attacks in the future, and the impact of the U.S.’s military campaigns may cause significant disruption to commerce throughout the world. We are unable to predict whether the threat of new attacks or the resulting response will result in any long-term commercial disruptions or do long-term harm to our business, results of operations or financial condition. To the extent that future disruptions further slow the global economy or, more particularly, result in delays or cancellations of purchase orders for our products or delays in shipping, our business and results of operations could suffer material damage.

Risks Relating to Our Common Stock

Members of management own sufficient shares to substantially control our company.

At March 8, 2005, Doug Otto beneficially owned approximately 15.2% of our common stock and all of our executive officers and directors as a group beneficially owned approximately 17.8%. The ownership positions of Mr. Otto and our executive officers as a group, together with the anti-takeover effects of the Delaware General Corporation Law and provisions of our certificate of incorporation, our bylaws and our stockholder rights plan, would likely delay, defer or prevent a change in control of our company, may deprive our stockholders of an opportunity to receive a premium for their common stock as part of a change in control and could have a negative effect on the market price of our common stock.

Our common stock price has been volatile, which could result in substantial losses for stockholders.

Our common stock is traded on the NASDAQ National Market. While our average daily trading volume for the 52-week period ended March 8, 2005 was approximately 402,000 shares, we have experienced more limited volume in the past and may do so in the future. The trading price of our common stock has been and may continue to be volatile. The closing sale prices of our common stock, as reported by the NASDAQ National Market, have ranged from $22.94 to $48.02 for the 52-week period ended March 8, 2005. The

trading price of our common stock could be affected by a number of factors, including, but not limited to the following:


	•	changes in expectations of our future performance;

	•	changes in estimates by securities analysts (or failure to meet such estimates);

	•	quarterly fluctuations in our sales and financial results;

	•	broad market fluctuations in volume and price; and

	•	a variety of risk factors, including the ones described elsewhere in this report.

Accordingly, the price of our common stock is volatile and any investment in our securities is subject to risk of loss.

Future sales of our common stock could adversely affect our stock price.

Future sales of substantial amounts of shares of our common stock in the public market, or the perception that these sales could occur, may cause the market price of our common stock to decline. In addition, we may be required to issue additional shares upon exercise of previously granted options that are currently outstanding.

Anti-takeover provisions of our certificate of incorporation, bylaws, stockholder rights plan and Delaware law could prevent or delay a change in control of our company, even if such a change of control would benefit our stockholders.

Provisions of our certificate of incorporation and bylaws, as well as provisions of Delaware law, could discourage, delay or prevent a merger, acquisition or other change in control of our company, even if such a change in control might benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. As a result, these provisions could limit the price that investors are willing to pay in the future for shares of our common stock. These provisions might also discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a price above the then current market price for our common stock. These provisions include the following:


	•	a board of directors that is classified so that only one-third of directors stand for election each year;

	•	authorization of “blank check” preferred stock, which our board of directors could issue with provisions designed to thwart a takeover attempt;

	•	limitations on the ability of stockholders to call special meetings of stockholders;

	•	a prohibition against stockholder action by written consent and a requirement that all stockholder actions be taken at a meeting of our stockholders; and

	•	advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

We adopted a stockholder rights plan in 1998 under a stockholder rights agreement intended to protect stockholders against unsolicited attempts to acquire control of our company that do not offer what our board of directors believes to be an adequate price to all stockholders or that our board of directors otherwise opposes. As part of the plan, our board of directors declared a dividend that resulted in the issuance of one preferred share purchase right for each outstanding share of our common stock. Unless extended, the preferred share purchase rights will terminate on November 11, 2008. If a bidder proceeds with an unsolicited attempt to purchase our stock and acquires 20% or more (or announces its intention to acquire 20% or more) of our outstanding stock, and the board of directors does not redeem the preferred stock purchase right, the right will become exercisable at a price that significantly dilutes the interest of the bidder in our common stock.

The effect of the stockholder rights plan is to make it more difficult to acquire our company without negotiating with the board of directors. However, the stockholder rights plan could discourage offers even if made at a premium over the market price of our common stock, and even if the stockholders might believe the transaction would benefit them.

In addition, we are subject to Section 203 of the Delaware General Corporation Law, which limits business combination transactions with 15% or greater stockholders that our board of directors has not approved. These provisions and other similar provisions make it more difficult for a third party to acquire us without negotiation. These provisions apply even if some stockholders would consider the transaction beneficial.


Item 7A.	*Quantitative and Qualitative Disclosures About Market Risk*

Derivative Instruments. Although we have used foreign currency hedges in the past, we no longer utilize forward contracts or other derivative instruments to mitigate exposure to fluctuations in the foreign currency exchange rate as all of our purchases and sales for the foreseeable future will be denominated in U.S. currency.

Although our sales are denominated in U.S. currency, our sales may be impacted by fluctuations in the exchange rates between the U.S. dollar and the local currencies in the international markets where our products are sold. If the United States dollar strengthens, it may result in increased pricing pressure on our distributors, which may have a negative impact on our net sales. We are unable to estimate the amount of any impact on sales attributed to pricing pressures caused by fluctuations in exchange rates.

Market Risk. Our market risk exposure with respect to financial instruments is to changes in the “prime rate” in the U.S. and changes in LIBOR. Our revolving line of credit provides for interest on outstanding borrowings at rates tied to the prime rate or at our election tied to LIBOR. At December 31, 2004, we had no outstanding borrowings under the revolving line of credit. A 1.00% increase in interest rates on our current borrowings would have no impact on income before income taxes.


Item 8.	*Financial Statements and Supplementary Data*

See Item 15 and page 49 for an index to the consolidated financial statements and supplementary information included herein.


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

None.


Item 9A.	*Controls and Procedures*

The Company’s Chief Executive Officer, Douglas B. Otto, and Chief Financial Officer, M. Scott Ash, with the participation of the Company’s management, carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer believe that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective in making known to them material information relating to the Company (including its consolidated subsidiaries) required to be included in this report.

Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors, mistakes or intentional circumvention of the established processes.

Although there were no significant changes to our internal controls or in other factors that could significantly affect our internal controls subsequent to the Evaluation Date, we have completed our efforts regarding compliance with Section 404 of the Sarbanes- Oxley Act of 2002 for our fiscal year ending

December 31, 2004. The results of our evaluation are discussed below in the Report of Management on Internal Control Over Financial Reporting.

This effort included internal control documentation and review under the direction of senior management. During the course of our evaluation, we reviewed identified data errors and control problems and confirmed that appropriate corrective actions, including process improvements, were undertaken. These improvements included formalization of policies and procedures, improved segregation of duties and additional monitoring controls. Many of the components of our internal controls are also evaluated on an ongoing basis by members of our organization. The overall goals of these various evaluation activities are to monitor our internal controls, and to modify them as necessary. Our intent is to maintain the internal controls as dynamic systems that change as conditions warrant.

REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Deckers Outdoor Corporation (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those written policies and procedures that:


	•	pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

	•	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America;

	•	provide reasonable assurance that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and

	•	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.

Internal control over financial reporting includes the controls themselves, as well as the monitoring of practices and actions taken to correct deficiencies as identified.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004. Management based this assessment on criteria for effective internal control over financial reporting described in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of our Board of Directors.

Based on this assessment, management determined that, as of December 31, 2004, the Company maintained effective internal control over financial reporting.

KPMG LLP, independent registered public accounting firm, who audited and reported on the consolidated financial statements of the Company included in this report, has issued an attestation report on management’s assessment of internal control over financial reporting.


Item 9B.	*Other Information*

None.

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND

FINANCIAL STATEMENT SCHEDULE


	Page

Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm		50
Consolidated Balance Sheets as of December 31, 2003 and 2004		53
Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 2004		54
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for each of the years in the three-year period ended December 31, 2004		55
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2004		56
Notes to Consolidated Financial Statements		57

Consolidated Financial Statement Schedule
Valuation and Qualifying Accounts		78

All other schedules are omitted because they are not applicable or the required information is shown in the Company’s consolidated financial statements or the related notes thereto.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Deckers Outdoor Corporation:

We have audited the accompanying consolidated financial statements of Deckers Outdoor Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Deckers Outdoor Corporation and subsidiaries as of December 31, 2003 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related consolidated 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 13 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, on January 1, 2002.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 11, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.


	/s/ KPMG LLP

Los Angeles, California

March 11, 2005

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Deckers Outdoor Corporation:

We have audited management’s assessment, included in the accompanying Report of Management on Internal Control Over Financial Reporting appearing under Item 9A, that Deckers Outdoor Corporation maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Deckers Outdoor Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

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

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

In our opinion, management’s assessment that Deckers Outdoor Corporation maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Deckers Outdoor Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Deckers Outdoor Corporation and subsidiaries as of December 31, 2003 and 2004, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2004, and the related financial statement schedule, and our report dated March 11, 2005 expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.

Our report also refers to the Company’s adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, on January 1, 2002.


	/s/ KPMG LLP

Los Angeles, California

March 11, 2005

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2003 and 2004


			2003		2004

Assets
Current assets:
	Cash and cash equivalents		$	6,662,000	$	10,379,000
	Short-term investments			—		15,475,000
	Trade accounts receivable, less allowance for doubtful accounts and sales discounts of $2,126,000 and $3,281,000 as of December 31, 2003 and 2004, respectively			18,745,000		41,957,000
	Inventories			18,004,000		30,260,000
	Prepaid expenses and other current assets			694,000		1,491,000
	Deferred tax assets			2,137,000		3,240,000

		Total current assets		46,242,000		102,802,000
Property and equipment, at cost, net				2,969,000		2,838,000
Trademarks				51,152,000		51,152,000
Goodwill				18,030,000		18,030,000
Intangible assets, net				1,390,000		1,137,000
Other assets, net				1,243,000		592,000

			$	121,026,000	$	176,551,000


Liabilities and Stockholders’ Equity
Current liabilities:
	Notes payable and current installments of long-term debt		$	3,792,000	$	—
	Trade accounts payable			11,220,000		16,524,000
	Reserve for returns			1,245,000		1,731,000
	Accrued sales commissions			623,000		1,714,000
	Accrued payroll			2,657,000		3,623,000
	Other accrued expenses			434,000		2,631,000
	Income taxes payable			3,468,000		6,725,000

		Total current liabilities		23,439,000		32,948,000

Long-term debt, less current installments				26,495,000		—
Deferred tax liabilities				568,000		2,607,000
Commitments and contingencies
Stockholders’ equity:
	Series A preferred stock at liquidation preference, $0.01 par value. Authorized 5,000,000 shares (1,375,000 designated as Series A); no shares issued and outstanding at December 31, 2003 and 2004			—		—
	Common stock, $0.01 par value. Authorized 20,000,000 shares; issued 10,703,433 shares and outstanding 9,730,481 shares at December 31, 2003; issued and outstanding 12,183,080 at December 31, 2004			97,000		122,000
	Additional paid-in capital			27,115,000		71,959,000
	Retained earnings			43,052,000		68,591,000
	Accumulated other comprehensive income			260,000		324,000

		Total stockholders’ equity		70,524,000		140,996,000

			$	121,026,000	$	176,551,000

See accompanying notes to consolidated financial statements.

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2002, 2003 and 2004


			2002			2003			2004

Net sales			$	99,107,000		$	121,055,000		$	214,787,000
Cost of sales				57,577,000			69,710,000			124,354,000

		Gross profit		41,530,000			51,345,000			90,433,000
Selling, general and administrative expenses				34,954,000			32,407,000			47,971,000
Litigation expense (income)				3,228,000			(500,000	)		—

		Income from operations		3,348,000			19,438,000			42,462,000
Other expense (income):
	Interest expense, net			406,000			4,557,000			2,236,000
	Other expense (income)			98,000			(3,000	)		3,000

				504,000			4,554,000			2,239,000

		Income before income taxes and cumulative effect of a change in accounting principle		2,844,000			14,884,000			40,223,000
Income taxes				1,224,000			5,730,000			14,684,000

		Income before cumulative effect of a change in accounting principle		1,620,000			9,154,000			25,539,000
Cumulative effect of a change in accounting principle, net of income tax benefit of $843,000				(8,973,000	)		—			—

		Net income (loss)		(7,353,000	)		9,154,000			25,539,000
Less preferred stock redemption premium				—			(438,000	)		—

		Income (loss) applicable to common stockholders	$	(7,353,000	)	$	8,716,000		$	25,539,000

Basic income per common share before cumulative effect of a change in accounting principle			$	0.17		$	0.91		$	2.32
Cumulative effect of a change in accounting principle				(0.96	)		—			—

		Basic net income (loss) per common share	$	(0.79	)	$	0.91		$	2.32

Diluted income per common share before cumulative effect of a change in accounting principle			$	0.17		$	0.77		$	2.10
Cumulative effect of a change in accounting principle				(0.92	)		—			—

		Diluted net income (loss) per common share	$	(0.75	)	$	0.77		$	2.10

Weighted average common shares:
	Basic			9,328,000			9,610,000			11,005,000
	Diluted			9,806,000			11,880,000			12,142,000

See accompanying notes to consolidated financial statements.

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)

Years Ended December 31, 2002, 2003 and 2004


																							Note
																				Accumulated			Receivable
		Preferred Stock						Common Stock						Additional						Other			From			Total			Comprehensive
														Paid-In			Retained			Comprehensive			Stockholder/			Stockholders’			Income
		Shares			Amount			Shares			Amount			Capital			Earnings			Income			Former Officer			Equity			(Loss)

Balance at December 31, 2001			—			—			9,324,357		$	93,000		$	25,689,000		$	41,251,000		$	123,000		$	(624,000	)	$	66,532,000
Fair value of equity issued as consideration in the acquisition of Teva (note 12)			1,375,000		$	5,500,000			100,000			1,000			554,000			—			—			—			6,055,000
Fair value of options issued under Teva license agreement (note 7)			—			—			—			—			111,000			—			—			—			111,000
Common stock issued under stock incentive plan			—			—			124,896			2,000			442,000			—			—			—			444,000
Common stock issued under the employee stock purchase plan			—			—			11,870			—			37,000			—			—			—			37,000
Net loss			—			—			—			—			—			(7,353,000	)		—			—			(7,353,000	)	$	(7,353,000	)
Write off of note receivable from stockholder/former officer			—			—			(100,000	)		(1,000	)		(623,000	)		—			—			624,000			—
Foreign currency translation adjustment			—			—			—			—			—			—			130,000			—			130,000			130,000
Unrealized losses on hedging derivatives			—			—			—			—			—			—			(729,000	)		—			(729,000	)		(729,000	)

	Total comprehensive loss																												$	(7,952,000	)

Balance at December 31, 2002			1,375,000			5,500,000			9,461,123			95,000			26,210,000			33,898,000			(476,000	)		—			65,227,000
Repurchase preferred stock (note 6)			(1,375,000	)		(5,500,000	)		—			—			(438,000	)		—			—			—			(5,938,000	)
Common stock issued under stock incentive plan			—			—			262,577			2,000			874,000			—			—			—			876,000
Tax benefit attributable to stock options			—			—			—			—			445,000			—			—			—			445,000
Common stock issued under the employee stock purchase plan			—			—			6,781			—			24,000			—			—			—			24,000
Net income			—			—			—			—			—			9,154,000			—			—			9,154,000		$	9,154,000
Foreign currency translation adjustment and reversal of unrealized hedging losses			—			—			—			—			—			—			736,000			—			736,000			736,000

	Total comprehensive income																												$	9,890,000

Balance at December 31, 2003			—			—			9,730,481			97,000			27,115,000			43,052,000			260,000			—			70,524,000
Common stock issued under follow-on offering			—			—			1,500,000			15,000			34,446,000			—			—			—			34,461,000
Compensation expense from nonvested stock units			—			—			—			—			61,000			—			—			—			61,000
Common stock issued under stock incentive plan			—			—			910,262			10,000			4,083,000			—			—			—			4,093,000
Tax benefit attributable to stock options			—			—			—			—			6,030,000			—			—			—			6,030,000
Common stock issued under the employee stock purchase plan			—			—			42,337			—			224,000			—			—			—			224,000
Net income			—			—			—			—			—			25,539,000			—			—			25,539,000		$	25,539,000
Foreign currency translation adjustment			—			—			—			—			—			—			64,000			—			64,000			64,000

	Total comprehensive income																												$	25,603,000

Balance at December 31, 2004			—		$	—			12,183,080		$	122,000		$	71,959,000		$	68,591,000		$	324,000		$	—		$	140,996,000

See accompanying notes to consolidated financial statements.

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2002, 2003 and 2004


						2002			2003			2004

Cash flows from operating activities:
	Net income (loss)					$	(7,353,000	)	$	9,154,000		$	25,539,000
	Adjustments to reconcile net income (loss) to net cash provided by operating activities:
		Cumulative effect of accounting change					8,973,000			—			—
		Depreciation and amortization of property and equipment					1,535,000			1,463,000			1,534,000
		Amortization of intangible assets					1,049,000			276,000			253,000
		Provision for doubtful accounts					1,785,000			504,000			580,000
		Write-off of inventory					1,099,000			1,329,000			1,898,000
		Loss (gain) on disposal of assets					23,000			3,000			(5,000	)
		Loss on write-down of assets					—			59,000			—
		Deferred tax provision					656,000			1,752,000			936,000
		Stock compensation					192,000			119,000			339,000
		Write-down of debt issuance costs					—			287,000			671,000
		Tax benefit attributable to stock options					—			445,000			6,030,000
		Changes in operating assets and liabilities, net of acquisitions:
			(Increase) decrease in:
				Trade accounts receivable			(2,224,000	)		1,602,000			(23,792,000	)
				Inventories			650,000			(2,266,000	)		(14,154,000	)
				Prepaid expenses and other current assets			943,000			89,000			(832,000	)
				Refundable income taxes			995,000			—			—
				Other assets			286,000			256,000			15,000
			Increase (decrease) in:
				Trade accounts payable			(844,000	)		(1,696,000	)		5,304,000
				Accrued expenses			(506,000	)		1,515,000			4,843,000
				Income taxes payable			732,000			2,736,000			3,257,000

					Net cash provided by operating activities		7,991,000			17,627,000			12,416,000

Cash flows from investing activities:
	Cash paid for acquisition of Teva						(43,254,000	)		(75,000	)		—
	Purchases of short-term investments						—			—			(31,250,000	)
	Proceeds from sales of short-term investments						—			—			15,775,000
	Proceeds from sale of property and equipment						—			33,000			43,000
	Purchase of property and equipment						(1,477,000	)		(663,000	)		(1,441,000	)

					Net cash used in investing activities		(44,731,000	)		(705,000	)		(16,873,000	)

Cash flows from financing activities:
	Borrowings under line of credit						19,075,000			42,706,000			—
	Repayments under line of credit						(14,300,000	)		(47,481,000	)		—
	Proceeds from issuance of long-term debt						21,000,000			—			—
	Repayments of long-term debt						(290,000	)		(4,159,000	)		(30,287,000	)
	Loan fees paid						(1,343,000	)		—			—
	Cash paid for repurchase of preferred stock						—			(5,938,000	)		—
	Cash received from issuances of common stock						400,000			781,000			38,500,000

					Net cash provided by (used in) financing activities		24,542,000			(14,091,000	)		8,213,000

Effect of exchange rates on cash							(550,000	)		(110,000	)		(39,000	)

					Net change in cash and cash equivalents		(12,748,000	)		2,721,000			3,717,000

Cash and cash equivalents at beginning of year							16,689,000			3,941,000			6,662,000

Cash and cash equivalents at end of year						$	3,941,000		$	6,662,000		$	10,379,000

Supplemental disclosure of cash flow information:
	Cash paid during the year for:
		Interest				$	264,000		$	3,640,000		$	1,512,000
		Income taxes				$	836,000		$	1,607,000		$	4,597,000

Supplemental disclosure of noncash investing and financing activities:

In 2002, the Company issued to the seller 1,375,000 shares of Series A preferred stock with a value of $5,500,000, 100,000 shares of common stock with a value of $368,000, options to purchase 100,000 shares of common stock with a value of $187,000 and $13,000,000 of long-term debt in connection with the acquisition of Teva.

See accompanying notes to consolidated financial statements.

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003 and 2004


(1)	The Company and Summary of Significant Accounting Policies

(a) The Company and Basis of Presentation

The consolidated financial statements include the accounts of Deckers Outdoor Corporation and its wholly owned subsidiaries (collectively referred to as the “Company”). All intercompany balances and transactions have been eliminated in consolidation.

The Company builds niche products into global lifestyle brands by designing and marketing innovative, functional and fashion-oriented footwear, developed for both high performance outdoor activities and everyday casual lifestyle use.

(b) Inventories

Inventories, principally finished goods, are stated at the lower of cost (first-in, first-out) or market (net realizable value). Market values are determined by historical experience with discounted sales, industry trends and the retail environment.

(c) Revenue Recognition

The Company recognizes revenue when products are shipped and the customer takes title and assumes risk of loss, collection of relevant receivable is probable, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. Allowances for estimated returns, discounts, and bad debts are provided for when related revenue is recorded. Amounts billed for shipping and handling costs are recorded as a component of net sales, totaling $993,000, $2,041,000, and $3,863,000 for the years ended December 31, 2002, 2003, and 2004, respectively. Related costs paid to third-party shipping companies are recorded as a cost of sales, totaling $1,124,000, $2,057,000, and $4,094,000 for the years ended December 31, 2002, 2003, and 2004, respectively.

(d) Goodwill and Other Intangibles Assets

Intangible assets consist primarily of goodwill, trademarks, patents, and noncompete covenants arising from the application of purchase accounting. On January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). Accordingly, goodwill and intangible assets with indefinite useful lives are no longer amortized, but instead tested for impairment at least annually, on December 31 of each year, in accordance with the provisions of SFAS No. 142. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets (“SFAS 144”).

In connection with the implementation of SFAS 142, a goodwill impairment charge of $8,973,000 (net of related income tax benefit of $843,000) was recorded for the year ended December 31, 2002. There were no impairments during the years ended December 31, 2003 and 2004.

(e) Impairment of Long-Lived Assets

SFAS 144 provides a single accounting model for long-lived assets to be disposed of. SFAS 144 also changes the criteria for classifying an asset as held for sale and broadens the scope of businesses to be disposed of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on such operations. The Company adopted SFAS 144 on January 1, 2002. The adoption of SFAS 144 did not have a significant impact on the Company’s consolidated financial statements.

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

In accordance with SFAS 144, long-lived assets, such as property and equipment, and purchased intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.


(f)	Depreciation and Amortization

Depreciation of property and equipment is computed using the straight-line method based on estimated useful lives ranging from one to seven years. Leasehold improvements are amortized on the straight-line basis over their estimated economic useful lives or the lease term, whichever is shorter.


(g)	Fair Value of Financial Instruments

The fair values of the Company’s cash equivalents, trade accounts receivable, prepaid expenses and other current assets, refundable income taxes, trade accounts payable, accrued expenses, and income taxes payable approximate the carrying values due to the relatively short maturities of these instruments.

The fair value of the Company’s revolving credit line approximates the carrying value due to variable interest rates associated with the credit line.

The fair values of the Company’s other notes payable are estimated by discounting future cash flows of each instrument at rates currently available to the Company for similar debt instruments of comparable maturities by the Company’s bankers. The fair values of these notes approximate the carrying value.


(h)	Stock Compensation

The Company accounts for stock-based compensation under the provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), as amended by SFAS 148. Under the provisions of SFAS 123 and SFAS 148, the Company has elected to continue to measure compensation cost for employees and nonemployee directors of the Company under the intrinsic value method of APB No. 25 and comply with the pro forma disclosure requirements under SFAS 123 and SFAS 148. The Company applies the fair value techniques of SFAS 123 and SFAS 148 to measure compensation cost for options/ warrants granted to nonemployees.

As discussed in note 1(u), the Financial Accounting Standards Board, or FASB, recently issued SFAS No. 123R (revised 2004), “Share-Based Payment” which supersedes APB Opinion No. 25, and requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after June 15, 2005.

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

The following table illustrates the effects on net income (loss) if the fair value-based method had been applied to all outstanding and unvested awards in each period. See assumptions used to determine the fair value of the awards in note 6.


			2002			2003			2004

Net income (loss), as reported			$	(7,353,000	)	$	9,154,000		$	25,539,000
Add stock-based employee compensation expense included in reported net income, net of tax				109,000			73,000			215,000
Deduct total stock-based employee compensation expense under fair value-based method for all awards, net of tax				(494,000	)		(596,000	)		(1,015,000	)

		Pro forma net income (loss)	$	(7,738,000	)	$	8,631,000		$	24,739,000

Pro forma net income per share:
	Basic		$	(0.83	)	$	0.85		$	2.25
	Diluted		$	(0.79	)	$	0.74		$	2.05

(i) Use of Estimates

Management of the Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, net sales, and expenses and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the U.S. Significant areas requiring the use of management estimates relate to inventory reserves, allowances for bad debts, returns and discounts, impairment assessments and charges, deferred taxes, depreciation and amortization, litigation reserves, fair value of financial instruments, fair value of acquired intangibles, assets and liabilities, and hedging activities. Actual results could differ from these estimates.

(j) Research and Development Costs

Research and development costs are charged to expense as incurred. Such costs amounted to $1,092,000, $1,099,000, and $1,438,000 in 2002, 2003, and 2004, respectively.

(k) Advertising, Marketing, and Promotion Costs

Advertising production costs are expensed the first time the advertisement is run. All other costs of advertising, marketing and promotion are expensed as incurred. These expenses charged to operations for the years ended 2002, 2003, and 2004 were $7,456,000, $6,594,000, and $8,687,000, respectively. Included in prepaid and other current assets at December 31, 2003 and 2004 were $221,000 and $851,000, respectively, related to prepaid advertising and promotion expenses for programs to take place after December 31, 2003 and 2004, respectively.

(l) Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(m) Income (Loss) per Share

Basic income (loss) per share (“EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from securities that could share in the earnings of the Company. Antidilutive securities are excluded from diluted EPS.

The reconciliations of basic to diluted weighted average shares are as follows:


			2002			2003			2004

Income (loss) used for basic and diluted income (loss) per share:
	Income before cumulative effect of a change in accounting principle		$	1,620,000		$	9,154,000		$	25,539,000
	Cumulative effect of a change in accounting principle, net of income tax benefit			(8,973,000	)		—			—

		Net income (loss) — diluted		(7,353,000	)		9,154,000			25,539,000
	Less redemption premium on preferred stock			—			(438,000	)		—

		Net income (loss) available for common stockholders — basic	$	(7,353,000	)	$	8,716,000		$	25,539,000

Weighted average shares used in basic computation				9,328,000			9,610,000			11,005,000
Dilutive effect of stock options				327,000			882,000			1,137,000
Dilutive effect of convertible preferred stock				151,000			1,388,000			—

		Weighted average shares used for diluted computation		9,806,000			11,880,000			12,142,000

The dilutive effect of convertible preferred stock above relates to preferred stock that was outstanding between November 25, 2002 and December 3, 2003. The Company repurchased all of the outstanding preferred stock on December 3, 2003.

Options to purchase 286,000, 217,000 and 10,000 shares of common stock at prices ranging from $4.80 to $9.88, $9.88 to $19.00 and $33.10 were outstanding during 2002, 2003 and 2004, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares during the respective periods, and therefore their inclusion would be antidilutive. Nonvested stock units in the amount of 59,750 shares were outstanding at December 31, 2004 but were not included in the computation of diluted earnings per share because they were antidilutive.


(n)	Foreign Currency Translation

The Company considers the U.S. dollar as the functional currency. Assets and liabilities of the foreign operations denominated in local currencies are translated at the rate of exchange at the balance sheet date. Net sales and expenses are translated at the weighted average rate of exchange during the period. The effects of translation are recorded in other comprehensive income as currency translation adjustment.


(o)	Hedging Activities

The Company may enter into foreign currency forward contracts in the ordinary course of business to mitigate the risk associated with foreign exchange rate fluctuations related to sales of goods in Eurodollars. Derivative financial instruments are not used for speculative purposes. At December 31, 2004, the Company had no foreign currency forward contracts.

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

In accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities , these foreign currency cash flow hedges are recorded at fair value in the accompanying balance sheet with unrealized gains and losses on outstanding foreign currency forward contracts recorded in the financial statements as a component of other comprehensive income, net of deferred taxes, to the extent they are effective hedges. When the transaction occurs, the effective portion of the gain or loss from the derivative designated as a hedge of the transaction is reclassified from accumulated other comprehensive income to the same statement of operations line item affected by the hedged forecasted transaction due to foreign currency fluctuations. Any terminated derivatives or ineffective portion of gains and losses resulting from changes in the fair value of the derivatives is recognized in current earnings. The ineffective portion of these gains and losses, which results primarily from the time value component of gains and losses on forward contracts, was immaterial for all periods presented.

(p) Comprehensive Income (Loss)

Comprehensive income is the total of net earnings (loss) and all other nonowner changes in equity. Except for net income (loss), foreign currency translation adjustments, and unrealized gains and losses as a result of hedging activities, the Company does not have any transactions and other economic events that qualify as comprehensive income as defined under SFAS No. 130.

(q) Business Segment Reporting

Management of the Company has determined its reportable segments are strategic business units. The four reportable segments are the Teva, UGG and Simple wholesale divisions and the Company’s Internet and catalog retailing business. Information related to these segments is summarized in note 10.

(r) Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.

(s) Short-term Investments

Short-term investments, which consist of market auction rate preferred securities are classified as “available for sale” under the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Accordingly, the short-term investments are reported at fair value, with any unrealized gains and losses included as a separate component of stockholders’ equity, net of applicable taxes. Realized gains and losses, interest and dividends are included in interest expense, net. The fair value of the short-term investments approximated cost at December 31, 2004, based on quoted market prices.

(t) Reclassifications

Certain reclassifications have been made to the 2002 and 2003 balances to conform to the 2004 presentation.

(u) New Accounting Standards

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

consolidated financial statements. In December 2003, the FASB revised FIN No. 46 to exempt certain entities from its requirements and to clarify certain issues arising during the implementation of FIN No. 46. The adoption of this revised interpretation in the first quarter of 2004 did not have any impact on the Company’s consolidated financial statements.

On October 22, 2004, the American Jobs Creation Act (AJCA) was signed into law. The AJCA includes a special one-time 85 percent dividends received deduction for certain foreign earnings that are repatriated. In December 2004, the FASB issued FASB Staff Position No. FAS 109-2 (FSP FAS 109-2), “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004.” FSP FAS 109-2 provides accounting and disclosure guidance for this repatriation provision. The Company has begun its evaluation of the effects of this provision. Although FSP FAS 109-2 is effective immediately, the Company will not be able to complete its evaluation until after Congress or the Treasury Department provides additional clarifying language on key elements of the provision. The Company expects to complete its evaluation of the effects of the repatriation provision within a reasonable period of time following the publication of the additional clarifying language.

In November 2004, the FASB issued Statement of Financial Accounting Standard, or SFAS No. 151, “Inventory Costs — An Amendment of ARB No. 43, Chapter 4”. SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing”, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 is effective for fiscal years beginning after June 15, 2005 and is required to be adopted by us in the first quarter of fiscal 2006. The Company does not expect the adoption of SFAS No. 151 to have a material impact on its consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123R (revised 2004), “Share-Based Payment”. SFAS No. 123R supersedes APB Opinion No. 25, and requires all share-based payments to employees, including grants or employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after June 15, 2005. The pro forma disclosure permitted under SFAS No. 123 will no longer be an alternative to financial statement recognition. SFAS No. 123R requires the determination of the fair value of the share-based compensation at the grant date and the recognition of the related expense over the period in which the share-based compensation vests. The Company is required to adopt the provisions of SFAS No. 123R effective July 1, 2005. The adoption of this Statement is expected to result in an additional expense for the year ending December 31, 2005 of approximately $400,000, which will be recorded in the third and fourth quarter of 2005.


(2)	Retirement Plan

Effective August 1, 1992, the Company established a 401(k) defined contribution plan. Substantially all employees are eligible to participate in the plan through tax-deferred contributions. The Company matches 50% of an employee’s contribution up to $1,200 per year. Matching contributions totaled $90,000, $67,000 and $92,000 during 2002, 2003 and 2004, respectively. In addition, the Company may also make discretionary profit sharing contributions to the plan. The Company did not make profit sharing contributions for the years ended December 31, 2002, 2003 or 2004.

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)


(3)	Property and Equipment

Property and equipment is summarized as follows:


		2003		2004

Machinery and equipment		$	5,602,000	$	6,441,000
Furniture and fixtures			663,000		666,000
Leasehold improvements			724,000		927,000

			6,989,000		8,034,000
Less accumulated depreciation and amortization			4,020,000		5,196,000

	Net property and equipment	$	2,969,000	$	2,838,000

During 2004, the Company wrote-off certain fully depreciated assets with an original cost of $395,000.


(4)	Notes Payable and Long-Term Debt

Notes payable and long-term debt consists of the following:


	2003		2004

Revolving line of credit with Comerica Bank (described below)	$	—	$	—
Term loan with Comerica Bank, secured by all assets of the Company, interest (4.37% at December 31, 2003) at Bank’s base rate or LIBOR plus a margin, as defined, principal payment of $1,750,000 due on May 31, 2004 with equal monthly payments of $292,000 beginning June 30, 2004, with final payment due on November 25, 2005, fully repaid in 2004		7,000,000		—
Secured subordinated note, payable in quarterly principal installments of $1,500,000 beginning November 2007, interest at a rate of 16.75%, of which 12.00% is payable monthly and 4.75% is payable at maturity, compounded monthly, due November 2008. A prepayment penalty ranging from 4.00% to 5.00% is incurred for any portion repaid prior to November 2004, fully repaid in 2004		10,000,000		—
Unsecured junior subordinated 9.00% note payable to the seller of Teva, interest payable in annual installments at a rate of 7.00% through November 2008. Principal and additional interest of 2.00% are due in November 2008, compounded annually, fully repaid in 2004		13,287,000		—

		30,287,000		—
Less current installments		3,792,000		—

	$	26,495,000	$	—

We amended the Facility with Comerica Bank-California (the “Bank”) in March 2005. As amended, the Facility expires June 1, 2006 and provides for a maximum availability of $20,000,000 subject to a borrowing base. In general, the borrowing base is equal to 75% of eligible accounts receivable, as defined, and 50% of eligible inventory, as defined. The accounts receivable advance rate can increase or decrease depending on our

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

accounts receivable dilution, which is calculated periodically. Up to $10,000,000 of borrowings may be in the form of letters of credit. The Facility bears interest at the Bank’s prime rate (5.25% at December 31, 2004) or at our option, at LIBOR (2.40% at December 31, 2004) plus 1.00% to 2.50%, depending on our ratio of liabilities to earnings before interest, taxes, depreciation and amortization (“EBITDA”), and is secured by substantially all assets. The Facility included an upfront fee of $230,000 and includes subsequent annual commitment fees of $100,000 for 2004 and $60,000 for 2005. At December 31, 2004, the Company had no outstanding borrowings under the Facility, no foreign currency reserves for outstanding forward contracts and no outstanding letters of credit. We had credit availability under the Facility of $20,000,000 at December 31, 2004.

The agreements underlying the Facility prohibit the payment of dividends and contain several financial covenants including a quick ratio requirement, profitability requirements and a tangible net worth requirement, among others. The Company was in compliance with all covenants at December 31, 2004.


(5)	Income Taxes

Components of income taxes are as follows.


		Federal		State			Foreign		Total

2002:
	Current	$	53,000	$	(7,000	)	$	522,000	$	568,000
	Deferred		493,000		163,000			—		656,000

		$	546,000	$	156,000		$	522,000	$	1,224,000

2003:
	Current	$	2,043,000	$	483,000		$	1,452,000	$	3,978,000
	Deferred		1,334,000		418,000			—		1,752,000

		$	3,377,000	$	901,000		$	1,452,000	$	5,730,000

2004:
	Current	$	9,930,000	$	2,073,000		$	1,745,000	$	13,748,000
	Deferred		629,000		293,000			14,000		936,000

		$	10,559,000	$	2,366,000		$	1,759,000	$	14,684,000

Foreign income before income taxes and cumulative effect of a change in accounting principle was $1,310,000, $4,220,000 and $7,261,000 during the years ended December 31, 2002, 2003 and 2004, respectively.

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Actual income taxes differed from that obtained by applying the statutory federal income tax rate to earnings before income taxes as follows:


	2002		2003		2004

Computed “expected” income taxes	$	967,000	$	5,060,000	$	14,078,000
State income taxes, net of federal income tax benefit		166,000		623,000		1,895,000
Other		91,000		47,000		(1,289,000	)

	$	1,224,000	$	5,730,000	$	14,684,000

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 2003 and 2004 are presented below:


				2003			2004

Deferred tax assets, current:
	Uniform capitalization adjustment to inventory			$	483,000		$	487,000
	Bad debt and other reserves				1,576,000			2,725,000
	State taxes				78,000			557,000
	Prepaid expenses				—			(529,000	)

		Total deferred tax assets, current			2,137,000			3,240,000

Deferred tax liabilities, noncurrent:
	Amortization of intangible assets				(224,000	)		(1,896,000	)
	Depreciation of property and equipment				(344,000	)		(711,000	)

		Total deferred tax liabilities, noncurrent			(568,000	)		(2,607,000	)

			Net deferred tax assets	$	1,569,000		$	633,000

In order to fully realize the deferred tax assets, the Company will need to generate future taxable income of approximately $8,000,000. The deferred tax assets are primarily related to the Company’s domestic operations. Domestic taxable income for the years ended December 31, 2003 and 2004 was approximately $1,272,000 and $15,879,000, respectively. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets and, accordingly, no valuation allowance has been recorded.

As of December 31, 2004, withholding and U.S. taxes have not been provided on approximately $12 million of unremitted earnings of our non-U.S. subsidiaries because the Company has currently reinvested these earnings permanently in such operations. Such earnings would become taxable upon the sale or liquidation of these subsidiaries or upon remittance of dividends.

In December 2004, the FASB issued FASB Staff Position No. FAS 109-2 (“FAS 109-2”), “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creations Act of 2004 (“AJCA”).” The AJCA introduces a limited time 85% dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are met. FAS109-2 provides accounting and disclosure guidance for the repatriation provision. Although FAS 109-2 is effective immediately, we do not expect to be able to complete our evaluation of the repatriation

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

provision until after Congress or the Treasury Department provides additional clarifying language on key elements of the provision. In January 2005, the Treasury Department began to issue the first of a series of clarifying guidance documents related to this provision. We expect to complete our evaluation of the effects of the repatriation provision in 2005. The range of possible amounts that we are considering for repatriation under this provision is between zero and $12 million. The Company is currently unable to reasonably estimate the related range of income tax effects of the potential repatriation.


(6)	Stockholders’ Equity

The Company is authorized to issue 5,000,000 shares of preferred stock with a par value of $0.01, of which 1,375,000 shares are designated as Series A Preferred Stock. The 1,375,000 shares of Series A Preferred Stock were issued to Mark Thatcher in connection with the acquisition of Teva (note 12). In December 2003, the Company redeemed all of the outstanding Preferred Stock. In connection with the redemption, the Company paid Mr. Thatcher a premium of approximately $438,000, which was recorded as a reduction of additional paid-in capital. The premium reduced income applicable to common stockholders and, therefore, is reflected in the income per share calculations.

The Company’s 1993 Stock Incentive Plan (the “1993 Plan”) provides for 3,000,000 shares of common stock that are reserved for issuance to officers, directors, employees, and consultants of the Company. Awards to 1993 Plan participants are not restricted to any specified form and may include stock options, securities convertible into or redeemable for stock, stock appreciation rights, stock purchase warrants, or other rights to acquire stock. Under the 1993 Plan, 124,896, 262,577 and 910,262 shares of common stock were issued to employees in 2002, 2003, and 2004, respectively.

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Common stock option activity under the 1993 Plan for the years ended December 31, 2002, 2003 and 2004 is as follows:


				Weighted
				Average
				Exercise
	Shares			Price

Outstanding at December 31, 2001		1,580,800		$	3.80
Granted		624,400			4.13
Exercised		(107,900	)		2.32
Canceled		(165,300	)		3.26

Outstanding at December 31, 2002		1,932,000			4.04
Granted		206,000			18.75
Exercised		(238,100	)		3.19
Canceled		(125,400	)		7.51

Outstanding at December 31, 2003		1,774,500			5.62
Granted		26,000			29.04
Exercised		(899,600	)		4.24
Canceled		(10,800	)		11.31

Outstanding at December 31, 2004		890,100			7.62

Options exercisable at December 31, 2002		1,245,900			4.07
Options exercisable at December 31, 2003		1,168,800			4.36
Options exercisable at December 31, 2004		517,000			6.79

The per share weighted average fair value of stock options granted during 2002, 2003, and 2004 was $2.25, $10.83, and $16.83, respectively, on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: 2002 — expected dividend yield of 0%, stock volatility of 48.46%, risk-free interest rate of 3.70%, and an expected life of seven years; 2003 — expected dividend yield of 0%, stock volatility of 51.70%, risk-free interest rate of 3.70%, and an expected life of seven years; 2004 — expected dividend yield of 0%, stock volatility of 52.85%, risk-free interest rate of 3.97%, and an expected life of seven years.

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

The following table summarizes information about stock options outstanding and exercisable at December 31, 2004.


	Options Outstanding						Options Exercisable

			Weighted		Weighted				Weighted
	Number		Average		Average		Number		Average
Range of	Outstanding		Remaining		Exercise		Exercisable at		Exercise
Exercise Price	December 31, 2004		Contractual Life		Price		December 31, 2004		Price

$1.56 to $3.12		155,100		4.08 years	$	1.82		155,100	$	1.82
$3.60 to $3.71		131,600		7.09 years		3.61		67,200		3.60
$4.03 to $4.80		315,700		7.21 years		4.24		124,100		4.22
$6.21 to $8.50		89,000		3.06 years		7.37		89,100		7.37
$19.00		172,700		8.92 years		19.00		55,500		19.00
$24.17 to $33.10		26,000		8.19 years		29.04		26,000		29.04

		890,100		6.59 years		7.62		517,000		6.79

In December 2004, the Company replaced its annual employee stock option grant with a grant of Nonvested Stock Units (“NSU’s”), which are accounted for as variable awards under APB 25. The NSU’s entitle the employee recipients to receive shares of common stock in the Company, which vest in quarterly increments during the year ended December 31, 2008, subject to achievement of certain performance targets. For the 2004 grant, the maximum quantity that is available to vest is 59,750 for all participants in the aggregate. The fair value of the aggregate NSU’s granted in 2004 was $2,808,000 as of December 31, 2004, of which approximately $61,000 was recorded as an expense in 2004. The Company currently intends to use NSU’s rather than stock options in its future compensation programs.

In August 1995, the Company adopted the 1995 Employee Stock Purchase Plan (the “1995 Plan”). The 1995 Plan is intended to qualify as an Employee Stock Purchase Plan under Section 423 of the Internal Revenue Code. Under the terms of the 1995 Plan, as amended, 300,000 shares of common stock are reserved for issuance to employees who have been employed by the Company for at least six months. The 1995 Plan provides for employees to purchase the Company’s common stock at a discount below market value, as defined by the 1995 Plan. Under the 1995 Plan, 11,870, 6,781 and 42,337 shares were issued in 2002, 2003, and 2004, respectively. Consistent with the application of APB Opinion No. 25, no compensation has been recorded for stock purchases.

The Company adopted a stockholder rights plan in 1998 to protect stockholders against unsolicited attempts to acquire control of the Company that do not offer what the Company believes to be an adequate price to all stockholders. As part of the plan, the board of directors of the Company declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock, par value $0.01 per share (the “Common Shares”), of the Company. The dividend was payable to stockholders of record on December 1, 1998 (the “Record Date”). In addition, one Right shall be issued with each Common Share that becomes outstanding (i) between the Record Date and the earliest of the Distribution Date, the Redemption Date, and the Final Expiration Date (as such terms are defined in the Rights Agreement) or (ii) following the Distribution Date and prior to the Redemption Date or Final Expiration Date, pursuant to the exercise of stock options or under any employee plan or arrangement or upon the exercise, conversion, or exchange of other securities of the Company, which options or securities were outstanding prior to the Distribution Date, in each case upon the issuance of the Company’s common stock in connection with any of the foregoing. Each right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series B

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Junior Participating Preferred Stock, par value $0.01 per share (the “Preferred Shares”), of the Company, at a price of $50.00, subject to adjustment.

The rights have no voting power and expire on November 11, 2008. The Company may redeem the rights for $0.01 per right until the right becomes exercisable.


(7)	Licensing Agreement

As discussed in note 12, on November 25, 2002, the Company acquired the worldwide Teva patents, trademarks and other assets. Prior to the acquisition, the Company had been selling its Teva line of sport sandals and other footwear since 1985, pursuant to various license arrangements with Mark Thatcher, the inventor of the Teva sport sandal and previous holder of the Teva patents and trademarks.

In 1999, the Company signed a new license agreement (the “License Agreement”) for Teva, which was effective January 1, 2000. Under the License Agreement, the Company received the exclusive worldwide rights for the manufacture and distribution of Teva footwear through 2004. In connection with the License Agreement, the Company paid the licensor a licensing fee of $1,000,000 and issued the licensor 428,743 shares of its previously unissued common stock with a fair value of $1,608,000. The Company recorded the license as an intangible asset for the value of the cash and common stock issued pursuant to the License Agreement. In addition, the Company agreed to grant the licensor not less than 50,000 stock options on the Company’s common stock annually, with an exercise price at the market value on the date of grant. The fair value of options granted under the License Agreement aggregated $111,000 in 2002.

In connection with the 1999 Teva license renewal, the Company received an option to buy Teva from Mr. Thatcher, which was subsequently renegotiated in 2001. On November 25, 2002, the Company completed the acquisition of Teva.

The License Agreement provided for royalties using a sliding scale ranging from 5.0% to 6.5% of annual sales, depending upon sales levels, and included minimum annual royalties ranging from $4,400,000 in 2002 to $7,600,000 in 2011. The agreement also required minimum advertising and promotional expenditures of 5.0% of annual sales for domestic sales and 6.5% for international sales. In addition to the minimum advertising and promotional costs, the Company and the licensor had agreed to each contribute annually 0.5% of annual sales toward the promotion of the Teva brand and trademark, with or without particular reference to individual styles.

Royalty expense related to Teva sales was included in selling, general, and administrative expenses in the accompanying consolidated financial statements and was $3,739,000 during the year ended December 31, 2002.

Subsequent to acquiring Teva on November 25, 2002, the Company ceased granting stock options and paying royalties on Teva footwear sales and owns all Teva rights and assets worldwide.

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)


(8)	Commitments and Contingencies


	The Company leases office facilities under operating lease agreements, which expire through December 2009. Future minimum commitments under the lease agreements are as follows:


Year ending December 31:
	2005	$	2,274,000
	2006		2,198,000
	2007		1,492,000
	2008		1,163,000
	2009		1,017,000

		$	8,144,000

Total rent expense for the years ended December 31, 2002, 2003, and 2004 was approximately $1,188,000, $1,271,000 and $1,341,000, respectively.

An action was brought against the Company in 1995 by Molly Strong-Butts and Yeti by Molly, Ltd. (collectively, Molly) which alleged, among other things, that the Company violated a certain nondisclosure agreement and obtained purported trade secrets regarding a line of winter footwear which Deckers stopped producing in 1994. A jury verdict was obtained against the Company in district court in March 1999 aggregating $1,785,000 for the two plaintiffs. In August 2001 the U.S. Court of Appeals for the Ninth Circuit affirmed the district court’s decision for a judgment against the Company, resulting in a settlement of approximately $2,000,000, including interest, which the Company paid in November 2001. In addition, the court of appeals reversed the district court’s refusal to consider an award of exemplary damages or attorney fees and remanded to the district court for further proceedings. On September 30, 2002, a federal judge ruled that the Company must pay an additional $4,290,000 to Molly, including $2,450,000 of exemplary damages and $1,840,000 to cover the plaintiff’s attorney fees. Deckers and Molly agreed to settle without going to appeal for the total sum of $4,000,000 in 2002. The accompanying consolidated statement of operations for the year ended December 31, 2002, the final year of this litigation, included litigation costs of $3,228,000 related to this matter.

In 1997, the European Commission enacted anti-dumping duties of 49.2% on certain types of footwear imported into Europe from China and Indonesia. Dutch Customs had issued an opinion to the Company that certain popular Teva styles were covered by this anti-dumping duty legislation. Based on this opinion, Dutch Customs sought anti-dumping duties of approximately $500,000 from the Company, which the Company had appealed. Nevertheless, the Company expensed the $500,000 prior to 2002 in accordance with SFAS 5, Accounting for Contingencies . In 2003, an appeals court ruled that the duties were not levied by the appropriate governing body and nullified the entire claim. As a result of this favorable final ruling, the Company reversed the previously established $500,000 accrual in 2003, which is reflected as an increase to income from operations in the accompanying consolidated statement of operations for the year ended December 31, 2003.

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Overall, the litigation expense (income) in the accompanying consolidated statement of operations for the years ended December 31, 2002, 2003 and 2004 includes the following:


	2002		2003			2004

Molly litigation	$	3,228,000	$	—		$	—
Anti-dumping duties matter		—	$	(500,000	)		—

	$	3,228,000	$	(500,000	)	$	—

The Company is currently involved in various other legal claims arising from the ordinary course of business. Management does not believe that the disposition of these matters will have a material effect on the Company’s financial position or results of operations.


(9)	Foreign Currency Forward Contracts

The Company uses foreign currency forward contracts to hedge the foreign currency exposure associated with a portion of its forecasted transactions in foreign currency. These forward contracts are designated as foreign currency cash flow hedges and are recorded at fair value in the accompanying consolidated balance sheet. The effective portion of gains and losses resulting from recording forward contracts at fair value are deferred in accumulated other comprehensive income in the accompanying consolidated balance sheet until the underlying forecasted foreign currency transaction occurs. When the transaction occurs, the effective portion of the gain or loss from the derivative designated as a hedge of the transaction is reclassified from accumulated other comprehensive income to the same statement of earnings line item affected by the hedged forecasted transaction due to foreign currency fluctuations.

Because the amounts and the maturities of the derivatives approximate those of the forecasted transactions, changes in the fair value of the derivatives are expected to be highly effective in offsetting changes in the cash flows of the hedged items. Any terminated derivatives or ineffective portion of gains and losses resulting from changes in the fair value of the derivatives is recognized in current earnings. The ineffective portion of these gains and losses, which results primarily from the time value component of gains and losses on forward contracts, was immaterial for all periods presented.

At December 31, 2004, the Company had no foreign currency forward contacts.


(10)	Business Segments, Concentration of Business, and Credit Risk and Significant Customers

The Company’s accounting policies of the segments below are the same as those described in the summary of significant accounting policies, except that the Company does not allocate interest, income taxes, or unusual items to segments. The Company evaluates performance based on net sales and profit or loss from operations. The Company’s reportable segments are strategic business units responsible for the worldwide operations of each of its brands. They are managed separately because each business requires different marketing, research and development, design, sourcing and sales strategies. The earnings from operations for each of the segments includes only those costs which are specifically related to each brand, which consist primarily of cost of sales, costs for research and development, design, marketing, sales, commissions, royalties, bad debts, depreciation, amortization and the costs of employees directly related to the brands. The unallocated corporate overhead costs are the shared costs of the organization and include, among others, the following costs: costs of the distribution center, information technology, human resources, accounting and finance, credit and collections, executive compensation, facilities costs and the 2002 and 2003 litigation expense (income). The operating income derived from Internet and catalog sales to third parties is separated into two components: (i) the wholesale profit is included in the operating income of each of the three brands, and (ii) the retail profit is included in the operating income of the Internet/catalog segment.

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Business segment information is summarized as follows:


		2002			2003			2004

Net sales to external customers:
	Teva wholesale	$	64,849,000		$	72,783,000		$	83,477,000
	UGG wholesale		23,491,000			34,561,000			101,806,000
	Simple wholesale		10,159,000			7,210,000			9,633,000
	Internet/catalog		608,000			6,501,000			19,871,000

		$	99,107,000		$	121,055,000		$	214,787,000

Income from operations:
	Teva wholesale	$	12,011,000		$	21,739,000		$	24,901,000
	UGG wholesale		6,589,000			10,002,000			31,674,000
	Simple wholesale		279,000			(1,176,000	)		45,000
	Internet/catalog		194,000			1,148,000			5,533,000
	Unallocated overhead		(15,725,000	)		(12,275,000	)		(19,691,000	)

		$	3,348,000		$	19,438,000		$	42,462,000

Depreciation and amortization:
	Teva wholesale	$	1,217,000		$	502,000		$	401,000
	UGG wholesale		13,000			21,000			30,000
	Simple wholesale		57,000			42,000			31,000
	Internet/catalog		2,000			41,000			92,000
	Unallocated overhead		1,295,000			1,133,000			1,233,000

		$	2,584,000		$	1,739,000		$	1,787,000

Capital expenditures:
	Teva wholesale	$	142,000		$	64,000		$	226,000
	UGG wholesale		16,000			30,000			19,000
	Simple wholesale		69,000			4,000			111,000
	Internet/catalog		—			151,000			151,000
	Unallocated overhead		1,250,000			414,000			934,000

		$	1,477,000		$	663,000		$	1,441,000

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)


		2003		2004

Total assets from reportable segments:
	Teva wholesale	$	85,491,000	$	87,640,000
	UGG wholesale		18,033,000		51,407,000
	Simple wholesale		4,231,000		4,538,000
	Internet/catalog		440,000		446,000

		$	108,195,000	$	144,031,000

The assets allocable to each reporting segment generally include accounts receivable, inventory, intangible assets and certain other assets, which are specifically identifiable with one of the Company’s business segments. Unallocated corporate assets are the assets not specifically related to one of the segments and generally include the Company’s cash, refundable and deferred tax assets, and various other assets shared by the Company’s brands.

Reconciliations of total assets from reportable segments to the consolidated financial statements are as follows:


		2003		2004

Total assets from reportable segments		$	108,195,000	$	144,031,000
Unallocated refundable income taxes and deferred tax assets			2,107,000		3,225,000
Other unallocated corporate assets			10,724,000		29,295,000

	Consolidated total assets	$	121,026,000	$	176,551,000

The Company sells its footwear products principally to customers throughout the U.S. The Company also sells its footwear products to foreign customers located in Europe, Canada, Australia, and Asia, among other regions. International sales to unaffiliated customers were 21.0%, 18.5%, and 18.3% of net sales for the years ended December 31, 2002, 2003, and 2004, respectively. The Company does not consider international operations a separate segment. The Chief Operating Decision Maker does not review such operations separately, but rather in the aggregate with the aforementioned segments. Management performs regular evaluations concerning the ability of its customers to satisfy their obligations and records a provision for doubtful accounts based upon these evaluations. For the years ended December 31, 2002, 2003 and 2004, no single customer exceeded 10% of consolidated net sales, except that one customer, which is a customer of the Company’s Teva, UGG and Simple segments, accounted for 14.1% of consolidated net sales for the year ended December 31, 2004. As of December 31, 2003, the Company had one customer representing 13.8% of net trade accounts receivable. As of December 31, 2004, the Company had one customer representing 22.0% of net trade accounts receivable.

Approximately $17,000,000 of trademarks and $466,000 of goodwill is held in Hong Kong by a subsidiary of the Company. Substantially all other long-lived assets are held in the United States.

The Company’s production and sourcing is concentrated primarily in the Far East, with the vast majority being produced at four independent contractor factories in China. The Company’s operations are subject to the customary risks of doing business abroad, including, but not limited to, currency fluctuations, customs duties, and related fees, various import controls and other nontariff barriers, restrictions on the transfer of funds, labor unrest and strikes and, in certain parts of the world, political instability.

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)


(11)	Quarterly Summary of Information (Unaudited)

Summarized unaudited quarterly financial data are as follows:


		2003

		March 31		June 30		September 30		December 31

Net sales		$	36,102,000	$	24,342,000	$	24,894,000	$	35,717,000
Gross profit			16,240,000		11,832,000		9,502,000		13,771,000
Net income			4,203,000		2,006,000		481,000		2,464,000
Net income per share:
	Basic	$	0.44	$	0.21	$	0.05	$	0.21
	Diluted	$	0.37	$	0.17	$	0.04	$	0.19


		2004

		March 31		June 30		September 30		December 31

Net sales		$	44,272,000	$	40,546,000	$	55,797,000	$	74,172,000
Gross profit			20,406,000		18,906,000		22,235,000		28,886,000
Net income			5,382,000		5,087,000		5,822,000		9,248,000
Net income per share:
	Basic	$	0.55	$	0.47	$	0.50	$	0.78
	Diluted	$	0.49	$	0.43	$	0.46	$	0.72


(12)	Acquisition of Teva

On November 25, 2002, the Company completed an acquisition of the worldwide Teva patents, trademarks, and other assets from Mark Thatcher, the Company’s former licensor and the holder of the Teva patents and trademarks and his wholly-owned corporation, Teva Sport Sandals, Inc., the owner of the Teva Internet and catalog business. As a result of the acquisition, the Company now owns all of the Teva worldwide assets including all patents, tradenames, trademarks and all other intellectual property, as well as Teva’s existing catalog and Internet retailing business, which includes the operations of Teva Sport Sandals, Inc. As a result of the acquisition, the Company will experience cost savings by not having to pay royalties and is able to control and build the Teva brand.

The aggregate purchase price was approximately $62,300,000. The Company paid cash in the amount of $43,300,000, including transaction costs of $300,000, and issued junior subordinated notes of $13,000,000, preferred stock with a fair value of $5,500,000, 100,000 shares of common stock valued at approximately $300,000 and options to purchase 100,000 shares of common stock valued at approximately $200,000. The preferred stock was valued based on its redemption value, and stock options were valued based on the Black-Scholes valuation model.

The results of the operations of Teva Sport Sandals, Inc. are included in the consolidated statement of operations from the acquisition date.

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

The following table summarizes the fair value of the assets and liabilities assumed at the date of acquisition:


Net current assets		$	357,000
Property and equipment			88,000
Trademarks			51,000,000
Intangible assets			1,580,000
Goodwill			11,174,000

	Net assets acquired	$	64,199,000	⁽¹⁾


⁽¹⁾	Includes $1,899,000 of amounts previously capitalized, primarily for payments to Mark Thatcher for contract extensions of the option to purchase the Teva patents and trademarks.

Intangibles of $51,000,000 were assigned to registered trademarks that are not amortized for financial reporting purposes, but are expected to be amortized and fully deductible for income tax reporting purposes. The remaining $1,580,000 of acquired intangible assets consists primarily of patents and has a weighted average useful life of approximately seven years. The $11,174,000 of goodwill is expected to be fully deductible for income tax purposes but is not amortizable for financial reporting purposes. The entire goodwill balance was recorded to the Teva segment. Such allocations were based upon an independent appraisal of the assets acquired in accordance with SFAS No. 141, Business Combinations.

The following table summarizes supplemental statement of income (loss) information for the year ended December 31, 2002 on a pro forma basis as if the acquisition had occurred on January 1, 2002, along with the actual results for the years ended December 31, 2003 and 2004 for comparison purposes.


			2002			2003		2004

Pro forma net sales			$	101,267,000		$	121,055,000	$	214,787,000
Pro forma net income before cumulative effect of a change in accounting principle				1,341,000			9,154,000		25,539,000
Cumulative effect of a change in accounting principle, net of tax benefit				(8,973,000	)		—		—

		Pro forma net income (loss)	$	(7,632,000	)	$	9,154,000	$	25,539,000

Basic income (loss) per share:
	Pro forma net income before cumulative effect of a change in accounting principle		$	0.14		$	0.91	$	2.32
	Cumulative effect of a change in accounting principle			(0.95	)		—		—

		Pro forma net income (loss)	$	(0.81	)	$	0.91	$	2.32

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)


			2002			2003		2004

Diluted income (loss) per share:
	Pro forma net income before cumulative effect of a change in accounting principle		$	0.14		$	0.77	$	2.10
	Cumulative effect of a change in accounting principle			(0.91	)		—		—

		Pro forma net income (loss)	$	(0.77	)	$	0.77	$	2.10


(13)	Goodwill and Other Intangible Assets

In July 2001, The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets . SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized to earnings but instead be reviewed periodically for impairment, including an annual test performed on December 31. The Company implemented this accounting standard on January 1, 2002, resulting in a goodwill impairment charge of $8,973,000 (net of the related income tax benefit of $843,000) during the year ended December 31, 2002, based on a relief from royalty valuation analysis. This noncash impairment charge included a write-down of approximately $7,800,000 for UGG goodwill and approximately $1,200,000 on an after-tax basis for Simple goodwill. As a result of these write-downs, UGG has approximately $6,100,000 of goodwill remaining at December 31, 2002 and Simple has no remaining goodwill, which has been included in intangible assets in the accompanying consolidated balance sheets. The impairment charge has been recorded as a cumulative effect of a change in accounting principle in the Company’s consolidated statement of operations for the year ended December 31, 2002.

In accordance with SFAS 142, the Company did not record any goodwill amortization for the years ended December 31, 2002, 2003 or 2004.

Summary of Intangible Assets

As of December 31, 2004

Weighted

Gross

Average

Net

Carrying

Amortization

Accumulated

Carrying

Amount

Period

Amortization

Amount

Amortizable intangible assets

1,858,000

6 years

721,000

1,137,000

Nonamortizable intangible assets:

Trademark

51,152,000

Goodwill

18,030,000

69,182,000

Aggregate amortization expense for amortizable intangible assets for the years ended December 31, 2002, 2003 and 2004 was $1,049,000, $276,000 and $253,000, respectively. Estimated amortization expense for the next five years is: $310,000 in 2005, $310,000 in 2006, $268,000 in 2007, $129,000 in 2008 and $119,000 in 2009.

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)


(14)	Licensing

The Company has initiated a program to selectively license its brand names in product categories beyond footwear. The Company currently has three domestic licenses for UGG, consisting of licenses for handbags, outerwear and cold weather accessories. The handbag and outerwear licensees began delivering products in 2004, whereas the cold weather accessories licensee is expected to begin deliveries in the Fall 2005 season. The Company has also initiated a Teva license program, which currently includes five domestic license agreements, consisting of U.S. licenses for men’s sportswear, headwear, eyewear, timepieces and socks, and has signed a Canadian sportswear license. The Teva licensees are expected to begin delivering products in 2005.

For several of its initial licensing arrangements, the Company used BHPC Global Licensing, Inc. (“BHPC”), a full service licensing agency, to identify candidates and coordinate its licensing business. The Company pays BHPC a commission on license income related to the licensing agreements that BHPC coordinated on its behalf. In 2004, The Company paid BHPC approximately $168,000. BHPC is owned by one of our directors, Daniel L. Terheggen.

The Company recognizes license income upon shipment of the products by the licensees and records a corresponding fee to BHPC for the underlying shipments. License income, net of any fees to BHPC, is included in net sales in the accompanying statement of operations. For the year ended December 31, 2004, the Company recognized net license revenues of approximately $950,000, primarily related to our UGG handbag and outerwear licenses.

Schedule II

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

Three Years Ended December 31, 2002, 2003 and 2004


		Balance at						Balance at
		Beginning						End of
		of Year		Additions		Deductions		Year

Year ended December 31, 2002:
	Allowance for doubtful accounts	$	2,014,000		1,785,000		1,846,000		1,953,000
	Reserve for sales discounts		806,000		713,000		837,000		682,000
	Reserve for sales returns		1,235,000		2,293,000		2,273,000		1,255,000
Year ended December 31, 2003:
	Allowance for doubtful accounts	$	1,953,000		504,000		876,000		1,581,000
	Reserve for sales discounts		682,000		741,000		878,000		545,000
	Reserve for sales returns		1,255,000		3,791,000		3,801,000		1,245,000
Year ended December 31, 2004:
	Allowance for doubtful accounts	$	1,581,000		580,000		365,000		1,796,000
	Reserve for sales discounts		545,000		1,508,000		568,000		1,485,000
	Reserve for sales returns		1,245,000		7,104,000		6,618,000		1,731,000

See accompanying report of independent registered public accounting firm.

PART III

Item 10. Directors and Executive Officers of the Registrant

We have adopted a written code of ethics that applies to our principal executive officer, principal financial and accounting officer, controller and persons performing similar functions. Our code of ethics is designed to meet the requirements of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. To the extent required by law, any amendments to, or waivers from, any provision of the code will be promptly disclosed publicly either on a report on Form 8-K or on our website at www.deckers.com .

All additional information required by this item, including information relating to Directors and Executive Officers of the Registrant, is set forth in the Company’s definitive proxy statement relating to the Registrant’s 2005 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days after the end of the Company’s fiscal year ended December 31, 2004, and such information is incorporated herein by reference.


Item 11.	*Executive Compensation*

Information relating to Executive Compensation is set forth under “Proposal No. 1 — Election of Directors” in the Company’s definitive proxy statement relating to the Registrant’s 2005 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days after the end of the Company’s fiscal year ended December 31, 2004, and such information is incorporated herein by reference.


Item 12.	*Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters*

Information relating to Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters is set forth under “Proposal No. 1 — Election of Directors” in the Company’s definitive proxy statement relating to the Registrant’s 2005 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days after the end of the Company’s fiscal year ended December 31, 2004, and such information is incorporated herein by reference.


Item 13.	*Certain Relationships and Related Transactions*

Information relating to Certain Relationships and Related Transactions is set forth under “Proposal No. 1 — Election of Directors” in the Company’s definitive proxy statement relating to the Registrant’s 2005 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days after the end of the Company’s fiscal year ended December 31, 2004, and such information is incorporated herein by reference.


Item 14.	*Principal Accountant Fees and Services*

Information relating to Principal Accountant Fees and Services is set forth under “Proposal No. 1 — Election of Directors” in the Company’s definitive proxy statement relating to the Registrant’s 2005 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days after the end of the Company’s fiscal year ended December 31, 2004, and such information is incorporated herein by reference.

PART IV


Item 15.	*Exhibits and Financial Statement Schedules*

Consolidated Financial Statements and Schedules required to be filed hereunder are indexed on page 49 hereof.


Exhibit

	2.1	Certificate of Ownership and Merger Merging Deckers Corporation into Deckers Outdoor Corporation. (Exhibit 2.1 to the Registrant’s Registration Statement on Form S-1, File No. 33-67248 and incorporated by reference herein)
	3.1	Amended and Restated Certificate of Incorporation of Deckers Outdoor Corporation. (Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1, File No. 33-67248 and incorporated by reference herein)
	3.2	Restated Bylaws of Deckers Outdoor Corporation. (Exhibit 3.2 to the Registrant’s Registration Statement on Form S-1, File No. 33-67248 and incorporated by reference herein)
	#10.1	1993 Employee Stock Incentive Plan. (Exhibit 99 to the Registrant’s Registration Statement on Form S-8, File No. 33-47097 and incorporated by reference herein)
	#10.2	Form of Incentive Stock Option Agreement under 1993 Employee Stock Incentive Plan. (Exhibit 10.9 to the Registrant’s Registration Statement on Form S-1, File No. 33-67248 and incorporated by reference herein)
	#10.3	Form of Non-Qualified Stock Option Agreement under 1993 Employee Stock Incentive Plan. (Exhibit 10.10 to the Registrant’s Registration Statement on Form S-1, File No. 33-67248 and incorporated by reference herein)
	#10.4	Form of Restricted Stock Agreement. (Exhibit 10.11 to the Registrant’s Registration Statement on Form S-1, File No. 33-67248 and incorporated by reference herein)
	#10.5	Employment Agreement with Douglas B. Otto. (Exhibit 10.13 to the Registrant’s Registration Statement on Form S-1, File No. 33-67248 and incorporated by reference herein)
	#10.6	First Amendment to Employment Agreement with Douglas B. Otto. (Exhibit 10.14 to the Registrant’s Registration Statement on Form S-1, File No. 33-67248 and incorporated by reference herein)
	#10.7	Second Amendment to Employment Agreement with Douglas B. Otto. (Exhibit 10.15 to the Registrant’s Registration Statement on Form S-1, File No. 33-67248 and incorporated by reference herein)
	#10.8	Third Amendment to Employment Agreement with Douglas B. Otto. (Exhibit 10.30 to the Registrant’s Registration Statement on Form S-1, File No. 33-67248 and incorporated by reference herein)
	#10.9	Deckers Outdoor Corporation 1995 Employee Stock Purchase Plan. (Exhibit 4.4 to the Registrant’s Registration Statement on Form S-8, File No. 33-96850 and incorporated by reference herein)
	#10.10	Amended Compensation Plan for Outside Members of the Board of Directors. (Exhibit 10.42 to the Registrant’s Form 10-Q for the period ended September 30, 1996 and incorporated by reference herein)
	#10.11	Extension Agreement to Employment Agreement with Douglas B. Otto. (Exhibit 10.36 to the Registrant’s Form 10-K for the period ended December 31, 1996 and incorporated by reference herein)
	10.12	Shareholder Rights Agreement, dated as of November 12, 1998. (Exhibit 10.39 to the Registrant’s Form 10-Q for the period ended September 30, 1998 and incorporated by reference herein)
	10.13	Revolving Credit Agreement dated as of February 21, 2002 among Deckers Outdoor Corporation, UGG Holdings, Inc. and Comerica Bank — California. (Exhibit 10.21 to the Registrant’s Form 10-K for the year ended December 31, 2001 and incorporated by reference herein.)
	#10.14	Employment Agreement dated March 29, 2002 between Douglas B. Otto and Deckers Outdoor Corporation. (Exhibit 10.22 to the Registrant’s Form 10-Q for the period ended March 31, 2002 and incorporated by reference herein.)
	10.15	Asset Purchase Agreement dated as of October 9, 2002 by and Among Mark Thatcher, Teva Sport Sandals, Inc. and Deckers Outdoor Corporation. (Exhibit 2.1 to the Registrant’s Form 8-K/A filed February 7, 2003 and incorporated herein by reference.)
	10.16	Disclosure letter associated with the Asset Purchase Agreement. (Exhibit 2.2 to the Registrant’s Form 8-K/A filed February 7, 2003 and incorporated herein by reference.)+


Exhibit

	#10.17	Employment Agreement dated November 25, 2002 between John A. Kalinich and Deckers Outdoor Corporation. (Exhibit 10.20 to the Registrant’s Form 10-K for the period ended December 31, 2002 and incorporated by reference herein)
	#10.18	Employment Agreement dated November 25, 2002 between Mark Thatcher and Deckers Outdoor Corporation. (Exhibit 10.21 to the Registrant’s Form 10-K for the period ended December 31, 2002 and incorporated by reference herein)
	10.19	Unsecured Subordinated Promissory Note dated November 25, 2002 between Mark Thatcher and Deckers Outdoor Corporation. (Exhibit 10.22 to the Registrant’s Form 10-K for the period ended December 31, 2002 and incorporated by reference herein)
	10.20	Note Purchase Agreement dated as of November 25, 2002 by and among Deckers Outdoor Corporation and The Peninsula Fund III Limited Partnership. (Exhibit 10.23 to the Registrant’s Form 10-K for the period ended December 31, 2002 and incorporated by reference herein)
	10.21	Amended and Restated Credit Agreement, dated as of November 25, 2002, by and among Deckers Outdoor Corporation, UGG Holdings Inc., and Comerica Bank-California. (Exhibit 10.24 to the Registrant’s Form 10-K for the period ended December 31, 2002 and incorporated by reference herein)
	10.22	Amendment Number One to Amended and Restated Revolving Credit Agreement dated April 29, 2003. (Exhibit 10.1 to the Registrant’s Form 10-Q for the period ended June 30, 2003 and incorporated by reference herein)
	10.23	Amendment Number Two to Amended and Restated Revolving Credit Agreement dated June 27, 2003. (Exhibit 10.2 to the Registrant’s Form 10-Q for the period ended June 30, 2003 and incorporated by reference herein)
	10.24	Amendment Number One to Senior Subordination Agreement dated April 29, 2003. (Exhibit 10.3 to the Registrant’s Form 10-Q for the period ended June 30, 2003 and incorporated by reference herein).
	10.25	Amendment Number Two to Senior Subordination Agreement dated June 27, 2003. (Exhibit 10.4 to the Registrant’s Form 10-Q for the period ended June 30, 2003 and incorporated by reference herein)
	10.26	Amendment Number Three to Amended and Restated Revolving Credit Agreement between the Company and Comerica Bank — California dated as of August 6, 2003. (Exhibit 10.1 to the Registrant’s Form 10-Q for the period ended September 30, 2003 and incorporated by reference herein)
	10.27	Amendment Number Four to Amended and Restated Revolving Credit Agreement between the Company and Comerica Bank-California dated as of November 13, 2003 (Exhibit 10.27 to the Registrant’s Form 10-K for the period ended December 31, 2003 and incorporated by reference herein)
	10.28	Amendment Number Three to Senior Subordination Agreement dated November 13, 2003 (Exhibit 10.28 to the Registrant’s Form 10-K for the period ended December 31, 2003 and incorporated by reference herein)
	#10.29	Employment Agreement effective as of January 1, 2004 between Douglas B. Otto and Deckers Outdoor Corporation (Exhibit 10.29 to the Registrant’s Form 10-K for the period ended December 31, 2003 and incorporated by reference herein)
	#10.30	Employment Agreement effective as of January 1, 2004 between M. Scott Ash and Deckers Outdoor Corporation (Exhibit 10.30 to the Registrant’s Form 10-K for the period ended December 31, 2003 and incorporated by reference herein)
	#10.31	Employment Agreement effective as of January 1, 2004 between Patrick C. Devaney and Deckers Outdoor Corporation (Exhibit 10.31 to the Registrant’s Form 10-K for the period ended December 31, 2003 and incorporated by reference herein)
	#10.32	Employment Agreement effective as of January 1, 2004 between Constance X. Rishwain and Deckers Outdoor Corporation (Exhibit 10.32 to the Registrant’s Form 10-K for the period ended December 31, 2003 and incorporated by reference herein)


Exhibit

	#10.33	Employment Agreement effective as of January 1, 2004 between Robert P. Orlando and Deckers Outdoor Corporation (Exhibit 10.33 to the Registrant’s Form 10-K for the period ended December 31, 2003 and incorporated by reference herein)
	10.34	Lease Agreement dated November 1, 2003 between Ampersand Aviation, LLC and Deckers Outdoor Corporation for office building at 495-A South Fairview Avenue, Goleta, California, 93117 (Exhibit 10.34 to the Registrant’s Form 10-K for the period ended December 31, 2003 and incorporated by reference herein)
	10.35	Exclusive Independent Contractor Representation Agreement between Deckers Outdoor Corporation and BHPC Marketing, Inc. effective as of January 1, 2003 for representation of the Teva brand (Exhibit 10.35 to the Registrant’s Form 10-K for the period ended December 31, 2003 and incorporated by reference herein)
	10.36	*Amendment Number Five to Amended and Restated Credit Agreement between the Company and Comerica Bank — California dated as of February 28, 2005.
	10.37	*Lease Agreement dated September 15, 2004 between Mission Oaks Associates, LLC and Deckers Outdoor Corporation for distribution center at 3001 Mission Oaks Blvd., Camarillo, CA 93012
	10.38	*First Amendment to Lease Agreement between Mission Oaks Associates, LLC and Deckers Outdoor Corporation for distribution center at 3001 Mission Oaks Blvd., Camarillo, CA 93012, dated December 1, 2004.
	14.1	Deckers Outdoor Corporation’s Code of Ethics for Senior Officers, as approved by the Board of Directors on December 5, 2003. (Exhibit 14.1 to the Registrant’s Form 10-K for the period ended December 31, 2003 and incorporated by reference herein)
	21.1	*Subsidiaries of Registrant.
	23.1	*Consent of Independent Registered Public Accounting Firm.
	31.1	*Certification of the Chief Executive Officer pursuant to Rule 13A-14(a) under the Exchange Act, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	*Certification of the Chief Financial Officer pursuant to Rule 13A-14(a) under the Exchange Act, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1	*Certification pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


*	Filed herewith.


+	Certain information in this Exhibit was omitted and filed separately with the Securities and Exchange Commission pursuant to a confidential treatment request as to the omitted portions of the Exhibit.

#	Management contract or compensatory plan or arrangement.

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.


	DECKERS OUTDOOR CORPORATION
	(Registrant)

	/s/ Douglas B. Otto

	Douglas B. Otto
	Chief Executive Officer

Date: March 16, 2005

Pursuant to the requirements 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.



/s/ Douglas B. Otto Douglas B. Otto	Chairman of the Board, President and Chief Executive Officer	March 16, 2005

/s/ M. Scott Ash M. Scott Ash	Chief Financial Officer (Principal Financial and Accounting Officer)	March 16, 2005

/s/ Gene E. Burleson Gene E. Burleson	Director	March 16, 2005

/s/ John M. Gibbons John M. Gibbons	Director	March 16, 2005

/s/ Rex A. Licklider Rex A. Licklider	Director	March 16, 2005

/s/ Daniel L. Terheggen Daniel L. Terheggen	Director	March 16, 2005

EXHIBIT 10.36

AMENDMENT NUMBER FIVE TO AMENDED AND RESTATED
CREDIT AGREEMENT

This AMENDMENT NUMBER FIVE TO AMENDED AND RESTATED CREDIT AGREEMENT (this "Amendment"), dated as of February 28, 2005, is entered into between DECKERS OUTDOOR CORPORATION, a Delaware corporation ("Borrower"), and COMERICA BANK, a Michigan banking corporation, successor by merger to Comerica Bank-California, a California banking corporation ("Bank"), with reference to the following facts:

A. Borrower and UGG Holdings, Inc., a California corporation ("UGG"), on the one hand, as co-borrowers, and Bank, on the other hand, previously entered into that certain Amended and Restated Credit Agreement, dated as of November 25, 2002, as amended by that certain Amendment Number One to Amended and Restated Credit Agreement, dated as of April 29, 2003, that certain Amendment Number Two to Amended and Restated Credit Agreement, dated as of June 27, 2003, and that certain Amendment Number Three to Amended and Restated Credit Agreement, dated as of August 6, 2003, and that certain Amendment Number Four to Amended and Restated Credit Agreement, dated as of November 13, 2004 (as so amended, the "Agreement");

B. UGG has duly merged with and into Borrower and Borrower is the surviving entity;

C. With the consent of Bank, which has previously been given to Borrower, Borrower has repaid all Subordinate Debt in full; and

C. Borrower and Bank desire to further amend the Agreement in accordance with the terms of this Amendment.

NOW, THEREFORE, in consideration of the foregoing, the parties hereto hereby agree as follows:

1. Defined Terms. All initially capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Agreement.

2. Amendment to Section 1.1. The definition of "Revolving Loans Maturity Date" set forth in Section 1.1 of the Agreement is hereby amended in its entirety as follows:

"`Revolving Loans Maturity Date' means June 1, 2006."

3. Amendment to Section 2.15(b). Section 2.15(b) of the Agreement is hereby amended in its entirety as follows:

"(b) On each anniversary of the Closing Date (except for the Term Loan Maturity Date), Borrower shall pay to Bank an annual fee (the "Annual Fee"), each in the amount of Sixty Thousand Dollars ($60,000)."

4. Amendments to Section 7.15.

(a) Clauses (e) and (f) of Section 7.15 of the Agreement are hereby amended in their entirety as follows:

"(e) Intentionally Deleted."

"(f) Consolidated Effective Tangible Net Worth, measured as of the end of each fiscal quarter of Borrower, commencing with the fiscal quarter ended December 31, 2004, at any time to be less than the sum of (i) $37,000,000 plus (ii) on a cumulative basis, 75% of the Consolidated Net Profit (but in no event less than zero) for each fiscal year, commencing with the fiscal year ended December 31, 2004."

5. Amendment to Article XI. Article XI of the Agreement is hereby deleted in its entirety. All references in the Agreement to "Parent," "UGG," "each Borrower," "such Borrower," "Borrowers" and similar references shall be deemed to be references to "Borrower."

6. Representations and Warranties. In order to induce Bank to enter into this Amendment, Borrower hereby represents and warrants to Bank that:

(a) No Event of Default or Unmatured Event of Default is continuing;

(b) All of the representations and warranties set forth in the Agreement and the Loan Documents are true, complete and accurate in all respects (except for representations and warranties which are expressly stated to be true and correct as of the Closing Date); and

(c) This Amendment has been duly executed and delivered by Borrower, and after giving effect to this Amendment, the Agreement and the Loan Documents continue to constitute the legal, valid and binding agreements and obligations of Borrower, enforceable in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency, and similar laws and equitable principles affecting the enforcement of creditors' rights generally.

7. Conditions Precedent to Effectiveness of Amendment. The effectiveness of this Amendment is subject to and contingent upon the fulfillment of each and every one of the following conditions:

(a) Bank shall have received this Amendment, duly executed by Borrower;

(b) Bank shall have received evidence satisfactory to Bank that (i) UGG has duly merged with and into Borrower and Borrower is the surviving entity, and (ii) all assets of UGG have been duly transferred and assigned to Borrower, and accepted by Borrower, and without limiting the generality of the foregoing, record title to all Intangible Assets shall be held in the name of Borrower;

(c) Bank shall have received a Collateral Access Agreement respecting Borrower's location at 3001 Mission Oaks Boulevard, Camarillo, California 93012, duly executed by the landlord of such location and in form and substance satisfactory to Bank;

(d) No Event of Default, Unmatured Event of Default or Material Adverse Effect shall have occurred and be continuing; and

(e) All of the representations and warranties set forth herein, in the Loan Documents and in the Agreement shall be true, complete and accurate in all respects as of the date hereof (except for representations and warranties which are expressly stated to be true and correct as of the Closing Date).

8. Counterparts; Telefacsimile Execution. This Amendment may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Amendment. Delivery of an executed counterpart of this Amendment by telefacsimile shall be equally as effective as delivery of a manually executed counterpart of this Amendment. Any party delivering an executed counterpart of this Amendment by telefacsimile also shall deliver a manually executed counterpart of this Amendment but the failure to deliver a manually executed counterpart shall not affect the validity, enforceability, and binding effect of this Amendment.

9. Integration. The Agreement as amended by this Amendment constitutes the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and thereof, and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof and thereof.

10. Reaffirmation of the Agreement. The Agreement as amended hereby and the other Loan Documents remain in full force and effect.

[remainder of page intentionally left blank; signatures to follow]

IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Amendment as of the date first hereinabove written.

DECKERS OUTDOOR CORPORATION,
a Delaware corporation

By:  /s/ M. Scott Ash
    --------------------------------
Name:  M. Scott Ash
Title: Chief Financial Officer

COMERICA BANK,
a Michigan banking corporation,
successor by merger to Comerica
Bank-California, a California
banking corporation

By:  /s/ Geoffrey Matthews
    --------------------------------
Name:  Geoffrey Matthews
Title: Assistant Vice President-
          Western Division

EXHIBIT 10.37

[AIR LOGO]

STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE - NET
AIR COMMERCIAL REAL ESTATE ASSOCIATION

1. BASIC PROVISIONS ("BASIC PROVISIONS").

1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only September 15, 2004, is made by and between Mission Oaks Associates, LLC ("LESSOR") and Deckers Outdoor Corporation ("LESSEE"), (collectively the "PARTIES", or individually a "PARTY").

1.2(a) PREMISES: That certain portion of the Project (as defined below), including all improvements therein or to be provided by Lessor under the terms of this Lease, commonly known by the street address of 3001 MISSION OAKS BLVD., UNIT B, located in the City of Camarillo, County of Ventura, State of California, with zip code 93012, as outlined on Exhibit "A" attached hereto ("PREMISES") and generally described as (describe briefly the nature of the Promises): an approximately 100,000 square foot portion (including nine (9) dock high doors and 4,000 square foot office space) of a larger approximately 310,736 square foot building located on M2 zoned land. In addition to Lessee's rights to use and occupy the Premises as hereinafter specified, Lessee shall have non-exclusive rights to the Common Areas (as defined in Paragraph 2.7 below) as hereinafter specified, but shall not have any rights to the roof, exterior walls or utility raceways of the building containing the Premises ("BUILDING") or to any other buildings in the Project. The Premises, the Building, the Common Areas, the land upon which they are located, along with all other buildings and improvements thereon, are herein collectively referred to as the "PROJECT." (See also Paragraph 2)

1.2(b) PARKING: 100 unreserved vehicle parking permits spaces ("UNRESERVED PARKING SPACES"); and -0- reserved vehicle parking spaces ("RESERVED PARKING SPACES"). (See also Paragraph 2.6)

1.3 TERM: Five (5) years and -0- months ("ORIGINAL TERM") commencing October 1, 2004 ("COMMENCEMENT DATE") and ending September 30, 2009 ("EXPIRATION DATE"). (See also Paragraph 3)

1.4 EARLY POSSESSION: See Addendum Paragraph 1.4 continued ("EARLY POSSESSION DATE"). (See also Paragraphs 3.2 and 3.3)

1.5 BASE RENT: $ 29,000.00 (see Addendum Paragraph 1.5 continued &
A.I.R. Rent Adjustment Standard Lease Addendum, Paragraph III - Fixed Rental Adjustments) per month ("BASE RENT"), payable on the 1st day of each month commencing December 1, 2004. (See also Paragraph 4)

[x] If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted.

1.6 LESSEE'S SHARE OF COMMON AREA OPERATING EXPENSES:
Thirty-two.eighteen percent (32.18%) ("LESSEE'S SHARE").

1.7 BASE RENT AND OTHER MONIES PAID UPON EXECUTION:

(a) BASE RENT: $ 29,000.00 for the period December 1-31, 2004 (October & November, 2004 shall be rent free.

(b) COMMON AREA OPERATING EXPENSES: $ 10,000.00 for the period See Addendum Paragraph 1.7(b) continued.

(d) OTHER: $ ____________________________ for _____________________

(e) TOTAL DUE UPON EXECUTION OF THIS LEASE: $ 39,000.00.

1.8 AGREED USE: Warehousing and distribution of footwear and related accessories as well as administrative office use. (See also Paragraph 6)

1.9 INSURING PARTY. LESSOR is the "INSURING PARTY". (See also Paragraph 8)

1.10 REAL ESTATE BROKERS: (See also Paragraph 15)

(a) REPRESENTATION: The following real estate brokers (the "BROKERS") and brokerage relationships exist in this transaction (check applicable boxes):

[X] TOLD Partners Inc. represents Lessor exclusively ("LESSOR'S BROKER");

[X] Colliers Seeley represents Lessee exclusively ("LESSEE'S BROKER"); or

[ ] __________________ represents both Lessor and Lessee ("DUAL AGENCY").

(b) PAYMENT TO BROKERS: Upon execution and delivery of this Lease by both Parties, Lessor shall pay to the Brokers the brokerage fee agreed to in a separate written agreement (or if there is no such agreement, the sum of_____________ or_______% of the total Base Rent for the brokerage services rendered by the Brokers).

1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be guaranteed by NOT GUARANTEED ("GUARANTOR"). (See also Paragraph 37)

1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda consisting of Paragraphs 1, 1.4, 1.5, 1.7(b), 2, 7.1, 12.4, 34, & 50 through 57 and Exhibits "A" through ----, all of which constitute a part of this Lease.

--------                                                 /s/ M.S.A.
--------                                                 ----------------------
INITIALS                                                 INITIALS D.O.

(C)1999 - AIR COMMERCIAL REAL ESTATE ASSOCIATION                FORM MTN-2-2/04E

PAGE 1 OF 16

2. PREMISES.

2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Promises, for the term, at the rental , and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of size set forth in this Lease or that may have been used in calculating Rent, is an approximation which the parties agree is reasonable and any payments based thereon are not subject to revision whether or not the actual size is more or less.

2.2 CONDITION. Lessor shall deliver that portion of the Premises contained within the Building ("Unit") to Lessee broom clean and free of debris on the Commencement Date or the Early Possession Date, whichever first occurs ("START DATE"), and, so long as the required service contracts described in Paragraph 7.l(b) below are obtained by Lessee and in effect within thirty days following the Start Date, warrants that the existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning systems ("HVAC"), loading doors, if any, and all other such elements in the Unit, other than those constructed by Lessee, shall be in good operating condition on said date and that the structural elements of the roof, bearing walls and foundation of the Unit shall be free of material defects. If a non-compliance with such warranty exists as of the Start Date, or if one of such systems or elements should malfunction or fail within the appropriate warranty period, Lessor shall, as Lessor's sole obligation with respect to such matter, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, malfunction or failure, rectify same at Lessor's expense. The warranty periods shall be as follows: (i) 6 months as to the HVAG systems, and (ii) 30 days as to the remaining systems and other elements of the Unit. If Lessee does not give Lessor the required notice within the appropriate warranty period, correction of any such non-compliance, malfunction or failure shall be the obligation of Lessee at Lessee's sole cost and expense (except for the repairs to the fire sprinkler systems, roof, foundations, and/or bearing walls - see Paragraph 7).

2.3 COMPLIANCE. Lessor warrants that the improvements on the Premises and the Common Areas comply with the building codes that were in effect at the time that each such improvement, or portion thereof, was constructed, and also with all applicable laws, covenants or restrictions of record, regulations, and ordinances in effect on the Start Date ("APPLICABLE REQUIREMENTS"). Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee Is Responsible For Determining Whether Or Not The Applicable Requirements, And Especially The Zoning, Are Appropriate For Lessee's Intended Use, And Acknowledges That Past Uses Of The Premises May No Longer Be Allowed. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within 6 months following the Start Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. If the Applicable Requirements are hereafter changed so as to require during the term of this Lease the construction of an addition to or an alteration of the Unit, Premises and/or Building, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Unit, Premises and/or Building ("CAPITAL EXPENDITURE"), Lessor and Lessee shall allocate the cost of such work as follows:

(a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises by Lessee as compared with uses by tenants in general, Lessee shall be fully responsible for the cost thereof, provided, however that if such Capital Expenditure is required during the last 2 years of this Lease and the cost thereof exceeds 6 months' Base Rent, Lessee may instead terminate this Lease unless Lessor notifies Lessee, in writing, within 10 days after receipt of Lessee's termination notice that Lessor has elected to pay the difference between the actual cost thereof and the amount equal to 6 months' Base Rent. If Lessee elects termination, Lessee shall immediately cease the use of the Premises which requires such Capital Expenditure and deliver to Lessor written notice specifying a termination date at least 90 days thereafter. Such termination date shall, however, in no event be earlier than the last day that Lessee could legally utilize the Premises without commencing such Capital Expenditure.

(b) If such Capital Expenditure is not the result of the specific and unique use of the Promises by Lessee (such as, governmentally mandated seismic modifications), then Lessor and Lessee shall allocate the obligation to pay for the portion of such costs reasonably attributable to the Premises pursuant to the formula set out in Paragraph 7.1(d); provided, however, that if such Capital Expenditure is required during the last 2 years of this Lease or if Lessor reasonably determines that it is not economically feasible to pay its share thereof, Lessor shall have the option to terminate this Lease upon 90 days prior written notice to Lessee unless Lessee notifies Lessor, in writing, within 10 days after receipt of Lessor's termination notice that Lessee will pay for such Capital Expenditure. If Lessor does not elect to terminate, and fails to tender its share of any such Capital Expenditure, Lessee may advance such funds and deduct same, with interest, from Rent until Lessor's share of such costs have been fully paid. If Lessee is unable to finance Lessor's share, or if the balance of the Rent due and payable for the remainder of this Lease is not sufficient to fully reimburse Lessee on an offset basis, Lessee shall have the right to terminate this Lease upon 30 days written notice to Lessor.

(c) Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to non-voluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are instead triggered by Lessee as a result of an actual or proposed change in use, change in intensity of use, or modification to the Premises then, and in that event, Lessee shall be fully responsible for the cost thereof, and Lessee shall not have any right to terminate this Lease.

2.4 ACKNOWLEDGEMENTS. Lessee acknowledges that: (a) it has been advised by Lessor and/or Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements and the Americans with Disabilities Act), and their suitability for Lessee's intended use, (b) Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Promises, and (c) neither Lessor, Lessor's agents, nor Brokers have made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. In addition, Lessor acknowledges that: (i) Brokers have made no representations, promises or warranties concerning Lessee's ability to honor the Lease or suitability to occupy the Promises, and (ii) It is Lessor's sole responsibility to investigate the financial capability and/or suitability of all proposed tenants.

2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in Paragraph 2 shall be of no force or effect if immediately prior to the Start Date Lessee was the owner or occupant of the Premises. In such event, Lessee shall be responsible for any necessary corrective work.

2.6 VEHICLE PARKING. Lessee shall be entitled to use the number of Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph 1.2(b) on those portions of the Common Areas designated from time to time by Lessor for parking. Lessee shall not use more parking spaces than said number. Said parking spaces shall be used for parking by vehicles no larger than full-size passenger automobiles or pick-up trucks, herein called "PERMITTED SIZE VEHICLES." Lessor may regulate the loading and unloading of vehicles by adopting Rules and Regulations as provided in Paragraph 2.9. No vehicles other than Permitted Size Vehicles may be parked in the Common Area without the prior written permission of Lessor.

(a) Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers, contractors or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities.

(b) Lessee shall not service or store any vehicles in the Common Areas.

(c) If Lessee permits or allows any of the prohibited activities described in this Paragraph 2.6, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to

---------                                                     /s/  M.S.A.
---------                                                     ---------------
INITIALS                                                      INITIALS  D.O.

(C)1999 - AIR COMMERCIAL REAL ESTATE ASSOCIATION              FORM MTN-2-2/04E

PAGE 2 OF 16

Lessee, which cost shall be immediately payable upon demand by Lessor.

2.7 COMMON AREAS - DEFINITION. The term "COMMON AREAS" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Project and interior utility raceways and installations within the Unit that are provided and designated by the Lessor from time to time for the general non-exclusive use of Lessor, Lessee and other tenants of the Project and their respective employees, suppliers, shippers, customers, contractors and invitees, including parking areas, loading and unloading areas, trash areas, roadways, walkways, driveways and landscaped areas.

2.8 COMMON AREAS - LESSEE'S RIGHTS. Lessor grants to Lessee, for the benefit of Lessee and its employees, suppliers, shippers, contractors, customers and invitees, during the term of this Lease, the non-exclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Lessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Project. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Lessor or Lessor's designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor.

2.9 COMMON AREAS - RULES AND REGULATIONS. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to establish, modify, amend and enforce reasonable rules and regulations ("RULES AND REGULATIONS") for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of the Building and the Project and their invitees. Lessee agrees to abide by and conform to all such Rules and Regulations, and to cause its employees, suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessor shall not be responsible to Lessee for the non-compliance with said Rules and Regulations by other tenants of the Project.

2.10 COMMON AREAS - CHANGES. Lessor shall have the right, in Lessor's sole discretion, from time to time:

(a) To make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways and utility raceways;

(b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available;

(d) To add additional buildings and improvements to the Common Areas;

(e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Project, or any portion thereof; and

(f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Project as Lessor may, in the exercise of sound business judgment, deem to be appropriate.

3. TERM.

3.1 TERM. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3.

3.2 EARLY POSSESSION. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease (including but not limited to the obligations to pay Lessee's Share of Common Area Operating Expenses, Real Property Taxes and insurance premiums and to maintain the Premises) shall, however, be in effect during such period. Any such early possession shall not affect the Expiration Date.

3.3 DELAY IN POSSESSION. Lessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises to Lessee by the Commencement Date. If, despite said efforts, Lessor is unable to deliver possession as agreed, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease. Lessee shall not, however, be obligated to pay Rent or perform its other obligations until it receives possession of the Premises. If possession is not delivered within 60 days after the Commencement Date, Lessee may, at its option, by notice in writing within 10 days after the end of such 60 day period, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder. If such written notice is not received by Lessor within said 10 day period, Lessee's right to cancel shall terminate. Except as otherwise provided, if possession is not tendered to Lessee by the Start Date and Lessee does not terminate this Lease, as aforesaid, any period of rent abatement that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts or omissions of Lessee. If possession of the Premises is not delivered within 4 months after the Commencement Date, this Lease shall terminate unless other agreements are reached between Lessor and Lessee, in writing.

3.4 LESSEE COMPLIANCE. Lessor shall not be required to tender possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Start Date, including the payment of Rent, notwithstanding Lessor's election to withhold possession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lesser may elect to withhold possession until such conditions are satisfied.

4. RENT.

4.1 RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms of this Lease (except for the Security Deposit) are deemed to be rent ("RENT").

4.2 COMMON AREA OPERATING EXPENSES. Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, Lessee's Share (as specified in Paragraph 1.6) of all Common Area Operating Expenses, as hereinafter defined, during each calendar year of the term of this Lease, in accordance with the following provisions:

(a) "COMMON AREA OPERATING EXPENSES" are defined, for purposes of this Lease, as all costs incurred by Lessor rotating to the ownership and operation of the Project, including, but not limited to, the following:

(i) The operation, repair and maintenance, in neat, clean, good order and condition of the following:

(aa) The Common Areas and Common Area improvements, including parking areas, loading and unloading areas, trash areas, roadways, parkways, walkways, driveways, landscaped areas, bumpers, irrigation systems, Common Area lighting facilities, fences and gates, elevators, roofs, and roof drainage systems.

(bb) Exterior signs and any tenant directories.

(cc) Any fire detection and/or sprinkle systems.

(ii) The cost of water, gas, electricity and telephone to service the Common Areas and any utilities not separately metered.

(iii) Trash disposal, pest control services, property management (to be based on 5% of monthly rent).

----------------                                          /s/  M.S.A.
----------------                                          ----------------------
INITIALS                                                  INITIALS  D.O.

(C)1999 - AIR COMMERCIAL REAL ESTATE ASSOCIATION          FORM MTN-2-2/04E

PAGE 3 OF 16

security services, and the costs of any environmental inspections.

(iv) Reserves set aside for maintenance and repair of Common Areas.
(v) Real Property Taxes (as defined in Paragraph 10).
(vi) The cost of the premiums for the insurance maintained by Lessor pursuant to Paragraph 8.
(vii) Any deductible portion of an insured loss concerning the Building or the Common Areas.
(viii)The cost of any Capital Expenditure to the Building or the Project not covered under the provisions of Paragraph 2.3 provided; however, that Lessor shall allocate the cost of any such Capital Expenditure over a 12 year period and Lessee shall not be required to pay more than Lessee's Share of 1/144th of the cost of such Capital Expenditure in any given month.
(ix) Any other services to be provided by Lessor that are stated elsewhere in this Lease to be a Common Area Operating Expense.

(b) Any Common Area Operating Expenses and Real Property Taxes that are specifically attributable to the Unit, the Building or to any other building in the Project or to the operation, repair and maintenance thereof, shall be allocated entirely to such Unit, Building, or other building. However, any Common Area Operating Expenses and Real Property Taxes that are not specifically attributable to the Building or to any other building or to the operation, repair and maintenance thereof, shall be equitably allocated by Lessor to all buildings in the Project.

(c) The inclusion of the improvements, facilities and services set forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation upon Lessor to either have said improvements or facilities or to provide those services unless the Project already has the same, Lessor already provides the services, or Lessor has agreed elsewhere in this Lease to provide the same or some of them.

(d) Lessee's Share of Common Area Operating Expenses shall be payable by Lessee within 10 days after a reasonably detailed statement of actual expenses is presented to Lessee. At Lessor's option, however, an amount may be estimated by Lessor from time to time of Lessee's Share of annual Common Area Operating Expenses and the same shall be payable monthly or quarterly, as Lessor shall designate, during each 12 month period of the Lease term, on the same day as the Base Rent is due hereunder. Lessor shall deliver to Lessee within 60 days after the expiration of each calendar year a reasonably detailed statement showing Lessee's Share of the actual Common Area Operating Expenses incurred during the preceding year. If Lessee's payments under this Paragraph 4.2(d) during the preceding year exceed Lessee's Share as indicated on such statement, Lessor shall credit the amount of such over-payment against Lessee's Share of Common Area Operating Expenses next becoming duo. II Lessee's payments under this Paragraph 4.2(d) during the preceding year were less than Lessee's Share as indicated on such statement, Lessee shall pay to Lessor the amount of the deficiency within 10 days after delivery by Lessor to Lessee of the statement.

4.3 PAYMENT. Lessee shall cause payment of Rent to be received by Lessor in lawful money of the United States, without offset or deduction (except as specifically permitted in this Lease), on or before the day on which it is due. Rent for any period during the term hereof which is for less than one full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing. Acceptance of a payment which is less than the amount then due shall not be a waiver of Lessor's rights to the balance of such Rent, regardless of Lessor's endorsement of any check so stating. In the event that any check, draft, or other instrument of payment given by Lessee to Lessor is dishonored for any reason, Lessee agrees to pay to Lessor the sum of $25 in addition to any late charges which may be due.

5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee's faithful performance of its obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults under this Lease, Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, expense, loss or damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of the Security Deposit, Lessee shall within 10 days after written request therefor deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. If the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional monies with Lessor so that the total amount of the Security Deposit shall at all times boar the same proportion to the increased Base Rent as the initial Security Deposit bore to the initial Base Rent. Should the Agreed Use be amended to accommodate a material change in the business of Lessee or to accommodate a sublessee or assignee, Lessor shall have the right to increase the Security Deposit to the extent necessary, in Lessor's reasonable judgment, to account for any Increased wear and tear that the Promises may suffer as a result thereof. If a change in control of Lessee occurs during this Lease and following such change the financial condition of Lessee is, in Lessor's reasonable judgment, significantly reduced, Lessee shall deposit such additional monies with Lessor as shall be sufficient to cause the Security Deposit to be at a commercially reasonable level based on such change in financial condition. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within 14 days after the expiration or termination of this Lease, if Lessor elects to apply the Security Deposit only to unpaid Rent, and otherwise within 30 days after the Premises have been vacated pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the Security Deposit not used or applied by Lessor. No part of the Security Deposit shall be considered to be held in trust, to bear interest or to be prepayment for any monies to be paid by Lessee under this Lease.

6. USE.

6.1 USE. Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs occupants of or causes damage to neighboring premises or properties. Lessor shall not unreasonably withhold or delay its consent to any written request for a modification of the Agreed Use, so long as the same will not impair the structural integrity of the improvements on the Promises or the mechanical or electrical systems therein, and/or is not significantly more burdensome to the Premises. If Lessor elects to withhold consent, Lessor shall within 7 days after such request give written notification of same, which notice shall Include an explanation of Lessor's objections to the change in the Agreed Use.

6.2 HAZARDOUS SUBSTANCES.

(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE" as used in this Lease shall moan any product, substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products, by-products or fractions thereof. Lessee shall not engage In any activity in or on the Premises which constitutes a Reportable Use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee's expense) with all Applicable Requirements. "REPORTABLE USE" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or
(iii) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of (be Agreed Use, so long as such use is In compliance with all Applicable Requirements, is not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition,

Lesser may condition its

---------                                                        /s/  M.S.A.
---------                                                        ---------------
INITIALS                                                         INITIALS  D.O.

(C) 1999-AIR COMMERCIAL REAL ESTATE ASSOCIATION                 FORM MTN-2-2/04E

PAGE 4 OF 16

consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit.

(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance.

(c) LESSEE REMEDIATION. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or any third party.

(d) LESSEE INDEMNIFICATION. Lessee shall indemnify, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims, expenses, penalties, and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, or any third party (provided, however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from areas outside of the Project). Lessee's obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement.

(e) LESSOR INDEMNIFICATION. Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages, including the cost of remediation, which existed as a result of Hazardous Substances on the Premises prior to the Start Date or which are caused by the gross negligence or willful misconduct of Lessor, its agents or employees. Lessor's obligations, as and when required by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease.

(f) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the responsibility and pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to the Start Date, unless such remediation measure is required as a result of Lessee's use (including "Alterations", as defined in paragraph 7.3(a) below) of the Premises, in which event Lessee shall be responsible for such payment. Lessee shall cooperate fully in any such activities at the request of Lessor, including allowing Lessor and Lessor's agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor's investigative and remedial responsibilities.

(g) LESSOR TERMINATION OPTION. If a Hazardous Substance Condition (see Paragraph 9.1(e)) occurs during the term of this Lease, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by the Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor's option, either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to remediate such condition exceeds 12 times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee, within 30 days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of Lessor's desire to terminate this Lease as of the date 60 days following the date of such notice. In the event Lessor elects to give a termination notice, Lessee may, within 10 days thereafter, give written notice to Lessor of Lessee's commitment to pay the amount by which the cost of the remediation of such Hazardous Substance Condition exceeds an amount equal to 12 times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within 30 days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time provided, this Lease shall terminate as of the date specified in Lessor's notice of termination.

6.3 LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as otherwise provided in this Lease, Lessee shall, at Lessee's solo expense, fully, diligently and in a timely manner, materially comply with all Applicable Requirements, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants which relate in any manner to the Premises, without regard to whether said requirements are now in effect or become effective after the Start Date. Lessee shall, within 10 days' after receipt of Lessor's written request, provide Lessor with copies of all permits and other documents, and other information evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Lessee or the Premises to comply with any Applicable Requirements.

6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's "LENDER" (as defined in Paragraph 30) and consultants shall have the right to enter into Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements, or a contamination is found to exist or be imminent, or the inspection is requested or ordered by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspection, so long as such inspection is reasonably related to the violation or contamination.

7. MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS.

7.1 LESSEE'S OBLIGATIONS.

(a) IN GENERAL. Subject to the provisions of Paragraph 2.2 (Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises, Utility Installations (intended for Lessee's exclusive use, no matter where located), and Alterations in good order, condition and repair (whether or not the portion of the Premises requiring repairs, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, but not limited to, all equipment or facilities, such as plumbing, HVAC equipment, electrical, lighting facilities, boilers, pressure vessels, fixtures, interior walls, interior surfaces of exterior walls, ceilings, floors, windows, doors, plate glass, and skylights but excluding any items which are the responsibility of Lessor pursuant to Paragraph 7.2. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices, specifically including the procurement and maintenance of the service contracts required by Paragraph 7.1(b) below. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair.

(b) SERVICE CONTRACTS. Lessee shall, at Lessee's sole expense, procure and maintain contracts, with copies to Lessor, in

---------                                                         /s/ M.S.A.
---------                                                         -------------
INITIALS                                                          INITIALS  D.O.

PAGE 5 OF 16

customary form and substance for, and with contractors specializing and experienced in the maintenance of the following equipment and Improvements, If any, If and when Installed on the Premises: (i) HVAC equipment, (ii) boiler and pressure vessels, (iii) clarifiers, and (iv) any other equipment, If reasonably required by Lessor. However, Lessor reserves the right, upon notice to Lessee, to procure and maintain any or all of such service contracts, and If Lessor so elects, Lessee shall reimburse Lessor, upon demand, for the cost thereof.

(c) FAILURE TO PERFORM. If Lessee fails to perform Lessee's obligations under this Paragraph 7.1, Lessor may enter upon the Premises after 10 days' prior written notice to Lessee (except in the case of an emergency, in which case no notice shall be required), perform such obligations on Lessee's behalf, and put the Premises in good order, condition and repair, and Lessee shall promptly reimburse Lessor for the cost thereof.

(d) REPLACEMENT. Subject to Lessee's indemnification of Lessor as set forth in Paragraph 8.7 below, and without relieving Lessee of liability resulting from Lessee's failure to exercise and perform good maintenance practices, if an item described in Paragraph 7.1(b) cannot be repaired other than at a cost which is in excess of 50% of the cost of replacing such item, then such item shall be replaced by Lessor, and the cost thereof shall be prorated between the Parties and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease, on the date on which Base Rent is due, an amount equal to the product of multiplying the cost of such replacement by a fraction, the numerator of which is one, and the denominator of which is 114 (i.e. 1/144th of the cost per month). Lessee shall pay interest on the unamortized balance at a rate that is commercially reasonable in the judgment of Lessor's accountants. Lessee may, however, prepay its obligation at any time.

7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance), 4.2 (Common Area Operating Expenses), G (Use),
7.1 (Lessee's Obligations), 9 (Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition and repair the foundations, exterior walls, structural condition of interior bearing walls, exterior roof, fire sprinkler system, Common Area fire alarm and/or smoke detection systems, fire hydrants, parking lots, walkways, parkways, driveways, landscaping, fences, signs and utility systems serving the Common Areas and all parts thereof, as well as providing the services for which there is a Common Area Operating Expense pursuant to Paragraph 4.2. Lessor shall not be obligated to paint the exterior or interior surfaces of exterior walls nor shall Lessor be obligated to maintain, repair or replace windows, doors or plate glass of the Premises. Lessee expressly waives the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease.

7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.

(a) DEFINITIONS. The term "Utility Installations" refers to all floor and window coverings, air lines, power panels, electrical distribution, security and fire protection systems, communication systems, lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "ALTERATIONS" shall mean any modification of the improvements, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a).

(b) CONSENT. Lessee shall not make any Alterations or Utility Installations to the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof) without such consent but upon notice to Lessor, as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during this Lease as extended does not exceed a sum equal to 3 month's Base Rent in the aggregate or a sum equal to one month's Base Rent in any one year. Notwithstanding the foregoing, Lessee shall not make or permit any roof penetrations and/or install anything on the roof without the prior written approval of Lessor. Lessor may, as a precondition to granting such approval, require Lessee to utilize a contractor chosen and/or approved by Lessor. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. Consent shall be deemed conditioned upon Lessee's: (i) acquiring all applicable governmental permits, (ii) furnishing Lessor with copies of both the permits and the plans and specifications prior to commencement of the work, and (iii) compliance with all conditions of said permits and other Applicable Requirements in a prompt and expeditious manner. Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as-built plans and specifications. For work which costs an amount in excess of one month's Base Rent, Lessor may condition its consent upon Lessee providing a lien and completion bond in an amount equal to 150% of the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor.

(c) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic's or materialman's lien against the Premises or any interest therein. Lessee shall give Lessor not less than 10 days notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility. If Lessee shall contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond in an amount equal to 150% of the amount of such contested lien, claim or demand, indemnifying Lessor against liability for the same. If Lessor elects to participate in any such action, Lessee shall pay Lessor's attorneys' fees and costs.

7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.

(a) OWNERSHIP. Subject to Lessor's right to require removal or elect ownership as hereinafter provided, all Alterations and Utility Installations made by Lessee shall be the property of Lessee, but considered a part of the Premises. Lessor may, at any time, elect in writing to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per paragraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or termination of this Lease, become the property of Lessor and be surrendered by Lessee with the Premises.

(b) REMOVAL. By delivery to Lessee of written notice from Lesser not earlier than 90 and not later than 30 days prior to the end of the term of this Lease, Lessor may require that any or all Lessee Owned Alterations or Utility Installations that were Installed without prior written approval of Landlord be removed by the expiration or termination of this Lease. At the time of request for Lessor's approval of lessee Owned Alterations or Utility Installations, lessor shall advise lessee If said improvements are acceptable to remain or shall need to be removed at the expiration or termination of this lease. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent.

(c) SURRENDER; RESTORATION. Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces thereof broom clean and free of debris, and in good operating order, condition and state of repair, ordinary wear and tear excepted. "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice. Notwithstanding the foregoing, if this Lease is for 12 months or less, then Lessee shall surrender the Premises in the same condition as delivered to Lessee on the Start Date with NO allowance for ordinary wear and tear. Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee owned Alterations and/or Utility Installations, furnishings, and equipment as well as the removal of any storage tank installed by or for Lessee. Lessee shall also completely remove from the Premises any and all Hazardous Substances brought onto the Premises by or for Lessee, or any third party (except Hazardous Substances which were deposited via underground migration from

--------                                                          /s/ M.S.A.
--------                                                          --------------
INITIALS                                                          INITIALS  D.O.

(c)1999 - AIR COMMERCIAL REAL ESTATE ASSOCIATION                FORM MTN-2-2/04E

PAGE 6 OF 16

areas outside of the Project) even if such removal would require Lessee to perform or pay for work that exceeds statutory requirements. trade Fixtures shall remain the property of Lessee and shall be removed by Lessee. The failure by Lessee to timely vacate the Promises pursuant to this Paragraph 7.4(c) without the express written consent of Lessor shall constitute a holdover under the provisions of Paragraph 26 below.

8. INSURANCE; INDEMNITY.

8.1 PAYMENT OF PREMIUMS. The cost of the premiums for the insurance policies required to be carried by Lessor, pursuant to Paragraphs 8.2(b), 8.3(a) and 8.3(b), shall be a Common Area Operating Expense. Premiums for policy periods commencing prior to, or extending beyond, the term of this Lease shall be prorated to coincide with the corresponding Start Date or Expiration Date.

8.2 LIABILITY INSURANCE.

(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force a Commercial General Liability policy of insurance protecting Lessee and Lessor as an additional insured against claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an annual aggregate of not less than $2,000,000, an "Additional Insured-Managers or Lessors of Premises Endorsement" and contain the "Amendment of the Pollution Exclusion Endorsement" for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "INSURED CONTRACT" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only.

(b) CARRIED BY LESSOR. Lessor shall maintain liability insurance as described in Paragraph 8.2(a), in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein.

8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE.

(a) BUILDING AND IMPROVEMENTS. Lessor shall obtain and keep in force a policy or policies of insurance in the name of Lessor, with loss payable to Lessor, any ground-lessor, and to any Lender insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by any Lender, but in no event more than the commercially reasonable and available insurable value thereof. Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee's personal property shall be insured by Lessee under Paragraph 8.4. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for debris removal and the enforcement of any Applicable Requirements requiring the upgrading, demolition, reconstruction or replacement of any portion of the Premises as the result of a covered loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Promises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence.

(b) RENTAL VALUE. Lessor shall also obtain and keep in force a policy or policies in the name of Lessor with loss payable to Lessor and any Lender, insuring the loss of the full Rent for one year with an extended period of indemnity for an additional 180 days ("Rental Value insurance"). Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected Rent otherwise payable by Lessee, for the next 12 month period.

(c) ADJACENT PREMISES. Lessee shall pay for any increase in the premiums for the property insurance of the Building and for the Common Areas or other buildings in the Project if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises.

(d) LESSEE'S IMPROVEMENTS. Since Lessor is the Insuring Party, Lessor shall not be required to insure Lessee Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease.

8.4 LESSEE'S PROPERTY; BUSINESS INTERRUPTION INSURANCE.

(a) PROPERTY DAMAGE. Lessee shall obtain and maintain insurance coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures and Lessee Owned Alterations and Utility Installations. Lessee shall provide Lessor with written evidence that such insurance is in force.

(b) BUSINESS INTERRUPTION. Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils.

(c) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cover Lessee's property, business operations or obligations under this Lease.

8.5 INSURANCE POLICIES. Insurance required herein shall be by companies duly licensed or admitted to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, as set forth in the most current issue of "Best's Insurance Guide", or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of the required insurance. No such policy shall be cancelable or subject to modification except after 30 days prior written notice to Lessor. Lessee shall, at least 30 days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "Insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less. If either Party shall fail to procure and maintain the insurance required to be carried by it, the other Party may, but shall not be required to, procure and maintain the same.

8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damage to its property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby.

8.7 INDEMNITY. Except for Lessor's gross negligence or willful misconduct, Lessee shall indemnify, protect, defend and hold harmless the Promises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the use and/or occupancy of the Promises by Lessee, If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall corporate with Lessee in such defence. Lessor need not have first paid any such claim in order to be defended or indemnified.

8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other

person in or about the Promises, whether such damage

--------                                                         /s/  M.S.A.
--------                                                         ---------------
INITIALS                                                         INITIALS  D.O.

(C)1999 - AIR COMMERCIAL REAL ESTATE ASSOCIATION                FORM MTN-2-2/04E

PAGE 7 OF 16

or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage result from conditions arising upon the Premises or upon other portions of the Building, or from other sources or places. Lessor shall not bo liable lor any damages arising from any act or neglect of any other tenant of Lessor nor from the failure of Lessor to enforce the provisions of any other lease in the Project. Notwithstanding Lessor's negligence or branch of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom.

9. DAMAGE OR DESTRUCTION.

9.1 DEFINITIONS.

(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Insinuations, which can reasonably be repaired in 3 months or loss from the date of the damage or destruction, and the cost thereof does not exceed a sum equal to 6 month's Base Rent. Lesser shall notify Lessee in writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total.

(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which cannot reasonably be repaired in 3 months or loss from the date of the damage or destruction and/or the cost thereof exceeds a sum equal to 6 month's Base Rent. Lessor shall notify Lessee in writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total.

(c) "INSURED LOSS" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved.

(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of Applicable Requirements, and without deduction for depreciation.

(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises.

9.2 PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage that is an insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $5,000 or less, and, in such event. Lessor shall make any applicable insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds as and when required to complete said repairs. In the event, however, such shortage was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within 10 days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said 10 day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If such funds or assurance are not received, Lessor may nevertheless elect by written notice to Lessee within 10 days thereafter to: (i) make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect, or
(ii) have this Lease terminate 30 days thereafter. Lessee shall not be entitled to reimbursement of any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be some insurance coverage, but the not proceeds of any such insurance shall be made available for the repairs if made by either Party.

9.3 PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), Lessor may either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) terminate this Lease by giving written notice to Lessee within 30 days after receipt by Lessor of knowledge of the occurrence of such damage. Such termination shall be effective 60 days following the date of such notice. In the event Lessor elects to terminate this Lease, Lessee shall have the right within 10 days alter receipt of the termination notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage without reimbursement from Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within 30 days after making such commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not make the required commitment, this Lease shall terminate as of the date specified in the termination notice.

9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, this Lease shall terminate 60 days following such Destruction. (THERE SHALL BE NO RENT OR COMMON AREA CHARGE DUE AFTER SAID TOTAL DESTRUCTION OF THE PREMISES.) If the damage or destruction was caused by the gross negligence or willful misconduct of Lessee, Lessor shall have the right to recover Lessor's damages from Lessee, except as provided in Paragraph 8.6.

9.5 DAMAGE NEAR END OF TERM. If at any time during the last 6 months of this Lease there is damage for which the cost to repair exceeds one month's Base Rent, whether or not an Insured Loss, Lesser may terminate this Lease effective 60 days following the date of occurrence of such damage by giving a written termination notice to Lessee within 30 days after the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, (a) exercising such option and (b) providing Lesser with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is 10 days after Lessee's receipt of Lessor's written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duty exercises such option during such period and provides Lesser with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's commercially reasonable expense, repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate on the date specified in the termination notice and Lessee's option shall be extinguished.

9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.

(a) ABATEMENT. In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for which Lessee is not responsible under this Lease, the Rent payable by Lessee for the period required for the repair, remediation or restoration of such damage shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, but not to exceed the proceeds received from the Rental Value insurance. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair or restoration except as provided herein.

(b) REMEDIES. If Lessor shall be obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration within 90 days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of

Lessee's election to terminate this

--------                                                   /s/  M.S.A.
--------                                                   ---------------------
INITIALS                                                   INITIALS  D.O.

(c)1999 - AIR COMMERCIAL REAL ESTATE ASSOCIATION               FORM MTN-2-2/04E

PAGE 8 OF 16

Lease on a date not less than 60 days following the giving of such notice. If Lessee gives such notice and such repair or restoration is not commenced within 30 days thereafter, this Lease shall terminate as of the date specified in said notice. If the repair or restoration is commenced within such 30 days, this Lease shall continue in full force and effect. "COMMENCE" shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Promises, whichever first occurs.

9.7 TERMINATION; ADVANCE PAYMENTS. Upon termination of this Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor.

9.8 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith.

10. REAL PROPERTY TAXES. SEE ADDENDUM PARAGRAPH 54

10.1 DEFINITION. As used herein, the term "REAL PROPERTY TAXES" shall include any form of assessment; real estate, general, special, ordinary or extraordinary, or rental levy or tax (other than inheritance, personal income or estate taxes); Improvement bond; and/or license fee imposed upon or levied against any legal or equitable interest of Lessor in the Project, Lessor's right to other income therefrom, and/or Lessor's business of leasing, by any authority having the direct or indirect power to tax and where the funds are generated with reference to the Project address and where the proceeds so generated are to be applied by the city, county or other local taxing authority of a jurisdiction within which the Project is located. The term "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring during the term of this Lease, including but not limited to, a change in the ownership of the Project or any portion thereof (DURING THE OPTION TO EXTEND LEASE, ONLY) or a change in the improvements thereon. In calculating Real Property Taxes for any calendar year, the Real Property Taxes for any real estate tax year shall be included in the calculation of Real Property Taxes for such calendar year based upon the number of days which such calendar year and tax year have in common.

10.2 PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes applicable to the Project, and except as otherwise provided in Paragraph 10.3, any such amounts shall be included in the calculation of Common Area Operating Expenses in accordance with the provisions of Paragraph 4.2.

10.3 ADDITIONAL IMPROVEMENTS. Common Area Operating Expenses shall not include Real Property Taxes specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Project by other lessees or by Lessor for the exclusive enjoyment of such other lessees. Notwithstanding Paragraph 10.2 hereof, Lessee shall, however, pay to Lessor at the time Common Area Operating Expenses are payable under Paragraph 4.2, the entirety of any increase in Real Property Taxes if assessed solely by reason of Alterations, Trade Fixtures or Utility Installations placed upon the Premises by Lessee or at Lessee's request.

10.4 JOINT ASSESSMENT. If the Building is not separately assessed, Real Property Taxes allocated to the Building shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lesser from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive.

10.5 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises. When possible, Lessee shall cause its Lessee Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee's property within 10 days after receipt of a written statement setting forth the taxes applicable to Lessee's property.

11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. Notwithstanding the provisions of Paragraph 4.2, if at any time in Lessor's sole judgment, Lessor determines that Lessee is using a disproportionate amount of water, electricity or other commonly metered utilities, or that Lessee is generating such a large volume of trash as to require an increase in the size of the dumpster and/or an increase in the number of times per month that the dumpster is emptied, then Lessor may increase Lessee's Base Rent by an amount equal to such increased costs.

12. ASSIGNMENT AND SUBLETTING.

12.1 LESSOR'S CONSENT REQUIRED.

(a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, "ASSIGN OR ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent.

(b) A change in the control of Lessee shall constitute an assignment requiring consent. The transfer, on a cumulative basis, of 25% or more of the voting control of Lessee shall constitute a change in control for this purpose.

(c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee by an amount greater than 25% of such Net Worth as it was represented at the time of the execution of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, whichever was or is greater, shall be considered an assignment of this Lease to which Lessor may withhold its consent. "NET WORTH OF LESSEE" shall mean the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles.

(d) An assignment or subletting without consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lesser elects to treat such unapproved assignment or subletting as a noncurable Breach, Lessor may either: (i) terminate this Lease, or (ii) upon 30 days written notice, increase the monthly Base Rent to 110% of the Base Rent then in effect. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to 110% of the price previously in effect, and (ii) all fixed and non-fixed rental adjustments scheduled during the remainder of the Lease term shall be increased to 110% of the scheduled adjusted rent.

(e) Lessee's remedy for any breach of Paragraph 12.1 by Lesser shall be limited to compensatory damages and/or injunctive relief.

12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.

(a) Regardless of Lessor's consent, no assignment or subletting shall: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) after the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee.

(b) Lessor may accept Rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of Rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for Lessee's Default or Breach.

constitute a consent to any subsequent assignment or

--------                                                          /s/ M.S.A.
--------                                                          --------------
INITIALS                                                          INITIALS  D.O.

(C) 1999 - AIR COMMERCIAL REAL ESTATE ASSOCIATION               FORM MTN-2-2/04E

PAGE 9 OF 16

subletting.

(d) In the event of any Default or Breach by Lessee, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of Lessee's obligations under this Lease, including any assignee or sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefore to Lessor, or any security held by Lessor.

(e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a fee of $1,000 or-10% of the current monthly Base Rent applicable to the portion of the Premises which is the subject of the proposed assignment or sublease, whichever is greater, as consideration for Lessor's considering and processing said request. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested.

(f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented to in writing.

(g) Lessor's consent to any assignment or subletting shall not transfer to the assignee or sublessee any Option granted to the original Lessee by this Lease unless such transfer is specifically consented to by Lessor in writing. (See Paragraph 39.2)

12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein:

(a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all Rent payable on any sublease, and Lessor may collect such Rent and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach shall occur in the performance of Lessee's obligations, Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or any assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor all Rent due and to become due under the sublease. Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to Lesser without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary.

(b) In the event of a Breach by Lessee, Lessor may, at its option, require sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any prior Defaults or Breaches of such sublessor.

(d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent.

(e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee.

13. DEFAULT; BREACH; REMEDIES.

13.1 DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or Rules and Regulations under this Lease. A "BREACH" is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default within any applicable grace period:

(a) The abandonment of the Premises; or the vacating of the Premises without providing a commercially reasonable level of security, or where the coverage of the property insurance described in Paragraph 8.3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism.

(b) The failure of Lessee to make any payment of Rent or any Security Deposit required to be made by Lessee hereunder, whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surely bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of 3 business days following written notice to Lessee.

(c) The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (ii) the service contracts, (iii) the rescission of an unauthorized assignment or subletting, (iv) an Estoppel Certificate, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) any document requested under Paragraph 41 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of 10 days following written notice to Lessee.

(d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 2.9 hereof, other than those described in subparagraphs 13.1(a), (b) or (c), above, where such Default continues for a period of 30 days after written notice; provided, however, that if the nature of Lessee's Default is such that more than 30 days are reasonably required for its cure, then it shall not be deemed to be a Breach if Lessee commences such cure within said 30 day period and thereafter diligently prosecutes such cure to completion.

(e) The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a "DEBTOR" as defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within 60 days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within 30 days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within 30 days; provided, however, in the event that any provision of this subparagraph
(e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions.

(f) The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was materially false.

(g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a Guarantor's breach of its guaranty obligation on an anticipatory basis, and Lessee's failure, within 60 days following written notice of any such event, to provide written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease.

13.2 REMEDIES. If Lessee fails to perform any of its affirmative duties or obligations, within 10 days after written notice (or in case of an emergency, without notice), Lessor may, at its option, perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee upon receipt of invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made by Lessee to

be by cashier's check. In the event of a Breach,

--------                                                         /s/  M.S.A.
--------                                                         ---------------
INITIALS                                                         INITIALS  D.O.

(C) 1999 - AIR COMMERCIAL REAL ESTATE ASSOCIATION               FORM MTN-2-2/04E

PAGE 10 OF 16

Lessor may, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach:

(a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall Immediately surrender possession to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent. Efforts by Lessor to mitigate damages caused by Lessee's Breach of this Lease shall not waive Lessor's right to recover damages under Paragraph 12. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by Paragraph 13.1. In such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute.

(b) Continue the Lease and Lessee's right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor's interests, shall not constitute a termination of the Lessee's right to possession.

(c) Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises.

13.3 INDUCEMENT RECAPTURE. Any agreement for free or abated rent or other charges, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS", shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease. Upon Breach of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this paragraph shall not be deemed a waiver by Lessor of the provisions of this paragraph unless specifically so stated in writing by Lessor at the time of such acceptance.

13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within 5 days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a one-time late charge equal to seven point five percent(7.5%) of each such overdue amount or $100, whichever is greater. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for 3 consecutive installments of Base Rent, then notwithstanding any provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance.

13.5 INTEREST. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor, when due as to scheduled payments (such as Base Rent) or within 30 days following the date on which it was due for non-scheduled payment, shall bear interest from the date when due, as to scheduled payments, or the 31st day after it was due as to non-scheduled payments. The interest ("INTEREST") charged shall be equal to the prime rate reported in the Wall Street Journal as published closest prior to the date when due plus two and one-half percent (2 1/2%) 4%, but shall not exceed the maximum rate allowed by law. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4.

13.6 BREACH BY LESSOR.

(a) NOTICE OF BREACH. Lessor shall not be deemed in breach of this Lease unless Lessor falls within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph, a reasonable time shall in no event be less than 30 days after receipt by Lessor, and any Lender whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than 30 days are reasonably required for its performance, then Lessor shall not be in breach if performance is commenced within such 30 day period and thereafter diligently pursued to completion.

(b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event that neither Lesser nor Lender cures said breach within 30 days after receipt of said notice, or if having commenced said cure they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee's expense and offset from Rent an amount equal to the greater of one month's Base Rent or the Security Deposit, and to pay an excess of such expense under protest, reserving Lessee's right to reimbursement from Lessor. Lessee shall document the cost of said cure and supply said documentation to Lessor.

14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of ominent domain or sold under the threat of the exercise of said power (collectively "CONDEMNATION"), this Lease shall terminate as to the part taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than 10% of the floor area of the Unit, or more than 25% of Lessee's Reserved Parking Spaces, is taken by Condemnation, Lessee may, at Lessee's option, to bo exercised in writing within 10 days alter Lesser shall have given Lessee written notice of such taking (or in the absence of such notice, within 10 days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in proportion to the reduction in utility of the Premises caused by such Condemnation. Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold, the value of the part taken, or for severance damages; provided,

however, that Lessee shall

--------                                                        /s/  M.S.A.
--------                                                        ---------------
INITIALS                                                        INITIALS  D.O.

(C)1999 - AIR COMMERCIAL REAL ESTATE ASSOCIATION                FORM MTN-2-2/04E

PAGE 11 OF 16

be entitled to any compensation for Lessee's relocation expenses, loss of business goodwill and/or Trade Fixtures, without regard to whether or not this Lease is terminated pursuant to the provisions of this Paragraph. All Alterations and Utility Installations made to the Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and all compensation which is payable therefor. In the event that this Lease is not terminated by reason of the Condemnation. Lessor shall repair any damage to the Premises caused by such Condemnation.

15. BROKERAGE FEES.

15.1 ADDITIONAL COMMISSION. In addition to the payments owed pursuant to Paragraph 1.10 above, and unless Lessor and the Brokers otherwise agree in writing. Lessor agrees that: (a) if Lessee exercises any Option, (b) if Lessee acquires from Lessor any rights to the Premises of other premises owned by Lessor and located within the Project, (c) if Lessee remains in possession of the Premises, with the consent of Lessor, after the expiration of this Lease, or
(d) if Base Rent is increased, whether by agreement or operation of an escalation clause herein, then, Lessor shall pay Brokers a fee in accordance with the schedule of the Brokers in effect at the time of the execution of this Lease.

15.2 ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of Lessor's interest in this Lease shall be deemed to have assumed Lessor's obligation hereunder. Brokers shall be third party beneficiaries of the provisions of Paragraphs 1.10, 15, 22 and 31. If Lessor falls to pay to Brokers any amounts due as and for brokerage fees pertaining to this Lease when due, then such amounts shall accrue interest. In addition, if Lessor fails to pay any amounts to Lessee's Broker when due, Lessee's Broker may send written notice to Lessor and Lessee of such failure and if Lessor fails to pay such amounts within 10 days after said notice, Lessee shall pay said monies to its Broker and offset such amounts against Rent. In addition, Lessee's Broker shall be deemed to be a third party beneficiary of any commission agreement entered into by and/or between Lessor and Lessor's Broker for the limited purpose of collecting any brokerage fee owed.

15.3 REPRESENTATIONS AND INDEMNITIES OF BROKER RELATIONSHIPS. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any) in connection with this Lease, and that no one other than said named Brokers is entitled to any commission or finder's fee in connection herewith. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys' fees reasonably incurred with respect thereto.

16. ESTOPPEL CERTIFICATES.

(a) Each Party (as "RESPONDING PARTY") shall within 10 days after written notice from the other Party (the "Requesting Party") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "ESTOPPEL CERTIFICATE" form published by the AIR Commercial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party.

(b) If the Responding Party shall fail to execute or deliver the Estoppel Certificate within such 10 day period, the Requesting Party may execute an Estoppel Certificate stating that: (i) the Lease is in full force and effect without modification except as may be represented by the Requesting Party, (ii) there are no uncured defaults in the Requesting Party's performance, and (iii) if Lessor is the Requesting Party, not more than one month's rent has been paid in advance. Prospective purchasers and encumbrances may rely upon the Requesting Party's Estoppel Certificate, and the Responding Party shall be estopped from denying the truth of the facts contained in said Certificate.

(c) If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past 3 years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth.

17. DEFINITION OF LESSOR. The term "LESSOR" as used herein shall mean the owner or owners at the lime in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. Notwithstanding the above, and subject to the provisions of Paragraph 20 below, the original Lessor under this Lease, and all subsequent holders of the Lessor's interest in this Lease shall remain liable and responsible with regard to the potential duties and liabilities of Lessor pertaining to Hazardous Substances as outlined in Paragraph 6.2 above.

18. SEVERABILITY. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof.

19. DAYS. Unless otherwise specifically indicated to the contrary, the word "DAYS" as used in this Lease shall mean and refer to calendar days.

20. LIMITATION ON LIABILITY. Subject to the provisions of Paragraph 17 above, the obligations of Lessor under this Lease shall not constitute personal obligations of Lessor, the individual partners of Lessor or its or their individual partners, directors, officers or shareholders, and Lessee shall look to the Premises, and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against the individual partners of Lessor, or its or their individual partners, directors, officers or shareholders, or any of their personal assets for such satisfaction.

21. TIME OF ESSENCE. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease.

22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the use, nature, quality and character of the Promises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. The liability (including court costs and attorneys' fees), of any Broker with respect to negotiation, execution, delivery or performance by either Lessor or Lessee under this Lease or any amendment or modification hereto shall be limited to an amount up to the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker's liability shall not be applicable to any gross negligence or willful misconduct of such Broker.

23. NOTICES.

23.1 NOTICE REQUIREMENTS. All notices required or permitted by this Lease or applicable law shall be in writing and may be delivered in person (by hand or by courier) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notices (to the attention of the President of Deckers Outdoor Corporation). Either Party may by written notice to the other specify a different address for notice, except that upon Lessee's taking possession of the Promises, the Promises shall constitute Lessee's address for notice. A copy of all notice to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing.

--------                                                         /s/  M.S.A.
--------                                                         --------------
INITIALS                                                         INITIALS  D.O.

(C)1999 - AIR COMMERCIAL REAL ESTATE ASSOCIATION                FORM MTN-2-2/04E

PAGE 12 OF 16

23.2 DATE OF NOTICE. Any notice send by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given 48 hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantee next day delivery shall be deemed given 24 hours after delivery of the some to the Postal Service or courier. Notices transmitted by facsimile transmission or similar means shall be deemed delivered upon telephone confirmation of receipt (confirmation report from fax machine is sufficient), provided a copy is also delivered via delivery or mail (TO BE ADDRESSED TO THE PRESIDENT OF DECKER OUTDOOR CORPORATION). If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day.

24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, 'notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment.

25. DISCLOSURES REGARDING THE NATURE OF A REAL ESTATE AGENCY RELATIONSHIP.

(a) When entering into a discussion with a real estate agent regarding a real estate transaction, a Lessor or Lessee should from the outset understand what type of agency relationship or representation it has with the agent or agents in the transaction. Lessor and Lessee acknowledge being advised by the Brokers in this transaction, as follows:

(i) LESSOR'S AGENT. A Lessor's agent under a listing agreement with the Lessor acts as the agent for the Lessor only. A Lessor's agent or subagent has the following affirmative obligations: To the Lessor: A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Lessor. To the Lessee and the Lessor: (a) Diligent exercise of reasonable skills and care in performance or the agent's duties. (b) A duty of honest and fair dealing and good faith. (c) A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential information obtained from the other Party which does not involve the affirmative duties set forth above.

(ii) LESSEE'S AGENT. An agent can agree to act as agent for the Lessee only. In these situations, the agent is not the Lessor's agent, even if by agreement the agent may receive compensation for services rendered, either in full or in part from the Lessor. An agent acting only for a Lessee has the following affirmative obligations. To the Lessee: A fiduciary duty of utmost care, integrity, honesty, and loyally in dealings with the Lessee. To the Lessee and the Lessor: (a) Diligent exercise of reasonable skills and care in performance of the agent's duties. (b) A duty of honest and fair dealing and good faith. (c) A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential information obtained from the other Party which does not involve the affirmative duties set forth above.

(iii) AGENT REPRESENTING BOTH LESSOR AND LESSEE. A real estate agent, either acting directly or through one or more associate licenses, can legally be the agent of both the Lessor and the Lessee in a transaction, but only with the knowledge and consent of both the Lessor and the Lessee. In a dual agency situation, the agent has the following affirmative obligations to both the Lessor and the Lessee: (a) A fiduciary duty of utmost care, integrity, honesty and loyalty in the dealings with either Lessor or the Lessee. (b) Other duties to the Lessor and the Lessee as stated above in subparagraphs (i) or
(ii). In representing both Lessor and Lessee, the agent may not without the express permission of the respective Party, disclose to the other Party that the Lessor will accept rent in an amount less than that indicated in the listing or that the Lessee is willing to pay a higher rent than that offered. The above duties of the agent in a real estate transaction do not relieve a Lessor or Lessee from the responsibility to protect their own interests. Lessor and Lessee should carefully read all agreements to assure that they adequately express their understanding of the transaction. A real estate agent is a person qualified to advise about real estate. If legal or tax advice is desired, consult a competent professional.

(b) Brokers have no responsibility with respect to any default or breach hereof by either Party. The liability (including court costs and attorneys' fees), of any Broker with respect to any breach of duty, error or omission relating to this Lease shall not exceed the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker's liability shall not be applicable to any gross negligence or willful misconduct of such Broker.

(c) Buyer and Seller agree to identify to Brokers as "Confidential" any communication or information given Brokers that is considered by such Party be be confidential.

26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or termination of this Lease. In the event that Lessee holds over, then the Base Rent shall be increased to 150% of the Base Rent applicable immediately preceding the expiration or termination. Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee.

27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity.

28. COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the Parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice verse, This Lease shall not be construed as if prepared by one of the Parties, but rather according to its fair meaning as a whole, as if both Parties had prepared it.

29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initialed in the county in which the Premises are located.

30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.

30.1 SUBORDINATION. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed to trust, or other hypothecation or security device (collectively, "SECURITY DEVICE"), now or hereafter placed upon the Premises, to any and all advances made on the security thereof, and to all renewals, modifications, and extensions thereof. Lessee agrees that the holders of any such Security Devices (in this Lease together referred to as "LENDER") shall have no liability or obligation to perform any of the obligations of Lessor under this Lease. Any Lender may elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device by giving written notice thereof to Lessee, whereupon this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof.

30.2 ATTORNMENT. In the event that Lessor transfers title to the Premises, or the Premises are acquired by another upon the foreclosure or termination of a Security Device to which this Lease is subordinated (i) Lessee shall, subject to the non-disturbance provisions of Paragraph 30.3, attorn to such new owner, and upon request, enter into a now lease, containing all of the terms and provisions of this Lease, with such new owner for the remainder of the term hereof, or, at the election of such new owner, this Lease shall automatically becomes a new Lease between Lessee and such new owner, upon all of the terms and conditions hereof, for the remainder of the term hereof, and (ii) Lessor shall thereafter be relieved of any further obligations hereunder and such new owner shall assume all of Lessor's obligations hereunder, except that

such new owner shall not: (a) be liable for

--------                                                         /s/  M.S.A.
--------                                                         --------------
INITIALS                                                         INITIALS  D.O.

(C)1999 - AIR COMMERCIAL REAL ESTATE ASSOCIATION               FORM MTN-2-2/04E

PAGE 13 OF 16

any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership; (b) be subject to any offsets or defenses which Lessee might have against any prior lessor, (c) be bound by prepayment of more than one month's rent, or (d) be liable for the return of any security deposit paid to any prior lessor.

30.3 NON-DISTURBANCE. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving a commercially reasonable non-disturbance agreement (a "NON-DISTURBANCE AGREEMENT") from the Lender which Non-Disturbance Agreement provides that Lessee's possession of the Premises, and this Lease, including any options to extend the form hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. Further, within 60 days after the execution of this Lease, Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance Agreement from the holder of any pre-existing Security Device which is secured by the Premises. In the event that Lessor is unable to provide the Non-Disturbance Agreement within said 60 days, then Lessee may, at Lessee's option, directly contact Lender and attempt to negotiate for the execution and delivery of a Non-Disturbance Agreement.

30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any subordination, attornment and/or Non-Disturbance Agreement provided for herein.

31. ATTORNEY'S FEES. If any Party or Broker brings an action or proceeding involving the Premises whether founded in tort, contract or equity, or to declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "PREVAILING PARTY" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys' fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred. In addition, Lessor shall be entitled to attorneys' fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach ($200 Is a reasonable minimum per occurrence for such services and consultation).

32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall have the right to enter the Premises at any time, In the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or tenants, and making such alterations, repairs, improvements or additions to the Premises as Lessor may deem necessary. All such activities shall be without abatement of rent or liability to Lessee. Lessor may at any time place on the Premises any ordinary "FOR SALE" signs and Lessor may during the last 6 months of the term hereof place on the Premises any ordinary "FOR LEASE" signs. Lessee may at any time place on the Premises any ordinary "FOR SUBLEASE" sign.

33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessor's prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to permit an auction.

34. SIGNS. Except for ordinary "For Sublease" signs which may be placed only on the Premises, Lessee shall not place any sign upon the Project without Lessor's prior written consent. All signs must comply with all Applicable Requirements.

35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lessor estate in the Premises; provided, however, that Lessor may elect to continue any one or all existing subtenancies. Lessor's failure within 10 days following any such event to elect to the contrary by written notice to the holder of any such lesser Interest, shall constitute Lessor's election to have such event constitute the termination of such interest.

36. CONSENTS. Except as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and supporting documentation therefor. Lessor's consent to any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. In the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons in writing and in reasonable detail within 10 business days following such request.

37. GUARANTOR.

37.1 EXECUTION. The Guarantors, if any, shall each execute a guaranty in the form most recently published by the AIR Commercial Real Estate Association, and each such Guarantor shall have the same obligations as Lessee under this Lease.

37.2 DEFAULT. It shall constitute a Default of the Lessee if any Guarantor fails or refuses, upon request to provide: (a) evidence of the execution of the guaranty, including the authority of the party signing on Guarantor's behalf to obligate Guarantor, and in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, (b) current financial statements, (c) an Estoppel Certificate, or (d) written confirmation that the guaranty is still in effect.

38. QUIET POSSESSION. Subject to payment by Lessee of the Rent and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof.

39. OPTIONS. If Lessee is granted an option, as defined below, then the following provisions shall apply.

39.1 DEFINITION. "OPTION" shall mean: (a) the right to extend the term of or renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal or first offer to lease either the Premises or other property of Lessor; (c) the right to purchase or the right of first refusal to purchase the Premises or other property of Lessor.

39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Any Option granted to Lessee in this Lease is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and, if requested by Lessor, with Lessee certifying that Lessee has no intention of thereafter assigning or subletting.

39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options have been validly exercised.

39.4 EFFECT OF DEFAULT ON OPTIONS.

(a) Lessee shall have no right to exercise an Option: (i) during the period commencing with the giving of any notice of Default and continuing until said Default is cured, (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee), (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has been given 3 or more notices of separate Default.

--------                                                         /s/  M.S.A.
--------                                                         ---------------
INITIALS                                                         INITIALS  D.O.

(C)1990 - AIR COMMERCIAL REAL ESTATE ASSOCIATION                FORM MTN-2-2/04E

PAGE 14 OF 16

whether or not the Defaults are cured, during the 12 month period immediately preceding the exercise of the Option.

(b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a).

(c) An Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and prior to the commencement of the extended term, (i) Lessee fails to pay Rent for a period of 30 days after such Rent becomes due (without any necessity of Lessor to give notice thereof), (ii) Lessor gives to Lessee 3 or more notices of separate Default during any 12 month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease.

40. SECURITY MEASURES. Lessee hereby acknowledges that the Rent payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises Lessee, its agents and invitees and their property from the acts of third parties.

41. RESERVATIONS. Lessor reserves the right: (i) to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, (ii) to cause the recordation of parcel maps and restrictions, and (iii) to create and/or install new utility raceways, so long as such easements, rights, dedications, maps, restrictions, and utility raceways do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate such rights.

42. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay.

43. AUTHORITY. If either Party hereto is a corporation, trust, limited liability company, partnership, or similar entity, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. Each party shall, within 30 days after request, deliver to the other party satisfactory evidence of such authority.

44. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions.

45. OFFER. Preparation of this Lease by either party or their agent and submission of same to the other Party shall not be deemed an offer to lease to the other Party. This Lease is not intended to be binding until executed and delivered by all Parties hereto.

46. AMENDMENTS. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by a Lender in connection with the obtaining of normal financing or refinancing of the Premises.

47. MULTIPLE PARTIES. If more than one person or entity is named herein as either Lessor or Lessee, such multiple Parties shall have joint and several responsibility to comply with the terms of this Lease.

48. WAIVER OF JURY TRIAL. The Parties hereby waive their respective rights to trial by jury in any action or proceeding involving the Property or arising out of this Agreement.

49. MEDIATION AND ARBITRATION OF DISPUTES. An Addendum requiring the Mediation and/or the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease [ ] is [X] is not attached to this Lease.

LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES.
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AIR COMMERCIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO:

1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.

2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT AND THE SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE.

WARNING: IF THE PREMISES ARE LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES ARE LOCATED.

The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures.

Execute at: Santa Monica, CA             Executed at: Goleta, CA
On: September ___, 2004                  On: September 28, 2004

BY LESSOR:                               BY LESSEE:
Mission Oaks Associates, LLC             Deckers Outdoor Corporation

By: /s/ ERI KROCH                        By: /s/ DOUG OTTO
-------------------------------------        ---------------------------------
Name Printed: Eri Kroch                  Name Printed: Doug Otto
Title: Manager                           Title: CEO

By:                                      By: /s/ SCOTT ASH
    ---------------------------------        ---------------------------------
Name Printed: _______________________    Name Printed: Scott Ash
Title: ______________________________    Title: CFO
Address: 1543 7th Street                 Address: 495-A South Fairview
Santa Monica, CA                                  Goleta, CA 93117

/s/ E.K.                                                          /s/ M.S.A.
--------                                                          --------------
INITIALS                                                          INITIALS  D.O.

PAGE 15 OF 16

Telephone: (310) 393-9000               Telephone: (305) 967-7611
Facsimile: (310) 395-6513               Facsimile: (305) 967-7862
Federal ID No._______________________   Federal ID No. 95.3015822

BROKER:                                 BROKER:
TOLD Partners Inc.                      Colliers Seeley

Att: Sam H. Wagner                      Att: John G. Ochoa
Title: Sr. V.P./Partner                 Title: Vice President
Address: 5940 Variel Avenue             Address: 300 Esplanade Drive, Suite 1280
Woodland Hills, CA 91367                Oxnard, CA 93036
Telephone: (818)593-3800                Telephone: (805)988-8050
Facsimile: (818)593-3850                Facsimile: (818)604-4920
Federeal ID No. 95-4351047              Federeal Id:____________________________

THESE FORMS ARE OFTEN MODIFIED TO MEET CHANGING REQUIREMENTS OF LAW AND NEEDS OF THE INDUSTRY. ALWAYS WRITE OR CALL TO MAKE SURE YOU ARE UTILIZING THE MOST CURRENT FORM: AIR COMMERCIAL REAL ESTATE ASSOCIATION, 700 SOUTH FLOWER STREET, SUITE 600, LOS ANGELES, CA 90017. (213) G87-8777.

--------                                                        /s/  M.S.A.
--------                                                        --------------
INITIALS                                                        INITIALS  D.O.

(C)1999 - AIR COMMERCIAL REAL ESTATE ASSOCIATION                FORM MTN-2-2/04E

PAGE 16 OF 16

ADDENDUM TO A.I.R. STANDARD INDUSTRIAL/COMMERCIAL, MULTI-TENANT LEASE-NET, DATED SEPTEMBER 15, 2004, BY AND BETWEEN 3001 MISSION OAKS ASSOCIATES LLC AS LESSOR AND DECKERS OUTDOOR CORPORATION, AS LESSEE, COVERING THE PROPERTY COMMONLY KNOWN AS 3001 MISSION OAKS BLVD, UNIT B, NEWBURY PARK, CALIFORNIA.

1. LESSOR -MISSION OAKS ASSOCIATES LLC AND LESSEE - DECKERS OUTDOOR CORPORATION

1.4 EARLY POSSESSION: Early Possession period to start upon the full execution of the Lease and once Lessee has provided necessary insurance certificate.

1.5 BASE RENT (CONT.): Monthly base rent shall commence December 1, 2004.

1.7(b) COMMON AREA OPERATING EXPENSES - CONTINUED: CAM charges to commence the earlier of (a) Lessee's occupying the Premises for business purposes or
(b) December 1,2004.

2. PREMISES (CONT.):

2.6 COMMON AREAS

COMMON AREAS - DEFINITION. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary that are provided by the Lessor from time to time for the general non-exclusive use of Lessor, Lessee and other tenants/owners of the Project and their respective employees, suppliers, shippers, customers, contractors, and invitees, including parking areas, loading and unloading areas, roadways, walkways, driveways and landscaped areas.

COMMON AREAS - LESSEE'S RIGHTS. Lessor grants to Lessee, for the benefit of Lessee and its employees, suppliers, shippers, contractors, customers and invitees, during the term of this Lease, the non-exclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Lessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Project. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Lessor or Lessor's designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the properly, store it and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor.

COMMON AREAS - RULES AND REGULATIONS. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to establish, modify, amend and enforce reasonable written rules and regulations ("Rules and Regulations") for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of the Building and the Project and their invitees. Lessee agrees to abide by and conform to all such Rules and Regulations, and to cause its employees, suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessor shall not be responsible to Lessee for the non-compliance with said Rules and Regulations by other tenants of the Project.

COMMON AREAS - CHANGES. Lessor shall have the right, in Lessor's sole discretion, from time to time:

(b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonably access to the Premises remains available;

(d) To add additional buildings and improvements to the Common Areas;
(e) Intentionally omitted.

(e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Project, or any portion thereof but using best efforts to minimize disruption of Lessee's business; and

7.1 LESSEE'S OBLIGATIONS

(a) SERVICE CONTRACTS (CONT.)

If Lessee shall fail to provide Lessor with evidence of Lessee's air conditioning system

maintenance contract within five (5) days after written notice from Lessor, Lessor shall procure and maintain said contract and Lessee shall pay to Lessor, monthly, as additional rent, Lessor's actual cost for such maintenance.

                                                                  /s/ M.S.A.
--------                                                          --------------
INITIALS                                                          INITIALS  D.O.

N SW/ADD04/3001 MISSION OAKS - ADD

PAGE 1 OF 2

(CONTINUED) ADDENDUM TO A.I.R. STANDARD INDUSTRIAL/COMMERCIAL, MULTI-TENANT LEASE-NET DATED SEPTEMBER 15, 2004, BY AND BETWEEN 3001 MISSION OAKS ASSOCIATES LLC AS LESSOR AND DECKERS OUTDOOR CORPORATION, AS LESSEE, COVERING THE PROPERTY COMMONLY KNOWN AS 3001 MISSION OAKS BLVD, UNIT B, NEWBURY PARK, CALIFORNIA.

12.4  LESSOR PARTICIPATION:

      Notwithstanding anything to the contrary contained herein, Lessee shall
      pay to Lessor together with its monthly rent due hereunder, fifty percent
      (50%) of the monthly rental income per square foot Lessee receives from
      any Sublessee of all or part of the Premises which exceeds the then
      current monthly rent including all charges and additional rent per square
      foot payable by Lessee to Lessor, after first recapturing in full from
      Lessor's share, all fees and expenses actually incurred in connection with
      any sublease including, but not limited to: advertising, tenant
      improvements, legal fees, real estate commissions and consultant fees.

34.   SIGNS (CONT.): Lessee, at its own sole cost and expense, shall provide its
      own signage with Lessor's prior consent and in accordance with applicable
      signage ordinances.

50.   RENT ADJUSTMENTS: See Attached Paragraph 50.

51.   OPTION TO EXTEND: See Attached Paragraph 51.

52.   RIGHT OF FIRST OFFER: Lessee shall have an ongoing Right of First Offer to
      lease space directly adjacent to the Premises during the initial Lease
      Term and the associated option periods per the following terms. If at any
      time space adjacent to the Premises is or becomes vacant, Lessor shall
      give Lessee written notice of its interest in leasing said vacant space.
      Lessor within seven (7) days of receiving said notice from Lessee shall
      give Lessee notice of the spaces availability and within said notice
      provide the business terms that Lessor would be willing to lease the space
      to Lessee ("RIGHT OF FIRST OFFER NOTICE"). Within seven (7) days of
      receipt of the Right of First Offer Notice, Lessee shall inform Lessor in
      writing of its intent to lease or not lease the vacant space. If Lessee
      decides to not lease the space, Lessor is free to lease the space to any
      other entity of its choosing. If after Lessee decides to not lease space
      pursuant to the terms cited in the Right of First Office Notice, the
      initial year base rent agreed to between Lessor and a prospective tenant
      is greater than fifteen percent (15%) lower than the initial year base
      rent offered to Lessee in the Right of First Offer Notice, then Lessor has
      to re-offer the space to Lessee based upon the business terms agreed to
      between Lessor and the prospective tenant. Lessee shall then have three
      (3) days to either accept or reject said space.

53.   LESSOR IMPROVEMENTS: Lessor shall construct, at Lessor's sole cost and
      expense, 12 ft. high plywood division wall. Balance of division wall to be
      chain link fence extending to the roof of the building, which divides
      Units A & B and Units B & C (see Exhibit "A"). Plywood wall to be painted
      by Lessor. Any leasehold improvement installed/constructs by Lessor most
      comply with applicable building code requirements.

54.   PROPOSITION 13 TAX LESSEE'S REAL ESTATE TAX PROTECTION: Lessee's pro rata
      share of real estate taxes shall not increase as a result of sale of the
      Property during the initial Lease Term.

55.   AMERICANS WITH DISABILITIES ACT (ADA): Please be advised that an owner or
      tenant of real properly may be subject to the Americans With Disabilities
      Act (the ADA), a Federal law codified at 42 USC Section 120101 et seq.
      Among other requirements of the ADA that could apply to your Properly,
      Title III of the ADA requires owners and tenants of "public
      accommodations" to remove barriers to access by disabled persons and
      provide auxiliary aids and services for bearing, vision or speech impaired
      persons by January 26, 1992. The regulations under Title III of the ADA
      are codified at 28 CFR Part 36. We recommend you review the ADA and
      regulations as the Brokers cannot give you legal advice on these issues.

56.   HAZARDOUS MATERIALS: As in any real estate transaction, it is recommended
      that you consult with a professional such as a civil engineer, industrial
      hygienist or other person, with experience in evaluating the condition of
      the Property including the possible presence of asbestos, hazardous
      materials and underground storage tanks. Owner agrees to disclose to
      broker and to prospective purchasers and tenants any and all information
      which Owner has regarding present and future zoning and environmental
      matters affecting the Property and regarding the condition of the Property
      including, but not limited to structural, mechanical and transformers,
      other toxic, hazardous or contaminated substances, and underground storage
      tanks, in, on, or about the Property. Broker is authorized to disclose any
      such information to prospective purchasers or tenants.

57.   INSURANCE: Per Section 8 of the Lease, Lessee must obtain and keep
      current, general liability insurance in the amount of one million
      ($1,000,000) dollars per occurrence with annual aggregate of not less than
      two million ($2,000,000) dollars. Lessor, Mission Oaks Associates, LLC,
      and Sandstone Properties, Inc. must be named as additional insureds. A
      Certificate of Insurance and an Additional Insured Endorsement must be
      received by Lessor prior to the Early Possession Period commencing. If the
      Certificate of Insurance and the Additional insured Endorsement are not
      received by the earlier of the Lease Commencement Date or the Early
      Possession period Lessee shall be in default of this Lease and Lessor, in
      addition to all of its remedies under the Lease, shall be able to bill
      Lessee the amount of one hundred dollars ($100.00) every month until said
      proofs on insurance are received.

                                                                  /s/ M.S.A.
--------                                                          --------------

INITIALS INITIALS D.O.

N SW/ADD04/3001 MISSION OAKS - ADD

PAGE 2 OF 2

[AIR LOGO]

RENT ADJUSTMENT(S)
STANDARD LEASE ADDENDUM

DATED September 15, 2004

BY AND BETWEEN (LESSOR) Mission oaks Associates, LLC

(LESSEE) Deckers Outdoor Corporation, Inc.

ADDRESS OF PREMISES: 3001 Mission Oaks Blvd., Unit B Camarillo, CA 93012

Paragraph 50

A. RENT ADJUSTMENTS:

The monthly rent for each month of the adjustment period(s) specified below shall be increased using the method(s) indicated below:

(Check Method(s) to be Used and fill in Appropriately)

[ ] I. COST OF LIVING ADJUSTMENT(S) (COLA)

a. On (Fill In COLA Dates):______________________________________________

the Base Rent shall be adjusted by the change, if any, from the Base Month specified below, in the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor for (select one):[ ] CPI W (Urban Wage Earners and Clerical Workers) or [ ] CPI U (All Urban Consumers), for (Fill in Urban Area):

_____________________________________________________________________, All Items

(1982-1984 = 100), heroin referred to as "CPI".

b. The monthly rent payable in accordance with paragraph A.I.a. of this Addendum shall be calculated as follows: the Base Rent set forth in paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the numerator of which shall be the CPI of the calendar month 2 months prior to the month(s) specified in paragraph A.I.a. above during which the adjustment is to take effect, and the denominator of which shall be the CPI of the calendar month which is 2 months prior to (select one): the [ ] first month of the term of this Lease as set forth in paragraph 1.3 ("Base Month") or [ ] (Fill in Other "Base Month"):___________________________. The sum so calculated shall constitute the new monthly rent hereunder, but in no event, shall any such new monthly rent be less than the rent payable for the month immediately preceding the rent adjustment.

c. In the event the compilation and/or publication of the CPI shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the CPI shall be used to make such calculation. In the event that the Parties cannot agree on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the then rules of said Association and the decision of the arbitrators shall be binding upon the parties. The cost of said Arbitration shall be paid equally by the Parties.

[ ] II. MARKET RENTAL VALUE ADJUSTMENT(S) (MRV)

a. On (Fill in MRV Adjustment Date(s):_________________________________

the Base Rent shall be adjusted to the "Market Rental Value" of the property as follows:

1) Four months prior to each Market Rental Value Adjustment Date described above, the Parties shall attempt to agree upon what the new MRV will be on the adjustment date. If agreement cannot be reached within thirty days, then:

(a) Lessor and Lessee shall Immediately appoint a mutually acceptable appraiser or broker to establish the new MRV within the next 30 days. Any associated costs will be split equally between the Parties, or

(b) Both Lessor and Lessee shall each immediately make a reasonable determination of the MRV and submit such determination, in writing, to arbitration In accordance with the following provisions:

(I) Within 15 days thereafter, Lessor and Lessee shall each select an [ ] appraiser or [ ] broker ("CONSULTANT" - check one) of their choice to act as an arbitrator. The two arbitrators so appointed shall immediately select a third mutually acceptable Consultant to act as a third arbitrator.

(ii) The 3 arbitrators shall within 30 days of the appointment of the third arbitrator roach a decision as to what the actual MRV for the Promises is, and whether Lessor's or Lessee's submitted MRV is the closest thereto. The decision of a majority of the arbitrators shall be binding on the Parties. The submitted MRV which is determined to be the closest to the actual MRV shall thereafter be used by the Parties.

--------                                                        /s/  M.S.A.
--------                                                        ----------------
INITIALS                                                        INITIALS  D.O.

(C)2000 - AIR COMMERCIAL REAL ESTATE ASSOCIATION                FORM RA-3-8/00E

PAGE 1 OF 2

(III) If either of the Parties falls to appoint an arbitrator within the specified 15 days, the arbitrator timely appointed by one of them shall reach a decision on his or her own, and said decision shall be binding on the Parties.

(iv) The entire cost of such arbitration shall be paid by the party whose submitted MRV is not selected, ie. the one that is NOT the closest to the actual MRV.

2) Notwithstanding the foregoing, the now MRV shall not be less than the rent payable for the month immediately preceding the rent adjustment.

b. Upon the establishment of each Now Market Rental Value:

1) the now MRV will become the now "Base Rent" for the purpose of calculating any further Adjustments, and

2) the first month of each Market Rental Value term shall become the new 'Base Month' for the purpose of calculating any further Adjustments.

[X] III. FIXED RENTAL ADJUSTMENT(S) (FRA)

The Base Rent shall be increased to the following amounts on the dates set forth below:

On (Fill In FRA Adjustment Date(s)):         The New Base Rent shall be:
Apr. 1, 2005 - Sept. 30, 2005              $42, 000 .00/month
Oct. 1, 2005 - Sept. 30, 2006              $46, 000 .00/month
Oct. 1, 2006 - Sept. 30, 2007              $50, 000 .00/month
Oct. 1, 2007 - Sept. 30, 2008              $54, 000 .00/month
Oct. 1, 2008 - Sept. 30, 2009              $58, 000 .00/month
___________________________________        _____________________________
___________________________________        _____________________________
___________________________________        _____________________________
___________________________________        _____________________________
___________________________________        _____________________________

B. NOTICE:

Unless specified otherwise herein, notice of any such adjustments, other than Fixed Rental Adjustments, shall be made as specified in paragraph 23 of the Lease.

C. BROKER'S FEE:

The Brokers shall be paid a Brokerage Fee for each adjustment specified above in accordance with paragraph 15 of the Lease.

NOTE: These forms are often modified to meet changing requirements of law and needs of the industry. Always write or call to make sure you are utilizing the most current form: AIR COMMERCIAL REAL ESTATE ASSOCIATION, 700 S. Flower Street,

Suite 600, Los Angeles, Calif. 90017

--------                                                         /s/  M.S.A.
--------                                                         ---------------
INITIALS                                                         INITIALS  D.O.

(C)2000 - AIR COMMERCIAL REAL ESTATE ASSOCIATION                 FORM RA-3-8/00E

PAGE 2 OF 2

[AIR LOGO]

OPTION(S) TO EXTEND
STANDARD LEASE ADDENDUM

DATED September 15, 2004

BY AND BETWEEN (LESSOR) Mission Oaks Associates, LLC

BY AND BETWEEN (LESSEE) Deckers Outdoor Corporation, Inc.

ADDRESS OF PREMISES: 3001 Mission Oaks Blvd., unit B

Camarillo, CA 93012

Paragraph 51

A. OPTION(S) TO EXTEND:

Lessor hereby grants to Lessee the option to extend the term of this Lease for Two (2) additional Five (5) year month period(s) commencing when the prior term expires upon each and all of the following terms and conditions:

(i) In order to exercise an option to extend, Lessee must give written notice of such election to Lessor and Lessor must receive the same at least Six but not more than Nine months prior to the date that the option period would commence, time being of the essence. If proper notification of the exercise of an option is not given and/or received, such option shall automatically expire. Options (If there are more than one) may only be exercised consecutively.

(ii) The provisions of paragraph 39, including those relating to Lessee's Default set forth in paragraph 39.4 of this Lease, are conditions of this Option.

(iii) Except for the provisions of this Lease granting an option or options to extend the term, all of the terms and conditions of this Lease except where specifically modified by this option shall apply.

(iv) This Option is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Promises and without the intention of thereafter assigning or subletting.

(v) The monthly rent for each month of the option period shall be calculated as follows, using the method(s) Indicated below:
(Check Method(s) to be Used and Fill in Appropriately)

[ ] I. COST OF LIVING ADJUSTMENT(S) (COLA)
a. On (Fill in COLA Dates):_________________________________________________
the Base Rent shall be adjusted by the change, if any, from the Base Month specified below, in the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor for (select one): [ ] CPI W (Urban Wage Earners and Clerical Workers) or [ ] CPI U (All Urban Consumers), for (Fill in Urban Area):

All Items (1982-1984 = 100), herein referred to as "CPI".

b. The monthly rent payable in accordance with paragraph A.I.a. of this Addendum shall be calculated as follows: the Base Rent set forth in paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the numerator of which shall be the CPI of the calendar month 2 months prior to the month(s) specified in paragraph A.I.a. above during which the adjustment is to take effect, and the denominator of which shall be the CPI of the calendar month which is 2 months prior to (select one): [ ] the first month of the term of this Lease as set forth in paragraph 1.3 ("Base Month") or [ ] (Fill in Other "Base Month"):

The sum so calculated shall constitute the new monthly rent hereunder, but in no event, shall any such new monthly rent be less than the rent payable for the month immediately preceding the rent adjustment.

c. In the event the compilation and/or publication of the CPI shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the CPI shall be used to make such calculation. In the event that the Parties cannot agree on such alternative Index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the then rules of said Association and the decision of the arbitrators shall be binding upon the parties. The cost of said Arbitration shall be paid equally by the Parties.

[ ] II. MARKET RENTAL VALUE ADJUSTMENT(S) (MRV)

a. On (Fill in MRV Adjustment Date(s)) _____________________________________
the Base Rent shall be adjusted to the "Market Rental Value" of the property as follows:

(a) Lessor and Lessee shall immediately appoint a mutually acceptable appraiser or broker to establish the new MRV within the next 30 days. Any associated costs will be split equally between the Parties, or

(b) Both Lessor and Lessee shall each immediately make a reasonable determination of the MRV and submit such determination, in

--------                                                         /s/  M.S.A.
--------                                                         ---------------
INITIALS                                                         INITIALS  D.O.

(C) 2000-AIR COMMERCIAL REAL ESTATE ASSOCIATION                  FORM OE-3-8/00E

PAGE 1 OF 2

writing, to arbitration in accordance with the following provisions:

(i) Within 15 days thereafter, Lessor and Lessee shall each select an [ ] appraiser or [ ] broker ("CONSULTANT" - check one) of their choice to act as an arbitrator. The two arbitrators so appointed shall immediately select a third mutually acceptable Consultant to act as a third arbitrator.

(ii) The 3 arbitrators shall within 30 days of the appointment of the third arbitrator reach a decision as to what the actual MRV for the Promises is, and whether Lessor's or Lessee's submitted MRV is the closest thereto. The decision of a majority of the arbitrators shall be binding on the Parties. The submitted MRV which is determined to be the closest to the actual MRV shall thereafter be used by the Parties.

(iii) If either of the Parties fails to appoint an arbitrator within the specified 15 days, the arbitrator timely appointed by one of them shall reach a decision on his or her own, and said decision shall be binding on the Parties.

(iv) The entire cost of such arbitration shall bo paid by the party whose submitted MRV is not selected, ie. the one that is NOT the closest to the actual MRV.

2) Notwithstanding the foregoing, the now MRV shall not be loss than the rent payable for the month immediately preceding the rent adjustment.

b. Upon the establishment of each New Market Rental Value:

1)the new MRV will become the new "Base Rent" for the purpose of calculating any further Adjustments, and

2) the first month of each Market Rental Value term shall become the now "Base Month" for the purpose of calculating any further Adjustments.

[X] III. FIXED RENTAL ADJUSTMENT(S) (FRA)

The Base Rent shall be increased to the following amounts on the dales set forth below:

On (Fill in FRA Adjustment Date(s)):               The New Base Rent shall be:
Option  1 - 1st year                           $60,320.00/month
2nd year                                       $62,732.80/month
3rd year                                       $65,242.11/month
4th year                                       $67,851.79/month
5th year                                       $70,565.86/month
Option 2 - 1st year                            $73,388.49/month
2nd year                                       $76,324.03/month
3rd year                                       $79,376.99/month
4th year                                       $82,552.07/month
5th year                                       $85,854.15/month

B. NOTICE:

Unless specified otherwise herein, notice of any rental adjustments, other than Fixed Rental Adjustments, shall be made as specified in paragraph 23 of the Lease.

C. BROKER'S FEE:

The Brokers shall be paid a Brokerage Fee for each adjustment specified above in accordance with paragraph 15 of the Lease.

NOTE: THESE FORMS ARE OFTEN MODIFIED TO MEET CHANGING REQUIREMENTS OF LAW AND NEEDS OF THE INDUSTRY. ALWAYS WRITE OR CALL TO MAKE SURE YOU ARE UTILIZING THE MOST CURRENT FORM: AIR COMMERCIAL REAL ESTATE ASSOCIATION, 700 S. FLOWER STREET, SUITE 600, LOS ANGELES, CALIF. 90017

--------                                                         /s/  M.S.A.
--------                                                         ---------------
INITIALS                                                         INITIALS  D.O.

(C)2000 - AIR COMMERCIAL REAL ESTATE ASSOCIATION                 FORM OE-3-8/00E

PAGE 2 OF 2

EXHIBIT "A"

3001 MISSION OAKS, CAMARILLO, CA

[FLOOR PLAN]

FOR FURTHER INFORMATION CONTACT:

SAM WAGNER x325
CHRIS LARSON x320
WILLIAM ADELMAN x349

[TOLD PARTNERS INC. LOGO]

EXHIBIT 10.38

FIRST AMENDMENT TO LEASE DATED SEPTEMBER 15, 2004 ("LEASE") BETWEEN MISSION OAKS ASSOCIATES, LLC ("LESSOR") AND DECKERS OUTDOOR CORPORATION ("LESSEE") FOR 3001 MISSION OAKS BOULEVARD, UNIT B, CAMARILLO, CA 93012 ("INITIAL PREMISES").

1. For reference purposes this First Amendment shall be dated December 1, 2004.

2. Lessor has agreed to extend the free rent period on the Initial Premises for an additional forty five (45) days in exchange for the term of the Lease to be extended for an additional forty five (45) days. As a result, the Base Rent payable by Lessee and term of the Lease on the Initial Premises shall be as follows:

10/01/04-01/14/05                   $        0/month NNN
01/15/05-05/14/05                   $   29,000/month NNN
05/15/05-11/14/05                   $   42,000/month NNN
11/15/05-11/14/06                   $   46,000/month NNN
11/15/06-11/14/07                   $   50,000/month NNN
11/15/07-11/14/08                   $   54,000/month NNN
11/15/08-11/14/09                   $   58,000/month NNN

3. Lessee has agreed to lease Unit C at 3001 Mission Oaks Boulevard, Camarillo, CA 93012 ("Expansion Premises") which is located adjacent to the Initial Premises as depicted in Exhibit A. The Expansion Premises is comprised of approximately 75,000 square feet. The term of the Lease for the Expansion Premises shall be from December 1, 2004 through November 14, 2009. The Base Rent on the Expansion Premises shall be as follows:

12/01/04-01/14/05                   $        0/month NNN
01/15/05-01/14/07                   $   29,250/month NNN
01/15/07-01/14/08                   $   33,750/month NNN
01/15/08-01/14/09                   $   36,750/month NNN
01/15/09-11/14/09                   $   40,500/month NNN

4. Lessee is accepting the Expansion Premises in its as-is condition except that Lessor shall be responsible for installing new ballasts in all of the light fixtures located within the Expansion Premises. Lessor shall have the new ballasts installed within the Expansion Premises by December 31, 2004.

5. Effective December 1, 2004, the Premises shall be defined to include the Initial Premises and the Expansion Premises.

6. Lessee's share of common area expenses shall increase from 10,000 to 17,500 as a result of the inclusion of the Expansion Premises.

7. Lessee shall have the right to seventy five (75) parking permits for the Expansion Premises pursuant to the terms of the Lease. These parking permits coupled with the one hundred (100) parking permits already provided for with the Initial Premises shall provide Lessee with a total of one hundred and seventy five (175) parking permits.

8. Article 53 contained within the Addendum to the Lease shall be revised as follows:

Lessor shall construct, at Lessor's sole cost and expense, a division wall between Unit A and Unit B (see Exhibit B). The division wall on the Unit B side of the wall shall be constructed of 5/8" drywall (non-taped) from the floor to the ceiling. The drywall shall be painted. Any leasehold improvements installed and constructed by Lessor must comply with applicable building code requirements. Lessor shall not be responsible for constructing a division wall between Unit B and Unit C.

Lessor shall utilize commercially reasonable efforts to commence construction of the division wall between Unit A and Unit B by December 13, 2004 and to complete the installation of the metal studs that will support the division wall and the installation of the drywall (inclusive of painting) on the Unit B side of the division wall by December 31, 2004. To the extent that Lessor does not complete the installation of the aforementioned metal studs and Unit B side of the drywall (inclusive of painting) by January 14, 2005, Lessee shall receive a day for day abatement of Base Rent on both the Initial Premises and the Expansion Premises. For example, if the installation of the metal studs and Unit B side of the drywall is completed on January 20, 2005, this is six (6) days beyond the January 14, 2005 deadline therefore Lessee shall not be obligated to commence with the payment of Base Rent on both the Initial Premises and Expansion Premises until January 21, 2005.

Lessee acknowledges that Lessor has been informed that it needs to install an exit corridor within the Initial Premises as depicted in Exhibit B. This corridor shall be constructed at Lessor's sole cost and expense. Lessor shall utilize commercially reasonable efforts to have the corridor constructed by December 31, 2004. To the extent that Lessor does not complete the construction of the corridor by January 14, 2004, Lessee shall receive a day for day abatement of Base Rent on both the Initial Premises and the Expansion Premises consistent with the methodology discussed above for the division wall.

9. All other terms and conditions of the Lease shall remain in full force and effect. To the extent that there are any discrepancies between this Amendment and the original Lease, the terms of this Amendment shall prevail.

LESSOR:                             LESSEE:

MISSION OAKS ASSOCIATES, LLC        DECKERS OUTDOOR CORPORATION.

By:   /s/ ERI KROCH                 By: /s/ SCOTT ASH
      ---------------                   ---------------
Its:  MANAGER                       Its: CFO
Date: 1/4/05                        Date: 1/5/05

                                    By: ______________________

                                    Its: _____________________

                                    Date: ____________________

EXHIBIT "A"

3001 MISSION OAKS, CAMARILLO,CA

[FLOOR PLAN]

FOR FURTHER INFORMATION CONTACT:

SAM WAGNER X325
CHRIS LARSON X320
WILLIAM ADELMAN X349

[TOLD PARTNERS INC LOGO]

[FLOOR PLAN]

LEASE EXHIBIT B

MISSION OAKS ASSOC., LLC

c/o Mr. David Garcia                                       3001 MISSION OAKS BL.
Sandstone Properties, Inc.                                   CAMARILLO, CA 93012
1543 7th Street, Ste. 202
Santa Monica, CA 90401
(310)393-9000

[SQUARE ONE ARCHITECTURE LOGO]

[SEAL]

SQUARE ONE ARCHITECTURE

3743 Valencia Ave, Simi Valley, CA 93083 805.522.6777 www.squareonearch.com

Issue date: Thursday, December 2, 2004

EXHIBIT 21.1

SUBSIDIARIES OF THE REGISTRANT

Holbrook Limited
Phillipsburg Limited
Deckers Consumer Direct Corporation
Deckers Europe B.V. (Hong Kong)
(Hong Kong)
(Arizona)
(The Netherlands)

EXHIBIT 23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors
Deckers Outdoor Corporation:

We consent to the incorporation by reference in the registration statements on Form S-3 (No. 333-113237 and 333-120717) and Form S-8 (No.333-82538 and 333-47097) of Deckers Outdoor Corporation of our reports dated March 11, 2005, with respect to the consolidated balance sheets of Deckers Outdoor Corporation and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows, for each of the years in the three-year period ended December 31, 2004, and the related financial statement schedule, management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2004 and the effectiveness of internal control over financial reporting as of December 31, 2004, which reports appear in the December 31, 2004 annual report on Form 10-K of Deckers Outdoor Corporation. Our report on the consolidated financial statements and schedule refers to the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, on January 1, 2002.

                                  /s/ KPMG LLP

Los Angeles, California


March 16, 2005

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Douglas B. Otto certify that:

1. I have reviewed this annual report on Form 10-K of Deckers Outdoor Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


	a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):


	a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


	/s/ Douglas B. Otto

	Douglas B. Otto
	Chief Executive Officer
	Deckers Outdoor Corporation

Date: March 16, 2005

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, M. Scott Ash certify that:

1. I have reviewed this annual report on Form 10-K of Deckers Outdoor Corporation;


	a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


	a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


	/s/ M. Scott Ash

	M. Scott Ash
	Chief Financial Officer
	Deckers Outdoor Corporation

Date: March 16, 2005

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to their knowledge, the Annual Report on Form 10-K for the annual period ended December 31, 2004 of Deckers Outdoor Corporation (the “Company”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in such periodic report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in such report.


	Very truly yours,

	/s/ Douglas B. Otto

	Douglas B. Otto
	Chief Executive Officer

	/s/ M. Scott Ash

	M. Scott Ash
	Chief Financial Officer

Dated: March 16, 2005

*A signed original of this written statement required by Section 906 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.


	trends and concentrate on the footwear demands of our customers and end-user consumers. Our brand teams are highly focused on developing new products and marketing programs that drive strong sales growth but remain true to each brand’s heritage. As a result, we have generated gross margins of 42.4% in 2003 and 42.1% in 2004 and achieved compound annual sales growth of approximately 47.2% since 2002. Our central management team provides important expertise in disciplines common to each of our brands, including sourcing, time-to-market, quality control, credit, information systems technology and overall management of our capital resources.

	*UGG Repositioning.* UGG gained brand recognition in the U.S. beginning in 1979 and was adopted as a favored brand by the California surf community. We acquired UGG in 1995 and have carefully re-positioned the brand as the luxury sheepskin collection sold through high-end retailers. While our sales have grown steadily over the past seven years, over the past few years UGG has benefited from significant national media attention and celebrity endorsement through our marketing programs and product seeding activities, further raising the profile of UGG as a luxury sheepskin brand. We intend to further support UGG’s market positioning by carefully expanding the selection of styles available in order to build consumer interest in our UGG collection. We also remain committed to limiting distribution of UGG through high-end retail channels.


	licensing in the near future. However, we believe licensing revenues may become a more significant portion of our net sales and profits over time if our licensees can sell the licensed products in the quantities they have promised. For the year ended December 31, 2004, our licensees began to ship their products and, accordingly, we recognized net license revenues of $950,000, primarily related to our UGG handbag and outerwear licenses.

	*Build New Brands.* We intend to continue to focus on identifying, developing or acquiring, and building new brands. We have been successful previously in identifying entrepreneurial concepts for innovative, fashionable footwear targeted at niche markets and building these concepts into viable brands utilizing our expertise in product development, production and marketing. We intend to continue to identify and build new brands that demonstrate potential for significant future growth.


	featuring rugged, contemporary styles for the traveler and adventurer. Our 2005 line includes several closed-toe styles featuring our patent-pending flipsole ^tm , a removable insole that can be easily converted to a flip-flop.

	*Sun and Moon.* Our Sun and Moon Series features fun, youthful and colorful slides and thongs in a variety of materials including waterproof leather, nylon, suede and air mesh. The Sun and Moon Series is designed to leverage our sandal-making capabilities and to appeal to fashion-oriented consumers seeking pre-activity and post-activity footwear alternatives that express a casual lifestyle and individual spirit.

	*Kids and Infants.* Our children’s series is an assortment of sandals incorporating a variety of materials including leather, waterproof suede, nylon, neoprene and mesh, as well as slip-on water shoes, hikers and other styles of amphibious footwear. In addition, for the 2005 season, we have expanded our product offering with a variety of styles of sandals and closed-toe footwear, including an assortment of styles that are reflective of our adult offerings.


Holbrook Limited Phillipsburg Limited Deckers Consumer Direct Corporation Deckers Europe B.V.		(Hong Kong) (Hong Kong) (Arizona) (The Netherlands)