Timberland (TBL) 10-Q 2006 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period endedSeptember 29, 2006

OR

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 Number1-9548

The Timberland Company

(Exact Name of Registrant as Specified in Its Charter)

Delaware	02-0312554
(State or Other Jurisdiction of	(I.R.S. Employer Identification No.)
Incorporation or Organization)
200 Domain Drive, Stratham, New Hampshire	03885
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s Telephone Number, Including Area Code: (603) 772-9500

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.

þ Yes      o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filerþ       Accelerated Filero       Non-Accelerated Filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes      þ No

On October 27, 2006, 50,676,027 shares of the registrant’s Class A Common Stock were outstanding and 11,743,660 shares of the registrant’s Class B Common Stock were outstanding.

Page 2

THE TIMBERLAND COMPANY

FORM 10-Q

TABLE OF CONTENTS

		Page(s)
Part I Financial Information (unaudited)
Item 1.	Financial Statements
	Unaudited Condensed Consolidated Balance Sheets - September 29, 2006, September 30, 2005 and December 31, 2005		3
	Unaudited Condensed Consolidated Statements of Income - For the Three and Nine Months Ended September 29, 2006 and September 30, 2005		4
	Unaudited Condensed Consolidated Statements of Cash Flows - For the Nine Months Ended September 29, 2006 and September 30, 2005		5
	Notes to Unaudited Condensed Consolidated Financial Statements		6-16
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17-28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		29
Item 4.	Controls and Procedures		29
Part II Other Information
Item 1A.	Risk Factors		30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		31
Item 6.	Exhibits		32
Signatures			33
Exhibit Index			34

Page 3

     PART I FINANCIAL INFORMATION

     Item 1. FINANCIAL STATEMENTS

THE TIMBERLAND COMPANY

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)

	September 29,			September 30,
	2006			2005			December 31, 2005
Assets
Current assets
Cash and equivalents	$	61,850		$	117,634		$	213,163
Accounts receivable, net of allowance for doubtful accounts of $13,002 at September 29, 2006, $10,243 at September 30, 2005 and $8,755 at December 31, 2005		330,384			298,172			168,831
Inventory, net		250,522			242,622			167,132
Prepaid expense		41,059			31,994			33,502
Deferred income taxes		18,416			23,524			26,934
Derivative assets		1,388			5,122			6,044
Total current assets		703,619			719,068			615,606
Property, plant and equipment, net		86,201			77,373			82,372
Deferred income taxes		8,261			—			—
Goodwill		39,533			14,163			39,503
Intangible assets, net		42,597			4,579			40,909
Other assets, net		10,467			10,007			10,264
Total assets	$	890,678		$	825,190		$	788,654
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable	$	54,200		$	—		$	—
Accounts payable		127,440			125,670			97,294
Accrued expense
Payroll and related		34,275			39,520			48,721
Other		88,374			64,173			53,121
Income taxes payable		34,087			47,844			44,210
Derivative liabilities		1,455			—			—
Total current liabilities		339,831			277,207			243,346
Deferred compensation and other long-term liabilities		13,486			15,274			16,046
Deferred income taxes		—			5,051			1,075
Stockholders’ equity
Preferred Stock, $.01 par value; 2,000,000 shares authorized; none issued		—			—			—
Class A Common Stock, $.01 par value (1 vote per share); 120,000,000 shares authorized; 72,512,804 shares issued at September 29, 2006, 71,688,107 shares issued at September 30, 2005 and 71,804,959 shares issued at December 31, 2005		725			717			718
Class B Common Stock, $.01 par value (10 votes per share); convertible into Class A shares on a one-for-one basis; 20,000,000 shares authorized; 11,743,660 shares issued and outstanding at September 29, 2006, September 30, 2005 and December 31, 2005		117			117			117
Additional paid-in capital		211,370			211,603			214,483
Deferred compensation		—			(30,498	)		(27,166	)
Retained earnings		807,093			692,124			739,004
Accumulated other comprehensive income		10,443			10,203			8,696
Treasury Stock at cost; 21,603,950 Class A shares at September 29, 2006, 17,330,185 Class A shares at September 30, 2005 and 18,921,290 Class A shares at December 31, 2005		(492,387	)		(356,608	)		(407,665	)
Total stockholders’ equity		537,361			527,658			528,187
Total liabilities and stockholders’ equity	$	890,678		$	825,190		$	788,654

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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THE TIMBERLAND COMPANY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except Per Share Data)

	For the Three Months Ended						For the Nine Months Ended
	September 29,			September 30,			September 29,		September 30,
	2006			2005			2006		2005
Revenue	$	502,980		$	505,913		$	1,079,396	$	1,100,393
Cost of goods sold		266,324			258,555			563,816		547,894
Gross profit		236,656			247,358			515,580		552,499
Operating expense
Selling		123,660			111,259			324,014		297,236
General and administrative		32,300			28,462			88,568		77,304
Restructuring and related costs		(92	)		2,531			820		2,531
Total operating expense		155,868			142,252			413,402		377,071
Operating income		80,788			105,106			102,178		175,428
Other income/(expense)
Interest income/(expense), net		(308	)		570			1,463		2,734
Other, net		494			(900	)		2,087		238
Total other income/(expense)		186			(330	)		3,550		2,972
Income before provision for income taxes		80,974			104,776			105,728		178,400
Provision for income taxes		29,099			35,624			37,639		60,656
Net income	$	51,875		$	69,152		$	68,089	$	117,744
Earnings per share
Basic	$	.84		$	1.04		$	1.08	$	1.76
Diluted	$	.82		$	1.02		$	1.06	$	1.72
Weighted-average shares outstanding
Basic		62,120			66,175			62,910		66,892
Diluted		63,062			67,697			64,069		68,359

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Page 5

THE TIMBERLAND COMPANY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)

	For the Nine Months Ended
	September 29,				September 30,
	2006				2005
Cash flows from operating activities:
Net income	$	68,089			$	117,744
Adjustments to reconcile net income to net cash used by operating activities:
Deferred income taxes		(495	)			(3,488	)
Share-based compensation		16,417				3,791
Depreciation and other amortization		20,413				18,190
Tax benefit from share-based compensation, net of excess benefit		1,284				6,490
Other non-cash charges/(credits), net		(1,969	)			1,966
Increase/(decrease) in cash from changes in working capital:
Accounts receivable		(155,614	)			(154,003	)
Inventory		(79,369	)			(116,360	)
Prepaid expense		(6,302	)			(5,881	)
Accounts payable		27,204				79,693
Accrued expense		19,365				(18,837	)
Income taxes payable		(10,204	)			13,157
Net cash used by operating activities		(101,181	)			(57,538	)
Cash flows from investing activities:
Additions to property, plant and equipment		(21,878	)			(15,704	)
Other		(4,241	)			147
Net cash used by investing activities		(26,119	)			(15,557	)
Cash flows from financing activities:
Common stock repurchases		(95,543	)			(128,906	)
Issuance of common stock		13,478				17,668
Net borrowing under short-term credit facilities		54,200				—
Excess tax benefit from share-based compensation		2,605				—
Net cash used by financing activities		(25,260	)			(111,238	)
Effect of exchange rate changes on cash and equivalents		1,247				(7,149	)
Net decrease in cash and equivalents		(151,313	)			(191,482	)
Cash and equivalents at beginning of period		213,163				309,116
Cash and equivalents at end of period	$	61,850			$	117,634
Supplemental disclosures of cash flow information:
Interest paid	$	693		��	$	290
Income taxes paid	$	44,416			$	43,987

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Page 6

THE TIMBERLAND COMPANY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Share and Per Share Data)

Note 1. Summary of Significant Accounting Policies

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain the adjustments necessary to present fairly The Timberland Company’s (“we”, “our”, “us”, “Timberland” or the “Company”) financial position, results of operations and changes in cash flows for the interim periods presented. Such adjustments consist of normal recurring items. The unaudited condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2005.

Our revenue consists of sales to wholesale customers, retail store revenues, license fees and royalties. We record wholesale revenues when title passes and the risks and rewards of ownership have passed to the customer, based on the terms of sale. Title passes generally upon shipment or upon receipt by the customer, depending on the country of sale and the agreement with the customer. Retail store revenues are recorded at the time of the sale. License fees and royalties are recognized as earned per the terms of our licensing agreements.

In the third quarter and the first nine months of 2006, we recorded $1,107 and $2,774 of reimbursed shipping expenses within revenues and the related shipping costs within selling expense, respectively. In the third quarter and the first nine months of 2005, we recorded $1,295 and $3,223 of reimbursed shipping expenses within revenues and the related shipping costs within selling expense, respectively. Shipping costs are included in selling expense and were $3,846 and $5,733 for the third quarters of 2006 and 2005, and $11,910 and $14,744 for the first nine months of 2006 and 2005, respectively.

Note 2. Historical Financial Results

The results of operations for the three and nine months ended September 29, 2006 are not necessarily indicative of the results to be expected for the full year. Historically, our revenue has been more heavily weighted to the second half of the year.

Note 3. Share-Based Compensation

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) 123(R), “Share-Based Payment,” which requires a company to measure the grant date fair value of equity awards given to employees in exchange for services and recognize that cost over the period that such services are performed. This Standard is a revision of SFAS 123, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles Board (“APB”) Opinion 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance. The Company adopted the provisions of SFAS 123(R) using the modified prospective application method. Under this method, compensation expense is recognized on all share-based awards granted prior to, but not yet vested as of adoption based on the grant date fair value estimated in accordance with the original provisions of SFAS 123. The Company recognizes the cost of share-based awards on a straight-line basis over the award’s requisite service period, with the exception of certain stock options for officers, directors and key employees granted prior to, but not yet vested as of adoption, for which expense continues to be recognized on a graded schedule over the vesting period of the award. Share-based compensation costs, which are recorded in cost of goods sold and selling and general and administrative expenses, totaled $5,450 ($3,493 net of taxes) and $16,417 ($10,573 net of taxes) for the three and nine months ended September 29, 2006, respectively.

As a result of adopting SFAS 123(R), the Company’s income before provision for income taxes for the three and nine months ended September 29, 2006 are $2,375 and $7,906 lower, respectively, and the Company’s net income for the three and nine months ended September 29, 2006 are $1,521 and $5,091 lower, respectively, than if we had continued to account for share-based compensation under APB Opinion 25. Had the Company not adopted SFAS 123(R), basic and diluted earnings per share for the three and nine months ended September 29, 2006 would have been:

Page 7

	For the Three		For the Nine
	Months Ended		Months Ended
	September 29, 2006		September 29, 2006
Basic earnings per share, as reported	$	.84	$	1.08
Pro forma basic earnings per share		.86		1.16
Diluted earnings per share, as reported		.82		1.06
Pro forma diluted earnings per share		.85		1.14

Prior to January 1, 2006, the Company applied the intrinsic value method in APB Opinion 25 and related interpretations in accounting for our stock plans, SFAS 123, and SFAS 148, “Accounting for Stock-Based Compensation-Transitional and Disclosure-An Amendment of FASB Statement No. 123,” for disclosure purposes. In our unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2005, no compensation expense was recognized for stock option grants. However, the Company recognized compensation expense for nonvested share awards of $2,467 ($1,629 net of taxes) and $3,791 ($2,502 net of taxes), respectively. The following table illustrates the effects on net income and earnings per share had compensation expense for stock option grants issued been determined under the fair value method of SFAS 123 for the three and nine months ended September 30, 2005:

	For the Three		For the Nine
	Months Ended		Months Ended
	September 30, 2005		September 30, 2005
Net income as reported	$	69,152	$	117,744
Add: Share-based employee compensation expense included in reported net income, net of related tax effect		1,629		2,502
Deduct: Total share-based employee compensation expense determined under fair value based method for all awards, net of related tax effect		3,822		8,585
Pro forma net income	$	66,959	$	111,661
Basic earnings per share, as reported	$	1.04	$	1.76
Pro forma basic earnings per share	$	1.01	$	1.67
Diluted earnings per share, as reported	$	1.02	$	1.72
Pro forma diluted earnings per share	$	.99	$	1.63

Financial statement amounts for the three and nine months ended September 30, 2005 have not been restated to reflect the fair value method of expensing share-based compensation.

Prior to the adoption of SFAS 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the statement of cash flows. Effective January 1, 2006 and in accordance with SFAS 123(R), the Company changed its cash flow presentation whereby the cash flows resulting from the tax benefits arising from tax deductions in excess of the compensation expense recognized for share-based awards (“excess tax benefits”) are now classified as financing cash flows. In the unaudited condensed consolidated statement of cash flows for the nine months ended September 29, 2006, the total excess tax benefit of $2,605 related to share-based compensation included in cash flows from financing activities would have been included in cash flows from operating activities if the Company had not adopted SFAS 123(R).

The Company received $13,478 in proceeds on the exercise of stock options under the Company’s stock option and employee stock purchase plans and recorded a tax benefit of $4,288 related to these stock option exercises during the nine months ended September 29, 2006.

Under the provisions of SFAS 123(R), the Company is required to estimate the number of all share-based awards that will be forfeited. Effective January 1, 2006, the Company uses historical data to estimate forfeitures. Prior to the adoption of SFAS 123(R), the Company recognized the impact of forfeitures as they occurred.

Shares issued upon the exercise of stock options under the Company’s stock option and employee stock purchase plans are normally from authorized but unissued shares of the Company’s Class A Common Stock. However, to the extent that the Company has treasury shares issued, such shares may be reissued upon the exercise of stock options.

Page 8

Stock Options

Under the Company’s 1997 Incentive Plan, as amended (the “1997 Plan”), 16,000,000 shares of Class A Common Stock have been reserved for issuance to officers, directors and key employees. In addition to stock options, any of the following incentives may be awarded to participants under the 1997 Plan: stock appreciation rights (“SARs”), nonvested shares, unrestricted stock, awards entitling the recipient to delivery in the future of Class A Common Stock or other securities, securities that are convertible into, or exchangeable for, shares of Class A Common Stock and cash bonuses. Option grants and vesting periods are determined by the Management Development and Compensation Committee of the Board of Directors. Outstanding stock options granted under the 1997 Plan are granted with an exercise price equal to market value at date of grant and become exercisable either in equal installments over three years, beginning one year after the grant date, or become exercisable two years after the grant date. Prior to 2006, most stock options granted under the 1997 Plan were exercisable in equal installments over four years. All options expire ten years after the grant date.

Under our 2001 Non-Employee Directors Stock Plan, as amended (the “2001 Plan”), we have reserved 400,000 shares of Class A Common Stock for the granting of stock options to eligible non-employee directors of the Company. Under the terms of the 2001 Plan, stock option grants are awarded on a predetermined formula basis. Unless terminated by our Board of Directors, the 2001 Plan will be in effect until all shares available for issuance have been issued, pursuant to the exercise of all options granted. The exercise price of options granted under the 2001 Plan is the market value of the stock on the date of the grant. Initial awards of stock options granted under the 2001 Plan to new directors become exercisable in equal installments over three years and annual awards of options granted under the 2001 Plan become fully exercisable one year from the date of grant and, in each case, expire ten years after the grant date. Stock options granted under the 2001 Plan prior to December 31, 2004 become exercisable in equal installments over four years, beginning one year after the grant date, and expire ten years after the grant date.

The Company estimates the fair value of its stock option awards on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table. Expected volatility is based on historical volatility of the Company’s stock. The expected term of options is estimated using the historical exercise behavior of employees and directors. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve corresponding to the stock option’s average life.

	For the Three Months Ended						For the Nine Months Ended
	September 29, 2006			September 30, 2005			September 29, 2006			September 30, 2005
Expected volatility		29.9	%		28.3	%		30.2	%		29.6	%
Risk-free interest rate		4.9	%		4.0	%		4.7	%		3.6	%
Expected life (in years)		4.0			4.1			4.2			5.1
Expected dividends		—			—			—			—

The following summarizes transactions under all stock option arrangements for the nine months ended September 29, 2006:

						Weighted-Average
				Weighted-		Remaining		Aggregate
				Average		Contractual Term		Intrinsic
	Shares			Exercise Price		(Years)		Value
Outstanding at January 1, 2006		5,708,184		$	25.15
Granted		784,231			33.06
Exercised		(707,845	)		17.63
Expired or forfeited		(285,954	)		29.35
Outstanding at September 29, 2006		5,498,616		$	27.02		6.9	$	21,874
Exercisable at September 29, 2006		3,034,174		$	23.67		5.7	$	18,630

Page 9

The weighted-average grant date fair values per share of stock options granted, for which exercise price equals market value at the date of grant, were $8.55 and $9.94 for the three months ended September 29, 2006 and September 30, 2005, respectively, and $10.46 and $11.57 for the nine months ended September 29, 2006 and September 30, 2005, respectively. The total intrinsic values of stock options exercised during the three months ended September 29, 2006 and September 30, 2005 were $1,354 and $4,252, respectively, and $11,307 and $17,631 for the nine months ended September 29, 2006 and September 30, 2005, respectively.

Information on stock options outstanding and exercisable as of September 29, 2006 is as follows:

				Options Outstanding						Options Exercisable
						Weighted-
						Average		Weighted-				Weighted-
						Remaining		Average				Average
Range of				Number		Contractual		Exercise		Number		Exercise
Exercise Prices				Outstanding		Term (Years)		Price		Exercisable		Price
$	5.27	—	17.74		804,539		4.05	$	14.28		802,414	$	14.28
	17.81	—	19.10		125,129		5.56		18.20		112,254		18.20
	19.12	—	19.49		683,890		6.42		19.48		431,784		19.47
	19.50	—	27.22		561,207		6.89		24.67		363,706		24.21
	27.53	—	28.50		654,326		5.51		28.40		520,180		28.50
	28.63	—	30.82		119,384		8.10		29.28		24,100		29.50
	30.88	—	31.29		928,902		7.36		31.29		465,848		31.29
	31.32	—	35.01		822,050		9.03		34.06		63,311		32.12
	35.02	—	35.27		3,950		8.99		35.14		486		35.23
	35.42	—	39.70		795,239		8.36		35.69		250,091		35.78
$	5.27	—	39.70		5,498,616		6.86	$	27.02		3,034,174	$	23.67

Total unrecognized share-based compensation expense related to nonvested stock options was $11,585 as of September 29, 2006. The cost is expected to be recognized over the weighted-average period of 1.1 years.

Nonvested Shares

As noted above, the Company’s 1997 Plan provides for grants of nonvested shares. The Company generally grants nonvested shares with a three year vesting period, which is the same as the contractual term. Expense is recognized over the award’s requisite service period, which begins on the first day of the measurement period and ends on the last day of the vesting period. The Company has assumed no forfeitures with respect to nonvested shares. The fair value of nonvested share grants is determined by the market value at the date of the grant. Changes in the Company’s nonvested shares for the nine months ended September 29, 2006 are as follows:

				Weighted-
				Average
				Grant Date
	Shares			Fair Value
Unvested at January 1, 2006		698,061		$	36.27
Awarded		377,770			26.47
Vested		(143,355	)		34.40
Unvested at September 29, 2006		932,476		$	32.59

The total fair value of shares vested during the nine months ended September 29, 2006 was $4,250.

Unrecognized compensation expense related to nonvested share grants was $20,546 as of September 29, 2006. The expense is expected to be recognized over a weighted-average period of 1.7 years.

Under the provisions of SFAS 123(R), we are no longer permitted to record deferred compensation for the unvested portion of nonvested share grants. Accordingly, upon adoption of SFAS 123(R), the balance of deferred compensation was reduced to zero, resulting in an offsetting reduction to additional paid-in capital in the unaudited condensed consolidated balance sheet.

Page 10

Employee Stock Purchase Plan

Pursuant to the terms of our 1991 Employee Stock Purchase Plan, as amended (the “ESP Plan”), we are authorized to issue up to an aggregate of 2,400,000 shares of our Class A Common Stock to eligible employees electing to participate in the ESP Plan. Eligible employees may contribute, through payroll withholdings, from 2% to 10% of their regular base compensation during six-month participation periods beginning January 1 and July 1 of each year. At the end of each participation period, the accumulated deductions are applied toward the purchase of Class A Common Stock at a price equal to 85% of the market price at the beginning or end of the participation period, whichever is lower.

The fair value of the Company’s ESP Plan was estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions in the following table. Expected volatility is based on the six-month participation period (the stock option’s contractual and expected lives). The risk-free interest rate is based on the six-month U.S. Treasury rate.

	For the Three Months Ended						For the Nine Months Ended
	September 29, 2006			September 30, 2005			September 29, 2006			September 30, 2005
Expected volatility		28.7	%		25.9	%		28.7	%		25.9	%
Risk-free interest rate		5.3	%		3.2	%		4.7	%		2.8	%
Expected life (in months)		6			6			6			6
Expected dividends		—			—			—			—

The weighted-average fair values of the Company’s ESP Plan purchase rights were approximately $6.27 and $7.99 for the three months ended September 29, 2006 and September 30, 2005, respectively. The weighted-average fair values of the Company’s ESP Plan purchase rights were approximately $6.64 and $6.91 for the nine months ended September 29, 2006 and September 30, 2005, respectively.

Total unrecognized compensation expense related to the unvested portion of the Company’s ESP awards was $119 as of September 29, 2006. The expense is expected to be recognized in the fourth quarter of 2006.

Note 4. Earnings Per Share

Basic earnings per share excludes common stock equivalents and is computed by dividing net income by the weighted-average number of common shares outstanding for the periods presented. Diluted earnings per share (“EPS”) reflects the potential dilution that would occur if potentially dilutive securities such as stock options were exercised and nonvested shares vested. The following is a reconciliation of the number of shares (in thousands) for the basic and diluted EPS computations for the three and nine months ended September 29, 2006 and September 30, 2005:

	For the Three Months Ended
	September 29, 2006							September 30, 2005
			Weighted		Per-					Weighted		Per-
	Net		-Average		Share			Net		-Average		Share
	Income		Shares		Amount			Income		Shares		Amount
Basic EPS	$	51,875		62,120	$	.84		$	69,152		66,175	$	1.04
Effect of dilutive securities		—		942		(.02	)		—		1,522		(.02	)
Diluted EPS	$	51,875		63,062	$	.82		$	69,152		67,697	$	1.02

	For the Nine Months Ended
	September 29, 2006							September 30, 2005
			Weighted		Per-					Weighted		Per-
	Net		-Average		Share			Net		-Average		Share
	Income		Shares		Amount			Income		Shares		Amount
Basic EPS	$	68,089		62,910	$	1.08		$	117,744		66,892	$	1.76
Effect of dilutive securities		—		1,159		(.02	)		—		1,467		(.04	)
Diluted EPS	$	68,089		64,069	$	1.06		$	117,744		68,359	$	1.72

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The following securities (in thousands) were outstanding as of September 29, 2006 and September 30, 2005, but were not included in the computation of diluted EPS because the options’ exercise price was greater than the average market price of the common shares:

	For the Three Months Ended				For the Nine Months Ended
	September 29, 2006		September 30, 2005		September 29, 2006		September 30, 2005
Options to purchase shares of common stock		3,392		903		2,573		659

Note 5. Comprehensive Income

     Comprehensive income for the three and nine months ended September 29, 2006 and September 30, 2005 is as follows:

	For the Three Months Ended						For the Nine Months Ended
				September 30,
	September 29, 2006			2005			September 29, 2006			September 30, 2005
Net income	$	51,875		$	69,152		$	68,089		$	117,744
Change in cumulative translation adjustment		(769	)		(699	)		7,584			(14,068	)
Change in fair value of derivative financial instruments, net of taxes		4,468			(1,176	)		(5,837	)		14,045
Comprehensive income	$	55,574		$	67,277		$	69,836		$	117,721

For the three months ended September 29, 2006 and September 30, 2005, the after tax hedging gains/(losses) reclassified to earnings were $(2,165) and $2,444, respectively. For the nine months ended September 29, 2006 and September 30, 2005, the after tax hedging gains/(losses) reclassified to earnings were $(259) and $1,384, respectively.

Note 6. Business Segments and Geographic Information

We manage our business in three reportable segments, each sharing similar product, distribution and marketing. The reportable segments are U.S. Wholesale, U.S. Consumer Direct and International.

The U.S. Wholesale segment is comprised of the sale of products to wholesale customers in the United States. This segment also includes royalties from licensed products sold in the United States, the management costs and expenses associated with our worldwide licensing efforts and certain marketing expenses and value added services. For the three and nine months ended September 30, 2005, marketing expenses of $3,121 and $4,132, respectively, were reclassified from our unallocated corporate segment to U.S. Wholesale as the expenses were deemed to be primarily related to our U.S. Wholesale business.

The U.S. Consumer Direct segment includes the Company-operated specialty and factory outlet stores in the United States and our e-commerce business.

The International segment consists of the marketing, selling and distribution of footwear, apparel and accessories and licensed products outside of the United States. Products are sold outside of the United States through our subsidiaries (which use wholesale and retail channels to sell footwear, apparel and accessories), independent distributors and licensees.

The Unallocated Corporate component of segment reporting consists primarily of corporate finance, information services, legal and administrative expenses, United States distribution expenses, global marketing support expenses, worldwide product development and other costs incurred in support of Company-wide activities. It also includes the costs related to share-based compensation. Additionally, Unallocated Corporate includes total other income, which is primarily interest income, net, and other miscellaneous income, net. Such income is not allocated among the reported business segments.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. We evaluate segment performance based on operating contribution, which represents pre-tax income before unallocated corporate expenses, interest and other income/(expense), net, and operating cash flow measurements. Total assets are

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disaggregated to the extent that assets apply specifically to a single segment. Unallocated Corporate assets primarily consist of cash and equivalents, manufacturing/sourcing assets, computers and related equipment and United States transportation and distribution equipment.

For the Three Months Ended September 29, 2006 and September 30, 2005

			U.S.
	U.S.		Consumer				Unallocated
	Wholesale		Direct		International		Corporate			Consolidated
2006
Revenue	$	202,110	$	45,858	$	255,012	$	—		$	502,980
Operating income/(loss)		61,814		2,867		71,290		(55,183	)		80,788
Income/(loss) before income taxes		61,814		2,867		71,290		(54,997	)		80,974
Total assets		347,505		36,772		418,182		88,219			890,678
Goodwill		31,745		794		6,994		—			39,533
2005
Revenue	$	220,694	$	46,595	$	238,624	$	—		$	505,913
Operating income/(loss)		75,243		5,512		76,498		(52,147	)		105,106
Income/(loss) before income taxes		75,243		5,512		76,498		(52,477	)		104,776
Total assets		291,324		34,424		369,029		130,413			825,190
Goodwill		6,804		794		6,565		—			14,163

For the Nine Months Ended September 29, 2006 and September 30, 2005

			U.S.
			Consumer				Unallocated
	U.S. Wholesale		Direct		International		Corporate			Consolidated
2006
Revenue	$	414,263	$	112,157	$	552,976	$	—		$	1,079,396
Operating income/(loss)		108,904		2,944		124,753		(134,423	)		102,178
Income/(loss) before income taxes		108,904		2,944		124,753		(130,873	)		105,728
2005
Revenue	$	438,036	$	119,899	$	542,458	$	—		$	1,100,393
Operating income/(loss)		139,616		12,746		140,588		(117,522	)		175,428
Income/(loss) before income taxes		139,616		12,746		140,588		(114,550	)		178,400

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Note 7. Inventory

Inventory, net of reserves, consists of the following:

	September 29, 2006		September 30, 2005		December 31, 2005
Materials	$	4,469	$	3,792	$	3,483
Work-in-process		998		2,068		762
Finished goods		245,055		236,762		162,887
Total	$	250,522	$	242,622	$	167,132

Note 8. Notes Payable

We have an unsecured committed revolving credit agreement with a group of banks which matures on June 2, 2011 (“Agreement”). The Agreement provides for $200,000 of committed borrowings, of which up to $125,000 may be used for letters of credit. Upon approval of the bank group, we may increase the committed borrowing limit by $100,000 for a total commitment of $300,000. Under the terms of the Agreement, we may borrow at interest rates based on Eurodollar rates (5.3% as of September 29, 2006), plus an applicable margin of between 13.5 and 47.5 basis points based on a fixed charge coverage grid that is adjusted quarterly. As of September 29, 2006, the applicable margin under the facility was 27 basis points. We will pay a utilization fee of an additional 5 basis points if our outstanding borrowings under the facility exceed $100,000. We will also pay a commitment fee of 6.5 to 15 basis points per annum on the total commitment, based on a fixed-charge coverage grid that is adjusted quarterly. As of September 29, 2006, the commitment fee was 8 basis points. The Agreement places certain limitations on additional debt, stock repurchases, acquisitions, amount of dividends we may pay and certain other financial and non-financial covenants. The primary financial covenants relate to maintaining a minimum fixed charge coverage of 3:1 and a leverage ratio of 2:1. We measure compliance with the financial and non-financial covenants and ratios as required by the terms of the Agreement on a fiscal quarter basis.

We had uncommitted lines of credit available from certain banks totaling $50,000 as of September 29, 2006. Borrowings under these lines are at prevailing money market rates (5.8% as of September 29, 2006). Further, we had an uncommitted letter of credit facility of $80,000 to support inventory purchases. These arrangements may be terminated at any time at the option of the banks or the Company.

As of September 29, 2006, we had short-term borrowings outstanding of $54,200, comprised of $45,000 from our revolving credit agreement and $9,200 from our uncommitted lines of credit. As of September 29, 2006, the weighted-average interest rate on these borrowings was 5.6%. As of September 30, 2005, we had no short-term borrowings outstanding under any of our credit facilities.

Note 9. Nonvested Share Awards and Other

In 2004, our Board of Directors approved awards of nonvested share grants of Class A Common Stock under the Company’s 1997 Incentive Plan, as amended, and a cash incentive award. The award of these nonvested share grants and the cash incentive award are based on achieving certain performance targets for the periods occurring between January 1, 2004 through December 31, 2006. Based on the achievement of 2005 performance targets, 377,770 of nonvested shares with a value of $10,000 were issued on July 5, 2006 and will fully vest three years from that date. Based on the achievement of 2004 performance targets, 275,117 of nonvested shares with a value of $10,873 were issued on July 5, 2005 and will vest equally over three years from that date. An additional award, based on the achievement of a separate performance target, of 200,000 nonvested shares with a value of $7,904 was also issued on July 5, 2005 and will vest two years after that date. All of these shares are subject to restrictions on sale and transferability, a risk of forfeiture and certain other terms and conditions. Through December 31, 2005, we recorded deferred compensation in stockholders’ equity on our unaudited condensed consolidated balance sheet to reflect these awards. Under the provisions of SFAS 123(R), we are no longer permitted to record deferred compensation in stockholders’ equity for unvested awards. For the measurement period from January 1, 2006 through December 31, 2006, an award of $8,732 may be made in 2007 if certain targeted performance goals are achieved. The award amount will vary based upon the degree to which these performance goals are attained. As of September 29, 2006, we estimate the award amount will be approximately $1,424.

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The number of shares to be awarded will be determined by the share price on the issuance date. Additionally, a cash incentive award of up to $3,000 may be awarded in 2007 based on the achievement of a performance target over a three year measurement period from January 1, 2004 through December 31, 2006. As of September 29, 2006, we estimate the performance target for the cash incentive award will not be achieved.

In March 2005, our Board of Directors approved an additional cash incentive award of $1,250, which will be paid in 2007 and was based on the achievement of a performance target over a one year measurement period from January 1, 2005 through December 31, 2005. This award is recorded in other long-term liabilities on the unaudited condensed consolidated balance sheet as of September 29, 2006.

In September 2006, our Board of Directors approved an additional future award of $1,000 of nonvested share grants of Class A Common Stock under the Company’s 1997 Incentive Plan, as amended, and a $2,000 cash incentive award. These awards may be issued in 2007 based on the achievement of a revenue target over a twelve month measurement period from September 30, 2006 through September 28, 2007.

Note 10. Restructuring Costs

During the first quarter of 2006, we initiated a plan to create a European finance shared service center in Schaffhausen, Switzerland. This shared service center will be responsible for all transactional and statutory financial activities for which certain activities are currently performed by our locally based finance organizations.

On July 6, 2005, the Company announced plans to consolidate our Caribbean manufacturing operations. We ceased operations in our Puerto Rico manufacturing facility at the end of 2005 and are expanding our manufacturing volume in the Dominican Republic.

The following table sets forth our restructuring activity for the nine months ended September 29, 2006:

	Restructuring							Restructuring
	Liabilities as of				Cash			Liabilities as of
	December 31, 2005		Charges		Payments			September 29, 2006
Severance and employment related charges	$	3,784	$	612	$	(3,562	)	$	834
Other charges		179		208		(373	)		14
Total	$	3,963	$	820	$	(3,935	)	$	848

Severance and employment related charges consist primarily of severance, health benefits and other employee related costs incurred due to these two restructuring plans. Other charges consist of fees related to the closing of our manufacturing facility in Puerto Rico only. Credits recorded for the three months ended September 29, 2006 reflect adjustments to our estimated restructuring liabilities related to the closing of the Puerto Rico manufacturing facility. The following tables detail the charges and payments by location:

	For the Three			For the Nine
	Months Ended			Months Ended
	September 29, 2006			September 29, 2006
Severance and employment related charges:
European shared service center	$	91		$	596
Puerto Rico manufacturing facility		(153	)		16
Total severance and employment related charges		(62	)		612
Other charges		(30	)		208
Total	$	(92	)	$	820

	For the Three		For the Nine
	Months Ended		Months Ended
	September 29, 2006		September 29, 2006
Severance and employment related cash payments:
European shared service center	$	270	$	270
Puerto Rico manufacturing facility		42		3,292
Total severance and employment related cash payments		312		3,562
Other cash payments		90		373
Total	$	402	$	3,935

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European finance shared service center restructuring activity will continue through the second quarter of 2007. The Puerto Rico closure was completed in the second quarter of 2006, but we will continue to make cash payments for severance benefits through the second quarter of 2007.

Total additional charges of approximately $200 are expected to be incurred in the fourth quarter of 2006 and $100 in 2007, which are expected to cover the remaining severance and employment related charges for the European finance shared service center restructuring activity.

Note 11. Income Taxes

The effective tax rate for the three and nine months ended September 29, 2006 was 35.9% and 35.6%, respectively. The effective tax rate was adjusted in the third quarter of 2006 to increase our full year 2006 tax rate estimate from 34.5% to 35.6%. This increase reflects updated estimates of the geographic mix of our profits and provisions for specific tax reserves. The effective tax rate for the three and nine months ended September 30, 2005 was 34.0%.

Note 12. Share Repurchase

On February 7, 2006, our Board of Directors approved an additional repurchase of 6,000,000 shares of our Class A Common Stock. As of September 29, 2006, 4,370,203 shares remained under this authorization. Shares repurchased totaled 928,735 during the quarter ended September 29, 2006.

We may use repurchased shares to offset future issuances under the Company’s stock-based employee incentive plans. From time to time, we use Rule 10b5-1 plans to facilitate share repurchases.

Note 13. Litigation

We are involved in various litigation and legal matters that have arisen in the ordinary course of business. Management believes that the ultimate resolution of any existing matter will not have a material adverse effect on our consolidated financial statements.

Note 14. New Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109”, which clarifies the accounting for uncertainty in income tax positions. FIN 48 requires a company to recognize in its financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination by the appropriate taxing authority, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact FIN 48 will have on our consolidated financial position and results of operations.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) 157, “Fair Value Measurements”. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP) and expands disclosures about fair value measurements. SFAS is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the effect SFAS 157 will have on our consolidated financial position and results of operations.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) 108 which provides interpretations regarding the process of quantifying prior year financial statement misstatements for the purposes of a materiality assessment. SAB 108 provides guidance that the following two methodologies should be used to quantify prior year income statement misstatements: i) the error is quantified as the amount by which the current period income statement is misstated and ii) the error is quantified as the cumulative amount by which the current year balance sheet is misstated.

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SAB 108 concludes that a Company should evaluate whether a misstatement is material using both of these methodologies. The interpretation is effective for evaluations made on or after November 15, 2006. The adoption of SAB 108 is not expected to have a material effect on the Company’s consolidated financial position or results of operations.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discusses The Timberland Company’s (“we”, “our”, “us”, “Timberland” or the “Company”) results of operations and liquidity and capital resources. The discussion, including known trends and uncertainties identified by management, should be read in conjunction with the unaudited condensed consolidated financial statements and related notes. Included herein are discussions and reconciliations of (i) total Company and International revenue changes to constant dollar revenue changes and (ii) diluted EPS to diluted EPS excluding restructuring and related costs and including share-based employee compensation costs related to stock option and employee stock purchase plans for 2005. Constant dollar revenue changes, which exclude the impact of changes in foreign exchange rates, and diluted EPS to diluted EPS excluding restructuring and related costs and including share-based employee compensation costs related to stock option and employee stock purchase plans are not Generally Accepted Accounting Principle (“GAAP”) performance measures. We provide constant dollar revenue changes for total Company and International results because we use the measure to understand revenue changes excluding any impact from foreign exchange rate changes. Management provides diluted EPS excluding restructuring and related costs and including share-based employee compensation costs related to stock option and employee stock purchase plans for 2005 to understand earnings excluding restructuring and related costs and to provide comparability to reported results that include share-based employee compensation costs as prescribed by Statement of Financial Accounting Standards (“SFAS”) 123(R), “Share-Based Payment.”

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to sales returns and allowances, realization of outstanding accounts receivable, the carrying value of inventories, derivatives, other contingencies, impairment of assets, incentive compensation accruals, share-based compensation and the provision for income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Historically, actual results have not been materially different from our estimates. Because of the uncertainty inherent in these matters, actual results could differ from the estimates used in applying our critical accounting policies. The Company is not aware of any reasonably likely events or circumstances that would result in materially different amounts being reported. Our significant accounting policies are described in Note 1 to the Company’s consolidated financial statements of our Annual Report on Form 10-K for the year ended December 31, 2005, except for the Company’s accounting for share-based compensation in connection with the adoption of SFAS 123(R) which is noted below. Our estimates, assumptions and judgments involved in applying the critical accounting policies are described in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended December 31, 2005.

Under SFAS 123(R), the Company estimates the fair value of its stock option awards and employee stock purchase plan (the “ESP Plan”) rights on the date of grant using the Black-Scholes option valuation model. The Black-Scholes model includes various assumptions, including the expected volatility for stock options and ESP Plan rights and the expected term of stock options. These assumptions reflect the Company’s best estimates, but they involve inherent uncertainties based on market conditions generally outside of the Company’s control. As a result, if other assumptions had been used, share-based compensation expense, as calculated and recorded under SFAS 123(R) could have been materially impacted. Furthermore, if the Company uses different assumptions in future periods, share-based compensation expense could be materially impacted in future periods. See Note 3 for additional information regarding the Company’s adoption of SFAS 123(R).

Recent Developments

European Union (EU) Duties

On March 22, 2006, the European Commission imposed provisional duties on leather upper footwear originating from China and Vietnam and imported into European Member States. These provisional duties, which began on April 7, 2006, were effective for a six month period and were phased in over a period of five months, beginning at a rate of about 4% and ending at a 19.4% rate for China sourced footwear and at a 16.8% rate for Vietnam sourced footwear. These duties became definitive on October 7, 2006, for a period of two years, with a final 16.5% rate for China sourced footwear and a 10% rate for

Page 18

Vietnam sourced footwear. Pursuant to EU regulations, only provisional duties which do not exceed the definitive duty rates will be collected. Children’s footwear with leather uppers was excluded from the provisional duties, but is subject to definitive duties. Our estimate is that the implementation of these duties will likely reduce our 2006 operating profits in the range of $6-$7 million and our 2007 operating profits in the range of $9-$10 million. The implementation of these duties, which results in additional expenses in lower tax rate jurisdictions, has also had a negative impact on the Company’s effective tax rate, which is estimated at 35.6% for 2006.

Overview

Our principal strategic goal is to become the authentic outdoor brand of choice globally. We continue to develop a diverse portfolio of footwear, apparel and accessories that reinforces the functional performance, benefits and classic styling that consumers have come to expect from our brand. We sell our products to consumers who embrace an outdoor-inspired lifestyle through high-quality distribution channels, including our own retail stores, which reinforce the premium positioning of the Timberland^â brand.

To deliver against our long-term goals, we are focused on driving progress on key strategic fronts. These include enhancing our leadership position in our core footwear business, capturing the opportunity that we see for outdoor-inspired apparel, extending enterprise reach through development of new brand platforms and brand building licensing arrangements, expanding geographically and driving operational and financial excellence while setting the standard for commitment to the community and striving to be a global employer of choice.

Highlights of our third quarter 2006 financial performance, compared to the third quarter of 2005, include the following:

• Third quarter revenue of $503.0 million was down slightly versus the prior year period as gains in new brands (including SmartWool^®), Timberland^® apparel, casual footwear and Timberland PRO^® footwear were offset by anticipated declines in boots and kids’ sales.

• Operating profit for the quarter was $80.8 million compared to $105.1 million in the third quarter of 2005. Profit declines reflected gross margin pressures from business mix impacts and higher comparable product costs, as well as increased operating expenses associated with new businesses, global business expansion and growth category development.

• Gross margin decreased from 48.9% to 47.1%, reflecting higher comparable product costs, including effects from anti-dumping duties on footwear imported into the European Union, unfavorable foreign exchange hedge rate changes and lower U.S. outlet store margins.

• Operating expenses increased 9.6% to $155.9 million with growth primarily attributed to investments in new businesses and global category development, International business expansion and higher share-based compensation costs, reflecting new accounting requirements. Excluding restructuring, operating expenses increased 11.6%.

• Diluted EPS decreased from $1.02 to $.82.

• Cash at the end of the quarter was $61.9 million.

• Short-term debt outstanding at the end of the quarter was $54.2 million.

• We continue to maintain our focus on serving as a reference for socially responsible companies through our commitment to community. In September, we hosted our ninth annual Serva-a-palooza, mobilizing over 6,300 employees, consumers and community partners in projects that impacted 150 communities in 32 countries. In addition, six employees spent three weeks conducting environmental research in the Rift Valley of Kenya in conjunction with Earthwatch Institute. We are also pleased to report that for the third consecutive year, we have been recognized byWorking Motheras one of the top companies to work for in the U.S.

Based on current trends, we are modifying our outlook for full year 2006 financial results, reflecting expectations for more moderate growth in the fourth quarter. We are now targeting fourth quarter revenue growth in the mid-single digit range, reflecting goals for relatively flat U.S. growth which will offset targeted double digit gains in our International business. We also expect continued pressure on operating margins. We expect that gross margin will be approximately 200 basis points

Page 19

below prior year levels, reflecting anticipated business mix impacts and effects from the implementation of anti-dumping duties on EU footwear sourced in China and Vietnam which will lower gross profit by approximately $3 million in the fourth quarter of 2006. We plan to continue to support investment against our growth strategies, including continued global expansion and development of Timberland’s business portfolio, which will drive fourth quarter operating expense growth in the 10% range. These factors contribute to our updated outlook for a decline in comparable EPS performance this year in the 30% range. For the purpose of comparison, we estimate that our 2005 EPS would have been approximately $2.35 after excluding restructuring and related costs and including costs related to stock options and our employee stock purchase plan.

As we look ahead to 2007, we anticipate continued pressure on operating profits in the first half of next year. We expect that soft sell-through rates in boots and kids’ products in the first half of 2006 will contribute to lower overall U.S. Wholesale sales in the first half of 2007 and will continue to constrain European growth results during this period. These factors will likely constrain first half revenue growth to the low single digit range. We also expect continued pressure on gross margins next year related to higher comparable product costs, reflecting rising material costs and wage cost pressures in Asia in 2007. We also expect gross margin pressures related to the implementation of anti-dumping duties on EU sourced footwear from China and Vietnam. The implementation of these duties will add an estimated $9-$10 million to product costs next year, with a likely $5 million impact in the first half of 2007. While we are targeting positive earnings gains in the second half of 2007, first half pressures will likely limit full year 2007 earnings per share to prior year levels.

Results of Operations for the Three Months Ended September 29, 2006 and September 30, 2005

Revenue

Consolidated revenue was $503.0 million in the third quarter of 2006, down 0.6% from the prior year period. Revenue results reflected gains in new brands, including the addition of SmartWool which added $15.3 million to third quarter revenues. Revenue results also reflected progress in developing key growth categories for Timberland including Timberland^® apparel and women’s and men’s casual and Timberland PRO^® footwear. These gains were offset by declines in boots and kids’ sales, primarily driven by lower sales in the U.S. and northern European markets.

Segments Review

We have three reportable business segments (see Note 6): U.S. Wholesale, U.S. Consumer Direct and International.

U.S. Wholesale revenues for the third quarter of 2006 were $202.1 million, down 8.4% in comparison to the prior year period, driven primarily by declines in kids’ footwear and boots. U.S. Wholesale revenues benefited from the addition of SmartWool, which added $12.0 million to third quarter 2006 revenues, and strong growth in Timberland PRO^® footwear and Timberland^® brand apparel sales.

U.S. Consumer Direct posted revenues of $45.9 million, down 1.6% from the prior year period. Sales results were driven primarily by lower comparable store sales at outlet stores, which were impacted by our decision to remove classic boot product from these stores as part of our strategy to strengthen overall pricing for these products in the U.S. market. U.S. specialty stores recorded solid comparable store gains in the third quarter of 2006. Our e-commerce business also posted strong gains over the prior year period. During the third quarter of 2006, we opened two new outlet stores in the U.S.

International revenues grew 6.9% to $255.0 million in the third quarter of 2006, reflecting 3.6% constant dollar growth, supported by gains across Asia, Canada and Europe. Overall, International revenues increased to 50.7% of total consolidated revenues for the quarter. European revenues increased 4.4%, or 0.4% on a constant dollar basis to $205.3 million. European sales results reflected strong gains in sales of casual footwear and apparel which were offset by lower sales of boots and kids’ footwear product, particularly in northern Europe, reflecting comparisons to very strong prior year sell-in levels for these categories. We continued to expand our retail presence in Europe with the third quarter 2006 addition of our new flagship store on Regent Street in London, which focuses on our new store format targeted at the casual “engager” consumer. For the fourth quarter of 2006, we are targeting solid revenue gains in Europe. This outlook reflects expectations for more favorable sell-in comparisons, as the prior year second half sell-in was weighted more heavily towards the third quarter.

In Asia, revenues grew 12.9%, or 14.9% in constant dollars, to $36.7 million, driven by strong gains in Japan and our Asian distributor business, which benefited from our continued expansion in China. Asia’s growth reflected gains in apparel and accessories, boots and casual footwear, supported by continued expansion of our integrated brand presence

Page 20

across the region. Our Asian retail business continued to expand in the third quarter of 2006 with the addition of six new stores and shops.

Products

Worldwide footwear revenue was $368.0 million in the third quarter of 2006, down 7.8% from the prior year period. Footwear results were driven primarily by declines in boots and kids’ footwear sales which offset gains in Timberland PRO^® and women’s and men’s casual footwear. Footwear unit sales declined 15.1% primarily reflecting lower sales of kids’ footwear. The average selling price increased 8.6%, driven primarily by business mix impacts including lower kids’ sales, higher sales in international markets and benefits from favorable foreign exchange rate changes.

Worldwide apparel and accessories revenue expanded 27.5% to $129.4 million. This increase was supported by the addition of SmartWool, which added $15.3 million to global apparel and accessories revenue, and strong gains in Timberland^® brand apparel sales globally. Apparel and accessories unit sales increased 48.4%, while the average selling price decreased by 14.1%, reflecting impacts from the addition of SmartWool’s products, which have lower average selling prices.

Channels

Worldwide wholesale revenues decreased 1.0% to $416.2 million as declines in sales of boots and kids’ footwear offset increases in apparel and accessories, Timberland PRO^® footwear and women’s and men’s casual footwear. Global consumer direct revenues increased 1.3% over the prior year period to $86.8 million. Benefits from global door expansion and growth in our e-commerce business offset a 4.1% decline in global comparable store sales, which was driven primarily by a decline in comparable outlet store performance. During the quarter, we opened nine stores, shops and outlets and closed three worldwide.

Gross Profit

Gross profit as a percentage of sales, or gross margin, was 47.1% for the third quarter of 2006, down 180 basis points from the prior year period. This decrease reflects higher product costs, including effects from anti-dumping duties on EU footwear, unfavorable foreign exchange hedge rate changes and lower U.S. outlet store margins.

We include the costs of procuring inventory (inbound freight and duty, overhead and other similar costs) in cost of goods sold. These costs amounted to $29.9 million and $32.7 million for the third quarters of 2006 and 2005, respectively.

Operating Expense

Operating expense for the third quarter of 2006 was $155.9 million, up $13.6 million or 9.6% from the $142.3 million reported in the third quarter of 2005. As a percentage of revenue, operating expense increased 290 basis points to 31.0% compared to 28.1% in the prior year period. Operating expense growth was driven by $7.0 million of incremental costs associated with new businesses and category development, including the addition of SmartWool, $4.6 million of constant dollar cost growth related to International expansion and $2.5 million of incremental costs associated with share-based compensation, reflecting new accounting requirements. We anticipate fourth quarter operating expense growth in the range of 10% as we continue to support our investment in global expansion and develop Timberland’s business portfolio.

Third quarter 2006 selling expense was $123.7 million, an increase of $12.4 million or 11.1% compared to the prior year period. The increase was driven by $5.6 million in costs related to new businesses and category development, $4.6 million in International business expansion, $1.6 million in share-based employee compensation costs and $1.3 million in distribution costs, partially offset by a reduction in marketing expenses of $2.6 million. Foreign exchange rate changes added $1.7 million, or 1.5%, to overall selling expense growth.

We include the costs of physically managing inventory (warehousing and handling costs) in selling expense. These costs totaled $10.7 million and $9.9 million in the third quarters of 2006 and 2005, respectively.

Advertising expense, which is also included in selling expense, was $6.5 million and $8.5 million in the third quarters of 2006 and 2005, respectively. Advertising costs are expensed at the time the advertising is used, predominantly in the season that the advertising costs are incurred. The decrease in advertising expense reflects shifts in spending towards other brand

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building activities. Prepaid advertising recorded on our unaudited condensed consolidated balance sheets was $3.7 million as of both September 29, 2006 and September 30, 2005.

General and administrative expense for the third quarter of 2006 was $32.3 million, $3.8 million or 13.5% higher than the prior year period. The increase was driven by $1.4 million related to new business initiatives, $1.3 million in costs associated with operating the new European finance shared service center and $0.9 million in share-based employee compensation costs. Foreign exchange rate changes contributed to overall general and administrative expense growth by $0.3 million or 1.0%.

Operating Income

Third quarter 2006 operating income was $80.8 million, down 23.1% in comparison to the $105.1 million recorded in the prior year period. Operating income as a percentage of revenue decreased from 20.8% to 16.1% reflecting gross margin pressures and increased expenses associated with investments against new businesses and growth category development, International expansion and effects from the implementation of new accounting requirements related to share-based compensation.

Operating income for our U.S. Wholesale segment was $61.8 million, down 17.8% from the third quarter of 2005. Revenue decreased 8.4%, driven by lower sales of kids’ footwear and boots. Operating profit margins were pressured by negative product mix impacts and moderate cost growth over a smaller revenue base.

Third quarter operating income for our U.S. Consumer Direct segment declined $2.6 million to $2.9 million. Revenue decreased 1.6%, impacted by a comparable store sales decline of 4.5%, partially offset by 30.0% growth in our e-commerce business. Operating profits were impacted by a 310 basis point decrease in gross margin resulting from negative mix impacts and increased promotions in outlet stores.

International operating income was $71.3 million, down 6.8% from the prior year period. International profit margins were pressured by a decline in gross margins impacted by negative product mix impacts from lower boot sales and higher comparable product costs, including effects from EU anti-dumping duties.

Our Unallocated Corporate expenses, which include central support and administrative costs, not allocated to our business segments, increased 5.8% to $55.2 million. Unallocated Corporate expenses as a percentage of total revenue increased 70 basis points to 11.0% of total revenue. Excluding restructuring costs in both the third quarters of 2006 and 2005 and increased share-based employee compensation costs of $2.9 million, Unallocated Corporate expenses increased $2.7 million or 5.5% from the prior year and represent 10.4% of total revenue. This increase was driven by $1.5 million in unfavorable product cost variances and $0.9 million in costs associated with operating the new European finance shared service center.

Other Income and Taxes

Interest income/(expense), net is comprised of interest income offset by fees related to the establishment and maintenance of our revolving credit facility and interest paid on short-term borrowings. For the third quarter of 2006, we incurred $0.3 million of interest expense related to our short-term borrowings used for our seasonal working capital needs. For the third quarter of 2005, we had net interest income of $0.6 million resulting from higher cash balances prior to our acquisition of SmartWool.

Other, net, included $0.1 million and $(0.9) million of foreign exchange gains/(losses) for the third quarters of 2006 and 2005, respectively, resulting from the timing of settlement of local currency denominated receivables and payables. These gains/(losses) were driven by the volatility of exchange rates within the third quarters of 2006 and 2005 and should not be considered indicative of expected future results.

The effective income tax rate for the third quarter of 2006 was 35.9% compared to 34.0% for the prior year period. The effective tax rate was adjusted in the third quarter of 2006 to increase our full year 2006 tax rate estimate from 34.5% to 35.6%. This increase reflects updated estimates of the geographic mix of our profits and provisions for specific tax reserves.

Results of Operations for the Nine Months Ended September 29, 2006 and September 30, 2005

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Revenue

Consolidated revenues of $1,079.4 million declined 1.9%, or 1.3% on a constant dollar basis, when compared to the first nine months of 2005. These results reflect declines in boots and kids’ sales, primarily in the U.S. and northern Europe, which offset progress in expanding key growth categories including men’s and women’s casual footwear, Timberland PRO^® footwear and Timberland^® brand apparel. Results also include benefits from new brands, including SmartWool which added $31.7 million to year-to-date sales.

Segments Review

Timberland’s U.S. Wholesale revenues for the first nine months of 2006 were $414.3 million, down 5.4% from the prior year period, driven primarily by declines in boots and kids’ footwear sales. These decreases were partially offset by the addition of SmartWool, which added $25.3 million to U.S. Wholesale revenues, and double-digit growth in Timberland PRO^® footwear and Timberland^® brand apparel.

U.S. Consumer Direct revenues were $112.2 million, down 6.5% from the prior year. The decrease was driven by a 7.7% decline in comparable store sales, reflecting soft first half results and comparable store sales declines at outlet stores, which were impacted by our decision to remove classic boot product from these stores as part of our strategy to strengthen overall pricing for these products in the market place.

International revenues for the first nine months of 2006 increased 1.9% to $553.0 million, despite unfavorable foreign exchange rate changes of $6.3 million. On a constant dollar basis, International revenues grew 3.1%, reflecting continued growth in Asia, Canada and Europe. Overall, International revenues increased to 51.2% of total consolidated revenues for the first nine months of 2006.

European revenues decreased 0.3% to $430.8 million, impacted by unfavorable foreign exchange rate changes. On a constant dollar basis, European revenues increased 0.7%, driven by strong growth in the key southern European markets of Italy and Spain and gains in our European distributor business, which offset soft sales results in France, Benelux and the U.K. Double digit growth in men’s and women’s casual footwear and solid gains in apparel and accessories were partially offset by declines in boots and outdoor performance and kids’ footwear, particularly in northern European markets.

Asia posted revenues of $96.2 million, up 4.8%, or 8.2% in constant dollars, in comparison to the prior year period. Gains in Japan, our Asian distributor business, reflecting our expansion in China, and Taiwan were responsible for most of the constant dollar increase. Asia’s growth is supported by sales gains in apparel and accessories, boots, men’s and women’s casual footwear and kids’ footwear.

Canada contributed significant growth to our International business with year-to-date revenues of $19.3 million, representing a 49.1% increase over 2005. Sales results reflect increased footwear revenues and benefits from the re-acquisition of distribution rights for apparel in Canada in 2006.

Products

Worldwide footwear revenue was $772.7 million in the first nine months of 2006, down 8.3% from the prior year period. Footwear results reflected declines in boots and kids’ footwear sales which were partially offset by gains in men’s and women’s casual footwear and Timberland PRO^® footwear. Footwear unit sales decreased 10.8% primarily reflecting lower sales of boots and kids’ footwear. Average selling price increased 2.9% largely due to business mix impacts, including lower kids’ sales and higher sales in international markets.

Worldwide apparel and accessories revenue expanded 19.0% to $292.4 million. This increase was supported by the addition of SmartWool, which added $31.7 million to global apparel and accessories revenue, and strong gains in Timberland^® brand apparel sales. Apparel and accessories unit sales increased 42.7%, while the average selling price decreased by 16.6%, reflecting impacts from of the addition of SmartWool’s products, which have lower average selling prices.

Channels

Worldwide wholesale revenues decreased 1.5% to $851.8 million as declines in sales of boots and kids’ footwear offset

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increases in apparel and accessories, Timberland PRO^® footwear and men’s casual footwear. Global consumer direct revenues decreased 3.5% to $227.6 million. Benefits from global door expansion and growth in our e-commerce business were more than offset by a 6.7% decline in worldwide comparable store sales, impacted by soft U.S. results and declines in outlet store sales globally. During the first nine months of 2006, we opened twenty-two stores, shops and outlets and closed ten worldwide.

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Gross Profit

Gross profit as a percentage of sales, or gross margin, was 47.8% for the first nine months of 2006, down 240 basis points from the prior year period. The decrease was primarily driven by product mix impacts, including lower sales of boots and kids’ footwear; higher product costs, including effects from anti-dumping duties on EU footwear; and impacts from higher levels of off-price and discounted sales.

We include the costs of procuring inventory (inbound freight and duty, overhead and other similar costs) in cost of goods sold. These costs amounted to $70.5 million and $75.9 million in the first nine months of 2006 and 2005, respectively.

Operating Expense

Operating expense for the first nine months of 2006 was $413.4 million, $36.3 million or 9.6% higher than the $377.1 million reported in the prior year period. As a percentage of revenue, operating expense was 38.3%, up 400 basis points from the 34.3% reported in the first nine months of 2005. Operating expense growth was driven by $18.5 million of incremental costs associated with new businesses and category development, including the addition of SmartWool, $11.7 million of cost growth related to International expansion and $10.6 million of incremental costs associated with share-based compensation, reflecting new accounting requirements.

Selling expense for the first nine months of 2006 was $324.0 million, up $26.8 million or 9.0% compared to the prior year period. The increase was driven by $14.8 million in costs related to new businesses and category development, $11.7 million in International business expansion, $6.8 million in share-based employee compensation costs and $3.1 million in distribution expenses. These increases were partially offset by decreases of $6.1 million in marketing costs and $1.3 million in product development expenses. Foreign exchange rate changes further reduced selling expense growth by $2.6 million or 0.9%.

We include the costs of physically managing inventory (warehousing and handling costs) in selling expense. These costs totaled $28.3 million and $27.5 million in the first nine months of 2006 and 2005, respectively.

Advertising expense, which is also included in selling expense, was $14.9 million and $19.8 million in the first nine months of 2006 and 2005, respectively. The decrease reflects shifts in spending towards other brand building activities.

General and administrative expense was $88.6 million, an increase of $11.3 million or 14.6% higher than the prior year period. The increase was driven by $3.9 million of share-based employee compensation costs, $3.7 million related to new business initiatives, $3.0 million in global support services and $2.4 million in costs associated with operating the new European finance shared service center. These increases were offset by a $4.0 million decline in worldwide incentive compensation costs. Foreign exchange rate changes had little impact on general and administrative expense.

Operating Income

Operating income for the first nine months of 2006 was $102.2 million compared to $175.4 million in the prior year period. Operating income as a percentage of revenue decreased from 15.9% to 9.5% reflecting gross margin pressures and increased expenses associated with investments against new businesses and growth category development, International expansion and effects from the implementation of new accounting requirements related to share-based employee compensation costs.

The U.S. Wholesale segment’s operating income decreased 22.0% to $108.9 million in the first nine months of 2006, driven by declines in both revenue and gross margin and increased operating expense. Revenue was down 5.4%, driven by decreases in boots and kids’ footwear sales. Gross margin fell 160 basis points impacted by negative mix effects from decreased sales of boots and kids’ footwear, higher product costs and increased off-price sales. Operating expense increased 26.2%, primarily due to the impact of SmartWool and moderate cost growth over a lower revenue base.

Operating income for our U.S. Consumer Direct segment was $2.9 million for the first nine months of 2006 compared to $12.7 million in the prior year period. Revenue decreased 6.5%, reflecting a 7.7% decline in comparable store sales. Gross margin was down 350 basis points primarily due to negative product mix impacts. During the first nine months of 2006, U.S. Consumer Direct operated five additional stores contributing to a 4.9% increase in operating expense.

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International operating income was $124.8 million, down 11.3% from the prior year period. International profit margins were pressured by a decline in gross margins impacted by negative product mix impacts from lower boot sales and higher comparable product costs, including effects from EU anti-dumping duties.

Our Unallocated Corporate expenses increased 14.4% to $134.4 million. Unallocated Corporate expenses as a percentage of total revenue increased 180 basis points to 12.5% of total revenue. Excluding restructuring costs in the first nine months of 2006 and 2005 and increased share-based employee compensation costs of $12.5 million, Unallocated Corporate expenses increased $6.1 million or 5.3% from the prior year and represent 11.2% of total revenue. This increase was driven by $4.5 million in unfavorable product cost variances, $2.1 million in costs related to operating the new European finance shared service center, $1.6 million of expenses associated with strategic initiatives, $1.5 million of legal and compliance costs and $1.4 million in product management expenses, offset by a $6.0 million reduction in worldwide incentive compensation costs.

Other Income and Taxes

Interest income, net is comprised of interest income offset by fees related to the establishment and maintenance of our revolving credit facility and interest paid on short-term borrowings. For the first nine months of 2006, interest income, net was $1.5 million compared to $2.7 million for the prior year period. The decrease is primarily due to higher levels of short-term borrowings to meet our seasonal working capital needs and lower cash balances, largely attributable to our SmartWool acquisition.

Other, net included $0.8 million and $(0.6) million of foreign exchange gains/(losses) for the first nine months of 2006 and 2005, respectively, resulting from the timing of settlement of local currency denominated receivables and payables. These gains/(losses) were driven by the volatility of exchange rates within the first nine months of 2006 and 2005 and should not be considered indicative of expected future results.

The effective income tax rate for the first nine months of 2006 was 35.6% compared to 34.0% for the prior year period. The effective tax rate was adjusted in the third quarter of 2006 to increase our full year 2006 tax rate estimate from 34.5% to 35.6%. This increase reflects updated estimates of the geographic mix of our profits and provisions for specific tax reserves.

Reconciliation of Total Company and International Revenue Changes to Constant Dollar Revenue Changes

Total Company Revenue Reconciliation:

	For the Three Months						For the Nine Months Ended
	Ended September 29, 2006						September 29, 2006
	$ Change						$ Change
	(in Millions)			% Change			(in Millions)			% Change
Revenue (decrease)	$	(2.9	)		-0.6	%	$	(21.0	)		-1.9	%
Increase/(decrease) due to foreign exchange rate changes		7.9			1.5	%		(6.3	)		-0.6	%
Revenue (decrease) in constant dollars	$	(10.8	)		-2.1	%	$	(14.7	)		-1.3	%

International Revenue Reconciliation:

	For the Three Months					For the Nine Months Ended
	Ended September 29, 2006					September 29, 2006
	$ Change					$ Change
	(in Millions)		% Change			(in Millions)			% Change
Revenue increase	$	16.4		6.9	%	$	10.5			1.9	%
Increase/(decrease) due to foreign exchange rate changes		7.9		3.3	%		(6.3	)		-1.2	%
Revenue increase in constant dollars	$	8.5		3.6	%	$	16.8			3.1	%

Management provides constant dollar revenue changes for total Company and International results because we use the measure to understand revenue changes excluding any impact from foreign exchange rate changes.

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Reconciliation of Diluted EPS to Diluted EPS Excluding Restructuring and Related Costs and Including Share-Based Employee Compensation Costs Related to Stock Option and Employee Stock Purchase Plans

	For the Twelve Months
	Ended December 31, 2005
Diluted EPS, as reported	$	2.43
Per share impact of restructuring and related costs		.04
Diluted EPS excluding restructuring and related costs		2.47
Per share impact of share-based employee compensation costs related to stock option and employee stock purchase plans		(.12	)
Diluted EPS excluding restructuring and related costs and including share-based employee compensation costs related to stock option and employee stock purchase plans	$	2.35

Management provides diluted EPS excluding restructuring and related costs and including share-based employee compensation costs to understand earnings excluding restructuring and related costs and to provide comparability to reported results that include share-based employee compensation costs as prescribed by SFAS 123(R).

Accounts Receivable and Inventory

Accounts receivable was $330.4 million as of September 29, 2006. Excluding SmartWool’s $12.9 million, accounts receivable increased 6.5% to $317.5 million as of September 29, 2006, compared with $298.2 million as of September 30, 2005. The increase in comparable receivables in the third quarter of 2006 reflected the timing of sales in the quarter compared to the prior year and the impacts of foreign exchange. Days sales outstanding were 59 days as of September 29, 2006, compared with 53 days as of September 30, 2005. Wholesale days sales outstanding were 63 days and 56 days for the third quarters ended 2006 and 2005, respectively.

Inventory was $250.5 million as of September 29, 2006. Excluding SmartWool’s $13.1 million, inventory decreased 2.1% to $237.4 million as of September 29, 2006, compared with $242.6 million as of September 30, 2005. The reduction in comparable inventories in the third quarter of 2006 reflected continued efforts to reduce excess inventory as a percentage of overall mix.

Liquidity and Capital Resources

Net cash used by operations for the first nine months of 2006 was $101.2 million, compared with $57.5 million for the first nine months of 2005. The increase in the use of cash in the first nine months of 2006 compared with 2005 was primarily due to reduced net income and an increase in our investment in working capital. In the first nine months of 2006, our net investment in working capital was $204.9 million, compared to $202.2 million in 2005. Working capital increases primarily reflect higher quarter-end receivables balances, impacted by sales timing, and higher inventory levels related to the addition of new businesses, including SmartWool. The increase in accrued expenses is primarily related to increased accruals for freight and duty and the timing of value added tax (“VAT”) payments, offset by lower payroll related accruals as of September 29, 2006, compared with December 31, 2005, than in the comparable period for the prior year. The increase in prepaids was driven by the timing of VAT payments and increased investment in concept shop fixturing and samples. The reduction in income taxes payable is due to reduced net income.

Net cash used for investing activities amounted to $26.1 million in the first nine months of 2006, compared with $15.6 million in the first nine months of 2005. Capital expenditures accounted for $21.9 million of this increase with growth primarily driven by investments in information systems, manufacturing equipment and retail stores. The increase in other investing activities primarily relates to our acquisition of certain assets of GoLite LLC, including trademarks.

Net cash used for financing activities was $25.3 million in the first nine months of 2006, compared with $111.2 million in the first nine months of 2005. Cash flows from financing activities reflected share repurchases of $95.5 million in the first nine months of 2006, compared with $128.9 million in the first nine months of 2005. As of September 29, 2006, we had outstanding balances under our short-term credit facilities of $54.2 million, compared with no borrowings as of September 30, 2005. We received cash inflows of $13.5 million in the first nine months of 2006 from the issuance of common stock related

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to the exercise of employee stock options and employee stock purchases, compared with $17.7 million in the first nine months of 2005.

We have an unsecured committed revolving credit agreement with a group of banks which matures on June 2, 2011 (“Agreement”). The Agreement provides for $200 million of committed borrowings, of which up to $125 million may be used for letters of credit. Upon approval of the bank group, we may increase the committed borrowing limit by $100 million for a total commitment of $300 million. Under the terms of the Agreement, we may borrow at interest rates based on Eurodollar rates (5.3% as of September 29, 2006), plus an applicable margin of between 13.5 and 47.5 basis points based on a fixed charge coverage grid that is adjusted quarterly. As of September 29, 2006, the applicable margin under the facility was 27 basis points. We will pay a utilization fee of an additional 5 basis points if our outstanding borrowings under the facility exceed $100 million. We will also pay a commitment fee of 6.5 to 15 basis points per annum on the total commitment, based on a fixed-charge coverage grid that is adjusted quarterly. As of September 29, 2006, the commitment fee was 8 basis points. The Agreement places certain limitations on additional debt, stock repurchases, acquisitions, amount of dividends we may pay and certain other financial and non-financial covenants. The primary financial covenants relate to maintaining a minimum fixed charge coverage of 3:1 and a leverage ratio of 2:1. We measure compliance with the financial and non-financial covenants and ratios as required by the terms of the Agreement on a fiscal quarter basis.

On December 20, 2005, we entered into a $4.5 million committed revolving credit agreement that matures on December 19, 2006 to provide for SmartWool’s working capital requirements. Up to $3 million of the facility may be used for letters of credit.

We had uncommitted lines of credit available from certain banks totaling $50 million as of September 29, 2006. Borrowings under these lines are at prevailing money market rates (5.8% as of September 29, 2006). Further, we had an uncommitted letter of credit facility of $80 million to support inventory purchases. These arrangements may be terminated at any time at the option of the banks or the Company.

As of September 29, 2006, we had short-term debt outstanding of $54.2 million and no long-term debt outstanding under our credit facilities. As of September 30, 2005, we had no short-term or long-term debt outstanding under any of our credit facilities.

Management believes that our capital needs and our share repurchase program for the balance of 2006 will be funded through our current cash balances, our existing credit facilities and cash from operations, without the need for additional permanent financing. However, as discussed in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2005 and in Part II, Item 1A, Risk Factors, of this report, several risks and uncertainties could cause the Company to need to raise additional capital through equity and/or debt financing. From time to time the Company considers acquisition opportunities which, if pursued, could also result in the need for additional financing. The availability and terms of any such financing would be subject to prevailing market conditions and other factors at that time.

Off Balance Sheet Arrangements

As of September 29, 2006 and September 30, 2005, we had letters of credit outstanding of $25.4 million and $14.0 million, respectively. These letters of credit were issued predominantly for the purchase of inventory. The increase in letters of credit outstanding was driven by higher apparel purchases and obligations associated with provisional anti-dumping duties on European Union footwear sourced in China and Vietnam. As of September 29, 2006, the Company had $224.4 million in foreign currency contracts outstanding, all of which are due to settle within the next 16 months.

We have the following off balance sheet arrangements:
(Dollars in Millions)

	Total Amounts
September 29, 2006	Committed
Lines of credit	$	—
Letters of credit		25.4
Foreign currency contracts		224.4
Total	$	249.8

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We use funds from operations and unsecured committed and uncommitted lines of credit as the primary sources of financing for our seasonal and other working capital requirements. Our principal risks to these sources of financing are the impact on our financial condition from economic downturns, a decrease in the demand for our products, increases in the prices of materials and a variety of other factors. We anticipate that capital requirements for the balance of 2006 will be met through the use of our current cash balances, through our existing credit facilities (which place certain limitations on additional debt, stock repurchases, acquisitions and on the amount of dividends we may pay, and also contain certain other financial and operating covenants) and through cash flow from operations, without the need for additional permanent financing. However, if the need arises, our ability to obtain any additional credit facilities will depend upon prevailing market conditions, our financial condition and the terms and conditions of such additional facilities.

New Accounting Pronouncements

A discussion of new accounting pronouncements is included in Note 14.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the normal course of business, our financial position and results of operations are routinely subject to a variety of risks, including market risk associated with interest rate movements on borrowings and investments and currency rate movements on non-U.S. dollar denominated assets, liabilities and income. We regularly assess these risks and have established policies and business practices that should result in an appropriate level of protection against the adverse effect of these and other potential exposures.

We utilize cash from operations and U.S. dollar denominated borrowings to fund our working capital and investment needs. Short-term debt, if required, is used to meet working capital requirements and long-term debt, if required, is generally used to finance long-term investments. In addition, we use derivative instruments in our hedging of foreign currency transactions. These debt instruments and derivative instruments are viewed as risk management tools and are not used for trading or speculative purposes. Cash balances are invested in high-grade securities with terms less than three months.

We have available unsecured committed and uncommitted lines of credit as sources of financing for our working capital requirements. Borrowings under these credit agreements bear interest at variable rates based on either lenders’ cost of funds, plus an applicable spread, or prevailing money market rates. As of September 29, 2006, we had short-term debt outstanding of $54.2 million and no long-term debt outstanding. As of September 30, 2005, we had no short-term or long-term debt outstanding.

Our foreign currency exposure is generated primarily from our European operating subsidiaries and, to a lesser degree, our Asian and Canadian operating subsidiaries. We seek to minimize the impact of these foreign currency fluctuations by hedging the related transactions with foreign currency forward contracts. These foreign currency forward contracts will expire in 16 months or less. Based upon sensitivity analysis as of September 29, 2006, a 10% change in foreign exchange rates would cause the fair value of our financial instruments to increase/decrease by approximately $22.3 million, compared with $20.4 million as of September 30, 2005. The increase as of September 29, 2006, compared with September 30, 2005, is primarily related to an increase in our foreign currency denominated net assets as of September 29, 2006, compared with September 30, 2005.

Item 4. CONTROLS AND PROCEDURES

We maintain a system of disclosure controls and procedures which are designed to ensure that information required to be disclosed by us in reports we file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed under the federal securities laws is accumulated and communicated to our management on a timely basis to allow decisions regarding required disclosure.

Based on their evaluation as of September 29, 2006, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were effective.

Other than the changes noted below, there were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that occurred during the quarter ended September 29, 2006, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The Company implemented certain new financial system modules to record financial data at our European subsidiary offices during the third quarter of 2006. Additionally, the Company transferred certain transactional and statutory financial activities from our locally based European finance organizations to our European finance shared service center during the third quarter of 2006. The implementations of the new financial system modules and European finance shared service center were undertaken to further standardize accounting systems, realize process efficiencies and improve our internal control over financial reporting. The Company intends to extend the implementation of certain new financial system modules to our U.S. locations in the future and will assess its impact on our internal control over financial reporting at that time.

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Part II OTHER INFORMATION

Item 1A. RISK FACTORS

This Quarterly Report on Form 10-Q contains forward-looking statements. As discussed in Part I, Item 1A, Risk Factors, entitled “Cautionary Statements for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995” of our Annual Report on Form 10-K for the year ended December 31, 2005, investors should be aware of certain risks, uncertainties and assumptions that could affect our actual results and could cause such results to differ materially from those contained in forward-looking statements made by or on behalf of us in our periodic reports filed with the Securities and Exchange Commission, in our annual report to shareholders, in our proxy statement, in press releases and other written materials and statements made by our officers, directors or employees to third parties. Such statements are based on current expectations only and actual future results may differ materially from those expressed or implied by such forward-looking statements due to certain risks, uncertainties and assumptions. We discuss below any material changes in the risks, uncertainties and assumptions previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005. We encourage you to refer to our Form 10-K to carefully consider these risks, uncertainties and assumptions. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Risks Related to our Business

We conduct business outside of the United States which exposes us to foreign currency, import restrictions and duties and other risks.

     On March 22, 2006, the European Commission imposed provisional duties on leather upper footwear originating from China and Vietnam and imported into European Member States. These provisional duties, which began on April 7, 2006, were effective for a six month period and were phased in over a period of five months, beginning at a rate of about 4% and ending at a 19.4% rate for China sourced footwear and at a 16.8% rate for Vietnam sourced footwear. These duties became definitive on October 7, 2006, for a period of two years, with a final 16.5% rate for China sourced footwear and a 10% rate for Vietnam sourced footwear. Pursuant to EU regulations, only provisional duties which do not exceed the definitive duty rates will be collected. Children’s footwear with leather uppers was excluded from the provisional duties, but is subject to definitive duties. The Company is advancing strategies in response to this action, including potential price increases on footwear products sold in Europe. Our estimate is that the implementation of such duties will likely reduce our 2006 operating profits in the range of $6-$7 million and our 2007 operating profits in the range of $9-$10 million. The implementation of these duties, which results in additional expenses in lower tax rate jurisdictions, has also had a negative impact on the Company’s effective tax rate, which is estimated at 35.6% for 2006.

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Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ISSUER PURCHASES OF EQUITY SECURITIES(1)

For the Three Fiscal Months Ended September 29, 2006

					Total Number		Maximum Number
					of Shares		of Shares
					Purchased as Part		That May Yet
	Total Number				of Publicly		be Purchased
	of Shares		Average Price		Announced		Under the Plans
Period*	Purchased **		Paid per Share		Plans or Programs		or Programs
July 1 – July 28		291,704	$	26.03		291,704		5,007,234
July 29 – August 25		302,636		26.40		302,636		4,704,598
August 26 – September 29		334,395		28.68		334,395		4,370,203
Q3 Total		928,735	$	27.10		928,735

Footnote (1)

			Approved
	Announcement		Program		Expiration
	Date		Size (Shares)		Date
Program 1		02/09/2006		6,000,000	None

No existing programs expired or were terminated during the reporting period. See Note 12 to our unaudited condensed consolidated financial statements in this Form 10-Q for additional information.

*	Fiscal month
**	Based on trade date — not settlement date

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Item 6. EXHIBITS

Exhibits.
Exhibit 10. 1 –	The Timberland Company 2006 COO Incentive Program, filed herewith.
Exhibit 31.1 –	Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
Exhibit 31.2 –	Principal Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
Exhibit 32.1 –	Chief Executive Officer Certification Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith.
Exhibit 32.2 –	Chief Financial Officer Certification Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith.

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SIGNATURES

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

	THE TIMBERLAND COMPANY
	(Registrant)
	By:	/s/ BRIAN P. MCKEON
		Brian P. McKeon
Date: November 8, 2006		Executive Vice President-Finance and Administration, Chief
		Financial Officer
	By:	/s/ JOHN CRIMMINS
Date: November 8, 2006		John Crimmins
		Vice President, Corporate Controller and Chief Accounting Officer

Page 34

EXHIBIT INDEX

Exhibit	Description
Exhibit 10. 1	The Timberland Company 2006 COO Incentive Program, filed herewith.
Exhibit 31.1	Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
Exhibit 31.2	Principal Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
Exhibit 32.1	Chief Executive Officer Certification Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith.
Exhibit 32.2	Chief Financial Officer Certification Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith.