ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Certain statements included in this Quarterly Report on Form 10-Q are "forward-looking statements" within the meaning of the federal securities laws. Forward-looking statements are made based on our expectations and beliefs concerning future events impacting Black Diamond, Inc. ("Black Diamond" or the "Company," which may be referred to as "we," "us," or "our") and therefore involve a number of risks and uncertainties. We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements. Potential risks and uncertainties that could cause the actual results of operations or financial condition of the Company to differ materially from those expressed or implied by forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to, the overall level of consumer spending on our products; general economic conditions and other factors affecting consumer confidence; disruption and volatility in the global capital and credit markets; the financial strength of the Company's customers; the Company's ability to implement its growth strategy; the Company's ability to successfully integrate and grow acquisitions; the Company's ability to maintain the strength and security of its information technology systems; stability of the Company's manufacturing facilities and foreign suppliers; the Company's ability to protect trademarks and other intellectual property rights; fluctuations in the price, availability and quality of raw materials and contracted products; foreign currency fluctuations; our ability to utilize our net operating loss carryforwards; and legal, regulatory, political and economic risks in international markets. More information on potential factors that could affect the Company's financial results is included from time to time in the Company's public reports filed with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. All forward-looking statements included in this Quarterly Report on Form 10-Q are based upon information available to the Company as of the date of this Quarterly Report on Form 10-Q, and speak only as the date hereof. We assume no obligation to update any forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q.

Overview

Black Diamond is a global leader in designing, manufacturing and marketing innovative active outdoor performance products for climbing, mountaineering, backpacking, skiing, cycling and other outdoor recreation activities for a wide range of year-round use. Our principal brands include Black Diamond®, GregoryTM and POCTM through which we target the demanding requirements of core climbers, skiers and cyclers, more general outdoor performance enthusiasts and consumers interested in outdoor-inspired gear for their urban activities. Our Black Diamond®, GregoryTM and POCTM brands are iconic in the active outdoor industry and are linked intrinsically with the modern history of the sports we serve. We believe our brands are synonymous with performance, innovation, durability and safety that the outdoor and action sport communities rely on and embrace in their active lifestyle.

Critical Accounting Policies and Use of Estimates

Management's discussion of financial condition and results of operations is based on the consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these condensed consolidated financial statements require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting periods. We continually evaluate our estimates and assumptions including those related to derivatives, revenue recognition, income taxes, stock-based compensation, and valuation of long-lived assets, goodwill, and other intangible assets. We base our estimates on historical experience and other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates.

There have been no significant changes to our critical accounting policies as described in our Annual Report on Form 10-K for the year ended December 31, 2011.

Recent Accounting Pronouncements

See "Recent Accounting Pronouncements" in Note 1 to the notes to the unaudited condensed consolidated financial statements.

Results of Operations

Consolidated Three Months Ended June 30, 2012 Compared to Consolidated Three Months Ended June 30, 2011

The following presents a discussion of consolidated operations for the three months ended June 30, 2012, compared with the consolidated three months ended June 30, 2011.

                                              THREE MONTHS ENDED
                                       June 30, 2012       June 30, 2011

Sales
Domestic sales                        $        15,626     $        12,972
International sales                            16,289              15,366
Total sales                                    31,915              28,338

Cost of goods sold                             19,449              17,303
Gross profit                                   12,466              11,035

Operating expenses
Selling, general and administrative            13,319              11,931
Transaction costs                               1,138                   -

Total operating expenses                       14,457              11,931

Operating loss                                 (1,991 )              (896 )

Other (expense) income
Interest expense                                 (604 )              (709 )
Interest income                                    22                  16
Other, net                                       (195 )               429

Total other expense, net                         (777 )              (264 )

Loss before income tax                         (2,768 )            (1,160 )
Income tax benefit                               (860 )              (349 )
Net loss                              $        (1,908 )   $          (811 )

Sales

Consolidated sales increased $3,577, or 12.6%, to $31,915 during the three months ended June 30, 2012 compared to consolidated sales of $28,338 during the three months ended June 30, 2011. The increase in sales was primarily attributable to an increase in the quantity of new and existing climb and mountain products sold during the period of $4,721. This increase was partially off-set by a decrease in sales of $1,144 due to the weakening of foreign currencies against the U.S. dollar.

Consolidated domestic sales increased $2,654, or 20.5%, to $15,626 during the three months ended June 30, 2012 compared to consolidated domestic sales of $12,972 during the three months ended June 30, 2011. The increase in domestic sales was primarily attributable to an increase in the quantity of new and existing climb and mountain products sold during the period.

Consolidated international sales increased $923, or 6.0%, to $16,289 during the three months ended June 30, 2012 compared to consolidated international sales of $15,366 during the three months ended June 30, 2011. The increase in international sales was primarily attributable to an increase in the quantity of new and existing climb and mountain products sold during the period of $2,067. This increase was partially off-set by a decrease in sales of $1,144 due to the weakening of foreign currencies against the U.S. dollar.

Cost of Goods Sold

Consolidated cost of goods sold increased $2,146, or 12.4%, to $19,449 during the three months ended June 30, 2012 compared to consolidated cost of goods sold of $17,303 during the three months ended June 30, 2011. The increase in cost of goods sold was attributable to an increase in sales.

Gross Profit

Consolidated gross profit increased $1,431, or 13.0%, to $12,466 during the three months ended June 30, 2012 compared to consolidated gross profit of $11,035 during the three months ended June 30, 2011. Consolidated gross margin was 39.1% during the three months ended June 30, 2012 compared to a consolidated gross margin of 38.9% during the three months ended June 30, 2011, which gross margins were consistent with one another.

Selling, General and Administrative

Consolidated selling, general and administrative expenses increased $1,388, or 11.6%, to $13,319 during the three months ended June 30, 2012 compared to consolidated selling, general and administrative expenses of $11,931 during the three months ended June 30, 2011. The increase in selling, general and administrative expenses was primarily attributable to the Company's investments in its strategic initiatives and infrastructure to support both current and anticipated future growth.

Transaction Costs

Consolidated transaction expense increased to $1,138 during the three months ended June 30, 2012 compared to consolidated transaction expense of $0 during the same period in 2011, which consisted primarily of professional fees and expenses related to due diligence and the negotiation and documentation of acquisition related agreements in connection with the Company's acquisition of POC on July 2, 2012.

Interest Expense

Consolidated interest expense decreased $105, or 14.8%, to $604 during the three months ended June 30, 2012 compared to consolidated interest expense of $709 during the three months ended June 30, 2011. The decrease in interest expense was primarily attributable to lower average balances outstanding on the Company's line of credit during the three months ended June 30, 2012 compared to the same period in 2011.

Income Taxes

Consolidated income tax benefit increased $511, or 146.4%, to $860 during the three months ended June 30, 2012 compared to a consolidated income tax benefit of $349 during the same period in 2011. The increase in tax benefit is due to the increase in pre-tax loss and effective income tax rate recorded during the three months ended June 30, 2011.

Our effective income tax rate was 31.1% for the three months ended June 30, 2012 compared to 30.1% for the same period in 2011. Many factors could cause our annual effective tax rate to differ materially from our quarterly effective tax rates, including changes in the geographic mix of taxable income and discrete events that may occur in various quarters. There were no meaningful discrete events recorded in the Company's effective income tax rate calculation for the three months ended June 30, 2012.

Consolidated Six Months Ended June 30, 2012 Compared to Consolidated Six Months Ended June 30, 2011

The following presents a discussion of consolidated operations for the six months ended June 30, 2012, compared with the consolidated six months ended June 30, 2011.

                                               SIX MONTHS ENDED
                                       June 30, 2012       June 30, 2011

Sales
Domestic sales                        $        34,441     $        28,802
International sales                            43,893              38,594
Total sales                                    78,334              67,396

Cost of goods sold                             47,252              41,290
Gross profit                                   31,082              26,106

Operating expenses
Selling, general and administrative            27,094              24,260
Restructuring charge                                -                 774
Transaction costs                               1,250                   -

Total operating expenses                       28,344              25,034

Operating income                                2,738               1,072

Other (expense) income
Interest expense                               (1,346 )            (1,437 )
Interest income                                    34                  26
Other, net                                         95                 847

Total other expense, net                       (1,217 )              (564 )

Income before income tax                        1,521                 508
Income tax expense                                839                 151
Net income                            $           682     $           357

Sales

Consolidated sales increased $10,938, or 16.2%, to $78,334 during the six months ended June 30, 2012 compared to consolidated sales of $67,396 during the six months ended June 30, 2011. The increase in sales was attributable to an increase in the quantity and average sales price per unit of new and existing climb and mountain products sold during the period of $12,252. This increase was partially off-set by a decrease in sales of $1,314 due to the weakening of foreign currencies against the U.S. dollar.

Consolidated domestic sales increased $5,639, or 19.6%, to $34,441 during the six months ended June 30, 2012 compared to consolidated domestic sales of $28,802 during the six months ended June 30, 2011. The increase in domestic sales was primarily attributable to an increase in the quantity of new and existing climb and mountain products sold during the period.

Consolidated international sales increased $5,299, or 13.7%, to $43,893 during the six months ended June 30, 2012 compared to consolidated international sales of $38,594 during the six months ended June 30, 2011. The increase in international sales was primarily attributable to an increase in the quantity and average sales price per unit of new and existing climb and mountain products sold during the period of $6,613. This increase was partially off-set by a decrease in sales of $1,314 due to the weakening of foreign currencies against the U.S. dollar.

Cost of Goods Sold

Consolidated cost of goods sold increased $5,962, or 14.4%, to $47,252 during the six months ended June 30, 2012 compared to consolidated cost of goods sold of $41,290 during the six months ended June 30, 2011. The increase in cost of goods sold was attributable to an increase in sales.

Gross Profit

Consolidated gross profit increased $4,976, or 19.1%, to $31,082 during the six months ended June 30, 2012 compared to consolidated gross profit of $26,106 during the six months ended June 30, 2011. Consolidated gross margin was 39.7% during the six months ended June 30, 2012 compared to a consolidated gross margin of 38.7% during the six months ended June 30, 2011. The increase in gross margin percentage is primarily driven by the mix of product sold and distribution channel in which it was sold during 2012 compared to 2011.

Selling, General and Administrative

Consolidated selling, general and administrative expenses increased $2,834, or 11.7%, to $27,094 during the six months ended June 30, 2012 compared to consolidated selling, general and administrative expenses of $24,260 during the six months ended June 30, 2011. The increase in selling, general and administrative expenses was primarily attributable to the Company's investments in its strategic initiatives and infrastructure to support both current and anticipated future growth.

Restructuring Charge

Consolidated restructuring expenses decreased 100.0% to $0 during the six months ended June 30, 2012 compared to consolidated restructuring expense of $774 during the same period in 2011. The restructuring expenses incurred during the six months ended June 30, 2011 comprised of: (i) $562 related to the relocation of Gregory Mountain Products, Inc. ("GMP") to the Company's headquarters, and
(ii) $212 related to the disposal of long-lived assets in conjunction with the relocation of the Company's U.S. distribution facilities in Salt Lake City, UT to a new location in Salt Lake City, UT as part integrating GMP.

Transaction Costs

Consolidated transaction expense increased to $1,250 during the six months ended June 30, 2012 compared to consolidated transaction expense of $0 during the same period in 2011, which consisted primarily of professional fees and expenses related to due diligence and the negotiation and documentation of acquisition related agreements in connection with the Company's acquisition of POC on July 2, 2012.

Interest Expense

Consolidated interest expense decreased $91, or 6.3%, to $1,346 during the six months ended June 30, 2012 compared to consolidated interest expense of $1,437 during the six months ended June 30, 2011. The decrease in interest expense was primarily attributable to lower average balances outstanding on the Company's line of credit during the six months ended June 30, 2012 compared to the same period in 2011. On February 22, 2012, the Company closed a public offering for 8,913 shares of its common stock, realizing net proceeds of $63,400 before expenses. On February 22, 2012, the Company reduced its outstanding balance on its revolving credit facility with Zions First National Bank to $0.

Income Taxes

Consolidated income tax expense increased $688, or 455.6%, to $839 during the six months ended June 30, 2012 compared to a consolidated income tax expense of $151 during the same period in 2011. The increase in tax expense is due to the increase in pre-tax income and the change in the effective income tax rate compared to the six months ended June 30, 2011.

Our effective income tax rate was 55.2% for the six months ended June 30, 2012 compared to 29.7% for the same period in 2011. Many factors could cause our annual effective tax rate to differ materially from our quarterly effective tax rates, including changes in the geographic mix of taxable income and discrete events that may occur in various quarters. There were no meaningful discrete events recorded in the Company's effective income tax rate calculation for the six months ended June 30, 2012.

Liquidity and Capital Resources

Consolidated Six Months Ended June 30, 2012 Compared to Consolidated Six Months Ended June 30, 2011

The following presents a discussion of cash flows for the consolidated six months ended June 30, 2012, compared with the consolidated six months ended June 30, 2011. Our primary ongoing funding requirements are for working capital, expansion of our operations and general corporate needs, as well as investing activities associated with targeted, strategic acquisitions and expansion into new product categories. We plan to fund our future expansion of operations and investing activities through a combination of our operating cash flows, revolving credit facility, and equity offerings. We believe that our liquidity requirements for at least the next 12 months will be adequately covered by existing cash, cash provided by operations, and our existing revolving credit facility. At June 30, 2012, we had total cash and cash equivalents of $43,423 compared with a cash and cash equivalents balance of $2,400 at December 31, 2011
- which was substantially all controlled by the Company's U.S. entities.

                                                          SIX MONTHS ENDED
                                                  June 30, 2012       June 30, 2011

Net cash provided by operating activities        $         1,669     $             8
Net cash used in investing activities                     (2,755 )            (2,095 )
Net cash provided by financing activities                 42,152                 793
Effect of foreign exchange rates on cash                     (43 )               182
Change in cash and cash equivalents                       41,023              (1,112 )
Cash and cash equivalents, beginning of period             2,400               2,767
Cash and cash equivalents, end of period         $        43,423     $         1,655

Net Cash From Operating Activities

Consolidated net cash provided by operating activities was $1,669 during the six months ended June 30, 2012 compared to consolidated net cash provided by operating activities of $8 during the six months ended June 30, 2011. The increase in net cash provided operating activities during 2012 is primarily due to timing differences of when accounts receivable were collected, inventory purchased, and accounts payable were paid during the six months ended June 30, 2012 compared to the same period in 2011. Excluding $1,250 of transaction costs primarily related to the acquisition of POC, net cash provided by operating activities would have been $2,919.

Free cash flow, defined as net cash provided by operating activities less capital expenditures, was free cash flows used of $1,086 during the six months ended June 30, 2012 compared to free cash flows used of $2,117 during the same period in 2011.

Net Cash From Investing Activities

Consolidated net cash used in investing activities increased by $660 to $2,755 during the six months ended June 30, 2012 compared to $2,095 during the six months ended June 30, 2011. The increase is due to the increase in consolidated capital expenditures. The increase in capital expenditures is due to certain machinery and equipment and computer hardware and software capital expenditures that were incurred during the six months ended June 30, 2012 that were not incurred during the same period in 2011.

On July 2, 2012, the Company acquired all of the issued and outstanding shares of capital stock of POC. The Company acquired POC for a total consideration valued at 311,300 Swedish kronor (SEK) or approximately $44,900 through the delivery to the Sellers of approximately $40,600 in cash and approximately 460 shares of Black Diamond common stock, par value $0.0001.

Net Cash From Financing Activities

Consolidated net cash provided by financing activities increased by $41,359 to $42,152 during the six months ended June 30, 2012 compared to consolidated cash provided by financing activities of $793 during the six months ended June 30, 2011. The increase is due to the proceeds from the sale of stock and proceeds from the exercise of stock options $62,562 and $447, respectively, which was partially off-set by net payments on the Company's debt (line of credit, capital leases, and other long-term debt) of $20,857 compared to proceeds from the exercise of stock options of $120 and net proceeds from borrowings of $673 during the same period in 2011. On February 22, 2012, the Company closed a public offering for 8,913 shares of its common stock, realizing net proceeds of $63,400 before expenses. On February 22, 2012, the Company reduced its outstanding balance on its revolving credit facility with Zions First National Bank to $0.

Net Operating Loss

As of December 31, 2011, the Company had net operating loss, research and experimentation credit and alternative minimum tax credit carryforwards for U.S. federal income tax purposes of $217,822 ($725 relates to tax windfall, which will not be realized until an income tax payable exists), $1,693 and $261, respectively. The Company believes its U.S. Federal net operating loss ("NOL") will substantially offset its future U.S. Federal income taxes, excluding the amount subject to U.S. Federal Alternative Minimum Tax ("AMT"). AMT is calculated as 20% of AMT income. For purposes of AMT, a maximum of 90% of income is offset by available NOLs. The majority of the Company's pre-tax income is currently earned and expected to be earned in the U.S., or taxed in the U.S. as Subpart F. income and will be offset with the NOL. Of the $217,097 of net operating losses available to offset taxable income, $215,538 does not expire until 2020 or later, subject to compliance with Section 382 of the Internal Revenue Code of 1986, as amended.

As of December 31, 2011, the Company's gross deferred tax asset was $92,251. The Company has recorded a valuation allowance, resulting in a net deferred tax asset of $73,747, excluding deferred tax liabilities. Management has provided a valuation allowance against some of the net deferred income tax assets as of December 31, 2011, because the ultimate realization of those benefits and assets does not meet the more likely than not criteria.

Revolving Credit Facility

The Company and certain of its subsidiaries have a loan agreement with Zions First National Bank, a national banking association ("Lender") (the "Loan Agreement"). Pursuant to the terms of the Loan Agreement, the Lender has made available a $35,000 unsecured revolving credit facility (the "Loan"). The Loan matures on July 2, 2013. The Loan may be prepaid or terminated at the Company's option at anytime without penalty. No amortization is required. Any outstanding principal balance together with any accrued but unpaid interest or fees will be due in full at maturity. The Loan bears interest at the 90-day LIBOR rate plus an applicable margin as determined by the ratio of Senior Net Debt (as calculated in the Loan Agreement) to Trailing Twelve Month EBITDA (as calculated in the Loan Agreement). As of June 30, 2012, there was $2,153 outstanding, and $32,847 available capacity, less outstanding letters of credit of $324.

Shelf Registration Statements

On February 1, 2011, our shelf registration statement on Form S-3 (File No. 333-171164) (the "Form S-3") filed with the Securities and Exchange Commission was declared effective whereby we may offer, issue and sell from time to time, in one or more offerings and series, together or separately, shares of common stock, shares of preferred stock, debt securities or guarantees of debt securities up to an aggregate amount of $250,000. The proceeds of any offering are anticipated to be used in the strategic development and growth of our business, both organically and through acquisitions.

On February 22, 2012, we consummated the closing of a public offering (the "Offering") of 7,750 shares of the Company's common stock, plus an additional 1,163 shares of common stock to cover an over-allotment option granted to the underwriters, at a price to the public of $7.50 per share (the "Offering Price"). Included in the total number of shares of common stock sold in the Offering were 1,333 shares of common stock purchased at the Offering Price by certain of the Company's officers, directors and employees (the "Reserved Shares"). The Reserved Shares were subject to lock-up agreements restricting the sales of such shares for a period of 90 days, subject to extension under certain circumstances. The underwriters received an underwriting discount of 6%, or $0.45 per share, in connection with the sale of the shares of common stock in the Offering, other than with respect to the sale of the Reserved Shares, for . . .