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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2010

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 No. 000-51754

Crocs, Inc.

(Exact name of registrant as specified in its charter)

6328 Monarch Park Place, Niwot Colorado 80503

(Address of registrant’s principal executive offices)

(303) 848-7000

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes o  No o

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o  No x

As of April 30, 2010, Crocs, Inc. had 85,794,003 shares of its $0.001 par value common stock outstanding.

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Crocs, Inc.

Form 10-Q

Quarter Ended March 31, 2010

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PART I—FINANCIAL INFORMATION

ITEM 1.  Financial Statements

CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(Unaudited)

See notes to condensed consolidated financial statements.

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CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

See notes to condensed consolidated financial statements.

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CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See notes to condensed consolidated financial statements.

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CROCS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

Crocs, Inc. and its subsidiaries (collectively, “we,” “us,” or the “Company”) are engaged in the design, manufacture, worldwide marketing and brand management of footwear made of specialty resins for men, women and children.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the rules and regulations for reporting on Form 10-Q. Accordingly, these statements do not include all of the information and disclosures required by GAAP or Securities and Exchange Commission (“SEC”) rules and regulations for complete financial statements. In the opinion of management, these financial statements reflect all adjustments considered necessary for a fair presentation of the results for the interim periods presented.  The results of operations for any interim period are not necessarily indicative of results for the full year.

These statements should be read in conjunction with the consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2009 (the “2009 Form 10-K”). The accounting policies used in preparing these unaudited condensed consolidated financial statements are the same as those described in Note 2 to the consolidated financial statements in the 2009 Form 10-K.

Amounts in the 2009 unaudited condensed consolidated statement of operations for foreign currency transaction losses (gains), net and charitable contributions have been reclassified from selling, general, and administrative expenses to conform to current quarter presentation. There was no change to income (loss) from continuing operations as a result of these reclassifications.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Management believes that the estimates, judgments and assumptions made when accounting for items and matters such as, but not limited to, the allowance for doubtful accounts, returns and discounts, impairment assessments and charges, recoverability of assets, including deferred tax assets, uncertain tax positions, share-based compensation expense, fair value of acquired intangibles, assessment of lower of cost or market on inventory, useful lives assigned to long-lived assets, depreciation and provisions for contingencies, are reasonable, based on information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Management also makes estimates in our assessments of potential losses in relation to threatened or pending legal and tax matters. See Note 17—Legal Proceedings. Actual results could materially differ from these estimates. For matters not related to income taxes, if a loss is considered probable and the amount can be reasonably estimated, the Company recognizes an expense for the estimated loss. If there is the potential to recover a portion of the estimated loss from a third party, the Company makes a separate assessment of recoverability and reduces the estimated loss if recovery is also deemed probable.

Change in Accounting Principle

Effective January 1, 2010, the Company decided to change its inventory valuation method for all inventories from the first-in, first-out (“FIFO”) cost method to the moving average cost method, which approximates FIFO.  The Company believes the change to the moving average cost method is preferable under the circumstances because the moving average methodology results in better alignment with the physical flow of inventory than the FIFO methodology, it is calculated by our inventory information system, which incorporates automated controls, and is also the method management uses when preparing budgets, reviewing actual and forecasted financial information, as well as the method used in determining incentive management compensation.  The moving average cost results substantially in the same net income per period.

Financial statements for periods ending on or before December 31, 2009 have not been retroactively adjusted due to immateriality. The impact of the change in the quarterly period ended March 31, 2010 is also immaterial.

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2. RECENT ACCOUNTING PRONOUNCEMENTS

In December 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. The amendments in ASU 2009-17 replace the quantitative-based risks-and-rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has (1) the power to direct the activities of a variable interest entity that most significantly affect the entity’s economic performance and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity. The ASU also requires additional disclosures about a reporting entity’s involvement with variable interest entities and about any significant changes in risk exposure as a result of that involvement. ASU 2009-17 is effective at the start of the Company’s fiscal year beginning after November 15, 2009 and is to be applied prospectively.  See Note 13 — Variable Interest Entities.

3. INVENTORIES

Inventories by major classification are as follows (in thousands):

4. PROPERTY AND EQUIPMENT

Property and equipment includes the following (in thousands):

5. INTANGIBLE ASSETS

The following table summarizes the Company’s identifiable intangible assets as of March 31, 2010 and December 31, 2009 (in thousands):

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For amortizable intangible assets denominated in a foreign currency, the Company translates the gross asset and accumulated amortization at the balance sheet rate and records amortization expense using the weighted average rate of exchange for the applicable period. A difference between the recorded amortization expense and the change in accumulated amortization exists.  This difference is reflected in the accumulated other comprehensive income line item on the Company’s unaudited condensed consolidated balance sheets.

6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities include the following (in thousands):

7. RESTRUCTURING ACTIVITIES

During the quarter ended March 31, 2010, the Company incurred $2.0 million in restructuring expenses primarily related to the retirement of the Company’s Chief Executive Officer, including severance pay and additional stock-based compensation as discussed in Note 10 – Stock Based Compensation.  Additionally, we incurred charges of $0.5 million related to a change in estimate of our original accrual for lease termination costs for our Canadian office facility, which was closed in 2008.

Of the restructuring charges discussed above, $0.5 million was in the Americas segment and $2.0 million was in the Corporate and other group.

Restructuring charges are included in the line items accrued restructuring charges and long-term restructuring in the Company’s unaudited condensed consolidated balance sheets and are recorded under the line item restructuring charges on the Company’s unaudited condensed consolidated statements of operations.

The following table details the changes in the restructuring accruals during the three months ended March 31, 2010 (in thousands):

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8. MARKETABLE SECURITIES

Marketable securities consist of certificates of deposit with maturities greater than three months and up to three years at the time of purchase. These securities, which are classified as available for sale, are carried at fair value, with unrealized gains and losses net of any tax effect reported in stockholders’ equity as accumulated other comprehensive loss, and are held at financial institutions. As of March 31, 2010, marketable securities of $0.3 million and $3.7 million are included in the prepaid and other assets and the long-term other assets line items, respectively, of the Company’s unaudited condensed consolidated balance sheets.

9. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS

Notes payable and capital lease obligations consist of the following (in thousands):

Capital Leases

The Company holds various capital leases for assets with a gross value of $2.7 million classified as equipment and depreciated using the straight-line method over the useful life.  Depreciation of equipment under capitalized leases is included in depreciation expense on the Company’s unaudited condensed consolidated statements of operations.  Certain software acquired under various capital leases for $3.2 million is classified as capitalized software and amortized using the straight-line method over the useful life.  Amortization of capitalized software under capitalized leases is included in amortization expense on the Company’s unaudited condensed consolidated statements of operations.

Notes Payable

On September 25, 2009, the Company entered into a Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, N.A., which matures on September 25, 2012.  The Credit Agreement provides for an asset-backed revolving credit facility of up to $30 million in total, which includes a $17.5 million sublimit for borrowings against the Company’s eligible inventory, a $2 million sublimit for borrowings against the Company’s eligible inventory in-transit, and a $4 million sublimit for letters of credit.  The total borrowings available under the Credit Agreement at any given time are subject to customary reserves and reductions to the extent the Company’s asset borrowing base changes.  Borrowings under the Credit Agreement are secured by all of the assets of the Company, including all receivables, equipment, general intangibles, inventory, investment property, subsidiary stock and leasehold interests.  The Credit Agreement requires the Company to prepay borrowings under the Credit Agreement in the event of certain dispositions of property.

Principal amounts outstanding under the Credit Agreement bear interest at a two percent (2%) premium over a rate that is the greater of either (i) PNC’s published reference rate, (ii) the Federal Funds Open Rate in effect on such day plus one half of one percent (0.5%) or, (iii) the sum of the daily LIBOR rate and one percent (1.0%), with respect to domestic rate loans.  Eurodollar denominated principal amounts outstanding under the Credit Agreement bear interest at the sum of three and one half percent (3.50%) premium over a rate that is the greater of (i) the Eurodollar rate, or (ii) one and one half percent (1.50%) with respect to Eurodollar loans, as applicable.  The Credit Agreement requires monthly interest payments with respect to domestic rate loans and at the end of each period with respect to Eurodollar rate loans.

The Credit Agreement contains certain customary restrictive and financial covenants.  The Company was in compliance with these financial covenants as of March 31, 2010.

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As of March 31, 2010, the Company had no outstanding borrowings under the Credit Agreement and had issued and outstanding letters of credit of $1.0 million which were reserved against the borrowing base.

10. STOCK-BASED COMPENSATION

Options granted generally vest ratably over four years with the first year vesting on a “cliff” basis followed by monthly vesting for the remaining three years.  Compensation expense is recognized ratably over the four year vesting period.  Stock-based compensation expense recognized, including options and non-vested shares, was $1.8 million and $4.2 million in the three months ended March 31, 2010 and 2009, respectively.  Stock-based compensation is recognized in the Costs of sales and Selling, general and administrative expenses line item in the Company’s unaudited condensed statement of operations.

Stock Options

A summary of stock option activity for the three months ended March 31, 2010 is as follows:

Restricted  Stock Awards

A summary of restricted stock award activity for the three months ended March 31, 2010 is as follows:

Separation Agreement.  On March 31, 2010, the Company entered into a separation agreement with its former Chief Executive Officer.  Pursuant to the separation agreement, the vesting of options to purchase 100,000 shares of Company common stock and 100,000 shares of restricted stock were accelerated as of March 31, 2010.  These options to purchase Company common stock will remain exercisable for three months after March 1, 2010, the separation date as defined in the separation agreement.  Additionally, pursuant to the terms of the separation agreement, the Company’s former Chief Executive Officer forfeited options to purchase 200,000 shares of Company common stock and 200,000 shares of restricted stock.  The Company recorded an insignificant amount to restructuring charges related to the acceleration of the vesting of these options and restricted stock awards.

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11. INCOME TAXES

During the three months ended March 31, 2010, the Company recognized an income tax expense of $3.4 million on pre-tax income of $9.1 million, representing an effective income tax rate of 37.2% compared to an income tax expense of $0.2 million on a pre-tax loss of $22.2 million, representing an effective income tax rate of 1% for the same period in 2009.  The change in effective tax rate is primarily the result of changes in the mix of profitability in foreign jurisdictions where the Company is taxable. The Company had unrecognized tax benefits of $29.2 million at January 1, 2010 and $29.4 million at March 31, 2010.

12. EARNINGS (LOSS) PER SHARE

Basic income (loss) per share (“EPS”) is computed by dividing net income (loss) by the weighted average number of shares outstanding for the period.  Diluted EPS reflects the potential dilution from securities that could share in the earnings of the Company.  Anti-dilutive securities are excluded from diluted EPS.  The Company has a small number of participating securities and consequently is computing basic income (loss) per share by dividing net income or loss attributable to common stockholders by the weighted average common shares outstanding during the period.

EPS for the three months ended March 31, 2010 and 2009 is as follows (in thousands except share and per share data):

Due to the Company’s net loss for the three months ended March 31, 2009, the dilutive effect of stock options and unvested restricted stock awards were not included in the computation of diluted EPS, as their inclusion would have been anti-dilutive.

For all periods presented above, there were options outstanding which could potentially dilute basic EPS in the future but were not included in diluted income (loss) per share as their effect would have been anti-dilutive.  The weighted average exercise price per share of the options that were anti-dilutive was $14.27 for the three months ended March 31, 2010, and $7.29 for the three months ended March 31, 2009.  The total number of anti-dilutive options for the three months ended March 31, 2010 and 2009 was 3,239,293 and 9,059,674, respectively.

13. VARIABLE INTEREST ENTITIES

The Company established a relationship with Shanghai Shengyiguan Trade, Ltd Co (“ST”) for the purpose of serving as a distributor of the Company’s products in the People’s Republic of China. The Company has determined that ST is a variable interest entity for which it is the primary beneficiary and there are no other non-controlling interests. The Company currently controls all business activities and absorbs substantially all of the expected residual returns and

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substantially all of the expected losses of ST based on agreements with ST. The Company determined that it is the primary beneficiary of ST by virtue of its variable interest in the equity of ST. All voting rights have been assigned to the Company and there is a transfer agreement between ST and the Company under which all of the equity, assets, and liabilities are to be transferred to the Company at the Company’s sole discretion, subject to certain conditions. Accordingly, the Company’s consolidation of ST does not reflect a non-controlling interest.

The Company did not provide material financial support during the first quarter of 2010 for the funding of ST’s operations. The condensed consolidated financial statements include $5.9 million in total assets as of March 31, 2010, primarily consisting of cash, inventory and receivables, partially offset by $0.2 million in liabilities as of March 31, 2010, primarily consisting of accounts payable and accrued expenses, excluding liabilities related to the support provided by the Company.  Cash is restricted to the extent that China has monetary laws which may limit the Company’s ability to utilize ST’s cash.

14. COMMITMENTS AND CONTINGENCIES

On July 26, 2005, the Company entered into an amended and restated four-year supply agreement with Finproject S.P.A., the former majority owner of Crocs Canada, pursuant to which the Company has the exclusive right to purchase the material for the manufacture of finished shoe products, except for certain current customer dealings (including boot manufacturers). The supply agreement was extended through June 30, 2010, and provides that the Company meet minimum purchase requirements to maintain exclusivity throughout the term of the agreement. The pricing is to be agreed upon each quarter and fluctuates based on order volume, currency fluctuations, and raw material prices.  The Company guarantees the payment to one its raw material suppliers for purchases of material used by one of its third-party manufactures of finished shoe products. The maximum potential amount of future payments the Company could be required to make under the guarantee is €2.1 million (approximately $2.8 million) at March 31, 2010. The Company evaluates the estimated loss for the guarantee under ASC Topic 450, Contingencies, and Topic 460, Guarantees.  The Company considers such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. The Company has recourse as a matter of common law. To date, the Company has not made any payments under the guarantee and, as of March 31, 2010, has not recorded a liability related to the guarantee in its unaudited condensed consolidated financial statements, as the Company does not believe the potential obligation under this guarantee is material.

The Company leases space for certain of its offices, warehouses, vehicles and equipment under leases expiring at various dates through 2026. Certain leases also contain rent escalation clauses (step rents) that require additional rental amounts in the later years of the term. Rent expense for leases with step rents is recognized on a straight-line basis over the minimum lease term. Step rents, tenant improvement allowances, rent holidays and other items are factored into the minimum lease payment and recognized on a straight-line basis over the minimum lease term.  Deferred rent is included in the unaudited condensed consolidated balance sheets in the accrued expenses and other current liabilities line item.

The Company indemnifies certain of its vendors and its directors and executive officers for specified claims. To date, the Company has not paid or been required to defend any indemnification claims, and accordingly, has not accrued any amounts for its indemnification obligations.

The Company has other various immaterial commitments and contingencies that are not discussed above.

15. OPERATING SEGMENTS AND RELATED INFORMATION

The Company operates in the consumer products industry internationally in which the Company principally designs, manufactures, markets and distributes footwear, apparel and accessories.  During 2009, the Company changed the information that was presented to the chief operating decision maker and has restated its revenues, depreciation and amortization, operating income and assets by segment as shown below.  The Company identifies its reportable segments as those geographic regions that represent 10% or more of its revenue, operating income (as defined below), or total assets.  The Company has three reportable segments: Americas, Europe and Asia. All of the reportable segments derive their revenue from the sale of footwear, apparel and accessories.  The Company evaluates performance and makes decisions about allocating resources to its operating segments based on financial measures such as revenue and operating income.

Operating income is the primary measure used by the Company’s chief operating decision maker to evaluate segment operating performance and to decide how to allocate resources to segments.  Operating income is defined as operating

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income before asset impairment charges and restructuring charges.  The Company evaluates the performance of its segments based primarily on the results of the segment without allocating corporate expenses, or indirect general, administrative and other expenses.  The corporate and other category includes (i) Ocean Minded, (ii) Colorado Footwear CV, and (iii) corporate category, which maintains corporate costs such as stock-based compensation, research and development, brand marketing, legal expenses, depreciation on global long-lived assets such as molds, tooling, IT systems, and other global costs that are not allocated to the regions.

Segment profits or losses include adjustments to eliminate intercompany profit or losses on intercompany sales.  Segment assets include the elimination of any intersegment profits or losses in inventory and the elimination of intercompany receivables.  Segment assets, primarily in the Americas segment, include certain long-lived assets that are depreciated in the corporate category due to their global functionality.  Negative assets within the Corporate and other category primarily include eliminations of investments made from the Americas segment in the other reportable segments.  Net revenues as shown below represent sales to external customers for each segment.

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16. COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) for the three months ended March 31, 2010 and 2009 was as follows (in thousands):

17. LEGAL PROCEEDINGS

On March 31, 2006, the Company filed a complaint with the ITC against Acme Ex-Im, Inc., Australia Unlimited, Inc., Cheng’s Enterprises, Inc., Collective Licensing International, LLC, D. Myers & Sons, Inc., Double Diamond Distribution, Ltd., Effervescent, Inc., Gen-X Sports, Inc., Holey Soles Holdings, Ltd., Inter-Pacific Trading Corporation, and Shaka Holdings, Inc., alleging patent and trade dress infringement and seeking an exclusion order banning the importation and sale of infringing products. On August 10, 2006, the Company filed a motion to voluntarily remove its trade dress claim from the investigation to focus on the patent claims. The Company’s motion was granted by Order No. 20 on August 24, 2006. The utility and design patents asserted in the complaint were issued to the Company on February 7, 2006 and March 28, 2006 respectively, by the United States Patent and Trademark Office. The ITC has issued final determinations

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terminating Shaka Holdings, Inc., Inter-Pacific Trading Corporation, Acme Ex-Im, Inc., D. Myers & Sons, Inc., Australia Unlimited, Inc. and Gen-X Sports, Inc. from the ITC investigation No. 337-TA-567 on the basis of settlement and Cheng’s Enterprises, Inc. on the suspension of accused activities. The ITC Administrative Law Judge (“ALJ”) issued an Initial Determination of non-infringement related to one of the patents at issue. The Company filed a petition with the Commission to review this determination. The Commission granted the Company’s petition and on February 15, 2007, after briefing by the parties, the Commission vacated the ALJ’s determination of non-infringement with respect to the remaining respondents and remanded it to the ALJ for further proceedings consistent with the Commission’s order. In light of the Commission’s Order, the procedural schedule and hearing date were reset pursuant to Order No. 38. A trial was held before the ALJ from September 7 to 14, 2007. The ALJ issued an Initial Determination on April 11, 2008 with a finding of no violation, finding infringement of the utility patent by certain accused products, but also finding that the utility patent was invalid as obvious. The ALJ also found that the design patent was valid, but not infringed by the accused products. The Company filed a Petition for Review of the Initial Determination which was due on April 24, 2008. On June 18, 2008, the Commission issued a Notice that it would review the ALJ’s findings in the Initial Determination with respect to the determination of non-infringement of the design patent and the determination of invalidity of the utility patent. On July 25, 2008, the Commission issued a Notice of its decision to terminate the Investigation with a finding of no violation as to either patent. Crocs filed a Petition for Review of the decision with the United States Court of Appeals for the Federal Circuit on September 22, 2008, and filed its initial brief on January 21, 2009. Briefing before the Federal Circuit was completed in April 2009 and oral arguments were heard on July 10, 2009. On October 4, 2009, the Company and Collective Licensing, International, LLC reached a settlement. Collective Licensing, International, LLC agreed to cease and desist infringing on the Company’s patents and to pay the Company certain monetary damages, which was recorded upon receipt. On February 24, 2010, the Federal Circuit found that the Commission erred in finding that the utility patent was obvious and reversed the Commission’s determination of non-infringement of the design patent.  On April 12, 2010, one of the remaining parties, Effervescent, Inc., filed a request for a panel or en banc hearing with the Federal Circuit of the February 24, 2010 decision, to which the Company has responded on April 28, 2010.

On April 3, 2006, the Company filed a complaint in the U.S. District Court for the District of Colorado alleging patent and trade dress infringement and seeking injunctive relief against Acme EX-IM, Inc., Australia Unlimited, Inc., Cheng’s Enterprises, Inc., Collective Licensing International, LLC, D. Myers & Sons, Inc., Double Diamond Distribution, Ltd., Effervescent, Inc., Gen-X Sports, Inc., Holey Soles Holdings, Ltd, Inter-Pacific Trading Corporation, Shaka Holdings, Inc., and Does 1-10 based upon certain utility and design patents that were issued to the Company on February 7, 2006 and March 28, 2006 respectively, by the United States Patent and Trademark Office. Consent judgments have been entered against Shaka Holdings, Inc., Interpacific Trading Corporation and Acme Ex-Im, Inc. The Company entered into a settlement with Australia Unlimited, and filed a stipulation for dismissal of all claims and counterclaims on January 25, 2007. The Company has entered into a settlement agreement with D. Myers & Sons and obtained a consent judgment in connection therewith on May 23, 2007. This action has been stayed pending resolution in the ITC Proceeding, Investigation No. 337-TA-567, which is currently on appeal to the U.S. Court of Appeals for the Federal Circuit. On June 11, 2009, the Company filed a Notice of Voluntary Dismissal of Gen-X Sports, Inc. on the basis of settlement and on November 4, 2009, the Company filed a Notice of Voluntary Dismissal with prejudice of Collective Licensing International, LLC on the basis of settlement.

The Company and certain current and former officers and directors have been named as defendants in complaints filed by investors in the United States District Court for the District of Colorado. The first complaint was filed in November 2007; several other complaints were filed shortly thereafter. These actions were consolidated and, in September 2008, the Court appointed a lead plaintiff and counsel. An amended consolidated complaint was filed in December 2008. The amended complaint purports to state claims under Section 10(b), 20(a), and 20A of the Exchange Act on behalf of a class of all persons who purchased the Company’s stock between April 2, 2007 and April 14, 2008 (the “Class Period”). The amended complaint alleges that, during the Class Period, defendants made false and misleading public statements about the Company and its business and prospects and that, as a result, the market price of the Company’s stock was artificially inflated. The amended complaint also claims that certain current and former officers and directors traded in the Company’s stock on the basis of material non-public information. The amended complaint seeks compensatory damages on behalf of the alleged class in an unspecified amount, interest, and an award of attorneys’ fees and costs of litigation. The Company believes the claims lack merit and intends to defend the action vigorously. Motions to dismiss are currently pending with the Court. Due to the inherent uncertainties of litigation and because the litigation is at a preliminary stage, the Company cannot at this time accurately predict the ultimate outcome of the matter.

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On December 8, 2009, Columbia Sportswear Company (“Columbia”) filed an Amended Complaint adding the Company as a defendant in a case between Columbia and Brian P. O’Boyle and 1 Pen. Inc. in the Multnomah County Circuit Court in the State of Oregon. Columbia has asserted claims against the Company for misappropriation of trade secrets, aiding and abetting breach of fiduciary duty, intentional interference with contract, injunctive relief, disgorgement and an accounting. The Amended Complaint also seeks damages in an unspecified amount, return of patent rights, reasonable attorney’s fees and costs and expenses against the Company. On January 25, 2010, the Company filed an Answer to the Amended Complaint. The Company denies Columbia’s claims in the Amended Complaint and intends to defend this action vigorously. Due to the inherent uncertainties of litigation and because the litigation is at a preliminary stage, the Company cannot at this time accurately predict the ultimate outcome of the matter.

Although the Company is subject to other litigation from time to time in the ordinary course of business, including employment, intellectual property and product liability claims, the Company is not party to any other pending legal proceedings that the Company believes will have a material adverse impact on its business.

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ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, we may make other written and oral communications from time to time that contain such statements. Forward-looking statements include statements as to industry trends and our future expectations and other matters that do not relate strictly to historical facts and are based on certain assumptions of our management. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. These statements are based on the beliefs and assumptions of our management based on information currently available to us. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. This Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include, among others, the risks described in the section entitled “Risk Factors” under Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2009 and subsequent filings with the Securities and Exchange Commission.  We caution the reader to carefully consider such factors. Furthermore, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

We are a designer, manufacturer, distributor, worldwide marketer and brand manager of footwear for men, women and children.  We strive to be the global leader in molded footwear design and development.  We manufacture a product offering that provides new and exciting molded footwear products that feature fun, comfort and functionality. We also design and sell a broad offering of footwear and accessories that utilize our proprietary closed cell-resin, called Croslite.  Our Croslite material is unique in that it enables us to produce an innovative, lightweight, non-marking, and odor-resistant shoe.  Certain shoes made with the Croslite material have been certified by U.S. Ergonomics to reduce peak pressure on the foot, reduce muscular fatigue while standing and walking and to relieve the musculoskeletal system.

Since the initial introduction and popularity of our Beach and Crocs Classic designs, we have expanded our Croslite products to include a variety of new styles and products and have extended our product reach through the acquisition of brand platforms such as Jibbitz, LLC (“Jibbitz”) and Ocean Minded, Inc. (“Ocean Minded”).  We intend to continue branching out into other types of footwear, bringing a unique and original perspective to the consumer in styles that may be unexpected from Crocs.  In part, we believe this will help us to continue to build a stable year-round business as we look to offer more winter-oriented styles. All of our products are designed to allow the product to be defined by comfort, fun, and function.

Our marketing efforts surround specific product launches and employ a fully integrated approach utilizing a variety of media outlets, including print and online media and television.  Our marketing efforts strive to drive business to both our wholesale partners and our company-operated retail and internet stores, ensuring that our presentation and story are first class and drive purchasing at the point of sale.

We currently sell our Crocs-branded products throughout the U.S. and in more than 100 countries.  We sell our products through domestic and international retailers and distributors and directly to end-user consumers through our webstores, Company-operated retail stores, outlets and kiosks. The broad appeal of our footwear has allowed us to market our products to a wide range of distribution channels, including department stores and traditional footwear retailers as well as a variety of specialty and independent retail channels.

Presentation of Operating Segments

We have three operating segments: Americas, Europe and Asia.  All of the reportable segments derive their revenue from the sale of footwear, apparel and accessories.  We evaluate performance and make decisions about allocating resources to our operating segments based on financial measures such as revenue, gross profit and operating income.   We evaluate the performance of our segments based primarily on the results of the segment without allocating corporate expenses or indirect general, administrative and other expenses.  The corporate and other category includes (i) Ocean Minded. (ii) Colorado Footwear CV, and (iii) corporate category, which maintains corporate costs such as stock-based compensation, research and

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development, brand marketing, legal expenses, depreciation on global long-lived assets such as molds, tooling, IT systems, and other global costs that are not allocated to the regions.  Segment profits or losses include adjustments to eliminate intercompany profit or losses on intercompany sales.  Net revenues in the discussion that follows represent sales to external customers for each segment.

Recent Events

During the three months ended March 31, 2010, revenues increased 23.7%, or $32.0 million, compared to the three months ended March 31, 2009 as a result of stronger performance in each of our geographic operating segments.  Earnings per share for the first quarter of 2010 was $0.07, an improvement from the first quarter of 2009, when we reported a net loss per share of ($0.27).  We believe these financial improvements are a reflection of our progress against our cost-savings initiatives throughout 2009, an increased marketing presence and an improved global economic climate.

During 2009, we undertook various cost savings initiatives in an effort to better align our cost structure with revenue.  These cost savings initiatives included the consolidation of our global distribution centers; reduction of warehouse space; impairments of certain assets we no longer intended to utilize, including molds, tooling, equipment and other assets; and reduction in our global workforce.  In addition, during 2009, we executed against a plan to dispose of excess discontinued and impaired product inventories.  Much of this product had been written down to a level that we considered realizable; however, we were able to sell this product at prices substantially higher than what we had previously estimated.  Accordingly, the net effect of these sales was accretive to our gross profit and revenue in 2009; we do not expect that the revenue and gross margins we achieved through the sales of discontinued and impaired inventory during 2009 will be repeatable at the same levels in the future.  In the first quarter of 2010, sales of discontinued and impaired product was at more normal levels given seasonality and normal fluctuations in our business.

General

Revenues are recorded when products are shipped and the customer takes title and assumes risk of loss, collection of related receivables are probable, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. Title passes on shipment or on receipt by the customer depending on the country of the sale and the agreement with the customer. Allowances for estimated returns and discounts are recognized when related revenue is recorded. Because we use both internal manufacturing and contract with third parties to manufacture our products, our cost of sales represents our costs to manufacture products in our Company-operated facilities, including raw materials costs and all overhead expenses related to production, as well as the cost to purchase finished products from our third-party manufacturers and costs to transport these products to our facilities, inclusive of all warehouse and outbound freight expenses. Cost of sales also includes depreciation and amortization of manufacturing assets such as molds and tooling. Our selling, general and administrative expense consists primarily of wages and related payroll and employee benefit costs for selling, marketing and administrative employees, unrealized gains or losses on foreign currency exchange, all non-product retail-related expenses (including rent and depreciation) and professional fees, facility expenses, bank charges and non-cash charges for share-based compensation. Selling, general and administrative expenses also include depreciation and amortization related to non-product, non-manufacturing assets such as our global information systems.

Results of Operations

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N/M – Not meaningful

Revenues.  Revenues increased $32.0 million to $166.9 million in the three months ended March 31, 2010, compared to the three months ended March 31, 2009. Total unit sales of footwear products increased by 1.4 million pairs and average selling price increased $1.30 during the three months ended March 31, 2010 compared to the same period in 2009, as shown in the table below.  In addition, our average selling prices during first quarter of 2009 were lower due to an increased amount of end of life and impaired product sales as management executed against its plan to dispose of this inventory as described above.  The following table sets forth revenue by channel and by region as well as other revenue information for the first quarter of 2010 and 2009:

Revenue from our wholesale channel was stronger globally, particularly in Asia, in the first quarter of 2010 compared to the first quarter of 2009.  We believe this to be largely the result of improved economic conditions as well as efforts made in 2009 and 2010 to improve our wholesale customer relationships, including our direct-merchandising program and efforts to right-size our distribution in this channel.

Revenue from our company-operated retail locations increased 23.3% in the three months ended March 31, 2010 compared to the same period in the previous year.  We believe that this increase in revenue is driven by an increase in the number of stores period over period (as shown in the table below) as well as the fact that we are able to merchandise the full breadth and depth of our product line.  As our retail channel becomes a larger portion of our business, we expect to see some improvements in total revenue and gross margin as we have traditionally been able to achieve a higher average selling price in this channel.  We plan to close certain kiosks and open more branded stores and we expect to open more company-operated retail locations in the future.  The table below sets forth information about the number of company-operated retail locations as of March 31, 2010 and 2009:

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The increase in revenue from our internet channel was driven by increased sales in our Europe segment, resulting from an increased number of internet sites in the region and increased demand.  These increases were partially offset by revenue declines from our internet channels in the Americas and Asia as we sold out of popular styles.  Revenue from our internet channel during the first quarter of 2010 represented 7.4% of our total revenue, down from 8.7% in the first quarter of 2009.  While still a relatively small percentage of our overall business, if our internet business becomes a larger percentage of our total revenue, our total revenue and gross margins would also increase as we have traditionally been able to achieve a higher average selling price in this channel.

The majority of our revenues during the three months ended March 31, 2010 were attributable to our non-classic footwear models.  Our classic models and core products (defined below) have become a smaller portion of our total revenue in recent quarters. Sales of our classic models, core products and new 2010 footwear products as a percentage of our total unit sales is presented in the table below:

(1) Core products includes Beach, Crocs Classic, Kids Cayman (to be renamed Kids Crocs Classic), Athens, Kids Athens, Mary Jane, Girls Mary Jane, Mammoth and Kids Mammoth.

We intend to continue to diversify our product offerings in order to expand our brand. We have also recently begun segmenting our product offerings into our various sales channels and to enhance our visual and fixture merchandising platforms in company-operated and wholesale customers’ stores to more effectively display our expanded product portfolio.

Changes in foreign currency exchange rates since the three month period ending March 31, 2009 contributed $9.2 million to our revenues in the three months ended March 31, 2010.  We expect that sales in international markets in foreign currencies will continue to represent a substantial portion of our overall revenues. Accordingly, changes in foreign currency exchange rates could materially affect our overall revenues or the comparability of those revenues from period to period as a result of translating our financial statements into our reporting currency, the U.S. dollar.

Americas Segment - Revenue.  Our revenues from the Americas segment increased 8.7% in the three months ended March 31, 2010 compared to the comparable period in 2009, driven by increased revenue from our Americas retail and wholesale channels, partially offset by a decline in revenue from our Americas internet channel.  First quarter revenue from company-operated retail locations in the Americas increased 26.5%, or $4.5 million, to $21.5 million in 2010 compared to 2009.  We continue to execute against plans to grow revenue in the U.S. wholesale channel which include, but are not limited to, investments in cooperative advertising and merchandising assistance for select locations at our largest U.S. wholesale accounts.

Asia Segment - Revenue.  Our revenues in Asia increased 40.3% during the first quarter of 2010 compared to the first quarter of 2009 as a result of continued strong demand in our Asia wholesale and retail channels, offset by a slight decline in internet revenue.  Revenue from company-operated retail locations in Asia increased 17.0%, or $1.6 million, to $11.0 million in the three months ended March 31, 2010 compared to the same period in 2009.

Europe Segment - Revenue.  Our revenues in Europe increased 34.3%, or $9.7 million, to $38.0 million in the three months ended March 31, 2010 from $28.3 million for the same period in 2009.  This increase was driven by increased demand in all Europe sales channels (wholesale, retail and internet), particularly at wholesale, where demand resulted in first quarter shipments of merchandise originally expected to ship in second quarter, causing a shift in the timing for revenue recognition. Revenue from Company-operated retail locations was $1.8 million in the three months ended March 31, 2010 versus $1.4 million for the three months ended March 31, 2009.

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Gross profitIncreases in gross profit and gross margin were driven primarily by favorable shifts in product mix towards higher margin products. In addition, gross margins during the first quarter of 2009 were adversely affected by sales of discounted end of life and impaired product, which, during the first quarter of 2009, yielded lower margins (in subsequent quarters, sales of impaired product yielded higher margins).  Notably, we experienced this increase in gross margin while our consumer-direct (internet and retail) channels, which typically yield higher margins than our wholesale channel, declined as a percentage of revenue.  If, in the future, our consumer-direct channels grow as a percentage of revenue, we anticipate improvement in our gross margins.

Changes in foreign currency exchange rates since the three month period ending March 31, 2009 increased our gross margin by $4.7 million in the three months ended March 31, 2010.  We expect that sales at subsidiary companies with functional currencies other than the U.S. dollar will continue to generate a substantial portion of our overall gross profit.  Accordingly, changes in foreign currency exchange rates could materially affect our overall gross profit or the comparability of our gross profit from period to period as a result of translating our financial statements into our reporting currency, the U.S. dollar.

Selling, general and administrative expenses and foreign currency transaction gain/losses.   Selling, general and administrative expense increased 3.3% in the three months ended March 31, 2010 compared to the same period in 2009, driven by increases of $4.0 million in salaries expense (of which $1.4 million related to expansion of our company-operated retail channel), $2.0 million in marketing expense and $1.7 million in rent and other retail-related costs.  Partially offsetting these increases was a decline in stock-based compensation expense of $2.2 million in the first quarter of 2010 compared to the first quarter of the prior year.  Selling, general and administrative expenses for the three months ended March 31, 2010 were also favorably impacted by a net gain on changes in currency exchange rates for transactions denominated, and settled or to be settled, in a currency other than the functional currency of the consolidated entity of $0.3 million compared to a net loss on changes in currency exchange rates of $3.4 million for the three months ended March 31, 2009.  As of March 31, 2010, we had 43 more company-operated retail stores than at March 31, 2009.  As our retail channel becomes a larger portion of our total business, we expect that selling, general and administrative expenses will increase as a percentage of total revenue as certain fixed costs associated with the retail channel are recognized in selling, general and administrative expenses.

Changes in the average foreign currency exchange rates used to translate expenses from our functional currencies to our reporting currency, the U.S. dollar, from the first quarter of 2009 to the same period in 2010 increased selling, general and administrative expenses by approximately $2.1 million.

Restructuring charges.  We recorded $2.5 million in restructuring charges in the three months ended March 31, 2010.  These restructuring charges consisted primarily of severance costs related to the departure of our former Chief Executive Officer, John Duerden, during the first quarter of 2010 as well as a change in estimate of our original accrual for lease termination costs for our office facility in Canada, which was closed in 2008.

Income (Loss) from Operations.  During the three months ended March 31, 2010, we generated income from operations of $9.4 million compared to a loss from operations of $22.6 million for the three months ended March 31, 2009, for the reasons stated above.  The following table summarizes operating income (loss) by segment for the three months ended March 31, 2010 and 2009 (in thousands):