8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of report (Date of earliest event reported):

November 10, 2010

Rosetta Stone Inc.

(Exact name of registrant as specified in its charter)

Delaware	001-34283	043837082
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	(IRS Employer Identification Number)

1919 North Lynn St., 7th Fl., Arlington, Virginia 22209

(Address of principal executive offices, including zip code)

800-788-0822

(Registrant’s telephone number, including area code)

N/A

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o    Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o    Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o    Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o    Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02. Results of Operations and Financial Condition.

On November 10, 2010, Rosetta Stone Inc. announced its financial results for the third fiscal quarter ended September 30, 2010. A copy of the press release is furnished as Exhibit 99.1 to this report.  In addition, a copy of the supplemental slides which will be discussed during the company’s earnings call at 4:30 p.m. Eastern Time on Wednesday, November 10, 2010 is attached to this report as Exhibit 99.2 and incorporated herein by reference.  A copy of the Supplemental Financial Data Sheet dated November 10, 2010 is attached to this report as Exhibit 99.3 and incorporated herein by reference.

In accordance with General Instruction B.2 of Form 8-K, the information in this Current Report on Form 8-K, including the exhibits, shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

Item 7.01   Regulation FD Disclosure.

See “Item 2.02 Results of Operations and Financial Condition” above.

Item 9.01. Financial Statements and Exhibits.

(d)	Exhibits.
99.1	Press Release dated November 10, 2010.
99.2	Presentation slides from the Rosetta Stone Inc. webcast of its third fiscal quarter ended September 30, 2010 earnings call held on November 10, 2010, furnished herewith.
99.3	Supplemental financial data sheet of Rosetta Stone Inc. for the third fiscal quarter ended September 30, 2010, 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 hereunto duly authorized.

Date:  November 10, 2010
	By:	/s/ Michael C. Wu
		Name:	Michael C. Wu
		Title:	General Counsel and Secretary

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EXHIBIT INDEX

Exhibit No.	Description
99.1	Press Release dated November 10, 2010.
99.2	Presentation slides from the Rosetta Stone Inc. webcast of its third fiscal quarter ended September 30, 2010 earnings call held on November 10, 2010, furnished herewith.
99.3	Supplemental financial data sheet of Rosetta Stone Inc. for the third fiscal quarter ended September 30, 2010, furnished herewith.

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EX-99.1

Exhibit 99.1

Rosetta Stone Inc. Reports Third Quarter 2010 Results

·Successful Launch of Rosetta Stone Version 4 TOTALe™ in September

·Next-Generation Learning Solution Strengthens Company’s Business Model

ARLINGTON, VA — November 10, 2010 — Rosetta Stone Inc. (NYSE:RST), a leading provider of technology-based language-learning solutions, today announced financial results for the third quarter of 2010.  Total revenue of $60.9 million declined 9% from the same period in 2009, and rose slightly from the second quarter 2010.

Sales bookings, which are total revenue plus the change in deferred revenue, were $73.3 million for the third quarter 2010, compared to $76.2 million in the third quarter of 2009.  Deferred revenue increased $12.4 million from the end of the second quarter, in part reflecting sales of the new Version 4 TOTALe™ in late September.  A portion of revenue from sales of Version 4 is deferred to reflect the inclusion of an online-learning subscription component; in the third quarter 2010, that portion totaled $3.6 million.

GAAP net loss for the third quarter 2010 was $0.4 million, or $0.02 per share, compared to GAAP net income of $5.3 million, or $0.25 per diluted share, in the third quarter 2009.

Adjusted EBITDA, which deducts stock-based compensation expense, was $1.2 million, and adjusted operating EBITDA, which also reflects the quarterly change in deferred revenue, was $13.6 million for the third quarter of 2010.  Non-GAAP net income was $0.3 million, or $0.01 per diluted share.  GAAP net loss and non-GAAP net income for the third quarter of 2010 both include $3.6 million, or $0.11 per share, of expenses associated with the launch of Version 4 TOTALe.  Excluding the launch expenses, non-GAAP net income per share was $0.12.

A reconciliation of GAAP to non-GAAP results, as well as an explanation of these measures, is provided below.

“The successful launch of Version 4 TOTALe on September 14 was the highlight of the quarter, and the culmination of years of innovation and effort by our team.  Initial customer response is very positive,” said Tom Adams, president and chief executive officer of Rosetta Stone.  “Version 4 is the most important and exciting instructional technology we’ve ever produced, combining the best elements of interactive self-study, conversational coaching and an online community — all supported by industry-leading technology and support services.  It’s fun, it’s convenient, and it works.  Further, Version 4’s online subscription component strengthens Rosetta Stone’s business model by increasing the higher-visibility subscription component of our revenue.”

“Sales bookings, revenue and per-share income were all consistent with our expectations,” Adams continued.  “Highlights in the quarter included the continued strength in our international business, with revenue up 119% from a year ago, and growth in our institutional segment of 12% from a year ago.  We’re also pleased to have begun the fourth quarter with the hiring of a talented professional, Steve Swad, as our chief financial officer.  Steve brings us a broad, deep understanding of every aspect of corporate finance, as well as a strong business perspective, and we’re glad to welcome him.”

Third Quarter 2010 Operational and Financial Highlights

·Product Launch — On September 14, 2010, Rosetta Stone successfully launched Version 4 TOTALe, the next generation of its award-winning and critically acclaimed language-learning solution.  Language coaches, success agents, and enhanced online tools are all now available to Rosetta Stone learners.  Launch activities included an investor day with a live demonstration of the new solution, press events and a revamped website and advertising campaign.

·Sales Bookings — Sales bookings, which are total revenue plus the change in deferred revenue, were $73.3 million for the third quarter 2010, compared to $76.2 million in the third quarter of 2009.  Total deferred revenue at the end of the third quarter was $39.6 million, up $12.4 million from the end of the second quarter, in part reflecting sales of the new Version 4 TOTALe in late September.  A portion of revenue from sales of Version 4 TOTALe is deferred to reflect the inclusion of an online-learning subscription component; in the third quarter 2010, that portion totaled $3.6 million.

·Revenue Mix — Product revenue for the third quarter was $49.4 million, or 81% of total revenue, while subscription and service revenue was $11.5 million, representing the remaining 19% of total revenue.  Revenue from sales to consumers was $42.7 million, a decline of 16% from the third quarter of 2009.  Consumer revenue reflected sales of approximately 116,300 units of Rosetta Stone’s solution, down from 143,500 in the year-ago period, at an average price of $405, up from $355 a year ago.  Consumer revenue was also affected by reductions in spending on advertising, reflecting higher prices and lower availability of spot television ads.  Rosetta Stone’s management is testing new marketing strategies and tactics for the US consumer market to optimize penetration of Version 4 TOTALe and improve consumer segment operating results.

Institutional revenue grew 12% over the third quarter of 2009, to $18.2 million, and represented 30% of total revenue, compared to 24% a year ago.  Institutional revenue is from sales primarily to educational institutions, government agencies and corporations, and includes a high level of subscription-based sales.

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·International Growth — International revenue grew 119% in the third quarter 2010, to $10.6 million, or 17% of total revenue.  International revenue growth is driven primarily by increased sales to consumers in Rosetta Stone’s established markets in Japan, South Korea, the United Kingdom and Germany.

·GAAP and non-GAAP Operating Income — GAAP operating loss for the third quarter of 2010 was $0.4 million.  Non-GAAP operating income, which excludes stock-based compensation expense and amortization of intangibles, was $0.3 million for the third quarter of 2010, or 1% of total revenue.

·Cash and Cash Equivalents — As of September 30, 2010, cash and cash equivalents were $109.8 million, an increase of approximately $10.1 million from June 30, 2010.  Net cash provided by operating activities in the quarter was $10.1 million, while cash used for capital expenditures was $2.5 million.

Financial Outlook for the Fourth Quarter 2010

Rosetta Stone today provided guidance for the fourth quarter 2010 as follows:

Fourth Quarter 2010:

·Total sales bookings of $82 to $88 million.

·Total revenue of $76 million to $81 million.

·Operating EBITDA, as defined above, of $17.5 million to $21.5 million.

·GAAP net income per diluted share of $0.28 to $0.38 and non-GAAP net income per diluted share of $0.31 to $0.41.

·Diluted weighted-average shares outstanding of approximately 21.4 million.

Rosetta Stone’s expectations regarding the fourth quarter 2010 GAAP and non-GAAP net income include the following anticipated expenses:

·Expenses associated with the launch of the Rosetta Stone Version 4 TOTALe product offering of approximately $1.5 million to $2.0 million, primarily for marketing activities.

Non-GAAP Financial Measures

This press release contains the following non-GAAP financial measures: non-GAAP net income, non-GAAP net income per share, Adjusted EBITDA, Operating EBITDA and non-GAAP operating income. These measures differ from GAAP in that they exclude amortization primarily related to acquired intangibles, and stock-based compensation expenses.  Adjusted EBITDA is GAAP net income or loss plus interest expense, income tax expense, depreciation, amortization and stock-based compensation expenses.

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Operating EBITDA is Adjusted EBITDA plus the change in deferred revenue from the prior quarter.  An additional non-GAAP financial measure in this press release is total sales bookings, which represents executed sales contracts received by the company that are either recorded immediately as revenue or as deferred revenue. In addition, constant currency represents revenue with the cost/benefit of currency movements removed.  Management uses this measure so that business results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of Rosetta Stone’s international business performance.  Management believes that these non-GAAP measures of financial results provide useful information to investors regarding certain financial and business trends relating to the company’s financial condition and results of operations. Management uses these non-GAAP measures to compare the company’s performance to that of prior periods for trend analyses, for purposes of determining executive incentive compensation, and for budgeting and planning purposes.  These measures are used in monthly financial reports prepared for management and in quarterly financial reports presented to the company’s Board of Directors.  Management believes that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing the company’s financial measures with other software companies, many of which present similar non-GAAP financial measures to investors.

Management typically excludes the amounts described above when evaluating the company’s operating performance and believes that the resulting non-GAAP measures are useful to investors and financial analysts in assessing the company’s operating performance due to the following factors:

·Amortization of Acquired Intangibles. Amortization costs and the related tax effects are fixed at the time of an acquisition, and then amortized over a period of several years after the acquisition and generally cannot be changed or influenced by management after the acquisition.

·Stock-based Compensation. Although stock-based compensation is an important aspect of compensation of the company’s employees and executives, stock-based compensation expense is generally fixed at the time of grant, then amortized over a period of several years after the grant of the stock-based instrument, and generally cannot be changed or influenced by management after the grant.

·Total Sales Bookings. Although revenue is an important aspect of measuring company performance, the company believes total sales bookings will better reflect the company’s performance as the company transitions to a greater amount of subscription sales resulting in the recording of increased deferred revenue to be recognized in periods after the initial sales are completed.

·Deferred Revenue. At the time a customer enters into a binding subscription agreement, the company classifies the amounts received, as well as the amounts on billed and uncollected amounts due from customers, in advance of revenue recognition as deferred revenue.  As the company transitions to a greater amount

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of subscription sales the company believes its GAAP earnings will no longer be reflective of the company’s underlying performance and as such believes adding the changes in deferred revenue to its Adjusted EBITDA will better reflect the company’s operating performance.

Management does not consider these non-GAAP measures in isolation or as an alternative to financial measures determined in accordance with GAAP.  The principal limitation of these non-GAAP financial measures is that they exclude significant expenses and income that are required by GAAP to be recorded in the company’s financial statements.  In addition, they are subject to inherent limitations, because they reflect the exercise of judgments by management about which expenses and items of income are excluded from these non-GAAP financial measures and may not be calculated in the same manner as other companies’ similarly titled non-GAAP measures.

In order to compensate for these limitations, management presents its non-GAAP financial measures in connection with its GAAP results.  Rosetta Stone urges investors to review the reconciliation of its non-GAAP financial measures to the comparable GAAP financial measures, which it includes in press releases announcing earnings information, including this press release, and not to rely on any single financial measure to evaluate the company’s business.

Reconciliation tables of the most comparable GAAP financial measures to the non-GAAP measures used in this press release are included at the end of this release.

Investor Webcast

This news release and the accompanying tables should be read in conjunction with the additional content that is available on the company’s website, which includes supplemental financial information as well as the link to a webcast that the company will host to discuss the third quarter 2010 financial results and its outlook for fiscal year 2010.  The webcast, available at http://investors.rosettastone.com, is scheduled for today, November 10, 2010 at 4:30 p.m. eastern time (ET).

Investors may also access the call by dialing +1-719-325-4932 or 877-681-3375 (toll-free in North America ).  Following the conference call, a replay will be available until November 24, 2010 at 877-870-5176 (toll-free in North America) or +1-858-384-5517 with the pass code 9492402.  The call will be archived online on Rosetta Stone’s investor relations website, http://investors.rosettastone.com.

About Rosetta Stone

Rosetta Stone Inc. is changing the way the world learns languages.  Rosetta Stone provides interactive solutions that are acclaimed for the speed and power to unlock the natural language-learning ability in everyone.  Available in more than 30 languages, Rosetta Stone language-learning solutions are used by schools, organizations and

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millions of individuals in over 150 countries throughout the world.  The company was founded in 1992 on the core beliefs that learning a language should be natural and instinctive and that interactive technology can replicate and activate the immersion method powerfully for learners of any age.  The company is based in Arlington, Va. For more information, visit RosettaStone.com®.

“Rosetta Stone” and “TOTALe” are trademarks of Rosetta Stone Ltd.

Cautionary Statement Regarding Forward-Looking Statements

Certain statements in this press release are forward-looking statements, including our guidance for the fourth quarter of 2010 and the full year 2010, our long-term growth prospects, and the costs of our launch of Rosetta Stone Version 4 TOTALe.  In this context, forward-looking statements often address our expected future business and financial performance, and often contain words such as “project,” “believe,” “plan,” “expect,” “anticipate,” “estimate,” “intend,” “should,” “would,” “could,” “potentially,” “seek,” “may,” or “will.”  These forward-looking statements reflect the company’s current views with respect to future events and are subject to certain risks, uncertainties, and assumptions.  A number of important factors could cause actual results or events to differ materially from those indicated by such forward-looking statements, including demand for language learning software; the advantages of our products, technology, brand and business model as compared to others; our ability to maintain effective internal controls or to remediate material weaknesses; our cash needs and expectations regarding cash flow from operations; our product development plans; the impact of our Version 4 TOTALe product on our industry; the appeal and efficacy of Rosetta Stone Version 4 TOTALe; and our expectations regarding capturing lifetime value and a broader range of market segments through such offerings; our plans regarding expansion of our marketing initiatives and sales force; our international expansion plans; our plans to increase our kiosks and retail relationships; our ability to manage and grow our business and execute our business strategy; our financial performance; adverse trends in general economic conditions and the other factors described more fully in the company’s filings with the U.S. Securities and Exchange Commission (SEC), including the company’s annual report on Form 10-K for the year period ended December 31, 2009, which is on file with the SEC.  The company assumes no obligation to update the information in this communication, except as otherwise required by law.  Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof.

Rosetta Stone Inc.
Investor Contact:	Media Contact:
703-522-9970	Reilly Brennan, 703-387-5863
ir@rosettastone.com	rbrennan@rosettastone.com
Source: Rosetta Stone Inc.

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ROSETTA STONE INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Revenue:
Product	$	49,407		$	58,151		$	154,025		$	149,663
Subscription and service	11,519			9,065			30,563			24,297
Total revenue	60,926			67,216			184,588			173,960
Cost of revenue:
Cost of product revenue	8,749			7,798			23,041			20,934
Cost of subscription and service revenue	1,680			1,210			3,631			2,204
Total cost of revenue	10,429			9,008			26,672			23,138
Gross profit	50,497			58,208			157,916			150,822
Operating expenses
Sales and marketing	34,093			32,263			91,896			83,023
Research and development	6,030			6,125			17,600			21,069
General and administrative	12,596			11,951			38,690			44,990
Lease Abandonment	(548		)	(37		)	(583		)	(23		)
Total operating expenses	52,171			50,302			147,603			149,059
Income (loss) from operations	(1,674		)	7,906			10,313			1,763
Other income and (expense):
Interest income	85			55			191			109
Interest expense	(8		)	(8		)	(25		)	(348		)
Other income (expense)	53			45			(158		)	81
Total other income (expense)	130			92			8			(158		)
Income (loss) before income taxes	(1,544		)	7,998			10,321			1,605
Income tax provision (benefit)	(1,159		)	2,695			2,001			399
Net income (loss)	$	(385	)	$	5,303		$	8,320		$	1,206
Net income (loss) per share:
Basic	$	(0.02	)	$	0.26		$	0.41		$	0.09
Diluted	$	(0.02	)	$	0.25		$	0.39		$	0.06
Common shares and equivalents outstanding:
Basic weighted average shares	20,490			20,177			20,367			13,229
Diluted weighted average shares	20,490			20,988			21,161			19,462

ROSETTA STONE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

	September 30,		December 31,
	2010		2009
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	109,814	$	95,188
Restricted cash	107		50
Accounts receivable (net of allowance for doubtful accounts of $754 and $1,349, respectively)	46,427		37,400
Inventory, net	11,789		8,984
Prepaid expenses and other current assets	5,967		7,447
Income tax receivable	4,657		—
Deferred income taxes	6,925		6,020
Total current assets	185,686		155,089
Property and equipment, net	20,640		18,374
Goodwill	34,851		34,838
Intangible assets, net	10,665		10,704
Deferred income taxes	5,386		5,565
Other assets	1,311		872
Total assets	$	258,539	$	225,442
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	1,294	$	1,605
Accrued compensation	7,900		10,463
Other current liabilities	37,761		25,638
Deferred revenue	36,131		24,291
Income tax payable	—		4,184
Total current liabilities	83,086		66,181
Deferred revenue	3,492		1,815
Other long-term liabilities	494		1,011
Total liabilities	87,072		69,007
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; 10,000 and 10,000 authorized; zero and zero shares issued and outstanding at September 30, 2010 and December 31, 2009	—		—
Non-designated common stock, $0.00005 par value, 190,000 and 190,000 shares authorized, 20,846 and 20,440 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively	2		2
Additional paid-in capital	137,245		130,872
Accumulated income	34,105		25,785
Accumulated other comprehensive income (loss)	115		(224		)
Total stockholders’ equity	171,467		156,435
Total liabilities and stockholders’ equity	$	258,539	$	225,442

ROSETTA STONE INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended									Three Months Ended
	September 30, 2010									September 30, 2009
	GAAP			Adjustments			non-GAAP			GAAP			Adjustments			non-GAAP
Revenue:
Product	$	49,407		$	—		$	49,407		$	58,151		$	—		$	58,151
Subscription and service	$	11,519		—			11,519			9,065			—			9,065
Total revenue	60,926			—			60,926			67,216			—			67,216
Cost of revenue:
Cost of product revenue (1)	8,749			(7		)	8,742			7,798			(10		)	7,788
Cost of subscription and service revenue	1,680			—			1,680			1,210			—			1,210
Total cost of revenue	10,429			(7		)	10,422			9,008			(10		)	8,998
Gross profit	50,497			7			50,504			58,208			10			58,218
Operating expenses
Sales and marketing(2)	34,093			(222		)	33,871			32,263			(207		)	32,056
Research and development(3)	6,030			(320		)	5,710			6,125			(290		)	5,835
General and administrative(4)	12,596			(530		)	12,066			11,951			(641		)	11,310
Lease abandonment	(548		)	—			(548		)	(37		)	—			(37		)
Total operating expenses	52,171			(1,072		)	51,099			50,302			(1,138		)	49,164
Income (loss) from operations	(1,674		)	1,079			(595		)	7,906			1,148			9,054
Other income and (expense):
Interest income	85			—			85			55			—			55
Interest expense	(8		)	—			(8		)	(8		)	—			(8		)
Other income	53			—			53			45			—			45
Total other income (expense)	130			—			130			92			—			92
Income (loss) before income taxes	(1,544		)	1,079			(465		)	7,998			1,148			9,146
Income tax provision (benefit) (5)	(1,159		)	405			(754		)	2,695			430			3,125
Net income (loss)	$	(385	)	$	674		$	289		$	5,303		$	718		$	6,021
Net income (loss) per share:
Basic	$	(0.02	)				$	0.01		$	0.26					$	0.30
Diluted	$	(0.02	)				$	0.01		$	0.25					$	0.29
Common shares and equivalents outstanding:
Basic weighted average shares	20,490						20,490			20,177						20,177
Diluted weighted average shares	20,490						21,169			20,988						20,988

(1)Represents stock based compensation expense of $7 and $10 in 2010 and 2009, respectively

(2)Represents stock based compensation expense of $208 and $207 in 2010 and 2009, respectively, and intangible expense of $14 and $0 in 2010 and 2009, respectively

(3)Represents stock based compensation expense of $320 and $290 in 2010 and 2009, respectively

(4)Represents stock based compensation expense of $530 and $472 in 2010 and 2009, respectively, as well as $169 of fees associated with the company’s canceled secondary stock offering

(5)Non-GAAP tax rate of 37.5%

ROSETTA STONE INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

	Nine Months Ended									Nine Months Ended
	September 30, 2010									September 30, 2009
	GAAP			Adjustments			non-GAAP			GAAP			Adjustments			non-GAAP
Revenue:
Product	$	154,025		$	—		$	154,025		$	149,663		$	—		$	149,663
Subscription and service	30,563			—			30,563			24,297			—			24,297
Total revenue	184,588			—			184,588			173,960			—			173,960
Cost of revenue:
Cost of product revenue (1)	23,041			(29		)	23,012			20,934			(22		)	20,912
Cost of subscription and service revenue	3,631			—			3,631			2,204			—			2,204
Total cost of revenue	26,672			(29		)	26,643			23,138			(22		)	23,116
Gross profit	157,916			29			157,945			150,822			22			150,844
Operating expenses
Sales and marketing(2)	91,896			(589		)	91,307			83,023			(881		)	82,142
Research and development(3)	17,600			(889		)	16,711			21,069			(5,737		)	15,332
General and administrative(4)	38,690			(1,525		)	37,165			44,990			(14,925		)	30,065
Lease abandonment	(583		)	—			(583		)	(23		)	—			(23		)
Total operating expenses	147,603			(3,003		)	144,600			149,059			(21,543		)	127,516
Income (loss) from operations	10,313			3,032			13,345			1,763			21,565			23,328
Other income and (expense):
Interest income	191			—			191			109			—			109
Interest expense	(25		)	—			(25		)	(348		)	—			(348		)
Other income	(158		)	—			(158		)	81			—			81
Total other income (expense)	8			—			8			(158		)	—			(158		)
Income (loss) before income taxes	10,321			3,032			13,353			1,605			21,565			23,170
Income tax provision (benefit) (5)	2,001			1,137			3,138			399			8,087			8,486
Net income (loss)	$	8,320		$	1,895		$	10,215		$	1,206		$	13,478		$	14,684
Net income (loss) per share:
Basic	$	0.41					$	0.50		$	0.09					$	1.11
Diluted	$	0.39					$	0.48		$	0.06					$	0.75
Common shares and equivalents outstanding:
Basic weighted average shares	20,367						20,367			13,229						13,229
Diluted weighted average shares	21,161						21,161			19,462						19,462

(1)	Represents stock based compensation expense of $29 and $22 in 2010 and 2009, respectively
(2)	Represents stock based compensation expense of $547 and $470 in 2010 and 2009, respectively as well as $377 of IPO related compensation expense in 2009 and amortization of intangible expense of $42 and $34 in 2010 and 2009, respectively
(3)	Represents stock based compensation expense of $889 and $704 in 2010 and 2009, respectively as well as $5,033 of IPO related compensation expense in 2009
(4)	Represents stock based compensation expense of $1,525 and $1,363 in 2010 and 2009, respectively as well as $13,393 of IPO related compensation expense in 2009 and $169 of fees associated with the company’s canceled secondary stock offering
(5)	Non-GAAP tax rate of 37.5%

ROSETTA STONE INC.

Reconciliation of Net Income to Operating EBITDA

(in thousands)

(unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Net income (loss)	$	(385	)	$	5,303		$	8,320		$	1,206
Interest (income)/expense, net	(77		)	(47		)	(166		)	239
Income tax expense (benefit)	(1,159		)	2,695			2,001			399
Depreciation and amortization	1,725			1,420			4,715			3,914
Stock-based and IPO-related compensation	1,065			979			2,990			21,362
Fees associated with canceled secondary stock offering	—			169			—			169
Adjusted EBITDA	$	1,169		$	10,519		$	17,860		$	27,289
Change in deferred revenue	12,379			8,942			13,517			11,418
Operating EBITDA	$	13,548		$	19,461		$	31,377		$	38,707

EX-99.2

Q3 2010 Financial Results November 10, 2010

These slides and accompanying oral presentation contain forward-looking statements including our guidance for the fourth quarter and full year 2010, the anticipated impact of Rosetta Stone Version 4 TOTALe on our industry, our plans for development and release of new products, and our plans to expand internationally. These statements relate to future events or to future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other comparable terminology. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control and that could materially affect actual results, levels of activity, performance, or achievements. Factors that could materially affect actual results, levels of activity, performance or achievements include those listed under the caption “Risk Factors” of Rosetta Stone’s Form 10-K dated March 10, 2010. If any of these risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary significantly from what we projected. Any forward-looking statement you see or hear during this presentation reflects our current views with respect to future events and is subject to these and other risks, uncertainties, and assumptions relating to our operations, results of operations, growth strategy, and liquidity. We assume no obligation to publicly update or revise these forward-looking statements for any reason, whether as a result of new information, future events, or otherwise. Safe Harbor Summary

This presentation contains the following non-GAAP financial measures: non-GAAP net income, non-GAAP net income per share, Adjusted EBITDA, Operating EBITDA and non-GAAP operating income. These measures differ from GAAP in that they exclude amortization, primarily related to acquired intangibles, and stock-based compensation expenses. Adjusted EBITDA is GAAP net income or loss plus interest expense, income tax expense, depreciation, amortization and stock-based compensation expenses. Operating EBITDA is Adjusted EBITDA plus the change in deferred revenue. An additional non-GAAP financial measure in this presentation is total sales bookings, which represents executed sales contracts received by the company that are either recorded immediately as revenue or as deferred revenue. Management believes that these non-GAAP measures of financial results provide useful information to investors regarding certain financial and business trends relating to the company’s financial condition and results of operations. Management uses these non-GAAP measures to compare the company's performance to that of prior periods for trend analyses, for purposes of determining executive incentive compensation, and for budgeting and planning purposes. These measures are used in monthly financial reports prepared for management and in quarterly financial reports presented to the company's Board of Directors. Management believes that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing the company's financial measures with other software companies, many of which present similar non-GAAP financial measures to investors Use of Non-GAAP Measures .

 Tom Adams President and CEO November 10, 2010

Rosetta Stone Inc. © 2010 5 Earnings and Operating EBITDA $M 1. Operating EBITDA is defined as Adjusted EBITDA plus the change in deferred revenue. Third Quarter Year-to-Date $M 5.3 (0.4) 19.5 13.5 3Q09 3Q10 Net income Operating EBITDA* 1.2 8.3 38.7 31.4 YTD 09 YTD 10 Net income Operating EBITDA*

Rosetta Stone Inc. © 2010 6 Strong Cash Flow Generation $M * “Free cash flow” is operating cash flow minus capital expenditures. $M Third Quarter Nine Months Ended 9/30 7.3 10.1 5.0 7.6 Q3 09 Q3 10 operating cash flow free cash flow* 16.3 16.6 9.1 10.9 YTD 09 YTD 10 operating cash flow free cash flow*

Rosetta Stone Inc. © 2010 7 Revenue and Sales Bookings $M $M Q3 2010 Year to Date 62.4 50.3 4.8 10.6 76.2 73.3 3Q09 3Q09 3Q10 3Q10 US rev Int'l rev Sales bookings 163.0 155.0 11.0 29.6 185.4 198.1 YTD 09 YTD 09 YTD 10 YTD 10 US rev Int'l rev Sales bookings

Rosetta Stone Inc. © 2010 8 Revenue Diversification Q3 2009 Q3 2010 76% 24% consumer institutional 93% 7% US non-US 70% 30% 83% 17%

Rosetta Stone Inc. © 2010 9 Strong Institutional Growth $M 28% 37% 12% 25% Institutional Revenue Growth (Year-over-Year) 10.3 13.2 9.9 13.6 13.6 17.0 16.3 18.2 4Q08 4Q09 1Q09 1Q10 2Q09 2Q10 3Q09 3Q10

Rosetta Stone Inc. © 2010 10 Triple-Digit International Growth $M 158% 275% 119% 155% International Revenue Growth (Year-over-Year) 3.3 8.5 2.8 10.5 3.3 8.5 4.8 10.5 4Q08 4Q09 1Q09 1Q10 2Q09 2Q10 3Q09 3Q10

 Matt Sysak Controller November 10, 2010

Third Quarter Version 4 TOTALe Impact Category Q3 2010 Impact Est. Q4 Impact Ongoing Coaches and agents Gross margin, less one-time obsolescence charge, of 85.7% 84 – 85% G.M. Non-recurring V4 launch activities $1.6 million Sales & Marketing costs $1.5 – 2.0 million V3 inventory obsolescence $1.7 million Cost of Product Revenue $0.3 million Sales & Marketing costs none Ongoing, no cash difference Revenue deferment $3.6 million revenue deferral related to sales of V4, affecting Total Revenue, Consumer Revenue and US Revenue comparisons to previous periods sales bookings more relevant for comparisons to previous periods

Strong Balance Sheet 12/31/2009 9/30/2010 Cash and cash equivalents $95.2 $109.8 Accounts receivable, net 37.4 46.4 Total assets 225.4 258.5 Deferred revenue 26.1 39.6 Total debt - - Total liabilities 69.0 87.1 Total liabilities and stockholders’ equity $225.4 $258.5 $M

Financial Outlook Q4 2010 Guidance Sales bookings1 $82M to $88M Total revenue $76M to $81M GAAP basic net income per share $0.28 to $0.38 Non-GAAP basic net income per share $0.31 to $0.41 Operating EBITDA2 $17.5M to $21.5M Diluted shares outstanding 21.4M “Sales bookings” are defined as executed sales contracts received by company that are either recorded immediately as revenue or as deferred revenue. “Operating EBITDA” equals Adjusted EBITDA (excludes stock-based compensation and amortization of intangibles) plus change in deferred revenue.

 Tom Adams President and CEO November 10, 2010

EX-99.3

Exhibit 99.3

Rosetta Stone Inc.

Business Metrics

(in thousands)

	Quarter-Ended															Quarter-Ended
	3/31/09			6/30/09			09/30/09			12/31/09			2009			3/31/10			6/30/10			9/30/10
Revenues - Consumer vs. Institutional
Consumer	40,350			42,902			50,935			65,083			199,270			49,450			43,698			42,726
Institutional	9,934			13,558			16,281			13,228			53,001			13,564			16,950			18,200
	50,284			56,460			67,216			78,311			252,271			63,014			60,648			60,926
YoY Growth (%)
Consumer	41		%	15		%	12		%	16		%	19		%	23		%	2		%	-16		%
Institutional	43		%	32		%	15		%	29		%	27		%	37		%	25		%	12		%
Total	41		%	18		%	12		%	18		%	20		%	25		%	7		%	-9		%
% of Total Revenue
Consumer	80		%	76		%	76		%	83		%	79		%	78		%	72		%	70		%
Institutional	20		%	24		%	24		%	17		%	21		%	22		%	28		%	30		%
	100		%	100		%	100		%	100		%	100		%	100		%	100		%	100		%
Consumer Revenue by Channel
DTC	24,945			25,944			28,470			34,643			114,002			30,668			24,702			26,761
Kiosk	8,222			9,279			9,776			13,141			40,418			9,356			8,645			7,344
Global Retail	7,183			7,679			12,689			17,299			44,850			9,426			10,351			8,621
	40,350			42,902			50,935			65,083			199,270			49,450			43,698			42,726
YoY Growth (%)
DTC	32		%	25		%	7		%	14		%	18		%	23		%	-5		%	-6		%
Kiosk	34		%	16		%	-3		%	8		%	11		%	14		%	-7		%	-25		%
Global Retail	101		%	-12		%	42		%	29		%	29		%	31		%	35		%	-32		%
	41		%	15		%	12		%	16		%	19		%	23		%	2		%	-16		%
% Revenue by Channel
DTC	62		%	60		%	56		%	53		%	57		%	62		%	57		%	63		%
Kiosk	20		%	22		%	19		%	20		%	20		%	19		%	20		%	17		%
Global Retail	18		%	18		%	25		%	27		%	23		%	19		%	24		%	20		%
Total	100		%	100		%	100		%	100		%	100		%	100		%	100		%	100		%
Unit Metrics
Consumer unit volume (in thousands)	116.3			118.8			143.5			190.3			568.9			127.4			111.6			116.3
Consumer average sales price per unit	$	347		$	361		$	355		$	342		$	350		$	388		$	392		$	405
YoY Unit Metrics Growth (%)
Consumer unit volume	8		%	-9		%	0		%	13		%	3		%	10		%	-6		%	-19		%
Consumer average sales price per unit	30		%	26		%	12		%	3		%	16		%	12		%	8		%	14		%

1

	Quarter-Ended										Quarter-Ended
	3/31/09		6/30/09		09/30/09		12/31/09		2009		3/31/10		6/30/10		9/30/10
# of Kiosks (end of period)
US	154		172		207		201		201		190		186		180
Europe	3		6		10		9		9		9		10		13
Asia Pacific	4		5		7		32		32		41		50		64
Total # of Kiosks (end of period)	161		183		224		242		242		240		246		257
Revenues by Geography
United States	47,477		53,128		62,379		69,820		232,804		52,476		52,139		50,390
International	2,807		3,332		4,837		8,491		19,467		10,538		8,509		10,536
	50,284		56,460		67,216		78,311		252,271		63,014		60,648		60,926
Revenues by Geography (as a %)
United States	94	%	94	%	93	%	89	%	92	%	83	%	86	%	83	%
International	6	%	6	%	7	%	11	%	8	%	17	%	14	%	17	%
	100	%	100	%	100	%	100	%	100	%	100	%	100	%	100	%

2