Rosetta Stone 2009 Annual Report Download - page 18

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Table of Contents
In August 2007, we launched a new product platform, Version 3, in ten languages in our consumer channels. This product launch was the culmination of
over three years of research and development. Version 3 provides a significant set of new features and benefits, including our proprietary speech recognition
technology. We subsequently introduced four additional Version 3 languages in March 2008 and seven more Version 3 languages in September 2008. We
also introduced the Audio Companion compact disc practice tool in all 14 of our then-available Version 3 languages in June 2008 and introduced the Audio
Companion in the seven new Version 3 languages in September 2008. In May 2009, we released Levels 4 and 5 in English (US) and Spanish (Latin America)
as well as an additional four languages in Version 3. In July 2009, we released Rosetta Stone TOTALe, our new web-based service offering that includes a
component of dedicated language conversation coaching. In November 2009, we released Levels 4 and 5 in 4 additional languages in Version 3. As of
December 31, 2009, all Version 3 languages are sold with Audio Companion and all Version 3 languages, except for Latin, are available with Rosetta Stone
TOTALe web-based services.
Our research and development expenses were $26.2 million in the year ended December 31, 2009.
Sourcing and Fulfillment
Our strategy is to maintain a flexible, diversified and low-cost manufacturing base. We use third-party contract manufacturers and suppliers to obtain
substantially all our product and packaging components and to manufacture finished products. We believe that we have good relationships with our
manufacturers and suppliers and that there are alternative sources in the event that one or more of these manufacturers or suppliers is not available. We
continually review our manufacturing and supply needs against the capacity of our contract manufacturers and suppliers with a view to ensuring that we are
able to meet our production goals, reduce costs and operate more efficiently.
We package and distribute our products primarily from our fulfillment facility in Harrisonburg, Virginia. We also contract with third-party fulfillment
vendors in Munich, Netherlands and Tokyo, Japan. From Tokyo, we distribute products for consumer orders in Japan. From Munich, we distribute products
for consumer orders in Europe. We distribute products for the remainder of our orders from Harrisonburg, Virginia.
Competition
The language learning industry is highly fragmented and subject to rapidly changing consumer preferences and industry trends. We expect competition in
the markets that we serve to persist and intensify. We face varying degrees of competition from a wide variety of companies providing language learning
solutions including:
language learning center operators;
audio CD and MP3 download providers;
pre-packaged software producers;
textbook publishers;
online tutoring service providers; and
online peer-to-peer practice providers.
Our competitors include Berlitz International Inc., Simon & Schuster, Inc. (Pimsleur), Random House Ventures LLC (Living Language), Disney Publishing
Worldwide and McGraw-Hill Education.
We believe that the principal competitive factors in our industry include:
product differentiation, including:
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