iRobot 2005 Annual Report Download - page 43

Research and Development Expenses
Research and development expenses consist primarily of:
‚ salaries and related costs for our engineers;
‚ costs for high technology components used in product and prototype development; and
‚ costs of test equipment used during product development.
We have significantly expanded our research and development capabilities and expect to continue to
expand these capabilities in the future. An example of this is the engineering design center we opened in India
late in 2005. Substantially all of our research and development is performed in the United States, although we
maintain engineering personnel in India and Hong Kong to serve as a liaison between our U.S.-based
engineering staff and our outsourced manufacturer in China. We are committed to increasing the level of
innovative design and development of new products as we strive to enhance our ability to serve our existing
consumer and military markets as well as new markets for robots. Accordingly, we anticipate that research and
development expenses will continue to increase in absolute dollars for the foreseeable future.
For the fiscal years ended December 31, 2005 and 2004, research and development expense was
$11.5 million and $5.5 million, or 8.1% and 5.8% of total revenue, respectively.
In addition to our internal research and development activities discussed above, we incur research and
development expenses under funded development arrangements with both governments and industrial third
parties. For the fiscal years ended December 31, 2005 and 2004, these expenses amounted to $12.5 million and
$8.4 million, respectively. In accordance with generally accepted accounting principles, these expenses have
been classified as cost of revenue rather than research and development expense.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist primarily of:
‚ salaries and related costs for sales and marketing personnel;
‚ salaries and related costs for executives and administrative personnel;
‚ advertising, marketing and other brand-building costs;
‚ professional services costs;
‚ information systems and infrastructure costs;
‚ travel and related costs; and
‚ occupancy and other overhead costs.
As we focus on increasing our market penetration and continuing to build brand awareness, we anticipate
that selling, general and administrative expenses will continue to increase both in absolute dollars and as a
percentage of sales for the foreseeable future, as we intend to continue aggressively building on the iRobot
brand. We also expect our general and administrative expenses will increase due to the costs associated with
being a public company, including costs associated with compliance with Section 404 of the Sarbanes-Oxley
Act, directors' and officers' liability insurance, increased professional services, and a new investor relations
function.
For the fiscal years ended December 31, 2005 and 2004, selling, general and administrative expense was
$33.7 million and $21.4 million, or 23.7% and 22.5% of total revenue, respectively.
Stock-Based Compensation Expenses
We have recorded deferred stock-based compensation expense related to grants of stock options made
after January 1, 2005. This amount represents the difference between the exercise price of an option awarded
to an employee and the amount retrospectively assessed to be the fair market value of the underlying shares on
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