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Rosetta Stone Inc. Reports Second Quarter 2013 Results

(Thomson Reuters ONE via COMTEX) --Rosetta Stone Inc. Reports Second Quarter 2013 Results

Company Continues Progress in Its Transformation;

Reports Adjusted EBITDA Growth of Nearly 150% to $2.8 Million

ARLINGTON, VA - August 7, 2013 - Rosetta Stone Inc. (NYSE:RST), a leading provider of technology-based language-learning solutions, today announced financial results for the second quarter of 2013, as summarized below:

US$ thousands                        Three Months Ended
except per-share data                June 30,            %
                                     2013      2012      change
Total revenue                        $62,139   $60,812   2%
Total bookings                       $63,083   $63,043   0%
Net loss                             ($3,557)  ($4,544)  22%
Net loss per share:                  ($0.16)   ($0.22)   27%
Adjusted net loss (1)                ($839)    ($1,829)  54%
Adjusted net loss per share: (1)     ($0.03)   ($0.09)   66%
Adjusted EBITDA (2)                  $2,786    $1,123    148%
Cash flow from operations            $2,489    $3,412    -27%
Purchases of property and equipment  ($1,684)  ($1,031)  -63%
Free cash flow                       $805      $2,381    -66%

- Adjusted net income(loss) and adjusted net income (loss) per share exclude the impact of items related to its litigation with Google, Inc., restructuring costs as well as all adjustments related to recording the non-cash tax valuation allowance for deferred tax assets. Adjusted net income(loss) for prior periods has been revised to conform to current definition.

- Adjusted EBITDA is GAAP net income(loss) plus interest income and expense, income tax benefit and expense, depreciation, amortization and stock-based compensation expenses. Adjusted EBITDA excludes any items related to the litigation with Google Inc., and restructuring costs. Adjusted EBITDA for prior periods has been revised to conform to current definition.

Definitions and reconciliations for all non-GAAP measures are provided in this press release.

"I was pleased with our results and would characterize the second quarter as another quarter where we showed steady progress against our strategy and we took meaningful actions to improve future results and move us closer to our 2015 targets," said Steve Swad, President and Chief Executive Officer of Rosetta Stone. Swad added "We continued our shift to digital, with 25% of Consumer revenue now coming from digital download and Online Learners and increased our online presence through the acquisition of Livemocha. We grew our core business, invested in new products and managed expenses, helping us to deliver impressive growth in Adjusted EBITDA. We also continued to push our transformation forward by closing kiosks, launching our first set of travel apps and extending into the digital reading space with the recent acquisition of Lexia."

Second Quarter 2013 Operational and Financial Highlights

- Bookings: Total consolidated bookings of $63.1 million were flat compared to the year-ago period. North American Consumer segment ("NA Consumer") bookings increased 5% to $39.3 million from $37.3 million primarily reflecting stronger performance in both the direct-to-consumer and retail sales channels, partially offset by a decline in the kiosk channel, which was closed early in the second quarter of 2013. Excluding the kiosk channel, NA Consumer bookings increased 15% year-over-year. The Rest of World Consumer segment ("ROW Consumer") declined 15%, with results due to lower year-over-year bookings in Asia and the UK. In Germany, results increased sharply, reflecting the lapping of the one year anniversary of the switch to online-only products in that market, while other geographies decreased. Bookings in the Global Enterprise & Education ("E&E") segment (previously known as the Institutional segment) decreased 4% compared with a year-ago, reflecting the absence of network product this quarter following the company's decision to curtail selling that product. Excluding the impact of de-emphasized network and CD-product sales, core E&E bookings increased 4% year-over-year.

- Revenue: Total revenue increased 2% year-over-year to $62.1 million from $60.8 million. NA Consumer revenue increased 8%, reflecting stronger performance in both the direct-to-consumer and retail sales channels. In particular, the direct-to-consumer sales channel benefited from cross-selling to community members of Livemocha, which the company acquired in early April 2013. Excluding kiosk, NA Consumer revenue increased 18% year-over-year. ROW Consumer revenue decreased 7% due to decreases in Japan and the UK, offset by modest improvement in Germany. E&E revenue decreased 7% in the second quarter due mainly to the absence of network product sales compared with a year ago. E&E revenue increased over 2% year-over-year, excluding the impact of network product sales.

US$ thousands                  Three Months Ended
                               June 30,
                               2013          2012           % change
Revenue from:
North America Consumer         $     39,934  $      36,918  8%
Rest of World Consumer         7,478         8,053          -7%
Total Consumer                 47,412        44,971         5%
Global Enterprise & Education  14,727        15,841         -7%
Total                          $     62,139  $      60,812  2%

- Adjusted EBITDA: Adjusted EBITDA for the second quarter increased 148% to $2.8 million from $1.1 million. The improvement in Adjusted EBITDA was due to an increase in revenue combined with lower operating expenses, after adjusting for one-time items. Cost of Goods Sold decreased $1.1 million due to mix shift to lower-cost digital offerings and lower hard-product and studio coaching costs. Sales and marketing expenses decreased by $2.0 million. The reduction in sales and marketing expense was due to marketing efficiencies and lower kiosk expenses resulting from the closing of the company's remaining 56 U.S. kiosk locations in the quarter. General and administrative (G&A) expenses increased by $0.7 million due in part to the addition of Livemocha. Research and development costs increased $2.6 million, reflecting the investment being made in product development and the additional costs from the Livemocha acquisition including product personnel. Adjusted EBITDA includes approximately $2.5 million of adjustments, mainly related to severance and lease termination costs associated with the shuttering of our U.S. kiosks and costs associated with the Livemocha acquisition.

- Adjusted Net Loss and Adjusted EPS: Adjusted Net Loss was $0.8 million in the second quarter of 2013, compared to Adjusted Net Loss of $1.8 million in the second quarter of 2012. Adjusted Net Loss per share was $0.03 compared to an Adjusted Net Loss of $0.09 per share in the prior year period.

- Balance Sheet and Cash Flow: Cash at the end of the quarter was $132.1 million, a $7.3 million decrease from $139.4 million at March 31, 2013. The decrease was mainly due to the company's $8.2 million acquisition, net of cash acquired, of Livemocha in the quarter. The balance sheet remains debt-free. Deferred revenue increased $1.7 million in the quarter to $61.6 million. Free cash flow in the second quarter was $0.8 million compared with $2.4 million a year ago. The decline in free cash flow reflects a decrease in working capital versus the year ago period and an increase in capital expenditures to $1.7 million in the second quarter compared with $1.0 million a year ago.

Financial Outlook

With the company's acquisition of Lexia Learning Systems, Inc. on August 1, 2013, the company is subject to purchase accounting adjustments which will impact the comparability of guidance issued prior to the announcement of the acquisition. Going forward the company will provide guidance on a pro forma basis, which excludes the impact of these purchase accounting adjustments. The company is providing the following guidance for the full year 2013, which includes the expected contribution from Lexia for the last five months of the year:

                              Guidance Before Impact of Lexia  Lexia Acquisition Impact  Updated Guidance
                              Range                            5-Month Results           Range
($ Millions)                  Low             High             Range                     Low      High
Pro Forma Revenue             $280            $290             $7-$8                     $287     $298
Pro Forma Adjusted EBITDA     $16             $18              ($1-$2)                   $14      $17
Pro Forma Adjusted Net Income ($1)            $1               ($1-$2)                   ($3)     $0
Pro Forma Adjusted EPS        ($0.02)         $0.04            ($0.05-$0.10)             ($0.12)  ($0.01)
Shares Outstanding (MM)       21.5            21.5                                       21.5     21.5
Capital Expenditures          $5              $8                                         $5       $8

Non-GAAP Financial Measures

This press release contains several non-GAAP financial measures.

- Adjusted EBITDA is GAAP net income or loss plus interest income and expense, income tax benefit and expense, depreciation, amortization and stock-based compensation expenses. Adjusted EBITDA excludes any items related to the litigation with Google Inc., restructuring costs and transaction and other costs associated with mergers and acquisitions. Adjusted EBITDA for prior periods has been revised to conform to current definition.

- Adjusted net loss and adjusted net loss per share exclude the impact of items related to the litigation with Google Inc., restructuring costs and transaction and other costs associated with mergers and acquisitions as well as all adjustments related to recording the non-cash tax valuation allowance for deferred tax assets.

- Free cash flow is cash flow from operations less cash used in purchases of property and equipment.

- Bookings represent executed sales contracts received by the Company that are either recorded immediately as revenue or as deferred revenue.

- Pro Forma Revenue is GAAP revenue plus the purchase accounting impact on acquired deferred revenue

- Pro Forma Adjusted EBITDA is Adjusted EBITDA (as defined above) plus the purchase accounting impact on acquired deferred revenue less the purchase accounting impact on acquired deferred commissions

- Pro Forma Adjusted Net Income/(Loss) and Pro Forma Adjusted EPS are Adjusted Net Income/(Loss) and Adjusted Net Income/(Loss) per Share (as defined above) plus the purchase accounting impact on acquired deferred revenue less the purchase accounting impact on acquired deferred commissions

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. In addition, the impact of shares granted under these plans is considered in the Company's EPS calculation to the extent the shares are dilutive.

- Bookings. Although revenue is an important aspect of measuring Company performance, the Company believes total sales bookings can be a valuable indicator of the Company's performance. The Company is transitioning to a greater amount of subscription sales, which results in an increasing portion of sales being recorded as deferred revenue.

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. The company 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.

In conjunction with this announcement, Rosetta Stone will host a webcast today at 4:30 p.m. eastern time (ET) to discuss the results and the company's business outlook.

The webcast will be available live on the Investor Relations page of the company's website at http://investors.rosettastone.com.

Investors may also dial in to the conference line using one of the following numbers:

1-877-407-9039 (toll-free) or

1-201-689-8470 (toll/international)

A recorded replay of the webcast will be available on the "Investor Relations" page of the company's web site http://investors.rosettastone.com after the live discussion. The replay will also be available beginning at 7:30PM ET until August 21, 2013 via telephone at the following numbers:

1-877-870-5176 (toll-free) or

1-858-384-5517 (toll/international)

Pass Code: 418197

About Rosetta Stone

Rosetta Stone Inc. provides cutting-edge interactive technology that is changing the way the world learns languages. The company's proprietary learning techniques-acclaimed for their power to unlock the natural language-learning ability in everyone-are used by schools, businesses, government organizations and millions of individuals around the world. Rosetta Stone offers courses in over 30 languages, from the most commonly spoken (like English, Spanish and Mandarin) to the less prominent (including Swahili, Swedish and Tagalog). The company was founded in 1992 on the core beliefs that learning to speak a language should be a natural and instinctive process, and that interactive technology can activate the language immersion method powerfully for learners of any age. Rosetta Stone is based in Arlington, VA., and has offices in Harrisonburg, VA, Boulder, CO, Austin, TX, San Francisco, CA, Seattle, WA, Boston, MA, Tokyo, Seoul, London, Dubai and Sao Paulo.

"Rosetta Stone" is a registered trademark or trademark of Rosetta Stone Ltd. in the United States and other countries.

Cautionary Statement Regarding Forward-Looking Statements

Certain statements in this press release are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including our guidance for future financial performance and operating targets, and our long-term growth prospects. 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," "likely," "will," "financial outlook," "guidance," "strategy," or "continue." 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 solutions; the advantages of our products, services, technology, brand and business model as compared to others; our strategic focus; 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 appeal and efficacy of our products and services; 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 operations and growth plans; our plans regarding our kiosks and retail relationships; our plans regarding our E&E business; the impact of any revisions to our pricing strategy; our ability to manage and grow our business and execute our business strategy; our financial performance; our actions to realign our cost structure and revitalize our go-to-market strategy; our plans to transition our distribution to more online in the Consumer business; our mergers and acquisitions plans; our plans related to Lexia and Livemocha; our ability to successfully integrate Lexia and Livemocha into our business; 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 fiscal year ended December 31, 2012, 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.

Investor Contact:

Steve Somers, CFA

ssomers@rosettastone.com

703-387-5876

Media Contact:

Jonathan Mudd

jmudd@rosettastone.com

571-357-7148

Source: Rosetta Stone Inc.

ROSETTA STONE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
                                            Three Months Ended  Six Months Ended
                                            June 30,            June 30,
                                            2013      2012      2013      2012
Revenue:
Product                                     $35,458   $37,543   $73,049   $85,073
Subscription and service                    26,681    23,269    53,013    45,188
Total revenue                               62,139    60,812    126,062   130,261
Cost of revenue:
Cost of product revenue                     6,998     7,122     13,938    16,229
Cost of subscription and service revenue    3,226     4,198     6,550     8,565
Total cost of revenue                       10,224    11,320    20,488    24,794
Gross profit                                51,915    49,492    105,574   105,467
Operating expenses
Sales and marketing                         33,144    35,125    70,203    73,529
Research and development                    9,093     6,493     16,451    12,766
General and administrative                  13,634    12,919    26,222    26,576
Lease Abandonment                           35        -         828       -
Total operating expenses                    55,906    54,537    113,704   112,871
Loss from operations                        (3,991)   (5,045)   (8,130)   (7,404)
Other income and (expense):
Interest income                             43        21        84        99
Interest expense                            -         -         (45)      -
Other income (expense)                      (9)       320       410       (44)
Total other income (expense)                34        341       449       55
Loss before income taxes                    (3,957)   (4,704)   (7,681)   (7,349)
Income tax (benefit) provision              (400)     (160)     576       (902)
Net loss                                    ($3,557)  ($4,544)  ($8,257)  ($6,447)
Net loss per share:
Basic                                       ($0.16)   ($0.22)   ($0.38)   ($0.31)
Diluted                                     ($0.16)   ($0.22)   ($0.38)   ($0.31)
Common shares and equivalents outstanding:
Basic weighted average shares               21,569    20,995    21,465    20,969
Diluted weighted average shares             21,569    20,995    21,465    20,969
ROSETTA STONE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
                                                                                      June 30,    December 31,
                                                                                      2013        2012
Assets
Current assets:
Cash and cash equivalents                                                             $132,070    $148,190
Restricted cash                                                                       64          73
Accounts receivable (net of allowance for doubtful accounts of $983 and $1,297,       41,735      49,946
respectively)
Inventory                                                                             5,939       6,581
Prepaid expenses and other current assets                                             7,788       5,204
Income tax receivable                                                                 254         1,104
Deferred income taxes                                                                 136         79
Total current assets                                                                  187,986     211,177
Property and equipment, net                                                           17,134      17,213
Goodwill                                                                              39,718      34,896
Intangible assets, net                                                                15,952      10,825
Deferred income taxes                                                                 210         260
Other assets                                                                          1,335       1,484
Total assets                                                                          $262,335    $275,855
Liabilities and stockholders' equity
Current liabilities:
Accounts payable                                                                      $9,344      $6,064
Accrued compensation                                                                  15,398      16,830
Other current liabilities                                                             25,916      36,387
Deferred revenue                                                                      56,399      59,195
Total current liabilities                                                             107,057     118,476
Deferred revenue                                                                      5,187       4,221
Deferred income taxes                                                                 8,954       8,400
Other long-term liabilities                                                           863         155
Total liabilities                                                                     122,061     131,252
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value; 10,000 and 10,000 authorized; zero and zero shares -           -
issued and outstanding June 30, 2013 and December 31, 2012, respectively
Non-designated common stock, $0.00005 par value, 190,000 and 190,000 shares           2           2
authorized, 22,535 and 21,951 shares issued and outstanding at June 30, 2013
and December 31, 2012, respectively
Additional paid-in capital                                                            164,982     160,693
Accumulated loss                                                                      (25,006)    (16,749)
Accumulated other comprehensive income                                                296         657
Total stockholders' equity                                                            140,274     144,603
Total liabilities and stockholders' equity                                            $262,335    $275,855
ROSETTA STONE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
                                                                                      Three Months Ended    Six Months Ended
                                                                                      June 30,              June 30,
                                                                                      2013       2012       2013      2012
Cash Flows From Operating Activities:
Net loss                                                                              ($3,557)   ($4,544)   ($8,257)  ($6,447)
Adjustments to reconcile net loss to cash provided by (used in) operating activities,
net of business acquisitions
Stock-based compensation expense                                                      2,036      2,096      3,704     3,731
Bad debt expense                                                                      465        431        227       596
Depreciation and amortization                                                         2,224      2,046      4,596     4,482
Deferred income tax benefit                                                           (925)      158        (627)     (1,156)
Loss on disposal of equipment                                                         64         348        205       380
Net change in:
Restricted cash                                                                       (23)       5          9         28
Accounts receivable                                                                   (3,125)    (1,261)    8,010     16,314
Inventory                                                                             1,298      1,189      552       480
Prepaid expenses and other current assets                                             (9)        146        (2,568)   649
Income tax receivable                                                                 398        (1,504)    811       (2,740)
Other assets                                                                          6          144        10        (1,065)
Accounts payable                                                                      3,156      (2,281)    2,947     (2,868)
Accrued compensation                                                                  4,853      3,850      (1,559)   1,774
Other current liabilities                                                             (5,543)    207        (9,796)   (7,813)
Excess tax benefit from stock options exercised                                       -          (18)       -         (18)
Other long-term liabilities                                                           (35)       9          336       1,596
Deferred revenue                                                                      1,206      2,391      (1,747)   (1,855)
Net cash provided by (used in) operating activities                                   2,489      3,412      (3,147)   6,068
Cash Flows From Investing Activities:
Purchases of property and equipment                                                   (1,684)    (1,031)    (4,212)   (1,998)
Proceeds from (purchases of) available-for-sale securities                            -          4,805      -         8,112
Acquisition, net of cash acquired                                                     (8,180)    -          (8,180)   -
Net cash (used in) provided by investing activities                                   (9,864)    3,774      (12,392)  6,114
Cash Flows From Financing Activities:
Proceeds from the exercise of stock options                                           1,448      -          1,798     -
Repurchase of shares from exercised stock options                                     (1,040)    -          (1,040)   -
Tax benefit of stock options exercised                                                -          18         -         18
Proceeds from equity offering, net of issuance costs                                  (171)      -          (171)     -
Payments under capital lease obligations                                              (3)        (1)        (196)     (3)
Net cash provided by financing activities                                             234        17         391       15
(Decrease) increase in cash and cash equivalents                                      (7,141)    7,203      (15,148)  12,197
Effect of exchange rate changes in cash and cash equivalents                          (100)      (502)      (972)     61
Net (decrease) increase in cash and cash equivalents                                  (7,241)    6,701      (16,120)  12,258
Cash and cash equivalents-beginning of period                                         139,311    112,073    148,190   106,516
Cash and cash equivalents-end of period                                               $132,070   $118,774   $132,070  $118,774
ROSETTA STONE INC.
Reconciliation of GAAP Net Loss to Adjusted EBITDA
(in thousands)
(unaudited)
                                      Three Months Ended  Six Months Ended
                                      June 30,            June 30,
                                      2013      2012      2013      2012
GAAP net loss                         ($3,557)  ($4,544)  ($8,257)  ($6,447)
Interest (income)/expense, net        (43)      (21)      (39)      (99)
Income tax (benefit) expense          (400)     (160)     576       (902)
Depreciation and amortization         2,168     2,046     3,924     4,482
Depreciation related to restructuring 56        -         672       -
Stock-based compensation              2,036     2,096     3,704     3,731
Other EBITDA Adjustments              2,526     1,706     4,614     2,093
Adjusted EBITDA*                      $2,786    $1,123    $5,194    $2,858

* Adjusted EBITDA is GAAP net income or loss plus interest income and expense, income tax benefit and expense, depreciation, amortization and stock-based compensation expenses. Adjusted EBITDA excludes any items related to the litigation with Google Inc., restructuring costs and transaction and other costs associated with mergers and acquisitions. Adjusted EBITDA for prior periods has been revised to conform to current definition.

ROSETTA STONE INC.
Reconciliation of GAAP Net Loss to Adjusted Net Loss
(in thousands, except per share amounts)
(unaudited)
                                                                                                         Three Months Ended  Six Months Ended
                                                                                                         June 30,            June 30,
                                                                                                         2013      2012      2013      2012
GAAP net loss                                                                                            ($3,557)  ($4,544)  ($8,257)  ($6,447)
Items related to litigation with Google, Inc., restructuring and other related costs, acquisition costs  2,582     1,706     5,286     2,093
Income tax adjustments *                                                                                 136       1,009     1,510     1,148
Adjusted net loss                                                                                        ($839)    ($1,829)  ($1,461)  ($3,206)
GAAP net loss per share                                                                                  (0.16)    (0.22)    (0.38)    (0.31)
Items related to litigation with Google, Inc. restructuring and other related costs                      0.12      0.08      0.25      0.10
Income tax adjustments *                                                                                 0.01      0.05      0.07      0.05
Adjusted net loss per share **                                                                           (0.03)    (0.09)    (0.06)    (0.16)
Basic weighted average shares                                                                            21,569    20,995    21,465    20,969
Diluted weighted average shares                                                                          21,569    20,995    21,465    20,969

* For adjusted net income(loss) purposes, we use a 39% effective tax rate which represents the projected, long term effective tax rate on adjusted pretax income. Our adjusted tax rate assumes full use of loss and credit carryforwards without reduction for valuation allowances.

** Adjusted net loss and adjusted net loss per share exclude the impact of items related to its litigation with Google, Inc., restructuring costs and transaction and other costs associated with mergers and acquisitions as well as all adjustments related to recording the non-cash tax valuation allowance for deferred tax assets.

Rosetta Stone Inc.                                                                         Rosetta Stone Inc.
Business Metrics
(in thousands)
                                                 Quarter-Ended                             Quarter-Ended                                        Quarter-Ended
                                                 3/31/11 6/30/11 9/30/11 12/31/11 2011     3/31/12            6/30/12 9/30/12 12/31/12 2012     3/31/13 6/30/13
Net Bookings by Market
North America Consumer                           29,814  36,828  35,562  55,209   157,413  41,733             37,295  42,283  57,870   179,181  41,303  39,321
Rest of World Consumer                           14,996  12,910  11,945  14,166   54,017   12,550             8,113   10,488  10,034   41,185   8,310   6,879
Worldwide Consumer                               44,810  49,738  47,507  69,375   211,430  54,283             45,408  52,771  67,904   220,366  49,613  46,200
Global Enterprise and Education                  10,770  16,973  18,555  15,459   61,757   10,984             17,635  19,354  16,423   64,396   10,758  16,883
Total                                            55,580  66,711  66,062  84,834   273,187  65,267             63,043  72,125  84,327   284,762  60,371  63,083
YoY Growth (%)
North America Consumer                           -28%    -5%     -14%    6%       -9%      40%                1%      19%     5%       14%      -1%     5%
Rest of World Consumer                           50%     58%     21%     -7%      25%      -16%               -37%    -12%    -29%     -24%     -34%    -15%
Worldwide Consumer                               -13%    6%      -7%     3%       -3%      21%                -9%     11%     -2%      4%       -9%     2%
Global Enterprise and Education                  18%     -1%     -17%    7%       -2%      2%                 4%      4%      6%       4%       -2%     -4%
Total                                            -9%     4%      -10%    4%       -2%      17%                -5%     9%      -1%      4%       -8%     0%
% of Total Net Bookings
North America Consumer                           54%     55%     54%     65%      57%      64%                59%     59%     69%      63%      68%     62%
Rest of World Consumer                           27%     20%     18%     17%      20%      19%                13%     14%     12%      14%      14%     11%
Worldwide Consumer                               81%     75%     72%     82%      77%      83%                72%     73%     81%      77%      82%     73%
Global Enterprise and Education                  19%     25%     28%     18%      23%      17%                28%     27%     19%      23%      18%     27%
Total                                            100%    100%    100%    100%     100%     100%               100%    100%    100%     100%     100%    100%
Revenue by Market
North America Consumer                           28,061  38,606  37,710  53,184   157,561  43,084             36,918  39,878  52,946   172,826  41,385  39,934
Rest of World Consumer                           14,601  12,014  11,002  12,848   50,465   12,204             8,053   9,903   10,088   40,248   8,570   7,478
Worldwide Consumer                               42,662  50,620  48,712  66,032   208,026  55,288             44,971  49,781  63,034   213,074  49,955  47,412
Global Enterprise and Education                  14,316  16,123  15,490  14,494   60,423   14,161             15,841  14,498  15,667   60,167   13,969  14,727
Total                                            56,978  66,743  64,202  80,526   268,449  69,449             60,812  64,279  78,701   273,241  63,924  62,139
YoY Growth (%)
North America Consumer                           -32%    0%      2%      19%      -2%      54%                -4%     6%      0%       10%      -4%     8%
Rest of World Consumer                           49%     57%     13%     -17%     18%      -16%               -33%    -10%    -21%     -20%     -30%    -7%
Worldwide Consumer                               -17%    9%      5%      10%      2%       30%                -11%    2%      -5%      2%       -10%    5%
Global Enterprise and Education                  21%     13%     8%      2%       11%      -1%                -2%     -6%     8%       0%       -1%     -7%
Total                                            -10%    10%     5%      8%       4%       22%                -9%     0%      -2%      2%       -8%     2%
% of Total Revenue
North America Consumer                           49%     58%     59%     66%      58%      62%                61%     62%     67%      63%      65%     64%
Rest of World Consumer                           26%     18%     17%     16%      19%      18%                13%     15%     13%      15%      13%     12%
Worldwide Consumer                               75%     76%     76%     82%      77%      80%                74%     77%     80%      78%      78%     76%
Global Enterprise and Education                  25%     24%     24%     18%      23%      20%                26%     23%     20%      22%      22%     24%
Total                                            100%    100%    100%    100%     100%     100%               100%    100%    100%     100%     100%    100%
Unit Metrics
Product Unit Volume (thousands)                  108.5   140.0   134.3   202.9    585.8    143.0              129.7   146.5   210.7    629.8    141.8   148.6
Paid Online Learners (thousands)                 16.4    17.1    21.5    26.6     26.6     41.2               48.7    57.4    68.4     68.4     80.6    85.1
YoY Growth (%)
Product Units                                    -14%    24%     14%     20%      11%      32%                -7%     9%      4%       8%       -1%     15%
Paid Online Learners                             30%     20%     21%     58%      58%      151%               185%    167%    157%     157%     95%     75%
Average Net Revenue Per Unit ($)
Average Net Revenue per Product Unit             $379    $349    $346    $313     $341     $367               $319    $313    $277     $315     $312    $275
Average Net Revenue per Online Learner (monthly) $30     $34     $39     $36      $35      $28                $27     $24     $24      $26      $26     $25
YoY Growth (%)
Average Net Revenue per Product Unit             -4%     -12%    -9%     -9%      -9%      -3%                -9%     -9%     -11%     -8%      -15%    -14%
Average Net Revenue per Online Learner           -10%    -2%     10%     3%       0%       -6%                -22%    -37%    -32%     -25%     -7%     -6%
# of Kiosks (end of period)
North America                                    144     117     114     103      103      57                 56      57      57       57       56      -
Europe                                           15      16      14      13       13       1                  1       1       1        1        -       0
Asia Pacific                                     78      76      69      58       58       44                 42      39      29       29       22      20
Total # of Kiosks (end of period)                237     209     197     174      174      102                99      97      87       87       78      20
Revenues by Geography
United States                                    41,271  53,418  51,708  65,725   212,122  54,914             50,810  52,167  65,856   223,747  52,791  52,163
International                                    15,707  13,325  12,494  14,801   56,327   14,535             10,002  12,112  12,845   49,494   11,133  9,976
Total                                            56,978  66,743  64,202  80,526   268,449  69,449             60,812  64,279  78,701   273,241  63,924  62,139
Revenues by Geography (as a %)
United States                                    72%     80%     81%     82%      79%      79%                84%     81%     84%      82%      83%     84%
International                                    28%     20%     19%     18%      21%      21%                16%     19%     16%      18%      17%     16%
Total                                            100%    100%    100%    100%     100%     100%               100%    100%    100%     100%     100%    100%

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(ii) they are solely responsible for the content, accuracy and originality of the

information contained therein.

Source: Rosetta Stone via Thomson Reuters ONE

HUG#1721768

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Statements in this press release regarding Rosetta Stone PR's business which are not historical facts are "forward-looking statements" that involve risks and uncertainties. For a discussion of such risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see "Risk Factors" in the Company's Annual Report or Form 10-K for the most recently ended fiscal year.
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