Table of Contents

April 14, 2010

Dear Stockholder:

You are cordially invited to attend the 2010 Annual Meeting of Stockholders of Rosetta Stone Inc. (the “Company”), which will be held at our offices located at 1919 North Lynn St., 7th Fl., Arlington, Virginia 22209, on Wednesday, May 26, 2010, at 10:00 a.m., local time.

Whether or not you plan to attend the annual meeting, it is important that your shares be represented and voted at the meeting. We encourage you to vote your shares according to the instructions on the enclosed proxy card or on the Notice of Internet Availability of Proxy Materials. If you decide to attend the meeting and vote in person, you may withdraw your proxy at that time.

To assist you in voting your shares, you will find enclosed the Notice of Annual Meeting, the 2010 Proxy Statement and our 2009 Annual Report to Stockholders which includes the Company’s audited financial statements.

On behalf of the Board of Directors and employees of Rosetta Stone, we thank you for your continued interest in and support of the Company.

Sincerely,

Your vote is important. Please vote promptly.

You may vote according to the instructions
on the enclosed proxy card or Notice of Internet
Availability of Proxy Materials.

Table of Contents

NOTICE OF 2010 ANNUAL MEETING OF STOCKHOLDERS

Dear Stockholder:

You are cordially invited to attend our 2010 Annual Meeting of Stockholders, which will be held at 10:00 a.m. local time on May 26, 2010 at our corporate offices located at 1919 North Lynn St., 7th Fl., Arlington, Virginia 22209 for the following purposes:

1.          Elect three Class I directors nominated by our Board of Directors to hold office until our annual meeting of stockholders in 2013 or until their respective successors have been elected;

2.          Ratify the selection of Deloitte & Touche LLP as our independent registered public accounting firm for the year ending December 31, 2010;

3.          Approve our 2009 Omnibus Incentive Plan; and

4.          Consider any other matters that may properly be brought before the meeting.

A proxy statement describing the matters to be considered at the annual meeting is attached to this notice. Only stockholders who owned our stock at the close of business on April 5, 2010 may vote at the meeting, or at any adjournment or postponement of the meeting.

Your vote is important. Whether or not you plan to attend the meeting, please cast your vote, as instructed in the Notice of Internet Availability of Proxy Materials and/or the Proxy Card sent to you, as promptly as possible.

Arlington, Virginia

April 14, 2010

Important Notice Regarding Availability of Proxy Materials for Rosetta Stone’s
Shareholder Meeting to be Held on May 26, 2010.

Your vote is important. Please vote promptly.

You may vote according to the instructions
on the enclosed proxy card or Notice of Internet
Availability of Proxy Materials.

Table of Contents

ROSETTA STONE INC.

PROXY STATEMENT 2010 ANNUAL MEETING OF STOCKHOLDERS

i

Table of Contents

ii

Table of Contents

ROSETTA STONE INC.

1919 North Lynn St., 7th Fl.

Arlington, Virginia 22209

PROXY STATEMENT FOR THE

2010 ANNUAL MEETING OF STOCKHOLDERS

INFORMATION ABOUT THE MEETING, VOTING AND PROXIES

Date, Time and Place of Meeting

Our Board of Directors is asking for your proxy for use at the Rosetta Stone Inc. 2010 Annual Meeting of Stockholders (the “Meeting”) and at any adjournment or postponement thereof for the purposes set forth in the accompanying Notice of Annual Meeting of Stockholders. We are holding the Meeting on Wednesday, May 26, 2010 at 10:00 a.m. local time at our offices at 1919 North Lynn St., 7th Fl., Arlington, Virginia 22209. We have first released this proxy statement to our stockholders beginning on or about April 14, 2010.

Internet Availability of Proxy Materials

Under rules recently adopted by the Securities and Exchange Commission (“SEC”), we are now furnishing proxy materials on the Internet in addition to mailing paper copies of the materials to each stockholder of record. Instructions on how to access and review the proxy materials on the Internet can be found on the proxy card sent to stockholders of record and on the Notice of Internet Availability of Proxy Materials (the “Notice”) sent to stockholders who hold their shares in street name. The Notice will also include instructions for stockholders who hold their shares in street name on how to access the proxy card to vote over the Internet.

Record Date, Outstanding Shares and Quorum

Only holders of record of our common stock at the close of business on April 5, 2010 (called the “Record Date”) will be entitled to vote at the Meeting. On the Record Date, we had approximately 20,524,357 shares outstanding and entitled to vote, held by approximately 53 stockholders of record and approximately 11,000 beneficial owners, who may hold their shares through banks, brokers or other nominees. We need a quorum to take action at the Meeting. We will have a quorum if a majority of the shares outstanding and entitled to vote on the Record Date are present at the Meeting, either in person or by proxy.

If by the date of the Meeting we do not receive sufficient shares to constitute a quorum or approve one or more of the proposals, the Chair of the Meeting, or the persons named as proxies, may propose one or more adjournments of the Meeting to permit further solicitation of proxies. The persons named as proxies would typically exercise their authority to vote in favor of adjournment.

Voting Rights

Holders of our common stock are entitled to one vote for each share they own on the Record Date. Cumulative voting for directors is not permitted. The Inspector of Elections appointed for the Meeting will tabulate all votes. The Inspector will separately tabulate yes and no votes, abstentions and broker non-votes for each proposal.

Voting and Revoking Proxies

Our Board of Directors is soliciting proxies to vote your shares at the Meeting. If you attend the Meeting, you may submit your vote in person, and any votes that you previously submitted may be revoked and superseded by the vote that you cast at the Meeting. If you properly submit your proxy, and do not revoke it prior to the Meeting, your shares will be voted in the manner described in this proxy statement or as you may otherwise direct.

If you sign and return your proxy card but do not give any voting instructions, your shares will be voted in favor of the election of each of the director nominees listed in Proposal 1 and in favor of Proposals 2 and 3. As far as we know, no other matters will be presented at the Meeting. However, if any other matters of business are properly

1

Table of Contents

presented, the proxy holders named on the proxy card are authorized to vote the shares represented by proxies according to their judgment.

Whether you submit your proxy via the Internet, by phone or by mail, you may revoke it at any time before voting takes place at the Meeting. If you are the record holder of your shares and you wish to revoke your proxy, you must deliver instructions to the Corporate Secretary, at Rosetta Stone Inc., 1919 North Lynn St., 7th Fl., Arlington, Virginia 22209. You may also revoke a proxy by submitting a later-dated vote, in person at the Meeting. Please note that if a broker, bank or other nominee is the record holder of your shares and you wish to vote at the Meeting, you must bring to the Meeting a letter from the record holder confirming your beneficial ownership of the shares. If a broker, bank or other nominee is the record holder of your shares and you wish to revoke your proxy, you must contact the record holder of your shares directly.

Abstentions and Broker Non-Votes

Any shares represented by proxies that are marked to abstain from voting on a proposal will be counted as present in determining whether we have a quorum. They will also be counted in determining the total number of shares entitled to vote on a proposal. A majority of votes cast is required to approve Proposals 2 and 3. Accordingly, abstentions are not counted for the purpose of determining the number of votes cast on these proposals.

If your shares are held in street name and you do not instruct your broker on how to vote your shares, your broker, in its discretion, may either leave your shares unvoted or vote your shares on certain routine matters. However, the New York Stock Exchange (the “NYSE”) precludes brokers from exercising voting discretion on certain proposals without specific instructions from the beneficial owner. Importantly, a recent amendment to an NYSE rule now expressly prohibits brokers holding shares in street name for their beneficial holder clients from voting in uncontested director elections on behalf of the clients without receiving specific voting instructions from those clients. Under NYSE rules, only Proposal 2 (ratifying the appointment of our independent registered public accounting firm) should be treated as a routine matter on which a broker can exercise its discretion and vote your shares without specific instructions. If your broker votes on your behalf on this proposal, your shares also will be counted as present for the purpose of determining a quorum. Proposal 3 is not considered a routine matter, and without your instruction, your broker cannot vote your shares. If a broker, bank, custodian, nominee or other record holder of Rosetta Stone stock indicates on a proxy that it does not have discretionary authority to vote certain shares on a particular matter, these shares (called “broker non-votes”) will also be counted as present in determining whether we have a quorum but will not be counted for the purpose of determining the number of votes cast on a specific proposal.

Soliciting Proxies

Rosetta Stone will pay all expenses of soliciting proxies to be voted at the Meeting. After the proxies are initially distributed, Rosetta Stone and/or its agents may also solicit proxies by mail, electronic mail, telephone or in person. We will ask brokers, custodians, nominees and other record holders to prepare and send a Notice of Internet Availability of Proxy Materials to people or entities for whom they hold shares and forward copies of the proxy materials to beneficial owners who request paper copies.

Delivery of Voting Materials to Stockholders Sharing an Address

To reduce the expense of delivering duplicate materials to stockholders sharing the same address, we have adopted a procedure approved by the U.S. Securities and Exchange Commission (the “SEC”) called “householding.” Under this procedure, certain stockholders of record who have the same address and last name and do not participate in electronic delivery of proxy materials will receive only one copy of the Notice of Internet Availability of Proxy Materials, annual report on Form 10-K and proxy materials, as applicable, sent to stockholders until such time as one or more of these stockholders notifies us that they wish to continue receiving individual copies. This procedure will reduce duplicate mailings and save printing costs and postage fees, as well as natural resources.

2

Table of Contents

How to Obtain a Separate Set of Voting Materials

If you and other residents at your mailing address own common stock in street name, your broker or bank may have sent you a notice that your household will receive only one annual report to stockholders and proxy statement for each company in which you hold shares through that broker or bank. This practice of sending only one copy of the proxy material is known as “householding.” Brokers household our proxy materials and annual reports, delivering a single proxy statement and annual report to multiple stockholders sharing an address unless contrary instructions have been received from the affected stockholders. If you would like to have additional copies of our Notice of Internet Availability of Proxy Materials, annual report on Form 10-K and proxy materials, as applicable, mailed to you, please submit your request to the Corporate Secretary, Rosetta Stone Inc., 1919 North Lynn St., 7th Fl., Arlington, Virginia 22209, or call the Corporate Secretary at (703) 387-5800 and we will promptly deliver these materials to you. You may also contact us at the address or phone number above if you received multiple copies of materials for the Meeting and would prefer to receive a single copy in the future. If you would like to opt out of householding for future mailings, call the Corporate Secretary at (703) 387-5800 or send a written request to the Corporate Secretary at the above address.

Annual Report on Form 10-K and Additional Materials

The Notice of Annual Meeting, this Proxy Statement and our annual report on Form 10-K for the year ended December 31, 2009 have been made available to all stockholders entitled to vote at the Meeting and who received the Notice of Internet Availability of Proxy Materials. The annual report on Form 10-K can also be viewed at http://investors.RosettaStone.com.

OUR BOARD OF DIRECTORS AND NOMINEES

Our Board of Directors currently consists of eight directors and is divided into three classes, with the nominees for one class to be elected at each annual meeting of stockholders, to hold office for a three-year term and until successors of the members of such class have been elected and qualified, subject to their earlier death, resignation or removal.

Only the terms of the Class I directors are scheduled to expire on the date of the upcoming Meeting. Based on the recommendation of the Corporate Governance and Nominating Committee of our Board of Directors, our Board of Directors’ nominees for election by the stockholders are the three current Class I members of our Board of Directors, Tom P.H. Adams, Phillip A. Clough and John E. Lindahl. If elected, the nominees will serve as directors until the annual meeting of stockholders in 2013 and until their successors are elected and qualified, subject to their earlier death, resignation or removal.

The names and certain information about the nominee directors and the continuing directors in each of the other two classes of our Board of Directors are set forth below. There are no family relationships among any of our directors or executive officers.

It is intended that the proxy will be voted, unless otherwise indicated, for the election of the nominees as Class I directors to our Board of Directors. If any of the nominees should for any reason be unable or unwilling to serve at any time prior to the Meeting, the proxies will be voted for the election of such other person as a substitute nominee as our Board of Directors may designate in place of such nominee.

Because the upcoming Meeting will trigger the expiration of the terms of only three directors, proxies cannot be voted for more than three director nominees. The three candidates receiving the highest number of affirmative votes of the shares of our common stock entitled to vote at the Meeting will be elected Class I directors to serve for a three-year term and until their successors have been duly elected and qualified, subject to their earlier death, resignation or removal.

3

Table of Contents

Nominees for Class I Directors

The name and age as of April 1, 2010 of each nominee director, his position with us, the year in which he first became a director and certain biographical information is set forth below:

Directors Standing for Election

Incumbent Nominees

Each of the incumbent directors listed below has been nominated for election by our Board of Directors upon recommendation by the Corporate Governance and Nominating Committee and has agreed to stand for election to a three-year term. Information concerning the incumbent nominees for director is provided below.

Tom P.H. Adams has served as President, Chief Executive Officer and as a Director since January 2006, prior to which he served as Chief Executive Officer of Fairfield & Sons, Ltd., the predecessor company of Rosetta Stone, since February 2003. Mr. Adams received his B.A. with honors from the University of Bristol, United Kingdom and an M.B.A. from INSEAD in Fontainebleau, France. Mr. Adams was named the 2009 Ernst & Young Entrepreneur of the Year. As our President and Chief Executive Officer, Mr. Adams has a thorough and comprehensive knowledge of all aspects of the Company’s business. Mr. Adam’s vision and recognized leadership of the Company are critical to our business.

Phillip A. Clough has served as a Director since January 2006. Mr. Clough is a Managing General Partner of ABS Capital Partners, and has been a General Partner of ABS Capital Partners since September 2001. Prior to joining ABS Capital Partners, Mr. Clough was President and Chief Executive Officer of Sitel Corporation, a publicly traded global provider of outsourced customer support services, from May 1998 to March 2001 and President of Sitel from January 1997 to May 1998. Prior to that, Mr. Clough was an investment banker with Alex Brown & Sons, an investment bank, from 1990 to 1997 and served in the United States Army from 1983 to 1988, rising to the rank of Captain. Mr. Clough serves on the boards of Liquidity Services, Inc., American Public Education, Inc. and various private companies. Mr. Clough holds a B.S. from the U.S. Military Academy at West Point and an M.B.A. from the Darden Graduate School of Business Administration at the University of Virginia. Mr. Clough has experience in finance, investment banking, international business and technology, in addition to having experience as a chief executive officer.

John E. Lindahl has served as a Director since February 2006 and is Managing Partner at Norwest Equity Partners VIII, LP, or Norwest, a private equity firm, which he joined in 1984. Prior to joining Norwest, Mr. Lindahl worked at Norwest Bank for 16 years. Mr. Lindahl serves on the boards of various private companies. He holds B.S. and B.A. degrees from the University of Minnesota. Mr. Lindahl has a background in finance, international business and management.

Directors Not Standing for Election

The names and certain biographical information as of April 1, 2010 about the continuing members of our Board of Directors who are not standing for election at the Meeting and are set forth below:

4

Table of Contents

Laura L. Witt has served as the Chairman of our Board of Directors since December 2005. In September 1997, Ms. Witt joined ABS Capital Partners, a private equity investment partnership, and has served as a General Partner since January 2001. She served on the boards of Double-Take Software, Inc. from 2002 to 2008 and Familymeds Group, Inc. from 2004 to 2007. Ms. Witt currently serves on the board of various private companies. She has a B.A. from Princeton University and an M.B.A. from the Wharton School at the University of Pennsylvania. Ms. Witt has experience in finance, technology and management.

John T. Coleman has served as a Director since May 2006. Mr. Coleman served as President, Chief Operating Officer and a Director of Bose Corp., a manufacturer of high end audio products, from July 2001 to July 2005. Prior to that, he was Executive Vice President and Vice President of Human Resources at Bose, and before that, he was General Manager of Bose’s European manufacturing operations. Prior to joining Bose, Mr. Coleman was Director of Human Resources for General Electric in Ireland. Mr. Coleman was Head of the College of Business and Law at University College Cork in Ireland from May 2006 until June 2007. He is a member of the Board of Advisors of the School of Economics at University College Cork. Mr. Coleman holds diplomas in Personnel Management and in Training and Development from the Irish Management Institute. He also holds a diploma in Management Studies and an M.B.A. from the University of Ulster, Northern Ireland. Mr. Coleman has a background in the retail industry building an international brand. He brings experience in management, operations, technology, human resources and education to our Board.

Laurence Franklin has served as a Director since May 2006. Mr. Franklin is the retired President and Chief Executive Officer of Tumi Inc., a manufacturer and retailer of luxury travel, business and lifestyle accessories, where he served from January 2002 until March 2009. Mr. Franklin remains a board member of Tumi, and serves on the boards of several private companies. Prior to joining Tumi, Mr. Franklin served as President of Coach Leatherware, and General Manager of Elizabeth Arden. Mr. Franklin began his career at Peat Marwick Mitchell and Co. in audit, and then worked in the Management Consulting Services group at Price Waterhouse & Co. Mr. Franklin earned his B.A. from Colgate University and his M.S. from the New York University Graduate School of Business. In addition to his public finance, accounting and operations knowledge, Mr. Franklin has extensive hands on experience in direct-to-consumer and wholesale channels of distribution, retail development, corporate management, operations and supply chain management, building international brands, and qualifies as an audit committee financial expert.

Patrick W. Gross has served as a Director since February 2006. Mr. Gross is Chairman of the Lovell Group, a private business and technology advisory and investment firm that he founded in 2002. Mr. Gross was a founder of, and served as a principal executive officer from 1970 to September 2002 at American Management Systems, Inc., or AMS, a publicly traded information technology consulting, software development, and systems integration firm. Mr. Gross is a director of Capital One Financial Corporation, Career Education Corporation, Liquidity Services, Inc., Taleo Corporation, and Waste Management, Inc. Mr. Gross also currently serves on the boards of various private companies. Mr. Gross previously served on the boards of Computer Network Technology Corporation from 1997 to 2006 and Mobius Management System, Inc. from 2002 to 2007. He holds a B.S.E. from Rensselaer Polytechnic Institute, a M.S.E. from the University of Michigan and an M.B.A. from the Stanford Graduate School of Business. Mr. Gross has experience in finance, management, information technology, software, and education, and qualifies as an audit committee financial expert.

Theodore (“Ted”) J. Leonsis has served as a Director since December 2009. Since 2006, Mr. Leonsis has been Vice Chairman Emeritus at AOL LLC, where he also served as Vice Chairman from 2000 to 2006, as President from 2003 to 2006, and in various other capacities from 1994 to 2000. Mr. Leonsis is the founder, chairman and majority owner of Lincoln Holdings, LLC, a sports and entertainment company that owns 100% of the NHL’s

5

Table of Contents

Washington Capitals and the WNBA’s Washington Mystics, and approximately 44% of Washington Sports and Entertainment Limited Partnership, which owns the NBA’s Washington Wizards, the Verizon Center in Washington, D. C. and the Baltimore-Washington Ticketmaster franchise. Mr. Leonsis is a director of NutriSystem Inc. and several private companies. Mr. Leonsis holds a B.A. degree from Georgetown University. Mr. Leonsis is involved in numerous charities through the work of the Leonsis Foundation, including Best Buddies, Hoop Dreams, See Forever Foundation and YouthAIDS. Mr. Leonsis has experience in management, operations, technology, finance, and international business.

CORPORATE GOVERNANCE

Code of Ethics

We have adopted a code of business conduct and ethics applicable to our principal executive, financial and accounting officers and all persons performing similar functions. A copy of that code is available on our corporate website at www.rosettastone.com.

Composition of our Board of Directors; Classified Board

Our Board of Directors currently consists of eight members, seven of whom are non-employee members. Each director holds office until the election and qualification of his or her successor, or his or her earlier death, resignation or removal. Our bylaws permit our Board of Directors to establish by resolution the authorized number of directors. Our certificate of incorporation provides that our Board of Directors is divided into three classes of directors, each serving a staggered three-year term. As a result, commencing with our annual meeting of stockholders in 2010, one class, which will be comprised of only a portion of our Board of Directors, will be elected at each annual meeting for three-year terms. Our Board of Directors is classified as follows:

·             Tom P.H. Adams, Phillip A. Clough and John E. Lindahl are designated Class I directors whose terms will expire at our 2010 annual meeting of stockholders;

·             Laura L. Witt, Laurence Franklin and Theodore J. Leonsis are designated Class II directors whose terms will expire at our 2011 annual meeting of stockholders; and

·             John T. Coleman and Patrick W. Gross are designated Class III directors whose terms will expire at our 2012 annual meeting of stockholders.

Our certificate of incorporation also provides that the number of authorized directors will be determined from time to time by resolution of our Board of Directors. Any additional directorships resulting from an increase in the number of authorized directors will be distributed among the three classes so that, as nearly as reasonably possible, each class will consist of one-third of the directors. The classification of our Board of Directors may have the effect of delaying or preventing changes in control of our Company. Our certificate of incorporation further provides for the removal of a director only for cause and by the affirmative vote of the holders of a majority of the shares then entitled to vote at an election of our directors.

Director Independence

Our Board of Directors has reviewed the independence of each director and considered whether any director had or has a material relationship with us that could compromise his or her ability to exercise independent judgment in carrying out his or her responsibilities. As a result of this review, our Board of Directors has determined that all of our directors, other than our Chief Executive Officer, Tom P.H. Adams, are “independent directors” and meet the independence requirements under the listing standards of the NYSE and rules and regulations of the SEC.

6

Table of Contents

Board Leadership Structure and Role in Risk Oversight

We have separated the positions of chairman of the Board and chief executive officer since our formation and funding by ABS Capital and Norwest Equity Partners. This separation reflected the determination of those stockholders at that time that such a structure was the most appropriate for us at that stage of our development. We will continue to review this structure as we continue to develop and grow our company.

The Board oversees risk by actively reviewing management decisions and financial controls. The Board takes a hands-on role in risk management practices in such areas as credit risk, liquidity risk, and operational risk by obtaining detailed reports from management, continuous dialogues with management, and providing extensive input on material corporate decisions. The leadership structure is appropriate at the time of this filing because of the Company’s growth rate, its new public status, and international expansion strategy. The Board extensively oversees management, particularly through regular conferences between the chief executive officer and chairman. The extent of the Board’s oversight function has the effect of solidifying the Board’s leadership structure by providing excellent knowledge of the day to day workings of the Company to the Board.

Committees of our Board of Directors

Our Board of Directors has established the following standing committees: the Audit Committee, the Compensation Committee and the Corporate Governance and Nominating Committee.

Attendance at Meetings

Our Board of Directors held nine meetings during the year ended December 31, 2009. Each director attended at least 75% of the aggregate of the meetings of our Board of Directors and of the committees on which he or she served during the period for which he or she was a director or committee member, respectively. The following table sets forth the standing committees of our Board of Directors, the number of meetings held by each committee in 2009 and the membership of each committee during the year ended December 31, 2009.

Directors are encouraged, but not required, to attend the Annual Stockholders’ Meeting.

Audit Committee

Our Audit Committee consists of John T. Coleman (appointed by the Board on February 24, 2010), Laurence Franklin and Patrick W. Gross, each of whom is a non-employee member of our Board of Directors. Mr. Gross is

7

Table of Contents

the chairperson of our Audit Committee. Our Board of Directors has determined that each member of our Audit Committee meets the requirements of financial literacy under the requirements of the NYSE and SEC rules and regulations. Mr. Gross serves as our audit committee financial expert, as defined under SEC rules, and possesses financial sophistication as required by the NYSE. Mr. Coleman, Mr. Franklin and Mr. Gross are independent as such term is defined in Rule 10A-3(b)(1) under the Securities Exchange Act of 1934 (as amended, the “Exchange Act”).

Our Audit Committee is responsible for, among other things:

·       approving the appointment, retention, and termination of our independent auditors, and approving the audit and non-audit services to be performed by our independent auditors;

·       evaluating the qualifications, performance and independence of our independent auditors;

·       monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to financial statements or accounting matters;

·       reviewing the adequacy and effectiveness of our internal control policies and procedures;

·       discussing the scope and results of the audit with the independent auditors and reviewing with management and the independent auditors our interim and year-end operating results; and

·       preparing the Audit Committee report required by the SEC to be included in our annual proxy statement.

Our Board of Directors has adopted a written charter for the Audit Committee, which is available on our website.

Report of the Audit Committee of the Board of Directors

During the year ended December 31, 2009, our Audit Committee met 12 times. In the exercise of the Audit Committee’s duties and responsibilities, the Audit Committee has reviewed and discussed the audited financial statements for the fiscal year ended December 31, 2009 with management. The Audit Committee has discussed with the independent registered public accounting firm the matters required to be discussed by the Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1. AU Section 380), as adopted by the Public Company Accounting Oversight Board (“PCAOB”) in Rule 3200T. The Audit Committee has also received the written disclosures and the letter from the independent registered public accounting firm required by applicable requirements of the PCAOB regarding the independent accounting firm’s communications with the Audit Committee regarding independence and has discussed with the independent registered public accounting firm the independent registered public accounting firm’s independence. Based on the foregoing, including its review and discussions, and subject to the limitations on the role and responsibilities of the Audit Committee in its charter, the Audit Committee recommended to the Board of Directors that our audited financial statements for fiscal year 2009 be included in our Annual Report for the fiscal year ended December 31, 2009 to shareholders on Form 10-K filed with the Securities and Exchange Commission.

Patrick W. Gross (Chair)
John T. Coleman

Laurence Franklin

This Report of the Audit Committee is not “soliciting material” and shall not be deemed incorporated by reference by any general statement incorporating by reference this Proxy Statement into any filing under the Securities Act of 1933 or under the Securities Exchange Act of 1934, as amended, except to the extent the Company specifically incorporates this report by reference, and shall not otherwise be deemed filed under such Acts.

Compensation Committee

Our Compensation Committee consists of Laura L. Witt, John T. Coleman, Theodore J. Leonsis and John E. Lindahl, each of whom is a non-employee member of our board of directors. Ms. Witt is the chairperson of our Compensation Committee. Our Board of Directors has determined that each member of our Compensation

8

Table of Contents

Committee meets the requirements for independence under the requirements of the NYSE. The Compensation Committee is responsible for, among other things:

·        reviewing and approving compensation of our executive officers including annual base salary, annual incentive bonuses, specific goals, equity-based awards, employment agreements, severance and change in control arrangements, and any other special benefits, compensations or arrangements;

·        reviewing and approving annual goals and objectives, bonus criteria and equity guidelines for our employees;

·        reviewing and discussing annually with management our “Compensation Discussion and Analysis” disclosure required by SEC rules and regulations;

·        preparing the Compensation Committee report required by the SEC to be included in our annual proxy statement; and

·        administering, reviewing and making recommendations with respect to our equity-based compensation plans.

Compensation Committee Interlocks and Insider Participation

None of Laura L. Witt, John T. Coleman, John E. Lindahl and Theodore J. Leonsis, each of whom is a member of our Compensation Committee, is or was an officer or is an employee of the Company. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or Compensation Committee of any entity that has one or more executive officers serving on our Board of Directors or Compensation Committee.

Corporate Governance and Nominating Committee

Our Corporate Governance and Nominating Committee consists of Laura L. Witt, John T. Coleman, Patrick W. Gross and Theodore J. Leonsis, each of whom is a non-employee member of our Board of Directors. Ms. Witt is the chairperson of this committee. Our Board of Directors has determined that each member of this committee satisfies the requirements for independence under the NYSE rules.

The Corporate Governance and Nominating Committee is responsible for, among other things:

·        assisting our Board of Directors in identifying prospective director nominees and recommending director nominees for each annual meeting of stockholders to our Board of Directors;

·        reviewing developments in corporate governance practices and developing and recommending governance principles applicable to our Board of Directors;

·        reviewing succession planning for our Chief Executive Officer;

·        overseeing the evaluation of our Board of Directors;

·        determining the compensation of our directors; and

·        recommending members for each committee of our Board of Directors.

Our Corporate Governance and Nominating Committee determines qualification criteria and procedures for the identification and recruitment of candidates for election to serve as directors of Rosetta Stone. The Corporate Governance and Nominating Committee relies on its knowledge and relationships and the knowledge and relationships of our officers and other directors, as well as third parties when it deems appropriate, to identify and evaluate nominees for director, including nominees recommended by stockholders. With respect to nominees recommended by stockholders, our Corporate Governance and Nominating Committee will consider such nominees in the same manner as it evaluates other potential director nominees.

Policy Governing Director Qualifications and Nominations

Our Company seeks directors who possess, at a minimum, the qualifications and skills described below as set forth in our Policy Governing Director Qualifications and Nominations. Our Company considers diversity in its nomination of directors, and in its assessment of the effectiveness of the Board and its committees. In considering

9

Table of Contents

diversity, we evaluate each director candidate in the context of the overall composition and needs of our Board, with the objective of recommending a group that can best manage the business and affairs of the Company and represent stockholder interests using its diversity of experience. Our Corporate Governance and Nominating Committee will consider these and other qualifications, skills, and attributes when recommending candidates to our Board.

At a minimum, our Corporate Governance and Nominating Committee must be satisfied that each Committee- recommended nominee meets the following minimum qualifications:

·        The candidate shall exhibit high standards of integrity, commitment, and independence of thought and judgment.

·        The candidate shall be committed to representing the long-term interests of our Company’s stockholders.

·        The candidate shall have sufficient time and availability to devote to the affairs of our Company, particularly in light of the number of boards on which the nominee may serve.

·        To the extent the candidate serves or has previously served on other boards, the candidate shall have a demonstrated history of contributing at board meetings.

·        The candidate meets any other minimum qualifications and other criteria for Board membership approved by our Board from time to time.

In addition to the minimum qualifications for each candidate set forth above, our Corporate Governance and Nominating Committee shall recommend that our Board select persons for nomination to help ensure that:

·        A majority of the Board is “independent” in accordance with the standards, if any, promulgated by the SEC, or any exchange upon which securities of our Company are traded, and any governmental or regulatory body exercising authority over our Company.

·        Each of our Audit, Compensation, and Corporate Governance and Nominating Committees are comprised entirely of independent directors.

·        At least one member of our Audit Committee shall have such experience, education and other qualifications necessary to qualify as an “audit committee financial expert” as defined by the rules of the SEC.

In addition to any other standards our Corporate Governance and Nominating Committee may deem appropriate from time to time for the overall structure and composition of our Board, the Committee may consider the following factors when selecting and recommending that our Board select persons for nomination:

·        Whether the candidate has direct experience in our Company’s industry or in the markets in which our Company operates.

·        Whether the candidate, if elected, assists in achieving a mix of Board members that represents a diversity of background and experience.

·        Whether the candidate has experience at a strategic or policymaking level in a business, government, non-profit or academic organization of high standing.

·        Whether the candidate is accomplished in his or her respective field, with strong credentials and recognition.

·        Whether the candidate is well regarded in the community.

DIRECTOR COMPENSATION

Summary Non-Employee Director Compensation Table

Our chief executive officer, Tom Adams, does not receive any compensation specifically related to his service on our Board of Directors. The following table summarizes the compensation of each non-employee member of our Board of Directors for the fiscal year ended December 31, 2009:

10

Table of Contents

(1)     Cash payments are made directly to ABS Capital Partners, LLC.

(2)     Cash payments are made directly to ABS Capital Partners, LLC.

(3)     Cash payments are made directly to Norwest Equity Partners, VIII, LP.

In April 2009, our Board of Directors adopted a compensation policy applicable to all of our non-employee directors effective upon completion of our initial public offering. This compensation policy provides that each non-employee director will receive the following compensation for board and committee services:

·        an annual retainer paid in cash or restricted stock units, at the choice of the director, in an amount equal to $35,000;

·        an annual cash retainer of $20,000 for chairing the Audit Committee and $15,000 for chairing the Compensation Committee or the Corporate Governance and Nominating Committee;

·        an annual retainer of $10,000 for each audit committee member and of $7,500 for each Compensation Committee member and each Corporate Governance and Nominating Committee member;

·        the members and chairpersons of any new committees that may be formed will be paid the same amounts as the members and chairpersons of the Compensation Committee and Corporate Governance and Nominating committee;

·        $1,250 for each board meeting attended in person or by telephone above eight in a year lasting more than one hour;

·        $1,250 for each meeting of a committee attended in person or by telephone above ten in a year lasting more than one hour; and

·        an annual grant of equity with a fair market value as of the date of grant of $60,000 comprised of:

·        50% stock options vesting quarterly over one year conditioned upon the director’s continued service on our board of directors during that year; and

·        50% restricted stock units, which will be fully vested and will be paid out in shares of our common stock when the recipient director terminates his or her service on our Board of Directors.

Directors are encouraged to accumulate stock ownership, including ownership of the restricted stock units, equal in value to three times the annual retainer within three years.

Option Grants to Non-Employee Directors

The following table shows each option grant made to our non-employee directors during the year ended December 31, 2009, including the grant date, number of shares, exercise price, and grant date fair value. All options have an exercise price equal to the fair market value of Rosetta Stone’s common stock on the date of grant.

11

Table of Contents

Restricted Stock Unit Grants to Non-Employee Directors

The following table shows each restricted stock unit grant made to our non-employee directors during the year ended December 31, 2009, including the grant date, number of units, and grant date fair value. No restricted stock units were granted prior to April 2009.

Outstanding Option Awards for Directors at December 31, 2009 (Exercisable and Unexercisable)

The following table provides information on the outstanding stock options for our non-employee directors as of December 31, 2009.

12

Table of Contents

STOCKHOLDER MATTERS

Stockholder Communications with our Board

Stockholders who wish to communicate with our Board of Directors may address any inquiries, items for discussion or other materials to a particular director or to our Board of Directors, in care of our General Counsel and Secretary, Mr. Michael C. Wu, at the following address: Rosetta Stone Inc., 1919 North Lynn Street, 7th Floor, Arlington, VA 22209. Our General Counsel and Secretary or designated staff members in the office of the General Counsel will review these submissions and forward messages to members of our Board of Directors, as appropriate. Communications may also be referred to other departments within our Company. We generally will not forward to our Board of Directors any communication that we determine to be primarily commercial in nature or related to an improper or irrelevant topic, or that requests general information about our Company.

Stockholder Recommendations of Director Candidates

Our Corporate Governance and Nominating Committee will consider director candidates recommended by our stockholders. A stockholder seeking to recommend a candidate for the Corporate Governance and Nominating Committee’s consideration should submit such candidate’s name and qualifications to: Corporate Governance and Nominating Committee, c/o Corporate Secretary, Rosetta Stone Inc., 1919 North Lynn Street, 7th Floor, Arlington, Virginia 22209.

Stockholder Proposals and Nominations for the 2011 Annual Meeting of Stockholders

Any stockholder who intends to present a proposal for inclusion in our 2011 proxy statement and form of proxy must submit the proposal, in writing, so that our Corporate Secretary receives it at our principal executive offices, located at 1919 North Lynn Street, 7th Floor, Arlington, Virginia 22209, by December 15, 2010, which is 120 days prior to the one year anniversary of the date this proxy statement is being sent to our stockholders. Any stockholder who wishes to bring a proposal or nominate a person for election to our Board of Directors at the 2011 Annual Meeting of Stockholders must provide written notice of the proposal or nomination to our Corporate Secretary, at our principal executive offices, between December 15, 2010 and January 14, 2011, which is 120 to 90 days prior to the one year anniversary of the upcoming Meeting. In addition, our stockholders must comply with the requirements of the SEC related to nominations and stockholder proposals and the procedural requirements in our bylaws, which stockholders can obtain from us upon request and which are also on file with the SEC.

Our bylaws provide that if a stockholder wishes to nominate a person for election as director or to propose other business to be considered at one of our annual meetings of stockholders, that stockholder must follow the procedures contained in our bylaws and satisfy the requirements of Regulation 14A of the Securities Exchange Act of 1934. The stockholder proposing such business or making such nomination must be a stockholder of record of our Company on the date the nomination is delivered to our Corporate Secretary and at the time of our annual meeting and be entitled to vote at the annual meeting. The proposal or nomination must be received by our Corporate Secretary at our principal executive offices not less than 90 nor more than 120 days prior to the first anniversary of the preceding year’s annual meeting, except that if the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder must be delivered not earlier than the close of business 120 days prior to the annual meeting and no later than 90 days prior to such annual meeting or 10 days following our first public announcement of the date of the annual meeting. In addition, if the number of directors to be elected to our Board of Directors at an annual meeting is increased and there is no public announcement by us naming all of the nominees for director or specifying the size of the increased Board of Directors at least 100 days prior to the first anniversary of the preceding year’s annual meeting, a stockholder’s nomination shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it is delivered to our Corporate Secretary at our principal executive offices not later than the close of business on the 10th day following the day on which we first make such public announcement. These time periods are designed to allow us time to adequately consider all proposals and nominees.

13

Table of Contents

To be considered, each nomination must include the following information:

·                  all information relating to the nominee that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to and in accordance with Section 14 of the Exchange Act and the rules and regulations promulgated thereunder;

·                  the nominee’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected;

·                  a description of all direct and indirect compensation and other material monetary agreements, arrangements and understandings during the past three years, and any other material relationships, between or among the nominating stockholder and beneficial owner, if any, and their respective affiliates and associates, or others acting in concert with them, on the one hand, and each proposed nominee, and his or her respective affiliates and associates, or others acting in concert with him, on the other hand, including, all information that would be required to be disclosed pursuant to Rule 404 promulgated under Regulation S-K if the stockholder making the nomination and any beneficial owner on whose behalf the nomination is made, if any, or any of their respective affiliates or associates or persons acting in concert with any such person, were the “registrant” for purposes of such rule and the nominee were a director or executive officer of such registrant;

·                  a written questionnaire with respect to the background and qualification of the nominee and the background of any other person or entity on whose behalf the nomination is being made, the form of which questionnaire will be provided by our Corporate Secretary upon written request; and

·                  a written representation and agreement, in the form provided by our Corporate Secretary upon written request, that the nominee is not and will not become a party to any agreement, arrangement or understanding with, and has not given any commitment or assurance to, any person or entity as to how the nominee, if elected as a director, will act or vote on any issue or question that has not been disclosed to us or that could limit or interfere with the nominee’s ability to comply, if elected as a director, with the nominee’s fiduciary duties under applicable law, is not and will not become a party to any agreement, arrangement or understanding with any person or entity other than us with respect to any direct or indirect compensation, reimbursement or indemnification in connection with service or action as our director that has not been disclosed to us, and in the nominee’s individual capacity and on behalf of any person or entity on whose behalf the nomination is being made, would be in compliance, if elected as our director, and will comply with all of our applicable publicly disclosed corporate governance, conflict of interest, confidentiality and stock trading policies and guidelines.

To be considered, proposals for business to be considered by our stockholders at an annual meeting, other than the nomination of persons for election as directors, must include the following information:

·                  a brief description of the business desired to be brought before the annual meeting;

·                  the reasons for conducting such business at the annual meeting;

·                  the text of the proposal or business, including the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend our Bylaws, the language of the proposed amendment;

·                  any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made;

·                  a description of all agreements, arrangements and understandings between such stockholder and beneficial owner, if any, and any other person or persons, including their names, in connection with the proposal of such business by such stockholder; and

·                  as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made:

·                  the name and address of such stockholder, as they appear on our books, and of such beneficial owner, if any,

·                  the class or series and number of shares of our capital stock that are, directly or indirectly, owned beneficially and of record by such stockholder and by such beneficial owner,

·                  any option, warrant, convertible security, stock appreciation right, or similar right with an exercise or conversion privilege or a settlement payment or mechanism at a price related to

14

Table of Contents

any class or series of our capital stock, whether or not such instrument or right shall be subject to settlement in the underlying class or series of our capital or otherwise directly or indirectly owned beneficially by such stockholder and by such beneficial owner, if any,

·                  any other direct or indirect opportunity held or owned beneficially by such stockholder and by such beneficial owner, if any, to profit or share in any profit derived from any increase or decrease in the value of our shares,

·                  any proxy, contract, arrangement, understanding, or relationship pursuant to which such stockholder or beneficial owner, if any, has a right to vote any shares of any of our securities,

·                  any short interest in any of our securities,

·                  any right to dividends on our shares of capital stock owned beneficially by such stockholder or such beneficial owner, if any, which right is separated or separable from the underlying shares,

·                  any proportionate interest in shares of our capital stock or derivative instrument held, directly or indirectly, by a general or limited partnership in which such stockholder or such beneficial owner, if any, is a general partner or with respect to which such stockholder or such beneficial owner, if any, directly or indirectly, beneficially owns an interest in a general partner, and

·                  any performance-related fees, other than an asset-based fee, to which such stockholder or such beneficial owner, if any, is entitled to based on any increase or decrease in the value of our shares or derivative instruments, if any, in each case with respect to the information required to be included in the notice.

Such information must include any such interests held by members of such stockholder’s or such beneficial owner’s immediate family sharing the same household. All such information must be supplemented by such stockholder and such beneficial owner, if any, not later than 10 days after the record date for the annual meeting to disclose such ownership as of the record date, 10 days before the annual meeting date, and immediately prior to the commencement of the annual meeting, by delivery of such supplemented information to our Corporate Secretary. Such information shall also include any other information relating to such stockholder and beneficial owner, if any, that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitation of proxies for election of directors in a contested election pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder, a representation that the stockholder is a holder of record of our stock entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business or nomination, and a representation whether the stockholder or the beneficial owner, if any, intends or is part of a group that intends to deliver a proxy statement and/or form of proxy to holders of at least the percentage of our outstanding capital stock required to approve or adopt the proposal or elect the nominee or otherwise to solicit proxies from stockholders in support of such proposal or nomination.

The proposing stockholder must also include such other information as we may reasonably require or that is otherwise reasonably necessary to determine the eligibility of such proposed nominee to serve as a director of our Company, to determine whether such nominee qualifies as an “independent director” or “audit committee financial expert” under applicable law, securities exchange rule or regulation, or any of our publicly-disclosed corporate governance guidelines or committee charters; including our policy governing director qualifications and nominations, and that could be material to a reasonable stockholder’s understanding of the independence and qualifications, or lack thereof, of such nominee.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership Table

The following table shows shares of our common stock that we believe are owned as of March 31, 2010 by:

·             Each named executive officer included in the Summary Compensation Table below,

·             Each director and nominee,

15

Table of Contents

·             All current directors, nominees and executive officers as a group, and

·             Each stockholder owning more than 5% of our common stock.

Unless indicated in the notes, to our knowledge each stockholder has sole voting and investment power for all shares shown, subject to community property laws that may apply to create shared voting and investment power. Unless indicated in the notes, the address of each beneficial owner is c/o Rosetta Stone Inc., 1919 North Lynn Street, 7th Floor, Arlington, Virginia 22209.

We calculated the percentage of shares outstanding based on 20,524,357 shares of common stock outstanding on March 31, 2010. In accordance with SEC regulations, we also include (1) shares subject to options that are currently exercisable or will become exercisable within 60 days of March 31, 2010, and (2) shares issuable upon settlement of restricted stock units that are vested, or will become vested within 60 days of March 31, 2010. Those shares are deemed to be outstanding and beneficially owned by the person holding such option or restricted stock unit for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person.

* Indicates ownership of 1% or less.

(1)  Includes 250,459 shares of our common stock subject to options which are exercisable within 60 days of March 31, 2010. Includes 1,780 shares owned by Mr. Adams’ spouse with respect to which Mr. Adams disclaims beneficial ownership.

(2)  Includes 134,814 shares of our common stock subject to options which are exercisable within 60 days of March 31, 2010.

(3)  Includes 84,653 shares of our common stock subject to options which are exercisable within 60 days of March 31, 2010.

(4)  Includes 134,191 shares of our common stock subject to options which are exercisable within 60 days of March 31, 2010.

(5)  Includes 27,400 shares of our common stock subject to options which are exercisable within 60 days of March 31, 2010.

(6)  Includes 4,548 shares of our common stock subject to options and restricted stock units which are exercisable within 60 days of March 31, 2010, and an aggregate of 5,099,618 shares held by the ABS Entities. Ms. Witt is a managing member of ABS Partners LLC, the general partner of the ABS Entities. Ms. Witt disclaims beneficial ownership of these shares. See footnote 14.

16

Table of Contents

(7)  Includes 4,548 shares of our common stock subject to options and restricted stock units which are exercisable within 60 days of March 31, 2010, and an aggregate of 5,099,618 shares held by the ABS Entities. Mr. Clough is a managing member of ABS Partners LLC, the general partner of the ABS Entities. Mr. Clough disclaims beneficial ownership of these shares. See footnote 14.

(8)  Includes 28,923 shares of our common stock subject to options and restricted stock units which are exercisable within 60 days of March 31, 2010. Includes 200 shares owned by Mr. Coleman’s spouse with respect to which Mr. Coleman disclaims beneficial ownership.

(9)  Includes 28,923 shares of our common stock subject to options and restricted stock units which are exercisable within 60 days of March 31, 2010.

(10)  Includes 35,423 shares of our common stock subject to options and restricted stock units which are exercisable within 60 days of March 31, 2010.

(11)  Includes 1,008 shares of our common stock subject to options and restricted stock units which are exercisable within 60 days of March 31, 2010.

(12)  Includes 4,548 shares of our common stock subject to options and restricted stock units which are exercisable within 60 days of March 31, 2010 and 3,334,002 shares held by Norwest. Mr. Lindahl is a director of our Company and is a managing member of Itasca, the sole general partner of Norwest. Mr. Lindahl disclaims beneficial ownership of these shares. See footnote 15.

(13)  Includes shares described in footnotes 1 through 12 above.

(14)  Includes:

(i)  4,512,641 shares of common stock held by ABS Capital Partners IV, L.P.;

(ii)  151,083 shares of common stock held by ABS Capital Partners IV-A, L.P.;

(iii)  259,175 shares of common stock held by ABS Capital Partners IV Offshore, L.P.; and

(iv)  176,719 shares of common stock held by ABS Capital Partners IV Special Offshore, L.P., or, together with ABS Capital Partners IV, L.P., ABS Capital Partners IV-A, L.P. and ABS Capital Partners IV Offshore, L.P., or collectively the ABS Entities.

ABS Partners IV L.L.C., or ABS Partners, LLC, is the general partner of the ABS Entities and has voting and dispositive power over these shares, which is shared by each of Ms. Witt and Mr. Clough as managing members of ABS Partners LLC. Ms. Witt and Mr. Clough, who both serve on our board of directors, disclaim beneficial ownership of these shares. The address for these entities is 400 East Pratt Street, Suite 910, Baltimore, MD 21202.

(15)  Norwest is a limited partnership whose sole general partner is Itasca Partners VIII, LLC, or Itasca, and whose managing members are John E. Lindahl and Timothy C. DeVries, and whose managing administrative member is John P. Whaley. All voting and dispositive power over these shares is held by Norwest acting by and through Itasca and its managing members. Each of the managing members, including Mr. Lindahl who serves on our board of directors, disclaims beneficial ownership of these shares. The address for these entities is 80 South 8th Street, Suite 3600, Minneapolis, MN 55402.

(16)  Ownership information is based on a Schedule 13G filed with the SEC on February 11, 2010 by T Rowe Price Associates Inc., the address of which is 100 East Pratt St., Baltimore, MD 21202.

(17)  Ownership information is based on a Schedule 13G filed with the SEC on February 12, 2010 by Waddell & Reed Financial, Inc., Waddell & Reed Financial Services, Inc., Waddell & Reed, Inc., Waddell & Reed Investment Management Company, and Ivy Investment Management Company, the address of all of which is 6300 Lamar Ave., Overland Park, KS 66202.

(18)  Ownership information is based on a Schedule 13G filed with the SEC on February 10, 2010 by Scopia Management Inc., the address of which is 450 Seventh Avenue, 43rd Floor, New York, NY 10123.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our directors and executive officers, as well as beneficial owners of more than ten percent of our common stock, to file with the SEC an initial report of ownership of our stock on Form 3 and reports of changes in ownership on Form 4 or Form 5. Persons subject to Section 16 are required by SEC regulations to furnish us with copies of all Section 16(a) forms that they file. As a matter of practice, our administrative staff assists our executive officers and directors in preparing initial ownership reports and reporting ownership changes and typically files those reports on their behalf. Based solely on a review of the copies of such forms in our possession and on written representations from reporting persons, we believe that during the year ended December 31, 2009 all of our executive officers and directors, as well as beneficial owners of more than ten percent of our common stock, filed the required reports on a timely basis under Section 16(a) of the Exchange Act.

COMPENSATION COMMITTEE REPORT

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis included in this Proxy Statement with the Company’s management and, based on such review and discussion, recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement and incorporated by reference into the Company’s 2009 annual report on Form 10-K.

Laura L. Witt (Chair)

John T. Coleman

Theodore J. Leonsis

John E. Lindahl

17

Table of Contents

COMPENSATION DISCUSSION AND ANALYSIS

Overview

The Compensation Committee of our Board of Directors (the “Compensation Committee”) has overall responsibility for the compensation program for our executive officers. Members of the Compensation Committee are appointed by our Board of Directors. Currently, the Compensation Committee consists of four members of our Board, none of whom are executive officers of our Company.

Our executive compensation program is designed to encourage our executives to focus on building stockholder value, maximizing rational growth and bottom line results.

Our objective is to provide a competitive total compensation package to attract and retain key personnel and drive effective results. To achieve this objective, the Compensation Committee has implemented and maintains compensation plans which tie a substantial portion of the executives’ overall compensation to key strategic financial and operational goals such as our annual revenue. Our executive compensation program provides for the following elements:

·             base salaries, which are designed to allow us to attract and retain qualified candidates in a highly competitive market;

·             annual incentive compensation, which provides additional cash compensation (i.e., bonus) based on achieving our financial and operational goals and individual performance;

·             equity-based compensation, principally in the form of stock options, which are granted to align executives’ interests with our stockholders’ interests to grow long-term value and retain executives; and

·             a benefits package that is available to all of our employees.

A detailed description of these components is provided below.

Elements of Our Executive Compensation Program

Base Salary. We utilize base salary as the primary means of providing compensation for performing the essential elements of an executive’s job. We believe our base salaries are set at levels that allow us to attract and retain executives in competitive markets.

Annual Incentive Compensation. Our annual non-equity incentive compensation, in the form of an annual cash bonus, is intended to compensate our executives for meeting our corporate objectives and their individual performance objectives and to motivate our executives to meet these objectives. In addition, our annual incentive compensation is intended to motivate and reward our executives for exceeding their objectives. These objectives may be both financial and non-financial and may be based on company, divisional or individual performance. These objectives are separated so that executives may be paid a bonus for meeting one objective and not be paid for failing to meet another objective. For financial objectives, the Compensation Committee typically sets a target level where the full 100% bonus can be earned and then also sets a slightly lower target where a partial bonus can be earned if the objective is almost achieved and a higher target where a substantially larger than 100% bonus can be earned for exceeding the 100% bonus target. In addition to the annual cash bonus plan, we may utilize discretionary cash bonuses to attract new executives or to reward executives for exemplary performance that is not necessarily rewarded by the cash bonus plan.

Equity-Based Compensation. Our equity-based compensation is intended to enhance our ability to retain talent over a longer period of time, to reward long-term efforts that enhance future value of the Company, and to provide executives with a form of reward that aligns their interests with those of our stockholders. Executives whose skills and results we deem to be critical to our long-term success are eligible to receive higher levels of equity-based compensation. Executives typically receive an equity-based award in the form of a stock option that vests over a period of time upon commencement of their employment. Thereafter, executives may receive additional awards

18

Table of Contents

from time to time as the Compensation Committee determines consistent with the objectives described above in this section. Our Compensation Committee expects to make annual equity-based compensation awards to our executives in amounts that are competitive with awards then being made by comparable public companies with whom we compete for talent. See the discussion under the caption “Executive Compensation—Stock Grants” and “Executive Compensation—IPO Option and Restricted Stock Grants” for the description of our Compensation Committee’s decision to award stock grants and options to our employees, including our named executive officers, and to award restricted stock grants to our employees, excluding our named executive officers, on April 15, 2009 in conjunction with our initial public offering.

Benefits. Our benefits, such as our basic health benefits, 401(k) plan, and life insurance, are intended to provide a stable array of support to executives and their families throughout various stages of their careers, and these core benefits are provided to all executives regardless of their individual performance levels on the same basis as our other salaried employees in the U.S. The 401(k) plan allows participants to defer up to 100% of their annual compensation, subject to any applicable caps set by the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). The executives’ elective deferrals are immediately vested and non-forfeitable upon contribution to the 401(k) plan. We currently provide matching contributions equal to 100% of an employee’s individual contribution, up to a maximum of 4% of the participant’s annual salary, subject to certain limits.

Taxes. Our Compensation Committee does not have any particular policies concerning the payment of tax obligations on behalf of our employees. We are required by law to withhold a portion of every compensation payment we make to our employees. In the case of noncash compensation, that means either (i) we withhold a portion of the noncash compensation payment and pay cash to the appropriate tax authorities or (ii) the employees make a direct cash payment to us in lieu of our withholding a portion of the noncash compensation. In the case of the stock grants to our key employees discussed under the caption “Executive Compensation—Stock Grants,” our Compensation Committee determined it was preferable to withhold a portion of the stock grant from the recipients and for us to pay the equivalent cash value to the tax authorities rather than requesting our underwriters to release key employees from their contractual lock-ups and allowing them to sell large amounts of our stock in the public market in order to fund their personal tax obligations. All payments to or on behalf of our employees, including tax payments, are considered compensation and are evaluated by our Compensation Committee as part of our overall compensation packages. In the future, our Compensation Committee will consider all possible forms of compensation, including payment of tax obligations on behalf of our employees, in determining how best to compensate our employees to achieve the overall objectives of our compensation program.

Determining the Amount of Each Element of Compensation

Overview. The amount of each element of our compensation program is determined by our Compensation Committee on an annual basis taking into consideration our results of operations, long and short-term goals, individual goals, the competitive market for our executives, the experience of our Compensation Committee members with similar stage companies and general economic factors. In 2008, our Compensation Committee engaged an independent compensation consultant, Towers, Perrin, Forster & Crosby, Inc., for the limited task of providing data as to the competitiveness of our compensation program compared with those of other companies with which we may compete for talent. Our Compensation Committee did not retain the compensation consultant to determine or recommend any particular compensation package for our executives. Rather, the compensation consultant provided survey data for a peer group of comparable companies for the positions of chief executive officer, chief operating officer and chief financial officer and a broader study of survey data for other executive officers for whom no peer group data was provided. No such compensation study was undertaken in 2009 and our Compensation Committee instead looked only to provide minor adjustments to the compensation structure put in place in 2008. Our Compensation Committee did, however, retain an independent compensation consultant, Fredrick W. Cook & Co. (“Frederick W. Cook”), to advise the committee on equity compensation practices in anticipation of our initial public offering.

Our chief executive officer provides input to the Compensation Committee on the performance and compensation levels of our executives, other than himself, but he does not have a vote on the Compensation Committee. Once the level of compensation is set for the year, the Compensation Committee may revisit its decisions if there are material developments during the year, such as promotions, that may warrant a change in

19

Table of Contents

compensation. After the year is over, the Compensation Committee reviews the performance of the executive officers and key employees to determine the achievement of annual incentive targets and to assess the overall functioning of our compensation plans against our goals.

Base Pay. Our Compensation Committee reviews our executives’ base salaries on an annual basis taking into consideration the factors described above as well as changes in position or responsibilities. In the event of material changes in position, responsibilities or other factors, the Compensation Committee may consider changes in base pay during the year. In February 2009, in anticipation of the completion of our initial public offering, we entered into new employment agreements with our executive officers. The agreements increased the annual base salaries of some of our executive officers for 2009 as follows:

In general, our management and our Compensation Committee both looked to hold base salaries company-wide to the same amounts as in 2008 reflecting the existing economic climate in the country as a whole. As a result, our Compensation Committee did not commission a new compensation study for 2009. However, our Compensation Committee recognized that the 2008 base salaries of our named executive officers were below the median salaries of their peers based on the 2008 compensation survey they used to determine 2008 base salaries and that we needed to reward exceptional performance. As a result, our Compensation Committee recommended that Mr. Adams’ base salary be increased to $400,000 for 2009, but Mr. Adams refused the increase. In addition, our Compensation Committee made such small discretionary increases as are reflected in the table above to reward the executives’ exceptional performance in 2008, recognize their importance to our Company going forward, reflect the substantial growth and overall success of our Company in 2008, and to keep those executives’ compensation at a level the Compensation Committee viewed as competitive with our peers.

Annual Incentive Plan Compensation. Our Compensation Committee establishes an executive non-equity incentive plan on an annual basis and distributions are typically made within 90 days after the end of each calendar year after the Compensation Committee has determined if the goals have been achieved. However, the Compensation Committee has the authority to modify a bonus structure during the year if it deems appropriate. Examples of circumstances in which our Compensation Committee might consider revising a bonus plan include mergers, acquisitions, divestitures, board-approved budget revisions and other material changes in our Company.

Our executive bonus plan for 2009 provided a potential bonus for each executive based on financial and nonfinancial goals. For all executives, the potential award is based 50% on financial goals, 40% on company-level strategic goals and 10% on a net promoter score that measures customer satisfaction with our solutions. The company-level financial goals, the company-level nonfinancial strategic goals and the net promoter score goals each stand-alone and are evaluated separately so that some goals can be met and corresponding bonuses paid while other goals are not met and no corresponding bonus paid. The award of the financial bonus is based 20% on the achievement of the total budgeted 2009 revenue, 40% on achievement of the budgeted 2009 net marketing contribution, which we define as gross profit less total sales and marketing expense, and 40% on achievement of the budgeted 2009 adjusted EBITDA, which we define as income without option expenses, interest income, finance charges, business taxes, depreciation and amortization. The structure of the bonus plan and the breakout of the percentages among the component parts is the same as it was in 2008 except that the percentage based on non-financial strategic goals was increased from 25% to 40% and the net promoter score replaced individual strategic goals. These changes were made to stress the importance of our Company-level strategic goals and to also stress the importance of customer satisfaction on the long-term success of our Company.

20

Table of Contents

For 2009, our Company-level nonfinancial strategic goals were international growth, launching and running our online experience, strengthening the foundations of our Company and strengthening the defenses of our Company.

With respect to our 2009 financial goals, consistent with our approach in 2008, no bonus would be earned if we failed to achieve 90% of a financial target If we achieved 90% of a financial target, 10% of the bonus would be earned. If we achieved 100% of a financial target, 100% of the bonus would be earned. For the sales target, if we achieved 110% or more of the target, 250% of the bonus would be earned. For the net marketing contribution target, if we achieved 120% or more of the target, 250% of the bonus would be earned. For the adjusted EBITDA target, if we achieved 125% or more of the target, 250% of the bonus would be earned. Between 90% and 100% and between 100% and the maximum payout percentages of the financial targets, the amount of the bonus earned would be proportional between the two points. In addition, no payment of any financial target bonus would be made in the event that capital expenditures, determined in accordance with GAAP, exceeded 110% of the budgeted amount.

Our Compensation Committee established the following financial targets for 2009 for purposes of developing the incentive compensation plan: (i) total revenue of $247 million; (ii) net marketing contribution, which represents revenue less cost of revenue and sales and marketing expenses, of $100.2 million; and (iii) adjusted EBITDA of $42.25 million.

Our Compensation Committee set each executive’s 2009 target bonus as a percentage of his 2009 annualized base salary as set forth in the table below.

For 2009, our Compensation Committee did not change the target bonus as a percentage of base salary that was set in 2008 for any of our executives except for Mr. Wu, whose target bonus as a percentage of salary was increased from 35% to 40% to bring Mr. Wu’s bonus opportunity in line with that of Mr. Helman and Mr. Long and with that of the median of the broad survey group in the 2008 compensation study and to reward Mr. Wu for the increased responsibilities he has undertaken in protecting our Company from software piracy and trademark infringement. The other executives’ total target bonus opportunity as a percentage of base salary for 2009 was already in line with the amount of the median of the broad survey group in the 2008 compensation study.

Our Compensation Committee determined the following bonuses for our named executive officers for 2009:

2009 Individual Bonuses Earned

21

Table of Contents

(1)     Each executive earned 154% of his company level financial objectives target bonus as described in the table below entitled “2009 Company Level Financial Target Achievement.”

(2)     Each executive earned 74% of his company level non-financial strategic target bonus as described in the table below entitled “2009 Company Level Non-Financial Strategic Target Achievement.”

(3)     Our Compensation Committee determined that we achieved a weighted net promoter score of 39.96% and as a result funded a bonus pool of $25,831 that was allocated among eight of our senior executives, including our five named executive officers, based on their perceived relative contributions to the achievement of the net promoter score.

Our Compensation Committee determined that each of our named executive officers earned 154% of his company level financial objectives bonus as follows:

2009 Company Level Financial Target Achievement

With respect to our Company-level nonfinancial strategic goals for 2009, our Compensation Committee determined a percentage of the overall target to award based on an evaluation of our performance in meeting each of these goals during the year. Many of these goals are subjective and not capable of being defined by bright-line measurements. Our Compensation Committee’s determination of the percentage of each strategic objective that was achieved was as follows:

2009 Company Level Non-Financial Strategic Target Achievement

Allocation of Equity-Based Compensation Awards

Stock options granted to executives and other employees under our 2009 Omnibus Incentive Plan vest over a period of four years, with 1/4 of the shares vesting on the one-year anniversary of the begin vesting date, which is typically the first date of the calendar quarter following the date of grant, except for new hires, whose begin vesting date is typically the date of hire. Our Compensation Committee exercises its judgment and discretion and considers, among other things, the role and responsibility of the executive, competitive factors, performance, the amount of stock-based equity compensation already held by the executive, the non-equity compensation received by the executive and the total number of options to be granted to all participants during the year. Our Compensation Committee typically makes annual grants of equity awards, if any, to our executives in connection with its annual review of our executives’ compensation and then throughout the year, on a quarterly basis, our Compensation Committee evaluates grants for new hires, promotions or other changes that may warrant additional grants. See the discussion under the captions “Executive Compensation—Stock Grants” and “Executive Compensation—IPO

22

Table of Contents

Option and Restricted Stock Grants” for a description of equity awards made on April 15, 2009 in connection with our initial public offering of common stock.

Timing of Equity-Based Awards

Our Compensation Committee generally grants stock options to executives and current employees once per quarter on the date of the regularly scheduled Compensation Committee meeting. With respect to newly hired employees, our practice is typically to make stock grants at the first meeting of the Compensation Committee following such employee’s hire date. We do not have any program, plan or practice to time stock option grants in coordination with the release of material non-public information. Prior to our initial public offering in April 2009, our Compensation Committee determined the exercise price of stock options based on valuations determined by our Board of directors. Since becoming a public company, the exercise price of stock options is determined based on the trading price of our common stock at the close of the market on the date of grant.

Executive Equity Ownership

We encourage our executives to hold a significant equity interest in our Company. However, we do not have specific share retention and ownership guidelines for our executives. We do not permit our executives to sell short our stock, prohibit our executives from holding our stock in a margin account, and discourage the purchase and sale of exchange-traded options on our stock by our executives.

Type of Equity-Based Awards

Our 2006 Stock Incentive Plan only provided for stock options. However, our 2009 Omnibus Incentive Plan permits us to issue stock options, restricted stock units, restricted stock, stock appreciation rights, performance units and performance shares. In 2009 we issued stock options and restricted stock to our employees and executives and also issued restricted stock units to our non-employee directors.

Severance and Change in Control Arrangements

Each of our equity incentive plans provides for a potential acceleration of outstanding awards in the event that we undergo a change in control, as defined in such plans. See “—Employee Benefit Plans” below for a description of the change in control provisions contained in our equity incentive plans.

In addition see “—Employment Arrangements with Named Executive Officers” and “—Payments Upon Termination or Upon Change in Control” below for a description of the severance and change in control arrangements we have with our named executive officers. The Compensation Committee believes that these arrangements were necessary to attract and are necessary to retain our named executive officers. The terms of each arrangement were determined in negotiation with the applicable named executive officer in connection with his hiring and were not based on any set formula.

Effect of Accounting and Tax Treatment on Compensation Decisions

In the review and establishment of our compensation programs, we consider the anticipated accounting and tax implications to us and our executives. While we consider the applicable accounting and tax treatment of alternative forms of equity compensation, these factors alone are not dispositive, and we also consider the cash and non-cash impact of the programs and whether a program is consistent with our overall compensation philosophy and objectives.

Section 162(m) of the Internal Revenue Code imposes a limit on the amount of compensation that we may deduct in any one year with respect to our chief executive officer and each of our next three most highly compensated executive officers, unless specific and detailed criteria are satisfied. Performance-based compensation, as defined in the Internal Revenue Code, is fully deductible if the programs are approved by stockholders and meet

23

Table of Contents

other requirements. We believe that grants of equity awards under our existing stock plans qualify as performance- based for purposes of satisfying the conditions of Section 162(m), thereby permitting us to receive a federal income tax deduction in connection with such awards. In general, we have determined that we will not seek to limit executive compensation so that it is deductible under Section 162(m). However, from time to time, we monitor whether it might be in our interests to structure our compensation programs to satisfy the requirements of Section 162(m). We seek to maintain flexibility in compensating our executives in a manner designed to promote our corporate goals and therefore our Compensation Committee has not adopted a policy requiring all compensation to be deductible. Our Compensation Committee will continue to assess the impact of Section 162(m) on our compensation practices and determine what further action, if any, is appropriate.

Role of Chief Executive Officer in Executive Compensation Decisions

Our Compensation Committee generally seeks input from our Chief Executive Officer, Tom P.H. Adams, when discussing the performance of and compensation levels for our named executive officers other than himself. Mr. Adams provides information relating to each named executive officer’s performance to support the Compensation Committee’s decision-making on executive compensation.

EXECUTIVE COMPENSATION

Summary Compensation Table

The following table provides information regarding the compensation of our chief executive officer, chief financial officer and each of our other three most highly compensated executive officers during 2007, 2008 and 2009. We refer to these executive officers as our named executive officers.

(1)     Represents the aggregate grant date fair value for restricted stock awards and option awards granted in the applicable year, computed in accordance with FASB ASC Topic 718. Information about the assumptions used to value these awards can be found in Note 10 to the consolidated financial statements in the Form 10-K for the fiscal year ended December 31, 2009 filed on March 10, 2010. An overview of the features of these awards can be found in the “Compensation Discussion and Analysis” above.

(2)     Mr. Adams received a net issuance of 238,066 shares of common stock on April 15, 2009. A total of 173,813 shares of common stock were withheld to satisfy the federal, state and local tax withholding obligations associated with the grant. The total grant date fair value of the grant was $7,413,822. This amount also includes $9,800 Mr. Adams received in a 401(k) matching contribution in 2009.

(3)     This amount includes $555,081 in gain recognized from stock option exercises and $12,110 of 401(k) plan matching contributions in 2008.

(4)     This amount includes $605,070 in gain recognized from a stock option exercise and $12,407 of 401(k) plan matching contributions in 2007.

24

Table of Contents

(5)     Mr. Eichmann received a net issuance of 64,611 shares of common stock on April 15, 2009. A total of 54,818 shares of common stock were withheld to satisfy the federal, state and local tax withholding obligations associated with the grant. The total grant date fair value of the grant was $2,149,740. This amount also includes $7,894 Mr. Eichmann received in a 401(k) matching contribution in 2009.

(6)     Mr. Helman received a net issuance of 44,250 shares of common stock on April 15, 2009. A total of 32,307 shares of common stock were withheld to satisfy the federal, state and local tax withholding obligations associated with the grant. The total grant date fair value of the grant was $1,378,044.

(7)     Mr. Helman’s annualized base salary of $220,000 was prorated based on his March 2007 start date.

(8)     Mr. Helman received a $15,000 one-time signing bonus upon commencement of his employment and a $10,000 performance-based discretionary bonus in 2007.

(9)     Mr. Helman received reimbursement for relocation expenses of $42,609 in 2007.

(10)  Mr. Long received a net issuance of 22,124 shares of common stock on April 15, 2009. A total of 16,153 shares of common stock were withheld to satisfy the federal, state and local tax withholding obligations associated with the grant. The total grant date fair value of the grant was $689,044. This amount also includes $4,587 Mr. Long received in a 401(k) matching contribution in 2009.

(11)  Mr. Long received a 401(k) matching contribution of $8,200 in 2008.

(12)  Mr. Long received a 401(k) matching contribution of $8,149 in 2007.

(13)  Mr. Wu received a net issuance of 30,974 shares of common stock on April 15, 2009. A total of 22,615 shares of common stock were withheld to satisfy the federal, state and local tax withholding obligations associated with the grant. The total grant date fair value of the grant was $964,602. This amount also includes $5,846 Mr. Wu received in a 401(k) matching contribution in 2009.

(14)  Mr. Wu received a 401(k) matching contribution of $7,014 in 2008.

(15)  Mr. Wu received a $30,000 one-time signing bonus in 2007.

Grants of Plan-Based Awards

The following table sets forth each grant of plan-based awards to our named executive officers during 2009:

(1)  If we earn 90% of our Company level financial targets, our executives will earn 10% of their financial target component of their bonus. The other components of the bonus do not have such thresholds and as such are deemed to be $0 for the purpose of this table.

(2)  Our executives could earn up to 250% of the financial target component of their bonus if we achieved 110% or more of our sales target, 120% or more of our net marketing contribution target, and 125% or more of our adjusted EBITDA target. For the other components of these awards it is not possible to earn more than 100% of the target bonus.

Outstanding Equity Awards at Fiscal Year-End

The following table lists all outstanding equity awards held by our named executive officers as of December 31, 2009.

25

Table of Contents

(1) The options reflected in the table above with an expiration date of April 15, 2019 were issued under the 2009 Omnibus Incentive Plan and vest as to one-fourth of the total number of shares on the one year anniversary of the begin vesting date specified in the award agreement and thereafter vest at the rate of one-quarter per annum. The options reflected in the table above with an expiration date other than April 15, 2019 were issued under the 2006 Stock Incentive Plan and vest as to one-fourth of the total number of shares on the one year anniversary of the begin date of vesting date specified in the award agreement and thereafter vest at a rate of one-sixteenth of the total number of shares per quarter. The begin vesting dates are as follows: January 1, 2006 for Mr. Adams (466,128 shares), April 15, 2009 (147,579 shares) for Mr. Adams, October 1, 2006 (130,000 shares) for Mr. Eichmann, April 1, 2007 (19,500 shares) for Mr. Eichmann, April 15, 2009 (25,756 shares) for Mr. Eichmann, March 12, 2007 for Mr. Helman (106,821) shares), April 15, 2009 (18,148 shares) for Mr. Helman, October 1, 2006 (149,500 shares) for Mr. Long, April 15, 2009 (13,513 shares) for Mr. Long and January 1, 2007 (29,133 shares) for Mr. Wu, and April 15, 2009 (14,917 shares) for Mr. Wu.

Option Exercises

None of our named executive officers exercised any of their options during the fiscal year ended December 31, 2009.

Pension Benefits

None of our employees participates in or has account balances in qualified or non-qualified defined benefit plans sponsored by us.

Nonqualified Deferred Compensation

None of our employees participates in or has account balances in non-qualified defined contribution plans or other deferred compensation plans maintained by us.

Stock Grants

Our Compensation Committee awarded to 10 of our key employees, including our named executive officers, a stock grant equal to an aggregate of 591,491 shares on April 15, 2009 in conjunction with our initial public offering. This grant was net of the number of shares required to be withheld to satisfy the federal, state and local tax withholding obligations. Thus, we refer to the grant as a “net issuance.” Our Compensation Committee determined this number of shares by multiplying the increase in the value of our Company from the time we acquired our

26

Table of Contents

predecessor, Fairfield & Sons, Ltd., in January 2006, to the assumed pre-money valuation of our Company on the date of grant by 7%. The value of our Company at the time of the acquisition of Fairfield & Sons, Ltd. was $62 million. Our Compensation Committee used an assumed pre-money valuation of $312 million for our Company on the date of grant, based on $17.00 per share. Therefore, the Compensation Committee concluded that the increase in value was approximately $250 million. This amount was then multiplied by 7% and divided by $17.00 per share to determine the total number of shares to which the recipients were entitled, or 1,029,699 shares. Then a number of shares equal to the required tax withholding was deducted to determine the “net issuance” of an aggregate of 591,491 shares to the recipients. The remaining 438,200 shares were not issued and instead we paid an equivalent cash amount to the appropriate tax authorities to cover the corresponding tax withholding obligations.

The allocation of the grant among the key employees was intended to reward those employees that our Compensation Committee believed played a material role in the growth and success of our Company and the resulting creation of stockholder value since January 2006. A secondary goal of the grant was to provide those employees with a sufficient equity ownership stake in our Company to align their interests with those of our stockholders moving forward.

We withheld a portion of the shares granted to each recipient to satisfy the federal, state and local tax withholding obligations associated with the “net issuance” of the grant. We withheld an aggregate of 438,200 shares of our common stock from the recipients’ awards to satisfy those obligations and we paid approximately $7.9 million to federal, state, and local tax authorities in satisfaction of the withholding obligations relating to the “net issuance” of the stock grant, which was equal to the number of shares withheld by us from grant recipients multiplied by $18.00, the price per share in our initial public offering. These shares were fully earned and vested upon their grant, but we restricted the transfer of the shares each recipient received, net of the shares withheld to satisfy tax obligations, for the following periods: 1/3 of each recipient’s shares for six months; 1/3 of each recipient’s shares for 12 months; and the remaining 1/3 of each recipient’s shares for 18 months.

Our Compensation Committee determined that, rather than make the entire stock grant to our key employees and require them to pay us the amount of the tax withholding obligations, we would do a “net issuance” of the stock grant to withhold from the recipient’s grant a number of shares equal to the value necessary to satisfy the federal, state and local tax withholding obligations associated with the grant. Our Compensation Committee’s decision was based on the fact that the recipients were prohibited, in accordance with the terms of their lock-up agreements with the underwriters in our initial public offering and the terms of the grant, from selling any shares of our common stock for at least 180 days after the completion of our initial public offering and because of the size of these grants in relation to the annual cash compensation of the recipients, each of the recipients would likely have to sell a substantial part of the shares he or she was receiving in order to satisfy the associated tax withholding obligations. Our Compensation Committee considered that the Company had cash on hand in excess of $30 million as of December 31, 2008, as of the date of the grant and at the time the stock grants were made with which to pay such tax withholding obligations whether or not our initial public offering was completed.

The following table sets forth the stock grants we made to each of our named executive officers.