The growth and longstanding popularity of skateboarding, inline skating, roller skating and scooter riding in the United States reflect consumers\\\\\\\' sustained interest in wheeled sports activities. For example, skateboarding and inline skating have remained a part of youth culture for over 40 and 25 years, respectively.

SGMA International, a sporting goods industry trade group, estimated that from 1998 to 2005, U.S. participation in basketball, baseball and soccer declined 24.6%, 16.7% and 6.4%, respectively, while U.S. participation in snowboarding, skateboarding and surfing increased 33.7%, 58.3% and 90.5%, respectively.

It is believed events such as the X Games, the inclusion of snowboarding medal events in the Winter Olympics and the national recognition of leading boardsport athletes have broadened general awareness and increased the popularity of the action sports youth lifestyle.

HEELYS-wheeled footwear can be classified into three categories – single-wheel, two-wheel and grind-and-roll.

The Company’s single-wheel HEELYS-wheeled footwear has one detachable wheel and are available in various sizes for men, women and children. The Company offers wheels of various performance capabilities in order to appeal to beginners and advanced users. Single-wheel HEELYS-wheeled footwear represented approximately 80.4% of the Company’s net sales in 2005.

The Company’s two-wheel HEELYS-wheeled footwear includes two detachable wheels, are designed for novice users and are offered only in children\\\\\\\'s sizes. This category represented approximately 9.9% of the Company’s net sales in 2005.

Grind-and-roll HEELYS-wheeled footwear represents the Company’s highest performance category and are preferred by enthusiasts seeking a challenging and exciting action sports experience. This category features a single detachable wheel and a patented, hard nylon plate in the arch, enabling the consumer to slide, or \\\\\\\"grind,\\\\\\\" on hand railings and other similar surfaces. Consumers can use the Company’s grind- and-roll HEELYS-wheeled footwear to perform distinctive maneuvers, similar to those performed by skateboarders and inline skaters. The grind-and-roll category represented approximately 4.9% of the Company’s net sales in 2005.

In addition to offering its standard styles, the Company collaborates with certain of its retail customers to develop HEELYS-wheeled footwear styles that these retail customers have the exclusive rights to sell. This special make-up program enables these customers to differentiate their HEELYS-wheeled footwear product offering. These exclusive products are made to order and shipped directly to the Company’s retail customers, thereby mitigating the inventory risk. In 2005, special make-up program products represented approximately 17.9% of the Company’s net sales.

In the past, the Company sold less expensive wheeled footwear under the \\\\\\\"Cruz\\\\\\\" brand name exclusively to certain of its independent distributors. The Cruz brand represented approximately 12.3%, 17.7% and 3.3% of the Company’s net sales in 2003, 2004 and 2005, respectively.

The Company also offers a selection of HEELYS branded accessories, including protective gear such as helmets and wrist, elbow and knee guards, heel plugs, wheel bags and replacement wheels.

Gross profit increased $10.0 million to $15.6 million for the six months ended June 30, 2006 from $5.6 million for the six months ended June 30, 2005.

Sales and marketing expense increased $2.6 million to $4.3 million for the six months ended June 30, 2006 from $1.7 million for the six months ended June 30, 2005.

Operating income increased $6.6 million to $9.1 million for the six months ended June 30, 2006 from $2.5 million for the six months ended June 30, 2005.

Net income was $5.9 million for the six months ended June 30, 2006, compared to $1.6 million for the six months ended June 30, 2005.