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I have looked over the results and here are some observations:

The company at year-end reflects no debt and $72 million in cash on the balance sheet. Cash at the end of 2004 was $97 million and it looks like it has gone down due to growing accounts receivable and inventory year over year 13% and 28% respectively. That may not be so bad but in this case sales only grew 2% year-over-year. Given that, the trend is not a good one. Particularly since sales for the 4th quarter were actually down 3% from Q4 2004.

Domestic consumer revenues ($479M) were up 11% over last year but International and Education & Training revnues both declined offsetting a good part of the gain limiting overall sales growth to 2% for the year. We have a mixed bag here. Domestic consumer revenue growth is encouraging. It is also the largest revenue source for the company by a significant margin. The drop in other segments is an issue and is the primary reason why the share price has not improved despite the company beating earnings estimates for the quarter and for the year.

Gross margins were up 2.6% over last year. Q4 2005 was up 4.7% over Q4 2004 due to reductions in excess and obsolete inventory and the positive impact of new products like the Pen Top Computer on the product mix. This is a positive sign and a big driver in the return to profitability for LF.

Reductions in headcount and other cost containment initiatives contributed to overall operating expense savings of 5% for the year and 21% for Q4 2005 versus Q4 2004. With the percentage improvement accelerating in the 4th quarter this is likely to continue to contribute to improve net margins in '06.

Overall LF's cost structure has improved, margins have improved and the balance sheet remains healthy with significant cash and no debt. There are still areas that need to show improvement, my top two being tightening the management of accounts receivable and inventory and leveraging great products into broader sales growth. Again, domestic consumer revenues are growing but international and schoolhouse sales need to turn around. If we are to see significant share price appreciation these things will need to move in the right direction.

All that said it adds up to a generally positive step in right direction.

As a footnote the President announced that he is stepping down and that the CEO and President's role will be combined into one. No reasons were noted in the announcement.
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