HEELYS, S-1/A Filing - DOC by HLYS-Agreements

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TABLE OF CONTENTS
HEELYS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                          As filed with the Securities and Exchange Commission on November 24, 2006.

                                                                                                            Registration No. 333-137046




  UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                                                     Washington, D.C. 20549


                                                        Amendment No. 3
                                                             to


                                                       FORM S-1
                                                REGIS TRATION S TATEMENT
                                                         UNDER
                                               THE S ECURITIES ACT OF 1933



                                                   HEELYS, INC.
                                       (Exact Name of Registrant as Specified in its Charter)

           Delaware                                             3140                                         75-2880496
            (State of                              (Primary Standard Industrial                           (I.R.S. Employer
         Incorporation)                            Classification Code Nu mber)                        Identificat ion Nu mber)


                                                3200 Belmeade Dri ve, Suite 100
                                                    Carrollton, Texas 75006
                                                        (214) 390-1831
        (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)


                                                     Michael G. Staffaroni
                                            Chief Executi ve Officer and Presi dent
                                               3200 Belmeade Dri ve, Suite 100
                                                    Carrollton, Texas 75006
                                                         (214) 390-1831
               (Name, address, including zip code, and telephone number, including area code, of agent for service)




                                                            Copies to:
              Alan J. Perkins, Es q.                                                         Marc D. Jaffe, Es q.
           Gardere Wynne Sewell LLP                                                         Ian D. Schuman, Es q.
                1601 El m Street                                                          Latham & Watkins LLP
                   Suite 3000                                                                   53 rd at Third
             Dallas, TX 75201-4761                                                            885 Third Avenue
             Phone: (214) 999-4683                                                     New York, New York 10022-4834
              Fax: (214) 999-3683                                                          Phone: (212) 906-1200
                                                                                             Fax: (212) 751-4864
 Approxi mate date of commencement of proposed sale to the public: As soon as practicable after the effecti ve date of this Registration
                                                            Statement.

    If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pu rsuant to Rule 415 under the
Securities Act, check the fo llo wing bo x. 

     If this Form is filed to register additional securit ies for an offering pursuant to Rule 462(b) under the Securit ies Act, please check the
following box and list the Securities Act registration statement number of the earlier effective reg istration statement for t he same offering.    

    If this Form is a post-effective amend ment filed pursuant to Rule 462(c) under the Securit ies Act, check the following box and list the
Securities Act registration statement number of the earlier effect ive registration statement for the same o ffering. 

    If this form is a post-effective amend ment filed pursuant to Rule 462(d) under the Securit ies Act, check the follo wing box and list the
Securities Act registration statement number of the earlier effect ive registration statement for the same o ffering. 




                                                  CALCULATION OF REGIS TRATION FEE

                 Title of Each Class                          Proposed Maximum Aggregate                                  Amount of
            of Securities to be Registered                         Offering Price(1)(2)                               Registration Fee(3)
Co mmon Stock, $0.001 par value                                 $129,375,000                                    $13,843.13
(1)
      Includes shares that the underwriters have the option to purchase to cover over-allot ments, if any.
(2)
      Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o).
(3)
      A fee of $12,305 was previously paid.

       The Registrant hereby amends this Registrati on Statement on such date or dates as may be necessary to delay its effecti ve date
until the Registrant shall file a further amendment that specificall y states that this Registration Statement shall thereafter become
effecti ve in accordance wi th Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effecti ve on such
date as the Commission acting pursuant to such Section 8(a), may determine.
                                      SUBJ ECT TO COMPLETION, DATED NOVEMB ER 24, 2006

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registratio n
statement filed with the Securities and Exchange Commission is effecti ve. This pros pectus is not an offer to sell these securities and i t is
not soliciting an offer to buy these securities in any jurisdicti on where the offer or sale is not permitted.

PROSPECTUS


                                                        6,250,000 Shares




                                                    HEELYS, INC.
                                                             Common Stock

     This is our init ial public offering. We are offering 3,125,000 shares of our co mmon stock and the selling st ockholders identified in this
prospectus are offering an additional 3,125,000 shares of our common stock. We will not receive any proceeds from the sale of the shares being
sold by the selling stockholders. We expect that the initial public offering price for our stock will be between $16.00 and $18.00 per share.

    Prior to this offering, there has been no public market fo r our co mmon stock. We have applied to list our common stock on the Nasdaq
Global Market under the symbol "HLYS."

      Investing in our common stock invol ves risks. See "Risk Factors" beginning on page 6.


                                                                                             Per Share                            Total

Public o ffering price                                                                  $                                   $
Underwrit ing discount                                                                  $                                   $
Proceeds, before expenses, to Heelys, Inc.                                              $                                   $
Proceeds to selling stockholders                                                        $                                   $
      Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or complete. Any representati on to the contrary is a cri minal offense .

    The underwriters expect to deliver the shares against payment in New York, New York on or about                     , 2006.

    The underwriters have a 30-day option to purchase up to 937,500 additional shares of common stock fro m the selling stockho lders to
cover over-allot ments, if any. We will not receive any proceeds from the exercise of the over-allotment option.


Bear, Stearns & Co. Inc.                                                                                 Wachovia Securities

JPMorgan                                                                                              CIBC World Markets
                                              The date of this prospectus is              , 2006.
                                                         TAB LE OF CONTENTS


PROSPECTUS SUMMA RY
RISK FA CTORS
SPECIA L NOTE REGA RDING FORWARD-LOOKING STATEM ENTS
INDUSTRY AND MARKET DATA
USE OF PROCEEDS
DIVIDEND POLICY
CAPITALIZATION
DILUTION
SELECTED CONSOLIDATED FINANCIA L DATA
MANAGEM ENT'S DISCUSSION A ND ANA LYSIS OF FINANCIA L CONDITION AND RESULTS OF OPERATIONS
BUSINESS
MANAGEM ENT
CERTAIN RELATIONSHIPS A ND RELATED PA RTY TRANSACTIONS
PRINCIPA L A ND SELLING STOCKHOLDERS
DESCRIPTION OF CAPITA L STOCK
SHA RES ELIGIBLE FOR FUTURE SA LE
UNDERWRITING
LEGA L MATTERS
EXPERTS
WHERE YOU CAN FIND MORE INFORMATION
INDEX TO CONSOLIDATED FINANCIA L STATEM ENTS


       You shoul d rely only on informati on contained i n this pros pectus, any free wri ting prospectus prepared by us or information t o
which we have referred you. We have not, and the underwriters have not, authorized anyone to provi de you with different
informati on. This pros pectus may only be used where it is legal to sell these securities and this prospectus is not an offer to sell or a
solicitation of an offer to buy shares in any jurisdiction where an offer or sale of shares woul d be unlawful. The information in this
pros pectus and any free writing pros pectus prepared by us may be accurate only as of their res pecti ve dates.

      We own trademarks and trade names that we use in conjunction with the operation of our business. Our trademarks include
HEEL YS®, which is registered in the Uni ted States and in many other countries for wheeled footwear and other goods. Each
trademark, service mark or trade name of any other company appearing in this pros pectus belongs to its owner. Use or dis play by us
of trademarks, service marks or trade names owned by others is not intended to and does not i mply a relati onshi p between us and, or
endorsement or sponsorshi p by, the owners of the trademarks, service marks or trade names.

                                                                      i
                                                          PROSPECTUS S UMMARY

      You should read the following summary together with the more detailed information regarding us and our common stock being sold in
this offering in our consolidated financial statements and notes appearing elsewhere in this prospectus and the risk facto rs beginning on
page 6. As used in this prospectus, the terms "we," "our," "us" or "our company" refer to Heelys, Inc. and its consolidated subsidiaries, taken
as a whole, unless the context otherwise indicates.


                                                                  Our Company

     We are a designer, marketer and distributor of innovative, action sports -inspired products under the HEELYS brand targeted to the youth
market. Our primary product, HEELYS-wheeled footwear, is patented, dual-purpose footwear that incorporates a stealth, remo vable wheel in
the heel. HEELYS-wheeled footwear allows the user to seamlessly transition from walking or running to skating by shifting weight to the heel.
Users can transform HEELYS-wheeled footwear into street footwear by removing the wheel. We believe that the growing expo sure of our
brand will allow us to selectively introduce additional product categories by taking advantage of our expertis e in p roduct development and
sourcing, strong retail relationships and knowledge of our target consumer. In 2005, our net sales increased $22.6 million, or 106.3%, to
$44.0 million fro m $21.3 million in 2004. For the nine months ended September 30, 2006, our net sales increased $88.1 million , or 303.1%, to
$117.1 million fro m $29.1 million for the nine months ended September 30, 2005.

     We believe that HEELYS-wheeled footwear provides users with a unique co mbination of fun and style that differentiates it fro m other
footwear and wheeled sports products. Our distinctive product offering has driven our growth, and we believe that our HEELYS brand is
becoming synonymous with an increasingly popular lifestyle activity. In 2005, appro ximately 95% of our net sales was derived fro m the sale of
our HEELYS-wheeled footwear. We also sell HEELYS branded accessories such as replacement wheels, helmets and other protective gear.

     Our brand message emphasizes individuality and independence and is represented by our market ing slogan, "Freedom is a wheel in your
sole." We believe that our brand has developed broad appeal among boys and girls between six and fourteen years of age, particularly those
who associate themselves with the action sports youth lifestyle. We employ a grass -roots market ing program designed to promote our brand
image, stimu late demand for our products, maintain a connection with our target consumer and capture consumer feedback on our products.

     We sell our products through distribution channels that merchandise our products in a manner that we believe enhances and pro tects our
brand image. Do mestically, our products can be purchased from full-line sporting goods retailers such as The Sports Authority, Modell's and
Dick's Sporting Goods, specialty apparel and footwear retailers such as Journeys and Bob's Stores and select department store s such as
Nordstrom and Mervyn's. Our products can also be purchased fro m select online retailers such as Zappos.com.

      The growth and longstanding popularity of skateboarding, inline skating, ro ller skating and scooter riding in the Un ited St at es reflect
consumers' sustained interest in wheeled sports activities. We believe that our HEELYS -wheeled footwear, which has broad patent protection
relative to other wheeled sports products, appeals to many of these same consumers. While the market fo r HEELYS-wheeled footwear has
grown significantly since our first product was introduced in 2000, we believe this market has substantial growth potential.

                                                                        1
Business Strengths

     We attribute our success to the following business strengths:

     •
            strong brand recognition;

     •
            an appealing, high quality product offering;

     •
            our focus on product innovation, supported by intellectual property protection;

     •
            an in-depth understanding of our target market;

     •
            the compelling value proposition we offer to our retail customers;

     •
            our flexib le and efficient sourcing model; and

     •
            our senior management team with deep industry experience.



Growth Strategy

     We plan to continue growing our net sales and earnings through the following strategies:

     •
            increasing awareness and popularity of our HEELYS brand with consumers;

     •
            broadening our relationships with existing customers;

     •
            expanding our customer base; and

     •
            developing and selectively acquiring new products and brands.




Risks Affecting Us

     We face a nu mber o f risks and uncertainties that may affect our financial and operating performance and our ability to execut e our
business strategies, as discussed in "Risk Factors." In particular, substantially all of our net sales are generated by one product, and we may not
be able to successfully introduce new product categories. Our intellectual p roperty may not restrict co mpeting products that infringe on our
patents from being sold. We outsource all of our manufacturing and our results of operations may be adversely affected if our independent
manufacturers do not provide us with quality goods on a timely basis. If we are not able to manage our growth effective ly, o r if the popularity
of our products does not continue to grow as rapidly as it has in the past or declines, our results of operations could suffe r. As we grow, we
must also effectively assimilate new employees and implement additional processes and in formation technology systems in ord er to effectively
manage our business and report our financial results on a timely basis.


Corporate Informati on
     We were incorporated in Nevada in May 2000, and since that time have operated through a wholly-o wned limited partnership organized in
the State of Texas. On August 25, 2006, we reincorporated as a Delaware corporation pursuant to a merger of Heeling, Inc., a Nevada
corporation, into Heelys, Inc., a Delaware corporation. Ou r principal executive offices are located at 3200 Belmeade Drive, Su ite 100,
Carrollton, Texas, and our telephone number is (214) 390-1831. Our website address is www.heelys.co m. The information on our website is
not part of this prospectus.

                                                                    2
                                                                     The Offering

Co mmon stock offered by Heelys, Inc.                           3,125,000 shares

Co mmon stock offered by the
selling stockholders                                            3,125,000 shares

Co mmon stock to be outstanding after this offering             27,028,875 shares

Use of proceeds                                                 We estimate that our net proceeds from the sale of 3,125,000 shares of our
                                                                common stock in this offering will be appro ximately $47.4 million, based on an
                                                                assumed init ial public o ffering price of $17.00 per share, the mid-point of the price
                                                                range set forth on the cover of this prospectus, and after deducting underwriting
                                                                discounts and commissions and estimated offering expenses payable b y us.

                                                                We intend to use these net proceeds as follows:

                                                                     to repay amounts outstanding, if any, under our $25.0 million revolving cred it
                                                                •    facility; and

                                                                     the remaining proceeds to fund infrastructure improvements, includ ing
                                                                     expanding and upgrading our informat ion technology systems; hiring new
                                                                     emp loyees; market ing and advertising; product development; working capital;
                                                                •    and other general corporate purposes. See "Use of Proceeds."

Proposed Nasdaq Global Market symbol                            "HLYS"

Risk factors                                                    See "Risk Factors" beginning on page 6 for a discussion of some of the factors that
                                                                you should consider carefully before decid ing to purchase our common stock.

      The number of shares of common stock outstanding after this offering is based on 23,903,875 shares of common stock outstanding as of
October 31, 2006, and excludes 2,042,500 shares of common stock issuable upon the exercise of stock options outstanding as of October 31,
2006, 100,000 shares of common stock issuable upon exercise of stock options to be granted effective as of the consummation of this offerin g
and 130,225 addit ional shares available for issuance upon exercise of stock options not yet granted under our 2006 Stock Incentive Plan. Of the
outstanding options, 2,042,500 vest and become exercisable in 48 equal monthly installments, beginning on July 31, 2006. The 100,000 options
to be granted effective as of the consummat ion of this offering will vest and become exercisable in four equal annual installments beginning on
the first anniversary of the consummation of th is offering.

    Un less otherwise indicated, all in formation in this prospectus:

     •
               gives effect to:


               —
                       our reincorporation in August 2006 as a Delaware corporat ion pursuant to a merger of Heeling, Inc., a Nevada corporation,
                       into Heelys, Inc., a Delaware corporation; and

               —
                       a 25-fo r-one stock split, wh ich was effected in October 2006; and


     •
               does not give effect to the exercise of the underwriters' over-allot ment option to purchase up to 937,500 additional shares of
               common stock fro m the selling stockholders.

                                                                           3
                                                    Summary Consolidated Financial Data

     The fo llo wing summary consolidated financial data should be read in conjunction with, and are qualified by reference to, our consolidated
financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operat ions"
appearing elsewhere in this prospectus. The consolidated statements of operations data for the years ended December 31, 2003, 2004 and 2005,
and for the nine months ended September 2006, and the consolidated balance sheet data at December 31, 2004 and 2005 and at September 30,
2006 are derived fro m our consolidated financial statements which have been audited by Deloitte & Touche LLP, independent registered public
accounting firm and are included elsewhere in this prospectus. The consolidated balance sheet data at December 31, 2003 are d erived fro m our
consolidated financial statements not included herein wh ich have been audited by Deloitte & Touche LLP, independent registered public
accounting firm. The consolidated statements of operations data for the nine months ended September 30, 2005 (unaudited) are derived fro m
our consolidated financial statements included elsewhere in this prospectus and, in the opinion of our management, include al l adjustments,
consisting only of normal recurring adjustments, that are necessary for a fair presentation of our financial position and results of operations for
these periods. The historical results are not necessarily indicative o f future results.

                                                                               Year Ended December 31,                     Nine Months Ended September 30,

                                                                      2003               2004                2005              2005              2006

                                                                                            (in thousands, except per share data)


Consolidated Statements of Operations Data:
Net sales                                                         $     22,215      $     21,310         $    43,950       $        29,052   $     117,107
Cost of sales                                                           15,583            14,529              28,951                19,143          76,570

Gross profit                                                             6,632              6,781             14,999                 9,909          40,537
Selling, general and ad min istrative expenses
    Sales and market ing                                                 2,739              3,191              5,247                 3,262              8,974
    General and administrative                                           2,184              2,368              2,987                 2,133              4,034

        Total selling, general and ad ministrative expenses              4,923              5,559              8,234                 5,395          13,008

Income fro m operations                                                  1,709              1,222              6,765                 4,514          27,529
Other (income) expense                                                      33                  1                131                    76             402

Income before inco me taxes                                              1,676              1,221              6,634                 4,438          27,127
Income taxes                                                               575                418              2,287                 1,530           9,460

Net inco me                                                       $      1,101      $           803      $     4,347       $         2,908   $      17,667


Earnings per share:
   Basic                                                          $          0.08   $           0.06     $          0.31   $          0.21   $           0.99
   Diluted                                                        $          0.04   $           0.03     $          0.17   $          0.11   $           0.70

Weighted average shares outstanding :
  Basic                                                                 13,989            13,989              13,989                13,989          17,812
  Diluted                                                               25,353            25,353              25,353                25,353          25,329

Other Data:
Unit sales of wheeled footwear:
   Pairs, do mestic                                                          292                423            1,145                  727               3,257
   Pairs, international                                                      454                274              266                  200                 601

                Total                                                        746                697            1,411                  927               3,858

Net sales, domestic                                               $      9,458      $     13,835         $    36,573       $        23,523   $     100,622
Net sales, international                                                12,757             7,475               7,377                 5,529          16,485

Depreciat ion and amort ization                                              548                454                 396               276                290

                                                                        4
                                                                             At December 31,                               At September 30, 2006

                                                               2003                 2004              2005              Actual            As Adjusted(1)

                                                                                                   (in thousands)


Consolidated B alance Sheet Data:
Cash and cash equivalents                                  $     1,200 (2)     $      1,628    $            738     $       3,269     $            28,658
Working capital                                                  3,355                4,281               8,101            21,906                  69,262
Total assets                                                     5,549                6,321              11,990            64,516                  89,905
Total debt                                                          98                   91                  96            26,499                   4,532
Total stockholders' equity                                       3,778                4,581               8,928            22,980                  70,336


(1)
       The as adjusted column in the consolidated balance sheet data table above gives effect to our sale of 3,125,000 shares of common stock
       in this offering, at an assumed init ial public offering price of $17.00 per share, the mid-point of the price range set forth on the cover of
       this prospectus, and the repayment of all amounts outstanding under our $25.0 million revolving cred it facility.

(2)
       Includes $1.1 million of cash on deposit held under a previously outstanding revolving line o f cred it.

A $1.00 increase or decrease in the assumed in itial public offering price of $17.00 per share would increase or decrease as a djusted cash and
cash equivalents, working capital, total assets and total stockholders' equity by $2.9 million, assuming the number o f shares offered by us, as
shown on the cover of this prospectus, remains the same and after deducting the underwrit ing discounts and commissions and es timated
offering expenses payable by us.

Note: The nu mbers in the tables above, except per share data, have been rounded to thousands. All calcu lations related to the period-to-period
comparisons in "Management's Discussion and Analysis of Financial Condition and Results of Operations" are derive d fro m th e tables above,
are rounded to millions and could differ immaterially if such calculations were co mputed without rounding.

                                                                         5
                                                                  RIS K FACTORS

      This o ffering and an investment in our common stock involve a high degree of risk. You should careful ly consider the following risk
factors and all of the other information in this prospectus before making an investment decision. Our business, financial condition and results
of operations could be seriously harmed if any of the following risks actually occur. In that case, the trading price of our common stock could
decline and you could lose all or part of your investment.

Risks Related to Our Business

We depend primarily upon sales from a single product line and the absence of continued demand for our pr oducts would have a material
adverse effect on our net sales and results of operations.

     In 2005 and in the nine-month period ended September 30, 2006, we generated approximately 95% and 99% of our net sales, respectively,
fro m our HEELYS-wheeled footwear and we expect to continue to depend upon HEELYS -wheeled footwear for substantially all of our net
sales in the foreseeable future. Because we are dependent on a single line of products, factors such as changes in consumer p references may
have a disproportionately greater impact on us than if we o ffered mu ltip le product categories. If consumer interest in HEELYS -wheeled
footwear or wheeled sports activity products in general declines, we would likely experience a significant loss of sales and may be forced to
liquidate excess inventories at a discount, which would have a material adverse impact on our business and operations.

If we are unable to enforce our patents, trademarks and other intellectual property rights, competitors may be able to sell p roducts that are
substantially similar to our products, which could adversely affect our sales and damage our brand image.

      We believe our trademarks, trade names, copyrights, trade secrets, issued and pending patents, trade dress and designs are va luable and
integral to our success. The costs associated with obtaining and maintain ing our intellectual property rights and protecting our HEELYS b rand
are significant. Further, we do not know whether our pending or future patent applications will result in the issuance of patents. Even if patents
are issued in the future, we cannot predict how the patent claims will be construed and such patents may not provide us with the ability to
prevent the development, manufacturing or marketing of infringing products. Enforcement of our patent and other intellectual p roperty rights in
the future may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our patents and other
intellectual property rights.

     In addit ion, we may not be able to detect infringement of our intellectual property rights quickly o r at all, and at times in th e past we h ave
not been, and in the future we may not be, successful combating counterfeit, infringing or knockoff products, thereby damagin g our
competitive position. For examp le, on many occasions, we have identified knockoff products sold by others that we believe may infringe upon
our intellectual property rights. Historically, knockoff p roducts have been sold main ly in international markets , but recently we have identified
an increasing number of knockoff products being sold domestically. Knockoff products often are sold under a brand name that i s the same as or
substantially similar to the HEELYS name. Knockoff and counterfeit products may continue to emerge, as others seek to trade on the goodwill
of the HEELYS name and benefit fro m the consumer demand for our p roducts. We may not be able to detect all knockoff and count erfeit
products and may lose our competitive position in a given geographic market before we beco me aware of any such infringemen t. For examp le,
our net sales in Asia decreased from $12.1 million in 2003 to $5.4 million in 2004, which we believe was primarily due to the presence of
lower priced counterfeit, knocko ff and infringing products in certain Asian markets.

     To protect our HEELYS brand, we have already spent significant resources and may be required to spend significantly greater r esources in
the future to monitor and police our intellectual property rights.

                                                                          6
If we are unsuccessful in enforcing our intellectual property rights, sales of counterfeit, knockoff or in fringing products by others could harm
our HEELYS brand and adversely affect our business, financial condition and results of operations. Even if we successfully en force our
intellectual property rights, the presence in the market of counterfeit, knockoff or infringing products of poor quality for even a short time
period could have a detrimental impact on our HEELYS brand.

We may not be able to obtain and maintain patent, trademark or other intellectual property rights protection in some foreign countries,
which could result in us being unable to prevent others from using our HEELYS mark, which could have a material adverse effec t on our
business.

     We depend upon the laws of the countries where our products are sold to protect our intellectual p rope rty. Intellectual property rights may
be unavailable or limited in some countries because patent laws and standards of patentability vary internationally. Conseque ntly, in certain
foreign jurisdictions, we have elected not to apply for patents or trademark reg istrations. Further, patent and trademark p rotection may not be
available in every country where our products are sold. While we generally apply for patents and trademarks in most countries where we intend
to sell patented products, we may not accurately predict all o f the countries where patent or trademark p rotection will ult imately be desirable. If
we fail to timely file a patent or trademark application in any such country, we will likely be precluded fro m doing so at a later date. Failure to
adequately pursue and enforce our patent and trademark rights could damage our HEELYS brand, enable others to compete with us and i mpair
our ability to compete effectively.

     In some countries where we have sought patent protection, third parties have challenged the validity, enforceability and scope of our
patent rights. For examp le, the valid ity of our Japanese patent was challenged in May 2004, resulting in the Japan Patent Office issuing an
opinion in February 2006 that our Japanese patent is invalid. We filed a lawsuit with the Intellectual Property High Court in Jap an in
June 2006, and we filed a Request for Trial for Correct ion in the Japan Patent Office in September 2006 to attempt to overturn the prior
opinion. In addition, a third party filed a cancellation applicat ion in July 2004 with the Taiwan Intellectual Property Office to cancel our issued
patent in Taiwan, and this proceeding is still pending. There can be no assurance that we will prevail in these or similar pr oceed ings. Our
HEELYS b rand, business, financial condition and results of operations could be adversely affected if we fail to obtain and main tain intellec tual
property right protection in foreign countries where we derive a large amount of our net sales.

Because we are a consumer products company, if we fail to accurately forecast consumer demand and trends in consumer preferences, our
HEELYS brand, net sales, customer relationships and results of operations may be adversely affected.

     Demand for our products, and for consumer products in general, is subject to rapidly changing consumer demand and trends in consumer
preferences. Therefore, our success depends upon our ability to:

     •
             identify, anticipate, understand and respond to these trends in a timely manner;

     •
             expand the number of styles of HEELYS-wheeled footwear we offer to broaden the appeal of our products to a wider range of
             consumers; and

     •
             introduce appealing new products and performance features on a timely basis.

     We generally must make decisions regarding product designs several months before our products are available for sale, and it can take us
up to six months to achieve full production of certain models. Accordingly, at the time we have to make decisions that determin e our inventory
levels, we cannot be certain that our product offerings will be well-received by consumers, in which case we may be forced to liquidate excess
inventories at a discount. Conversely, if we underestimate consumer demand for our p roducts, we could have inventory shortage s, which would
result in lost sales, delays in shipments to

                                                                          7
retail customers and independent distributors, strains on our relationships with retail customers and independent distributors and dimin ished
brand loyalty. Even if we introduce appealing new styles and products on a timely basis, we may set prices for our products too high to be
successful. A decline in demand for our products, or any failure on our part to satisfy increased demand for our p roducts, could adversely affect
our net sales and results of operations.

We have significantly increased our sales and the scope of our operations over the past two years. If we fail to manage our g rowth
effectively, we may experience difficulty in filling purchase orders, declines in product quality, increased costs or other operating
challenges.

     We have:

     •
             transitioned from purchasing almost all of our footwear products fro m one independent manufacturer at Dec ember 31, 2005 to
             purchasing fro m a nu mber o f additional manufacturers in the second quarter of 2006;

     •
             increased the pairs of HEELYS-wheeled footwear sold fro m 697,000 pairs in 2004, to 1.4 million pairs in 2005 and to 3.9 million
             pairs in the nine-month period ended September 30, 2006; and

     •
             increased the number of our fu ll-time emp loyees from 19 at June 30, 2004 to 38 at October 31, 2006.

      We anticipate that continued growth of our operations will be required to satisfy increasing consumer demand and to avail our selves of
new market opportunities. The expanding scope of our business and growth in the number of our employees, customers and in dependent
manufacturers have placed and will continue to place a significant strain on our management, informat ion technology systems and other
resources. To properly manage our growth, we need to hire addit ional emp loyees, upgrade our existing financial a nd reporting systems,
improve our business processes and controls and identify and develop relationships with additional independent manufacturers. We may also
be required to expand our distribution facilities or add new facilities. Failu re to effect ively manage our growth could result in difficulty in
distributing our products and filling purchase orders, declines in product quality or increased costs, any of which would adv ersely impact our
business and results of operations.

Because we outsource all of our manufacturing to a small number of independent manufacturers, we may face challenges i n maintaining a
sufficient supply of products to meet demand for our products or experience interruptions in our supply chain. A ny shortfall in the supply
of our products may decrease our net sales and have an adverse impact on our customer relationships and results of operations.

     All of our products are produced by independent manufacturers with which we do not have long -term contracts. As such, any of them
could unilaterally terminate its relationship with us or increase the prices it charges us at any time. Until May 2006, one inde pendent
manufacturer p roduced almost all of our HEELYS -wheeled footwear. Co mmencing in May 2006, when demand for our HEELYS-wheeled
footwear products outstripped the capacity of this independent manufacturer, we used additional independent manufacturers to produce
HEELYS-wheeled footwear. A lthough these additional manufacturers have begun production to address our immed iate needs, we have been
unable to fill a substantial nu mber of orders placed by our customers on a timely basis. To expedite the delivery of past -due customer o rders,
we typically ship via air freight for which we pay higher shipping rates. Our inability to deliver cust omer o rders on a timely basis and resulting
higher shipping costs have caused us to miss our internal financial targets in certain periods. If we cannot procure sufficie nt quantities of
HEELYS-wheeled footwear to meet customer demand in a timely manner, or if the quality of our p roducts declines, customers may cancel
orders, refuse shipments, negotiate for reduced purchase prices or ask us to pay extraord inary shipping costs, any of which c ould have a
material adverse effect on our customer relationships and operating results. Additionally, if any of our

                                                                         8
independent manufacturers fail or refuse to ship any orders for any reason, our business could be adversely affected.

Our operations are dependent upon the strength of our relationships with our retail customers and i ndependent distributors an d their
success in selling our products, and a small number of retail customers and independent distributors are responsible for a significant
percentage of our net sales.

     Our success is dependent upon the willingness and ability of our retail customers to market and sell our products to consumer s, as well as
the success of our independent distributors in developing foreign markets for our products. For the year ended December 31, 2005, Big 5
Sporting Goods, Journeys and The Sports Authority were responsible for appro ximately 12.3%, 11.3% and 10.6% of our net sales, respectively.
In the nine months ended September 30, 2006, Journeys and The Sports Authority accounted for approximately 11.6% and 11.0%, respectively,
of our net sales. If any of these or our other significant retail customers or independent distributors were to experience financial difficu lties,
reduce the quantity of our products it sells or stop selling our products, our financial condition and results of operations could be adversely
affected.

We do not have long-term contracts with any of our retail customers or independent distributors, and the loss or material reduction in their
business with us could result in reduced sales of our products.

      Our retail customers and independent distributors generally purchase products from us on a purchase order basis and do not ha ve
long-term contracts with us. Consequently, with little or no notice and without penalty, our retail customers and independent distributors may
terminate their relationship with us or materially reduce the level of their purchases of our products. If this were to occur with one or more
retail customers or independent distributors who purchase significant quantities of our products, it may be d ifficu lt for us to esta blish substitute
relationships in a timely manner, wh ich could have a material adverse effect on our financial condition and results of operations.

We rely on our independent sales representatives for our domestic sales, and if our relationships with a material number of t hese
representatives were terminated, it could result in reduced sales of our products.

     We sell substantially all of our p roducts domestically through our network of 16 independent sales representatives. We rely on these
independent sales representatives to provide new customer prospects and market our products to our retail customers. Our inde pendent sales
representatives do not sell our products exclusively and may terminate their relat ionships with us at any time with limited no tice. Our ability to
maintain and increase our domestic sales depends in large part on our success in maintain ing relat ionships wit h our independent sales
representatives on commercially reasonable terms. Any failu re to maintain and develop new satisfactory relationships with ind ependent sales
representatives, or any failu re of our independent sales representatives to effectively market our products, could adversely affect our domestic
sales.

Our current information technology systems may be unable to support our growth, and planned improvements may be inadequate or may
not be successfully implemented on a timely basis, which would adversely affect our ability to operate effectively.

     We expect to upgrade and imp lement new informat ion technology systems to facilitate our growth, streamline our financial repo rt ing and
improve our internal controls. We have identified a number of s ignificant deficiencies related to the security of our informat ion technology
systems that may affect the timeliness and accuracy of recording transactions and which could become material weaknesses in f uture periods if
not remedied. The deficiencies include our need to further enhance access privileges and password settings and provide for more frequent
monitoring of production crit ical processes. In addition, we may experience difficu lties in transitioning to new or upgraded systems, including
the loss of data and diminished productivity as our personnel become familiar with our new systems. As we

                                                                           9
grow and our business needs change, we could experience difficult ies associated with systems transitions. If we experience difficulties in
implementing new or upgraded information technology systems or experience system failures, or if we are unable to successfully modify our
informat ion technology systems to respond to changes in our business, our ability to operate effectively could be adversely affected.

Our business could suffer if our i ndependent manufacturers violate legal requirements or fail to conform to generally accepte d ethical
standards.

    We expect our independent manufacturers to comply with applicable legal requirements and generally accepted ethical standards for
working conditions and other matters. However, we do not control our independent manufacturers or their business practices. I f any of our
manufacturers were to use forced or indentured labor or child labor, fail to pay co mpensation in accordance with local law, fail t o operate in
compliance with local safety regulations or diverge fro m other applicab le legal requirements or business practices gen erally accepted as ethical,
we would take appropriate action, which could result in an interruption in our product supply. In addition, we could suffer n egative publicity
and damage to our reputation and the value of our HEELYS brand, which would adversely affect our business and results of operations.

If our independent manufacturers are unable to obtain raw materials, our costs could increase or the delivery of our products could be
delayed, which could adversely affect our net sales and results of operat ions.

    The production capacity of our independent manufacturers is dependent, in part, upon the availability of raw materials. Ou r manufacturers
may experience shortages of raw materials, which could result in increased costs to us or delays in deliveries of our products from our
manufacturers. As a result, we could experience cancellat ion of orders, refusal to accept deliveries or a reduction in our sa les prices and profit
margins, any of wh ich could harm our net sales and results of operations.

Because our products are manufactured in Asia and a portion of our sales activities occur outside of the United States, we a re s ubject to
international business, political, operational, financial and economic risks that could adversely affect our net sales an d results of
operations.

     Conducting business internationally entails numerous risks wh ich could interrupt or otherwise adversely affect our business, including:

     •
            increased transportation costs;

     •
            delays and other logistical problems relating to the transportation of goods shipped by ocean freight;

     •
            work stoppages, strikes, lockouts or increased security concerns at seaports;

     •
            tariffs, import and export controls and other barriers, such as quotas and local content rules;

     •
            restrictions on the transfer of funds;

     •
            changing economic conditions;

     •
            changes in governmental policies and regulations;

     •
            limitat ions on the level of intellectual property protections;

     •
            poor or unstable infrastructure of certain foreign countries;

     •
            trade sanctions, political unrest, terroris m, war, epidemics and pandemics;
•
    expropriat ion and nationalizat ion; and

                                               10
     •
             difficult ies in understanding and complying with local laws, regulations and customs in foreign jurisdictions.

     These factors and the failu re to effect ively respond to them could result in, among other things, poor quality in our product s, product
shortages, delivery delays, decreased net sales and increased costs.

We are subject to foreign exchange risk, and if the U.S. dollar significantly weakens compared to the currency in the markets where our
products are produced, our manufacturers could increase the prices they charge us for our products, w hich could reduce our profitability.

     We pay for our products and we pay commissions to our independent sourcing agent in U.S. dollars, and our independent distrib utors pay
us in U.S. dollars. International sales accounted for approximately 35.1% of our net sales in 2004, 16.8% o f our net sales in 2005 and 14.1% o f
our net sales in the nine months ended September 30, 2006. We do not engage in any foreign currency hedging transactions. If t he U.S. dolla r
strengthens compared to the currency in the foreign markets where our products are sold, our products will be mo re expensive in those markets
making them less attractive to consumers. If the U.S. dollar significantly weakens compared to the currency in t he foreign markets where our
products are produced, our manufacturers could increase the prices they charge us for our products, which could reduce our pr ofitability. There
can be no assurance that we can effectively mit igate our foreign exchange risk.

HEELYS-w heeled footwear could become subject to import duties in the United States, and if we cannot increase our prices to compensa te
for such duties, it could reduce our profitability.

     HEELYS-wheeled footwear is currently classified by U.S. Customs and Border Protection as a skate, and as such we do not pay import
duties to the United States. This customs classification can be changed at any time and, although we would v igorously oppose any proposed
change, there can be no assurance that we would prevail. If the classificat ion for HEELYS-wheeled footwear changed and HEELYS -wheeled
footwear became subject to an import duty, it might be difficult to increase our prices to compensate for any such duty, whic h could reduce our
profitability.

Third parties may claim that we are infringing their intellectual property rights, and such claims may be costly to defend, may require us to
pay licensing fees, damages or other amounts a nd may prevent or limit the ma nufacture, marketing or sale of our products.

      Third parties may successfully claim that we are infringing their intellectual property rights. While we do not believe that any of our
products infringe valid intellectual p roperty rights of third parties, we may be unaware of the intellectual property rights of others that may
cover some of our technology or products. For examp le, because many patent applications in the United States are not publicly disclosed
immed iately after they are filed, we could adopt technology without knowledge of a pending pat ent application, which technology would
infringe a third-party patent once that patent is issued.

     Our co mpetitors in both the United States and foreign countries may have applied for or obtained, or may in the future apply for or obtain,
patents that will prevent, limit or otherwise interfere with our ability to make, market or sell our products. Although we may co nduct our own
independent review of patents issued to certain third parties, we cannot assure you that we will be aware of all pre -existing technology that may
subject us to patent litigation. If we are forced to defend against infringement claims, whether or not such claims are resolved in our favor, we
could encounter expensive and time-consuming litigation wh ich could divert the attention of our management and other key personnel fro m our
business operations. Furthermo re, if we are found to be infringing intellectual property rights of others, we could be requir ed to pay licensing
fees or damages. In addition, if we are not able to obtain license agreements on terms acceptable to us, or at all, we may be prev ented from
manufacturing, marketing or selling our products. As a result, our net sales could be significantly

                                                                         11
reduced and our cost of sales could be significantly increased, either o f which could have an adverse effect on our business.

We are dependent on our management team a nd other personnel and the failure to attract and ret ain such individuals could adversely
affect our operations.

      Our future success will depend in large part on our ability to retain Michael G. Staffaroni, M ichael W. Hessong and Charles D. Beery and
to attract and retain other qualified managerial and personnel. Our management and other employees can terminate their emp lo yment with us at
any time, and we do not maintain key person life insurance. Our inability to attract or retain qualified emp loyees, or the lo ss of any key
emp loyee, could harm our business and results of operations. We recently hired a Vice President — Marketing and a Vice President — Design
and Development. Our failure to successfully integrate either individual into our management team could adversely affect our b usiness and
results of operations.

We are subject to product liability, warranty and recall claims and our insurance coverage may not cover such claims, which c ould cause
us to incur substantial costs and adversely affect our business.

     Due to the inherent risk of inju ry related to the use of our products, our business exposes us to claims for product liability and warranty
claims if our products actually or allegedly fail to perform as expected, or the use of our products results or is alleged to result in personal
injury, disability or death. There can be no assurance that we will be able to successfully defend or settle the product liabil ity claims and
lawsuits to which we are and in the future may be subject.

       We attach warning labels to our products and packaging relating to safe usage and the risk of inju ry. However, if a product liability claim
is brought against us, the content of the warnings, the placement of them or both may be considered inadequate by courts, exp o sing us to
liab ility. We cannot be certain that our safety warning labels are adequate. Product liability claims could result in us having to expend
significant time and expense to defend these claims and to pay, if necessary, settlement amounts or damages, wh ich could adve rsely affect our
financial condition. In addition, claims that use of our products resulted in an injury, disability or death could cause our HEEL YS brand image
and operating performance to suffer by damaging our reputation and prospects and by diverting the time and attention of our management, even
if we are not at fault.

    There can be no assurance that our product liability insurance coverage will be adequate, that our insurers will be financial ly viable when
payment of a claim is required or that we will be able to obtain such insurance in the future on acceptable terms, if at all.

     If any of our products are or are alleged to be defective, we may be required to recall that product. Any product recall coul d cause us to
incur substantial cost, and irreparab ly harm our relationships with our customers, which could adversely affect our business.

Additional bans on the use of our HEELYS -wheeled footwear due to public safety and liability concerns could adversely affect our net sales
and results of operations.

     Various places of business and other institutions, such as shopping malls and schools, have imposed bans on the use of our
HEELYS-wheeled footwear due to public safety and liab ility concerns. If the number of businesses and other institutions instituting such bans
increases in the future, consumers could find our HEELYS -wheeled footwear less appealing, which could adversely affect our net sales and
result of operations.

                                                                         12
Expanding our distribution to mass merchants could have a material adverse effect on our gross margin, brand image and result s of
operations.

      We sell our products to sporting goods retailers, specialty apparel and footwear retailers and selec t department stores in an effort to
maintain a h igh quality image for our HEELYS brand and premiu m price points for or products. Although we do not currently ant icipate
distributing to mass merchants, if we choose to do so in the future it could have a mat erial adverse effect on our gross marg in and could
negatively affect our HEELYS brand image and our reputation with consumers, wh ich could adversely affect our results of opera tions and
financial condition.

Our operating results are subject to seasonal and quarterly variations in our net sales and net income, w hich could adversely affect the
price of our common stock.

     We have experienced, and expect to continue to experience, substantial seasonal and quarterly variations in our net sales and net income.
We generated approximately 29.8% and 33.9% of our annual net sales during the fourth quarter of 2004 and 2005, respectively. These
variations are primarily related to increased sales of our products during the holiday selling season. Our quarterly res ults of operations may also
fluctuate significantly as a result of a variety of other factors, including, among other things, the timing of holidays and advertising init iatives
and changes in our product mix. In addition, variations in weather conditions may significantly affect our results of operations.

     As a result of these seasonal and quarterly fluctuations, we believe that co mparisons of our operating results between different quarters
within a single year are not necessarily meaningfu l and that these comparisons cannot be relied upon as indicators of our future performance.
Any seasonal or quarterly fluctuations that we report in the future may d iffer fro m the expectations of market analysts and investors. This could
cause the price of our co mmon stock to fluctuate significantly.

As a relatively young consumer products company, we may not be able to compete effectively, which could have a negative impac t on our
sales and our business.

     We compete with co mpanies that sell to young consumers in several d ifferent product markets, including footwear, sporting goo ds and
recreational products. These markets are intensely competitive and we expect co mpetition to increase in the future. A nu mber o f our
competitors have significantly greater financial, marketing, d istribution and manufacturing resources than we do, as well as greater brand
awareness in the markets in wh ich they operate. We also compete with counterfeit, knockoff and in fringing pro ducts, which are often sold at
lower prices. If we fail to remain compet itive with respect to the quality, design, price and timely delivery of products, ou r business, financial
condition and results of operations could be materially adversely affected.

We may have difficulty identifying and successfully integrating acquisitions into our business and any acquisitions we make coul d result in
adverse consequences.

    We may make acquisitions of co mplementary co mpanies and products. The pursuit of acquisitions may divert the attention of
management and cause us to incur significant expenses identifying, investigating and pursuing suitable acquisitions, whether or not they are
consummated.

    We have limited experience acquiring other businesses and may not be able to successfully integrate any acquired operations with our
business or effectively manage the combined business following an acquisition. We also may not achieve the anticipated benefits of an
acquisition due to any of the follo wing factors:

     •
             unanticipated costs associated with making the acquisition and operating the acquired business;

     •
             harm to our business relationships with independent manufacturers, retail customers and independent distributors;

                                                                         13
     •
            loss of key emp loyees of the acquired business; or

     •
            difficult ies associated with entering product categories or markets in wh ich we have little or no prior experience.

    If we experience any of the difficulties noted above, our business and financial condition could be adversely affected.

Risks Related to this Offering

Management may invest or spend our net proceeds from this offeri ng in ways that may not yield an acceptab le return to you.

     We plan to use substantially all of our net proceeds from this offering to repay debt and for general corporate purposes. We will have
broad discretion as to how we will spend the proceeds, and you will have no advance opportunity to evaluate and may not agree with the
manner in which we spend the proceeds. We may not be successful investing our proceeds fro m this offering in either our opera tions or
external investments.

The trading price of our common stock may fluctuate significantly.

    Vo latility in the trading price of our co mmon stock may prevent you fro m being able to sell your shares of our common stock a t prices
equal to or greater than your purchase price. The trading price of our co mmon stock could fluctuate significantly for various reasons, including:

     •
            our operating and financial performance and prospects;

     •
            our quarterly or annual earn ings or those of other companies in our industry;

     •
            the public's reaction to our press releases, other public announcements and filings with the Securit ies and Exchange Co mmission,
            or SEC;

     •
            changes in earnings estimates or reco mmendations by research analysts who track our common stock or the stock of other
            companies in our industry;

     •
            strategic actions by us or our competitors;

     •
            new laws or regulat ions or new interpretations of existing laws or regulat ions applicable to our business;

     •
            changes in accounting standards, policies, guidance, interpretations or principles;

     •
            changes in general economic conditions in the United States and global economies or financial markets, including such changes
            resulting fro m war or incidents of terroris m; and

     •
            sales of our common stock by us or members of our management team.

     In addit ion, in recent years, the stock market has experienced significant price and volu me fluctuations. This volatility has had a
significant impact on the trading price of securities issued by many companies, including co mpanies in our industry. The cha nges frequently
occur irrespective of the operating performance of the affected companies. Hence, the trading price of our co mmon stock could fluctuate based
upon factors that have little or nothing to do with our business.

Our common stock has no prior market, and we do not know if a market will develop to provide you with adequate liquidity.
      Prior to this offering, there has not been a public market fo r our co mmon stock. We cannot predict the extent to which investor interest
will lead to the development of an active trading market in our co mmon stock. If an active trad ing market does not develop, you may have
difficulty selling shares

                                                                        14
of our co mmon stock that you own. The in itial public offering price for our co mmon stock will be determined by negotiations between us and
the representatives of the underwriters and may not be indicative of t rading prices that will prevail in the open market following this offering.
Consequently, you may not be able to sell your shares of our common stock at prices equal to or greater than your purchase pr ice.

Future sales of our common stock in the public market could lower the trading price of our common stock, and the exerci se of outstanding
stock options and any additional capital raised by us through the sale of our common stock may dilute your ownership in us.

     We may sell additional shares of common stock in the future. Ou r Cert ificate of Incorporation authorizes u s to issue 75,000,000 shares of
common stock, of which 27,028,875 shares will be outstanding upon consummation of this offering. This number includes 6,250,000 shares
that we and the selling stockholders are selling in this offering, wh ich may be resold immediately in the public market unless held by affiliates
of ours. The remaining 20,778,875 shares are restricted fro m immediate resale under the lock-up agreements between our current stockholders
and the underwriters described in "Underwriting," but may b e sold into the market in the future. These shares will become available for sale at
various times fo llo wing the exp iration of the lock-up agreements, which, without the prior consent of Bear, Stearns & Co. Inc. and Wachovia
Capital Markets, LLC on behalf of the underwriters, is 180 days after the date of this prospectus (which period could be extended by the
underwriters for up to an additional 34 days under certain circu mstances). Immed iately after the expiration of the lock-up period, these shares
will be elig ible for resale under Ru le 144 or Rule 701 of the Securities Act of 1933, or the Securit ies Act, subject to volume limitations and
applicable hold ing period requirements.

     Upon consummation of this offering, options to purchase 2,142,500 shares of our common stock will be outstanding. Of this total,
2,042,500 vest and become exercisable in 48 equal monthly installments, beginning on July 31, 2006 and 100,000 vest and become exercisable
in four annual installments beginning on the first annivers ary of the consummat ion of this offering. After expiration of the lock-up agreements,
holders of 14,916,808 shares of our outstanding common stock will have demand and other registration rights, as described in "Description of
Capital Stock." In addition, following this offering, we intend to file a registration statement under the Securities Act registering 2,272,725
shares reserved for issuance under our 2006 Stock Incentive Plan. We cannot predict the effect, if any, that future issuances and sales of our
common stock will have on the trading price of our co mmon stock. Sales of substantial amounts of our common stock (includin g shares issued
in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing trading prices for our co mmon
stock.

As a new investor, you will incur substantial dilution as a result of this offering and the exercise of outstanding stock opt ions.

      The in itial public offering price is substantially h igher than the book value per share of our outstanding common stock. As a result, you
will incur immed iate and substantial dilution of $14.42 per share, based on an assumed public offering price of $17.00 per sh are, the mid-point
of the price range set forth on the cover of this prospectus. In addition, we have issued 2,042,500 options to acquire common stock at prices
below the in itial public offering price. To the extent outstanding options are ultimately exercised, there will be further di lution t o you.

Existing stockholders will significantly influence our corporate governance.

    Upon co mpletion of th is offering, executive officers, key emp loyees, directors and their affiliates will beneficially own, in the aggregate,
approximately 74.6% of our outstanding common stock. In ad dition, Capital Southwest Venture Corporation, or CSVC, which will own
approximately 34.5% of

                                                                         15
our common stock upon completion of th is offering, has the contractual right to designate (i) two no minees for director to be included in
management's slate of director no minees, so long as it owns at least 15% o f the outstanding shares of our common stock, and (ii) one such
nominee so long as it owns at least 10%, but less than 15%, of the outstanding shares of our common stock. As a result, throu gh its designees,
CVSC may significantly influence our corporate governance.

Our Certificate of Incorporation and By-Laws and Delaware law contain provisions that could discourage a third party from acquiring us
and consequently decrease the value of an invest ment in our common stock.

     Our Certificate of Incorporation and By-Laws and Delaware corporate law contain provisions that could delay or prevent a change in
control of our co mpany or changes in our management. A mong other things, these provisions:

     •
             authorize our board of d irectors, without prior stockholder approval, t o issue preferred stock with rights, priv ileges and
             preferences, including voting rights, senior to those of our common stock;

     •
             prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our
             stockholders;

     •
             establish advance notice requirements for submitt ing nominations for election to the board of directors and for proposing mat ters
             that can be acted upon by stockholders at a meeting; and

     •
             impose restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding
             common stock.

     These provisions could discourage proxy contests, make it more difficult fo r our stockholders to elect directors and take oth er corporate
actions and may discourage, delay or prevent a change in control or changes in our management that a stockholder might consider favorable.
Any delay or prevention of a change in control or change in management that stockholders might otherwise consider to be favor able could
deprive you of the opportunity to sell your co mmon stock at a price in excess of the prevailing trading price and cause the trading p rice of our
common stock to decline.

As a public company, we will be required to meet periodic reporting requirements under SEC rules and regulations. Complying with federal
securities laws as a public company is expensive and we will incur significant time and expense enhancing, documenting, testi ng and
certifying our internal control over financial reporting. Any deficiencies in our financial reporting or internal controls could adversely
affect our business and the trading price of our common stock.

     SEC rules require that, as a publicly-t raded company following comp letion of this offering, we file periodic reports containing our
financial statements within a specified time fo llo wing the co mpletion of quarterly and annual periods. Prior to this offerin g, we have not been
required to comp ly with SEC requirements to have our financial statements completed and reviewed or audited within a specifie d time and, as
such, we may experience difficu lty in meet ing the SEC's reporting requirements. Any failure by u s to file our periodic reports with the SEC in a
timely manner could harm our reputation and reduce the trading price of our co mmon stock.

     As a public co mpany we will incur significant legal, accounting, insurance and other expenses. The Sarbanes -Oxley Act o f 2002, as well
as compliance with other SEC and Nasdaq rules, will increase our legal and financial co mp liance costs and make some activit ie s more
time-consuming and costly. Furthermore, once we become a public co mpany, SEC ru les require that ou r chief executive officer and chief
financial officer periodically cert ify the existence and effectiveness of our internal control over financial report ing. Our independent registered
public accounting firm will be required, beginning with our Annual Report on Form 10-K for our fiscal year ending on Decemb er 31, 2007, to
attest to our assessment of our internal control over financial reporting. Th is process generally requires significant

                                                                          16
documentation of policies, procedures and systems, review of that documentation by our internal accounting staff and our outs ide auditors and
testing of our internal control over financial reporting by our internal accounting staff an d our outside independent registered public accounting
firm. Docu mentation and testing of our internal controls, which we have not undertaken in the past, will involve considerable time and expense,
may strain our internal resources and have an adverse impact on our operating costs.

     During the course of our testing, we may identify deficiencies which would have to be remediated to satisfy the SEC rules for cert ification
of our internal control over financial reporting. As a consequence, we may have to disclose in periodic reports we file with the SEC significant
deficiencies or material weaknesses in our system of internal controls. The existence of a material weakness would preclude management fro m
concluding that our internal control over financial reporting is effective, and would preclude our independent auditors fro m issuing an
unqualified opin ion that our internal control over financial reporting is effective. In addition, d isclosures of this type in our SEC reports could
cause investors to lose confidence in our financial reporting and may negatively affect the trading price of our co mmon stock. Moreover,
effective internal controls are necessary to produce reliable financial reports and to prevent fraud. If we have deficiencies in our disclosure
controls and procedures or internal control over financial reporting it may negatively impact our business, results of operat ions and reputation.

                                                                         17
                                 SPECIAL NOTE REGARDING FORWARD-LOOKING S TATEMENTS

     This prospectus includes forward-looking statements with respect to our financial condition, results of operations and business that are not
historical informat ion. Forward-looking statements include statements that may relate to our plans, objectives, goals, strategies, future events,
future revenues or performance, cap ital expenditures, financing needs and other informat ion that is not historical informat io n. Many of these
statements appear, in particular, under the headings "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business." Forward -looking statements can be identified by the use of terminology such
as "subject to," "believes," "anticipates," "plans," "expects," "intends," "estimates," "projects," "may," "will," "should," "can," the negatives
thereof, variat ions thereon and similar expressions, or by discussions of strategy.

     All forward-looking statements are based upon our current expectations and various assumptions. We believe there is a reasonable basis
for our expectations and assumptions, but they are inherently uncertain, we may not realize our expectations and our assumptions may not
prove correct. Actual results could differ materially fro m those described or imp lied by such forward-looking statements. Factors that may
materially affect such forward -looking statements include:

     •
            significant co mpetition;

     •
            our ability to adequately enforce our intellectual p roperty rights;

     •
            unfavorable publicity, consumer perception or material p roduct liability claims concerning our products;

     •
            costs of compliance and our failure to co mply with governmental regulat ions;

     •
            economic, polit ical and other risks associated with our internation al manufacturing and sales;

     •
            our failure to satisfy consumer demand for our products;

     •
            changes in consumer preferences or demand fo r our products;

     •
            our inability to attract and retain key members of management;

     •
            the effects of seasonality on our sales; and

     •
            other factors described in this prospectus under "Risk Factors."

     Consequently, such forward-looking statements should be regarded solely as our current plans, estimates and beliefs. You should not place
undue reliance on forward-looking statements. We cannot guarantee future results, events, performance or ach ievements. We do not have any
obligation and do not intend to update, republish or revise forward -looking statements to reflect future events or circu mstances or to reflect the
occurrences of unanticipated events.


                                                       INDUS TRY AND MARKET DATA

     Industry and market data used in this prospectus were obtained through surveys and studies conducted by third parties, ind ust ry and
general publications and our internal research. Industry data estimates involve risks a nd uncertainties and are subject to change based on
various factors, including those discussed under "Risk Factors."

                                                                         18
                                                               US E OF PROCEEDS

     We estimate that the net proceeds fro m the sale of the 3,125,000 shares of common stock we are offering will be $47.4 million, based on
an assumed init ial public offering price of $17.00 per share, the mid -point of the price range set forth on the cover of this prospectus, and after
deducting underwrit ing discounts and commissions and estimated offering expenses payable by us.

     A $1.00 increase or decrease in the assumed init ial public o ffering price of $17.00 per share would increase or decrease the net proceeds to
us from th is offering by $2.9 million, assuming the number of shares offered by us, as shown on the cover of this prospectus, remains the same
and after deducting the underwrit ing discounts and commissions and estimated offering expenses payable by us.

    We intend to use our net proceeds to repay the outstanding amount u nder our $25.0 million revolv ing credit facility. The maximu m
amount availab le under our revolving cred it facility, which exp ires on June 30, 2007, reduces to $10.0 million on January 1, 2007.
Indebtedness under our revolving credit facility bears interest at a floating rate of interest based on either the prime rate quoted by JPMorgan
Chase Bank, N.A. or an ad justed LIBOR rate. At October 31, 2006, the applicable interest rate under our revolving credit facility was 8.0% per
annum and the amount outstanding under such facility was appro ximately $22.0 million. The borrowings under the revolving credit facility are
used for working capital purposes.

     The remainder of our net proceeds will be used for in frastructure improvements, including expanding and upgrading our information
technology systems; hiring new employees; marketing and advertising; product development; working capital; and other general corporate
purposes. We will have broad discretion as to how we will spend the proceeds, and you will hav e no advance opportunity to evaluate, and may
not agree with, the manner in wh ich we spend the proceeds. We will not receive any proceeds from the sale of shares of commo n stock offered
by the selling stockholders.

     The principal purposes of this offering are to provide additional funds for the purposes described above, to attract and retain qualified
emp loyees and consultants by providing them with stock options and to create a public market for our co mmon stock for the ben efit of our
stockholders.

     Until such time as we have identified specific uses for the offering proceeds, we will invest the funds from this offering in short-term,
investment grade securities.

                                                                          19
                                                              DIVIDEND POLICY

      In the past we have not paid any dividends, nor do we anticipate paying any dividends in the foreseeable future. Instead, we anticipate that
all of our earnings, if any, in the foreseeable future will be used for wo rking capital and to finance the growth and develop ment of our business.
Any future determination relating to dividend policy will be made at the discretion of our board of directors and will depend on a n umber of
factors, including our outstanding indebtedness, earnings, capital requirements, financial condition and future prospects, applicable Delaware
law, which provides that dividends are only payable out of surplus or net profit for the then current and immediately p receding fiscal years, and
other factors that our board of directors may deem relevant. Our revolving credit facilit y prohibits us from paying dividends or making other
distributions to our stockholders, and future agreements governing our borrowings, and the terms of any preferred stock we ma y issue in the
future, will also likely contain restrictive covenants prohibiting us from paying div idends.

                                                                        20
                                                                   CAPITALIZATION

     The fo llo wing table provides our cash and cash equivalents and our capitalizat ion as of September 30, 2006, on an actual basis and on an
as adjusted basis to give effect to:

      •
                our sale of 3,125,000 shares of common stock in this offering at an assumed in itial public offering price of $17.00 per share , the
                mid-point of the price range set forth on the cover of this prospectus, and after deducting the underwriting discounts and
                commissions and estimated offering expenses payable by us; and

      •
                the repayment of all amounts outstanding under our $25.0 million revolving cred it facility.

     You should read this table in connection with "Use of Proceeds," "Selected Consolidated Fina ncial Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations," as well as the audited consolidated financial statements and related notes
included elsewhere in this prospectus.

                                                                                                                               At September 30, 2006

                                                                                                                            Actual             As Adjusted

                                                                                                                      (dollars in thousands, except par value)




Cash and cash equivalents                                                                                            $          3,269      $           28,658

Revolving cred it facility(1)                                                                                                  21,967                       —
Line of credit note(2)                                                                                                          4,000                    4,000
Other notes payable                                                                                                               532                      532
Stockholders' equity:
   Co mmon stock, $0.001 par value, 75,000,000 shares authorized, 23,903,875 shares issued and
   outstanding actual; 75,000,000 shares authorized, 27,028,875 shares outstanding, as adjusted                                    24                      27
   Additional paid-in capital                                                                                                     515                  47,868
   Retained earnings(3)                                                                                                        22,441                  22,441

          Total stockholders' equity(3)                                                                                        22,980                  70,336

             Total capitalization                                                                                    $         49,479      $           74,868

(1)
           As of September 30, 2006, an irrevocable standby letter of credit in the amount of $50,000 was outstanding under our revolving credit
           facility.
(2)
           In October 2006, the line of credit note was paid in full fro m cash fro m operating activit ies and canceled.
(3)
           Based on an assumed initial public offering price of $17.00 per share, the mid -point of the price range set forth on the cover of this
           prospectus, and after deducting underwrit ing discounts and commissions payable by us, the repayment of all amounts outsta nding at
           September 30, 2006 under our $25 million revolving cred it facility, fro m our sale of appro ximately 1.4 million shares of comm on stock
           in this offering, would result in pro forma as adjusted basic and diluted earnings per share for the year ended December 31, 2005 of
           $0.28 and $0.16, respectively, and pro forma as adjusted basic and diluted earnings per share for the nine months ended Septe mber 30,
           2006 of $0.93 and $0.67, respectively.

     A $1.00 increase or decrease in the assumed init ial public o ffering price of $17.00 per share would increase or decrease as adjusted cash
and cash equivalents, total stockholders' equity and total capitalization by $2.9 million, assuming the number of shares offered by us, as shown
on the cover of this prospectus, remains the same and after deducting the underwriting d iscounts and commissions and estimated offering
expenses payable by us.

                                                                             21
                                                                    DILUTION

     If you invest in our common stock in th is offering, upon completion of this offering your ownership interest will be di luted to the extent of
the difference between the in itial public offering price per share and the as adjusted net tangible book value per share of o ur common stock.
Our net tangible book value as of September 30, 2006 was $22.5 million, or appro ximately $0.94 per share. Net tangible book value per share
represents the amount of stockholders' equity, less intangible assets, divided by the total number of shares of common stock outstanding.

      Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of
shares of common stock in this offering and the net tangible book value per share of co mmon stock immediately after co mp letio n of this
offering. After giv ing effect to our sale of 3,125,000 shares of common stock in this offering at an assumed in itial public offering price of
$17.00 per share, the mid-point of the price range set forth on the cover of this prospectus, and after deducting the underwrit ing discounts and
commissions and estimated offering expenses, our net tangible book value as of September 30, 2006 would have been $69.9 million or $2.58
per share. This represents an immediate increase in net tangible book value of $1.64 per share to existing stockholders and a n immediate
dilution in net tangible book value of $14.42 per share to purchasers of common stock in this offering, as illustrated in the follo wing table:

                        Assumed initial public offering price per share                                               $       17.00
                          Net tangible book value per share as of September 30, 2006                $     0.94
                          Increase per share attributable to new investors                                1.64

                        As adjusted net tangible book value per share after this offering                             $        2.58

                        Dilution per share to new investors                                                           $       14.42

     A $1.00 increase or decrease in the assumed init ial public o ffering price of $17.00 per share would increase or decrease as a djusted net
tangible book value as of September 30, 2006 by $2.9 million, as adjusted net tangible book value per share after th is offering by $0.11 per
share and dilution per share to new investors by $0.89, assuming the number of shares offered by us, as shown on the cover of this prospectus,
remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

     The fo llo wing table presents as of September 30, 2006, the differences between the existing stockholders and the purchasers of sh ares in
this offering with respect to the number of shares purchased from us, the total consideration paid and the average price paid per share
(assuming a public offering price o f $17.00 per share, the mid-point of the price range set forth on the cover of this prospectus):

                                                               Shares Purchased               Total Consideration

                                                                                                                                       Average
                                                                                                                                        Price
                                                                                                                                      Per Share

                                                              Number          Percent         Amount                Percent

Existing stockholders                                         23,903,875           88.4 % $       262,943               0.5 % $               0.01
New stockholders                                               3,125,000           11.6        53,125,000              99.5                  17.00

     Totals                                                   27,028,875          100.0 % $    53,387,943            100.0 %


                                                                         22
     A $1.00 increase or decrease in the assumed init ial public o ffering price of $17.00 per share, the mid -point of the range shown on the
cover of this prospectus, would increase or decrease total consideration paid by new stockholders and total consideration paid by all
stockholders by $3.1 million, assuming the number of shares offered by us, as set forth on the front cover page of this prospectus, remains the
same.

      Sales by the selling stockholders in this offering will cause the number of shares he ld by existing stockholders to be reduced to 20,778,875
shares or 76.9% of the total nu mber of shares of our common stock outstanding after this offering. If the underwriters' over-allo tment option is
exercised in full, the number of shares held by the existing stockholders after this offering would be reduced to 19,841,375, or 73.4% of the
total number of shares of our common stock outstanding after this offering, and the number of shares held by new investors wo uld increase to
7,187,500, or 26.6% of the total number o f shares of our common stock outstanding after this offering.

      To the extent outstanding options or options granted in the future under our 2006 Stock Incentive Plan are exercised, there w ill be fu rther
dilution to new investors.

                                                                         23
                                                             S ELECTED CONSOLIDATED FINANCIAL DATA

     The fo llo wing selected consolidated financial data should be read in conjunction with, and are qualified by reference to, our consolidated
financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this prospectus. The consolidated statements of operations data for the years ended December 31, 2003, 2004 and 2005
and for the nine months ended September 30, 2006, and the consolidated balance sheet data at December 31, 2004 and 2005 an d at
September 30, 2006 are derived fro m our consolidated financial statements which have been audited by Deloitte & Touche LLP, independent
registered public accounting firm and are included elsewhere in this prospectus. The consolidated statements of operations da ta for the years
ended December 31, 2001 and 2002, and the consolidated balance sheet data at December 31, 2001, 2002 and 2003 are derived fro m our
consolidated financial statements not included herein wh ich have been audited by Deloitte & Touche LLP, independent registered public
accounting firm. The consolidated statements of operations data for the nine months ended Sep tember 30, 2005 (unaudited) are derived fro m
our consolidated financial statements included elsewhere in this prospectus and, in the opinion of our management, include al l adjustments,
consisting only of normal recurring adjustments, that are necessary for a fair presentation of our financial position and results of operations for
these periods. The historical results are not necessarily indicative o f future results.

                                                                                                                                                              Nine Months Ended
                                                                                           Year Ended December 31,                                               September 30,

                                                                      2001              2002               2003            2004            2005               2005              2006

                                                                                                          (in thousands, except per share data)


Consolidated Statements of Operations Data:
Net sales                                                         $     20,437      $     25,820      $       22,215 $        21,310 $        43,950      $     29,052      $     117,107
Cost of sales                                                           12,743            17,741              15,583          14,529          28,951            19,143             76,570

Gross profit                                                             7,694             8,079                6,632           6,781         14,999             9,909             40,537
Selling, general and administrative expenses
    Sales and marketing                                                  2,864             3,048                2,739           3,191             5,247          3,262              8,974
    General and administrative                                           1,770             3,035                2,184           2,368             2,987          2,133              4,034

        Total selling, general and administrative expenses               4,634             6,083                4,923           5,559             8,234          5,395             13,008

Income from operations                                                   3,060             1,996                1,709           1,222             6,765          4,514             27,529
Other (income) expense                                                     375                43                   33               1               131             76                402

Income before income taxes                                               2,685             1,953                1,676           1,221             6,634          4,438             27,127
Income taxes                                                               916               667                  575             418             2,287          1,530              9,460

Net income                                                        $      1,769      $      1,286      $         1,101 $           803 $           4,347   $      2,908      $      17,667


Earnings per share:
   Basic                                                          $          0.13   $          0.09   $           0.08 $          0.06 $           0.31   $          0.21   $          0.99
   Diluted                                                        $          0.07   $          0.05   $           0.04 $          0.03 $           0.17   $          0.11   $          0.70
Weighted average shares outstanding:
   Basic                                                                13,579            13,989              13,989          13,989          13,989            13,989             17,812
   Diluted                                                              24,943            25,353              25,353          25,353          25,353            25,353             25,329

Other Data:
Unit sales of wheeled footwear:
   Pairs, domestic                                                           373               415                292             423             1,145              727            3,257
   Pairs, international                                                       52               420                454             274               266              200              601

        Total                                                                425               835                746             697             1,411              927            3,858

Net sales, domestic                                               $     18,608      $     13,058      $        9,458 $        13,835 $        36,573      $     23,523      $     100,622
Net sales, international                                                 1,829            12,762              12,757           7,475           7,377             5,529             16,485

Depreciation and amortization                                                157               304                548             454              396               276               290


                                                                                          24
                                                                                              At December 31,

                                                                                                                                            At September 30, 2006

                                                                   2001            2002              2003            2004          2005

                                                                                                            (in thousands)


Consolidated Balance Sheet Data:
Cash and cash equivalents                                      $         99    $         54      $     1,200 (1) $     1,628   $        738 $                3,269
Working capital                                                       3,207           4,015            3,355           4,281          8,101                 21,906
Total assets                                                          7,509           7,881            5,549           6,321         11,990                 64,516
Total debt                                                            3,694           2,217               98              91             96                 26,499
Total stockholders' equity                                            1,391           2,677            3,778           4,581          8,928                 22,980



(1)
        Includes $1.1 million of cash on deposit held under a previously outstanding revolving line of credit.


Note: The nu mbers in the tables above, except per share data, have been rounded to thousands. All calcu lations related to the period -to-period
comparisons in "Management's Discussion and Analysis of Financial Condition and Results of Operations" are derived fro m th e t ables above,
are rounded to millions and could differ immaterially if such calculations were co mputed without rounding.

                                                                                              25
                            MANAGEMENT'S DISCUSSION AND ANALYS IS OF FINANCIAL CONDITION
                                            AND RES ULTS OF OPERATIONS

      The following discussion should be read in conjunction with our consolidated financial statements and the related notes inclu ded
elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. See "Risk Factors"
included elsewhere in this prospectus for a discussion of important factors that could cause actual results to differ materia lly from those
described or implied by the forward-looking statements contained in this discussion. Please refer to "Special Note Regarding Forward -Looking
Statements" included elsewhere in this prospectus.

Overview

     We are a designer, marketer and distributor of innovative, action sports -inspired products under the HEELYS brand targeted to the youth
market. Our primary product, HEELYS -wheeled footwear, is patented, dual-purpose footwear that incorporates a stealth, remo vable wheel in
the heel. HEELYS-wheeled footwear allows the user to seamlessly transition from walking or running to skating by shifting weight to the heel.
Users can transform HEELYS-wheeled footwear into street footwear by removing the wheel. In 2005, appro ximately 95% of our net sales was
derived fro m the sale of our HEELYS-wheeled footwear. We also sell branded accessories such as replacement wheels, helmets and other
protective gear.

      We introduced HEELYS-wheeled footwear in 2000, and for several years our domestic sales were concentrated with one large, national
specialty retailer. A lthough we initially focus ed on driving our domestic sales growth, we also established relationships with an independent
distributor in each of Japan, South Korea and Southeast Asia. As a result, the sources of our net sales were largely concentrated and we were
susceptible to customer-specific and region-specific factors, including co mpetition fro m counterfeit , knockoff and infringing products in
international markets. This concentration caused variability in our results of operations. Since that time, we have diversified our retail customer
base in the United States and expanded our international d istribution channels to mitigate this concentration.

     Since 2003, our do mestic net sales have increased rapidly. We believe that this increase has resulted primarily fro m the growing
acceptance of HEELYS-wheeled footwear by consumers, increasing recognition of our HEELYS brand name and expanding distribution of
HEELYS-wheeled footwear to existing and new retail customers. We believe that our grass -roots market ing programs, high quality products
and relationships with our retail customers have contributed to this growing demand. Continued growth of our net sales will d epend on
consumer demand for HEELYS-wheeled footwear and our ability to satisfy this demand. A number of factors may i mpact consumer demand
for our products, including:

     •
            the effectiveness of our marketing strategies;

     •
            our ability to effectively distribute our products;

     •
            our ability to design products that appeal to our target consumers;

     •
            our ability to protect our intellectual property rights;

     •
            general economic conditions, particularly changes in consumer discretionary spending patterns; and

     •
            changes in the popularity of and participation rates in wheeled sports activities.




     We intend to continue to diversify our product offering with new HEELYS -wheeled footwear models, product categories and accessories
in order to benefit fro m the increasing recognition of our HEELYS b rand and the growing market for act ion sports -inspired products.
Designing, marketing and

                                                                        26
distributing new products will require us to devote additional resources to product development, marketing and operations. Th ese additional
resources may include hiring new emp loyees to support our growth in these areas and increasing amounts allocated to product a dvertising and
promotion. Each of these additional resource commit ments will increase our selling, general and administrative expenses. Because the selling
price and unit cost of new products may differ fro m those of our existing products, sales of these new products may also impa ct our gross
margin. In addition, we may seek to selectively acquire products and companies that o ffer products that are comp lementary to ours.

General

Net Sales

     Net sales represent primarily sales of HEELYS -wheeled footwear, less an estimated reserve for sales returns, allowances and discounts. A
small portion of our net sales are derived fro m the sale of accessories such as replacement wheels, helmets and other p rotective gear. A mounts
billed to domestic customers for shipping and handling are included in net sales.

      We sell our products through distribution channels that merchandise our products in a manner that we believe enhances and pro tects our
HEELYS b rand image. Do mestically, our products can be found in full-line sporting goods retailers, specialty apparel and footwear retailers
and select department stores and online retailers. As of September 30, 2006, our customer base of retail customers in the Un ited States included
over 800 accounts that operated more than 7,400 stores. Based on communications with these customers, we believe that as of S eptember 30,
2006, our HEELYS-wheeled footwear was offered for sale in mo re than 5,000 of these stores. In 20 05, 83.2% of our net sales were derived
fro m do mestic retail customers. Internationally, our products are sold to over 31 independent distributors with exclusive rig hts to specified
territories. Our three largest international territories in 2005, by net s ales, were Canada, Japan and Spain/Portugal. Sales to our independent
distributors are denominated in U.S. dollars.

Cost of Sales and Gross Profit

    Cost of sales consists primarily of the cost to purchase finished products fro m our independent manufacturers. Cost of sales also includes
commissions paid to our independent sourcing agent, inbound and outbound freight, warehousing expenses, tooling depreciatio n, royalty
expenses related to licensed intellectual p roperty and an inventory reserve for shrinkage and write-downs.

     We source all of our products and accessories from manufacturers located in Ch ina, Indonesia and South Korea. Our product cos ts are
largely driven by the prices we negotiate with our independent manufacturers. Each season, we negotiate a unit price for each model of
HEELYS-wheeled footwear. Factors that influence these prices include raw materials and labor costs and foreign exchange rates. We pa y our
independent sourcing agent a commission equal to a specified percentage of o ur per unit cost, with the percentage decreasing when our annual
purchases exceed a predetermined unit volu me threshold. We believe that our sourcing model allows us to minimize our capital investment,
retain the production flexibility, cost-effectiveness and scalability inherent in the use of independent manufacturers and focus our resources on
developing new products and enhancing our HEELYS brand image.

      We have generally avoided selling our products at close-out prices due to strong demand. Should demand for our products slow, we may
discount our products to reduce our inventory, which may cause our gross profit as a percentage of net sales, or gross marg in , t o decline. Our
gross marg in is affected by our ability to avoid excess inventory by accurately forecasting demand for our products, our sourcing and
distribution costs and our product mix. The unit prices that we charge our domestic retail customers are generally higher tha n those that we
charge our independent distributors for similar products, because our independent distributors are responsible for d istribution and marketing
costs

                                                                        27
relating to our products. The gross margin for products sold to our domestic retail customers and independent distributors are similar, however,
due to higher shipping costs and standard customer d iscounts and allowances related to domestic sales.

Selling, General and Administrative Expenses

     Selling, general and administrative expenses consist of wages and related payroll and emp loyee benefit costs, sales and marketing
expenses, advertising costs, travel and insurance expenses, product development costs, costs to enforce our intellectual prop erty rights,
depreciation, amortizat ion, professional fees and facility expenses. In 2002, we incurred appro ximately $620,000 of litigation expenses, ne t of
insurance reimbursement, related to the enforcement of our intellectual property, which negatively impacted our operating inc ome. Since 2003,
our selling, general and ad min istrative expenses have increased annually as we have increased our market ing expenses and exp a nded our
infrastructure to support our sales growth. In addition, our product liability insurance premiu ms have inc reased as our net sales have increased.
We expect that our selling, general and ad ministrative expenses will continue to increase in future periods as we continue to hire additional
personnel, develop our infrastructure, increase our brand recognition thro ugh marketing, secure and enforce our intellectual pro perty rights and
incur additional expenses associated with operating as a public company, including comp liance with the Sarbanes -Oxley Act of 2002.

      As a result of adopting the Financial Accounting Standards Board, or FASB, No. 123(R), Share-Based Payment (Revised 2004), on
January 1, 2006, we will incur appro ximately $343,000, net of tax, in non -cash stock-based compensation expense during 2006 based on the
number of stock options outstanding as of September 30, 2006. We will recognize additional stock-based compensation expense in 2006 based
on the fair value of any additional stock-based awards made in 2006. The amount of co mpensation expense recognized will dep end upon
numerous factors and estimates, includ ing the number and vesting period of option grants, the publicly traded price of our co mmon stock, the
estimated volatility of our common stock price, estimates of the timing and volume of exercises and forfeitures of the option s and fluctuations
in future interest and income tax rates.

Income Taxes

      We operate through Heeling Sports Limited, a Texas limited partnership, and, accordingly, have not incurred significant amoun ts of Texas
franchise taxes. Texas recently passed legislation amending its franchise tax law. As a result, effective January 1, 2007, we exp ect our effective
tax rate to increase by up to 0.5%.

                                                                        28
Results of Operations

                                                                                                                          Nine Months Ended
                                                                                   Year Ended December 31,                  September 30,

                                                                      2003                   2004            2005        2005            2006

Net sales                                                              100.0 %                100.0 %         100.0 %     100.0 %         100.0 %
Cost of sales                                                           70.1                   68.2            65.9        65.9            65.4

Gross profit                                                             29.9                   31.8           34.1        34.1               34.6

Selling, general and ad min istrative expenses
   Sales and market ing                                                  12.3                   15.0           11.9        11.2                 7.7
   General and administrative                                             9.9                   11.1            6.8         7.3                 3.4

      Total selling, general and ad ministrative expenses                22.2                   26.1           18.7        18.5               11.1

Income fro m operations                                                      7.7                    5.7        15.4        15.6               23.5
Other expense (inco me)                                                      0.1                     —          0.3         0.3                0.3

Income before inco me taxes                                                  7.6                    5.7        15.1        15.3               23.2
Income taxes                                                                 2.6                    2.0         5.2         5.3                8.1

Net inco me                                                                  5.0 %                  3.8 %        9.9 %     10.0 %             15.1 %


Comparison of the Nine Months Ended September 30, 2006 and Nine Months Ended September 30, 2005

      Net sales. Net sales increased $88.1 million, or 303.1%, to $117.1 million for the nine months ended September 30, 2006 fro m
$29.1 million for the nine months ended September 30, 2005. This increase was primarily the result of higher unit sales of our
HEELYS-wheeled footwear, which increased by 2.9 million pairs, or 316.2%, to 3.9 million pairs for the nine months ended September 30,
2006 fro m 927,000 pairs for the nine months ended September 30, 2005. For the nine months ended September 30, 2006, 85.9% of our net
sales were fro m domestic retail customers, as compared to 81.0% for the nine months ended September 30, 2005. Do mestically , our net sales
increased $77.1 million, or 327.8%, to $100.6 million for the nine months ended September 30, 2006 fro m $23.5 million for the nine months
ended September 30, 2005. This increase was primarily the result of higher unit sales of our HEELYS -wheeled footwear to existing and new
retail customers, wh ich increased by 2.5 million pairs, or 348.0%, to 3.3 million pairs for the nine months ended September 30, 2006 fro m
727,000 pairs fo r the nine months ended September 30, 2005. Internationally, our net sales increased $11.0 million, or 198.2%, to $16.5 million
for the nine months ended September 30, 2006, co mpared to $5.5 million for the nine months ended September 30, 2005. This increase was
primarily the result of increased sales to distributors in Canada, the Un ited Kingdom, Ireland and Argentina/Brazil/Ch ile, part ially o ffset by
decreased sales to distributors in Japan and Spain/Portugal.

      Gross profit.   Gross profit increased $30.6 million to $40.5 million for the nine months ended September 30, 2006 fro m $9.9 million for
the nine months ended September 30, 2005. Our gross margin was 34.6% fo r the nine months ended September 30, 2006 co mp ared to 34.1%
for the nine months ended September 30, 2005. The increase in gross marg in was due to a decrease in our product costs of 0.8% of net sales
due to product mix, reduced costs of 0.4% of net sales related to efficiencies in operating our distribution center and reduc ed royalty expense of
0.2% of net sales related to fewer royalty-based sales, partially offset by increased freight costs of 1.1% of net sales, primarily caused by air
freight costs incurred to meet demand.

    Sales and marketing expense. Sales and marketing expense increased $5.7 million to $9.0 million for the nine months ended
September 30, 2006 fro m $3.3 million for the nine months ended

                                                                        29
September 30, 2005. This increase was primarily the result of increases over the prior year in sales commissions of $4.3 million due to
increased domestic sales volume, telev ision advertising of $606,000 and co -op advertising of $281,000. Although sales and marketing expense
increased fro m the prio r period, as a percentage of net sales, sales and market ing expense decreased to 7.7% for the nine mon ths ended
September 30, 2006 fro m 11.2% for the nine months ended September 30, 2005.

     General and administrative expense. General and ad ministrative expense increased $1.9 million to $4.0 million for the nine months
ended September 30, 2006 fro m $2.1 million for the nine months ended September 30, 2005. This increase was primarily the result of an
$802,000 increase in our product liability insurance premiu ms which are based on sales volumes, $418,000 in payroll and related costs due to
increased headcount, $260,000 in stock-based compensation expense and $92,000 in our p rovision for doubtful accounts due to increa sed sales
volume. Although general and admin istrative expense increased from the prior period, as a percentage of net sales, general an d administrative
expense decreased to 3.4% fo r the nine months ended September 30, 2006 fro m 7.3% for the nine months ended September 30, 2005.

     Operating income. As a result of the above factors, operating income increased $23.0 million to $27.5 million for the nine months
ended September 30, 2006 fro m $4.5 million for the nine months ended September 30, 2005. As a percentage of net sales, operating income
increased to 23.5% for the nine months ended September 30, 2006 fro m 15.6% for the nine months ended September 30, 2005.

     Income taxes. Inco me taxes were $9.5 million for the nine months ended September 30, 2006, representing an effective income tax rate
of 34.9%, co mpared to $1.5 million for the nine months ended September 30, 2005, representing an effective inco me tax rate of 34.5%.

     Net income. As a result of the above factors, net income was $17.7 million for the nine months ended September 30, 2006 co mpared to
$2.9 million for the nine months ended September 30, 2005. As a percentage of net sales, net income increased to 15.1% for the nine months
ended September 30, 2006 fro m 10.0% for the nine months ended September 30, 2005.

Comparison of the Years Ended December 31, 2005 and 2004

     Net sales. Net sales increased $22.6 million, or 106.3%, to $44.0 million in 2005 fro m $21.3 million in 2004. This increase was
primarily the result of higher unit sales of our HEELYS-wheeled footwear, wh ich increased by 714,000 pairs, or 102.4%, to 1.4 million pairs in
2005 fro m 697,000 pairs in 2004. In 2005, 83.2% of our net sales were derived fro m do mestic retail customers co mpared to 64.9% in 2004.
Do mestically, our net sales increased $22.7 million, or 164.4%, to $36.6 million in 2005 fro m $13.8 million in 2004. This increase was
primarily the result of higher unit sales of our HEELYS -wheeled footwear to existing and new retail customers, which increased by 722,000
pairs, or 170.7%, to 1.1 million pairs in 2005 fro m 423,000 pairs in 2004. Internationally, our net sales decreased $97,000, or 1.3%, to
$7.4 million in 2005 co mpared to $7.5 million in 2004. This decrease was primarily the result of lower sales in Japan that we believe occurred
primarily due to competing counterfeit and knockoff products, partially offset by increased sales to independent distributors in Canada, the
United Kingdom, Ireland and Spain/Portugal.

     Gross profit.     Gross profit increased $8.2 million to $15.0 million in 2005 fro m $6.8 million in 2004. Ou r gross margin improved to
34.1% in 2005 fro m 31.8% in 2004. The increase in g ross margin was primarily due to decreases in our product costs of 1.0% o f net sales due
to product mix and cost reductions, reduced inventory reserve costs of 0.8% of net sales based on actual experience, reduced costs of 0.3% of
net sales related to efficiencies in operating our distribution center and reduced royalty expense of 0.3% o f ne t sales related to fewer
royalty-based sales, all of wh ich were partially offset by increased freight costs of 0.1% of net sales.

                                                                      30
     Sales and marketing expense. Sales and marketing expense increased $2.0 million to $5.2 million in 2005 fro m $3.2 million in 2004.
This increase was primarily the result of a $1.3 million increase in sales commissions related to our increased domestic net sales, together with
a $415,000 increase in advertising expense. Although the dollar amount of sales and market ing expense in 2005 increased fro m th e prior
period, as a percentage of net sales, sales and market ing expense decreased to 11.9% in 2005 fro m 15.0% in 2004.

     General and administrative expense. General and ad ministrative expense increased $619,000 to $3.0 million in 2005 from $2.4 million
in 2004. Th is increase was primarily the result of $304,000 in increased compensation expense due to an increase in the n umber of our
emp loyees and amount of bonus payments, and a $110,000 increase in our bad debt expense as we increased our provision for dou btful
accounts due to increased sales volume. Although the dollar amount of general and ad min istrative expense in 2005 increased from the prior
period, as a percentage of net sales, general and administrative expense decreased to 6.8% in 2005 fro m 11.1% in 2004.

     Operating income. As a result of the above factors, operating income increased $5.5 million to $6.8 million in 2005 fro m $1.2 million
in 2004. As a percentage of net sales, operating income increased to 15.4% in 2005 fro m 5.7% in 2004.

    Income taxes. Inco me taxes were $2.3 million in 2005, representing an effective income tax rate of 34.5%, co mpared to $418,000 in
2004, representing an effective inco me tax rate of 34.2%.

     Net income. As a result of the above factors, net income was $4.3 million in 2005 co mpared to $803,000 in 2004. As a percentage of
net sales, net income increased to 9.9% in 2005 fro m 3.8% in 2004.

Comparison of the Years Ended December 31, 2004 and 2003

     Net sales. Net sales decreased $905,000, or 4.1%, to $21.3 million in 2004 fro m $22.2 million in 2003. This decrease was primarily the
result of lower unit sales of our HEELYS -wheeled footwear, which decreased by 49,000 pairs, or 6.6%, to 697,000 pairs in 2004 fro m 746,000
pairs in 2003. In 2004, 64.9% of our net sales were fro m do mestic retail customers co mpared to 42.6% in 2003. Do mestically, our net sales
increased $4.4 million, or 46.3%, to $13.8 million in 2004 fro m $9.5 million in 2003. This increase was primarily the result of higher unit sales
of our HEELYS-wheeled footwear to existing and new retail customers, wh ich increased by 131,000 pairs, or 44.9%, to 423,000 pairs in 2004
fro m 292,000 pairs in 2003. Internationally, our net sales decreased $5.3 million, or 41.4%, to $7.5 million in 2004 co mpared to $12.8 million
in 2003. Th is decrease was primarily the result of decreased sales in South Korea that we believe was primarily due to competit ion fro m
counterfeit and knockoff products, partially offset by increased sales in other countries.

     Gross profit.     Gross profit increased $149,000 to $6.8 million in 2004 fro m $6.6 million in 2003. Our gross marg in imp roved to 31.8%
in 2004 fro m 29.9% in 2003. The increase in gross margin was primarily due to decreases in our product costs of 3.0% of net s ales due to
product mix and cost reductions and reduced royalty expense of 0.2% of net sales related to fewer royalty -based sales, all of wh ich were
partially offset by increased inventory reserve costs of 0.6% of net sales based on actual experience, increased freight costs of 0.6% o f net
sales, and increased costs of 0.1% o f net sales related to the operation of our distribution center.

     Sales and marketing expense. Sales and marketing expense increased $452,000 to $3.2 million in 2004 fro m $2.7 millio n in 2003. Th is
increase was primarily the result of h igher sales commissions in 2004, which increased $299,000 over the prior year period, due to increased
domestic net sales. As a percentage of net sales, sales and market ing expense increased to 15.0% in 2004 fro m 12.3% in 200 3.

                                                                        31
     General and administrative expense. General and ad ministrative expense increased $184,000 to $2.4 million in 2004 from $2.2 million
in 2003. Th is increase was primarily the result of an increase in our bad debt expense as we increased our provision for doub tful accounts due
to increased domestic sales volume, legal fees relating to enforcing our rights against intellectual prop erty infringers, product development
expenses and amortization expense. As a percentage of net sales, general and administrative expense increased to 11.1% in 200 4 fro m 9.8% in
2003.

    Operating income. As a result of the above factors, operating income decreased $487,000 to $1.2 million in 2004 fro m $1.7 million in
2003. As a percentage of net sales, operating income decreased to 5.7% in 2004 fro m 7.7% in 2003.

     Income taxes. Inco me taxes were $418,000 in 2004 representing an effective inco me tax rate of 34.2%, co mpared to $575,000 in 2003,
representing an effective inco me tax rate of 34.3%.

     Net income. As a result of the above factors, net income was $803,000 in 2004 co mpared to $1.1 million in 2003. As a percentage of
net sales, net income decreased to 3.8% in 2004 fro m 5.0% in 2003.

Li qui di ty and Capital Resources

     Our primary cash need is for working capital, which we generally finance with cash flow fro m operating activities and borrowings under
our revolving credit facility. These sources of liquid ity may be impacted by fluctuations in demand fo r our products, investments in our
infrastructure and expenditures on market ing and advertising.

     The table belo w sets forth, for the periods indicated, our beginning balance of cash and cash equivalents, net cash flows from operating,
investing and financing activities and our ending balance of cash and cash equivalents:

                                                                                     Year Ended                             Nine Months Ended
                                                                                    December 31,                              September 30,

                                                                        2003             2004            2005             2005             2006

                                                                                                    (in thousands)


Cash and cash equivalents at beginning of period                   $          54 $               61 $       1,628 $         1,628 $              738
Cash provided by (used in) operating activit ies                           3,617                711            21            (316 )          (19,505 )
Cash (used in) provided by investing activities                           (1,491 )              863          (416 )          (310 )             (367 )
Cash (used in) provided by financing activit ies                          (2,119 )               (7 )        (495 )          (303 )           22,403

Cash and cash equivalents at end of period                         $           61    $      1,628   $           738   $          699   $          3,269


     Cash flow fro m operating activit ies consists primarily of net inco me adjusted for certain non -cash items, including depreciation and
amort ization, deferred income taxes and gains or losses on sales of assets and the effect of changes in operating assets an d liabilities,
principally including accounts receivable, inventory, accounts payable and accrued expenses.

     For the nine months ended September 30, 2006, cash used in operating activities was $19.5 million co mpared to $316,000 for the nine
months ended September 30, 2005. Cash used in operating activities for the nine months ended September 30, 2006 consisted primarily of an
increase in net working capital of $37.5 million partially offset by net income of $17.7 million and non-cash items of $279,000. The increase in
net working capital was primarily the result of an increase of $36.5 million in accounts receivable due to increased net sales, an increase in
inventory of $11.3 million due to an increase in inventory in transit, an increase in prepaid expenses of $1.8 million due to higher liability
insurance premiu ms resulting fro m increased net sales and deferred costs incurred associated with this offering, partially o ffset by an increase
in accrued expenses of $6.6 million and inco me taxes payable of $4.5 million related to our increased income before income taxes.

                                                                        32
     In 2005, cash provided by operating activities was $21,000 and consisted of net income of $4.3 million, increased by adjustments for
non-cash items of $244,000, offset by an increase of $4.6 million in net working capital. The increase in net working capit al consisted primarily
of increases in accounts receivable of $5.8 million due to the increase in net sales for the period, and an increase in inventory of $542,000,
partially offset by increases in accrued expenses of $1.2 million and income taxes payable of $209,000.

    In 2004, cash provided by operating activities was $711,000 and consisted of net income of $803,000, increased by adjustments for
non-cash items of $399,000, partially offset by an increase of $491,000 in net working capital. The increase in net working capital consisted
primarily of an increase in accounts receivable of $778,000 and a decrease in accounts payable of $130,000, partially offset by a decrease in
inventory of $279,000 and an increase in inco me taxes payable of $115,000.

     In 2003, cash provided by operating activities was $3.6 million and consisted of net income of $1.1 million, increased by adjustments for
non-cash items of $562,000 and a $2.0 million decrease in net working capital. The decrease in net working capital consisted primarily of
decreases in accounts receivable of $2.8 million and inventory of $476,000, partially offset by decreases in accounts payable, accrued expenses
and income taxes payable that totaled $1.4 million.

     Investing activities relate primarily to changes in cash invested with our co mmercial lender, investments in intangible assets and capital
expenditures. Investments in intangible assets are amounts we capitalize related to the acquisition and enforcement of our pa tents and
trademarks. Our capital expenditures are primarily related to leasehold improvements, furniture and fixtures, co mputer equip ment, wa rehouse
equipment and product molds and designs.

      For the nine months ended September 30, 2006, cash used in investing activities was $367,000 co mpared to $310,000 for the nine months
ended September 30, 2005. The cash used in investing activities primarily related to purchases of equipment and legal and other costs
capitalized related to securing intellectual property rights. In 2005, cash used in investing activities was $416,000, consisting primarily of
$236,000 for capital expenditures and $180,000 for legal and other costs capitalized related to securing intellectual propert y rig hts. In 2004,
cash provided by investing activities was $863,000, consisting primarily o f $1.1 million fro m the withdrawal of cash on deposit with our
commercial lender, part ially offset by $209,000 for legal and other costs capitalized related to securing intellectual property rights and $84,000
in capital expenditures. In 2003, cash used in investing activities of $1.5 million related primarily to $1.1 million of cash deposited with our
commercial lender, in addition to $268,000 for legal and other costs capitalized related to securing intellectual property rights and $84,000 for
capital expenditures. In 2006, we expect to incur appro ximately $600,000 in cap ital expenditures and amounts capitalized rela ted to securing
intellectual property rights.

     Financing activities relate primarily to net borrowings and repayments under our revolving credit facility and pro missory notes and
redemptions of our preferred stock. We borrow funds under our revolving cred it facility primarily to fund seasonal increases in our inventory
and selling, general and ad ministrative expenses. We repay amounts outstanding on our revolving credit facility with cash generated fro m the
sale of our inventory and the collection of accounts receivable. We also borrow funds fro m co mmercial finance co mpanies to fi nance the
payment of insurance premiu ms.

      For the nine months ended September 30, 2006, cash provided by financing activities was $22.4 million co mpared to $303,000 used for
the nine months ended September 30, 2005. The $22.4 million in cash provided by financing activit ies for the nine months ended
September 30, 2006 p rimarily related to $4.5 million in net proceeds from short-term debt and $22.0 million in borrowings under our revolv ing
line of credit, partially offset by our repurchase of $4.0 million in shares of our common stock fro m certain of our stockholders. In 2005, cash
used in financing activities was $500,000 related to our redemption of our Series A Preferred Stock. In 2004, cash used in financing activities
was $7,000 related to the net repayment of our pro missory notes. In 2003, cash used in financing

                                                                        33
activities was $2.1 million related primarily to the repayments of $1.9 million to retire our subordinated debt and $191,000 under our revolv ing
credit facility.

     We believe that our cash flow fro m operating activit ies and borrowings available to us under our revolving credit facility, t ogether with
the net proceeds from this offering, will be adequate to meet our liquidity needs and capital expenditure requirements for at least the next
12 months.

     Our ability to access these sources of liquid ity may be negatively impacted by a decrease in demand for our products and the requirement
that we meet certain borro wing conditions under our revolving credit facility, as well as the other factors described in "Risk Factors."

Revolving Credit Facility

      On August 20, 2004, we entered into a $3.0 million revolv ing credit facility with a predecessor of JPMorg an Chase Ban k, N.A. On
August 28, 2006, we amended this revolving credit facility, increasing our maximu m amount available to $25.0 million. The maximu m amount
available under our revolving credit facility will decrease to $10.0 million on January 1, 2007. Our amended revolving cred it facility exp ires on
June 30, 2007. Borrowings are subject to certain limitations, primarily based upon 85% of eligible accounts receivable and 50% of eligib le
inventory. As of October 31, 2006, there was $22.0 million outstanding under our revolving credit facility. Accounts receivable, inventory and
general intangibles other than our patents and trademarks are pledged as collateral for our revolving cred it facility and we are subject to
compliance with certain covenants, including maintain ing a minimu m level of net worth of at least $7.0 million as of the end of each fiscal
quarter and a minimu m interest coverage ratio of 2.5 to 1.0. Our revolving cred it facility also prohibits us fro m, among othe r things, incurring
indebtedness for borrowed money, guaranteeing the obligations of another person or entity, creating or permitting any liens on our assets,
paying dividends or making other distributions to our stockholders. Currently, we are in co mp liance with these covenants. Ind ebtedness under
our revolving credit facility bears interest at a floating rate of interest based on either the prime rate quoted by JPMorgan Chase Bank, N.A. o r
an adjusted LIBOR rate. At October 31, 2006, the applicab le interest rate under our revolving credit facility was 8.0% per annum. We are also
required to pay quarterly non-usage fees, at a rate of 0.25% per annum, based on the average daily unused portion of our revolving credit
facility. An irrevocable standby letter of credit in the amount of $50,00 0 is outstanding under our revolving credit facility in fav or of the
landlord for our corporate headquarters. The landlord may draw upon this letter of credit if we are in default under the leas e. Th e letter of credit
expires on March 1, 2008.

Line of Credit Note

     On April 18, 2006, we executed a $5.0 million line of credit note with JPMorgan Chase Bank, N.A. In May 2006, we borrowed
$4.0 million under this note. This line of credit note was repaid in October 2006 and was canceled.

                                                                         34
Contractual Obligati ons and Commercial Commi tments

      The fo llo wing table summarizes our significant contractual cash obligations as of December 31, 2005:

                                                                                                              Payments due by period

                                                                                        Less than                                                More than
                                                                        Total            1 year                  1-3 years       4-5 years        5 years

                                                                                                          (in thousands)


Debt obligations                                                    $        96    $                 96      $          —    $          —    $                —
Operating lease obligations(1)                                            1,888                     163                567             407                   751


Total obligations                                                   $     1,984    $                259      $         567   $         407   $               751

(1)
        Our office lease provides that if we are in default of the lease, we must pay certain damages to the landlord, and the landlo rd may elect
        to require us to continue to pay rent through the end of the lease term or to pay the present value of the excess, if any, of the aggregate
        rent otherwise payable through the end of the lease over the aggregate fair market value of the premises for the lease period .

     We lease our corporate headquarters, a 50,000 square foot facility located in Carrollton, Texas, co nsisting of 42,000 square feet of
warehouse space and 8,000 square feet of office space. Our lease expires in August 2015, but we have two five-year extension options. The
informat ion in the table above does not include these lease extensions. We believe t his facility has sufficient capacity to meet our anticipated
growth for the foreseeable future.

     We pay monthly royalt ies related to a feature incorporated in our grind -and-roll HEELYS-wheeled footwear equal to a percentage of the
purchase price we pay to our manufacturers, net of the costs of the wheels and any other skating apparatus. Because the royalty is calculated in
this manner, we cannot quantify the future royalty payments. In 2003, 2004 and 2005 and the nine months ended September 30, 2005 and 2006,
we expensed $188,000, $143,000, $179,000, $120,000 and $217,000, respectively, in royalties. Our pay ment obligation for these royalties will
terminate on December 31, 2008.

                                                                         35
Seasonality and Quarterl y Results

    The fo llo wing table sets forth certain financial information for the periods indicated. The data is prepared on the same basis as the audited
consolidated financial statements. All recurring, necessary adjustments are reflected in the data below.

                                                                                                   Three months ended

                                     3/31/04          6/30/04      9/30/04        12/31/04       3/31/05        6/30/05       9/30/05      12/31/05       3/31/06      6/30/06       9/30/06

                                                                                                       (in thousands)


Consolidated Statements of
Operations Data:
Net sales                        $       4,354 $         5,871 $       4,731 $         6,354 $        5,432 $     10,656 $      12,964 $       14,898 $     13,669 $     30,927 $      72,511
Cost of sales                            3,007           4,004         3,111           4,407          3,472        7,003         8,668          9,808        8,749       20,237        47,584

Gross profit                             1,347           1,867         1,620           1,947          1,960         3,653        4,296          5,090        4,920       10,690        24,927
Selling, general and
administrative expenses
    Sales and marketing                   803              796          764             828            624          1,082        1,556          1,986        1,381         2,954        4,639
    General and administrative            531              588          510             739            575            855          703            853          931         1,220        1,883

       Total selling, general
       and administrative
       expenses                          1,334           1,384         1,274           1,567          1,199         1,937        2,259          2,839        2,312         4,174        6,522

Income from operations                         13          483          346             380            761          1,716        2,037          2,251        2,608         6,516       18,405
Other expens e (income)                        (1 )          1            3              (2 )           (4 )            2           78             55            1            77          324

Income before income taxes                     14          482          343             382            765          1,714        1,959          2,196        2,607         6,439       18,081
Income taxes                                    5          165          117             131            264            591          675            757          912         2,254        6,294

Net income                       $              9 $        317 $        226 $           251 $          501 $        1,123 $      1,284 $        1,439 $      1,695 $       4,185 $     11,787


Other Data:
Unit sales of wheeled
footwear:
    Pairs, domestic                            65          105               93         160            127           253           347           418           375          878         2,004
    Pairs, international                       88           86               60          40             40            87            73            66            59          132           410

       Total                               153             191           153             200            167          340           420            484          434        1,010         2,414
Net sales, domestic              $       2,107 $         3,547 $       3,010 $         5,171 $        4,336       $8,391 $      10,796 $       13,050 $     12,034 $     27,201 $      61,387
Net sales, international                 2,247           2,324         1,721           1,183          1,096        2,265         2,168          1,848        1,635        3,726        11,124
Depreciation and amortization               93              95            90             176             92           94            90            120           93           95           102


      Similar to other vendors of footwear products, sales of our products are subject to seasonality. There are th ree major buyin g seasons in
footwear: spring/summer, back-to-school and holiday. Ship ments for spring/summer take place during the first quarter and early weeks of the
second quarter, shipments for back-to-school generally occur over the summer and shipments for the holiday season begin in October and
fin ish in early December. Historically, we have experienced greater revenues in the second half of the year than those in the first half due to a
concentration of shopping around the back-to-school and holiday seasons. Our first quarter has typically been our lowest sales quarter.
Although weather is a factor in our seasonality, it is difficult to measure its impact. Results for any one quarter are not n ecessarily indicat ive of
results to be expected for any other quarter or for any year.

Internal Controls

     Prior to this offering, we plan to co mmence a program to co mprehensively document and analyze our system of internal controls sufficient
to satisfy our reporting obligations as a public company. We plan to continue this program as well as prepare for our first management report
on internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002, for the year ending December 31,
2007. We expect to contract with an independent public accounting firm to assist us with these efforts. We believe this added expertise and
experience will aug ment our internal resources. We believe adequate resources and expertise, both internal and external, will be committed to
meet the Sa rbanes-Oxley Act of 2002 Section 404 requirements.

                                                                                                 36
Backlog

     We typically receive most of our orders three to four months prior to the date the products are shipped to customers. Generally, these
orders are not subject to cancellation prior to the date of shipment. At September 30, 2006, our backlog was appro ximately $69.0 million,
compared to appro ximately $13.0 million at September 30, 2005. At December 31, 2005, our backlog was appro ximately $10.7 million,
compared to appro ximately $3.6 million at December 31, 2004. Fo r a variety of reasons, including the timing of release dates for our product
offerings, shipments, order deadlines and receipt of orders, backlog may not be a reliable measure of future sales and may not be comparab le
fro m one period to another.

Vulnerability Due to Customer Concentration

     In 2003, A G Corp Japan, our d istributor in Japan, accounted for 19.9% of our net sales, Boss Technic al Services, our distributor in South
Korea at that time, accounted for 27.5% of our net sales and Journeys represented 12.0% of our net sales. In 2004, A G Corp Ja pan accounted
for 19.4% of our net sales and Big 5 Sporting Goods represented 15.8% o f our net sales. In 2005, Big 5 Sporting Goods, Journeys and The
Sports Authority represented 12.3%, 11.3% and 10.6% of our net sales, respectively. For the nine months ended September 30, 2006, Journeys
and The Sports Authority accounted for 11.6% and 11.0%, resp ectively, of our net sales. No other retail customer or independent distributor
accounted for 10% or more of our net sales in any of these periods. We anticipate that our net sales may remain concentrated for the
foreseeable future. If any of our significant retail customers or independent distributors decreases its purchases of our products or stops
purchasing our products our net sales and results of operations could be adversely affected.

Critical Accounti ng Policies and Esti mates

      Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States, which require us to make estimates and judgments that affect the reported amounts of assets, liabilities, net sales a nd expenses and
related disclosure at the date of our financial statements. We continually evaluate our estimates and judgments, including th ose related to net
sales, intangible assets and stock compensation. We base our estimates and judgments on historical experience a nd on various other factors that
we believe to be reasonable under the circumstances, the results of which form the basis of our judgments about the carrying values of assets
and liabilities that are not readily apparent fro m other sources. Actual results or changes in the estimates or other judg ments of matters
inherently uncertain that are included within these accounting policies could result in a significant change to the information presented in the
consolidated financial statements. We believe that the following discussion addresses the critical accounting policies that are necessary to
understand and evaluate our reported consolidated financial results.

     Revenue Recognition. Revenues are recognized when merchandise is shipped and the customer takes title and assumes risk of loss,
collection of relevant receivables are probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Tit le
passes upon shipment or upon receipt by the customer depending on the agreement with the customer. Revenues are stated net of estimated
returns and other allowances, including permitted returns of damaged or defective merchandise and markdowns. Other allowan ces include
funds for promotional and market ing activities and a volu me-based incentive program.

     Reserve for Uncollectible Accounts Receivable. We continually make estimates relating to the collectability of our acco unts receivable
and maintain a reserve for estimated losses resulting fro m the failure of our customers to make required pay ments. In determining the amount
of the reserve, we consider our historical level of credit losses and make judgments about the creditworthiness of significan t customers.
Because we cannot predict future changes in the financial stability of our

                                                                        37
customers, actual future losses from uncollectib le accounts may d iffer fro m our estimates. If the financial condition of our customers were to
deteriorate, resulting in their inability to make pay ments, a larger reserve might be required. If we determined that a smaller o r larger reserve
was appropriate, we would record a benefit or charge to general and administrative expense in th e period in wh ich we made such a
determination.

    Inventory Write-Downs. We also continually make estimates relating to the net realizable value of our inventories, based on our
assumptions about future demand and market conditions. If we estimat e that the net realizab le value of our inventory is less than the cost of the
inventory recorded on our books, we record a write-down equal to this difference. This write-down is recorded as a charge to cost of sales.

      Long-Lived Assets.     Long-lived assets, including furniture and fixtures, office equip ment, p lant equipment, leasehold improvements,
computer hardware and software and certain intangible assets, are recorded at cost and this cost is depreciated over the asset's estimated useful
life. We continually evaluate whether events and circu mstances have occurred that indicate the remaining estimated useful life of long-lived
assets and certain intangible assets may warrant revision or that the remain ing balance may not be recoverable. These fa ctors may include a
significant deterioration of operating results, changes in business plans or changes in anticipated cash flow. When factors indicate that a
long-lived asset or certain intangible property should be evaluated for possible impairment, we rev iew the asset or property to assess
recoverability fro m future operations using the undiscounted pre-tax future net cash flows expected to be generated by that asset or property.
Impairments are recognized in earn ings to the extent that the carrying value exceeds fair value.

     Income Tax. We estimate what our effective tax rate will be for the fu ll year and record a quarterly inco me tax expense in accordance
with the anticipated effect ive annual tax rate. As the year progresses, we continually refine our estimate based upon actual events and income
before inco me taxes by jurisdiction during the year. This process may result in a change to our expected effective tax rate f or the year. When
this occurs, we adjust the income tax expense during the quarter in which the change in estimate occurs so that the year-to-date expense equals
the expected annual rate. Texas recently passed legislation overhauling its franchise tax law. As a result, effective January 1, 2007, we expect
our effective tax rate to increase by up to 0.5%.

     Stock -Based Compensation. We will recognize addit ional stock-based compensation expense in 2006 based on the fair value of any
additional stock-based awards made in 2006. The amount of compensation expense recognized w ill depend upon numerous factors and
estimates, including the number and vesting period of option grants, the publicly t raded price of our co mmon stock, the estimat ed volatility of
our common stock price, estimates of the timing and volume of exercises and forfeitures of the options and fluctuations in future interest and
income tax rates.

      In connection with options granted on June 23, 2006 under our 2006 Stock Incentive Plan, our board of directors determin ed the fair value
of our co mmon stock and engaged an independent third party appraiser to perform a contemporaneous valuation of our commo n stock as of
such date. Utilizing the methodologies and procedures set forth in the AICPA Pract ice Aid for the Valuation of Privately -Held Co mpany
Equity Securities Issued as Co mpensation, the independent appraiser determined the value of our co mmon stock based upon a number o f
significant factors, assumptions and methodologies. These factors included recent sales and negotiations for sales of our com mon stock, the
timing of such transactions, the discounted value of our estimated future cash flows, valuations of comparable co mpanies and transactions and
our expected value as a public company. The independent appraiser correlated the value indications derived fro m the various methodologies to
a single value by "weighting" each value indication, applied a lack of marketability discount and further decreased the value per share by the
dilution to the value that would be realized by one of our stockholders by virtue of the June 23, 2006 option issuances. Between June 23, 2006
and the date of the offering

                                                                         38
contemplated by this prospectus, several events have occurred that we believe have contributed to the increase in the fair value of our co mmon
stock. These events include, among others, our increased earnings, ability to exceed internally projected sales targets after July 2006 and the
filing of the registration statement relating to this prospectus which increases the likelihood of a trading market fo r our co mmon stock.

     Based upon an assumed initial public offering price of $17.00, the mid -point of the price range set forth on the cover page of this
prospectus, the intrinsic value of the options outstanding at September 30, 2006 was $26.5 million, of which $1.7 million related to vested
options and $24.8 million related to unvested options. Although it is reasonable to expect that the completion of this offering will add value to
the shares because they will have increased liquidity and marketability, the amount of additional value can be measured with neither precision
nor certainty.

Quantitati ve and Qualitati ve Disclosures About Market Risk

      We have a $25.0 million revolving cred it facility with JPMorgan Chase Bank, N.A. that will expire on June 30, 2007. The maximu m
amount availab le under this facility will decrease to $10.0 million on January 1, 2007. As of December 31, 2005, there were no outstanding
borrowings under this facility, and as of October 31, 2006, we had borrowed $22.0 million. To the extent we borro w under our revolving credit
facility, which bears interest at floating rates based either on the prime rate quoted by JPMorgan Chase Bank, N.A. or an adjusted LIBOR rate,
we are exposed to market risk related to changes in interest rates. At October 31, 2006, the applicab le interest rate on borrowings outstanding
under our revolving credit facility was 8.0% per annum. If applicable interest rates were to increase by 100 basis points, for every $1.0 million
outstanding under our revolving credit facility, our income before income taxes would be reduced by approximately $10,000 per year. We are
not party to any derivative financial instruments.

      We pay our independent sourcing agent and our independent distributors pay us in U.S. dollars. Because our independent manufa cturers
buy materials and pay for manufacturing expenses in their local currencies, to the extent the U.S. dollar weakens compared to such local
currencies, our operating results may be adversely affected. Conversely, to the extent the U.S. dollar strengthens compared t o lo cal currencies
in foreign markets where our products are sold, our products may be more e xpensive.

     Recent Accounting Pronouncements

     In December 2004, the FASB issued SFAS No . 153, Exchange of Nonmonetary Assets — an amendment of APB Opinion No. 29 , or
SFAS 153 . SFAS 153 eliminates the exception fro m fair value measurement for non monetary exchanges of similar productive assets in
paragraph 21(b ) of APB Op inion No. 29, Accounting for Nonmonetary Transactions , and replaces it with an exception for exchanges that do
not have commercial substance. SFAS 153 is effect ive for non monetary asset exchanges occurring in fiscal years beginning after June 15,
2005. Our adoption of SFAS 153 d id not have an impact on our financial position, cash flow or results of operations.

     In November 2004, the FASB issued SFAS No. 151, Inventory Costs — an amendment of Accounting Research Bulletin (ARB) No. 43,
Chapter 4 , or SFAS No. 151. SFAS No. 151 amends ARB No. 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight,
handling costs and wasted materials (spoilage) should be recognized as current period charges. It also requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for
fiscal years beginning after June 15, 2005. Our adoption of SFAS 151 d id not have an impact on our financial position, results of operations or
cash flows.

     In December 2004, the FASB issued a revision to SFAS No. 123, Accounting for Stock -Based Compensation , which requires the
calculation of the fair value of stock-based compensation, estimat ion

                                                                        39
of future forfeitures and income taxes and recognition of the fair value as a non-cash expense over the vesting period of the underlying
instruments. SFAS No. 123(R), Share-Based Payment . We will incur appro ximately $343,000, net of tax, in non-cash stock-based
compensation expense during fiscal 2006 based on the number of stock options outstanding as of September 30, 2006.

      In March 2005, the FASB issued Statement No. 47, Accounting for Conditional Asset Retirement Obligations , or FIN 47. FIN 47 clarifies
that the term conditional asset retirement obligation as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations , refers
to a legal obligation to perform an asset retirement activ ity in which the timing and/or method of settlement are conditioned on a future event
that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though
uncertainty exists about the timing and/or method of settlement. FIN 47 is effective no later than the end of fiscal years ending after
December 15, 2005 (December 31, 2005, for calendar-year enterprises). Ou r adoption of FIN 47 did not have an impact on our financial
position, cash flow o r results of operations.

     In May 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections: a replacement of APB Opinion No. 20
and FASB Statement No. 3 , or SFAS 154. SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting
principles. Th is statement applies to all voluntary changes in accounting principles and also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include specific t ransition provisions. This statement requires
retrospective application to prior periods' financial statements of changes in accounting principles, unless it is imp racticable to do so. Th e
requirements for SFAS 154 are effective fo r accounting changes and corrections of errors made in fiscal years beginning after Dec ember 15,
2005. Our adoption of SFAS 154 d id not have an impact on our financial position, cash flow or results of operations.

     In February 2006, the FASB issued Statement No. 155, Accounting for Certain Hybrid Financial Instruments , or SFAS 155 , an
amend ment of FASB Statements No. 133 and 140. SFAS 155 establishes, among other things, the accounting for certain derivatives embedded
in other financial instruments. This comb ination is referred to as a hybrid financial instru ment. SFAS 155 is effective for all fin ancial
instruments acquired, issued or subject to a remeasurement (new basis) event occurring after the beginning of an entity's fir st fiscal year that
begins after September 15, 2006. We do not believe our adoption of SFAS 155 will have a significant impact on our financial position, cash
flow or results of operations.

     In March 2006, the FASB issued Statement No. 156, Accounting for Servicing of Financial Assets , or SFAS 156, an amen dment of FASB
Statements No. 140. SFAS 156 requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a
financial asset by entering into a servicing contract in certain situations. SFAS 156 also requires all separately recognized servicing assets and
servicing liabilit ies to be initially measured at fair value, if practicab le, and to choose the subsequent measurement method. S FAS 156 is
effective fo r us as of January 1, 2007. Early adoption is permitted as of the beginning of our fiscal year provided we h ave not yet issued
financial statements, including interim financial statements, for any period of that fiscal year. We do not believe our adopt ion of SFAS 156 will
have a significant impact on our financial position, cash flow or results of operations.

     In Ju ly 2006, the FASB issued Statement No. 48, Accounting for Uncertainty in Income Taxes , or FIN 48. FIN 48 requires the use of a
two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclo sures regarding
uncertainties in inco me tax positions. We are required to adopt FIN 48 effective January 1, 2007. The cu mu lative effect of init ially adopting
FIN 48 will be recorded as an adjustment to opening retained earnings in the year of adoption and will be presented separately. Only tax
positions that meet the more likely than not recognition threshold at the effective date may be recognized upon adoption of F IN 48. We are

                                                                         40
currently evaluating the impact FIN 48 will have on our future results of operations and financial position.

      In September 2006, the FASB issued Statement No. 157, Fair Value Measurements , or SFAS No. 157. SFAS 157 clarifies the principle
that fair value should be based on the assumptions that market part icipants would use when pricing an asset or liability. Add itio nally, it
establishes a fair value hierarchy that priorit izes the information used to develop those assumptions. SFAS 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007. We have not yet determined the impact that the imp lementation of
SFAS 157 will have on our results of operations or financial condition.

      In September 2006, the FASB issued Statement No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) , or SFAS No. 158. SFAS 158 requires emp loyers to recognize the
underfunded or overfunded status of a defined benefit postretirement plan as an asset or liability in the employer's statemen t of financial
position and to recognize changes in the funded status in the year in which the changes occur through accumulated other comprehensive
income. Additionally, SFAS 158 requires emp loyers to measure the funded status of a plan as of the date of the employer's year-end statement
of financial position. The new reporting requirements and related new footnote disclosure rule s of SFA S 158 are effective for fiscal years
ending after December 15, 2006. The new measurement date requirement applies for fiscal years ending after December 15, 2008. We are
currently evaluating the impact that the implementation of SFAS 158 will have on our financial statements.

      In September 2006, the SEC issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year M isstatements when
Quantifying Misstatements in Current Year Financial Statements," or SAB 108. SAB 108 addresses quantifiying the financial statement effects
of misstatements, specifically, how the effects of prior year uncorrected errors must be considered in quantifying misstateme nts in the current
year financial statements. SAB 108 does not amend or change the SEC Staff's previous positions in Staff Accounting Bulletin No. 99,
"Materiality," regard ing qualitative considerations in assessing the materiality of misstatements. SAB 108 is effective for fiscal years beginning
after November 15, 2006. We do not expect the adoption of SAB 108 to have a material impact on our consolidated financial p osition, results
of operations or cash flows.

                                                                        41
                                                                    B USINESS

Introduction

     We are a designer, marketer and distributor of innovative, action sports -inspired products under the HEELYS brand targeted to the youth
market. Our primary product, HEELYS -wheeled footwear, is patented, dual-purpose footwear that incorporates a stealth, remo vable wheel in
the heel. HEELYS-wheeled footwear allows the user to seamlessly transition from walking or running to skating by shifting weight to the heel.
Users can transform HEELYS-wheeled footwear into street footwear by removing the wheel. Our d istinctive product offering has driven our
growth, and we believe that our HEELYS brand is becoming synonymous with an increasingly popula r lifestyle activity. We believe that the
growing exposure of our HEELYS brand will allo w us to selectively introduce additional product categories in the future by ta king advantage
of our expert ise in product development and sourcing, strong retail relationships and knowledge of our target consumer.

     We believe that HEELYS-wheeled footwear provides users with a unique co mbination of fun and style that differentiates it fro m other
footwear and wheeled sports products. Our HEELYS b rand message emphasizes indiv iduality and independence and is represented by our
market ing slogan, "Freedom is a wheel in your sole." We believe that our HEELYS brand has developed broad appeal among boys and girls
between six and fourteen years of age, particularly those who associate themselves with the action sports youth lifestyle. We emp loy a
grass-roots market ing program designed to promote our HEELYS brand image, stimulate demand for our p roducts, maintain a connection with
our target consumer and capture consumer feedback on our products.

     We currently offer HEELYS-wheeled footwear in a wide variety of styles and colors at domestic retail price points ranging fro m $59.99 to
$99.99 depending upon performance features, co mfort and materials. HEELYS -wheeled footwear is protected by numerous patents and
trademarks, enabling us to capture the emerging demand for our unique offering in the United States and other countries where we can enforce
our patents. In 2005, appro ximately 95% of our net sales was derived fro m the sale of our HEELYS-wheeled footwear. We also sell branded
accessories, such as replacement wheels, helmets and other protective gear.

     We sell our products through distribution channels that merchandise our products in a manner that we believe enhances and protects our
HEELYS b rand image. Do mestically, our products can be purchased fro m full-line sporting goods retailers such as The Sports Authority,
Modell's and Dick's Sport ing Goods, specialty apparel and footwear retailers, such as Journeys and Bob's Stores, and select department stores,
such as Nordstrom and Mervyn's. Our products can also be purchased fro m select online retailers such as Zappos.com. In 2005, 83.2% of our
net sales were derived fro m retailers in the United States. Internationally, our products are sold to independent distributors with exclusive rights
to specified international territories.

    We were founded in May 2000 by Roger R. Adams, the inventor of HEELYS-wheeled footwear. M ichael G. Staffaroni joined our team in
August 2000 and became our Chief Executive Officer in January 2001. Mr. Staffaroni brings significant management experience in both the
branded athletic footwear and action sports industries. Since our inception, our management team has carefully cult ivated the HEELYS brand
name, enhanced our product offering and developed our infrastructure to meet the rapid ly increasing demand for our products.

Target Market

     The growth and longstanding popularity of skateboarding, inline skating, ro ller skating and scooter riding in the Un ited St ates reflect
consumers' interest in wheeled sports activities. For examp le, skateboarding and inline skating have remained a part of youth culture for over
40 and 25 years, respectively. Our HEELYS-wheeled footwear, which we believe has broad patent protection relative to

                                                                         42
other wheeled sports products, appeals to many of these same consumers. While the market fo r HEELYS-wheeled footwear has grown
significantly since our first product was introduced in 2000, we believe this market has substantial growth potential.

    Our products appeal to a broad range of young, active consumers around the world who enjoy wheeled sports activities. Our primary
market is six to fourteen year old boys and girls, an age group in the Un ited States that the U.S. Census Bureau estimated to be 36.4 million
people in 2005 and projected to grow to 38.2 million people by 2015. Based on our sales of more than 3.2 million pairs of HEELYS-wheeled
footwear in the United States in the nine months ended September 30, 2006, we believe that our target market offers significant growth
potential fo r both HEELYS-wheeled footwear and future product introductions. In addition, we believe we benefit fro m greater repeat
purchases by our consumers relat ive to other wheeled sports products, driven by the natural replacement cycle of children's footwear and the
new styles that we offer each season.

     We believe that our products have become more popular in recent years due to the trend among young people away fro m t raditional team
sports and toward individual, action sports. For examp le, SGMA International, a sporting goods industry trade group, estimate d that fro m 1998
to 2005, U.S. part icipation in basketball, baseball and soccer declined 24.6%, 16.7% and 6.4%, respectively, while U.S. particip ation in
snowboarding, skateboarding and surfing increased 33.7%, 58.3% and 90.5%, respectively. We believe events such as the X Games, the
inclusion of snowboarding medal events in the Winter Oly mpics and the national recognition of leading boardsport athletes have broadened
general awareness and increased the popularity of the action sports youth lifestyle. The trend towa rds individual, action sports has influenced
the styles and performance features of our products and our market ing strategies.

Business Strengths

    We attribute our success to the following business strengths:

     •
            Strong Brand Recognition. We believe that our brand awareness is a significant competit ive strength and has positioned us for
            continued growth. We have positioned the HEELYS brand to represent a fun, youthful and active image and we believe it now
            defines an emerg ing lifestyle activity with a following among consumers in our target market. For the quarter ended September 30,
            2006, HEELYS-wheeled footwear had a 17.0% market share in retail sales dollars for skateboard -related footwear brands, behind
            only Vans, according to data collected by NPD, a retail and apparel industry research group.

     •
            Appealing, High Quality Products. We strive to provide high quality, stylish products. We carefully select our independent
            manufacturers and diligently monitor their manufacturing process to ensure the quality of their finished goods. To stimulate
            demand for our products and encourage repeat purchases by consumers, we endeavor to consistently offer a line of wheeled
            footwear that combines style, comfort and high quality co mponents including A BEC-rated bearings, specially formulated
            polyurethane wheels and abrasion-resistant outsoles and upper materials. We have generally introduced more than 20 standard
            styles each year in an attempt to respond to changing consumer tastes and preferences.

     •
            Focus on Innovation with Intellectual Property Protection. Our innovative HEELYS-wheeled footwear is highly differentiated
            fro m other wheeled sports products and athletic footwear. We believe that our patents and pending patent applications enable us to
            maintain this differentiat ion. We own more than 77 issued patents and pending patent applications in more than 25 countries, 49 of
            which are related to our HEELYS-wheeled footwear. We also have more than 75 registered trademarks and pending trademark
            applications in more than 30 countries. We believe that our experience introducing HEELYS-wheeled footwear to the market

                                                                       43
         and our growing brand awareness will allow us to successfully develop and introduce additional products incorporating innovative
         designs and technologies that appeal to our target consumers.

    •
           In-Depth Understanding of Our Target Market. We emp loy a grass-roots marketing model that enables us to regularly interact
           with and maintain an in-depth understanding of our target market. Our event marketing managers, or EMMs, coordinate over 3,000
           in-store clin ics and demonstrations annually, allowing us to communicate our brand message in an interactive, fun environ ment. In
           addition, our EMMs use online marketing techniques such as hosting message boards and contributing to skate -oriented chat
           rooms. We also sponsor "team riders" to showcase HEELYS -wheeled footwear in h igh-traffic, public areas. Through these
           mu lti-faceted interactions with our target consumers, we continually refine our understanding of their evolving preferences. We
           intend to use this insight to develop new HEELYS -wheeled footwear models, strengthen and extend our HEELYS brand and offer
           additional product categories.

    •
           Compelling Value Proposition for Retail Customers. We believe that our differentiated product offering and brand name
           represent a compelling value proposition for our retail customers. Our products have historically enabled our retail customer s to
           achieve high sales volumes at or near our suggested retail p rices, rap id inventory turns and attractive marg ins. These results have
           allo wed us to develop strong relationships with our retail customers, expand our product offering with existing retail customers and
           add new retail customers.

    •
           Flexible and Efficient Sourcing Model. By outsourcing manufacturing, we eliminate the need to purchase raw materials and
           limit the amounts we are required to spend on working capital, capital expenditures and overhead. This enables us to focus ou r
           resources on developing new products and brand-enhancing activities. We do not have any long-term manufacturing contracts,
           choosing instead to retain the flexibility to change our manufacturing sources if necessary. We have developed systems and
           procedures that enable us to actively monitor product quality, control product costs and facilitate timely p roduct delivery.

    •
           Senior Management Team with Deep Industry Experience.             Our senior management team, which has overseen our company
           since its inception, has been instrumental in developing our HEELYS brand, establishing strong relationships with retail customers
           and international distributors and directing our growth. Our Ch ief Executive Officer has approximately 30 years of experience in
           the branded footwear and action sports industries and has held senior level positions at the Rollerb lade division of Benetton S.p.A.
           and L.A. Gear. Our Sen ior Vice President — Global Sales has over 25 years of sales and marketing experience in the athletic
           apparel and footwear industries and has held executive level and sales positions at L.A. Gear, Kaepa, Nike, Stride-Rite and Wilson
           Sporting Goods.

Growth Strategy

    We plan to continue growing our net sales and earnings through the following strategies:

    •
           Increase Awareness and Popularity of our HEELYS Brand. We plan to increase the awareness and popularity of our
           HEELYS b rand, wh ich we believe will fuel demand for our products. By conveying our brand message through word -of-mouth,
           grass-roots and traditional marketing, we seek to strengthen our understanding of and broaden our target market. We believe that
           enhanced brand awareness will allow us to expand sales of our current products and successfully offer new product categories.

    •
           Broaden Our Relationships with Existing Retail Customers. Many of our retail customers do not initially sell our products in
           all of their stores, choosing to evaluate consumer acceptance of our products in a limited number of stores. As the demand fo r o ur
           products continues to grow and our relationships with our retail customers develop, we believe that certain of our retail

                                                                      44
           customers will continue to increase the number of stores in which our products are sold and expand the selection of our produ cts that
           they offer. Based on the success that these retailers have had selling our products, we believe that we will have opportun ities to
           expand our sales with existing retail customers in the future. In addit ion, we encourage our independent distributors to purs ue similar
           growth strategies with their customers.

     •
             Expand Our Customer Base. We intend to increase our domestic distribution by adding new retail customers. In particu lar, we
             believe that there are a nu mber of regions in the Un ited States where we are just beginning to realize the sales potential fo r our
             products, and we intend to increase our distribution in these regions. We believe that international distribution also represents a
             significant growth opportunity for us. We intend to take advantage of this opportunity by encouraging our existing distributo rs to
             expand their market presence and by establishing relationships with distributors in new international markets.

     •
             Develop and Selectively Acquire New Products and Brands.         Our v ision is to become an action-sports lifestyle company,
             consistently bringing innovative branded products to the global market. We intend to leverage our HEELYS brand and our
             reputation for innovation, quality, performance and comfo rt by expanding our apparel and accessories product offerings, enter ing
             new product categories and increasing the breadth of HEELYS branded products sold by our existing retail customers. In addit ion
             to continually updating our HEELYS -wheeled footwear offering with new colo rs, materials and textures to keep our style
             assortment fresh and developing related products and technologies, we believe opportunities exist to acquire comp lementary
             brands and products that appeal to our target market.

Products

     Our primary product is HEELYS-wheeled footwear, patented, dual-purpose footwear that incorporates a stealth, removable wheel in the
heel. HEELYS-wheeled footwear allo ws the user to seamlessly transition fro m walking or running to skating by shifting weight to the heel.
Users can remove the wheel to transform HEELYS -wheeled footwear into street footwear. HEELYS -wheeled footwear is offered in over 20
styles, incorporating various comfort and perfo rmance features and colors at five retail price points. We offer a new line of HEELYS-wheeled
footwear twice each year fo r the spring/summer selling season and the back-to-school and holiday selling seasons.

                                                                         45
     HEELYS-wheeled footwear can be classified into the follo wing three categories:

                                   Single-Wheel. Our single -wheel HEELYS-wheeled footwear have one
                                   detachable wheel and are available in various sizes for men, wo men and
                                   children. We offer wheels of various performance capabilities in o rder to
                                   appeal to beginners and advanced users. Single-wheel HEELYS-wheeled
                                   footwear represented approximately 80.4% of our net sales in 2005.
                                   Suggested domestic retail p rices for our single-wheel HEELYS-wheeled
                                   footwear generally range fro m $59.99 to $99.99.

                                   Two-Wheel. Our two -wheel HEELYS-wheeled footwear include two
                                   detachable wheels, are designed for novice users and are offered only in
                                   children's sizes. Th is category represented approximately 9.9% of our net
                                   sales in 2005. The suggested domestic retail price for our two-wheel
                                   HEELYS-wheeled footwear is generally $59.99.




                                   Grind-and-Roll. Grind-and-roll HEELYS-wheeled footwear represent
                                   our 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 our 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 our net sales in 2005. The
                                   suggested domestic retail price for our grind-and-roll HEELYS-wheeled
                                   footwear is generally $89.99.

     In addit ion to offering our standard styles, we collaborate with certain of our 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 and allo ws us to broaden our product range. These exclusive products are made to order and
shipped directly to our retail customers, thereby mitigating our inventory risk. In 2005, special make -up program products represented
approximately 17.9% of our net sales.

     In the past, we sold less expensive wheeled footwear under the "Cru z" brand name exclusively to certain of our independent distributors.
The Cru z brand rep resented approximately 12.3%, 17.7% and 3.3% of our net sales in 2003, 2004 and 2005, respectively. Althoug h we have
not sold any Cruz branded footwear since 2005, we may choose t o re-launch this product line in the future.

      We also offer 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. We plan to take advantage of growing consumer awareness of our brand name and our strong
retail relationships to expand our HEELYS b randed accessories offerings. In response to demand fro m certain o f our retail cus tomers, we began
to offer HEELYS b randed apparel and additional accessories in the third quarter of 2006.

Product Design and Devel opment

     We continually update and refine our product offerings in response to evolving consumer preferences. For example, in 2002 we
introduced the grind plate for our grind-and-roll HEELYS-wheeled footwear and the two-wheel HEELYS-wheeled footwear, and in 2003 we
introduced specific

                                                                        46
styles for girls and the "sole saver" heel plug, which provides a finished look to the footwear by covering the wheel cav ity when the wheel is
removed. We believe that introducing new products, performance features and designs allows us to maintain premiu m price p oints, encourages
repeat purchases and creates incremental consumer demand for our products. We monitor changing consumer trends and identify n ew product
opportunities through close, interactive contact with our target consumers, frequent dialogue between our EMMs and our retail customers and
input fro m our sponsored "team riders" who are paid to use and promote our products.

    Our product development efforts include both incremental improvements to our existing products and entirely new technologies and
product categories. Incremental improvements to our existing products include introducing new styles, improving the materials used in our
wheels and designing lighter shoes with greater durability and enhanced comfort and performance features. Innovative technologies for our
HEELYS-wheeled footwear include a patent pending wheel suspension system featuring shock-absorbing springs in the wheel housing,
providing a more co mfortable walking, running and skating experience, that we introduced in July 2006.

      Our product design and development process is rigorous and highly collaborative, using input from our sales staff, product de velopment
professionals, retail customers, EMMs and consumers. We focus not only on the performance of our products, but also on production cost and
efficiency. We outsource the aesthetic, non-technical aspects of our product design, such as color and style, to independent product designers,
which allo ws us to concentrate on developing innovative performance technologies.

Sales

    We carefu lly control the distribution of our p roducts to protect and enhance our HEELYS brand and maintain our ab ility t o off er our
products at premiu m price points. We sell our products domestically direct ly to retail customers, while internatio nally we sell through
independent distributors. Currently, we do not sell our products to mass merchants or directly to consumers.

Domestic Sales

      As of September 30, 2006, our customer base of retail customers in the United States included over 800 accounts that operated more than
7,400 stores. Based on communications with those customers, we believe that as of September 30, 2006, our HEELYS-wheeled footwear was
offered for sale in more than 5,000 of those stores. These retail customers include a va riety of full-line sporting goods retailers, specialty
apparel and footwear retailers and select department stores. Our products are also sold through select online retailers. We a ttempt to choose
retail customers who appeal to our target market and who are able and willing to merchandise our products in a manner that we believe is
consistent with our brand message and positioning. Big 5 Sport ing Goods, Dick's Sporting Goods, Modell's, The Sports Authorit y, Journeys,
Bob's Stores, Nordstrom, Mervyn's and Zappos.com are examples of our do mestic retail customers. In 2003, 2004 and 2005 and the nine -month
period ended September 30, 2006, our do mestic net sales were $9.5 million, $13.8 million, $36.6 million and $100.6 million, respectively,
representing 42.6%, 64.9%, 83.2% and 85.9% of our total net sales, respectively.

     We believe that there are numerous opportunities to expand our domestic d istribution. We intend to increase our domestic dist ribution by
expanding the number of stores in which HEELYS -wheeled footwear is sold by existing retail customers and by adding new retail customers.
Due to our limited funding at our inception, we focused our marketing resources on specific regions of the country that we be lieved embraced
wheeled sports and innovative products such as HEELYS-wheeled footwear. As the exposure of our products and brand name increased and
our financial position imp roved, we expanded our focus to other regions of the country, where we believe we are just beginnin g to realize the
sales potential for our products.

                                                                       47
     We are co mmitted to providing the highest levels of service to our retail customers. We maintain a national sales force of 16 independent
sales representatives, each of whom is assigned an exclusive territory and is co mpensated on a commission basis, and who together are
responsible for substantially all o f our do mestic sales. We believe that our product line represents a significant percentage of the sales made by
these independent sales representatives. Our Senior Vice President — Global Sales, who oversees our independent sales representatives, and
our independent sales representatives are supported by our eight-person sales and customer service depart ment.

International Sales

      As of September 30, 2006, we offered our products internationally through more than 30 independent distributors, each of which has
exclusive rights to a designated territory. In 2005, our largest intern ational territories by net sales were Canada, Japan and Spain/Portugal. We
select our independent distributors based on their relationships with appropriate retailers, their ability to effectively rep resent the HEELYS
brand and their execution of our distribution strategy. In order to maintain a consistent brand image throughout the world, we p rovide
market ing, distribution and product training support to our independent distributors. Each distributor must meet minimu m sale s goals and is
responsible for funding its local market ing campaigns, maintain ing its own inventory and providing sufficient sales, distribution and customer
service infrastructure. In 2003, 2004 and 2005 and the nine-month period ended September 30, 2006, our international net sales were
$12.8 million, $7.5 million, $7.4 million and $16.5 million, respectively, representing 57.4%, 35.1%, 16.8% and 14.1% of our total net sales,
respectively. In 2003, Japan and South Korea accounted for 19.9% and 27.5% of our net sales, respectively, and in 2004, Japan accounted for
19.4% of our net sales. Since 2004, no country other than the United States has accounted for 10% or more of our net sales. W e believe that
international distribution represents a meaningful gro wth opportunity for us that we inten d to take advantage of by encouraging our existing
distributors to expand their market presence and by establishing relat ionships with distributors in new international markets .

Principal Customers

     In 2003, A G Corp Japan, our d istributor in Japan, accounted for 19.9% of our net sales, Boss Technical Services, our distribu tor in South
Korea at that time, accounted for 27.5% of our net sales and Journeys represented 12.0% of our net sales. In 2004, A G Corp Japan accounted
for 19.4% of our net sales and Big 5 Sporting Goods represented 15.8% o f our net sales. In 2005, Big 5 Sporting Goods, Journe ys and The
Sports Authority represented 12.3%, 11.3% and 10.6% of our net sales, respectively. For the nine mo nths ended September 30, 2006, Journeys
and The Sports Authority accounted for 11.6% and 11.0%, respectively, of our net sales. No other retail customer or independent distributor
accounted for 10% or more of our net sales in any of these periods.

Marketing

     Our market ing strategy is to position our products and the HEELYS brand to represent a lifestyle that includes excitement, in dividuality
and the unique culture of action sports. To promote awareness of our HEELYS brand, we utilize a mu lti -faceted strategy that includes event
market ing activities, television advertising, point-of-purchase, or POP, d isplays and product placement and public relations opportunities.
While we fund the cost of these activities domestically, our independent distributors are solely responsible for these costs in their markets.

Event Marketing Activities

     We employ a team o f six EMMs that enables us to reach consumers at the grass -roots level and help drive foot traffic to o ur retail
customers' locations. EMMs increase consumer awareness of our products by hosting in-store product clinics and demonstrations, teaching
store personnel how to use

                                                                         48
our products, employing "guerrilla" marketing methods such as arranging for our sponsored "team riders" to skate in high traffic public areas
and using online marketing techniques such as hosting message boards and contributing to skate -oriented chat rooms. EMMs educate retail
sales personnel on techniques to maximize sell through of our products and to promote product awareness and safety.

Television Advertising

     Telev ision advertisements have recently become a more important and highly effect ive tool for increasing awareness of our brand and
products among our target consumers because these advertisements allow us to show consumers HEELYS -wheeled footwear in action.
Advertisements air in selected regions of the United States during our primary selling seasons on cable channels such as ABC's Family
Channel, Nickelodeon and The Cartoon Network. As part of our regional television advertising strategy, we feature the name of a local retail
customer at the end of our telev ision advertisements. This tactic is intended to drive consumers to specific retail customers and allo ws us to
evaluate the effectiveness of our advertising. We ran our first national cable television advertising campaign in the fourth quarter of 2005. We
expect to continue utilizing both regional and national telev ision advertising campaigns in the future.

Point-of-Purchase Displays

     Certain of our retail customers have committed valuable floor space to POP d isplays we provide to enhance the presentation of our
products. Through the use of these POP displays, we are able to present the HEELYS brand message to consumers in a consistent manner and
increase our shelf space in our retail customers' locations. EMMs ensure our merchandise is effectively featured using POP displays.

Product Placement

     Because HEELYS-wheeled footwear is highly d ifferentiated fro m other wheeled sports products and other footwear, we o ften receive
requests from television shows, magazines and news organizations to review or highlight our products. While we have not paid for product
placement, our products have been featured in numerous television and print spots, including television networks such as CNN and CNBC,
television shows such as So You Think You Can Dance , Good Morning America , Radical Sabbatical , Livin' Large , CSI: Miami and Invent
This , magazines and newspapers such as Time , People , The Wall Street Journal , In Style , Newsweek and Sports Illustrated and the World
Book Encyclopedia and McGraw Hill school textbooks. HEELYS-wheeled footwear was used in the Miramax film Spy Kids 2 and has been
featured in pop artist Usher's music videos and television specials. We believe that product placement activities enable us t o build awareness of
our products and our HEELYS brand in a cost-effective manner.

Manufacturing and Sourcing

    We do not own or operate any manufacturing facilities and we purchase our products as finished goods from independent manufac turers.
We do not have any long-term manufacturing contracts, choosing instead to retain the flexibility to change our ma nufacturing sources if
necessary. We believe that alternate manufacturing sources are available at co mparab le costs to those we currently experience .

     We carefu lly mon itor all aspects of the production of our HEELYS -wheeled footwear, including the development and man ufacturing of
prototypes, initial p roduction runs and final product manufacturing. We perform an array of inspection procedures at various stages of the
production process, including examination and testing of raw materials and components prior to manufacture, work-in-process at various stages
of production and finished goods prior to shipment. Historically, our

                                                                       49
defective return rate has been less than 0.5% of our net sales. We also regularly conduct on -site visits to our manufacturers' facilit ies to confirm
they engage in ethical business practices.

    Boss Technical Services, our independent sourcing agent, helps us identify and develop relationships with manufacturers of our footwear
products and provides quality inspection, testing, logistics and product development and design assistance. We pay for these services on a
commission basis.

     Bu Kyung Industrial, which is owned by one of the owners of Boss Technical Services, has manufactured HEELYS -wheeled footwear
since our inception and until recently was responsible for manufacturing substantially all of our HEELYS -wheeled footwear. Due to rapid
growth in demand for our HEELYS-wheeled footwear, in 2006 we began using a number of other manufacturers to supply our products. We
expect Bu Kyung Industrial to continue to manufacture a significant portion of our footwear products, but we expect to develo p relat ionships
with additional manufacturers in order to secure additional capacity and mitigate the risk associated with using a limited nu mber of
manufacturers.

Order Ful fillment and Inventory Management

      Our products are inspected, bar coded and packaged by our independent manufacturers and transported by container ship typically to Long
Beach, California. Our independent manufacturers mark, label and pre-t icket our p roducts for certain of our larger retail customers. For
products sold in the United States, after the products clear U.S. customs, we use an independent freight forwarder and customs broker to ship
them via rail by container either to our distribution center located in Carrollton, Texas or d irectly to our retail customers . In 2005,
approximately 67.4% of our products in the United States were shipped directly to our retail customers. Upon receipt at our warehouse,
merchandise is inspected and recorded in our management info rmation systems and packaged for delivery. We maintain electronic data
interchange, or EDI, connections with many of our larger retail customers in order to automate order tracking and inventory management.
Substantially all of our products destined for international distribution are sent directly by our independent manufacturers to our independent
distributors.

     To allow us to better plan our production volume with our manufacturers, we offer our retail customers discount incentives to place
advance orders. We typically receive most of our orders, wh ich are not sub ject to cancellation, three to four months in advance of the scheduled
delivery dates. To manage our inventory risk, we regularly monitor availab le sell through data and seek input on anticipated consumer demand
fro m our retail customers.

Intellectual Property — Patents and Trademarks

     We have both domestic and international patent coverage for the technology incorporated in our HEELYS -wheeled footwear and own
more than 77 patents issued or pending in more than 25 countries. Our first patent was a me thod patent that was issued in June 2002 and
includes coverage for wheeled footwear, including HEELYS -wheeled footwear, with a wheel in the heel that allo ws the user to transition fro m
walking or running to skating by shifting weight to at least one wheel in the heel. We also own a variety of trademarks, with more than 75
registered and pending trademarks in mo re than 30 countries.

     We have vigorously enforced and expect to continue to vigorously enforce our intellectual property rights against infringers around the
world. Despite the challenges inherent in co mbating infringers in international jurisdictions that may not protect intellectu al p roperty rights to
the same extent as the United States, we have cooperated with the appropriate authorities an d they have conducted successful raids, customs
seizures and product confiscations of products that infringe our intellectual property rights in various countries. We have o btained agreements
fro m importers and retailers to cease and

                                                                          50
desist all infringing activ ities and, in some cases have been paid monetary compensation. We have also successfully asserted our patent rights
against manufacturers of infringing products.

     We have an exclusive worldwide license to use intellectual property related to the technology used in our grind -and-ro ll
HEELYS-wheeled footwear. We pay a royalty of 12.0% o f our cost on certain products, $1.00 per un it on certain styles of foot wear and 25% of
any sublicensed revenue of any non-footwear products, apparel and accessories or similar items that absent our license would infringe the
trademarks relating to such products under the license agreement. Provided we make the required min imu m payments of $10,000 per month
through January 2007, at December 31, 2008 t itle to this intellectual property automatically transfers to us without any further payment. The
licensor has the right to reacquire the intellectual property if we fail to make t he required royalty payments.

Empl oyees

      As of October 31, 2006, we emp loyed a total of 38 full-t ime emp loyees, 33 of whom work in our Carrollton, Texas headquarters. Our
full-time emp loyees include 11 in sales and customer service, eight in marketing, seven in executive and ad ministration, one in informat ion
technology, five in finance and six in warehousing operations. We also employ temporary warehouse employees during peak ship ment periods.
We are not party to any labor agreements and none of our emp loyees is represented by a labor union. We consider our relationships with our
emp loyees to be excellent and have never experienced a work stoppage.

     In September 2004, we entered into an agreement with an affiliate of Gevity HR, Inc. a professional employer organizatio n, or PEO, under
which Gev ity provides payroll and employee benefit services and acts as a co -emp loyer of our emp loyees. We believe this arrangement allows
us to provide our emp loyees with co mpetitive benefits in a cost-effective manner.

Insurance and Product Li ability

     We purchase insurance to cover standard risks associated with our business, including policies to cover commercial general liab ility and
other casualty and property risks. Our insurance rates depend upon our safety record as well as trends in the insurance industry. Through our
PEO, our emp loyees are also covered by workers compensation insurance, the cost of which is retrospective and varies dependin g upon the
frequency and severity of claims during the policy year.

     We face an inherent risk of exposure to personal injury or product liability claims if, among other things, use of our products results in
injury, disability or death. We believe our insurance coverage is sufficient for the risks relat ing to our products. Our cove rage in volves
retentions with primary and excess liability coverage above the retention amount.

     We retain certain property and casualty risks based on our analysis of the risk, the frequency and severity of a loss and the cost of
insurance for the risk. We believe that the risk we have assumed through retention is not significant and payments of retained claims will not
have an adverse impact on our performance.

Information Technol ogy Systems

     Our in formation technology systems are designed to provide us with, among other things, comprehensive order processing, production,
accounting and management informat ion for the sourcing, import ing, distribution and marketing aspects of our business. We use the Microsoft
Dynamics SL version 6.0 software, with several customizations that enhance this package for our purposes. We also maintain an EDI system
that provides a computer link between us and certain of our customers that enables us to monitor purchases, inventory and ret ail sales and also
improves our efficiency in

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responding to customer needs. Prior to May 1, 2006, when we hired a Director of Informat ion Technology, we outsourced all o f our
informat ion technology functions.

     We intend to expand and upgrade our information technology systems to support recent and expected future growth. Specifically , we plan
to add servers and data warehousing machines and enhance our order management, inventory and EDI modu les. We will also evaluate and may
implement a new warehouse management system, a new customer-relationship management tool that will integrate with our website for
improved customer service and an online and off -site backup system with fu ll data recovery and redundancy cap ability. Although we do not
have an enterprise resource planning system, after making these upgrades, we believe our informat ion technology systems will be sufficient to
meet our anticipated growth for the foreseeable future.

Properties

     We lease our corporate headquarters, a 50,000 square foot facility located in Carrollton, Texas, consisting of 42,000 square feet of
warehouse space and 8,000 square feet of office space. Our lease expires in August 2015, but we have two five-year extension options. We
believe this facility has sufficient capacity to meet our anticipated growth for the foreseeable future.

Competiti on

     We compete with co mpanies that focus on the young consumer across a nu mber of markets, including footwear, sporting goods and
recreational products. Many of these companies have substantially greater financial, distribution and marketing resources than we have.
Product design, performance, styling, co mfort, quality, brand awareness, timeliness of product delivery and pricing are all impo rtant elements
of competit ion in the markets for our p roducts. We believe that the strength of our HEELYS brand, the intellectual property r elated to the
design of HEELYS-wheeled footwear, the quality of our products and our relationships with retailers and distributors allows us to compete
effectively in the markets we serve. In certain international markets where enforcing our intellectual p roperty rights is more difficult than in the
United States, we co mpete against counterfeit, knockoff and infringing products, which typically are offered at lower prices.

Legal Matters

      Due to the nature of our products, from time to time we have to defend against pe rsonal injury and product liability claims arising out of
personal in juries that allegedly are suffered using our products. To date, none of these claims has had a material adverse effect on us. We are
also engaged fro m time to time in various claims and legal proceedings relating to intellectual property matters and because of the recent
increasing number of in fringing and knockoff p roducts being sold domestically, we have an increased number of claims and leg a l proceedings
relating to intellectual property matters. We believe that none of our pending legal matters will have a material adverse effect upon our
liquid ity, financial condition or results of operations.

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                                                                  MANAGEMENT

Executi ve Officers and Directors

       Our executive officers and directors, and their ages as of October 31, 2006, are as follows:

Name                                                     Age                                          Position

Michael G. Staffaroni                                    49        Chief Executive Officer, President and Director
Roger R. Adams                                           52        Director
Michael W. Hessong                                       41        Vice President — Finance, Chief Financial Officer, Treasurer and Secretary
Charles D. Beery                                         54        Senior Vice President — Global Sales
Patrick F. Hamner                                        50        Chairman of the Board
James S. Peliotis                                        39        Vice President — Marketing
Robert W. Byrne                                          42        Vice President — Design and Development
Samuel B. Ligon(1)(2)                                    67        Director
Richard E. M iddlekauff(1)(2)                            64        Director
William R. Thomas                                        78        Director
James T. Kindley(1)(2)                                   59        Director


(1)
         Member of the co mpensation committee

(2)
         Member of the audit co mmittee

     Mr. Staffaroni has served as our Chief Executive Officer since January 2001, as our President since May 2006 and as one of our directors
since August 2006. Before jo ining us as Chief Executive Officer, Mr. Staffaron i served as our full-time consultant fro m August 2000 to
January 2001. Fro m September 1995 to February 2000, M r. Staffaroni was Vice President of the Rollerblade d ivision of Benetton Group,
S.p.A., a worldwide design, marketing, manufacturing and distribution company. Fro m May 1992 to September 1995, Mr. Staffaroni served as
Vice President of Research, Design and Develop ment at L.A. Gear, an athletic footwear co mpany. Mr. Staffaroni began his footwear career in
1976 and during his career has been involved in product development, marketing, operations and general management. M r. Staffaroni attended
the University of Wisconsin-Milwau kee.

       Mr. Adams is the inventor of HEELYS-wheeled footwear. M r. Adams has been one of our directors since he founded our company in
2000, and served as our President and Secretary until May 2006, when he became our Director of Research and Develop ment. Before inventing
HEELYS-wheeled footwear and founding our company, Mr. Adams served as a crisis associate, mental health counselor, mental health
supervisor and regional coordinator for the State of Oregon fro m 1990 to 1995. Mr. Adams has extensive industry experience and has been
involved in the skate industry for over 40 years, including operating his family's skate centers and working in his family's skate distribution
company and skate-related manufacturing company. Mr. Adams received a Bachelor of Arts degree in psychology and a graduate degree in
clin ical counseling and independent studies from Pacific Lutheran University. M r. Adams is the first cousin of Richard E. M iddlekauff, one of
our directors.

     Mr. Hessong has served as our Chief Financial Officer since December 2000 and as our Vice President — Finance, Treasurer and
Secretary since May 2006. Mr. Hessong served as Vice President — Finance of the Marketing Continuum, a pro motional marketing company,
fro m May 1998 to December 2000. He also served as Vice President — Finance of Firstcom Music, a licensor of production music, fro m
August 1997 to May 1998, and was the Controller and Director of Operations for Jokari/ US, Inc., a consumer product company fro m May 1993
to August 1997. Mr. Hessong is a licensed certified public accountant in the State of Texas and received a Bachelor of Science in accounting
fro m Oklaho ma State University.

     Mr. Beery has served as our Senior Vice President — Global Sales since March 2001. M r. Beery has over 25 years of athletic footwear
sales and market ing experience. He has held executive level and

                                                                         53
sales positions at L.A. Gear, Nike, Stride-Rite, Kaepa and Wilson Sporting Goods. Mr. Beery received a Bachelor of Science in physical
education from Texas Tech Un iversity.

      Mr. Hamner has served as one of our directors and our Chairman o f the Board since May 2000, and became a full-t ime employee of our
company in May 2006. Prior to May 2006, Mr. Hamner was a Senior Vice President of Capital Southwest Corporation, a publicly traded
venture capital investment company, and its subsidiary CSVC. Mr. Hamner has over 24 years of venture capital experience and business
start-up and development activities. Mr. Hamner currently serves on the board of directors of Blue Magic, Inc., Jet-Lube, Inc., The RectorSeal
Corporation and The Whit more Manufacturing Co mpany, all of which are chemical or lubricant manufacturing companies and are wh olly
owned by Capital Southwest Corporation. Fro m October 2001 to October 2002, M r. Hamner served as Chairman of the Nation al Association of
Small Business Investment Co mpanies. Mr. Hamner received a Bachelor of Science in mechanical engineering, cu m laude, fro m Southern
Methodist University and a Masters of Business Administration fro m the Un iversity of Texas.

     Mr. Peliotis has served as our Vice President — Marketing since October 2006. M r. Peliotis has over 17 years of experience with
consumer products companies. Fro m August 2002 through September 2006, Mr. Peliotis served as a Business Unit Manager for Easton-Bell
Sports, a sports products company. Fro m July 2000 through July 2002, Mr. Peliotis served as a Director of Brand Marketing for Diageo, a
liquor manufacturer, and fro m August 1989 through June 2000, Mr. Peliot is served in various marketing and product manager positions at
Kimberly -Clark Co rporation, a world wide consumer products company. Mr. Peliotis has a Bachelor of Arts fro m Lakeland Co llege and a
Masters of Business Admin istration fro m the Un iversity of Nevada, Las Vegas.

     Mr. Byrne has served as our Vice President — Design and Develop ment since October 2006. Mr. Byrne has almost 20 years experience in
product design and development. Before join ing us, Mr. Byrne worked fro m August 1998 through May 2005 as a product designer and
developer at Skechers USA, Inc., an international footwear co mpany. Fro m December 1993 through August 1998, M r. Byrne served as Vice
President at Edge Quest, a research and development footwear co mpany, and fro m May 1989 through December 1993, he was in product
design and development at L.A. Gear, an athlet ic footwear co mpany. Mr. Byrne received a Bachelor of Arts in Art Co mmunication fro m
Roanoke College.

     Mr. Ligon has served as one of our directors since June 2000. Mr. Ligon has more than 31 years of experience with variou s consumer
product companies. Mr. Ligon served as Chairman of the Board of Jo kari/US, Inc., a consumer p roducts company, fro m 1975 through
July 2006, and has served as Chairman of the Board and CEO of Smith Abrasives, Inc., a consumer products company since 1993. Mr. Ligon
has served since September 2003 as a director and since July 2005 as a member of the audit co mmittee of the board of director s of Capital
Southwest Corporation. Mr. Ligon has a Bachelor of Science fro m Auburn University and a Masters of Business Admin istration fro m Harvard
Business School.

     Mr. Middlekauff has served as one of our directors since our inception in 2000. Since June 1977, Mr. Middlekauff has owned a Ford car
dealership in Dallas, Texas. Mr. M iddlekauff received a Bachelor of Science in business administration fro m Oregon State University and a
Masters of Business Admin istration fro m Cal-State Long Beach. Mr. Middlekauff is the first cousin of Roger R. Adams.

     Mr. Tho mas has served as one of our directors since August 2006. Mr. Tho mas joined Capital Southwest Corporation in 1962 and has
served as its President since 1980 and Chairman of the Board since 1982. His previous experience includes positions in the chemical industry
and at a consulting firm. M r. Tho mas' education includes a Masters of Business Admin istration with distinction fro m Harvard Business School
and a Bachelor of Science in chemical engineering fro m Texas A&M Un iversity. Mr. Tho mas also serves on the board of directors of Alamo
Group, Inc., wh ich provides mo wing equip ment for agricu ltural, co mmercial and governmental users, Palm Harbor Ho mes, Inc., a
manufactured housing company, and Encore Wire Co rporation, a copper wire manufacturer.

                                                                      54
     Mr. Kindley has served as one of our directors since August 2006. Mr. Kindley has over 35 years of consumer product experience.
Currently, Mr. Kindley is a senior lecturer at the Co x Graduate School of Business at Southern Methodist University where he has taught in the
market ing area since 1996. Fro m 1996 to 1999, M r. Kindley served as President of American Designer Pottery, a manufacturer of polyurethane
garden containers, fro m 1990 to 1995 as Vice President of Market ing for W illiamson -Dickie Mfg. Co., fro m 1988 to 1990 as Vice President of
Marketing for Bissell, Inc. and fro m 1985 to 1988 as Group Product Manager for Newell Rubbermaid Inc. He is also engaged by several
companies as a new product consultant and holds over ten patents. Mr. Kindley has served as a member of the board of director s of
Williamson-Dickie Mfg. Co. since 2002. Mr. Kindley has a Bachelor of Science fro m Georgia Institute of Technology, a Masters of Science in
product design from the Illinois Institute of Technology and a Masters of Business Administration fro m Harvard Business Schoo l.

Board of Directors; Committees

     Our board of directors consists of seven members. Under our By -Laws, each of our directors holds office for a one-year term or until h is
successor has been elected and qualified or until his earlier death, resignation, disqualification or removal. The authorized nu mber of directors
may be changed by resolution of our board of directors. Vacancies on our board of directors can be filled by resolution of our board of
directors.

      The ru les of The Nasdaq Global Market require that our board of directors has a majo rity of independent directors. Messrs. Ligon,
Middlekauff, Tho mas and Kindley are independent directors as defined by Rule 4200(a)(15) of the Nat ional Association of Securities Dealers
listing standards. Our board of directors has established a compensation committee and an audit co mmittee.

     Compensation Committee. The co mpensation committee of our board of directors determines, or reviews and approves, forms of
compensation provided to our executive officers and our directors, including stock compensation. In addition, the compensation committee
administers, and oversees the admin istration of, the stock and other incentive compensation plans or programs for all of our other employees.
As part of these responsibilities, the compensation committee ad min isters our 2006 Stock Incentive Plan. The current members of the
compensation committee are Messrs. Ligon, Middlekauff and Kindley, each of who m has been determined to be independent by our board of
directors.

     Audit Committee. The audit co mmittee of our board of d irectors reviews and monitors (i) our corporate financial reporting and our
internal and external audits, including our internal audit and control functions, the results and scope of our annual audit a nd other services
provided by our independent registered public accounting firm and (ii) our co mp liance with legal matters that have a significant impact on our
financial reports. The audit co mmittee also consults with management and our independent registered public accounting firm b e fore the
presentation of financial statements to stockholders and, as appropriate, initiates inquiries into aspects of our financial affairs. In addition, the
audit committee has the responsibility to consider and appoint, and determine the services of and the fee arrangements with, our independent
registered public accounting firm. The current members of the audit co mmittee are Messrs. Ligon, Middlekauff and Kindley, each of who m has
been determined to be independent by our board of directors. Our board of directors has determined that Mr. Ligon, the chairman of our audit
committee, is an "audit committee financial expert" under applicable SEC ru les and has the required financial sophistication pursuant to the
rules of The Nasdaq Global Market.

Director Compensation

     Other than James T. Kindley, our d irectors do not receive any cash fees for their service on our board of d irectors but are entitled to
reimbursement of all reasonable out-of-pocket expenses incurred in connection with their attendance at board of directors and board committee
meet ings. We pay Mr. Kindley $12,000 per year for serving on our board of directors, $5,000 per year for chairing the

                                                                         55
compensation committee of our board of directors and, subject to an $8,000 per year maximu m, $750 and $500 for each board mee t ing and
committee meeting, respectively, attended in person.

Compensati on Committee Interlocks and Insi der Partici pation

    No interlocking relat ionship exists between any member of our board of d irectors or our co mpensation committee and any member of the
board of directors or co mpensation committee of any other company, and no interlocking relationship has existed in the past.

Li mitation of Li ability and Indemnification

     Our Certificate of Incorporation includes a provision that eliminates the personal liability of our directors for monetary da mages for
breach of fiduciary duty as a director, except for liability:

     •
             for any breach of the director's duty of loyalty to us or our stockholders;

     •
             for acts or omissions not in good faith or that involve intentional misconduct or a knowing vio lation of law;

     •
             under Section 174 o f the Delaware General Corporat ion Law regarding unlawful dividends and stock purchases; or

     •
             for any transaction from wh ich the director or o fficer derived an imp roper personal benefit.

     Our By-Laws provide that:

     •
             we must indemnify our d irectors and officers to the fullest extent permitted by Delaware law, subject to very limited exceptions;

     •
             we may indemnify our other emp loyees and agents to the same extent that we indemn ify our d irectors and officers; and

     •
             we must advance expenses, as incurred, to our directors and officers in connection with a legal proceeding to the fullest extent
             permitted by Delaware law, subject to very limited exceptions.

       We have also entered into an indemnificat ion agreement with each of our directors and officers containing provisions that require us to
indemn ify our d irectors and officers against liab ilit ies that may arise by reason of their status or service as directors or officers, other than
liab ilit ies arising fro m willful misconduct of a culpable nature, to advance their expenses incurred as a result of any proceeding against them as
to which they could be indemn ified and to obtain directors' and officers' insurance if available on reasonable terms.

     In addit ion, shortly before consummat ion of this offering, we expect to purchase directors' and officers' liab ility insurance.

                                                                          56
Executi ve Compensati on

     The fo llo wing table presents compensation information fo r services by our chief execut ive officer and our other highest -paid executive
officers, who m we refer to as the named executive officers, whose total salary and bonus for such year exceeded $100,0 00:


                                                           Summary Compensati on Table

                                                                                                                                                 Long Term
                                                                                            Annual Compensation                                 Compensation

                                                                                                                                                  Securities
                                                                                                                   Other Annual                   Underlying
Name and Principal Position                          Year             Salary                Bonus                 Compensation(1)                 Options (#)

Michael G. Staffaroni                                 2005     $        230,808        $      112,043       $                         —                 330,000
Chief Executive Officer and President

Michael W. Hessong                                    2005              129,503                    30,543                           6,000               415,000
Vice President — Finance, Chief Financial
Officer, Treasurer and Secretary

Charles D. Beery                                      2005              135,181               229,523 (2)                             —                 290,000
Senior Vice President — Global Sales

Roger R. Adams(3)                                     2005              145,688                    37,493                             —                         —


(1)
        Includes cash amounts received by the named executive officer for car allowance. In accordance with applicable SEC rules, any cash
        amount exceeding 25% of the total other annual compensation and any additional items not listed a bove are noted in this footnote. We
        have omitted perquisites and other personal benefits that do not exceed the lesser of $50,000 o r 10% of the named executive o fficer's
        annual salary and bonus disclosed in this table.

(2)
        Includes monthly commissions equal to 0.5% o f our invoiced net sales, excluding net sales derived fro m certain specified independent
        distributors, or an aggregate of $203,017.

(3)
        Mr. Adams served as our President and Secretary since our inception until May 2006, when he transitioned to his current position as our
        Director of Research and Develop ment.

     The fo llo wing table sets forth the options granted on June 23, 2006 to our named executive officers and Patrick F. Hamner under our 2006
Stock Incentive Plan. Except as noted, all options granted were non-qualified options. Each of the options granted vests and becomes
exercisable in 48 equal monthly installments, beginning on July 31, 2006, and none of the options has been exercised.

                                                                                                                                        Potential Reali zable
                                                                                                                                         Value at Assumed
                                                                                                                                           Annual Rates
                                                                                                                                           of Stock Price
                                                                                                                                         Appreciation for
                                                                                                                                          Option Term(2)

                                                                               Individual Grants

                                              Number of              Percent of
                                              Securities           Total Options
                                              Underlying            Granted to
                                               Options             Employees in
                                               Granted             Fiscal Year(1)

                                                                                              Exercise or
                                                                                              Base Price          Expiration
Name                                                                                           ($/Share)            Date
                                                                                                                      5% ($)         10% ($)

Michael G. Staffaroni(3)                      330,000               16.16 %   $         4.05       06/ 23/ 2016   $       6.60   $      10.50
Patrick F. Hamner(4)                          790,000               38.68 %   $         4.05       06/ 23/ 2016   $       6.60   $      10.50
Michael W. Hessong(5)                         415,000               20.32 %   $         4.05       06/ 23/ 2016   $       6.60   $      10.50
Charles D. Beery(6)                           290,000               14.20 %   $         4.05       06/ 23/ 2016   $       6.60   $      10.50


(1)
       Based on 2,042,500 options granted to employees on June 23, 2006 under our 2006 Stock Incentive Plan.

                                                                   57
(2)
       In accordance with SEC rules, these columns show the gain that could accrue for the listed options, assuming that the market price per
       share of our common stock appreciates fro m the date of grant over a period of ten years at an assumed annual rate of 5% and 10%. Ou r
       actual stock price appreciation over the ten-year option term will likely differ fro m these assumed rates. If the stock price does not
       increase above the exercise price at the time of exercise, the realized value fro m these options will be zero.

(3)
       Of h is total options, 123,575 were granted as incentive stock options.

(4)
       Of h is total options, 123,575 were granted as incentive stock options.

(5)
       Of h is total options, 123,575 were granted as incentive stock options.

(6)
       Of h is total options, 123,575 were granted as incentive stock options.



2006 Stock Incenti ve Pl an

     On June 23, 2006, our board of directors adopted and our stockholders approved our 2006 Stock Incentive Plan. We have re served
2,272,725 shares of common stock for issuance under our 2006 Stock Incentive Plan pursuant to the exercise of options granted under our 2006
Stock Incentive Plan. If any options granted under our 2006 Stock Incentive Plan are fo rfeited or terminate for any other reason without having
been exercised in fu ll, then the shares subject to those options that are not purchased will become availab le for additional grants under our 2006
Stock Incentive Plan. As of November 1, 2006, options to purchase 2,042,500 shares of our common stock had been granted and were
outstanding under our 2006 Stock Incentive Plan, options to purchase 100,000 shares of our common stock were to be granted effective upon
the consummation of this offering and 130,225 addit ional shares were available for future option grants.

      Under our 2006 Stock Incentive Plan, all of our employees, including directors and officers and any independent contractor or advisor
who performs services for us or one of our subsidiaries, are elig ible to receive grants of nonqualified options, while our emp loyees only are
elig ible to receive grants of incentive stock options, or ISOs, intended to qualify under Section 422 of the Internal Revenue Code of 1986, as
amended. Ou r 2006 Stock Incentive Plan is ad ministered by the compensation committee of our board of d irectors, wh ich selects the persons to
whom options will be granted, determines the number of shares to be subject to each grant and prescribes the other terms and conditions of
each grant, including the amount and type of consideration to be paid to us upon exercise and the vesting schedule.

     The exercise price under nonqualified options and ISOs must be at least 100% of the fair market value o f the common stock on the date of
grant and, in the case of ISOs granted to holders of more than 10% of our voting power, not less than 110% of such fair market value. The t erm
of an option cannot exceed 10 years, and the term of an ISO granted to a holder of more than 10% of our voting power cannot exceed five
years.

     If a change of control of our co mpany (as defined in our 2006 Stock Incentive Plan) occurs, all of the options issued and out standing under
our 2006 Incentive Stock Plan will accelerate and become fu lly vested and exercisable.

      The stock option agreements provide that stock options that are not exercisable as of the date of termination of employ men t s hall exp ire
and options which are exercisable as of such date will remain exercisable for a three-month period, or one year after the option holder's death or
total disability.

Empl oyment Agreements

     We entered into an emp loy ment agreement with Mr. Adams in May 2000 and with each of Messrs. Staffaroni, Hessong and Beery in
November 2005. Each of the agreements with Messrs. Staffaroni and Beery was amended and restated in September 2006, at which time we
also entered into an employ ment agreement with Mr. Hamner. Each of the agreements with Messrs. Adams

                                                                        58
and Hessong was amended and restated in November 2006. The in itial emp loyment terms under the employ ment agreements exp ire on
December 31, 2008 (December 31, 2007 for Mr. Adams). Each of the employ ment agreements is subject to an automat ic annual one-year
renewal, unless either we or the employee provides advance notice of termination. The emp loy ment agreements for Messrs. Staffaroni,
Hessong, Beery, Hamner and Adams provide for annual base salaries of $238,000, $175,000, $139,236, $210,000 and $150,000, respectively.
In addition, Mr. Beery's employ ment agreement provides that, subject to our compensation committee's determination on an annual basis, he
will be entitled to be paid a co mmission not to exceed 0.5% of our invoiced net sales. Under the terms of the employ ment agreements, we pay
bonuses based on an annual bonus plan adopted by our compensation committee.

     Under each emp loy ment agreement, if the executive is terminated without cause, including in connection with a change o f control (as
defined in the employ ment agreements), or if he is constructively terminated due to a reduction in his title or scope of his responsibilit ies or
because he is required to relocate more than 50 miles fro m our co mpany's headquarters, he is entitled to receive an amount equal to his annual
base salary (for Mr. Staffaroni, two times his base salary) plus one month of base salary for each year of co mp leted service in excess of five
years. Such payments will be made in equal monthly installments over one year after termination (two years for Mr. Staffaroni). In addition, the
executive will be reimbursed for the cost of the monthly health insurance premiu ms payable by such executive to maintain cove rage for such
executive and his dependents for up to 18 months after his termination without cause.

     Each employ ment agreement also provides that upon death or disability, the executive or his estate will be entit led to be paid an amount
equal to the executive's then current annual base salary (two years for M r. Staffaroni). Such payments will be made in equal mo nthly
installments over one year after such executive's death or disability (t wo years for Mr. Staffaroni). Each employ ment agreement prohibits the
executive fro m disclosing our confidential or proprietary information and contains certain non-competition and non-solicitation provisions
which restrict the executive during the term of h is employ ment and for a period of one year after the date of termination of emp loyment.

                                                                       59
                                CERTAIN RELATIONS HIPS AND RELATED PARTY TRANSACTIONS

     Since January 1, 2003, there has not been, nor is there currently proposed, any transaction or series of similar trans actions to which we
were or are to be a party in wh ich the amount involved exceeds $60,000 and in which any director, executive officer or holder o f more than 5%
of our co mmon stock, or an immed iate family member of any of the foregoing, had or will have a d irect or indirect interest other than:

     •
            emp loyment agreements and other compensation arrangements, which are described under "Management;" and

     •
            the transactions described below.

     Agreement Regarding Director Designations.

          In September 2006, we entered into an agreement with CSVC and certain of our other stockholders pursuant to which CSVC has th e
     contractual right to designate (i) t wo persons to be included in management's slate of director nominees so long as it owns at le ast 15% of
     the outstanding shares of our common stock, and (ii) one such nominee so long as it owns at least 10%, but less than 15%, of the
     outstanding shares of our common stock. In May 2000, in connection with our fo rmation and in itial capitalization, ou r in itial stockholders
     and investors entered into an Investor Rights Agreement giving the investors the right to designate directors, a right of first refu sal to
     purchase shares of our common stock, a right of co-sale with respect to shares of our common s tock and a right to purchase additional
     shares of our common stock. The September 2006 agreement provides that, upon consummat ion of this offering, the Investor Righ ts
     Agreement will terminate.

     Agreement with Roger R. Adams.

         In May 2006, we purchased 724,300 shares of our common stock owned by Roger R. Adams for a purchase price of $1,999,937, or
     $2.76 per share. Simultaneously with this sale and purchase, Mr. Adams also sold to Patrick F. Hamner, our Chairman of the Board,
     362,150 shares of our common stock owned by Mr. Adams for a purchase price of $999,969, or $2.76 per share.

     Agreement with Richard E. Middlekauff.

         In April 2006, we purchased 724,325 shares of our common stock owned by Richard E. Middlekauff for a purchase price of
     $2,000,006, or $2.76 per share.

     Agreements with CSVC.

          In May 2000, we borro wed $1,800,000 fro m CSVC, wh ich we repaid in August 2003, and sold to CSVC 1,745,455 shares of
     Series A Preferred Stock for a purchase price of $480,000 and 436,364 shares of our Series B Preferred Stock for a purchase price of
     $120,000.

          In May 2005, we redeemed all of our Series A Preferred Stock fro m CSVC for a purchase price of $480,000. In June 2006, each
     share of Series B Preferred Stock held by CSVC was converted into one share of our co mmon stock, prior to giving effect to the
     25-for-one stock split we effected in October 2006.

     Agreements with Samuel B. and Patricia P. Ligon.

         In May 2000, we borro wed $75,000 fro m Samuel and Patricia Ligon, which we repaid in August 2003, and sold Mr. and Mrs. Ligon
     72,727 shares of Series A Preferred Stock for a

                                                                        60
     purchase price of $20,000 and 18,181 shares of Series B Preferred Stock for a purchase price of $5,000.

          In May 2005, we redeemed all of our Series A Preferred Stock fro m M r. and Mrs. Ligon for a purchase price of $20,000. In
     June 2006, each share of Series B Preferred Stock held by Mr. and Mrs. Ligon was converted into one share of our common stock, prior to
     giving effect to the 25-for-one stock split we effected in October 2006.

          Until the end of January 2005, we subleased office and warehouse space fro m Jo kari/US, Inc., of wh ich Mr. Ligon is a minority
     owner and chairman of the board. We paid Jokari/US, Inc. $142,000, $141,000 and appro ximately $14,000 in 2003, 2004 and 2005,
     respectively, for the subleased space and related warehouse services. Since that time, we have not subleased any property or purchased
     any warehouse services from Jokari/US, Inc.

     Indemnification. We have entered into an indemn ification agreement with each of our d irectors and officers. See "Management —
Limitation of Liability and Indemnification" for a description of the indemn ification available to our directors and officers under these
agreements.

     Participation in Directed Share Program. All members of our board of directors and executive officers will be elig ible to purch ase
shares of our common stock under the directed share program described under "Underwrit ing."

                                                                      61
                                                PRINCIPAL AND S ELLING STOCKHOLDERS

      The fo llo wing table sets forth information with respect to the beneficial ownership of our co mmon stock as of November 1, 2006, and
after the sale of shares in this offering by:

     •
              each current director;

     •
              each of the named executive officers;

     •
              all of our d irectors and named executive officers as a group;

     •
              each person who is known by us to own beneficially mo re than 5% of our voting securities; and

     •
              each selling stockholder participating in this offering.

     Beneficial ownership is determined in accordance with the SEC's rules and includes voting or investment power with respect to securities
and includes shares issuable under stock options that are exercisable within 60 days of November 1, 2006. Shares issuable under stock options
exercisable within 60 days are deemed outstanding for computing the percentage of the person holding the options, but are not outstanding for
computing the percentage of any other person.

     Percentage ownership calculat ions are based on 23,903,875 shares of common stock outstanding as of November 1, 2006.

     To our knowledge, except as indicated in the footnotes to the following table and under applicable co mmunity property laws, the pers ons
or entities identified in th is table have sole voting and investment power with respect to all shares of common stock shown a s beneficially
owned by them.

                                                                  Shares Beneficially                                 Shares Beneficially
                                                                  Owned Before the                                     Owned After the
                                                                      Offering                                            Offering

                                                                                                   Number of
                                                                                                  Shares to be
                                                                                                   Sold in the
                                                                                                    Offering

Name of Beneficial Owners†

                                                               Shares             Percentage                       Shares             Percentage

Directors and Named Executi ve Officers (1)
Michael G. Staffaroni(2)                                        1,291,250                 5.4 %             —        1,291,250                4.8 %
Roger R. Adams(3)(4)                                            6,277,350                26.3 %        815,656       5,324,919               19.7 %
Michael W. Hessong(5)                                             426,875                 1.8 %             —          426,875                1.6 %
Charles D. Beery(6)                                               536,250                 2.2 %             —          536,250                2.0 %
Patrick F. Hamner(7)                                              460,900                 1.9 %             —          460,900                1.7 %
James S. Peliotis                                                      —                   —                —               —                  —
Robert W. Byrne                                                        —                   —                —               —                  —
Richard E. M iddlekauff(8)                                      3,025,750                12.7 %        441,501       2,584,249                9.6 %
Samuel B. Ligon(9)                                                454,525                 1.9 %         66,321         388,204                1.4 %
William R. Thomas(10)                                          10,909,100                45.6 %      1,591,790       9,317,310               34.5 %
James T. Kindley                                                       —                   —                —               —                  —

All d irectors and executive officers as a group (11
persons)                                                       23,382,000                96.9 %      2,915,268     20,329,957                74.6 %
Beneficial Owners of 5% or More of Our
Outstandi ng Common Stock
Capital Southwest Venture Corporation(10)                      10,909,100                45.6 %      1,591,790       9,317,310               34.5 %
Other Selling Stockhol ders
    Robert J. Ward(4)(11)                                    386,775             1.6 %         136,775             250,000                *
    Michael F. Gaines(12)                                    500,000             2.1 %          72,957             427,043              1.6 %
All Selling Stockholders                                                                     3,125,000


*
       Less than 1% of the outstanding shares

†
       The principal and selling stockholders acquired shares of our common stock and preferred stock in connection with our formati on and
       through a private placement in May 2000, as co mpensation for services and pursuant to subsequent purchases and gifts between the
       stockholders.

                                                                     62
(1)
       The address of each director and executive officer, other than Mr. Tho mas, is c/o Heelys, Inc., 3200 Belmeade Drive, Suite 100,
       Carrollton, Texas 75006.

(2)
       Includes options to purchase an aggregate of 41,250 shares of common stock that are currently exercisable or exercisable with in
       60 days. If the underwriters exercise in full their option to purchase additional shares of our common stock, Mr. Staffaroni will sell
       189,287 shares of our common stock.

(3)
       Includes 113,625 shares of common stock owned by CYPO, Inc., a Texas corporation wholly o wned by Mr. Adams. If the underwriters
       exercise in fu ll their option to purchase additional shares of our common stock, Mr. Adams will sell an additional 307,925 shares of our
       common stock.

(4)
       Prior to our formation, our intellectual property was owned by a limited partnership, Heeling Ltd., which was owned by Mr. Adams,
       Mr. M iddlekauff and Mr. Ward. In connection with our format ion, Mr. Adams, Mr. M iddlekauff and Mr. Ward assigned their rights in
       Heeling Ltd. to the Co mpany, fro m which Mr. Ward obtained shares equal to 1% of our fully diluted common stock and Mr. A dams
       and Mr. Ward entered into a Stockholders Agreement. The Stockholders Agreement provides that Mr. Adams is to protect Mr. Ward
       fro m d ilution of Mr. Ward's ownership of our co mmon stock by transferring additional shares of our common stock to Mr. Ward at any
       time Mr. Ward's ownership of our co mmon stock would otherwise be diluted. The Stockholders Agreement provides that Mr. Adams'
       obligations terminate when Mr. Ward has received 1,281,469 shares, provided that Mr. Adams otherwise comp lies with all o f h is
       obligations under that Stockholders Agreement. On November 17, 2006, Messrs. Adams and Ward entered into an Agreement pursuant
       to which, subject to completion of this offering, Mr. Ward will exchange his rights under the Stockholders Agreement for 136,775
       shares of our common stock owned by Mr. Adams. Such shares are reflected as beneficially owned by both Mr. Adams and Mr. Ward
       before this offering. The Agreement will be void if this offering does not close by June 30, 2007.

(5)
       Includes options to purchase an aggregate of 51,875 shares of common stock that are currently exercisable or exercisable with in
       60 days. If the underwriters exercise in full their option to purchase additional shares of our common stock, Mr. Hessong will sell
       94,644 shares of our common stock.

(6)
       Includes options to purchase an aggregate of 36,250 shares of common stock that are currently exercisable or exercisable with in
       60 days. If the underwriters exercise in full their option to purchase additional shares of our common stock, Mr. Beery will sell 94,644
       shares of our common stock.

(7)
       Includes options to purchase an aggregate of 98,750 shares of common stock that are currently exercisable or exercisable with in
       60 days.

(8)
       Includes 250,000 shares of common stock owned by The Middlekauff 2006 Ch ildren's Trust. Mr. M iddlekauff is the trustee of the trust
       and exercises voting and investment power over these shares, but Mr. Middlekauff disclaims beneficial ownership of such shares . If the
       underwriters exercise in full their option to purchase additional shares of our common stock, Mr. Middlekauff will sell an additional
       87,807 shares of our common stock.

(9)
       All of Mr. Ligon's shares in the Co mpany are owned joint ly with Patricia Ligon, h is spouse. If the underwriters exercise in full t heir
       option to purchase additional shares of our common stock, Mr. Ligon will sell an additional 13,189 shares of our co mmon stock.

(10)
       Mr. Tho mas is one of our directors and is also President, Chairman of the Board and a director of Capital Southwest Corporation. As
       indicated in the table, CSVC, wh ich is a wholly o wned subsidiary of Capital Southwest Corporation, beneficially o wns more th a n 5% of
       our outstanding common stock. Mr. Thomas may be deemed to share voting and investment power with respect to the 10,909,100
       shares of common stock beneficially owned by CSVC. Mr. Tho mas disclaims beneficial ownership of such shares. The address for
       Mr. Tho mas and Capital Southwest Venture Corporation is 12900 Preston Road, Suite 700, Dallas, Texas 75230.

(11)
       Mr. Ward is a partner at Gardere Wynne Sewell LLP, and we have capitalized or expensed $385,000, $242,000, $190,000, $112,000
       and $894,000 during 2003, 2004, 2005 and for the nine months ended September 30, 2005 and September 30, 2006, respectively, to
       Mr. Ward's current and former law firms relating to legal services. If the underwriters exercise in fu ll their option to purchase additional
       shares of our common stock, Mr. Ward will sell an additional 135,494 shares of our common stock.

(12)
       Mr. Gaines received his shares of our common stock as compensation for consulting services rendered in 2002. In June 2006,
       Mr. Gaines performed consulting services for us. We paid him $2,400 for such services. If the underwriters exercise in fu ll their option
       to purchase additional shares of our common stock, M r. Gaines will sell an additional 14,510 shares of our common stock.

                                                                        63
                                                    DES CRIPTION OF CAPITAL STOCK

    Upon the consummation of this offering, we will be authorized to issue 75,000,000 shares of co mmon stock, and 5,000,000 share s of
undesignated preferred stock. The fo llo wing is a summary description of our capital stock. Our Certificate of Incorporation a nd By-Laws
provide further in formation about our capital stock.

Common Stock

     As of November 1, 2006, there were 23,903,875 shares of common stock outstanding held by 12 holders of record. There will be
27,028,875 shares of common stock outstanding, assuming no exercise after November 1, 2006 of outstanding options, after giving effect to the
sale of the shares of common stock to the public offered in this prospectus.

      The holders of our co mmon stock are entitled to one vote per share on all matters to be voted upon by our stockholders, and do not have
cumulat ive voting rights. Accordingly, holders of a majority of the shares of common stock entitled to vote in the election o f directors can elect
all of the directors standing for election (subject only to any special rights that may hereafter be granted to holders of preferred stock to elect
one or mo re directors). Subject to preferences that may be applicable to shares of preferred stock then outstanding, if any, the h olders of our
common stock are entit led to receive ratably such dividends, if any, as may be declared fro m time to time by our board of d irect ors out of funds
legally available for div idends. See "Dividend Policy." Upon our liquidation, d issolution or winding up, the holders of our co mmon stock will
be entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock then
outstanding, if any. Our co mmon stock has no preemptive or conversion rights or other subscription rights, nor are there any redemption or
sinking fund provisions applicable to our common stock. All outstanding shares of our common stock are fully paid and the shares of our
common stock to be issued upon complet ion of this offering will be fully p aid.

     In September 2006, we entered into an agreement with CSVC and certain of our other stockholders pursuant to which CSVC has th e
contractual right to designate (i) t wo persons to be included in management's slate of director nominees so long as it owns at least 15% of the
outstanding shares of our common stock, and (ii) one such nominee so long as it owns at least 10%, but less than 15%, of the outstanding
shares of our common stock.

Preferred Stock

     In May 2000, we sold 1,812,182 shares of Series A Preferred Stock for $500,000 and 454,545 shares of Series B Preferred Stock fo r
$125,000. The Series A Preferred Stock was nonconvertible and redeemable, and in May 2005, we redeemed all of the shares of Series A
Preferred Stock for $500,000. Each share of the Series B Preferred Stock was convertible into one share of our common stock, prior to giv ing
effect to the 25-for-one stock split we effected in October 2006. In June 2006, all outstanding shares of Series B Preferred Stock were
converted into shares of our common stock.

     The board of directors has the authority, without further vote or action by our stockholders, to issue preferred stock in one or more series
and to fix the rights, preferences, privileges and restrictions of such preferred stock, including dividend, conversion and voting rights, terms of
redemption, liquidation preferences and the number of shares constituting any series or the designation of such series. The issuance of preferred
stock may have the effect of delay ing, deferring or preventing a change in control of the Co mpany without further action by the stockholders
and may adversely affect the voting and other rights of the holders of our common stock. The issuance of preferred stock with v oting and
conversion rights may adversely affect the voting power of the holders of our co mmon stock, including the loss of voting control to others. At
present, we have no plans to issue any shares of preferred stock.

                                                                        64
Registration Rights

      Beginning 180 days after this offering (wh ich period could be extended by the underwriters for up to an additional 34 days under certain
circu mstances), the holders of 14,916,808 shares of our common stock will be entitled to rights with respect to the registrat ion of such shares
under the Securities Act. Under the terms of the agreements between us and these holders, if we propose to register any of our securities under
the Securities Act, either for our o wn account or for the account of other security holders exercising registration rights, t hese holders are
entitled to notice of registration and are entitled to include their shares of common stock in the registration. So me of these holders also may
demand that we file at our expense a registration statement under the Securities Act with respect to shares of our common sto ck owned by
them, in which case we are required to use our best efforts to effect this registration, and if we are eligib le to file a reg istration statement on
Form S-3, so me of these holders have the right to demand that we file a registration statement for such holder on Form S-3. All of these
registration rights are subject to conditions and limitations, including the right of the underwriters of an offering to limit the number of shares
included in the registration.

Anti -Takeover Effects of Provisions of our Certi ficate of Incorporati on, By -Laws and Delaware Law

     Certificate of Incorporation and By-Laws. Our Cert ificate of Incorporation provides that, effective upon the closing of this offering, all
stockholder actions must be effected at a duly called meeting and not by a consent in writ ing. As described above, our Cert ificate of
Incorporation permits our board of directors to issue preferred stock with voting or other rights without stockholder action. Our By-Laws
provide that stockholder meet ings may only be called by our board of directors or stockholders having a majority of the voting power of capital
stock entitled to vote at such a meeting. These provisions, which require the vote of stockholders holding at least a majorit y of t he voting power
of the capital stock to amend, could d iscourage potential acquisition proposals and could delay or prevent a change in control of our company.
Such provisions could also have the effect of discouraging others from making tender offers for our shares and, as a conseque nce, they also
may inhibit fluctuations in the trading price of our shares that could result fro m actual or ru mored takeover attempts. Such provisions also may
have the effect of preventing changes in our management.

      Delaware Takeover Statute. As a Delaware corporation, upon the consummat ion of this offering, we will be subject to Section 203 of
the General Corporation Law of the State of Delaware. Section 203 provides that, subject to certain specified exceptions, a Delaware
corporation shall not engage in certain "business combinations" with any "interested stockholder" for a three-year period following the time
that the stockholder became an interested stockholder unless:

     •
             prior to such time, the board of directors approved either the business combination or the transactio n that resulted in the
             stockholder becoming an interested stockholder;

     •
             upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested
             stockholder owned at least 85% of our voting stock outstanding at the time the transaction commenced, excluding certain share s;
             or

     •
             at or subsequent to the time the stockholder became an interested stockholder, the business combination is approved by our board
             of directors and by the affirmative vote of holders of at least 66 2 / 3 % of the outstanding voting stock that is not owned by the
             interested stockholder.




      Generally, a "business combination" includes a merger, asset or stock sale or other transaction resulting in a financial bene fit to the
interested stockholder. Subject to certain exceptions, an "interested stockholder" is a person who, together with that person's affiliates and
associates, owns, or within the previous three years did own, 15% or mo re of the corporation's voting stock.

    Under certain circu mstances, Section 203 makes it mo re difficult for a person who would be an "interested stockholder" to effect various
business combinations with a corporation for a three-year

                                                                         65
period. The provisions of Section 203 may encourage companies interested in acquiring our company to negotiate in advance with our board of
directors because the stockholder approval requirement would be avoided if our board of d irectors approves either the busines s combination or
the transaction that results in the stockholder becoming an interested stockholder. These provisions also may make it mo re difficult to
accomplish transactions that stockholders may deem to be in their best interests.

     Election, Appointment and Removal of Directors. Our board of directors is authorized to fill vacant director positions or increase the
size of our board. Any vacancy created by the resignation, removal or other termination of a director nominated by CSVC must be filled in
accordance with the agreement between CSVC and us.

     Special Meeting of Stockholders. Our Cert ificate of Incorporation provides that, effective upon the closing of this offering, all
stockholder actions must be effected at a duly called meeting and not by a conse nt in writ ing. Ou r By-Laws provide that special meetings of
our stockholders may be called only by our board of d irectors or by stockholders having a majority of the voting power of cap it al stock entitled
to vote at such a meet ing.

     Advance Notice Requirements for Stockholders Proposals and Director Nominations. Our By-Laws provide that stockholders seeking
to bring business before an annual meet ing of stockholders, or to nominate candidates for election as directors at an annual meeting of
stockholders or a special meeting to elect d irectors, must provide us with timely written notice of their proposal. To nominate an y candidate for
election as a director at any annual meeting of stockholders to elect any directors, a stockholder's notice must be delivered to or mailed and
received at our principal executive offices not less than 120 days before the date in the current year that corresponds to the date that we released
our pro xy statement to stockholders for the previous year's annual meet ing. If, however, no meeting was held in the prio r year, no proxy
statement was released to stockholders for the prior year's meeting or the date of the annual meeting has been changed by mor e than 30 days
fro m the date contemplated in the notice of annual meeting, notice by the stockholder in order to be timely must be received no later than the
close of business on the 90 th day before the date of the annual meeting or on the tenth day following the day on which the date of the annual
meet ing is first publicly announced or disclosed (including by sending or transmitting notice of the meet ing), whichever is earlier. To be t imely
to nominate any candidate for election as a director at any special meeting of stockholders to elect any directors, a stockho lder's notice must be
delivered to and received at our principal executive offices no later than the tenth day following the day on which the date of the special
meet ing and the number of directors to be elected at that meeting is first publicly announced or disclosed. Our By-Laws also specify
requirements as to the form and content of a stockholder's notice. These provisions may preclude stockholders fro m bringing m atters before an
annual meet ing of stockholders or fro m making nominations for directors at an annual mee ting of stockholders or a special meeting of
stockholders to elect directors. Subject to the foregoing, our By -Laws specifically acknowledge CSVC's right to nominate directors in
accordance with the agreement between CSVC and us.

     Authorized But Unissued Shares. Our Board can approve the issuance of authorized but unissued shares of common stock and preferred
stock without stockholder approval. We may use these shares for a variety of corporate purposes, including future public offe rings to raise
additional capital, corporate acquisitions and employee benefit plans. The existence of our authorized but unissued shares of common stock and
preferred stock could render mo re difficult or discourage an attempt to obtain control of our co mpany by means o f pro xy contest, tender offer,
merger or other transaction.

     Amendment of By-Laws. Our d irectors are generally authorized to amend or replace our By -Laws, subject to exceptions regarding
denying action by stockholder consent and calling special stockholders' meetings, and subject to the right of our stockholders to amend or
replace our By-Laws. Our directors may not amend or repeal any amend ment of our By -Laws adopted by the stockholders that specifies the
votes necessary for the election of d irectors.

                                                                        66
Transfer Agent and Registrar

    The transfer agent and registrar for our co mmon stock is American Stock Transfer & Trust Company.

The Nasdaq Gl obal Market Listing

    We have applied to list our common stock on The Nasdaq Global Market under the symbol "HLYS."

                                                                   67
                                                    SHARES ELIGIBLE FOR FUTUR E SALE

     Future sales of substantial amounts of our common stock, including shares issued upon exercise of outstanding options, in the public
market following this offering could adversely affect market prices prevailing fro m time to time and could impair our ab ility to raise capital
through the sale of our equity securities. As described below, none of the shares of our common stock currently outstanding will b e available
for sale immed iately after this offering due to the existing contractual and legal restrictions on resale described below.

     Upon co mpletion of th is offering, we will have outstanding 27,028,875 shares of common stock, assuming no exercise of outstanding
options prior to co mpletion of this offering. Of these shares, the 6,250,000 shares sold in this offering will be freely t radable wit hout restriction
under the Securities Act, except for any shares purchased by our "affiliates" as that term is defined in Ru le 144 under the Securities Act.

     The remaining 20,778,875 shares of common stock held by existing stockholders will be "restricted shares" as that term is defined in
Rule 144 under the Securit ies Act. These restricted shares are subject to lock-up agreements with the underwriters providing th at, with certain
limited exceptions, the existing stockholders will not offer, sell, contract to sell or otherwise dispose of any common stock or any securities that
are convertible into common stock for a period of 180 days after the date of this prospectus (which period could be exten ded by the
underwriters for up to an additional 34 days under certain circu mstances) without the prior written consent of Bear, Stearns & Co. Inc. and
Wachovia Cap ital Markets, LLC. As a result of these lock-up agreements, notwithstanding possible earlier eligibility for sale under the
provisions of Rules 144, 144(k) and 701 under the Securities Act, none of these shares may be sold until the expiration of 180 d ays after the
date of this prospectus (which period could be extended by the underwriters for up to an additional 34 days under certain circu mstances). Bear,
Stearns & Co. Inc. and Wachovia Capital Markets, LLC may, in their sole discretion and at any time without notice, release all or any portion
of the securities subject to lock-up agreements.

Rule 144

      In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned
restricted shares for at least one year, includ ing the holding period of any prior owner except an affi liate, would be entit led to sell within any
three-month period a nu mber of shares that does not exceed the greater of:

     •
             1% of the number of shares of our common stock then outstanding, which will equal 270,289 shares immediately after this
             offering; or

     •
             the average weekly trad ing volu me of our co mmon stock during the four calendar weeks preceding the filing of a Form 144 with
             respect to such sale.

     Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability o f current public
informat ion about us. Under Ru le 144(k), a person who is not deemed to have been an affiliate of ours at any time during the three months
preceding a sale, and who has beneficially owned the shares proposed to be sold for a least two years, including the holding period of any prior
owner except an affiliate, is entitled to sell such shares without complying with the manner of sale, pub lic information, volu me limitat ion or
notice provisions of Rule 144.

Rule 701

     Any of our employees, officers, directors or consultants who purchased shares of our common stock under a written comp ensator y plan or
contract may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits affiliates to sell their Ru le 701 shares under Ru le 144
without comply ing with the holding period requirements of Rule 144. Ru le 701 further provides that nonaffiliates may sell

                                                                           68
such shares in reliance on Ru le 144 without having to comply with the holding period, public informat ion, volu me limitation or notice
provisions of Rule 144. All holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before selling such
shares. However, all Ru le 701 shares held by our directors, officers and affiliates are subject to lock-up agreements and will only become
elig ible for sale upon the e xpirat ion of the lock-up agreements. Bear, Stearns & Co. Inc. and Wachovia Capital Markets, LLC may, in their sole
discretion and at any time without notice, release all or any portion of the shares of our common stock subject to lock-up agreements.

     Following the effect iveness of this offering, we will file a Reg istration Statement on Form S-8 registering 2,272,725 shares of common
stock subject to then outstanding options or available for issuance upon exercise of options not yet granted under our 2006 Stock Incentive
Plan. As of November 1, 2006, options to purchase a total of 2,042,500 shares were outstanding, options to purchase 100,000 s hares were to be
granted effective as of the consummation of this offering and 130,225 addit ional shares were available for issuance upon exercise of options
not yet granted under our 2006 Stock Incentive Plan. Shares of our co mmon stock issued upon exercise of outstanding vested op tions are
available for immediate resale in the open market, subject to compliance by our affiliates with the requirements of Ru le 144 an d their
respective lock-up agreements.

Registration Rights

     Beginning 180 days after the date of this prospectus (which period could be extended by the underwriters for up to an additional 34 days
under certain circu mstances), holders of 14,916,808 shares of our co mmon stock will be entit led to certain rights with respec t to the registration
of such shares under the Securities Act. See "Description of Capital Stock — Reg istration Rights." Registration of such shares under the
Securities Act would result in such shares, except for shares purchased by affiliates, becoming freely tradable without restriction under the
Securities Act immediately upon the effectiveness of such registration.

                                                                         69
                                                                UNDERWRITING

     We and the selling stockholders intend to offer the shares of our common stock through the underwriters. Subject to the terms and
conditions in an underwriting agreement among us, the selling stockholders and Bear, Stearns & Co. Inc. and Wachovia Capital Markets, LLC,
acting as representatives of the underwriters named below and joint book-running managers for this offering, we and the selling stockholders
have agreed to sell to the underwriters, and the underwriters severally have agreed to pu rchase fro m us and the selling stockholders the number
of shares of common stock listed opposite their names below.

                           Underwriter                                                                   Number of Shares

                           Bear, Stearns & Co. Inc.
                           Wachovia Cap ital Markets, LLC
                           J.P. Morgan Securit ies Inc.
                           CIBC World Markets Corp.

                                Total                                                                          6,250,000

     The underwriters have agreed to purchase all of the shares sold under the underwriting agreement if any of these shares are p urchased. If
an underwriter defaults, the underwrit ing agreement provides that the purchase commit ments of the non -defaulting underwriters may be
increased or the underwriting agreement may be terminated.

    We and the selling stockholders have agreed to indemnify the underwriters against certain liab ilities, including liab ilities u nder the
Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities.

     The underwriters are offering the shares, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal
matters by their counsel, includ ing the validity of the shares, and other conditions contained in the underwriting agreement, such as the receipt
by the underwriters of officer's cert ificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the
public and to reject orders in whole or in part.

Other Relationships

     The underwriters may, fro m t ime to t ime, engage in transactions with and perform services for us in the ordinary course of th eir business.
We have a $25.0 million revolv ing credit facility fro m JPMorgan Chase Ban k, N.A., an affiliate of J.P. Morgan Securit ies Inc. The maximu m
amount availab le under our revolving cred it facility will decrease to $10.0 million on January 1, 2007, and on June 30, 2007 th is facility will
expire. At our request, JPMorgan Chase Bank, N.A. has also issued to our landlord a $50,000 letter of credit under our revolv in g credit facility,
which is held as security for our obligations under the lease for our corporate headquarters. JPMorg an Chase Bank, N.A. has received
customary interest, non-usage and other fees and expenses for the revolving credit facility and the letter of credit.

     Under Ru le 2710(h)(1) of the Conduct Rules of the National Association of Securities Dealers, Inc., or NASD, if more than 10% of the net
proceeds of a public offering of equity securities are to be paid to members of the NA SD that are part icipating in the offering, o r affiliated or
associated persons, the price of the equity securities distributed to the public must be no higher than that recommended by a "qualified
independent underwriter," as defined in Ru le 2720 of the Conduct Rules of the NASD. Because affiliates of certain of the underwriters of this
offering may receive repayments of amounts outs tanding under our $25.0 million revolv ing credit facility fro m the net proceeds of this offering
that are, in the aggregate, more than 10% of our net proceeds of this offering, Bear, Stearns & Co. Inc. will act as a qualified in dependent
underwriter in connection with this offering. In its role as qualified independent underwriter, Bear, Stearns & Co, Inc. has performed due

                                                                         70
diligence investigations and reviewed and participated in the preparation of this prospectus and the registration statement of wh ich this
prospectus forms a part. Bear, Stearns & Co. Inc. will not receive a fee for serving as a qualified independent underwriter in connection with
this offering. The price of the shares of our common stock sold to the public will be no higher than that recommended by the qualified
independent underwriter.

     We have agreed to indemnify Bear, Stearns & Co. Inc., in its role as qualified independent underwriter, against certain liabilit ies,
including liabilities under the Securit ies Act. If we are unable to provide this indemn ification, we will contribute to payme nts Bear, Stearns &
Co. Inc. may be required to make in respect of those liabilities.

Commissions and Discounts

     The underwriters have advised us that they propose initially to offer the shares to the public at the public offering price o n the cover
page of this prospectus and to dealers at that price less a concession not in excess of $         per share. The underwriters may allo w, and the
dealers may reallow, a d iscount not in excess of $         per share to other dealers. After the public offering, the public offering price,
concession and discount may be changed.

     The fo llo wing table shows the public offering price, underwriting discount and proceeds before expenses to us and the selling
stockholders. The informat ion assumes either no exercise or full exercise by the underwriters of their over-allot ment option.

                                                                                                    Without
                                                                                   Per Share        Option        With Option

                       Public o ffering price                                      $            $                $
                       Underwrit ing discount                                      $            $                $
                       Proceeds, before expenses, to Heelys, Inc.                  $            $                $
                       Proceeds, before expenses, to the selling stockholders      $            $                $

    The expenses of the offering, excluding the underwriting discount and commissions and related fees, are estimated at $2.1 million and are
payable by us.

Over-Allotment Option

      The selling stockholders have granted the underwriters an option exercisable for 30 days fro m the date of this prospectus to purchase a
total of up to 937,500 additional shares at the public offering price less the underwriting discount. The underwriters may exercise this option
solely to cover any over-allot ments, if any, made in connection with this offering. To the extent the underwriters exercise this option in whole
or in part, each will be obligated, subject to conditions contained in the underwrit ing agreement, to purchase a number of ad ditional shares
approximately proportionate to that underwriter's in itial co mmit ment amount reflected in the above table.

      If the underwriters sell mo re shares than could be covered by the over-allot ment option, a naked short position would be created that can
only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned
that there could be downward pressure on the price of the shares in the open market after p ricing that could adversely affect investors who
purchase in the offering.

Directed Share Program

      The underwriters have reserved for sale, at the in itial public offering price, up to 5% of the shares of our common stock being offered for
sale in this offering for our employees and their families and other persons associated with us who exp ress an interest in purchasing these
shares of common stock in this offering. The number of shares available for sale to the general public in the offering will b e

                                                                         71
reduced to the extent these persons purchase reserved shares. Any reserved shares not purchased by these persons will be offe red by the
underwriters to the general public on the same terms as the other shares offered in this offering.

No Sales of Si milar Securities

     We, each of our executive officers and directors and all of the holders of our co mmon stock, subject to limited exceptions, h ave agreed not
to sell or transfer any shares of our common stock for 180 days after the date of this prospectus (which period could be extended by the
underwriters for up to an additional 34 days under certain circu mstances) without first obtaining the written consent of Bear, St earns & Co. Inc.
and Wachovia Capital Markets, LLC.

      The 180-day period described in the preceding paragraph will be automatically extended if: (i) during the last 17 days of the 180-day
period we issue an earnings release or announce material news or a material event; or (ii) prior to the expiration of the 180-day period, we
announce that we will release earnings results during the 15-day period following the last day of the 180-day period, in either o f wh ich case the
restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the issuance of
the earnings release or the announcement of the material news or material event.

     Notwithstanding the foregoing, parties who have agreed not to sell or transfer shares of our common stock during such period of time may
transfer shares during such period, without the prior written consent of Bear, Stearns & Co. Inc. and Wachovia Capital Markets, LLC:

          (i)   as a bona fide gift or gifts;

          (ii) to any trust for the direct or indirect benefit o f such party or his or her immediate family; or

          (iii) by will or intestate succession;

provided, however, it is a condition to any such transfer that the transferee (or trustee in the case of clause (ii) above) e xecute an agreement
stating that such transferee (or trustee) is receiv ing and holding shares of our common stock subject to the provisions of th e agreement pursuant
to which these persons agreed not to sell or transfer shares of our common stock and there shall be no furth er transfer of shares of our co mmon
stock except in accordance with the terms of such agreement; provided, further, that in the case of any such transfer, no fil ing by any party
under the Securities Act or the Securities Exchange Act of 1934 is required in connection with such transfer (other than a filing on Form 5
made after the exp iration of the lock-up period in connection with a donation or transfer pursuant to clause (i)). For this purpose, "immed iate
family" shall mean any relationship by blood, marr iage or adoption, not more remote than first cousin.

Offering Price Determinati on

      Before this offering, there has been no public market for our co mmon stock. The initial public offering price will be determined by
negotiation between the underwriters and us. The principal factors to be considered in determin ing the public offering price include: the
informat ion set forth in this prospectus and otherwise available to the underwriters; the history and the prospects for the industry in wh ich we
will co mpete; the ability of our management; the prospects for our future earnings; the present state of our development and our cur rent
financial condition; the general condition of the securities markets at the time of this offering; and the recent market pric es of, and the demand
for, publicly traded co mmon stock of generally co mparable co mpanies.

                                                                          72
Stabilization, Short Positions and Penalty Bi ds

     The underwriters may engage in over-allot ment, stabilizing transactions, syndicate covering transactions and penalty bids in accordance
with Regulation M under the Securities Exchange Act of 1934.

     •
            Over-allot ment involves syndicate sales in excess of the offering size, which creates a syndicate short position.

     •
            Stabilizing transactions permit b ids to purchase the underlying security so long as the stabilizing bids do not exceed a spec ified
            maximu m.

     •
            Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been
            completed in order to cover syndicate short positions.

     •
            Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock origin a lly
            sold by the syndicate member is purchased in a syndicate covering transaction to cover syndicate short positions.

    Stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of our co mmon stock to be higher than it
would otherwise be in the absence of these transactions. These transactions may be effected on The Nasdaq Global Market or o t herwise and, if
commenced, may be d iscontinued at any time.

The Nasdaq Gl obal Market Listing

    We have applied to list our common stock on The Nasdaq Global Market under the symbol "HLYS."

Discretionary Shares

    In connection with this offering, the underwriters may allocate shares to accounts over which they exercise discretionary aut hority. The
underwriters do not expect to allocate shares to discretionary accounts in excess of 5% of the total number o f shares in this offering.

Sales in Other Jurisdictions

     Each of the underwriters may arrange to sell shares in certain ju risdictions outside the United States through affiliates, eith er directly
where they are permitted to do so or through affiliates. In that regard, Wachovia Cap ital Markets, LLC may arrange to sell the shares in certain
jurisdictions through an affiliate, Wachovia Securities International Limited or WSIL. WSIL is a wholly -o wned indirect subsidiary of
Wachovia Corporat ion and an affiliate of Wachovia Cap ital Markets, LLC. W SIL is a UK incorporated investment firm regulated by the
Financial Services Authority. Wachovia Securities is the trade name for the corporate and investment banking services of Wachovia
Corporation and its affiliates, including Wachovia Capital Markets, LLC and WSIL.

     Each of the underwriters has represented and agreed that:

     •
            it has not made or will not make an offer of shares to the public in the United Kingdom within the meaning of section 102B of t he
            Financial Se rvices and Markets Act 2000 (as amended) (FSMA) except to legal entit ies which are authorized or regulated to
            operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities or
            otherwise in circu mstances which do not require the publication by us of a prospectus pursuant to the Prospectus Rules of the
            Financial Services Authority (FSA);

     •
            it has only communicated or caused to be communicated and will only co mmunicate or cause to be communica ted an invitation or
            inducement to engage in investment activity (within the meaning of section 21 of FSMA) to persons who have professional
            experience in matters

                                                                        73
          relating to investments falling within A rticle 19(5) of the Financial Services and Markets Act 2000 (Financial Pro motion) Order 2005
          or in circu mstances in which section 21 o f FSMA does not apply to us; and

     •
             it has complied with and will co mply with all applicab le provisions of FSMA with respect to anything done by it in relat ion t o the
             shares in, fro m or otherwise involving the Un ited Kingdom.

    The shares will not be offered, directly or indirectly, to the public in Switzerland and this prospectus does not constitute a public offering
prospectus as that term is understood pursuant to article 652a or 1156 of the Swiss Federal Code of Obligations.

      The shares (i) will not be offered or sold, directly or indirectly, to the public (appel public à l'épargne) in the Republic of France and
(ii) offers and sales of shares in the Republic of France (a) will only be made to qualified investors (investisseurs qualifiés) as defined in, and in
accordance with, Articles L 411-1, L 411-2 and D 411-1 to D 411-3 of the French Code monétaire et financier or (b) will be made in any other
circu mstances which do not require the publication by the issuer of a prospectus pursuant to Article L 411-2 of the Code monétaire et financier
and Article 211-2 o f the Règ lement Général of the Autorité des marchés financiers.

      Investors are informed that this prospectus has not been admitted to the clearance procedures of the Autorit é des marchés financiers, and
that any subsequent direct or indirect circulation to the public of the shares so acquired may not occur without meet ing the conditions pro vided
for in Articles L 411-1, L 411-2, L 412-2 and L 621-8 to L 621-8-2 of the Code Monétaire et Financier.

      In addit ion, the issuer represents and agrees that it has not distributed or caused to be distributed and will not distribute or cause to b e
distributed in the Republic of France, this prospectus or any other offering material relating to the shares other than to th ose investors (if any) to
whom offers and sales of the shares in the Republic of France may be made as described above.

     In relat ion to each Member State of the Eu ropean Economic Area which has imp lemented the Prospectus Directive (each, a Releva nt
Member State), with effect fro m and including the date on which the Prospectus Directive is imp lemented in that Relevant Member S tate (the
Relevant Implementation Date), it has not made and will not make an offer of shares to the public in that Relevant Member State prior to the
publication of a prospectus in relat ion to the shares which has been approved by the competent authority in that Relevant Mem ber State or,
where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in
accordance with the Prospectus Directive, except that it may, with effect fro m and including the Relevant Implementation Date , make an offer
of shares to the public in that Relevant Member State at any time:

     •
             to legal entities wh ich are authorised or regulated to operate in the financial markets or, if not so authorised or regulated, wh ose
             corporate purpose is solely to invest in securities;

     •
             to any legal entity which has two or mo re of (1) an average of at least 250 emp loyees during the last financial year; (2) a total
             balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or
             consolidated accounts; or

     •
             in any other circu mstances which do not require the publication by the issuer of a prospectus pursuant to Article 3 of the
             Prospectus Directive.

     For the purposes of this provision, the expression an "offer of shares to the public" in relation to any shares in any Releva nt Member State
means the communicat ion in any form and by any means of sufficient information on the terms of the offer and the shares to be of fered so as to
enable an investor to decide to purchase or subscribe the shares, as the same may be varied in that Member State by any measure imp lementing
the Prospectus Directive in that Member State and the expression "Prospectus Direct ive" means Directive 2003/71/ EC and includ es any
relevant imp lementing measure in each Relevant Member State.

                                                                          74
                                                               LEGAL MATTERS

     The validity of the co mmon stock being offered will be passed upon for us by Gardere Wynne Sewell LLP, Dallas, Texas and for the
underwriters by Latham & Watkins LLP, New Yo rk, New York. As of the date of this prospectus, Robert J. Ward, a partner of Gardere Wynne
Sewell LLP, beneficially o wns an aggregate of 250,000 shares of our common stock prior to the offering and will be selling up to 43,733 shares
of our co mmon stock in this offering. A Stockholders Agreement between Mr. Adams and Mr. Ward entered into in May 2000 provides that
Mr. Adams is to protect Mr. Ward fro m dilution of Mr. Ward's ownership of our co mmon stock by transferring additional shares of common
stock to Mr. Ward at any time that Mr. Ward's ownership of our co mmon stock would otherwise be diluted. The Stockholde rs Agreement
provides that Mr. Adams' obligations terminate when Mr. Ward has received 1,281,469 shares, provided that Mr. Adams otherwise co mplies
with all of h is obligations under that Agreement. On November 17, 2006, Messrs. Adams and Ward entered into an Agreement pursuant to
which, subject to complet ion of this offering, Mr. Ward will exchange his rights under the Stockholders Agreement for 136,775 shares of our
common stock owned by Mr. Adams. Such shares are reflected as beneficially owned by both Mr. Adams and Mr. Ward before this offering.
The Agreement will be void if this offering does not close by June 30, 2007.


                                                                     EXPERTS

     The consolidated financial statements as of September 30, 2006 and December 31, 2005 and 2004, for each of the three years in the period
ended December 31, 2005 and fo r the nine months ended September 30, 2006, included in this prospectus and the related finan cial statement
schedule included elsewhere in the registration statement have been audited by Deloitte & Touche LLP, an independent registered public
accounting firm, as stated in their report appearing herein and elsewhere in the registration statement (which report expresses an unqualified
opinion on the financial statements and financial statement schedule and includes an explanatory paragraph referring to the r etroactive
adjustment of all co mmon shares and per common share amounts for all periods presented to reflect the October 23, 2006 stock split), and have
been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.


                                             WHERE YOU CAN FIND MORE INFORMATION

     We have filed with the SEC a registration statement on Form S-1 under the Securit ies Act with respect to our common stock being offered
by this prospectus. This prospectus does not contain all of the informat ion presented in the registration statement and the e xh ibits to the
registration statement. For further information with respect to us and our common stock we are o ffering, reference is made to the registration
statement and the exh ibits filed as a part of the reg istration statement. Statements contained in this prospectus concerning the contents of any
contract or any other document referred to may be only summaries of these documents. The exhib its to this registration statement should be
referenced for the co mplete contents of these contracts and documents. Each statement is quali fied in all respects by reference to the exh ibits.

     Upon co mpletion of th is offering, we will be subject to the reporting and informat ion requirements of the Securit ies Exchange Act of
1934, as amended, and, as a result, will file period ic and current reports, pro xy statements and other information with the SEC. You may read
and copy this information at the Public Reference Roo m of the SEC located at 100 F St reet, NE, Washington, D.C. 20549. Please call the SEC
at 1-800-SEC-0330 for further informat ion on the operation of the Public Reference Roo m. Copies of all or any part of the registration
statement may be obtained fro m the SEC's offices upon payment of fees prescribed by the SEC. The SEC maintains an Internet site that
contains periodic and current reports, pro xy and information statements and other information regard ing issuers that file electro nically with the
SEC. The address of the SEC's website is www.sec.gov.

                                                                         75
                                                            HEELYS , INC.

                                    INDEX TO CONSOLIDATED FINANCIAL S TATEMENTS

Report of Independent Registered Public Accounting Firm
    Consolidated Balance Sheets as of December 31, 2004 and 2005 and September 30, 2006
    Consolidated Statements of Operations for the Years Ended December 31, 2003, 2004 and 2005 and the Nine Months Ended
    September 30, 2005 (unaudited) and 2006
    Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2003, 2004 and 2005 and the Nine Months Ended
    September 30, 2005 (unaudited) and 2006
    Consolidated Statements of Cash Flows fo r the Years Ended December 31, 2003, 2004 and 2005 and the Nine Months Ended
    September 30, 2005 (unaudited) and 2006
Notes to Consolidated Financial Statements

                                                                 F-1
                              REPORT OF INDEPENDENT REGIS TERED PUB LIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Heelys, Inc.
Carrollton, TX

We have audited the accompanying consolidated balance sheets of Heelys, Inc. and subsidiaries (th e "Co mpany") as of September 30, 2006,
December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of th e three
years in the period ended December 31, 2005 and for the nine months ended September 30, 2006. Our audits also included the financial
statement schedule listed in the Index at II-8. These financial statements and financial statement schedule are the responsibility of the
Co mpany's management. Our responsibility is to express an op inion on these financial statements and financial statement schedule based on
our audits.

We conducted our audits in accordance with the standards of the Public Co mpany Accounting Oversight Board (United States). Th ose
standards require that we plan and perfo rm the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Co mpany is not required to have, nor were we engaged to perform, an audit of its internal control over fina n cial reporting.
Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are app ropriate in the
circu mstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal cont rol over financial reporting.
Accordingly, we exp ress no such opinion. An audit also includes examin ing, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Heelys, In c. and
subsidiaries as of September 30, 2006 and December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2005 and for the nine months ended September 30, 2006, in conformity with accounting
principles generally accepted in the United States of A merica. Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the informat ion set forth therein.

As discussed in Note 15 to the financial statements, all co mmon share and per co mmon share amounts in the consolidated financial statements
have been retroactively adjusted for all periods presented, to give effect to the stock split that occurred on October 23, 2006.

/s/ Deloitte & Touche LLP

Dallas, Texas

November 24, 2006

                                                                         F-2
                                                  HEELYS , INC. AND S UBSIDIARIES

                                                CONSOLIDATED BALANCE S HEETS

                                 AS OF DECEMB ER 31, 2004 AND 2005 AND S EPTEMB ER 30, 2006

                                                    (In thousands, except share data)

                                                                                      December 31,

                                                                                                                   September 30,
                                                                                                                        2006

                                                                               2004              2005

ASSETS

CURRENT ASSETS:
  Cash and cash equivalents                                                $    1,628       $            738   $               3,269
  Accounts receivable, net of allowances of $324, $704, and $1,312,
  respectively                                                                  2,520                 8,286                   44,828
  Inventories                                                                     937                 1,479                   12,754
  Deferred inco me tax benefits                                                    89                   235                      460
  Prepaid and deferred expenses                                                   222                   300                    2,131

     Total current assets                                                       5,396                11,038                   63,442

PROPERTY, PLA NT AND EQUIPM ENT, Net of accu mulated
depreciation of $661, $760, and $869, respectively                                146                    240                       363

PATENTS AND TRADEMA RKS, Net of accu mulated amortizat ion of
$574, $779, and $958, respectively                                                616                    534                       486

DEFERRED INCOM E TA X BENEFITS                                                    163                    178                       225

TOTA L ASSETS                                                              $    6,321       $        11,990    $              64,516


LIAB ILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIA BILITIES:
  Accounts payable                                                         $      228       $           218    $                 138
  Co mmissions payable                                                             47                   153                    1,273
  Accrued bonus                                                                   274                   612                      639
  Accrued expenses                                                                334                 1,508                    8,155
  Income taxes payable                                                            141                   350                    4,832
  Debt                                                                             91                    96                   26,499

     Total current liabilities                                                  1,115                 2,937                   41,536

COMMITM ENTS A ND CONTINGENCIES (Note 8)

SERIES A REDEEMABLE PREFERRED STOCK, $0.001 par value,
1,818,182 shares issued and outstanding as of December 31, 2004(1)                500                —                    —

SERIES B CONVERTIBLE, REDEEMA BLE PREFERRED STOCK,
$0.001 par value, 454,545 shares issued and outstanding as of
December 2004 and 2005(1)                                                         125                    125              —

     Total mezzanine financing                                                    625                    125              —

STOCKHOLDERS' EQUITY:
  Co mmon stock, $0.001 par value, 75,000,000 shares authorized;
  13,988,875 shares issued and outstanding as of December 31, 2004 and
  2005 and 23,903,875 shares issued and outstanding as of September 30,
  2006                                                                                   14              14           24
  Additional paid-in capital                                                            140             140          515
  Retained earnings                                                                   4,427           8,774       22,441

      Total stockholders' equity                                                      4,581           8,928       22,980

TOTA L LIABILITIES AND STOCKHOLDERS' EQUITY                                    $      6,321   $   11,990      $   64,516

(1)
       Does not give effect to the 25-for-one stock split effected in October 2006.

                                                    See notes to consolidated financial statements.

                                                                      F-3
                                                   HEELYS , INC. AND S UBSIDIARIES

                                        CONSOLIDATED STATEMENTS OF OPERATIONS

                              FOR THE YEARS ENDED DEC EMB ER 31, 2003, 2004 AND 2005 AND

                           THE NINE MONTHS ENDED S EPTEMB ER, 2005 (UNAUDITED) AND 2006

                                                   (In thousands, except per share data)

                                                                                                                                Nine Months
                                                                                                                                   Ended
                                                                   Year Ended December 31,                                     September 30,

                                                          2003                 2004               2005                  2005                   2006

                                                                                                                     (Unaudited)


NET SALES                                             $     22,215        $     21,310        $    43,950        $          29,052         $    117,107

COST OF SA LES                                              15,583              14,529             28,951                   19,143               76,570

GROSS PROFIT                                                 6,632                6,781            14,999                      9,909             40,537
SELLING, GENERA L AND ADM INISTRATIVE
EXPENSE
  Sales and market ing                                       2,739                3,191              5,247                     3,262              8,974
  General and administrative                                 2,184                2,368              2,987                     2,133              4,034

      Total selling, general and ad ministrative
      expense                                                4,923                5,559              8,234                     5,395             13,008

INCOM E FROM OPERATIONS                                      1,709                1,222              6,765                     4,514             27,529
OTHER (INCOM E) EXPENSE
  Interest expense                                                51                   11                 51                        42                383
  Interest income                                                (18 )                 (3 )              (15 )                     (11 )              (47 )
  Other (income) expense                                          —                    (7 )               95                        45                 66

      Total other (inco me) expense                               33                    1                131                        76                402

INCOM E BEFORE INCOM E TAXES                                 1,676                1,221              6,634                     4,438             27,127

INCOM E TAXES                                                    575                  418            2,287                     1,530              9,460

NET INCOM E                                           $      1,101        $           803     $      4,347       $             2,908       $     17,667

EA RNINGS PER SHARE:
  Basic                                               $          0.08     $           0.06    $          0.31    $               0.21      $          0.99
  Diluted                                             $          0.04     $           0.03    $          0.17    $               0.11      $          0.70
WEIGHTED A VERA GE SHARES
  OUTSTANDING:
  Basic                                                     13,989              13,989             13,989                   13,989               17,812
  Diluted                                                   25,353              25,353             25,353                   25,353               25,329

                                               See notes to consolidated financial statements.

                                                                         F-4
                                                 HEELYS , INC. AND S UBSIDIARIES

                                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUIT Y

                               FOR THE YEARS ENDED DEC EMB ER 31, 2003, 2004, AND 2005 AND

                                        THE NINE MONTHS ENDED S EPTEMB ER 30, 2006

                                                             (In thousands)

                                                             Common Stock

                                                                                           Additional                                 Total
                                                                                            Paid-In            Retained           Stockholders'
                                                                                            Capital            Earnings              Equity

                                                         Shares          Amount

BA LANCE—January 1, 2003                                  13,989    $             14   $             140   $        2,523     $              2,677

        Net inco me                                        —                —                    —                  1,101                    1,101


BA LANCE—December 31, 2003                                13,989                  14                 140            3,624                    3,778

        Net inco me                                        —                —                    —                     803                        803


BA LANCE—December 31, 2004                                13,989                  14                 140            4,427                    4,581

        Net inco me                                        —                —                    —                  4,347                    4,347


BA LANCE—December 31, 2005                                13,989                  14                 140            8,774                    8,928

        Net inco me                                        —                —                    —                 17,667                   17,667

        Purchase of treasury stock                         1,449            —                    —                 (4,000 )                 (4,000 )

        Conversion of Series B redeemable preferred
        stock to common stock                             11,364                  10                 115           —                              125
Amort izat ion of stock compensation                          —                   —                  260                  —                       260


BA LANCE—September 30, 2006                               23,904    $             24   $             515   $       22,441     $             22,980


                                              See notes to consolidated financial statements.

                                                                   F-5
                                                                     HEELYS , INC. AND S UBSIDIARIES

                                                         CONSOLIDATED STATEMENTS OF CAS H FLOWS

                                           FOR THE YEARS ENDED DEC EMB ER 31, 2003, 2004 AND 2005 AND

                                     THE NINE MONTHS ENDED S EPTEMB ER 30, 2005 (UNAUDITED) AND 2006

                                                                                (In thousands)

                                                                                                                                                Nine Months
                                                                                       Year Ended December 31,                               Ended September 30,

                                                                                    2003             2004               2005                2005                    2006

                                                                                                                                         (Unaudited)


OPERATING ACTIVITIES:
  Net income                                                                    $     1,101      $          803     $     4,347      $             2,908        $      17,667
  Adjustments to reconcile net income to net cash provided by (used in)
  operating activities:
      Depreciation and amortization                                                    548              454                  396                       276                   290
      Deferred income tax expense (benefit)                                             14               (55 )              (161 )             —                            (272 )
      Stock-based compensation expens e                                                 —                 —                   —                          —                   260
      Loss (gain) on sale of equipment                                                —                —                       9                         (1 )                  1
      Changes in operating assets and liabilities:
          Accounts receivable                                                         2,761             (778 )            (5,767 )                 (2,772 )           (36,542 )
          Inventory                                                                     476              279                (542 )                 (2,077 )           (11,275 )
          Prepaid and deferred expenses                                                  31               32                 (77 )                   (150 )            (1,831 )
          Accounts payable                                                             (299 )           (130 )                (9 )                    665                 (81 )
          Commissions payable                                                            31              (56 )               106                      210               1,120
          Accrued bonus                                                                  56               (9 )               338                      184                  27
          Accrued expens es                                                            (517 )             56               1,172                      149               6,649
          Income taxes payabl e                                                        (585 )            115                 209                      292               4,482

               Net cash provided by (used in) operating activities                    3,617                 711                 21                     (316 )         (19,505 )

INVESTING ACTIVITIES:
   Change in cash on deposit held under line of credit                               (1,139 )          1,139              —                    —                      —
   Purchase of equipment                                                                (84 )            (84 )             (236 )                      (192 )               (235 )
   Increase in patents and trademarks                                                  (268 )           (209 )             (180 )                      (118 )               (132 )
   Proceeds from sale of equipment                                                    —                   17              —                    —                      —

               Net cash (used in) provided by investing activities                   (1,491 )               863             (416 )                     (310 )               (367 )

FINANCING ACTIVITIES:
   Purchase of treasury stock                                                         —                —                  —                    —                      (4,000 )
   Redemption of preferred stock                                                      —                —                   (500 )                      (500 )         —
   Net (payments) borrowings on revolving credit facility                              (191 )          —                  —                    —                      21,967
   Proceeds from issuance of short-term debt                                            518             497                 508                         433            4,958
   Principal payments on short-term debt                                             (2,446 )          (504 )              (503 )                      (236 )           (522 )

               Net cash (used in) provided by financing activities                   (2,119 )                (7 )           (495 )                     (303 )          22,403

NET INCREASE (DECREASE) IN CASH AND CASH EQ UIVALENTS                                        7         1,567                (890 )                     (929 )              2,531

CASH AND CASH EQ UIVALENTS , beginning of period                                            54              61            1,628                    1,628                    738

CASH AND CASH EQ UIVALENTS , end of period                                      $           61   $     1,628        $          738   $                 699      $          3,269


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the period for:
             Interest                                                           $          195   $            8     $           48   $                   37     $           223

               Income taxes                                                     $     1,148      $          357     $     2,238      $             1,238        $          5,250


SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION:
  Conversion of Series B redeemabl e preferred stock into common stock                —                —                  —                    —                $           125



                                                                 See notes to consolidated financial statements.
F-6
                                                     HEELYS , INC. AND S UBSIDIARIES

                                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. COMPANY B ACKGROUND

     Heelys, Inc. and subsidiaries (the "Company" or "Heelys") is a designer, marketer and distributor of innovative, action sports -inspired
products under the HEELYS brand targeted to the youth market. The primary p roduct, HEELYS-wheeled footwear, is patented, dual-purpose
footwear that incorporates a stealth, removable wheel in the heel. HEELYS are d istributed primarily through retail stores in the United States
and international wholesale distributors.

     The Co mpany initially incorporated as Heeling, Inc. in Nevada in 2000. The Co mpany was reincorporated in Delaware in August 2006
and changed its name to Heelys, Inc. Through its general and limited partner interests, Heelys, Inc. owns 100% of Heeling Sports Limited
("HSL"), a Texas limited partnership, which was formed in May 2000.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Consolidated Financial Statements —Consolidated financial statements include the accounts of Heelys, Inc. and its subsidiaries.
Significant intercompany balances and transactions are eliminated in consolidation.

         Use of Estimates —The preparation of the consolidated financial statements in conformity with accounting principles generally accepted
in the United States of A merica requires management to make estimates and assump tions that affect reported amounts of certain assets and
liab ilit ies and disclosure of contingent assets and liabilit ies at the date of the consolidated financial statements and the reported amounts of
revenues and expenses for the period. Management's significant estimates are as follows: allowances for doubtful accounts, inventory reserves,
long-lived assets, income taxes, sales return allo wance and legal reserves. Actual results could differ fro m these estimates and are reported in
the period they become known.

      Unaudited Interim Financial Information —The interim financial information for the nine months ended September 30, 2005 is
unaudited and has been prepared on the same basis as the audited consolidated financial statements. In the opinion o f management, such
unaudited informat ion includes all adjustments, consisting of normal recurring adjustments, necessary for fair presentation o f the interim
financial informat ion. Operat ing results for the interim periods are not necessarily indicative of results for any subsequent periods. Certain
informat ion in the footnote disclosure normally included in annual financial statements has been condensed or omitted for the interim periods
presented, in accordance with the rules and regulations of the Securit ies and Exchange Co mmission for interim financial statements.

      Segment Reporting —The Co mpany operates in one segment although it sells different types of products in both the domestic and
international markets. The gross margin in these markets is consistent and comparable. The Co mpany does not create separate statements of
operations for these products or markets.

     Cash Equivalents —Cash equivalents consist of highly liquid investments with orig inal maturity dates of three months or less when
purchased.

      Concentration of Risk —The Co mpany's cash and cash equivalents are maintained in one financial institution in amounts that typically
exceed federally insured limits. The Co mpany has not experienced any losses in such accounts and b elieves it is not exposed to significant
credit risk.

                                                                        F-7
      Inventories —Inventories are stated at the lower of cost or market. Inventories are valued on a first -in first-out ("FIFO") basis. Inventory
costs include inbound freight. All other purchasing and distribution costs associated with ending inventories are expensed.

      Property and Equipment —Property and equipment, such as leasehold improvements, furn iture and fixtures, equip ment and product
mo lds and designs, are stated at cost less accumulated depreciation and amort ization. Depreciat ion and amort ization are provid ed using the
straight-line method over the estimated useful lives of the assets.

      Patents and Trademarks —These intangibles are stated at cost less accumulated amortizat ion. A mortization is provided using the
straight-line method over the estimated useful lives of five years of these assets. These assets are amort ized beginning when p roducts
incorporating these intangibles are in itially d istributed or the patent or trademark application is granted, whichever is earlier.

      Long-Lived Assets —The Co mpany reviews its long-lived assets and certain intangible assets for impairment whenever events or
changes in circu mstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is
generally measured by a comparison of the carrying amount of an asset to undiscounted pretax future ne t cash flows expected to be generated
by that asset. An impairment loss is recognized if the estimated undiscounted future cash flows are less than the carrying va lue of the related
assets. There were no impairments identified in the periods reported.

      Accrued Expenses— Accrued expenses include amounts accrued by the Company for expenses incurred but not yet realized. Such
expenses may include marketing, professional fees, property taxes, liability insurance premiu ms, interest expense, royalties, inv entory received
but not invoiced and amounts received fro m customers or credits due to customers in excess of invoices they owe to the Co mpan y.

      Deferred Income Taxes— Deferred income taxes are provided using the asset and liability method for temporary differences between
the tax basis of an asset or liability and its reported amount in the consolidated financial statements.

      Recognition of Revenues— Revenues are recognized when merchandise is shipped, title passes to the customer, the customer assumes
risk of loss, the collection of relevant receivables is probable, persuasive evidence of an arrangement exists and the sales price is fixed or
determinable. Tit le passes upon shipment or upon receipt by the customer depending on the agreement with the customer. The Co mpany
records reductions to revenue for estimated returns, including permitted returns of damaged or defective merchandise, and for all other
allo wances and markdowns, in accordance with Emerging Issues Task Force Issue 01 -09, "Accounting for Consideration Given by a Vendor to
a Customer o r a Reseller of the Vendor's Product" at the time of revenue recognition. Accordingly, the Co mpany provided total allowances of
$265,000, $329,000, $733,000, $371,000 (unaudited) and $2.0 million during 2003, 2004, 2005 and for the nine months ended September 30,
2005 and 2006, respectively.

      Advertising Costs— Advertising production costs are expensed the first time the advertisement is run. Media (TV and print) placement
costs are expensed in the month the advertising appears. Through cooperative advertising programs, the Co mpany reimbu rses its retail
customers for certain of their costs of advertising the Company's products. The Company records these costs in selling and administrative
expense at the point in time when it is obligated to its customers for the costs, which is when the related revenues are reco gnized. This
obligation may arise prior to the related advertisement

                                                                        F-8
being run. Total advertising and promotion expenses were $997,000, $1.1 million, $1.6 million, $905,000 (unaudited) and $1.9 million during
2003, 2004, 2005 and for n ine months ended September 30, 2005 and 2006, respectively. Prepaid advertising and promotion expenses recorded
as appropriate in prepaid and deferred expenses totaled $15,000, $62,000 and $22,000 at December 31, 2004 and 2005 and September 30,
2006, respectively.

       Shipping and Handling Costs— Shipping and handling costs are expensed as incurred and included in costs of sales.

      Insura nce— The Co mpany's insurance retention is $25,000 per claim for claims incurred through May 31, 2006, and is $50,000 per
claim fo r claims after May 31, 2006. An estimated liab ility is provided for current pending claims and estimated incurred -but-not-reported
claims due to this retention risk. A liability for unpaid claims in the amount of $50,000 , $75,000 and $125,000 as of December 31, 2004 and
2005 and September 30, 2006, respectively, is reflected in the balance sheet as an accrued expense.

      Net Income per Share — The Co mpany calculates net income per share in accordance with SFAS No. 128, Earnings Per Share . Under
SFAS No. 128, basic net inco me per co mmon share is calculated by dividing net inco me by the weighted -average number of co mmon shares
outstanding during all periods presented. Diluted net income per co mmon share reflects the effects of potentially d ilutive securities, which
consists of preferred stock and stock options. A reconciliat ion of the numerator and denominator used in the calculation of b asic and diluted net
income per share is as follows (in thousands):

                                                                                                                                    Nine Months
                                                                                   Year Ended December 31,                       Ended September 30,

                                                                            2003              2004             2005              2005                2006

                                                                                                                              (Unaudited)


Numerator—net income applicable to common stockholders                  $      1,101      $          803   $      4,347   $              2,908   $     17,667

Denominator:
   Weighted average common stock outstanding for basic earnings per
   share                                                                      13,989            13,989           13,989                 13,989         17,812
   Effect of dilutive securities:
       Weighted average stock options and restricted stock                        —                 —                —                      —             749
       Preferred stock                                                        11,364            11,364           11,364                 11,364          6,768

   Adjusted weighted average common stock and assumed conversions for
   diluted earnings per share                                                 25,353            25,353           25,353                 25,353         25,329

      Fair Value of Financial Instruments— Management estimates that, as of December 31, 2004 and 2005, the fair value o f cash and cash
equivalents, receivables, inventories, accounts payable and accrued expenses are carried at amounts that reasonably approxima te their fair
value.

       Other Comprehensive Income — The Co mpany has no components of comprehensive income other than net income.

      Recent Accounting Pronouncements— In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 153,
Exchange of Nonmonetary Assets—an amendment of APB Opinion No. 29 ("SFAS 153"). SFAS 153 eliminates the exception from fair value
measurement for non monetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary
Transactions , and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 is effect ive fo r nonmonetary
asset exchanges occurring in fiscal years beginning after June 15, 2005. The Co mpany adopted SFAS 153 on January 1, 2006 and the adoption
of

                                                                                    F-9
SFAS 153 did not have an impact on the Co mpany's financial position, cash flows or results of operations.

     In November 2004, the FASB issued SFAS No. 151, Inventory Costs — an amendment of Accounting Research Bulletin ("ARB") No. 43,
Chapter 4 ("SFAS 151"). SFAS 151 amends ARB No. 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight,
handling costs and wasted materials (spoilage) should be recognized as current period charges. It also requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effect ive for fiscal
years beginning after June 15, 2005. The Co mpany adopted SFAS 151 on January 1, 2006 and the adoption of SFAS 151 did n ot have an
impact on the Co mpany's financial position, results of operations or cash flows.

     In December 2004, the FASB issued a revision to SFAS No. 123, Accounting for Stock -Based Compensation , which requires the
calculation of the fair value of stock-based compensation, estimat ion of future forfeitures and income taxes and recognition of t he fair value as
a non-cash expense over the vesting period of the underlying instruments. SFAS No. 123(R), Share-Based Payment . The Co mpany adopted
SFAS No. 123(R) effective as of January 1, 2006. The Co mpany will incur appro ximately $343,000, net of tax, in non -cash stock-based
compensation expense during fiscal 2006 based on the number of stock options outstanding as of September 30, 2006.

      In March 2005, the FASB issued Statement No. 47, Accounting for Conditional Asset Retirement Obligations ("FIN 47"). FIN 47 clarifies
that the term conditional asset retirement obligation as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations , refers
to a legal obligation to perform an asset retirement activ ity in which the timing and/or method of settlement are conditional on a future event
that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditiona l even though
uncertainty exists about the timing and/or method of settlement. FIN 47 is effective no later than the end of fiscal years ending after
December 15, 2005 (December 31, 2005, for calendar-year enterprises). The Co mpany adopted FIN 47 on January 1, 2006 and the adoption of
FIN 47 did not have an impact on the Co mpany's financial position, cash flo ws or results of operation s.

     In May 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections: a replacement of APB Opinion No. 20
and FASB Statement No. 3 ("SFAS 154"). SFA S 154 changes the requirements for the accounting for and reporting of a chan ge in accounting
principle. Th is statement applies to all voluntary changes in accounting principles. This statement also applies to changes r equired by an
accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. This statement
requires retrospective application to prior periods' financial statements of changes in accounting principles, unless it is i mpracticable to do so.
The requirements for SFAS 154 are effective for accounting changes and corrections of errors made in fiscal years beginning after
December 15, 2005. The Co mpany adopted SFAS 154 on January 1, 2006 and the adoption of SFAS 154 did not have an impact on the
Co mpany's financial position, cash flows or results of operations.

     In February 2006, the FASB issued Statement No. 155, Accounting for Certain Hybrid Financial Instruments, an amendment of FASB
Statements No. 133 and 140 ("SFAS 155"). SFAS 155 establishes, among other things, the accounting for certain derivatives embedded in
other financial instru ments. This combination is referred to as a hybrid financial instrument. SFAS 155 is effect ive for all finan cial instruments
acquired, issued or subject to a remeasurement (new basis) event occurring after the

                                                                        F-10
beginning of an entity's first fiscal year that begins after September 15, 2006. The Co mpany does not believe the adoption of SFAS 155 will
have a significant impact on the Co mpany's financial position, cash flows or results of operations.

     In March 2006, the FASB issued Statement No. 156, Accounting for Servicing of Financial Assets, an amendment of FASB Statements
No. 140 ("SFAS 156"). SFAS 156 requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a
financial asset by entering into a servicing contract in certain situations. SFAS 156 also requires all separately recognized servicing assets and
servicing liabilit ies to be initially measured at fair value, if practicab le, and to choose the subsequent measurement method. SFAS 156 is
effective fo r the Co mpany as of the beginning of its fiscal year that begins after September 15, 2006. Earlier adoption is permitted as of the
beginning of the Co mpany's fiscal year, p rovided it has not yet issued financial statements, including interim financial stat emen ts, for any
period of that fiscal year. The Co mpany does not believe the adoption of SFAS 156 will have a significant impact on the Co mp any's financial
position, cash flows or results of operations.

     In Ju ly 2006, the FASB issued Statement No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48 requires the use of a
two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding
uncertainties in inco me tax positions. The Co mpany is required to adopt FIN 48 effective January 1, 2007. The cu mu lative effect of init ially
adopting FIN 48 will be recorded as an adjustment to opening retained earnings in the year of adoption and will be presented separately. On ly
tax positions that meet the more likely than not recognition threshold at the effective date may be recognized upon adoption of FIN 48. The
Co mpany is currently evaluating the impact FIN 48 will have on its future results of operations and financial position.

      In September 2006, the FASB issued Statement No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157 clarifies the princip le that
fair value should be based on the assumptions that market participants would use when pricing an asset or liability. Addit ion ally, it establishes a
fair value hierarchy that prioritizes the informat ion used to develop those assumptions. SFAS 157 is effect ive for financial statements issued for
fiscal years beginning after November 15, 2007. We have not yet determined the impact that the imp lementation of SFA S 157 will have on our
results of operations or financial condition.

      In September 2006, the FASB issued Statement No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) ("SFAS 158"). SFAS 158 requires employers to recognize the
underfunded or overfunded status of a defined benefit postretirement plan as an asset or liability in the employer's statement of financial
position and to recognize changes in the funded status in the year in which the changes occur through accumulated othe r comprehensive
income. Additionally, SFAS 158 requires emp loyers to measure the funded status of a plan as of the date of the employer's year-end statement
of financial position. The new reporting requirements and related new footnote disclosure rules of SFA S 158 are effective for fiscal years
ending after December 15, 2006. The new measurement date requirement applies for fiscal years ending after December 15, 2008. We are
currently evaluating the impact that the implementation of SFAS 158 will have on our financial statements.

    In September 2006, the SEC issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year M isstatements when
Quantifying Misstatements in Current Year Financial Statements"

                                                                       F-11
("SAB 108"). SA B 108 addresses quantifiy ing the financial statement effects of misstatements, specifically, how the effects of prior year
uncorrected errors must be considered in quantifying miss tatements in the current year financial statements. SAB 108 does not amend or
change the SEC Staff's previous positions in Staff Accounting Bulletin No. 99, "Materiality," regard ing qualitative considerations in assessing
the materiality of misstatements. SAB 108 is effective for fiscal years beginning after November 15, 2006. We do not expect the adoption of
SAB 108 to have a material impact on our consolidated financial position, results of operations or cash flows.

3. SIGNIFICANT CUS TOMERS

     Customers of the Co mpany consist principally of do mestic retail stores and international independent distributors. The customers,
individually or considered as a group under common o wnership, wh ich accounted for greater than 10% of accounts receivable or 10% of net
sales during the periods reflected were as follows:

                                                                                                                     Net Sales

                                              Accounts Receivable

                                                                                            Years Ended                                Nine Months
                                                                                            December 31,                            Ended September 30,

                                      December 31,

                                                           September 30,
                                                                2006

                                     2004      2005                                  2003           2004        2005                2005            2006

                                                                                                                              (Unaudited)
          Customer A                     1%           2%                      5%         10 %          7%            11 %                  11 %            12 %
          Customer B                    —            —                       —           20           19              3                     5              —
          Customer C                    48           24                       6           7           16             12                    11               4
          Customer D                    11           16                       6           7            6              8                     7               4
          Customer E                    10           14                      14          27            5             11                    12              11

4. PROPERTY AND EQUIPMENT

    Property and equipment included the following (in thousands):

                                                                                                           December 31,

                                                                    Lesser of terms of
                                                                    lease or estimated                                                       September 30,
                                                                        useful lives                                                             2006

                                                                                                    2004               2005

        Leasehold improvements                                        1-10 years                $       10       $             45      $                       49
        Furniture and fixtures                                          7 years                         19                     56                              68
        Co mputer equip ment                                            5 years                        144                    163                             213
        Equip ment                                                      5 years                         48                     61                             113
        Product mo lds and designs                                      2 years                        586                    675                             789

               Total                                                                                   807                1,000                              1,232

        Less accumulated depreciation and
        amort ization                                                                                  (661 )               (760 )                            (869 )

        Property and equipment—net                                                              $      146       $            240      $                      363


    Depreciation expense related to property and equipment was $202,000, $159,000, $134,000, $98,000 (unaudited) and $110,000 in 2003,
2004, 2005 and fo r the nine months ended September 30, 2005 and 2006, respectively.

                                                                           F-12
5. PATENTS AND TRADEMARKS

    Patents and trademarks included the following (in thousands):

                                                                                           December 31,                    September 30,

                                                                                    2004                  2005                 2006

               Patents                                                          $          807     $             834   $               855
               Trademarks                                                                   97                   101                   117
               Patents in progress                                                         260                   353                   415
               Trademarks in progress                                                       26                    25                    32
               Other                                                                        —                     —                     25

                 Total patents and trademarks                                         1,190                 1,313                     1,444

               Less accumulated amortizat ion:
               Patents                                                                     434                   597                   698
               Trademarks                                                                   51                    68                    81
               Patents in progress                                                          81                   103                   159
               Trademarks in progress                                                        8                    11                    16
               Other                                                                        —                     —                      4

                 Total accumu lated amortization                                       (574 )                (779 )                    (958 )

               Patents and trademarks—net                                       $          616     $             534   $               486


     A mortization expense related to patents and trademarks was $346,000, $295,000, $262,000, $177,000 (unaudited) and $180,000 in 2003,
2004, 2005 and fo r the nine months ended September 30, 2005 and 2006, respectively. The amo rtization amounts include write-offs of
$124,000, $37,000, $27,000, $0 (unaudited) and $0 in 2003, 2004, 2005 and for the nine months ended September 30, 2005 and 2006,
respectively, for patents that were evaluated as having no future benefits. Amort izat ion expense fro m 2006 through 2010 is expected to be
$228,000, $149,000, $79,000, $40,000, and $12,000, respectively.

     In September 2002, the Co mpany entered into an Intellectual Property Exclusive License Agreement (the "License Agreement"), which
granted the Company an exclusive wo rld wide license to use various marks, trademarks, URLs, patents and patent applications related to the
technology used in the Co mpany's grind-and-roll HEELYS-wheeled footwear (co llectively, the "Intellectual Property"). In January 2006, the
Co mpany converted the License Agreement into an Intellectual Property Purchase Agreement (the "Purchase Agreement"). Up on the
conversion, the Co mpany paid a non-compete fee of $25,000, wh ich is included in other intangible assets and is being amortized over five
years, and became subject to a minimu m royalty pay ment of $10,000 per month for the next 12 months.

      At December 31, 2002, the Co mpany capitalized, as patents in progress, an escrow deposit of $100,000 required under the License
Agreement that converted to the purchase price of the Intellectual Property upon execution of the Purchase Agreement. The Co mpany has also
capitalized $102,000 in bro kerage and legal fees related to these agreements as patents in progress at December 31, 2004. Upon the initial
distribution of products incorporating the Intellectual Property in 2003, the Co mpany began to amort ize these patents in prog ress over their
estimated useful life.

     Royalty payments of 12% of the Co mpany's cost of certain products, $1.00 per footwear unit for certain styles and 25% o f any sublicense
revenue of any non-footwear products, apparel, accessories, or

                                                                     F-13
similar products that would infringe the trademarks for such products absent the Company's agreements with respect to such trademarks are
expensed as incurred under the License Agreement. Th is royalty expense was $188,000, $143,000, $179,000, $120,000 (unaudited) and
$217,000 in 2003, 2004, 2005 and for the nine months ended September 30, 2005 and 2006, respectively.

    The Co mpany is contingently obligated to maintain and/or prosecute, if considered necessary, the Intellectual Property under both the
License Agreement and the Purchase Agreement until the total payments under the License Agreement and Purchase Agreement exceed
$650,000. The licensor has the option to reacquire the Intellectual Property for certain fixed prices if the minimu m royalty payments are not
made throughout the term of the Purchase Agreement.

6. ACCRUED EXPENS ES

    Accrued expenses consisted of the follo wing (in thousands):

                                                                                        December 31,

                                                                                                                    September 30,
                                                                                                                        2006

                                                                                     2004          2005

Inventory received but not invoiced                                              $       —     $           51   $              4,846
Marketing costs                                                                          52               650                    468
Customer prepay ments                                                                     5               339                    763
Liability insurance                                                                      —                 81                    312
Professional fees                                                                       132               175                    916
Other                                                                                   145               212                    850

   Total accrued expenses                                                        $      334    $       1,508    $              8,155

7. DEB T

       Revolving Credit Facility— At December 31, 2005, the Co mpany had an aggregate $3,000,000 revolving cred it facility (the "Financing
Agreement"). Borro wings were subject to certain limitations, primarily based upon 85% of eligib le accounts receivable and 50% of elig ible
inventory. The 50% of elig ible inventory calculation was limited to $1,500,000. During 2005, the Co mpany had total borrowings of $7,500,000
and total payments of $7,500,000 related to this facility. There were no outstanding borrowings at December 31, 2004 and 2005. In
August 2006, the Co mpany amended the Financing Agreement, increasing the maximu m amount availab le to $25.0 million. Th is maximu m
amount will decrease to $10.0 million on January 1, 2007 and the facility will exp ire in June 2007. Borrowings are subject to certain
limitat ions, primarily based upon 85% of eligib le accounts receivable and 50% of elig ible inventory not to exceed the amount advan ced on
elig ible accounts receivable. At September 30, 2006, the Co mpany had outstanding borrowings of $22.0 million. Indebtedness under the
Financing Agreement bears interest at a floating rate of interest based on either the prime rate quoted by JPMorgan Chase Ban k, N.A. or an
adjusted LIBOR rate. At October 31, 2006, the applicab le interest rate under the Financing Agreement was 8.0% per annum.

     Accounts receivable and inventory are pledged as collateral under the Financing Agreement. The Co mpany is subject to complian ce with
certain covenants under the Financing Agreement, including minimu m levels of net worth and minimu m interest coverage ratios . The Co mpany
is not permitted under the Financing Agreement to pay dividends or make distributions.

                                                                      F-14
      Other Debt— Other debt at December 31, 2004 and 2005 and September 30, 2006, consisted of the following (in thousands):

                                                                                           December 31,                  September 30,

                                                                                         2004            2005                2006

                 Line of credit note, bearing interest at 7.07%, due April 2007      $     —         $     —         $           4,000
                 Pro missory note, bearing interest at 3.60%, due March 2005                91             —                    —
                 Pro missory note, bearing interest at 5.55%, due March 2006               —                96                  —
                 Pro missory note, bearing interest at 6.29%,
                 due February 2007                                                         —               —                         532

                        Total                                                                   91              96                  4,532

                 Less current portion                                                       (91 )           (96 )                (4,532 )

                 Long-term port ion                                                  $     —         $     —         $          —


       Line of Credit— In April 2006, the Co mpany executed a $5.0 million line of credit note that matured in April 2007, but was required to
be repaid upon consummat ion of the Co mpany's init ial public offering. Th is note was secured by the same collateral as the rev olving credit
facility. In May 2006, the Co mpany borrowed $4.0 million under this note to repurchase 1,448,625 shares of the common stock owned by two
stockholders.

       Promissory Notes— During 2004 and 2005, the Co mpany signed agreements with co mmercial finance companies to finance the payment
of its commercial general liability and u mbrella p re miu ms. Each agreement provided for an initial pay ment of a port ion of the premiu m, with
the remaining principal balance plus interest to be paid in monthly installments. Interest accrued at 5.55% on the unpaid balance of $96,000 at
December 31, 2005. Total monthly principal and interest installments of $49,000 were due until maturity in March 2006. Interest accrued at
3.60% on the unpaid balance of $91,000 at December 31, 2004. Prepaid p remiu ms fro m the insurance policies financed are p ledged as
collateral under the promissory notes.

8. COMMITMENTS AND CONTINGENCIES

     Leases— During 2004 and January 2005, the Co mpany sublet its warehouse and office facilit ies, pursuant to a month -to-month operating
sublease, fro m a related party (see Note 12). The Co mpany also leases certain equipment under a cancelable operating lease. Rent expense was
$131,000, $129,000, $162,000, $121,000 (unaudited) and $165,000 for 2003, 2004, 2005 and for the nine months ended September 30, 2005
and 2006, respectively.

    Effective February 1, 2005, the Co mpany entered into a new operating lease whereby the Co mpany leases office space for 10 years with
renewal options. On February 27, 2006, the Co mpany signed an

                                                                      F-15
amend ment to its lease for additional warehouse space for the duration of the lease term. Future minimu m rental payments unde r the lease are
as follows (in thousands):

                              Years Ending
                              December 31,

                              2006                                                                        $         163
                              2007                                                                                  189
                              2008                                                                                  189
                              2009                                                                                  189
                              2010                                                                                  197
                              Thereafter                                                                            961

                                                                                                          $       1,888

     Employment Arrangement— All o f the personnel of the Co mpany are contractually employees of a Professional Emp loyer Organization
("PEO"). The PEO incurs payroll, payroll tax and payroll-related benefit costs. The Co mpany reimburses these costs plus an administrative fee.
With respect to these payroll-related benefits, the personnel of the Co mpany are pooled with other employees of the PEO.

     Legal Proceedings— The Co mpany is involved in certain legal proceedings arising in the ordinary course of business, none of which the
Co mpany's management believes will have a material adverse effect on the Co mpany's financial position, cash flows or results o f operations.

9. INCOME TAXES

     Co mponents of income taxes were as fo llo ws (in thousands):

                                                                        December 31,                          September 30,

                                                               2003          2004          2005            2005                2006

                                                                                                        (Unaudited)

             Current tax expense                           $      561    $      473 $       2,447 $                1,530   $    9,732
             Deferred                                              14           (55 )        (160 )                   —          (272 )

                                                           $      575    $      418    $    2,287   $              1,530   $    9,460


     A reconciliat ion of inco me tax co mputed at the U.S. federal statutory income tax rate of 34% for 2003, 2004, and 2005 an d for the nine
months ended September 30, 2005 (unaudited), and 35% for the nine months ended September 30, 2006 to the provision for income taxes is as
follows (in thousands):

                                                                        December 31,                          September 30,

                                                               2003          2004          2005            2005                2006

                                                                                                        (Unaudited)

             Tax at statutory rate                         $     570     $     415     $    2,256   $              1,509   $    9,494
             Expenses not deductible for tax purposes              5             3              4             —                     3
             Other                                               —             —               27             21                  (37 )

             Income taxes                                  $      575    $      418    $    2,287   $              1,530   $    9,460


                                                                        F-16
     Deferred inco me taxes reflect the tax effects of temporary differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amount used for inco me tax purposes. The tax effects of significant items included in the Co mpany's net deferred
tax benefits at December 31, 2004 and 2005 and September 30, 2006 were as follows (in thousands):

                                                                                        December 31,               September 30,

                                                                                      2004            2005             2006

                   Current tax assets (liabilities):
                      Allowances for receivables not currently deductible         $       98 $           240 $                  459
                      Allowances for inventory not currently deductible                   21              43                    105
                      Prepaid expenses currently deductible                              (71 )           (79 )                 (231 )
                      Accrued expenses not currently deductible                           41              31                    127

                          Net current deferred tax benefits                                  89          235                   460

                   Long-term tax assets:
                     Organization expenses not currently deductible                        3            —                  —
                     Accumulated depreciation and amortization                           160            178                    225

                          Net long-term deferred tax benefits                            163             178                   225

                   Total deferred tax benefits                                    $      252      $      413   $               685


     We assess the realization of our deferred tax assets to determine whether an inco me tax valuation allo wance is required. Base d on all
available ev idence, both positive and negative, and the weight of that evidence to the extent such evidence can be objectively verified, we
determined it is more likely than not the deferred tax assets will be realized.

10. STOCKHOLDERS' EQUIT Y

     Common Stock— Du ring May 2000, the Co mpany issued 11,363,875 shares of its common stock to the initial co mmon s tockholders for
$125,000, or $0.011 per share, the estimated fair value of the shares at the date of issuance, in exchange for patent applica tions and trademarks,
which were recorded as patents and trademarks. The Co mpany has the right of first refusal on any disposition of common stock by the
stockholders, but this right terminates on the Co mpany's initial public offering.

      Long-Term Incentive Plan— An aggregate of 2,625,000 shares of common stock was reserved for issuance pursuant to the 2001
Long-Term Incentive Plan (the "2001 Plan"), adopted in February 2001. Under the terms of the 2001 Plan, incentive and nonqualified options
to purchase common stock and restricted stock awards were permitted to be granted to employees, consultants and nonemployee directors of
the Co mpany at the discretion of the compensation committee of the Co mpany's board of directors, subject to certain restrictions.

      Under the 2001 Plan, the Co mpany sold 2,625,000 shares of restricted co mmon stock to employees, officers and a consultant of th e
Co mpany, during February 2001, in exchange for $28,875 or $0.011 per share, the estimated fair value at the time of g rant. Forfeiture and
restriction provisions of the shares lapsed evenly at the following three anniversaries of the date of grant. At December 31, 2004 and 2005 and
September 30, 2006, no shares were subject to restrictions.

                                                                       F-17
11. REDEEMAB LE CONVERTIB LE PREFERRED S HARES

      Preferred Stock— The Co mpany had authorized an aggregate 3,000,000 shares of $0.001 par value Series A and B Preferred Stock. In
May 2000, the Co mpany sold preferred stock and debentures pursuant to an investment agreement between the preferred stockholders and the
Co mpany (the "Investment Agreement"). The Co mpany sold 1,818,182 shares of Series A Preferred Stock for $500,000, and 454,545 shares of
Series B Preferred Stock for $125,000, o r in each case $0.275 per share, the estimated fair value of the shares at the date of purch ase (not
giving effect to the 25-for-one stock split effected in October 2006).

     The Co mpany is subject to compliance with certain covenants included in the Investment Agreement, including restricting the Co mpany
fro m paying any dividends or distributions and issuing additional shares, except for those restricted common shares issued in February 2001.
Concurrent with the execution of the Investment Agreement, the preferred stockholders and the Co mpany executed a reg istration rights
agreement. After May 2001, the Series B Preferred Stockholders could request a demand registration upon a greater than 50% v ote. This
demand registration would cause the Co mpany to perform all conversions, redemptions and payments associated with a qualified public
offering.

     Also, concurrent with the execution of the Investment Agreement, the co mmon and preferred stockholders executed an inves tor rights
agreement. Under that agreement, a preferred stockholder was entitled to designate two members of the five -member Board of Directors, and
the initial co mmon stockholders were entit led to designate two members of the Board o f Directors. The init ial co mmon stockholders and a
preferred stockholder were entitled to designate one mutually acceptable member of the Board of Directors.

     The Series A Preferred Stock was nonconvertible and redeemable. The Co mpany could redeem the shares at any time with 30-days'
notice, and the shares were mandatorily redeemab le upon the completion of a qualified public offering. The stockholders could require the
Co mpany to redeem the shares beginning May 31, 2007. The redemption price and liquidation preference were $0.275 per share, plus all
accrued and unpaid dividends. A cumulative d ividend at the rate of $0.022 per annum was to accrue fro m May 31, 2005 through May 31, 2007
and was payable quarterly in cash. The dividend rate was to increase to $0.033 per annu m o n May 31, 2007. The Series A Preferred Stock was
redeemed by the Co mpany on May 31, 2005 for $500,000. Dividends had not begun accumulating; therefore the shares were redeemed for the
original purchase price of $500,000.

     The Series B Preferred Stock was convertible and redeemable. One share of Series B Preferred Stock was convertible into one share of
common stock at the option of the stockholder at $0.275 per share (not giving effect to the 25-for-one stock split effected in Oct ober 2006). All
shares of Series B Preferred Stock would have automatically been converted into shares of common stock if the Co mpany co mpleted a
qualified public o ffering, co mpleted a sale of substantially all of its assets or were to have undergone a change in control or a merger. The
stockholders could have required the Co mpany to redeem the shares beginning May 31, 2007. The redemption price was the greater of
estimated fair value per share or $0.275 per share (liquidation preference) (not giving effect to the 25-for-one stock split effected in
October 2006). No dividends were to be accrued or paid on the Series B Preferred Stock. In June 2006, all outstanding shares of the Series B
Preferred Stock were converted into Co mmon Stock, prior to giv ing effect to the 25-for-one stock split effected in October 2006.

                                                                      F-18
12. RELATED-PARTY TRANSACTIONS

     During 2003, 2004 and January 2005, the Co mpany sublet its warehouse and office faci lities fro m a related co mpany (see Note 8). A
director and minority owner of the lessor is a stockholder and director of the Co mpany. The Co mpany expensed $142,000, $141,000, $14,000,
$14,000 (unaudited) and $0 during 2003, 2004 and 2005 and for the nine months ended September 30, 2005 and 2006, respectively, for rent,
warehouse management and labor and reimbursement of utilities provided by this related co mpany.

     The Co mpany's patent attorney is also a stockholder of the Co mpany. The Co mpany capital ized and expensed a total of $385,000,
$242,000, $190,000, $112,000 (unaudited) and $894,000 included in patents and trademarks and selling, general and ad ministrat ive expenses,
during 2003, 2004 and 2005 and for the nine months ended September 30, 2005 and 2006, respectively, for costs incurred with this patent
attorney's law firms.

     Prior to and during 2003, the Co mpany purchased component parts utilized in the "Heelys" brand footwear and product molds and designs
fro m a company owned by a relative of a director and stockholder of the Co mpany. The Co mpany purchased $116,000 during 200 3 fro m this
supplier. This relationship was terminated in 2003.

    In April 2006, the Co mpany purchased 724,325 shares of Co mpany common stock owned by one of the Co mpany's directors for a
purchase price of $2,000,006, or $2.76 per share.

     In May 2006, the Co mpany purchased 724,300 shares of Co mpany common stock owned by the Company's founder for a purchase price
of $1,999,937, or $2.76 per share. Simu ltaneously with this sale and purchase, the Company's founder also sold to the Company 's Chairman of
the Board 362,150 shares of Co mpany co mmon stock owned by the founder for a purchase price of $999,969, or $2.76 per share.

13. OTHER EMPLOYEE B EN EFIT PLANS

      401(k) Plan— Effective January 2002, the Co mpany sponsored a 401(k) Ret irement Plan (the "401(k) Plan") through its PEO. All
emp loyees who are 21 years of age or o lder are immediately eligib le to enroll in the 401(k) Plan. The Co mpany makes discretionary
nonelective contributions to the 401(k) plan. The Co mpany expensed contributions of $37,000, $36,000, $73,000 during 2003, 2004 and 2005,
respectively, related to discretionary contributions.

14. STOCK-B AS ED COMPENSATION

     In June 2006, the Co mpany adopted the 2006 Stock Incentive Plan (the "2006 Plan"). The 2006 Plan rep laces the 20 01 Plan (see Note 10).
Under the 2006 Plan, in June 2006 the Co mpany granted 711,800 incentive and 1,330,700 nonqualified stock options at an exercise price of
$4.05 per share, wh ich was the fair value at the grant date. The options granted in June 2006 are subject to a 48-month vesting period with a
contractual term of ten years. In connection with the June 2006 option grant, the Co mpany determined the fair value of its co mmon stock and
engaged an independent third party appraiser to perform a contemporaneous valuation of the Company's common stock as of Ju ne 23, 2006, the
date of grant of the June 2006 options. Utilizing the methodologies and procedures set forth in the AICPA Pract ice Aid for the Valuation of
Privately-Held Co mpany Equity Securities Issued as Co mpensation, the independent appraiser determined the value of the Co mpany's common
stock based upon a number of significant factors, assumptions and methodologies. These factors included

                                                                    F-19
recent sales and negotiations for sales of the Company's common stock, the timing of such transactions, the Company's discounted value of
estimated future cash flows, valuations of co mparable co mpanies and transactions and the Company's expected value as a public company. The
independent appraiser correlated the value indications derived fro m the various methodologies to a single value by "weighting " each value
indication, applied a lack o f marketability discount and further decreased the value per share by the dilution to the value that would be realized
by a Co mpany stockholder by virtue of the June 2006 option issuances. Between June 23, 2006 and the date of the offering contemplated by
this prospectus, several events have occurred that the Company believes have contributed to the increase in the fair value of the Co mpany's
common stock. These events include, among others, the Company's increased earnings, the Company's ability to exceed internally p rojected
sales targets after July 2006, and the filing of the Co mpany's registration statement.

     The Co mpany has reserved 2,272,725 shares of common stock subject to the 2006 Plan and has 230,225 shares remaining available that
may be granted to employees, consultants and nonemployee directors of the Co mpany in the future. The 2006 Plan is ad min istered by the
compensation committee of the Co mpany's board of directors, which selects the persons to whom options will be granted, determ ines the
number of shares to be subject to each grant, and prescribes the other terms and conditions of each grant, including the type of consideration to
be paid to the Co mpany upon exercise and the vesting schedule. If a change of control of the Co mpany, as defined by the 2006 Plan, occurs, all
of the options issued and outstanding under the 2006 Plan will accelerate and become fully vested and exercisable.

     The fair value on the date of grant of the Co mpany's outstanding options of $2.04 per share results in unearned compensation of
$4,165,000 that will be recorded as an expense over the vesting period of the awards. The Co mpany estimated the volatility of its common
stock at the date of grant based on the historical volatility of co mparable public co mpanies. The risk-free interest rate for periods within the
contractual life of the options is based on the U.S. Treasury yield curve in effect at the time o f each grant. Accordingly, t he Company has
computed the fair values of all options granted during the nine months ended September 30, 2006, using the Black-Scholes option pricing
model and the follo wing weighted average assumptions:

                                                                                                                   Nine months
                                                                                                                      ended
                                                                                                                  September 30,
                                                                                                                       2006

                     Expected volatility                                                                                44.27 %
                     Div idend yield                                                                                   —
                     Risk-free interest rate                                                                             5.21 %
                     Weighted average remain ing contractual life (in years)                                             6.02

                                                                        F-20
Stock Option Activity

     The fo llo wing summarizes stock option transactions for the nine months ended September 30, 2006:

                                                                                                  Weighted
                                                                            Weighted              Average
                                                                         Average Exercise        Remaining               Aggregate Intrinsic
Options                                                 Shares                Price            Contractual Life               Value*

                                                                                                   (Years )


Outstanding at December 31, 2005                          —                      —                   —                            —
Granted                                                 2,042,500        $            4.05                     10                 —
Exercised                                                 —                      —                   —                            —
Forfeited or exp ired                                     —                      —                   —                            —

Outstanding at September 30, 2006                       2,042,500        $            4.05                    9.75   $          26,450,000

Exercisable at September 30, 2006                         127,650        $            4.05                    9.75   $           1,653,000

Vested at September 30, 2006                              127,650        $            4.05                    9.75   $           1,653,000

*
          Based upon an initial public offering price of $17.00, the mid -point of the price range set forth in the Co mpany's Amend ment No. 3 to
          the Registration Statement #333-137046 on Fo rm S-1, the intrinsic value of the options outstanding at September 30, 2006 was
          $26.5 million, of which $1.7 million related to vested options and $24.8 million related to unvested options.

     The status of total stock options outstanding at September 30, 2006 was as follows:

                                                   Weighted Average
                            Number of                 Remaining                       Number
Exercise Prices              Shares                Contractual Life                  Exercisable                Fair Value Determination

                                                       (Years )


          $4.05               2,042,500                           5.96                  127,650                      Black-Scholes

15. SUBS EQUENT EVENTS

     In October 2006, the Co mpany repaid in fu ll the line of credit (see Note 7).

     In October 2006, the Co mpany effected a 25-for-one stock split. All co mmon share and per common share amounts in these consolidated
financial statements have been retroactively adjusted for all periods presented to give effect to the stock split.

                                                                             ******

                                                                              F-21
                                                            HEELYS, INC.
                                                               6,250,000 Shares
                                                                Common Stock


                                                                   PROSPECTUS
                                                                          , 2006



Bear, Stearns & Co. Inc.                                                                                      Wachovia Securities

JPMorgan                                                                                                   CIBC World Markets
    Until                 , 2006 (25 days after the commencement of this offering), all dealers that effect transactions in our common stock,
whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' o bligation to deliver a
prospectus when acting as underwriters and with respect to their unsold allot ments or subscriptions.
                                                                     PART II

                                                   Information Not Required in Pros pectus

  Item 13. Other Expenses of Issuance and Distribution

     The fo llo wing table presents the costs and expenses, other than underwriting discounts and commissions, payable by us in conn ection with
the sale of common stock being registered. All amounts are es timates except the SEC reg istration fee and the NASD filing fee.

SEC Registration fee                                                                                                     $                  13,843
NASD filing fee                                                                                                                             25,000
The Nasdaq Global Market listing fee                                                                                                        12,500
Printing and engraving expenses                                                                                                            270,000
Legal fees and expenses                                                                                                                    800,000
Accounting fees and expenses                                                                                                               850,000
Blue sky fees and expenses                                                                                                                  10,000
Custodian and transfer agent fees                                                                                                            3,500
Miscellaneous fees and expenses                                                                                                             65,157

      Total                                                                                                              $               2,050,000


 Item 14. Indemni fication of Directors and Officers

     Section 145 of the Delaware General Corporat ion Law permits a corporation to (1) indemnify its directors and officers, as well as its other
emp loyees and agents, against expenses (including attorneys' fees), judg ments, fines and settlement amounts actually and reasonably incurred
or paid by that person in connection with any threatened, pending or completed action, suit or proceeding in which that perso n is made a party
because that person is or was a director, officer, emp loyee or agent of the corporation, subject to certain limitations, and (2) advance the
expenses incurred by its directors, officers, employees and agents before the final disposition of an action, su it or proceeding. Section 145 also
provides that it is not exclusive of other rights to which persons seeking indemnificat ion may be entitled under any by -law, agreement, vote of
stockholders or disinterested stockholders or otherwise. Article VIII of our By-Laws provides for mandatory indemnification of and
advancement of expenses to our directors and officers to the maximu m extent permitted by the Delaware General Co rporation Law subject to
limited exceptions, and authorizes our board of directors to gran t indemnification and advance expenses to any of our other employees or
agents to the same extent that we indemnify our directors and officers.

      Our Certificate of Incorporation provides that, in accordance with Section 102(b)(7) of the Delaware General Corporation Law, our
directors will not be liable for monetary damages for breach of their fiduciary duty as directors to our stockholders and us. This provision does
not eliminate a director's fiduciary duty, and in appropriate circu mstances, equitab le remed ies like in junctive or other forms of non-monetary
relief will remain available under Delaware law and each director will continue to be subject to monetary or other liab ility for breach of the
director's duty of loyalty to our stockholders or us, for acts or omissions not in good faith or involving intentional misconduct for knowing
violations of law, for actions leading to imp roper personal benefit to the director and for pay ment of d ividends or approval of stock repurchases
or redemptions that are unlawful under Delaware law. The provision also does not affect a director's responsibilities under any other law, such
as the federal securities laws or state or federal environ mental laws.

     We have entered into an indemnification agreement with each of our executive officers and directors, the form of wh ich is attached as
Exh ib it 10.1 and is incorporated herein by reference, and we generally intend to enter into indemnificat ion agreements with any new e xecutive
officers and directors

                                                                        II-1
in the future. The indemn ification agreements provide our executive officers and directors with certain rights to and in conn ection with
indemn ification and advancement of expenses in addition to those provided for in our By-Laws. As provided in those indemnification
agreements, we intend to maintain directors' and officers' insurance coverage to the extent such insurance is available on co mmercially
reasonable terms, as determined by our board of directors. That insurance would protect our executive officers and directors against losses
arising fro m any claim asserted against them and expenses incurred by them in those capacities, subject to certain exclusions and limits on the
amount of coverage.


 Item 15. Recent Sales of Unregistered Securities

     In May 2000, we sold 436,364 shares of our Series B Preferred Stock to Capital Southwest Venture Corporation for $120,000 and 18,181
shares of our Series B Preferred Stock to Samuel and Patricia Ligon for $5,000. In June 2006, each share of Series B Preferred Stock was
converted into one share of co mmon stock (25 shares giving effect to the 25-for-one stock split effected in October 2006). Mr. Robert J. Ward,
our patent attorney, was issued 250,000 shares of our common stock (giv ing effect to the 25-for-one stock split effected in Octo ber 2006) in
May 2000 when we were formed. The conversion of Series B Preferred Stock and the issuance to Mr. Ward were deemed to be exempt fro m
registration under the Securities Act in reliance upon Section 3(a)(9) and Section 4(2) o f the Securities Act, respectively. On Ju ne 23, 2006, we
granted options to employees under our 2006 Stock Incentive Plan to purchase 2,042,500 sha res of our common stock at an exercise price of
$4.05 per share (giving effect to the 25-for-one stock split effected in October 2006). Effect ive as of the consummation of th is offering, we will
grant options to employees under our 2006 Stock Incentive Plan to purchase 100,000 shares of our common stock, at an exercise price equal to
the offering price. The sales of these securities were deemed to be exempt fro m registration under the Securities Act in reliance upon Rule 701
promu lgated under Section 3(b) of the Securities Act, as transactions by an issuer not involving any public offering or transactions under
compensation benefit plans and contracts relating to compensation as provided under Rule 701.


 Item 16. Exhibits and Financial Statement Schedules

(a)     Exhibits

      Exhibit
       No.                                                                      Description

            *1.1      Form of Underwriting Agreement.

          **3.1       Cert ificate of Incorporation of the Registrant.

          **3.2       By-Laws of the Reg istrant.

                4.1   Form of Registrant's Common Stock cert ificate.

          **5.1       Opinion of Gardere Wynne Sewell LLP.

         **10.1       Registration Rights Agreement, dated May 26, 2000, among the Registrant, Samuel B. Ligon and Patricia P. Ligon and
                      Capital Southwest Venture Corporation.

         **10.2       Manufacturing Agreement, dated March 8, 2001, between Bu Kyung Industrial and Heeling Sports Limited.

         **10.3       Consulting Agreement, dated September 30, 2006, between Boss Technical Services and Heeling Sports Limited.

         **10.4       Cred it Agreement, dated August 20, 2004, as amended by an Amendment to Credit Agreement, dated June 15, 2006, and an
                      Amend ment to Cred it Agreement, dated August 25, 2006, between Heeling Sports Limited and JPMorgan Chase Bank, N.A.


                                                                         II-2
**10.5    Lease Agreement, dated November 4, 2004, between CP Co mmercial Propert ies — XIX, Inc. and Heeling Sports, Limited, as
          amended by the First A mendment to Lease Agreement, dated February 27, 2006, fo r 3200 Belmeade, Su ite 100, Carrollton,
          Texas.

**10.6    Line of Credit Note, dated April 18, 2006, between Heeling Sports Limited and JPMorgan Chase Bank, N.A.

**10.7    Stock Purchase Agreement, dated as of April 28, 2006, by and between the Registrant and Richard E. M iddlekauff.

**10.8    Stock Purchase Agreement, dated as of May 19, 2006, by and between the Registrant and Roger R. Adams.

**10.9    Letter Agreement, dated June 28, 2006, by and between Richard E. Midd lekauff and Roger R. Adams, and approved by the
          Registrant.

**10.10   Amended and Restated Employ ment Agreement, dated as of September 18, 2006, between Michael G. Staffaroni and Heeling
          Sports Limited.

  10.11   Amended and Restated Employ ment Agreement, dated as of November 16, 2006, between M ichael W. Hessong and Heeling
          Sports Limited.

**10.12   Amended and Restated Employ ment Agreement, dated as of September 18, 2006, between Charles D. Beery and Heeling
          Sports Limited.

  10.13   Amended and Restated Employ ment Agreement, dated as of November 16, 2006, between Roger R. Adams and Heeling
          Sports Limited.

**10.14   Emp loy ment Agreement, dated as of September 18, 2006, between Patrick F. Hamner and Heeling Sports Limited.

  10.15   Waiver and Agreement, dated September 14, 2006, among the Reg istrant, Roger R. Adams, Richard E. M iddlekauff,
          Robert J. Ward, CYPO, Inc., Heeling Ho lding Corporation, Heeling Management Corporat ion, Samuel B. Ligon and
          Patricia P. Ligon and Capital Southwest Venture Corporation.

**10.16   2006 Stock Incentive Plan, as amended by Amendment to Heeling, Inc. 2006 Stock Incentive Plan and form of Stock Option
          Agreement thereunder.

**10.17   Heeling Sports Limited 2006 Bonus Plan.

**10.18   Form of Indemnificat ion Agreement entered into by the Registrant with each of its directors and executive officers.

**10.19   Intellectual Property Exclusive License Agreement, dated and effective as of September 23, 2002, between Heeling Sports
          Limited and Curt is Holdings, LLC; Intellectual Property Purchase Agreement, dated September 23, 2002, between Heeling
          Sports Limited and Cu rtis Ho ldings, LLC, and Letter Agreement, dated January 5, 2006, between Heeling Sports Limited and
          Curtis Holdings, LLC.

**10.20   Investor Rights Agreement, dated as of May 24, 2000, among the Registrant, Roger R. Adams, Richard E. Middlekauff,
          Robert J. Ward, Cypo, Inc., Heeling Holding Corporation, Heeling Management Corp., Samuel P. Ligon and Patricia P.
          Ligon and Capital Southwest Venture Corporation.

**10.21   Stockholder Agreement, dated as of May 24, 2000, between Roger R. Adams and Robert J. Ward.




                                                              II-3
        10.22      Agreement, dated November 17, 2006, between Roger R. Adams and Robert J. Ward.

       **21.1      List of subsidiaries of the Registrant.

         23.1      Consent of Deloitte & Touche LLP, independent registered public accounting firm.

       **23.2      Consent of Gardere Wynne Sewell LLP (included in Exh ibit 5.1).

       **24.1      Powers of Attorney (included with signature page).


*
        To be filed by amendment.

**
        Previously filed.

(b)   Financial Statement Schedules


      Schedule II — Valuation and Qualifying Accounts and Res erves

      Other schedules are omitted because they are not required.


 Item 17. Undertakings

     We undertake to provide to the underwriters at the closing specified in the underwriting agreement certificates in the denominations and
registered in the names as required by the underwriters to permit pro mpt delivery to each purchaser.

     Insofar as indemnification fo r liab ilities arising under the Securities Act may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions summarized in Item 14 above or otherwise, we have been advised that, in the opinion of the SEC, this
indemn ification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. If a claim for indemnification
against such liabilities, other than the payment by us of expenses incurred or paid by a director, officer o r controlling person of ours in the
successful defense of any action, suit or proceeding, is asserted by a director, officer or controlling person in connection with the securities
being registered in this offering, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether this indemn ification by us is against public policy as expressed in the Securities Act
and will be governed by the final adjudication of this issue.

      We undertake that:

            (1) For the purpose of determin ing liability under the Securities Act of 1933 to any purchaser, if the registrant is subject to
      Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relat ing to an offering, other than registration
      statements relying on Ru le 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and in cluded in
      the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a reg istration
      statement or prospectus that is part of the registration statement or made in a document incorporated or deemed in corporated by reference
      into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale
      prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the
      registration statement or made in any such document immediately prior to such date of first use.

            (2) For the purpose of determin ing liability of the registrant under the Securities Act of 1933 to any purchaser of the init ial
      distribution of the securities, the undersigned registrant undertakes

                                                                          II-4
that in a primary offering of securities of the undersigned reg istrant pursuant to this registration statement, regardless of the underwrit ing
method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following
communicat ions the undersigned registrant will be a seller to the purchasers and will be considered to offer or sell such securities to such
purchaser:

          (i) Any preliminary p rospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant
     to Rule 424;

          (ii) Any free writ ing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or
     referred to by the undersigned registrant;

         (iii) The portion of any other free writing prospectus relating to the offering containing material information about the
     undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

          (iv) Any other communication that is an offer in the offering made by undersigned registrant to the purchaser.

     (3) For purposes of determining any liability under the Securities Act, the information o mitted fro m the form of p rospectus filed as
part of this registration statement in reliance upon Rule 430A and contained in a form o f prospectus filed by us under Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it is declared ef fective.

     (4) For the purpose of determin ing any liability under the Securit ies Act, each post -effective amend ment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the securities offered, and the offering of these s ecurities at that
time shall be deemed to be the in itial bona fide offering.

                                                                    II-5
                                                                 SIGNATUR ES

    Pursuant to the requirements of the Securit ies Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on November 24, 2006.

                                                       HEELYS, INC.

                                                       By:     /s/ MICHA EL G. STAFFA RONI


                                                               Michael G. Staffaroni
                                                               Chief Executive Officer
                           Signature                                                Title                                      Date




           /s/ MICHA EL G. STAFFA RONI                         Chief Executive Officer, President and                 November 24, 2006
                                                               Director
                                                               (Principal Executive Officer)
                    Michael G. Staffaroni

                              *                                Vice President — Finance, Chief Financial              November 24, 2006
                                                               Officer, Treasurer and Secretary
                                                               (Principal Financial and Accounting Officer)
                     Michael W. Hessong

                              *                                Chairman of the Board                                  November 24, 2006


                      Patrick F. Hamner

                              *                                                   Director                            November 24, 2006


                       Roger R. Adams

                              *                                                   Director                            November 24, 2006


                   Richard E. M iddlekauff

                              *                                                   Director                            November 24, 2006


                      Samuel B. Ligon


                                                                      II-6
                    *                        Director   November 24, 2006


            William R. Thomas

                    *                        Director   November 24, 2006


             James T. Kindley

* By:   /s/ MICHA EL G. STAFFA RONI


                Attorney-in-Fact

                                      II-7
                                                                                                                                              Schedule II


                                                                   Heelys, Inc.

                                            Valuation and Qualifying Accounts and Reserves

                                                                 (in thousands)

For the years ended December 31, 2003, 2004 and 2005 and the nine months ended September 30, 2006:

                                                    Balance at                Charged to                                    Balance at
                                                    Beginning                 Costs and                                      End of
Description                                         of Period                  Expenses              Deductions              Period



Year ended December 31, 2003

Allowance for doubtful accounts (deducted
fro m accounts receivable)                      $                172   $                   (89 ) $                (45 ) $                38

Reserve for estimated defective returns                           57                       130                (136 )                     51

Year ended December 31, 2004

Allowance for doubtful accounts (deducted
fro m accounts receivable)                                        38                        (2 )                   (4 )                  32

Reserve for estimated defective returns                           51                       165                (130 )                     86

Year ended December 31, 2005

Allowance for doubtful accounts (deducted
fro m accounts receivable)                                        32                       104                     (6 )              130

Reserve for estimated defective returns                           86                       290                (199 )                 177

Nine months ended September 30, 2006

Allowance for doubtful accounts (deducted
fro m accounts receivable)                                       130                       151                    (56 )              225

Reserve for estimated defective returns                          177                  1,063                   (455 )                 785

                                                                       II-8
                                                            INDEX TO EXHIB ITS

Exhibit
 No.                                                                    Description

      *1.1      Form of Underwriting Agreement.

    **3.1       Cert ificate of Incorporation of the Registrant.

    **3.2       By-Laws of the Reg istrant.

          4.1   Form of Registrant's Common Stock cert ificate.

    **5.1       Opinion of Gardere Wynne Sewell LLP.

   **10.1       Registration Rights Agreement, dated May 26, 2000, among the Registrant, Samuel B. Ligon and Patricia P. Ligon and
                Capital Southwest Venture Corporation.

   **10.2       Manufacturing Agreement, dated March 8, 2001, between Bu Kyung Industrial and Heeling Sports Limited.

   **10.3       Consulting Agreement, dated September 30, 2006, between Boss Technical Services and Heeling Sports Limited.

   **10.4       Cred it Agreement, dated August 20, 2004, as amended by an Amendment to Credit Agreement, dated June 15, 2006, and an
                Amend ment to Cred it Agreement, dated August 25, 2006, between Heeling Sports Limited and JPMorgan Chase Bank, N.A.

   **10.5       Lease Agreement, dated November 4, 2004, between CP Co mmercial Propert ies — XIX, Inc. and Heeling Sports, Limited, as
                amended by the First A mendment to Lease Agreement, dated February 27, 2006, fo r 3200 Belmeade, Su ite 100, Carrollton,
                Texas.

   **10.6       Line of Credit Note, dated April 18, 2006, between Heeling Sports Limited and JPMorgan Chase Bank, N.A.

   **10.7       Stock Purchase Agreement, dated as of April 28, 2006, by and between the Registrant and Richard E. M iddlekauff.

   **10.8       Stock Purchase Agreement, dated as of May 19, 2006, by and between the Registrant and Roger R. Adams.

   **10.9       Letter Agreement, dated June 28, 2006, by and between Richard E. Midd lekauff and Roger R. Adams, and approved by the
                Registrant.

 **10.10        Amended and Restated Employ ment Agreement, dated as of September 18, 2006, between Michael G. Staffaroni and Heeling
                Sports Limited.

    10.11       Amended and Restated Employ ment Agreement, dated as of November 16, 2006, between M ichael W. Hessong and Heeling
                Sports Limited.

 **10.12        Amended and Restated Employ ment Agreement, dated as of September 18, 2006, between Charles D. Beery and Heeling
                Sports Limited.

    10.13       Amended and Restated Employ ment Agreement, dated as of November 16, 2006, between Roger R. Adams and Heeling
                Sports Limited.

 **10.14        Emp loy ment Agreement, dated as of September 18, 2006, between Patrick F. Hamner and Heeling Sports Limited.

    10.15       Waiver and Agreement, dated September 14, 2006, among the Reg istrant, Roger R. Adams, Richard E. M iddlekauff,
                Robert J. Ward, CYPO, Inc., Heeling Ho lding Corporation, Heeling Management Corporat ion, Samuel B. Ligon and
                Patricia P. Ligon and Capital Southwest Venture Corporation.
     **10.16     2006 Stock Incentive Plan, as amended by Amendment to Heeling, Inc. 2006 Stock Incentive Plan and form of Stock Option
                 Agreement thereunder.

     **10.17     Heeling Sports Limited 2006 Bonus Plan.

     **10.18     Form of Indemnificat ion Agreement entered into by the Registrant with each of its directors and executive officers.

     **10.19     Intellectual Property Exclusive License Agreement, dated and effective as of September 23, 2002, between Heeling Sports
                 Limited and Curt is Holdings, LLC; Intellectual Property Purchase Agreement, dated September 23, 2002, between Heeling
                 Sports Limited and Cu rtis Ho ldings, LLC, and Letter Agreement, dated January 5, 2006, between Heeling Sports Limited and
                 Curtis Holdings, LLC.

     **10.20     Investor Rights Agreement, dated as of May 24, 2000, among the Registrant, Roger R. Adams, Richard E. Middlekauff,
                 Robert J. Ward, Cypo, Inc., Heeling Holding Corporation, Heeling Management Corp., Samuel P. Ligon and Patricia P.
                 Ligon and Capital Southwest Venture Corporation.

     **10.21     Stockholder Agreement, dated as of May 24, 2000, between Roger R. Adams and Robert J. Ward.

       10.22     Agreement, dated November 17, 2006, between Roger R. Adams and Robert J. Ward.

     **21.1      List of subsidiaries of the Registrant.

        23.1     Consent of Deloitte & Touche LLP, independent registered public accounting firm.

     **23.2      Consent of Gardere Wynne Sewell LLP (included in Exh ibit 5.1).

     **24.1      Powers of Attorney (included with signature page).


*
       To be filed by amendment.

**
       Previously filed.
                                                                                                                                       Exhi bit 4.1

[FACE OF CERTIFICATE]

COMMON STOCK

H

[LOGO]

HEELYS, INC.

INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE

COMMON STOCK

SEE REVERSE FOR CERTAIN DEFINITIONS

CUSIP TO COM E

THIS IS TO CERTIFY THAT

IS THE OWNER OF

FULLY PAID AND NON-ASSESSABLE SHA RES OF

HEELYS, INC.

transferable only on the books of the Corporation by the holder hereof in person or by duly authorized Attorney upon surrende r of this
Cert ificate properly endorsed. This certificate is not valid until countersigned and registered by the Transfer Agent and Registrar.

WITNESS, the facsimile seal o f the Corporat ion and the facsimile signatures of its duly authorized officers.

Dated:

[SIGNATURE]
SECRETARY AND TREA SURER

[SEA L]

[SIGNATURE]
PRESIDENT AND CHIEF EXECUTIVE OFFICER

COUNTERSIGNED A ND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
    (NEW YORK, N.Y.)
TRANSFER A GENT
AND REGISTRAR,
BY
AUTHORIZED SIGNATURE

[REVERSE OF CERTIFICATE]

HEELYS, INC.

The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in
full according to applicable laws or regulat ions:

TEN COM—as tenants in common
TEN ENT—as tenants by the entireties
JT TEN—as joint tenants with right
of survivorship and not as
tenants in common
UNIF GIFT M IN ACT—                         Custodian
                        (Cust)             (Minor)
under Uniform Gifts to Minors Act

_______________________________
    (State)

Additional abbreviations may also be used though not in the above list.

For value received, hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUM BER OF ASSIGNEE
__________________________________________

________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAM E AND ADDRESS, INCLUDING ZIP
CODE, OF ASSIGNEE)

Shares of the common stock represented by the within Cert ificate, and do hereby irrevocably constitut e and appoint

Attorney to transfer the said stock on the books of the within-named Co rporation with full power of substitution in the premises.

Dated

NOTICE: THE SIGNATURE(S) TO THIS ASSIGNM ENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVER Y PA RTICULA R, WITHOUT A LTERATION OR ENLA RGEM ENT OR ANY CHANGE
WHATSOEVER.

SIGNATURE(S)
GUA RANTEED:

THE SIGNATURE(S) M UST BE GUA RANTEED BY AN ELIGIBLE GUARA NTOR INSTITUTION (BANKS, STOCKBROKERS,
SA VINGS AND LOAN ASSOCIATIONS A ND CREDIT UNIONS WITH M EM BERSHIP IN AN APPROVED SIGNATURE
GUA RANTEE M EDA LLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.

KEEP THIS CERTIFICATE IN A SAFE PLA CE. IF IT IS LOST, STOLEN, MUTILATED OR DESTROYED, THE CORPORATION WILL
REQUIRE A BOND OF INDEM NITY AS A CONDITION TO THE ISSUANCE OF A REPLA CEM ENT CERTIFICATE.
QuickLinks -- Click here to rapidly navigate through this document

                                                                                                                                   Exhi bit 10.11

                                                  AMENDED AND RES TATED
                                    EMPLOYMENT AGREEMENT, INCLUDING AGREEMENT TO
                                       ARB ITRATE, NONCOMPETITION AGREEMENT AND
                                               NONDIS CLOS URE AGREEMENT

    This Agreement is made and entered into on November 16, 2006 (effective as of May 19, 2006), by and between Michael W. Hessong
("Emp loyee") and Heeling Sports Limited, a Texas limited partnership (the "Company").


                                                                R E C IT A LS

    A. Emp loyee is currently serving as Vice President—Finance, Ch ief Financial Officer, Treasurer and Secretary o f the Company
pursuant to an Emp loy ment Agreement dated as of November 23, 2005 (the "Prior Agreement").

     B.   Emp loyee and the Co mpany want to amend and restate the Prior Agreement in its entirety.

     C. In the course of Emp loyee's emp loyment with the Co mpany, Emp loyee has and will continue to gain access to Confid ential
Information, as hereina fter defined, relating to the business of the Co mpany.

    D.    Co mpany and Emp loyee desire a speedy, economical and impartial d ispute resolution procedure.

     E.   Employee's performance of services to the Company may result in Discoveries, as hereinafter defined.

     F. The part ies hereto desire to enter into this Agreement in order to amend and restate the Prior Agreement and to set forth the
respective rights, limitations and obligations of both the Company and Emp loyee with respect to Employee's employ ment with th e Co mpany,
the Confidential Information, the Discoveries, arbitrat ion and the other matters set forth herein.

     NOW, THEREFORE, in consideration of the emp loyment of Employee by the Co mpany, the compensation paid to Emp loyee, and the
Co mpany continuing to provide Confidential Informat ion to Emp loyee, as well as the other mutual pro mises hereinafter containe d, the receipt
and sufficiency of wh ich are hereby acknowledged, the parties hereto agree as follows:

           1. EMPLOYMENT. The Co mpany agrees to continue to employ Emp loyee and Emp loyee hereby accepts such continued
     emp loyment fro m the Co mpany upon the terms and conditions set forth in this Agreement for the period wh ich begins on the date hereof
     and continuing through December 31, 2008 (" Emp loyment Period") which shall be automatically renewable in one year increments at the
     end of such period and each anniversary date thereafter, unless terminated by either party in writ ing at least 90 days prior to the end of
     such term or terminated earlier in accordance with Sect ion 5 hereof.

                                                                        1
       2. S ERVICES . During the Emp loyment Period, Emp loyee will render the services to the Co mpany as Vice President —Finance,
Chief Financial Officer, Treasurer and Secretary and/or such other position as agreed to by the Board of Directors and Employee.
Emp loyee covenants that he will devote his best efforts, knowledge, skill and entire productive time and attention (except fo r v acation or
other leave periods) to the business of the Company and will faithfully an d diligently carry out such duties and have such responsibilit ies
as are customary fo r persons employed in a substantially similar capacity for similar co mpanies. Emp loyee shall also use his best efforts to
initiate, preserve and maintain the favorable relat ionships of the Co mpany with its customers, suppliers and stockholders. Durin g the
Emp loy ment Period, Emp loyee shall not render services of a business, professional or commercial nature to any other entity or person
without the written consent of the board of directors (the "Board of Directors") of Heelys, Inc., successor by merger to Heeling, Inc. and
the owner of all o f the equity interests of the Company (the "Parent"), which consent may be withheld in the Board of Directo r's sole
discretion. Emp loyee will report to the Board of Directors and shall faithfully and diligently co mply with all reasonable and lawful
directives.

     3. ADHER ENCE TO COMPANY RULES . Emp loyee, at all t imes during the performance of this Agreement, shall adhere to
and obey all of the Co mpany's rules, regulations and policies which are now in effect, or as subsequently adopted or modified b y the
Co mpany which govern the operation of the Co mpany's business and the conduct of employees of the Co mpany.

     4.    COMPENS ATION.

          a. Salary and B onus. During the Emp loy ment Period, the Co mpany will pay Emp loyee the compensation set forth in
     Exhibit 1 hereto. Emp loyee's compensation shall be rev iewed annually by the co mpensation committee of the Board of Directors, but
     may not be reduced below the amount set forth in Exhibit 1 hereto. Emp loyee's compensation will be payable in accordance with the
     Co mpany's customary payroll practices.

           b. Benefits. During the Emp loyment Period, Employee shall be entitled to the Benefits as set forth on Exhibit 1 hereto.
     Notwithstanding anything in this Section 4(b) to the contrary, all Benefit obligations are subject to guidance issued by the U.S.
     Depart ment of Treasury under Section 409A of the Internal Revenue Code of 1986, as amended (the "Code"). To the extent req uired,
     the Co mpany may mod ify the Benefits provided under this Section 4(b) to co mply with such guidance; provided, however, that the
     aggregate value of Benefits provided to Emp loyee after such modification sha ll not be less than the aggregate value of the Benefits
     provided to him prior to the modification.

      5. TERMINATION. Emp loyee's emp loyment with the Co mpany will continue throughout the Emp loyment Period unless earlier
terminated pursuant to any of the following provisions:

           a. Termination by the Company for Cause. The Co mpany shall have the right to immediately terminate Emp loyee's
     emp loyment at any time for any of the following reasons (each of which is referred to herein as "Cause") by giving Emp loyee written
     notice of termination (the effective date of which may be the date of such notice):

                 (i) willful breach by Emp loyee of any provision of this Agreement and failure to cure such breach (to the extent
          practicable) within 15 days after the date he is given written notice thereof by the Co mpany;

               (ii) any willful act by Emp loyee of fraud or dishonesty, including but not limited to stealing or falsificat ion of Co mpany
          records, with respect to any aspect of the Company's business;

                                                                    2
          (iii) knowing violation of state, federal or international laws applicable to the Co mpany;

          (iv) drug or alcohol use of Emp loyee in v iolation of Co mpany policy or that materially impedes Emp loyee's job
     performance or brings Emp loyee or Emp loyer into disrepute in the commun ity;

          (v ) substantial failu re by Employee to perform any reasonable specific direct ive of the Board of Directors after 30 days
     notice of such failure and exp lanation of such failu re of performance;

          (vi) willful (x) misappropriation of funds or of any corporate opportunity or (y) acts disloyal to the Company;

         (vii) conviction of Emp loyee of a felony, or o f a crime that the Co mpany, in its sole discretion, determines involves a
     subject matter wh ich may reflect negatively on the Co mpany's reputation or business (or a plea of nolo contendere thereto);

        (v iii) acts by Emp loyee attempting to secure or securing any personal profit not fully disclosed to and approved by the
     Board of Directors of the Co mpany in connection with any transaction entered into on behalf of the Co mpany;

         (ix) gross, willful or wanton negligence, or conduct which constitutes a breach of any fiduciary duty owed to the Compan y
     by Emp loyee;

         (x) conduct on the part of Emp loyee, even if not in connection with the performance of h is duties contemplated under this
     Agreement, that could result in serious prejudice to the interests of the Company, and Employee fails to cease such conduct
     immed iately within 30 days of receipt of notice to cease such conduct;

          (xi) voluntary termination initiated by Emp loyee; or

         (xii) acceptance of employ ment with any other employer.

If the Co mpany terminates Emp loyee's emp loyment fo r any of the reasons set forth above, the Company shall have no further
obligations hereunder from and after the effect ive date of termination except for the pay ment of Emp loyee's salary and accrued
vacation time earned through the date of termination pro mptly after such termination and the Co mpany shall have all other rig h ts and
remedies availab le under this or any other agreement and at law or in equity.

       b. Termination Upon Death or Disability. If Emp loyee shall d ie or beco me disabled during the Emp loyment Period,
Emp loyee's emp loyment hereunder shall terminate (such termination being treated for purposes of this Agreement as if Emp loyee
had not been terminated for "Cause" pursuant to subsection (a) above) and the Company shall pay to Emp loyee or h is estate, as
applicable, (i) any co mpensation (including accrued vacation time and a pro -rated bonus under the Co mpany's Bonus Plan through
the date of death or disability) due that would otherwise have been payable through the date of death or disability pro mptly after the
death or disability (but the pro-rated bonus will be paid when otherwise payable had he continued as an employee of the Co mpany)
and (ii) an amount equal to one times the Emp loyee's annual base salary which amount shall be payable in cash in 12 equal

                                                              3
monthly payments commencing with the month following the month of his death or disability and shall be paid when otherwise
payable had he continued as an Emp loyee. For purposes of this Agreement, Emp loyee shall beco me "disabled" if (A) he is unable to
engage in any substantial gainfu l activ ity by reason of any medically determinable physical or mental impairment wh ich can be
expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (B) he is, by reason of any
med ically determinable physical or mental impairment wh ich can be expected to result in death or can be expected to last for a
continuous period of not less than 12 months, receiv ing inco me rep lacement benefits for a period of not less than three month s under
an accident or health plan covering employees of the Co mpany.

       c. Termination Without Cause. The Co mpany shall have the right to terminate Employee's employ ment Without Cause at
any time. Upon termination, the Co mpany shall pay to Emp lo yee (i) any co mpensation (including accrued vacation time and a
pro-rated bonus under the Co mpany's Bonus Plan through the date of termination Without Cause) due that would otherwise have
been payable through the date of termination Without Cause promptly after the date of termination Without Cause (but the pro-rated
bonus will be paid when otherwise payable had he continued as an employee of the Co mpany) and (ii) one year's base salary plus, if
Emp loyee has completed more than five years of service, includ ing service as a member o f the Board of Directors, an additional
amount equal to his monthly base salary for each year of co mpleted service in excess of five years which shall be paid in 12 equal
monthly payments commencing with the month following the mon th in wh ich his employ ment is terminated Without Cause and shall
be paid when otherwise payable had he continued as an Employee and the Co mpany shall have no further obligations to Emp loyee
under this Agreement. If Employee is a Specified Emp loyee on the d ate his employ ment is terminated Without Cause, the monthly
payments under Section 5(c)(ii) shall not co mmence until the first month next following the six-month anniversary of the date his
emp loyment so terminated. For purposes of this Agreement, an Emplo yee shall be considered a "Specified Emp loyee" as provided in
Code §409A and the Treasury regulations promulgated thereunder. If Employee dies after h is employ ment is terminated Without
Cause and before his receipt of all salary continuation payments due Emp loyee under this Section 5(c), the balance shall be paid to
his estate in the same manner and at the same time as specified in this Section 5(c). During the required period of continuation
coverage within the meaning of Code §4980B(f)(2)(B)(i)(I), Emp loyee shall be reimbursed by the Co mpany within five days of each
payment by Emp loyee of the monthly premiu m payable to continue coverage of Employee and his dependents under the Comp any's
group health plan or plans following the date his emp loyment is termin ated Without Cause in an amount equal to the amount of that
monthly premiu m payable by Emp loyee for such continuation coverage. Termination "Without Cause" means the termination of
Emp loyee's emp loyment either (i) by the Co mpany for a reason other than for Cause or (ii) by the Co mpany or Employee resulting
fro m a "Change of Control." For purposes of this Agreement, a " Change of Control" means the occurrence of any of the follo win g
events: (A) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securit ies Exchange Act of 1934, as amended (the
"Exchange Act")), other than one or more Permitted Ho lders, is or beco mes the "beneficial o wner" (as defined in Ru le 13d-3 un der
the Exchange Act), directly or indirectly, of securities of the Parent representing (1) 50% or mo re of the co mbined voting power of
the Parent's then outstanding securities prior to a "Qualified Public Offering" (which, for purposes of this Agreement, means the first
firm co mmit ment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as
amended, covering the offering and sale of the Parent's common stock for the account of the Parent in wh ich the aggregate net
proceeds to the Parent equals or exceeds $20 million) or (2) 25% or mo re of the co mbined voting power of the Parent's

                                                              4
then outstanding securities after a Qualified Public Offering; (B) any change or changes in the composition of the Parent's Board of
Directors within a two-year period as a result of which less than a majority of the directors are (1) persons who were directors at the
beginning of that two-year period or (2) persons who were elected or no minated for elect ion as directors with the affirmative vote or
consent of at least a majority of the incumbent directors at the time o f that election or no mination, but not including any p erson
whose election or nomination was or is in connection with an actual or threatened pro xy contest regarding the election of the Parent's
directors; (C) the Parent is merged or consolidated with another corporation or other entity (other than one or more Permitted Holders
or any entity controlled by one or more Permitted Ho lders) and, as a result of the merger or consolidation, less than 75% of the
outstanding voting securities of the surviving or resulting corporation or other entity, as the case may be, are "beneficially o wned"
(within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, immediately after the merger or consolidation by
persons who or which beneficially owned the outstanding voting securities of the Parent immed iately before the merger or
consolidation; or (D) the Parent transfers, sells or otherwise disposes of all or substantially all of its assets to another corporation or
other entity which is not an affiliate of the Parent. "Permitted Holders" means Capital Southwest Venture Corporation and its
affiliates and Roger R. Adams and his affiliates. For purposes of this Agreement, any termination of Employee's employ ment by the
Co mpany which occurs within 12 months following such Change of Control shall be conclusively presumed to have resulted from
such Change of Control unless the Co mpany demonstrates to an arbitrator, or Emp loyee agrees, that the termination was with Cause.
Should the Co mpany fail to co mply in a material respect with this Agreement, and such failure is not cured (if practicable) with in
30 days after the Co mpany is given written notice of such noncompliance, Emp loyee may resign and receive the benefits of this
Section 5(c). If, whether before or after a Change of Control, without Employee's consent the Company reduces the Emp loyee's base
salary or "Target" amount for purposes of the Co mpany's Bonus Plan, materially changes his title, reduces the scope of the assigned
work responsibilities, or relocates its offices in excess of 50 miles fro m the address set forth herein, Emp loyee shall be de emed to
have been constructively terminated Without Cause.

      d. Li mitati on on Payments. If any severance payment or other benefits received or to be received by Emp loyee under
Section 5(c) of this Agreement or any other of the Total Severance Benefits constitute "parachute payments" within the meanin g of
Code §280G and would be subject to the excise tax imposed by Code §4999 (the "Excise Tax" ), then Employee's payments and
benefits under Section 5(c) o f this Agreement shall be either

            (i) paid in full, or

            (ii) paid as to such lesser extent which would result in no portion of such payments or benefits being subject to the Excise
     Tax,

whichever of the fo regoing amounts, taking into account the applicable federal, state and local inco me and payroll taxes and the
Excise Tax, results in the receipt by Emp loyee on an after-tax basis, of the greatest amount of Total Severance Benefits,
notwithstanding that all or some portion of such benefits may be subject to the Excise Tax under Section 4999 of the Code. For
purposes of this Agreement, "Total Severance Benefits" means the severance payments and benefits under Section 5(c) o f this
Agreement and all other payments and benefits received or to be received by Emp loyee under this Agreement and all payments and
benefits (if any) to which Emp loyee may be entitled under any plan, agreement or otherwise upon or as the result of a Change of
Control or the termination of h is employ ment with the Co mpany, or both. This Section 5(d) is not intended to prevent and shall not
result in the prevention of the acceleration and full vesting of any outstanding stock option held by

                                                               5
     Emp loyee. Any determination required under this Section 5(d) shall be made in writing by the Co mpany's independent public
     accountants (the "Accountants"), whose determination shall be conclusive and binding upon Employee and th e Co mpany for all
     purposes. For purposes of making the calculations required by this Section 5(d), the Accountants may make reasonable assumptions
     and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concern ing the application of
     Code §§280G and 4999. The Co mpany and Emp loyee shall furn ish to the Accountants such information and documents as the
     Accountants may reasonably request in order to make a determination under this Section 5(d). The Co mpany shall bear all costs the
     Accountants may reasonably incur in connection with any calculat ions contemplated by this Section 5(d).

       6. NONDISCLOS URE. Emp loyee acknowledges that during the course of his employ ment by the Co mpany, the Co mpany and
its affiliates have provided and will provide, and the Employee has acquired and will acquire, technical knowledge with respect to the
Co mpany's and its affiliates' business operations, including, by way of illustration, the Co mpany's and its affiliates' exist ing and
contemplated product line, trade secrets, compilations, business and financial methods or practices, plans, pricing, market in g,
merchandising and selling techniques and information, customer lists, supplier lists and confidential informat ion relating to the Co mpany's
and its affiliates' policies and/or business strategy (all o f such information herein referenced to as the "Confidential Info rmat ion"). The
protection of the Confidential Informat ion against unauthorized disclosure or use is of crit ical impo rt ance to the Company. Employee
agrees that Emp loyee will not, during the Emp loyment Period, divulge to any person, directly or indirectly, except to the Co mp any or its
officers and agents or as reasonably required in connection with Employee's duties on beh alf of the Co mpany, or use, except on behalf of
the Co mpany, any Confidential Information acquired by the Employee during the Emp loyment Period. Employee agrees that Emp loye e
will not, for a period of three years after the Emp loyment Period has ended, use or divulge to any person directly or indirectly any
Confidential In formation, o r use any Confidential Information in subsequent employment.

        7. RET URN OF DOCUMENTS. Emp loyee's relationship with the Co mpany is terminated (for whatever reason), Employee
shall not take with Employee, but will leave with the Co mpany, all work product, records, files, memo randa, reports, price lists, customer
lists, supplier lists, documents and other informat ion, in whatever form (including on co mputer disc), and any copies thereof, relating to
the Confidential Information or if such items are not on the premises of the Co mpany, Employee agrees to return such items im med iately
upon Employee's termination). Emp loyee acknowledges that all such items are and remain the property of the Co mpany.

      8. DIS COVERIES. Emp loyee will pro mptly and freely disclose to the Co mpany, in writing, any and all ideas, conceptions,
inventions, improvements and discoveries (collect ively, "Discoveries"), whether patentable or not, that are conceived or made by
Emp loyee, solely or joint ly with another, during the Emp loy ment Period, and that relate to the business or activities of, or the products
sold by, the Company. Emp loyee hereby assigns to the Company all of Employee's interest in any such Discoveries. Upon the request of
the Co mpany, whether during or after the Employ ment Period, Emp loyee will execute any and all applicat ions, assignments and o ther
instruments that the Company shall, in its sole discretion, deem necessary to apply for and obtain protection, including, witho ut limitation,
patent protection, for the Discoveries in all countries of the world. The obligations of the parties under this Sect ion 8 shall survive the
termination of this Agreement.

                                                                   6
       9. COPYRIGHT. If, during the Emp loy ment Period, Emp loyee creates any original work of aut horship fixed in any tangible
med iu m of expression, which is the subject matter of copyright, including, without limitation, v ideo tapes, written presentat ions, co mputer
programs, drawings, models, manuals, brochures and the like, that relate to the Co mpan y's business, products sold or services, whether
such work is created solely by Employee or joint ly with others, the Company shall be deemed to be the author of such work if t he work is
prepared by Emp loyee with in the scope of Employee's employ ment; or if the work is not prepared by Emp loyee within the scope of
Emp loyee's emp loyment, but is specially ordered by the Co mpany, including, without limitation, as a contribution to a collect ive work, or
as a part of an audio-visual work, as a translation, as a supplementary wo rk, as a co mpilation, or as an instructional text, o r is created using
any resources or property of the Company, the work shall be considered a work made for hire, and the Co mpany shall be the aut hor of the
work. If such work is neither prepared by Emp loyee within the scope of employ ment, nor as a work made for hire, Emp loyee hereby
assigns to the Company all of Employee's world-wide right, title and interest in and to such work and all rights of copyright therein.
Emp loyee agrees to, upon the request of the Company, whether during or after the period of Emp loyee's emp loy ment by the Company,
assist the Company in the protection of the Co mpany's world -wide right, title and interest in and to the work and all rights of copyright
therein, including, without limitation, the execution of all formal assignment documents requested by the Company, and the execution of
all lawfu l oaths and applications for reg istration of copyright in the United States and foreign countries. The obligations o f the parties
under this Section 9 shall survive the termination of this Agreement.

     10. NO EXCLUS IONS. Employee hereby represents that Employee has not heretofore made any Discoveries or prepared any
work wh ich is the subject of copyrights that Employee wish es to exclude fro m the provisions of Sections 8 and 9 above.

      11. NONCOMPETITION. The business of the Company is relatively unique and Emp loyee acknowledges that he is being
provided and will continue to be provided by the Company with significan t information, trade secrets and opportunities, which are
confidential and proprietary in nature. Emp loyee further acknowledges that such informat ion and opportunities would have sign ificant
value to any current or prospective competitor of the Co mpany. In recognition of the Co mpany's agreement to provide to Employee such
informat ion and opportunities, of the need to fully protect such informat ion and opportunities fro m unauthorized disclosure o r use, and in
consideration of the numerous mutual pro mises contained in this Agreement between the Co mpany and the Employee, includin g, without
limitat ion, those involving Confidential Informat ion, co mpensation, termination and arbitration, and in order to protect the Co mpany's
Confidential In formation and to reduce the likelihood of irreparab le damage wh ich would occur in the event such information is provided
to or used by a competitor of the Co mpany, during the Employ ment Period and for an addit ional period of one year immediately following
the Emp loyment Period (the "Nonco mpetition Term"), Emp loyee will not, directly or ind irectly, either through any form of o wnership or
as a director, officer, principal, agent, employee, emp loyer, adviser, consultant, shareholder, partner, or in any other individual or
representative capacity whatsoever, either fo r his own benefit or fo r the benefit of any other person, firm, corporation, governmental o r
private entity, or any other entity of whatever kind, without the prior written

                                                                      7
consent of the Company (wh ich consent may be withheld in its sole discretion), co mpete with the Co mpany or its affiliates, in North and
South America, Mexico, Western and Eastern Europe, the M iddle East, an d the Far East including Japan, Malaysia, South Korea, Ch ina,
Taiwan or Asia ("Noncompetit ion Territory") in any business activity of the Co mpany existing or contemplated as of, or conduc ted or
contemplated by the Company prior to, the date of this Agreement, and/or during the Employ ment Period. Any such acts during the
Noncompetition Term in the Non-co mpetition Territory shall be considered breaches and violations of this Agreement. Additionally,
during the Noncompetition Term, Employee shall not directly or indirect ly request or advise any customer or supplier of the Co mpany to
withdraw, curtail o r cancel its business activities with the Co mpany.

      If, during any period within the Noncompetit ion Term, Emp loyee is not in co mpliance with the terms of t his Section 11, the
Co mpany shall be entitled to, among other remedies, seek co mp liance by Emp loyee with the terms of this Sect ion 11 for an additional
period equal to the period of such noncompliance. For purposes of this Agreement, the term "Noncompetit ion Term" shall also include
this additional period. Emp loyee hereby acknowledges that the geographic boundaries, scope of prohibited activities and the t ime duration
of the provisions of this Section 11 are reasonable and are no broader than are necessary to protect the legitimate business interests of the
Co mpany, given the unique and worldwide nature of the Internet and electronic co mmerce.

     This Section 11 shall survive the termination of Emp loyee's employ ment and can only be revoked or modified b y a writ ing signed by
the parties which specifically states an intent to revoke or modify this provision.

      12. NO INTERFER ENCE WITH EMPLOYEES . During the Nonco mpetition Term, without the consent of the Board of
Directors, whose consent shall not be unreasonably withheld, neither Emp loyee nor any individual, partners, limited partnership,
corporation or other entity or business with wh ich Emp loyee is in any way affiliated, including, without limitation, any part ner, limited
partner, director, officer, shareholder or employee of any such entity or business, will (i) request, induce or attempt to influence, direct ly
or indirectly, any emp loyee of the Co mpany to terminate his employ ment with the Co mpany or (ii) employ any person who as of the date
hereof was, or after such date is or was, an employee of the Co mpany.

      13. REFORMATION OF S ECTIONS 11 AND 12. The Co mpany and Employee agree and stipulate that the agreements and
covenants not to compete contained in Sections 11 and 12 hereof are fair and reasonable in light of all of the facts and circumstances of
the relationship between Emp loyee and the Company; however, Emp loyee and the Company are aware that in certain circu mstances
courts have refused to enforce certain agreements not to compete. Therefore, in furtherance of, and not in derogation of the provisions of
Sections 11 and 12, that in the event a court should decline to enforce the provisions of Sections 11 and/or 12, Sections 11 and/or 12, as
applicable, shall be deemed to be modified or reformed to restrict Emp loyee's competition with the Co mpany or its affiliates to the
maximu m extent, as to time, geography and business scope, which the court shall find enforceable; provided, however, in no ev ent shall
the provisions of Sections 11 and/or 12, as applicable, be deemed to be more restrictive to Emp loyee than those contained herein.

                                                                    8
      14. INJ UNCTIVE RELIEF. Employee acknowledges that breach of any of the agreements contained herein, including , without
limitat ion, any of the noncompetition and confidentiality covenants specified in Sect ions 6 through 12, will g ive rise to irr eparable in jury
to the Company, inadequately compensable in damages. Accordingly, notwithstanding Section 15 belo w, the Co mpany shall be entitled,
without the posting of any bond, to injunctive relief to prevent or cure breaches or threatened breaches of the provisions of this Agreement
and to enforce specific performance of the terms and provisions hereof in any court of co mpetent jurisdiction, in addition to any other
legal or equitable remedies which may be available. Employee further acknowledges and agrees that in the event of the termination of this
Agreement, his experience and capabilities are such that he can obtain employ ment in business activities which are of a diffe rent or
noncompeting nature with his activities as an emp loyee of the Co mpany; and that the enforcement of a remedy hereunder by way of
injunction shall not prevent Emp loyee fro m earning a reasonable livelihood. Emp loyee further acknowledges and agrees that the
covenants contained herein are necessary for the protection of the Company's legit imate business interests and are reasonable in scope and
content.

    15. MUTUAL AGREEMENT TO ARB ITRATE . COMPANY AND EM PLOYEE RECOGNIZE THAT DIFFERENCES MA Y
ARISE BETW EEN THEM. THROUGH THIS SECTION 15, BOTH PARTIES EXPECT TO GAIN THE BENEFITS OF A SPEEDY,
ECONOMICA L, IMPA RTIA L DISPUTE-RESOLUTION PROCEDURE. THEREFORE, THE PA RTIES A GREE AS FOLLOWS:

           a. THIS SECTION 15 SHA LL APPLY TO A LL DISPUTES OR CONTROVERSIES, W HETHER OR NOT A RISING OUT
     OF EM PLOYEE'S EMPLOYM ENT (OR TERMINATION OF THAT EM PLOYM ENT), THAT COM PANY MA Y HA VE
     AGAINST EMPLOYEE, OR THAT EM PLOYEE MA Y HA VE A GAINST COMPA NY OR A GAINST (AS APPLICA BLE) ITS
     PAST OR PRESENT OFFICERS, DIRECTORS, SHAREHOLDERS, PA RTNERS, EM PLOYEES, ADVISORS OR A GENTS
     (COLLECTIVELY, "CLA IMS"), EXCEPT FOR INJUNCTIVE RELIEF TO BE PURSUED BY COM PANY PURSUANT TO
     SECTION (b) BELOW. THE CLAIMS INCLUDE, BUT ARE NOT LIM ITED TO, CONTROVERSIES RELA TING TO:
     COMPENSATION OR BENEFITS, BREA CH OF A NY CONTRACT, TORTS, DISCRIMINATION UNDER STATE, FEDERA L
     OR LOCAL LAW, AND VIOLATION OF ANY FEDERA L, STATE, OR OTHER GOVERNM ENTA L LAW, STATUTE,
     REGULATION, OR ORDINANCE. HOW EVER, THIS SECTION 15 SHA LL NOT A PPLY TO ANY CLA IM: (I) FOR
     WORKERS' COM PENSATION OR UNEMPLOYM ENT BENEFITS; OR (II) BY COMPANY FOR INJUNCTIVE A ND/ OR
     OTHER EQUITABLE RELIEF FOR UNFA IR COM PETITION AND/ OR THE USE AND/OR UNAUTHORIZED DISCLOSURE
     OF TRA DE SECRETS OR CONFIDENTIA L INFORMATION, INCLUDING BUT NOT LIM ITED TO, MATTERS DESCRIBED
     IN SECTIONS 6 A ND 11 A BOVE. WITH RESPECT TO MATTERS REFERRED TO IN THE FOREGOING SUB-PARA GRAPH
     (II), COMPA NY MA Y SEEK AND OBTAIN INJUNCTIVE RELIEF IN COURT, AND THEN PROCEED WITH ARBITRA TION
     UNDER THIS SECTION 15.

        b. EXCEPT AS SET FORTH IN THIS A GREEM ENT, THE SOLE AND EXCLUSIVE M ETHOD TO RESOLVE A NY
     CLAIM IS ARBITRATION AS PROVIDED IN THIS SECTION 15 AN D THE PA RTIES EA CH WAIVE THEIR RIGHT TO
     COMMENCE A N A CTION IN ANY COURT TO RESOLVE A CLA IM. EXCEPT WITH RESPECT TO INJUNCTIVE RELIEF
     SPECIFICA LLY PROVIDED FOR IN THIS A GREEM ENT, NEITHER PA RTY SHA LL INITIATE OR PROSECUTE ANY
     LAWSUIT IN ANY WA Y RELATED TO A NY CLAIM COVERED BY THIS SECTION 15.

          c.   A CLA IM MUST BE PROCESSED IN THE MANNER SET FORTH BELOW.

                                                                     9
      (i) WRITTEN NOTICE OF DESIRE TO ARBITRATE SHA LL DESCRIBE THE FACTUA L BASIS OF ALL CLAIM S
ASSERTED, AND SHA LL BE SENT TO THE OTHER PA RTY BY CERTIFIED OR REGISTERED MAIL, RETURN
RECEIPT REQUESTED. WRITTEN NOTICE TO EMPLOYEE WILL BE MAILED TO EM PLOYEE'S ADDRESS AS IT
APPEARS IN COMPANY'S RECORDS. W RITTEN NOTICE TO COMPANY, OR ITS OFFICERS, DIRECTORS,
EMPLOYEES OR A GENTS, SHA LL BE SENT TO THE COM PANY AT COMPANY'S PRINCIPA L EXECUTIVE OFFICE.
IF W RITTEN NOTICE OF INTENTION TO A RBITRATE IS NOT GIVEN WITHIN THE APPLICABLE TIM E PERIOD,
THE PARTY W HO FAILED TO GIVE NOTICE WILL BE DEEM ED TO HA VE WAIVED THE RIGHT TO FURTHER
CONTEST THE MATTER, AND WILL BE DEEM ED TO HA VE ACCEPTED THE OTHER PARTY'S LAST STATED
POSITION ON THE CLAIM.

    (ii) THE A RBITRATION SHA LL BE CONDUCTED IN ACCORDA NCE WITH THE TH EN-CURRENT MODEL
EMPLOYM ENT A RBITRATION PROCEDURES OF THE AM ERICA N ARBITRATION ASSOCIATION ("AAA")
BEFORE A SINGLE A RBITRATOR. THE A RBITRATION SHA LL TAKE PLACE IN OR NEA R THE CITY IN WHICH
EMPLOYEE IS OR WAS LAST WORKING WITH COMPANY.

       (A) THE A RBITRATOR SHA LL BE SELECTED IN THE FOLLOWING MANNER. THE AAA SHA LL GIVE
   EA CH PA RTY A LIST OF AT LEAST SIX A RBITRATORS DRAWN FROM ITS PANEL OF LA BOR AND
   EMPLOYM ENT A RBITRATORS. EA CH SIDE MA Y STRIKE A LL NAM ES ON THE LIST IT DEEMS
   UNA CCEPTA BLE. IF ONLY ONE COMMON NAME REMAINS ON THE LISTS OF A LL PARTIES, THAT
   INDIVIDUA L SHALL BE THE ARBITRATOR. IF MORE THA N ONE COMM ON NAM E REMAINS ON THE LISTS
   OF A LL PA RTIES, THE PA RTIES SHA LL STRIKE NAM ES ALTERNATELY UNTIL ONLY ONE REMAINS. IF NO
   COMMON NAM E REMAINS ON THE LISTS OF A LL PARTIES, THE AAA SHALL FURNISH ONE ADDITIONA L
   LIST, AND THE A BOVE PROCEDURE WILL BE UTILIZED. IF NO ARBITRATOR IS DESIGNATED FROM THE
   SECOND LIST, THE PROCEDURE OF THE AAA RULES WILL BE UTILIZED TO SELECT THE ARBITRATOR. IN
   NO EVENT WILL THE ARBITRATOR BE THEN AFFILIATED IN A NY MA NNER WITH A COM PETITOR OF THE
   COMPANY.

       (B) ANY PARTY MA Y BE REPRESENTED BY AN ATTORNEY OR OTHER REPRESENTATIVE SELECTED
   BY THE PARTY.

       (C) EA CH PA RTY SHA LL HA VE THE RIGHT TO TAKE DEPOSITIONS OF INDIVIDUA LS AND ANY
   EXPERT WITNESSES DESIGNATED BY ANOTHER PARTY. EACH PARTY A LSO SHALL HA VE THE RIGHT TO
   MAKE REQUESTS FOR PRODUCTION OF DOCUM ENTS TO ANY PA RTY. A DDITIONAL DISCOVERY MA Y BE
   HAD ONLY WHERE THE ARBITRATOR SO ORDERS, UPON A SHOWING OF SUBSTANTIAL NEED. A LL
   ISSUES RELATED TO DISCOVERY W ILL BE RESOLVED BY THE ARBITRATOR.

      (D) AT LEAST 14 DA YS BEFORE THE ARBITRATION, THE PARTIES MUST EXCHA NGE LISTS OF
   WITNESSES, INCLUDING A NY EXPERT, AND COPIES OF ALL EXHIBITS INTENDED TO BE USED AT THE
   ARBITRATION.

                                         10
              (iii) THE ARBITRATOR WILL HA VE NO AUTHORITY TO: ADOPT NEW COMPANY POLICIES OR
          PROCEDURES, M ODIFY THIS SECTION 15 OR EXISTING COMPANY POLICIES, PROCEDURES, WA GES OR
          BENEFITS, OR IN THE A BSENCE OF A WRITTEN WAIVER PURSUANT TO PA RA GRAPH (ix) BELOW, HEA R OR
          DECIDE A NY MATTER THAT WAS NOT PROCESSED IN ACCORDANCE WITH THIS SECTION 15. THE
          ARBITRATOR SHALL HA VE EXCLUSIVE AUTHORITY TO RESOLVE A NY CLA IM, INCLUDING, BUT NOT
          LIMITED TO, A DISPUTE RELATING TO THE INTERPRETATION, APPLICA BILITY, ENFORCEABILITY OR
          FORMATION OF THIS SECTION 15, OR ANY CONTENTION THAT A LL OR ANY PART OF THIS SECTION 15 IS
          VOID OR VOIDABLE. THE ARBITRATOR WILL HA VE THE AUTHORITY TO AWARD ANY FORM OF REM EDY OR
          DAMAGES THAT WOULD BE A VAILA BLE IN A COURT.

             (iv) COMPA NY SHALL PA Y REASONA BLE AND NECESSA RY FEES OF THE AAA AND THE ARBITRATOR.
          THE PARTIES WILL PA Y THEIR OWN ATTORNEYS' FEES AND EXPENSES ASSOCIATED WITH THE
          ARBITRATION.

             (v ) EITHER PA RTY, IN ITS SOLE DISCRETION, MA Y, IN WRITING, WAIVE, IN WHOLE OR IN PA RT, THE
          OTHER'S FAILURE TO FOLLOW A NY TIM E LIMIT OR OTHER REQUIREM ENT SET FORTH IN THIS SECTION 15.

              (vi) TO THE EXTENT PERMITTED BY LAW, EM PLOYEE A GREES NOT TO INITIATE OR PROSECUTE
          AGAINST COM PANY ANY ADM INISTRATIVE A CTION (OTHER THA N AN ADMINISTRATIVE CHARGE OF
          DISCRIMINATION) IN A NY WAY RELATED TO ANY CLAIM COVERED BY THIS SECTION 15.

             (vii) THE A RBITRATION WILL BE CONDUCTED IN PRIVATE, AND WILL NOT BE OPEN TO THE PUBLIC OR
          THE M EDIA. THE TESTIM ONY A ND OTHER EVIDENCE PRESENTED, AND THE RESULTS OF THE ARBITRATIO N,
          UNLESS OTHERWISE A GREED TO BY BOTH PARTIES, A RE CONFIDENTIA L AND MA Y NOT BE MADE PUBLIC
          OR REPORTED BY ANY NEWS A GENCY OR LEGA L PUBLISHER OR SERVICE.

             (v iii) THE ARBITRATOR SHA LL RENDER A W RITTEN DECISION AND AWARD (THE "AWARD"), WHICH
          SHA LL SET FORTH THE FA CTS AND REASONS THAT SUPPORT THE AWARD. THE AWARD SHA LL BE FINA L
          AND BINDING ON COMPA NY AND EMPLOYEE A ND SHALL BE ENTERED IN A COURT OF COMPETENT
          JURISDICTION.

       16. S EVERAB ILITY AND REFORMATION. Subject to the reformation provision in Section 13, if any provision of this
Agreement is held to be illegal, invalid or unenforceable under any present or future law, and if the rights or obligations o f Emp loyee or
the Co mpany under this Agreement would not be materially and adversely affected thereby, such provision shall be fully severable, and
this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a p art thereof,
the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or
unenforceable provision or by its severance herefrom, and in lieu of such illegal, invalid o r unenforceable provision, there shall be added
automatically as a part of this Agreement a legal, valid and enforceable prov ision as similar in terms to such illegal, invalid o r
unenforceable provision as may be possible, and the Co mpany and Emp loyee hereby request the court or any arbitrator to whom d isputes
relating to this Agreement are submitted to reform the otherwise unenforceable covenant in accordance with this Section 16.

                                                                  11
       17. HEADINGS, GENDER, ETC. The headings used in this Agreement have been inserted for convenience and do not constitute
matter to be construed or interpreted in connection with this Agreement. Unless the context of this Agreement otherwise requi res,
(i) words of any gender shall be deemed to include each other gender; (ii) words using the singular or p lural number shall also include the
plural o r singular nu mber, respectively; and (iii) the terms "hereof," "herein," "hereby," "hereto," and derivative or similar words shall
refer to this entire Agreement.

    18. GOVERNING LAW. THIS A GREEM ENT WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE W ITH
THE LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO ANY PRINCIPLE OF CONFLICT OF LAWS THAT
WOULD REQUIRE THE APPLICATION OF THE LAW OF ANY OTHER JURISDICTION.

     19. S URVIVAL. Emp loyee's termination fro m emp loy ment, for whatever reason, shall not reduce or terminate Emp loyee's or the
Co mpany's covenants and agreements set forth herein.

      20. NOTICES. Any notice necessary under this Agreement shall be in writing and shall be considered delivered three d ays after
mailing if sent certified mail, return receipt requested, or when received, if sent by telecopy, prepaid courier, express mail or personal
delivery to the following addresses:


                 If to the Co mpany:     Heelys, Inc.
                                         3200 Belmeade Dr., Su ite 100
                                         Carrollton, Texas 75006
                                         Telecopy: (214) 390-1661
                                         Attention: Chairman of the Board

                 If to the Employee:     Michael W. Hessong
                                         3200 Belmeade Dr.,- Suite 100
                                         Carrollton, Texas 75006
                                         Telecopy: 214-390-1661

       21. ATTORNEYS' FEES. The prevailing party in any legal proceedings brought by or against the other party to enforce any
provision of this Agreement shall be entitled to recover against the non -prevailing party the reasonable attorneys' fees, court costs,
arbitration fees and other expenses incurred by the prevailing party. Th is Section shall not apply to arbitration, which is g overned by
Section 15(c)(viii).

      22. ENTIRE AGREEMENT. Th is Agreement, including the Recitals and introductions and all Exh ibits referred to, embodies the
entire agreement and understanding of the parties hereto in respect of the subject matter contained herein and supersedes all p rior
conflicting or inconsistent agreements, consents and understandings relating to such subject matter. Employee acknowledges and agrees
that there is no oral or other agreement between the Co mpany and Emp loyee relating to the employ ment relationship which has n ot been
incorporated in this Agreement.

      23. NO WAIVER. The forebearance or failure of one of the parties hereto to insist upon strict compliance by the other with any
provisions of this Agreement, whether continuing or not, shall not be construed as a waiver of any rights or priv ileges hereunder. No
waiver of any right or priv ilege of a party arising fro m any default or failure hereunder of performance by the other shall a ffect such
party's rights or privileges in the event of a further defau lt or failure of performance.

      24. ASSIGNMENT. Th is Agreement may not be assigned by the Company without the Emp loyee's approval, but no approval
shall be required for the Co mpany to assign this Agreement to any affiliate or successor in interest to the Company's busines s or in
connection with a Change of Control. Th is Agreement may not be assigned by Employee. Any assignment made by either party in
contravention of this Section shall be null and void for all purposes.

                                                                   12
           25. B INDING EFFECT. This Agreement shall be binding on and inure to the benefit of the parties and their respective successors
      and permitted assigns.

           26. MODIFICATION. This Agreement may be modified only by a written agreement signed by both parties. Any such written
      modification must be authorized by the Board of Directors of the Co mpany.

            27. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an
      original instrument, and all of which together shall constitute one and the same Agreement.

             28. CODE §409A COMPLIANCE . It is the intention of the Co mpany and Emp loyee that this Agreement not result in
      unfavorable tax consequences to Employee under Code §409A. The Co mpany and Employee acknowledge that only limited gu idance has
      been issued by the Internal Revenue Service with respect to the application of Code §409A to certain arrangements, such as this
      Agreement. It is expected by the Co mpany and Employee that the Internal Revenue Service will provide further guidance regarding the
      interpretation and application of Code §409A in connection with finalizing its current proposed regulations. The Company and Emp loyee
      acknowledge further that the full effect of Code §409A on potential pay ments pursuant to this Agreement cannot be determined at the time
      that the Company and Emp loyee are entering into this Agreement. The Co mpany and Employee agre e to work together in good faith in an
      effort to co mply with Code §409A including, if necessary, amending the Agreement based on further guidance issued by the Internal
      Revenue Service fro m time to time, provided that neither party shall be required to ass ume an economic burden beyond what is already
      required by this Agreement.

      IN WITNESS WHEREOF, the parties hereto have executed this Employ ment Agreement as of the day and year first above written.


HEELING SPORTS LIMITED                                              EMPLOYEE

By:     HEELING MANAGEMENT CORP.,                                   /s/ Michael W. Hessong
         its sole general partner
                                                                    Michael W. Hessong

        By:         /s/ Michael Staffaroni


        Title:      President & CEO


                                                                      13
                                                                   Exhi bit 1
                                                              Salary and Benefits

Reference Section 4, part a.

1.
       Salary to be $14,583.33 per month—$175,000 per year.

2.
       Bonus Plan: An Annual Bonus amount as determined by the Co mpany's Co mpensation Committee and for p urposes of such Bonus
       Plan, Employee's "Target" amount is 40% of Emp loyee's then current base salary.

Reference Section 4, part b.

1.
       Emp loyee to receive four weeks paid vacation each calendar year.

2.
       Emp loyee to receive life, medical and dental insurance through the plan adopted by the Co mpany for its full t ime employees.

3.
       Emp loyee shall be entitled to participate in a 401(k) p lan adopted by the Co mpany for its full t ime employees, including any matching
       arrangements in effect fro m time to time.

4.
       Emp loyee to receive $500 per month for the use and maintenance of Emp loyee's own car or truck, payable in accordance with the
       Co mpany's customary payroll practices.

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                                                  AMEND ED AND RES TATED
                                    EMPLOYMENT AGREEMENT, INCLUDING AGREEMENT TO
                                       ARB ITRATE, NONCOMPETITION AGREEMENT AND
                                               NONDIS CLOS URE AGREEMENT

    This Agreement is made and entered into on November 16, 2006 (effective as of May 19, 2006), by and between Roger R. Adams
("Emp loyee") and Heeling Sports Limited, a Texas limited partnership (the "Company").


                                                                 R E C IT A LS

    A. Emp loyee is currently serving as Director of Research and Develop ment of the Co mpany pursuant to an Emp loyment Agreement
dated as of May 26, 2000 (the "Prior Agreement").

     B.   Emp loyee and the Co mpany want to amend and restate the Prior Agreement in its entirety.

     C. In the course of Emp loyee's emp loyment with the Co mpany, Emp loyee has and will continue to gain access to Confid ential
Information, as hereinafter defined, relating to the business of the Co mpany.

    D.    Co mpany and Emp loyee desire a speedy, economical and impartial d ispute resolution procedure.

     E.   Employee's performance of services to the Company may result in Discoveries, as hereinafter defined.

     F. The part ies hereto desire to enter into this Agreement in order to amend and restate the Prior Agreement and to set forth the
respective rights, limitations and obligations of both the Company and Emp loyee with respect to Employee's employ ment with the Co mpany,
the Confidential Information, the Discoveries, arbitrat ion and the other matters set forth herein.

     NOW, THEREFORE, in consideration of the emp loyment of Employee by the Co mpany, the compensation paid to Emp loyee, and the
Co mpany continuing to provide Confidential Informat ion to Emp loyee, as well as the other mutual pro mises hereinafter containe d, the receipt
and sufficiency of wh ich are hereby acknowledged, the parties h ereto agree as follows:

           1.    EMPLOYMENT. The Co mpany agrees to continue to employ Employee and Employee hereby accepts such continued
     emp loyment fro m the Co mpany upon the terms and conditions set forth in this Agreement for the period wh ich begins on the date hereof
     and continuing through December 31, 2007 (" Emp loyment Period") which shall be automatically renewable in one year increments at the
     end of such period and each anniversary date thereafter, unless terminated by either party in writ ing at least 90 days prior to the end of
     such term or terminated earlier in accordance with Sect ion 5 hereof.

          2.      S ERVICES. Du ring the Employ ment Period, Employee will render the services to the Company as Director of Research
     and Development and/or such other position as agreed to by the Board of Directors and Employee. Emp loyee covenants that he will
     devote his best efforts, knowledge, skill and entire productive time and attention (except for vacation or other leave periods) to the
     business of the Co mpany and will faithfully and diligently carry out such duties and have such responsibilities as are customary for
     persons employed in a substantially similar capacity for similar co mpanies. Emp loyee shall also use his best efforts to initiate, p reserve
     and maintain the favorable relationships of the Company with its customers, suppliers and stockholders. During the Employ ment Period,
     Emp loyee shall not render services of a business, professional or

                                                                         1
commercial nature to any other entity or person without the written consent of the board of directors (the "Board of Directors") of
Heelys, Inc., successor by merger to Heeling, Inc. and the owner of all of the equity interests of the Company (the "Parent"), which
consent may be withheld in the Board of Director's sole discretion. Employee will report to the Board o f Directors and shall fait hfully and
diligently comp ly with all reasonable and lawfu l directives.

       3.     ADHERENCE TO COMPANY RULES. Subject to the remainder of this Sect ion 3, Employee, at all times during the
performance of this Agreement, shall adhere to and obey all of the Co mpany's rules, regulat ions and policies which are now in effec t, or as
subsequently adopted or modified by the Co mpany which govern the operation of the Co mpany's business and the conduct of emp loyees
of the Co mpany. Emp loyee has substantial responsibility for the research and development function of the Co mpany, and the pro per
discharge of such responsibilities requires him to spend considerable time in the field, often outside of normal office hours. The Co mpany
is willing to allo w Emp loyee to work off-site, including in his personal workshop. Therefore, Employee's comp liance with the Co mpany's
rules that would otherwise restrict his place of work o r the hours during which such work is to be pe rformed are waived; provided that
nothing herein shall be construed to waive the obligation of Emp loyee to work fu ll -time, or to work the aggregate number of ho urs
otherwise required fo r his position by the Company's rules, regulat ions and policies and this Agreement.

     4.     COMPENSATION.

         a.     Sal ary and B onus. During the Emp loyment Period, the Co mpany will pay Emp loyee the compensation set forth in
    Exhibit 1 hereto. Emp loyee's compensation shall be rev iewed annually by the co mpensation committee of the Board of Directors, but
    may not be reduced below the amount set forth in Exhibit 1 hereto. Emp loyee's compensation will be payable in accordance with the
    Co mpany's customary payroll practices.

          b.    Benefi ts. Du ring the Employ ment Period, Emp loyee shall be entit led to the Benefits as set forth on Exhibit 1 hereto.
    Notwithstanding anything in this Section 4(b) to the contrary, all Benefit obligations are subject to guidance issued by the U.S.
    Depart ment of Treasury under Section 409A of the Internal Revenue Code of 1986, as amended (the "Code"). To the extent req uired,
    the Co mpany may mod ify the Benefits provided under this Section 4(b) to co mply with such guidance; provided, however, that the
    aggregate value of Benefits provided to Emp loyee after such modification shall not be less than the aggregate value of the Be nefits
    provided to him prior to the modification.

      5.     TERMINATION.          Emp loyee's employ ment with the Co mpany will continue throughout the Employ ment Perio d unless
earlier terminated pursuant to any of the following provisions:

          a.     Terminati on by the Company for Cause. The Co mpany shall have the right to immediately terminate Emp loyee's
    emp loyment at any time for any of the following reasons (each of which is referred to herein as "Cause") by giving Emp loyee w ritten
    notice of termination (the effective date of which may be the date of such notice):

               (i) willful breach by Emp loyee of any provision of this Agreement and failure to cure such breach (to the extent
          practicable) within 15 days after the date he is given written notice thereof by the Co mpany;

               (ii) any willful act by Emp loyee of fraud or dishonesty, including but not limited to stealing or falsificat ion of Co mpany
          records, with respect to any aspect of the Company's business;

               (iii) knowing violation of state, federal or international laws applicable to the Co mpany;

                                                                    2
          (iv) drug or alcohol use of Emp loyee in v iolation of Co mpany policy or that materially impedes Emp loyee's job
     performance or brings Emp loyee or Emp loyer into disrepute in the commun ity;

           (v) substantial failu re by Employee to perform any specific d irective of the Board of Directors after 30 days notice of such
     failure and exp lanation of such failure of performance;

          (vi) willful (x) misappropriation of funds or of any corporate opportunity or (y) acts disloyal to the Company;

          (vii) conviction of Emp loyee of a felony, or o f a crime that the Co mpany, in its sole discretion, determines involves a
     subject matter wh ich may reflect negatively on the Co mpany's reputation or business (or a plea of nolo contendere thereto);

         (viii) acts by Employee attempt ing to secure or securing any personal profit not fu lly d isclose d to and approved by the
     Board of Directors of the Co mpany in connection with any transaction entered into on behalf of the Co mpany;

         (ix) gross, willful or wanton negligence, or conduct which constitutes a breach of any fiduciary duty owed to the Compan y
     by Emp loyee;

         (x) conduct on the part of Emp loyee, even if not in connection with the performance of h is duties contemplated under this
     Agreement, that could result in serious prejudice to the interests of the Company, and Employee fails t o cease such conduct
     immed iately within 30 days of receipt of notice to cease such conduct;

          (xi) voluntary termination initiated by Emp loyee; or

          (xii) acceptance of employ ment with any other employer.

If the Co mpany terminates Emp loyee's emp loyment fo r any of the reasons set forth above, the Company shall have no further
obligations hereunder from and after the effect ive date of termination except for the pay ment of Emp loyee's salary and accrue d
vacation time earned through the date of termination pro mptly after such termination and the Co mpany shall have all other righ ts and
remedies availab le under this or any other agreement and at law or in equity.

       b.     Termination Upon Death or Disability. If Emp loyee shall die or beco me disabled during the Employ ment Period,
Emp loyee's emp loyment hereunder shall terminate (such termination being treated for purposes of this Agreement as if Emp loyee
had not been terminated for "Cause" pursuant to subsection (a) above) and the Company shall pay to Emp loyee or h is estate, as
applicable, (i) any co mpensation (including accrued vacation time and a pro -rated bonus under the Co mpany's Bonus Plan through
the date of death or disability) due that would otherwise have been payable through the date of death or disability pro mptly after the
death or disability (but the pro-rated bonus will be paid when otherwise payable had he continued as an employee of the Co mpany)
and (ii) an amount equal to one times the Emp loyee's annual base salary which amount shall be payable in cash in 12 equal mo nthly
payments commencing with the month follo wing the month of his death or disability and shall be paid when otherwise payable ha d
he continued as an Employee. Fo r purposes of this Agreement, Emp loyee shall become " disabled" if (A) he is unable to engage in
any substantial gainfu l activ ity by reason of any medically determinable physical or mental impairment which can be expected to
result in death or can be expected to last for a continuous period of not less than 12 months, or (B) he is, by reason of any med ically
determinable physical or mental impairment wh ich can be expected to result in death or can be expected to last for a continuo us
period of not less than 12 months, receiving inco me

                                                               3
replacement benefits for a period of not less than three months under an accident or health plan covering employees of the Co mpany.

       c.     Terminati on Without Cause. The Co mpany shall have the right to terminate Emp loyee's emp loyment Without Cause
at any time. Upon termination, the Co mpany shall pay to Emp loyee (i) any co mpensation (including accrued vacation time and a
pro-rated bonus under the Co mpany's Bonus Plan through the date of termination Without Cause) due that would otherwise have
been payable through the date of termination Without Cause promptly after the date of termination Without Cause (but the pro -rated
bonus will be paid when otherwise payable had he continued as an employee of the Co mpany) and (ii) one year's base salary plus, if
Emp loyee has completed more than five years of service, including service as a member o f the Board of Directors, an additiona l
amount equal to his monthly base salary for each year of co mpleted service in excess of five years which shall be paid in 12 equal
monthly payments commencing with the month following the month in wh ich his employ ment is terminated Without Cause and shall
be paid when otherwise payable had he continued as an Employee and the Co mpany shall have no further obligations to Emp loyee
under this Agreement. If Employee is a Specified Emp loyee on the date his employ ment is terminated Without Cause, the monthly
payments under Section 5(c)(ii) shall not co mmence until the first month next following the six-month anniversary of the date his
emp loyment so terminated. For purposes of this Agreement, an Employee shall be considered a "Specified Emp loyee" as provided in
Code §409A and the Treasury regulations promulgated thereunder. If Employee dies after h is employ ment is terminated Without
Cause and before his receipt of all salary continuation payments due Emp loyee under this Section 5(c), the balance shall be paid to
his estate in the same manner and at the same time as specified in this Section 5(c). During the required period of continuation
coverage within the meaning of Code §4980B(f)(2)(B)(i)(I), Emp loyee shall be reimbursed by the Co mpany within five days of each
payment by Emp loyee of the monthly premiu m payable to continue coverage of Employee and his dependents under the Comp any's
group health plan or plans following the date his emp loyment is terminated Without Cause in an amount equal to the amount of that
monthly premiu m payable by Emp loyee for such continuation coverage. Termination "Without Cause" means the termination of
Emp loyee's emp loyment either (i) by the Co mpany for a reason other than for Cause or (ii) by the Co mpany or Employee resulting
fro m a "Change of Control." For purposes of this Agreement, a " Change of Control" means the occurrence of any of the follo wing
events: (A) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securit ies Exchange Act of 1934, as amended (the
"Exchange Act")), other than one or more Permitted Ho lders, is or beco mes the "beneficial o wner" (as defined in Ru le 13d-3 un der
the Exchange Act), directly or indirectly, of securities of the Parent representing (1) 50% or mo re of the co mbined voting power of
the Parent's then outstanding securities prior to a "Qualified Public Offering" (which, for purposes of this Agreement, means the first
firm co mmit ment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as
amended, covering the offering and sale of the Parent's common stock for the account of the Parent in wh ich the aggregate net
proceeds to the Parent equals or exceeds $20 million) or (2) 25% or mo re of the co mbined voting power of the Parent's then
outstanding securities after a Qualified Public Offering; (B) any change or changes in the composition of the Parent's Board of
Directors within a two-year period as a result of which less than a majority of the directors are (1) persons who were directors at the
beginning of that two-year period or (2) persons who were elected or no minated for elect ion as directors with the affirmative vote or
consent of at least a majority of the incumbent directors at the time o f that election or no mination, but not including any p erson
whose election or nomination was or is in connection with an actual or threatened pro xy contest regarding the election of the Parent's
directors; (C) the Parent is merged or consolidated with another

                                                             4
corporation or other entity (other than one or more Permitted Holders or any entity controlled by one or more Permitted Ho lde rs) and,
as a result of the merger or consolidation, less than 75% of the outstanding voting securities of the surviving or resulting corporation
or other entity, as the case may be, are "beneficially owned" (within the meaning of Rule 13d-3 under the Exchange Act), directly or
indirectly, immed iately after the merger or consolidation by persons who or wh ich beneficially owned the outstanding voting
securities of the Parent immediately before the merger or consolidation; or (D) the Parent transfers, sells or otherwise disposes of all
or substantially all of its assets to another corporation or other entity which is not an affiliate of the Parent. "Permitted Holders"
means Cap ital Southwest Venture Co rporation and its affiliates and Roger R. Adams and his affiliates. For purposes of this
Agreement, any termination of Emp loyee's employ ment by the Co mpany which occurs within 12 months following such Change of
Control shall be conclusively presumed to have resulted from such Change of Control unless the Company demonstrates to an
arbitrator, or Emp loyee agrees, that the termination was with Cause. Should the Co mpany fail to co mply in a material respect with
this Agreement, and such failure is not cured (if practicable) within 30 days after the Co mpany is given written notice of such
noncompliance, Emp loyee may resign and receive the benefits of this Sect ion 5(c). If, whether before or after a Change of Control,
without Emp loyee's consent the Co mpany reduces the Emp loyee's base salary or "Target" amount for purposes of the Company's
Bonus Plan, materially changes his title, reduces the scope of the assigned work responsibilities, or relocates its offices in excess of
50 miles fro m the address set forth herein, Employee shall be deemed to have been constructively terminated Without Cause.

      d.     Li mitation on Payments. If any severance payment or other benefits received or to be received by Employee u nder
Section 5(c) of this Agreement or any other of the Total Severance Benefits constitute "parachute payments" within the meanin g of
Code §280G and would be subject to the excise tax imposed by Co de §4999 (the "Excise Tax" ), then Employee's payments and
benefits under Section 5(c) o f this Agreement shall be either

            (i)   paid in full, or

            (ii) paid as to such lesser extent which would result in no portion of such payments or benefits being subject to the Excise
     Tax,

whichever of the fo regoing amounts, taking into account the applicable federal, state and local inco me and payroll taxes and the
Excise Tax, results in the receipt by Emp loyee on an after-tax basis, of the greatest amount of Total Severance Benefits,
notwithstanding that all or some portion of such benefits may be subject to the Excise Tax under Section 4999 of the Code. For
purposes of this Agreement, "Total Severance Benefits" means the severance payments and benefits u nder Section 5(c) o f this
Agreement and all other payments and benefits received or to be received by Emp loyee under this Agreement and all payments an d
benefits (if any) to which Emp loyee may be entitled under any plan, agreement or otherwise upon or as t he result of a Change of
Control or the termination of h is employ ment with the Co mpany, or both. This Section 5(d) is not intended to prevent and shall not
result in the prevention of the acceleration and full vesting of any outstanding stock option held b y Employee. Any determination
required under this Section 5(d) shall be made in writ ing by the Co mpany's independent public accountants (the "Accountants"),
whose determination shall be conclusive and binding upon Employee and the Co mpany for all purposes. For purposes of making the
calculations required by this Section 5(d), the Accountants may make reasonable assumptions and approximations concerning
applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Code §§280G and 4999. The
Co mpany and Emp loyee shall furn ish to the Accountants such informat ion and documents as the Accountants may reasonably
request in order to make a determination under this

                                                               5
     Section 5(d ). The Co mpany shall bear all costs the Accountants may reasonably incur in connection with any calculations
     contemplated by this Section 5(d).

      6.       NONDIS CLOS URE. Employee acknowledges that during the course of his employ ment by the Co mpany, the Co mpany
and its affiliates have provided and will p rovide, and the Emp loyee has acquired and will acquire, technical knowledge with r espect to the
Co mpany's and its affiliates' business operations, including, by way of illustration, the Co mpany's and its affiliates' existing and
contemplated product line, trade secrets, compilations, business and financial methods or practices, plans, pricing, market in g,
merchandising and selling techniques and information, customer lists, supplier lists and confidential informat ion relating to the Co mpany's
and its affiliates' policies and/or business strategy (all o f such information herein referenced to as the "Confidential Info rmat ion"). The
protection of the Confidential Informat ion against unauthorized disclosure or use is of crit ical impo rtance to the Company. Employee
agrees that Emp loyee will not, during the Emp loyment Period, divulge to any person, directly or indirectly, except to the Co mp any or its
officers and agents or as reasonably required in connection with Employee's duties on behalf of the Co mpany, or use, except on behalf of
the Co mpany, any Confidential Information acquired by the Employee during the Emp loyment Period. Employee agrees that Emp loye e
will not, for a period of three years after the Emp loyment Period has ended, use or divulge to any person directly or indirectly a ny
Confidential In formation, o r use any Confidential Information in subsequent employment.

        7.    RETURN OF DOCUMENTS . Employee's relat ionship with the Co mpany is terminated (for whatever reason), Employee
shall not take with Employee, but will leave with the Co mpany, all work product, records, files, memo randa, reports, price lists, customer
lists, supplier lists, documents and other informat ion, in whatever form (including on co mputer disc), and any copies thereof, relating to
the Confidential Information or if such items are not on the premises of the Co mpany, Employee agrees to return such items im med iately
upon Employee's termination). Emp loyee acknowledges that all such items are and remain the property of the Co mpany.

      8.     DISCOVERIES.           Emp loyee will pro mptly and freely disclose to the Company, in writ ing, any and all ideas, conceptions,
inventions, improvements and discoveries (collect ively, "Discoveries"), whether patentable or not, that are conceived or made by
Emp loyee, solely or joint ly with another, during the Emp loy ment Period, and that relate to the business or activities of, or the products
sold by, the Company. Emp loyee hereby assigns to the Company all of Employee's interest in any such Discoveries. Upon the request of
the Co mpany, whether during or after the Employ ment Period, Emp loyee will execute any and all applicat ions, assignments and o ther
instruments that the Company shall, in its sole discretion, deem necessary to apply for and obtain protection, including, wit hout limitation,
patent protection, for the Discoveries in all countries of the world. The obligations of the parties under th is Section 8 shall survive the
termination of this Agreement.

      9.      COPYRIGHT.        If, during the Emp loyment Period, Employee creates any original work o f authorship fixed in any tangible
med iu m of expression, which is the subject matter of copyright, including, without limitation, v ideo tapes, written presentations, co mputer
programs, drawings, models, manuals, brochures and the like, that relate to the Co mpany's business, products sold or services , whether
such work is created solely by Employee or joint ly with others, the Company shall be deemed to be the author of such work if t he work is
prepared by Emp loyee with in the scope of Employee's employ ment; or if the work is not prepared by Emp loyee within the scope o f
Emp loyee's emp loyment, but is specially ordered by the Co mpany, including, without limitation, as a contribution to a collective work, or
as a part of an audio-visual work, as a translation, as a supplementary wo rk, as a co mpilation, or as an instructional text, o r is created using
any resources or property of the Company, the work shall be considered a work made for hire, and the Co mpany shall be the author of the
work. If such work is neither prepared by Emp loyee within the scope of

                                                                      6
emp loyment, nor as a work made for hire, Employee hereby assigns to the Co mpany all of Emp loyee's world -wide right, tit le and interest
in and to such work and all rights of copyright therein. Emp loyee agrees to, upon the request of the Co mpany, whether during or after the
period of Emp loyee's emp loyment by the Co mpany, assist the Co mpany in the protection of the Co mpany's world -wide right, t itle and
interest in and to the work and all rights of copyright therein, including, without limitation, the execution of all formal assignment
documents requested by the Company, and the execution of all lawful oaths and applications for registration of copyright in t he United
States and foreign countries. The obligations of the parties under this Section 9 shall survive the termination of this Agreement.

     10.    NO EXCLUS IONS.          Emp loyee hereby represents that Emp loyee has not heretofore made any Discoveries or prepared
any work which is the subject of copyrights that Emp loyee wishes to exclude fro m the provisions of Sections 8 and 9 above.

       11.     NONCOMPETITION. The business of the Company is relat ively unique and Employee acknowledges that he is being
provided and will continue to be provided by the Company with significant information, trade secrets and opportunities, which are
confidential and proprietary in nature. Emp loyee further acknowledges that such informat ion and opportunities would have sign ificant
value to any current or prospective competitor of the Co mpany. In recognition of the Co mpany's agreement to provide to Employee such
informat ion and opportunities, of the need to fully protect such informat ion and opportunities fro m unauthorized disclosure o r use, and in
consideration of the numerous mutual pro mises contained in this Agreement between the Co mpany and the Employee, includin g, without
limitat ion, those involving Confidential Informat ion, co mpensation, termination and arbitration, and in order to protec t the Co mpany's
Confidential In formation and to reduce the likelihood of irreparab le damage wh ich would occur in the event such information i s provided
to or used by a competitor of the Co mpany, during the Employ ment Period and for an addit ional period of one year immediately following
the Emp loyment Period (the "Nonco mpetition Term"), Emp loyee will not, directly or ind irectly, either through any form of o wne rship or
as a director, officer, principal, agent, employee, emp loyer, adviser, consultant, shareholder, partner, or in any other individual or
representative capacity whatsoever, either fo r his own benefit or fo r the benefit of any other person, firm, corporation, gov ernmental or
private entity, or any other entity of whatever kind, without the prior wr itten consent of the Company (which consent may be withheld in
its sole discretion), compete with the Co mpany or its affiliates, in North and South America, Mexico, Western and Eastern Eur ope, the
Middle East, and the Far East including Japan, Malaysia, So uth Korea, China, Taiwan or Asia ("Noncompetit ion Territory") in any
business activity of the Co mpany existing or contemp lated as of, or conducted or contemplated by the Company prior to, the da te of this
Agreement, and/or during the Emp loy ment Period. Any such acts during the Noncompetition Term in the Non-co mpetition Territory shall
be considered breaches and violations of this Agreement. Additionally, during the Noncompetit ion Term, Emp loyee shall not dir ectly or
indirectly request or advise any customer or supplier of the Co mpany to withdraw, curtail or cancel its business activities with t he
Co mpany.

      If, during any period within the Noncompetit ion Term, Emp loyee is not in co mpliance with the terms of this Section 11, the
Co mpany shall be entitled to, among other remedies, seek co mp liance by Emp loyee with the terms of this Sect ion 11 for an additional
period equal to the period of such noncompliance. For purposes of this Agreement, the term "Noncompetit ion Term" sha ll also include
this additional period. Emp loyee hereby acknowledges that the geographic boundaries, scope of prohibited activities and the t ime duration
of the provisions of this Section 11 are reasonable and are no broader than are necessary to protect the legitimate business interests of the
Co mpany, given the unique and worldwide nature of the Internet and electronic co mmerce.

                                                                   7
     This Section 11 shall survive the termination of Emp loyee's employ ment and can only be revoked or modified by a writ ing signed by
the parties which specifically states an intent to revoke or modify this provision.

       12.    NO INTERFER ENCE WITH EMPLOYEES . During the Noncompetition Term, without the consent of the Board of
Directors, neither Emp loyee nor any individual, partners, limited partnership, corporation or other entity or business with wh ich Employee
is in any way affiliated, including, without limitat ion, any partner, limited partner, d irector, officer, shareholder or employee of any such
entity or business, will (i) request, induce or attempt to influence, directly or indirectly, any emp loyee of the Co mpany to terminate his
emp loyment with the Co mpany or (ii) emp loy any person who as of the date hereof was, or after such date is or was, an employ ee of the
Co mpany.

      13.      REFORMATION OF S ECTIONS 11 AND 12. The Co mpany and Emp loyee agree and stipulate that the agreements
and covenants not to compete contained in Sections 11 and 12 hereof are fair and reasonable in light of all of the facts and circu mstances
of the relationship between Emp loyee and the Co mpany; however, Employee and the Co mpany are aware that in certain circu mstanc es
courts have refused to enforce certain agreements not to compete. Therefore, in furtherance of, and not in derogation of the provisions of
Sections 11 and 12, that in the event a court should decline to enforce the provisions of Sections 11 and/or 12, Sections 11 and/or 12, as
applicable, shall be deemed to be modified or reformed to restrict Emp loyee's competition with the Co mpany or its affiliates to the
maximu m extent, as to time, geography and business scope, which the court shall find enforceable; provided, however, in no ev ent shall
the provisions of Sections 11 and/or 12, as applicable, be deemed to be more restrictive to Emp loyee than those contained her ein.

       14.     INJ UNCTIVE RELIEF.           Emp loyee acknowledges that breach of any of the agreements contained herein, including,
without limitation, any of the noncompetition and confidentiality covenants specified in Sect ions 6 through 12, will g ive ris e to irreparable
injury to the Co mpany, inadequately compensable in damages. Accordingly, notwithstanding Se ction 15 below, the Co mpany shall be
entitled, without the posting of any bond, to injunctive relief to prevent or cure breaches or threatened breaches of the pro visions of this
Agreement and to enforce specific performance of the terms and provisions here of in any court of competent jurisdiction, in ad dition to
any other legal or equitable remedies wh ich may be available. Emp loyee further acknowledges and agrees that in the event of t he
termination of this Agreement, his experience and capabilities are such that he can obtain employ ment in business activities which are of a
different or noncompeting nature with his activ ities as an emp loyee of the Co mpany; and that the enforcement of a remedy here under by
way of injunction shall not prevent Emp loyee fro m ea rning a reasonable livelihood. Emp loyee further acknowledges and agrees that the
covenants contained herein are necessary for the protection of the Company's legit imate business interests and are reasonable in scope and
content.

    15.   MUTUAL AGREEMENT TO ARB ITRATE.       COMPANY AND EM PLOYEE RECOGNIZE THAT DIFFERENCES
MAY A RISE BETWEEN THEM . THROUGH THIS SECTION 15, BOTH PA RTIES EXPECT TO GA IN THE BENEFITS OF A
SPEEDY, ECONOMICA L, IMPA RTIAL DISPUTE-RESOLUTION PROCEDURE. THEREFORE, THE PA RTIES A GREE AS
FOLLOWS:

         a.   THIS SECTION 15 SHA LL APPLY TO A LL DISPUTES OR CONTROVERSIES, WHETHER OR NOT ARISING
     OUT OF EM PLOYEE'S EM PLOYM ENT (OR TERMINATION OF THAT EMPLOYM ENT), THAT COMPA NY MA Y HAVE
     AGAINST EMPLOYEE, OR THAT EM PLOYEE MA Y HA VE A GAINST COMPA NY OR A GAINST (AS APPLICA BLE) ITS
     PAST OR PRESENT OFFICERS, DIRECTORS, SHAREHOLDERS, PA RTNERS, EM PLOYEES, ADVISORS OR A GENTS

                                                                    8
(COLLECTIVELY, "CLA IMS"), EXCEPT FOR INJUNCTIVE RELIEF TO BE PURSUED BY COM PANY PURSUANT TO
SECTION (b) BELOW. THE CLAIMS INCLUDE, BUT ARE NOT LIM ITED TO, CONTROVERSIES RELA TING TO:
COMPENSATION OR BENEFITS, BREA CH OF A NY CONTRACT, TORTS, DISCRIMINATION UNDER STATE, FEDERA L
OR LOCAL LAW, AND VIOLATION OF ANY FEDERA L, STATE, OR OTHER GOVERNM ENTA L LAW, STATUTE,
REGULATION, OR ORDINANCE. HOW EVER, THIS SECTION 15 SHA LL NOT A PPLY TO ANY CLA IM: (I) FOR
WORKERS' COM PENSATION OR UNEMPLOYM ENT BENEFITS; OR (II) BY COMPANY FOR INJUNCTIVE A ND/ OR
OTHER EQUITABLE RELIEF FOR UNFA IR COM PETITION AND/ OR THE USE AND/OR UNAUTHORIZED DISCLOSURE
OF TRA DE SECRETS OR CONFIDENTIA L INFORMATION, INCLUDING BUT NOT LIM ITED TO, MATTERS DESCRIBED
IN SECTIONS 6 A ND 11 A BOVE. WITH RESPECT TO MATTERS REF ERRED TO IN THE FOREGOING SUB-PARA GRAPH
(II), COMPA NY MA Y SEEK AND OBTAIN INJUNCTIVE RELIEF IN COURT, AND THEN PROCEED WITH ARBITRA TION
UNDER THIS SECTION 15.

    b.   EXCEPT AS SET FORTH IN THIS A GREEM ENT, THE SOLE A ND EXCLUSIVE M ETHOD TO RESOLVE ANY
CLAIM IS ARBITRATION AS PROVIDED IN THIS SECTION 15 AND THE PA RTIES EA CH WAIVE THEIR RIGHT TO
COMMENCE A N A CTION IN ANY COURT TO RESOLVE A CLA IM. EXCEPT WITH RESPECT TO INJUNCTIVE RELIEF
SPECIFICA LLY PROVIDED FOR IN THIS A GREEM ENT, NEITHER PA RTY SHA LL INITIATE OR PROSECUTE ANY
LAWSUIT IN ANY WA Y RELATED TO A NY CLAIM COVERED BY THIS SECTION 15.

    c.    A CLAIM MUST BE PROCESSED IN THE MANNER SET FORTH BELOW.

       (i) WRITTEN NOTICE OF DESIRE TO ARBITRATE SHA LL DESCRIBE THE FACTUA L BASIS OF ALL CLAIM S
   ASSERTED, AND SHA LL BE SENT TO THE OTHER PA RTY BY CERTIFIED OR REGISTERED MAIL, RETURN
   RECEIPT REQUESTED. WRITTEN NOTICE TO EMPLOYEE WILL BE MAILED TO EM PLOYEE'S ADDRESS AS IT
   APPEARS IN COMPANY'S RECORDS. W RITTEN NOTICE TO COMPANY, OR ITS OFFICERS, DIRECTORS,
   EMPLOYEES OR A GENTS, SHA LL BE SENT TO THE COM PANY AT COMPANY'S PRINCIPA L EXECUTIVE OFFICE.
   IF W RITTEN NOTICE OF INTENTION TO A RBITRATE IS NOT GIVEN WITHIN THE APPLICABLE TIM E PERIOD,
   THE PARTY W HO FAILED TO GIVE NOTICE WILL BE DEEM ED TO HA VE WAIVED THE RIGHT TO FURTHER
   CONTEST THE MATTER, AND WILL BE DEEM ED TO HA VE ACCEPTED THE OTHER PARTY'S LAST STATED
   POSITION ON THE CLAIM.

      (ii) THE A RBITRATION SHA LL BE CONDUCTED IN ACCORDA NCE WITH THE THEN-CURRENT MODEL
   EMPLOYM ENT A RBITRATION PROCEDURES OF THE AM ERICA N ARBITRATION ASSOCIATION ("AAA")
   BEFORE A SINGLE A RBITRATOR. THE A RBITRATION SHA LL TAKE PLACE IN OR NEA R THE CITY IN WHICH
   EMPLOYEE IS OR WAS LAST WORKING WITH COMPANY.

             (A) THE A RBITRATOR SHA LL BE SELECTED IN THE FOLLOWING MANNER. THE AAA SHA LL GIVE
         EA CH PA RTY A LIST OF AT LEAST SIX A RBITRATORS DRAWN FROM ITS PANEL OF LA BOR AND
         EMPLOYM ENT A RBITRATORS. EA CH SIDE MA Y STRIKE A LL NAM ES ON THE LIST IT DEEMS
         UNA CCEPTA BLE. IF ONLY ONE COMMON NAME REMAINS ON THE LISTS OF A LL PARTIE S, THAT
         INDIVIDUA L SHALL BE THE ARBITRATOR. IF MORE THA N ONE COMM ON NAM E REMAINS ON THE LISTS
         OF A LL PA RTIES, THE PA RTIES SHA LL STRIKE NAM ES ALTERNATELY UNTIL ONLY ONE REMAINS. IF NO
         COMMON NAM E

                                               9
   REMAINS ON THE LISTS OF ALL PA RTIES, THE AAA SHA LL FURNISH ONE ADDITIONA L LIST, AND THE
   ABOVE PROCEDURE WILL BE UTILIZED. IF NO A RBITRATOR IS DESIGNATED FROM THE SECOND LIST,
   THE PROCEDURE OF THE AAA RULES WILL BE UTI LIZED TO SELECT THE A RBITRATOR. IN NO EVENT
   WILL THE ARBITRATOR BE THEN AFFILIATED IN ANY MANNER WITH A COMPETITOR OF THE
   COMPANY.

       (B) ANY PARTY MA Y BE REPRESENTED BY AN ATTORNEY OR OTHER REPRESENTATIVE SELECTED
   BY THE PARTY.

       (C) EA CH PA RTY SHA LL HA VE THE RIGHT TO TAKE DEPOSITIONS OF INDIVIDUA LS AND ANY
   EXPERT WITNESSES DESIGNATED BY ANOTHER PARTY. EACH PARTY A LSO SHALL HA VE THE RIGHT TO
   MAKE REQUESTS FOR PRODUCTION OF DOCUM ENTS TO ANY PA RTY. A DDITIONAL DISCOVERY MA Y BE
   HAD ONLY WHERE THE ARBITRATOR SO ORDERS, UPON A SHOWING OF SUBSTANTIAL NEED. A LL
   ISSUES RELATED TO DISCOVERY W ILL BE RESOLVED BY THE ARBITRATOR.

      (D) AT LEAST 14 DA YS BEFORE THE ARBITRATION, THE PARTIES MUST EXCHA NGE LISTS OF
   WITNESSES, INCLUDING A NY EXPERT, AND COPI ES OF ALL EXHIBITS INTENDED TO BE USED AT THE
   ARBITRATION.

    (iii) THE ARBITRATOR WILL HA VE NO AUTHORITY TO: ADOPT NEW COMPANY POLICIES OR
PROCEDURES, M ODIFY THIS SECTION 15 OR EXISTING COMPANY POLICIES, PROCEDURES, WA GES OR
BENEFITS, OR IN THE A BSENCE OF A WRITTEN WAIVER PURSUANT TO PA RA GRAPH (ix) BELOW, HEA R OR
DECIDE A NY MATTER THAT WAS NOT PROCESSED IN ACCORDANCE WITH THIS SECTION 15. THE
ARBITRATOR SHALL HA VE EXCLUSIVE AUTHORITY TO RESOLVE A NY CLA IM, INCLUDING, BUT NOT
LIMITED TO, A DISPUTE RELATING TO THE INTERPRETATION, APPLICA BILITY, ENFORCEABILITY OR
FORMATION OF THIS SECTION 15, OR ANY CONTENTION THAT A LL OR ANY PART OF THIS SECTION 15 IS
VOID OR VOIDABLE. THE ARBITRATOR WILL HA VE THE AUTHORITY TO AWARD ANY FORM OF REM EDY OR
DAMAGES THAT WOULD BE A VAILA BLE IN A COURT.

   (iv) COMPA NY SHALL PA Y REASONA BLE AND NECESSA RY FEES OF THE AAA AND THE ARBITRATOR.
THE PARTIES WILL PA Y THEIR OWN ATTORNEYS' FEES AND EXPENSES ASSOCIATED WITH THE
ARBITRATION.

   (v) EITHER PA RTY, IN ITS SOLE DISCRETION, MA Y, IN WRITING, WAIVE, IN WHOLE OR IN PA RT, THE
OTHER'S FAILURE TO FOLLOW A NY TIM E LIMIT OR OTHER REQUIREM ENT SET FORTH IN THIS SECTION 15.

    (vi) TO THE EXTENT PERMITTED BY LAW, EM PLOYEE A GREES NOT TO INITIATE OR PROSECUTE
AGAINST COM PANY ANY ADM INISTRATIVE A CTION (OTHER THA N AN ADMINISTRATIVE CHARGE OF
DISCRIMINATION) IN A NY WAY RELATED TO ANY CLAIM COVERED BY THIS SECTION 15.

   (vii) THE A RBITRATION WILL BE CONDUCTED IN PRIVATE, AND WILL NOT BE OPEN TO THE PUBLIC OR
THE M EDIA. THE TESTIM ONY A ND OTHER EVIDENCE PRESENTED, AND THE RESULTS OF THE ARBITRATION,

                                          10
          UNLESS OTHERWISE A GREED TO BY BOTH PARTIES, A RE CONFIDENTIA L AND MA Y NOT BE MADE PUBLIC
          OR REPORTED BY ANY NEWS A GENCY OR LEGA L PUBLISHER OR SERVICE.

              (viii) THE ARBITRATOR SHALL RENDER A WRITTEN DECISION A ND AWARD (THE "AWARD"), W HICH
          SHA LL SET FORTH THE FA CTS AND REASONS THAT SUPPORT THE AWARD. THE AWARD SHA LL BE FINA L
          AND BINDING ON COMPA NY AND EMPLOYEE A ND SHALL BE ENTERED IN A COURT OF COMPETENT
          JURISDICTION.

       16.     S EVERAB ILITY AND REFORMATION.                  Subject to the reformation provision in Section 13, if any provision of this
Agreement is held to be illegal, invalid or unenforceable under any present or future law, and if the rights or obligations o f Emp loyee or
the Co mpany under this Agreement would not be materially and adversely affe cted thereby, such provision shall be fully severable, and
this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a p art thereof,
the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or
unenforceable provision or by its severance herefrom, and in lieu of such illegal, invalid o r unenforceable provision, there shall be added
automatically as a part of this Agreement a legal, valid and enforceable prov ision as similar in terms to such illegal, invalid o r
unenforceable provision as may be possible, and the Co mpany and Emp loyee hereby request the court or any arbitrator to whom d isputes
relating to this Agreement are submitted to reform the otherwise unenforceable covenant in accordance with this Section 16.

      17.      HEADINGS, GENDER, ETC. The headings used in this Agreement have been inserted for convenience and do not
constitute matter to be construed or interpreted in connection with this Agreement. Unless the context of th is Agreement otherwise
requires, (i) words of any gender shall be deemed to include each other gender; (ii) words using the singular or plural nu mber s hall also
include the plural or singular nu mber, respectively; and (iii) the terms "hereof," "herein," "hereby," "hereto," and derivative or similar
words shall refer to this entire Agreement.

    18.   GOVERNING LAW. THIS A GREEM ENT WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANC E
WITH THE LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO ANY PRINCIPLE OF CONFLICT OF LAWS
THAT WOULD REQUIRE THE APPLICATION OF THE LAW OF ANY OTHER JURISDICTION.

     19.    S URVIVAL. Employee's termination fro m employ ment, for whatever reason, shall not reduce or terminate Emp loyee's or
the Co mpany's covenants and agreements set forth herein.

      20.     NOTICES. Any notice necessary under this Agreement shall be in writ ing and shall be considered delivered three days
after mailing if sent certified mail, return receipt requested, or when received, if sent by telecopy, prepaid courier, exp ress mail or personal
delivery to the following addresses:

                      If to the Co mpany:                                Heelys, Inc.
                                                                         3200 Belmeade Dr., Su ite 100
                                                                         Carrollton, Texas 75006
                                                                         Telecopy: (214) 390-1661
                                                                         Attention: Chairman of the Board

                      If to the Employee:                                Roger R. Adams
                                                                         3200 Belmeade Dr.,- Suite 100
                                                                         Carrollton, Texas 75006
                                                                         Telecopy: 214-390-1661

                                                                    11
       21.     ATTORNEYS' FEES. The prevailing party in any legal proceedings brought by or against the other party to enforce any
provision of this Agreement shall be entitled to recover against the non-prevailing party the reasonable attorneys' fees, court costs,
arbitration fees and other expenses incurred by the prevailing party. Th is Section shall not apply to arbitration, which is g overned by
Section 15(c)(viii).

       22.      ENTIRE AGREEMENT. This Agreement, including the Recitals and introductions and all Exh ib its referred t o,
embodies the entire agreement and understanding of the parties hereto in respect of the subject matter contained herein and s upersedes all
prior conflict ing or inconsistent agreements, consents and understandings relating to such subject matter. Emp loyee acknowled ges and
agrees that there is no oral or other agreement between the Co mpany and Emp loyee relat ing to the emp loyment relationship which has not
been incorporated in this Agreement.

      23.      NO WAIVER. The forebearance or failure of one of the parties hereto to insist upon strict comp liance by the other with
any provisions of this Agreement, whether continuing or not, shall not be construed as a waiver of any rights or privileges hereunder. No
waiver of any right or priv ilege of a party arising fro m any default or failure hereunder of performance by the other shall a ffect such
party's rights or privileges in the event of a further defau lt or failure of performance.

      24.    ASSIGNMENT. This Agreement may not be assigned by the Company without the Employee's approval, but no
approval shall be required for the Co mpany to assign this Agreement to any affiliate or successor in interest to the Company's business or
in connection with a Change of Control. This Agreement may not be assigned by Employee. Any assignment made by either party i n
contravention of this Section shall be null and void for all purposes.

     25.     B INDING EFFECT.          Th is Agreement shall be b inding on and inure to the benefit of the parties and their respective
successors and permitted assigns.

      26.     MODIFICATION. Th is Agreement may be mod ified only by a written agreement signed by both parties. Any such
written mod ification must be authorized by the Board of Directors of the Co mpany.

      27.     COUNTERPARTS. Th is Agreement may be executed in any number of counterparts, each of which shall be deemed to
be an original instrument, and all of which together shall constitute one and the same Agreement.

       28.    CODE §409A COMPLIANCE. It is the intention of the Co mpany and Emp loyee that this Agreement not result in
unfavorable tax consequences to Employee under Code §409A. The Co mpany and Employee acknowledge that only limited gu idance has
been issued by the Internal Revenue Service with respect to the application of Code §409A to certain arrangements, such as this
Agreement. It is expected by the Co mpany and Employee that the Internal Revenue Service will provide further guidance regarding the
interpretation and application of Code §409A in connection with finalizing its current proposed regulations. The Company and Emp loyee
acknowledge further that the full effect of Code §409A on potential pay ments pursuant to this Agreement cannot be determined at the time
that the Company and Emp loyee are entering into this Agreement. The Co mpany and Employee agree to wor k together in good faith in an
effort to co mply with Code §409A including, if necessary, amending the Agreement based on further guidance issued by the Internal
Revenue Service fro m time to time, provided that neither party shall be required to assume an e conomic burden beyond what is already
required by this Agreement.

                                                                  12
      IN WITNESS WHEREOF, the parties hereto have executed this Emp loyment Agreement a s of the day and year first above written.

HEELING SPORTS LIMITED                                                 EMPLOYEE

By:   HEELING MANAGEMENT CORP.,                                        /s/ ROGER R. ADAMS
       its sole general partner
                                                                       Roger R. Adams
      By:      /s/ Michael Staffaroni

      Title:   President & CEO


                                                                  13
                                                                    Exhi bi t 1

                                                              Salary and Benefits

Reference Section 4, part a.

    1.
            Salary to be $12,500 per month—$150,000 per year.

    2.
            Bonus Plan: An Annual Bonus amount as determined by the Co mpany's Co mpensation Committee and for purposes of such Bonus
            Plan, Employee's "Target" amount is 35% of Emp loyee's then current base salary.

Reference Section 4, part b.

    1.
            Emp loyee to receive four weeks paid vacation each calendar year.

    2.
            Emp loyee to receive med ical and dental insurance through the plan adopted by the Company for its full time emp loyees.

    3.
            Emp loyee shall be entitled to participate in a 401(k) p lan adopted by the Co mpany for its full t ime employees, including any
            matching arrangements in effect fro m time to time.

                                                                       14
QuickLin ks

 AMENDED A ND RESTATED EM PLOYM ENT A GREEM ENT, INCLUDING A GREEM ENT TO A RBITRATE, NONCOMPETITION
AGREEM ENT AND NONDISCLOSURE A GREEM ENT
R E CI T A L S
 Exh ibit 1 Salary and Benefits
                                                                                                                                      Exhi bi t 10.15

                                                         WAIVER AND A GREEM ENT

    THIS WAIVER A ND A GREEM ENT (this "Agreement"), dated as of September 14, 2006, is among Heelys, Inc., the surviving
corporation pursuant to its merger with Heeling, Inc., a Nevada corporation (the "Company"), Roger R. Adams ("Adams"), Richard E.
Middlekauff ("Midd lekauff"), Robert J. Ward ("Ward"), Cypo, Inc., a Texas corporation ("Cypo," and together with Adams, Middlekauff and
Ward, the "Initial Co mmon Shareholders"), Heeling Hold ing Corporat ion, a Nevada corporation ("Ho lding"), Heeling Management Corp., a
Texas corporation ("Management," and together with the Co mpany and Holding, the "Heeling Co mpanies"), Samuel B. Ligon and Patricia P.
Ligon (the "Ligons") and Capital Southwest Venture Corporation, a Nevada corporation ("Investor").

    WHEREAS, the parties hereto are parties to that certain Investor Rights Agreement, dated as of May 24, 2000 (the "Investor Rights
Agreement");

    WHEREAS, pursuant to the Investor Rights Agreement, an Init ial Co mmon Shareholder may not make o r suffer any bona fide
Disposition (as defined in the Investor Rights Agreement) of all or any portion of h is or its shares of common stock of the Co mpany without
comply ing with the provisions of the Investor Rights Agreement;

     WHEREAS, the Init ial Co mmon Shareholders are contemplating selling sh ares of common stock of the Co mpany in connection with the
Co mpany's underwritten public offering, and Co mpany, Investor and the Ligons desire to waive any right of first refusal conta ined in the
Investor Rights Agreement with respect to the Initial Co mmon Shareholders' sales of Co mpany common stock in the Co mpany's underwritten
public offering, so long as such offering is a "Qualified Public Offering" as defined below;

      WHEREAS, pursuant to the Investor Rights Agreement, (i) Investor has the right to designate two directors of each of the Heeling
Co mpanies, (ii) the In itial Co mmon Shareholders and the Ligons agreed to vote in favor of such directors, and (iii) for so long as the Investor
had the right to designate such two directors, the parties agreed that the board of directors of each of the Heeling Co mpanies wo uld consist of
five directors, two designated by Investor, two designated by the Initial Co mmon Shareholders and one director mutually accep table to the
Initial Co mmon Shareholders and Investor;

     WHEREAS, the parties wish to waive certain rights under the Investor Rights Agreement, terminate the Investor Rights Agreemen t in its
entirety effective upon consummation of the Co mpany's Qualified Public Offering, and to agree to certain prov isions relating to the nomination
of certain candidates for election to the board of directors of the Co mpany (the "Board"), upon the terms and conditions set forth in this
Agreement.

                                                                         1
     NOW, THEREFORE, in consideration of the premises and the mutual covenants and considerations herein set forth, the receipt an d
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

1.
       Waiver of Rights under, and Termination of, Investor Rights Agreement .


       (a)
              Investor, the Ligons and the Initial Co mmon Shareholders each waive any and all rights under Section 2 o f the Investor Rights
              Agreement relating to the size of the Board and agree that the Board shall be increased to seven and that the following
              individuals shall serve on the Board:


              Roger A. Adams
              Patrick F. Hamner
              Samuel B. Ligon
              Richard E. M iddlekauff
              Michael G. Staffaroni
              William R. Thomas
              James T. Kindley


              If a Qualified Public Offering shall not occur by June 30, 2007, then the Board shall remain at seven and Section 2(b) of the
              Investor Rights Agreement shall be amended and restated in its entirety as follows: "For so long as the Investor has the right to
              designate the Preferred Directors under Section 2(a), the part ies agree that the Board of Directors of each of the Heeling
              Co mpanies shall consist of seven directors: the Preferred Directors, two directors designated by the Initial Co mmon
              Shareholders and three directors mutually acceptable to the Init ial Co mmon Shareholders and Investor, and the Investor and th e
              Ligons agree to vote his, her or its shares in favor of the directors designated by the Initial Co mmon Shareholders."

       (b)
              Co mpany, Investor and the Ligons each waive any and all rights under Section 3 of the Investor Rights Agreement relating to
              the sale of shares of Co mpany common stock by the Init ial Co mmon Shareholders in connection with t he Co mpany's Qualified
              Public Offering. "Qualified Public Offering" means the first firm co mmit ment underwritten public o ffering pursuant to an
              effective reg istration statement under the Securities Act of 1933, as amended, covering the offering and sale of common stock
              for the account of the Company in which the aggregate net proceeds to the Co mpany equal or exceeds $20 million, net of all
              expenses and underwrit ing.

       (c)
              Investor, the Ligons and the Initial Co mmon Shareholders each waive any and all rights under Section 5 o f the Investor Rights
              Agreement relating to the sale of shares of Co mpany common stock by the Co mpany in connection with the Co mpany's
              Qualified Public Offering.

       (d)
              Effective immediately upon consummation of the Co mpany's Qualified Public Offering, the Investor Rights Agreement shall
              terminate and be of no further fo rce or effect.

                                                                      2
2.
     Designees; Mechanics of Designation .


     (a)
            Subject to the provisions of Sections 2(b) and 2(c) of this Agreement, Investor will have the right to designate one or two
            individuals for nomination by the Board for elect ion to the Board as set forth below and the Co mpany shall cause such
            individual o r individuals to be nominated for elect ion to the Board as set forth below (provided that any obligation of the
            Co mpany's directors to make such nomination under this Agreement are subject to (1) the fiduciary duties of the Co mpany's
            directors and the Delaware General Corporation Law and (2) the requirements imposed upon a person to be eligib le to serve as a
            director under all applicable laws, includ ing the rules of the Securit ies and Exchange Co mmission and the rules of Nasdaq
            Global Market):


            i.
                    For so long as Investor owns, in the aggregate, at least 15% of the issued and outstanding shares of common stock
                    $0.001 par value, of the Co mpany (the "Shares"), Investor shall be entitled to designate two persons for nomination for
                    election to the Board, minus the number of persons that were designated for nomination for election to the Board by
                    Investor and that are then serving as a member of the Board; or

            ii.
                    For so long as Investor owns, in the aggregate, less than 15%, but at least 10%, of the issued and outstanding Shares,
                    Investor shall be entitled to designate one person for nomination for elect ion to the Board, unless a person designated for
                    nomination for election to the Board by Investor is then serving as a member o f the Board.


     (b)
            At least 120 days prior to the date of such annual meet ing of the Co mpany's stockholders, the Co mpany shall provide Investor
            with written notice of the expected date of such meeting (the "Co mpany Notice"). In order to nominate an indiv idual for elect ion
            to the Board, Investor must s ubmit to the Co mpany written notice within 30 days after the Co mpany Notice, which notice shall
            include (i) all informat ion relating to such person that is required to be disclosed in solicitations of proxies for election of
            directors in an elect ion contes t, or is otherwise required, in accordance with Regulation 14A under the Exchange Act, and
            (ii) such person's written consent to being named in the pro xy statement as a nominee and to serving as a director if elected. At
            each meeting of the Co mpany's stockholders at which the directors of the Co mpany are to be elected, the Co mpany agrees to
            recommend that the stockholders elect to the Board each designee of Investor nominated for elect ion at such meeting in
            accordance with the provisions of this Agreement.

     (c)
            If, wh ile Investor maintains the right to designate a person for nomination for election to the Board under this Agreement a
            vacancy is created on the Board as a result of the death, disability, ret irement, resignation, removal o r otherwise of a designee of
            Investor, Investor shall have the right to designate for appointment by the remaining directors of the Co mpany under the
            Cert ificate of Incorporation an individual to fill such vacancy and to serve as a director on the Board. To designate a direc tor to
            fill a vacancy pursuant to this Section 2(c), Investor must submit to the Co mpany written notice of such designee or designees,
            which notice shall include (i) all info rmation relating to such person that is required to be disclosed in solicitations of pro xies fo r
            election of directors in an elect ion contest, or is otherwise required, in accordance with Regulation 14A under the Exchange Act,
            and (ii) such person's written consent to being named in the pro xy statement as a nominee and to serving as a dire ctor if elected.
            The Board shall appoint the individual so designated by Investor to the Board as soon as practicable.

                                                                        3
3.
     Miscellaneous .


     (a)
            Modification, Amendment, Waiver . No mod ification, amend ment or waiver of any provision of Section 1 o r 3 of this Agreement
            shall be effect ive unless approved in writing by the parties hereto. No modification, amendment or waiver of any provision of
            Section 2 of this Agreement shall be effect ive unless approved in writing by the Co mpany and Investor. The failure o f any party
            at any time to enforce any of the provisions of this Agreement shall in no way be construed as a waiver of such provisions and
            shall not affect the rights of the party thereafter to enforce the provisions of this Agreement in accordance with its terms.

     (b)
            Invalid or Unenforceable Provisions . Whenever possible, each provision of this Agreement will be interpreted in such manner
            as to be effective and valid under applicable law, but if any term or provision of this Agreement is held to be invalid, illegal or
            unenforceable in any respect under any applicable law or ru le in any jurisdiction, all other conditions and provisions of this
            Agreement shall nevertheless remain in full force and effect and this Agreement will be reformed, construed and enforced in
            such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. The parties further agree
            that any court of competent jurisdiction is expressly authorized to modify any such unenforceable provision of this Agreement in
            lieu of severing such unenforceable provision fro m this Agreement in its entirety, whether by rewrit ing the offending provision,
            deleting any or all of the offending provision, adding additional language to this Agreement, or by making such other
            modifications as it deems warranted to carry out the intent and agreement of the parties as embodied herein to the maximu m
            extent permitted by law. The part ies expressly agree that this Agreement as so modified by a court of co mpetent jurisdiction
            shall be binding upon and enforceable against each of them.

     (c)
            Entire Agreement . Except as otherwise expressly set forth herein, this document embodies the entire agreement and
            understanding between the parties hereto with respect to the subject matter hereof and supersedes and preempts any prior
            understandings, agreements or representations by or between the parties, written or oral, wh ich may hav e related to the subject
            matter hereof in any way.

     (d)
            Binding Effect; Assignment . All of the terms of this Agreement shall inure to the benefit of and shall be binding upon the parties
            hereto and their respective successors and assigns.

     (e)
            Remedies . The part ies hereto will be entitled to enforce their rights under this Agreement specifically (without posting a bond or
            other security), to recover damages by reason of any material breach of any provision of this Agreement and to exercise all o ther
            rights existing in their favor. The parties agree that money damages may not be an adequate remedy for any breach of the
            provisions of this Agreement and that any party may in its sole discretion apply to any court of law or equity of co mpetent
            jurisdiction for specific performance and/or injunctive relief in order to enforce or prevent any violation of the provisions of this
            Agreement. In the event of any dispute involving the terms of this Agreement, the prevailing party shall be entitled to colle ct
            reasonable fees and expenses incurred by the prevailing party in connection with such dispute fro m the other parties to such
            dispute.

     (f)
            Notices . Any notice or other commun ication in connection with this Agreement shall be deemed to be delivered and received if
            in writ ing addressed as provided below each parties' signature below (a) when actually delivered, in person, (b) if sent by
            facsimile to said address, when electronically confirmed, (c) when delivered if delivered by overnight courier or (d) in the case
            of delivery by mail, five business days shall have elapsed after the same shall have been deposited in the United States mails,
            postage prepaid and registered or certified to the address set forth below.

                                                                      4
(g)
      Governing Law; Submission to Jurisdiction . All questions concerning the construction, validity and interpretation of this
      Agreement will be governed by the internal laws of the State of Delaware, without giving effect to principles of conflicts of law.
      The parties hereby irrevocably and unconditionally consent to submit to the exclusive jurisdiction of the courts of the State of
      Delaware o r the Un ited States of America located in the State of Delaware for any actions, suits or proceedings arising out of or
      relating to this Agreement and the transactions contemplated hereby (and the parties agree not to commence any action, suit o r
      proceeding relating hereto except in such courts), and further agree that service of any process, summons, notice or documents by
      United States registered mail to a party shall be effective service of process for any action, suit or proceeding brought aga inst such
      party in any such court and, absent any statute, rule or order to the contrary, that each party shall have 30 days fro m actual receipt
      of any complaint to answer or otherwise plead with respect thereto. The parties hereby irrevocably and unconditionally waive any
      objection to the laying of venue of any action, suit or proceeding arising out of this Agreement or the transactions contemplated
      hereby in the courts of the State of Delaware or the United States of America located in the State of Delaware, and hereby fu rther
      irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such action, suit or proceeding
      brought in any such court has been brought in an inconvenient forum.

(h)
      Descriptive Headings . The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part
      of this Agreement.

(i)
      Counterparts . This Agreement may be executed in separate counterparts each of which will be an original and all of which taken
      together will constitute one and the same agreement.

                                                     [Signature pages follow.]

                                                                  5
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written.


                                      Capital Southwest Venture Corporation
                                      12900 Preston Road at LBJ, Suite 700
                                      Dallas TX 75230
                                      Attn: William R. Thomas
                                      Fax: (972) 233-7362

                                      By:       /s/ William R. Thomas


                                                William R. Thomas, President

                                      /s/ Samuel B. Ligon


                                      Samuel B. Ligon
                                      3707 Villanova
                                      Dallas TX 75225
                                      Fax: (214) 265-0493

                                      /s/ Patricia P. Ligon


                                      Patricia P. Ligon
                                      3707 Villanova
                                      Dallas TX 75225
                                      Fax: (214) 265-0493

                                      Heelys, Inc.
                                      3200 Belmeade Drive, Su ite 100
                                      Carrollton TX 75006
                                      Fax: (214) 390-1661

                                      By:       /s/ Mike Hessong


                                                Mike Hessong
                                                Chief Financial Officer

                                      Heeling Ho lding Corporation
                                      3200 Belmeade Drive, Su ite 100
                                      Carrollton TX 75006
                                      Fax: (214) 390-1661

                                      By:       /s/ Mike Hessong


                                                /s/ Mike Hessong, Chief Financial Officer


                                                              6
Heeling Management Co rp.
3200 Belmeade Drive, Su ite 100
Carrollton TX 75006
Fax: (214) 390-1661

By:     /s/ Mike Hessong


        Mike Hessong, Chief Financial Officer

/s/ Richard E. M iddlekauff


Richard E. M iddlekauff

/s/ Robert J. Ward


Robert J. Ward
1601 Elm Street, Suite 3000
Dallas, TX 75201-4761
Fax: (214) 999-3266

CYPO, INC.
3200 Belmeade Drive, Su ite 100
Carrollton TX 75006
Fax: (214) 390-1661

By:     /s/ Roger R. Adams


        Roger R. Adams, President

/s/ Roger R. Adams


Roger R. Adams
3200 Belmeade Drive, Su ite 100
Carrollton TX 75006
Fax: (214) 390-1661

                      7
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                                                                                                                                      Exhi bit 10.22


                                                                    Agreement

    This Agreement is by and between Roger R. Adams ("Adams") and Robert J. Ward ("Ward")(colle ctively called "Parties")

     For and in consideration of the mutual pro mises and covenants contained herein, and other good and valuable consideration, th e receipt
and sufficiency of wh ich is hereby acknowledged, the Parties covenant and agree as follows:

          1) The Parties shall execute and deliver to each other such additional forms, documents, consents, agreements, and releases as may
     be reasonably requested to effectuate the intent of this Agreement and to facilitate the successful, efficien t, and timely contemplated initial
     public offering of Heelys, Inc. ("Heelys") (which, including the underwriters' over-allotment option to purchase shares fro m Heelys'
     existing shareholders and resell them to the public, is referred to as the "IPO").

          2) Effective as of the initial public offering, and in consideration solely for the fu lfillment of all rights, obligations, duties, claims
     and demands owed to Ward by Adams arising out of the Stockholders Agreement dated May 24, 2000 ("Stockholders Agreement"),
     Adams shall assign and transfer to Ward 136,775 shares in Heelys (subject to the provisions of paragraph 7 of this Agreement), such that
     Ward shall own a total of 386,775 shares, and provide Ward with the right to sell up to 136,775 shares transferred fro m Adams to Ward at
     the initial public offering. Effect ive as of the init ial public offering, Ward hereby authorizes Heelys to remove the "Legend " referenced in
     the Stockholders Agreement fro m all shares of legended stock owned by Adams. For purp oses of the initial public offering, Ward consents
     to the immediate removal of the " Legend" from 1.25 million shares of legended stock owned by Adams.

          3) The Parties understand and agree that if the 136,775 shares are transferred to Ward by Adams pursuant to this Agreement, these
     136,775 shares will be sold at the in itial public offering and neither those shares nor the legended shares owned by Adams an d referenced
     in the prior paragraph (whether sold in the IPO or retained) shall bear any restrictive legend or otherwise be encumbered. The Parties
     further understand and agree that none of such stock is being transferred to Ward fro m Heelys, but all such stock is being transferred fro m
     Adams to Ward.

           4) Adams acknowledges and agrees that the 136,775 shares transferred by Adams to Ward, and the allocation of 136,775 shares to
     be sold by Ward at the initial public offering, will be exchanged solely for all of Ward's contract rights set forth in the S tockholders
     Agreement, and none of that represents compensation for services rendered by Ward or anyone else. Adams further agrees that he will not
     take a deduction fro m ord inary inco me for said transfer, or otherwise claim a right to a deduction for the transfer of said s hares in any
     filing with the Internal Revenue Service on a tax return or otherwise, or take a tax position that is in any way inconsistent with the
     provisions of this Agreement.

          5) Heelys has represented in its November 17, 2006 S-1 filing with the SEC that Ward shall be permitted to sell up to 272,269 of
     the 386,775 shares owned by Ward at the IPO, and that Ward has the right to sell up to a total of 136,775 shares at the initial public
     offering, and up to a total of 135,494 shares in the over-allotment, if any. Heelys has represented in its November 17, 2006 S-1 filing with
     the SEC that Adams shall be permitted to sell up to 1,123,581 shares at the IPO, and that Adams has the right to sell up to a total of
     815,656 shares at the initial public offering, and up to a total of 307,925 shares in the over-allotment, if any.

          6) If the over-allot ment (also referred to as the "Greenshoe") is not exercised, the Part ies agree to use commercially reasonably
     efforts to register Ward's allocation of 135,494 shares upon Heelys' first firm underwritten secondary offering. The Parties agree that the
     numbers of shares of stock to be sold as stated in paragraphs 3 and 5 herein above are based upon calculations provided
by Heelys, and in the event the calculations prove to be incorrect and the actual shares available to be sold in the over-allot ment, if any,
are materially different fro m what is stated herein, Adams and Ward shall mediate such issues in good faith in Dallas County, Texas, but
in no event shall Ward be liab le to Adams or shall Adams be liab le to Ward for such error, and neither Ward nor Adams waive a ny rights,
benefits, or remedies pursuant to existing agreements or understandings with Heelys.

     7) If Heelys does not close an initial public offering by June 30, 2007, then this Agreement is void ab initio and Adams and Ward
shall immediately be placed in the same position as to the Stockholders Agreement as if this Agreement had never existed, with all of their
rights, obligations, claims, and defenses.

     8) The Parties each acknowledge that he/it is fully and co mpletely info rmed by indep endent counsel and by his/its independent
investigation of the facts relating to the subject matter of this Agreement and of the rights and liabilities of all Part ies; that each enter into
this Agreement voluntarily, after having given carefu l and mature consideration to the making of th is Agreement; that this Agreement
represents the entire agreement of the parties with regard to the subject matter of this Agreement; that each Party is legally co mpetent to
execute this Agreement and, if executed in a representative capacity, that the individual executing this Agreement has the actual authority
to execute this Agreement; and that this Agreement shall not be suspended, amended, or mod ified in any manner except by an in strument
in writ ing signed by all Parties sought to be bound.

     9) Where applicable, the terms hereof shall survive the closing of this Agreement. As used in this Agreement, whenever the conte xt
so indicates, the masculine, feminine, or neuter gender, and the singular or plural nu mber, s hall each be defined to include the others. The
invalid ity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof, an d this Agreement
shall be construed in all respects as if such invalid o r unenforceable provisions were o mitted, while still carry ing out the intent of this
Agreement.

     10) Th is Agreement may be signed in counterpart copies. A set of counterpart copies that collectively contains the signature of a ll
Parties shall constitute an original.

     11) It is exp ressly understood and agreed that the terms hereof are contractual and not merely recitals. Each Party expressly warrants
and represents that he/it owns the rights being compromised and released; that no persons or entities no t expressly made a Party to this
Agreement are required to jo in in this Agreement on behalf of any of them in order to make this Agreement and the documents t o be
executed by each of the Parties pursuant to this Agreement, valid, binding, and enforceable a gainst each of them; and that none of them
have compro mised, settled, sold, assigned, or transferred any rights or interests made the subject of this Agreement.

    12) Th is Agreement shall be b inding on and shall inure to the benefit of the Part ies and their respective heirs, legal repres entatives,
successors, and assigns.

      13) Th is Agreement has been drafted after negotiation between and among all the Parties, all of whom are represented by counsel,
and contains the work product of all Parties. Therefo re, it is not to be construed strictly against any Party, but instead is to be construed
fairly, according to the plain meaning of its terms.

     14) Th is Agreement shall be governed by the laws of the State of Texas and is exp ressly performable in Dallas County, Texas.

                                                                      2
Agreed on this 17th day of November 2006.

/s/ Roger R. Adams


Roger R. Adams, Indiv idually

/s/ Robert J. Ward


Robert J. Ward, Indiv idually

                                            3
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                                                                                                                                      Exhi bit 23.1


                             CONS ENT OF INDEPEND ENT REGIS TERED PUB LIC ACCOUNTING FIRM

We consent to the use in this Amendment No. 3 to the Reg istration Statement #333-137046 on Form S-1 of our report dated November 24,
2006 (which expresses an unqualified opinion and includes an explanatory paragraph relat ing to the retroactive adjustment of all co mmon
shares and per common share amounts for all periods presented to reflect the October 23, 2006 stock split), relating to the consolidated
financial statements and financial statement schedules of Heelys, Inc. appearing in the Prospectus, which is part of this Reg istration Statement.

We also consent to the reference to us under the headings "Selected Financial Data" and "Experts" in such Prospectus.

/s/ Deloitte & Touche LLP
Dallas, Texas
November 24, 2006
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CONSENT OF INDEPENDENT REGISTERED PUBLIC A CCOUNTING FIRM

								
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