Summary of LEAPFROG ENTERPRISES INC

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This report on Form 10-Q, including the sections entitled "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Part II, Item 1A. Risk Factors," contains forward-looking statements, including statements regarding: the effects of global economic conditions on our business; our expectations for sales trends, margins, profitability, liquidity, expenses, inventory or cash balances, capital expenditures, cash flows, or other measures of financial performance in future periods; future products and services we may offer; anticipated competitive benefits of our strategy or of current or future products or services; and the effects of strategic actions on future financial performance. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by such forward-looking statements. These risks and other factors include those listed under "Risk Factors" in Part II, Item 1A of this Form 10-Q and those found elsewhere in this Form 10-Q. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "intend," "plan," "anticipate," "believe," "estimate," "predict," "potential," "continue" or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this report.

The following management's discussion and analysis of financial condition and results of operations ("MD&A") is intended to help the reader understand the results of operations and financial condition of LeapFrog Enterprises, Inc. This MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying Notes to the Consolidated Financial Statements ("Notes") in Part I, Item 1 of this report.

Our Business

We design, develop and market a family of innovative technology-based learning platforms and related proprietary content for children of all ages for use at home and in schools around the world. We have created more than 340 interactive software titles, covering important subjects such as phonics, reading, writing and math. In addition, we have a broad line of stand-alone educational products, or learning toys, that do not require the separate purchase of software and are generally targeted at children from infancy through age five. Our products are available in six languages and are sold globally through retailers, distributors and directly to schools. Our goal is to create educational products that kids love, parents trust and teachers value.

We generate revenue from selling platform hardware including our Tag and Tag Jr. reading systems, our classic Leapster, Leapster2 and Didj educational gaming platforms, and our Clickstart: My First Computer and Zippity learning systems, along with a range of other learning toys. We also generate revenue from the sale of a wide range of content which we develop, based on licensed characters or using LeapFrog-owned characters for our platforms.

Our products compete most directly in the toy industry in the pre-school toy and electronic learning aids categories, both in the United States and in selected international markets. The educational toy category continues to attract new entrants as well as new innovative products, and competition is significant.

Our business is highly seasonal with a significant portion of our revenues occurring in the second half of the year. Given relatively low sales volumes in the first half of the calendar year and the relatively fixed nature of many of our operating expenses, which occur fairly evenly throughout the year, our results of operations are generally stronger in our third and fourth quarters relative to our first and second quarters. Conversely, our historical cash flow from operations tends to be highest in the first quarter of the year, when we collect the majority of our accounts receivable related to the prior year's fourth quarter sales, and lowest in our third quarter as we begin building inventory in preparation for the fourth quarter holiday season.

The global economic crisis, which began impacting consumer spending in the third quarter of 2008, led to a severe sales decline in the fourth quarter of 2008 resulting in a departure from our normal seasonal pattern described above. As retailers reacted to sharply declining consumer spending, our sales for the fourth quarter of 2008 were significantly below our expectations and constituted a substantially smaller percentage of our annual sales than they have in previous years. In addition, weak retail consumer spending generated unusually high retail inventory levels which adversely impacted net sales for the first three quarters of 2009. Given the seasonality of our business, declines in sales in the third and fourth quarters generally have a disproportionate impact on our annual operating results as well as our cash flows from operations at the beginning of the following year due to higher than anticipated

retailer inventory levels. We believe retail inventory levels were brought down to appropriate levels during the third quarter of 2009 through promotions and discounting programs during the first three quarters.

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Reducing our cost structure to remain competitive in a challenging economic environment has been a priority in 2009. For example, during the second quarter of 2009, we sublet a portion of our headquarter facilities in Emeryville, California. Further, we have continued to automate and simplify our operational processes, reduced staffing levels throughout the year, and we have spent less and plan to continue spending less on non-targeted advertising.

We intend to focus our spending resources on building out our core product lines and adding to our content library. We invest in research and development ("R&D") of existing and new lines of business that we believe will contribute to our long-term growth and profitability. For example, we continue to invest in developing new hardware platforms and content based on the latest relevant technologies that impact both offline and online play experiences. We believe delivering innovative and high-value experiences that are fun and that facilitate broad learning in kids who play with our products is the key to our future growth.

We face significant risks associated with the current economic downturn and continuing uncertainty through at least 2009. Weak sales in the fourth quarter of 2008 meant that retailers built up inventories of our products, which negatively impacted our sales for the first two full quarters and part of the third quarter of 2009. In addition, many retailers have encountered liquidity problems. If any of our significant retailers suspend or reduce payments to us, become insolvent or file for bankruptcy, the resulting bad debt expense we would incur would have an adverse effect on our results of operations. The potential business risk for us from macroeconomic conditions anticipated for 2009 is discussed further in Part II. Item 1A.-Risk Factors-"The current economic crisis has had a material adverse effect on our sales, and we cannot be certain when sales will recover," "Retailer liquidity problems could harm our liquidity and financial results," and "Our liquidity may be insufficient to meet the long-term or periodic needs of our business."

Our strategic priorities for the remainder of 2009 and beyond are to invest in the core categories of reading, educational gaming, our standalone toy line and in our Learning Path "ecosystem." Our marketing will be aimed at increasing consumer sales in each of these lines, driving content sales to be a greater percentage of our overall sales, and catalyzing new growth in the children's learning category. We have launched new connected products and content in our reading and gaming lines, and we have expanded our learning toy line in 2009. New learning toy products include our widely reviewed and relatively inexpensive Scout line of learning toys, and the Zippity learning system, a gaming system featuring full body-movement controls, which is our first co-branded product with Disney.