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LeapFrog Reports First Quarter 2006 Financial Results

First Quarter Highlights

- Net sales for the quarter were down 7%;

- U.S. Consumer net sales were up 6%, International net sales down 31%, Education and Training net sales were down 24%;

- Lower gross margins were partially offset by lower operating expenses, resulting in a net operating loss of $29.2 million for the first quarter of 2006, compared to a net operating loss of $29.1 million for the first quarter of 2005;

- Loss per share for the first quarter of 2006 was $0.38 compared to loss of $0.32 per share in the first quarter of 2005;

- Net cash provided by operating activities was $133 million, up $43 million from last year. Cash and short-term investments grew to $202 million at March 31, 2006 from $72 million at December 31, 2005 and $186 million at March 31, 2005.

EMERYVILLE, Calif., May 4 /PRNewswire-FirstCall/ -- LeapFrog Enterprises, Inc. (NYSE: LF) today reported financial results for the quarter ended March 31, 2006. For the quarter, the company recorded a net loss of $23.6 million, or ($0.38) per share compared to a net loss of $19.9 million, or ($0.32) per share for the first quarter of 2005.

"We continue to make progress in improving our business processes and are on schedule for our new product introductions," commented Tom Kalinske, Chief Executive Officer. "We are investing in products and programs to strengthen the product line for the long-term. Towards that end, we will be increasing our research and development spending over 2005 levels to drive innovation, while continuing to provide marketing programs to support long-term growth."

Financial Overview

Net sales for the first quarter of 2006 were $66.5 million, compared to $71.9 million, for the first quarter of 2005, down 7% on both a reported and constant-currency basis. Net sales declined in the International and Education and Training segments, partially offset by a net sales increase in our U.S. Consumer segment.

First quarter gross margin decreased by 1.3 percentage points to 37.3% in 2006 from 38.6% in the same period of 2005. An unfavorable segment mix and lower gross margin in the International segment contributed to the overall decline in gross margin. Selling, general and administrative expenses declined slightly due to $3 million of lower legal expenses than the first quarter of 2005 and the on-going benefits from the 2005 workforce reduction, partially offset by a $1.4 million increase in equity-based compensation. The increase in equity-based compensation was due in part to the adoption of Statement of Financial Accounting Standard No. 123 (R), Share-Based Payment. Research and development expenses declined by $2.3 million due to the timing of expenditures.

The operating loss for the quarter was $29.2 million, compared to an operating loss of $29.1 million in the first quarter of 2005. Lower sales and gross margins were offset by reductions in operating expenses. The effective tax rate fell to 13.9% for the first quarter of 2006 from 29.5% for the first quarter of 2005. The decline in the tax rate was due to the benefits of foreign sourcing arrangements and the impact of research and development tax credits. As a result of the lower effective tax rate and resulting lower tax benefit, net loss increased to $23.6 million for the first quarter of 2006, compared to a net loss of $19.9 million for the first quarter of 2005.

Cash from operations was $133 million for the quarter, up $43 million from the first quarter last year. Reductions in accounts receivable, and to a lesser degree, inventories, drove the improvement. Cash and short term investments at the end of the quarter stood at $202 million, up from $186 million at the end of the first quarter of 2005.

Conference Call

A conference call will be held today, May 4, at 5:00 pm Eastern time (2:00 pm Pacific time) to provide further discussion of the results for the first quarter of 2006. A live web cast of the conference call will be offered on LeapFrog's investor relations website at www.leapfroginvestor.com and on www.ccbn.com. A replay of the web cast will be available on these websites through April 30, 2007. To participate in the call, please dial 706-634-0183.

About LeapFrog

LeapFrog Enterprises, Inc. (NYSE: LF) is a leading designer, developer and marketer of innovative, technology-based learning products and related proprietary content, dedicated to making learning effective and engaging for all ages, at home and in schools, around the world. The company was founded in 1995 and is based in Emeryville, California. LeapFrog has developed a family of learning platforms that come to life with more than 100 interactive software titles, covering important subjects such as phonics, reading, writing, math, music, geography, social studies, spelling, vocabulary, and science. In addition, the company has created more than 35 stand-alone educational products for children from birth to 18 years. LeapFrog's award- winning U.S. Consumer products are available in six languages at major retailers in more than 25 countries around the world. The LeapFrog SchoolHouse(TM) curriculum programs are currently in more than 100,000 classrooms across the U.S. with over 200 interactive books and over 450 skill cards representing more than 6,000 pages of educational content. LeapFrog SchoolHouse(TM) products have won numerous awards from the education industry, including the Golden Lamp Award and Distinguished Achievement Award from the Association of Educational Publishers, the Award of Excellence from Technology & Learning magazine, and the Teacher's Choice Award from Learning magazine.

NOTE: LEAPFROG, the LeapFrog Logo, LEAPFROG SCHOOLHOUSE, LEAPPAD, LEAPSTER TV, LITTLE LEAPS, FLY, LEAPSTER and LEAPSTER L-MAX are trademarks or registered trademarks of LeapFrog Enterprises, Inc.

Forward-Looking Statements

Cautionary Statement Under The Private Securities Litigation Reform Act Of 1995:

Except for the historical information contained herein, this news release contains forward-looking statements, including statements regarding long-term sales and profit growth, expected levels of research and development spending, and anticipated product launches. These forward-looking statements involve risks and uncertainties, including the company's ability to develop and launch new products on time and at anticipated margin and profit levels, the company's ability to develop and market products that are accepted by consumers, schools and retailers at sales and profit levels to justify the development investment, and the company's ability to achieve cost reductions and implement business process and system efficiencies on a timely basis. These and other risks and uncertainties detailed from time to time in the company's SEC filings, including its 2005 annual report on Form 10-K filed on March 7, 2006, could cause the company's actual results to differ materially from those discussed in this release. All forward-looking statements are based on information available to the company on the date hereof, and the company assumes no obligation to update such statements.

     Investor Contact:                       Media Contact:
     Eileen VanEss                           Cherie Stewart
     510-420-5361                            510-596-3343
     evaness@leapfrog.com                    cstewart@leapfrog.com

                            LEAPFROG ENTERPRISES, INC.
                           CONSOLIDATED BALANCE SHEETS
                      (In thousands, except per share data)

                                           March 31             December 31
                                     2006             2005          2005
    Current assets:

     Cash and cash equivalents      $97,624         $35,343       $48,422
     Short term investments         104,650         150,794        23,650
     Restricted cash                     --              --           150
     Accounts receivable, net of
      allowances of $1,601, $2,353,
      and $1,328 at March 31, 2006
      and 2005 and December 31,
      2005, respectively             50,257          69,305       257,747
     Inventories, net               163,733         129,289       169,072
     Prepaid expenses and other
      current assets                 16,403          13,715        21,319
     Deferred income taxes           11,141          34,153        10,715
    Total current assets            443,808         432,599       531,075

    Property and equipment, net      23,253          22,915        23,817
    Deferred income taxes            19,295           7,087        16,588
    Intangible assets, net           27,153          29,024        27,574
    Other assets                      9,844           3,979         6,775

    Total assets                   $523,353        $495,604      $605,829

    Current liabilities:

     Accounts payable               $22,532         $32,169      $ 74,329
     Accrued liabilities             33,658          36,278        43,811
     Deferred revenue                   413             332           414
     Income taxes payable               375           6,811         1,781
    Total current liabilities        56,978          75,590       120,335

    Deferred rent and other long
     term liabilities                19,714           1,212        19,171

    Stockholders' equity:
     Class A common stock, par value
      $0.0001; 139,500 shares
      authorized; shares issued
      and outstanding: 34,862;
      33,962 and 34,853 at March 31,
      2006 and 2005 and December 31,
      2005, respectively.                 3               3             3

     Class B common stock, par value
      $0.0001; 40,500 shares
      authorized; shares issued and
      outstanding: 27,614 at March 31,
      2006 and 2005 and December 31,
      2005, respectively.                 3               3             3

     Treasury Stock                   (185)              --         (148)
     Additional paid-in capital     336,462         323,218       342,595
     Deferred compensation               --         (1,899)       (9,855)
     Accumulated other comprehensive
      income                          1,174           2,056           925
     Retained earnings              109,204          95,421       132,800
    Total stockholders' equity      446,661         418,802       466,323

    Total liabilities and
     stockholders' equity          $523,353        $495,604      $605,829

                          LEAPFROG ENTERPRISES, INC.
                    (In thousands, except per share data)

                                                  Three Months Ended March 31
                                                      2006           2005

    Net sales                                        $66,548        $71,859
    Cost of sales                                     41,759         44,087
    Gross profit                                      24,789         27,772

    Operating expenses:
     Selling, general and administrative              32,851         33,209
     Research and development                         12,440         14,739
     Advertising                                       6,158          6,493
     Depreciation and amortization                     2,529          2,430
    Total operating expenses                          53,978         56,871

    Loss from operations                            (29,189)       (29,099)

     Interest expense                                   (98)            (4)
     Interest income                                   1,376            853
     Other income (expense), net                         462             55

    Loss before benefit for income taxes            (27,449)       (28,195)

    Benefit for income taxes                           3,853          8,316

    Net loss                                       $(23,596)      $(19,879)

    Net loss per common share:
     Basic                                           $(0.38)        $(0.32)
     Diluted                                         $(0.38)        $(0.32)

    Shares used in calculating net loss per
     common share:
     Basic and Diluted                                62,469         61,187

    Segment Reporting

    The Company's reportable segments include U.S. Consumer, International and
Education and Training.

                                   Three Months Ended March 31
                                      2006            2005        % Change
    Segment Net Sales
    U.S. Consumer                    46,800          44,260            6%
    International                    12,041          17,533         (31%)
    Education and Training            7,707          10,066         (24%)
    Total Company Net Sales         $66,548         $71,859          (7%)

                          LEAPFROG ENTERPRISES, INC.
                                (In thousands)

                                                  Three Months Ended March 31
                                                     2006          2005
    Net loss                                       $(23,596)      $(19,879)

    Adjustments to reconcile net loss to net
     cash provided by operating activities:
     Depreciation                                      4,699          3,833
     Amortization                                        421            472
     Unrealized foreign currency loss                    894          3,538
     Loss (Gain) on disposal of property
      and equipment                                    (393)             74
     Provision for doubtful accounts                   (344)          (124)
     Deferred income taxes                           (3,134)        (9,612)
     Deferred rent and deferred revenue                  542          (118)
     Stock-based compensation related to employees     2,364             --
     Tax benefit from exercise of stock options           --          1,034

    Other changes in operating assets and liabilities:
     Accounts receivable                             207,833        158,059
     Inventories                                       5,339          1,545
     Prepaid expenses and other current assets         4,916          (407)
     Other assets                                    (3,070)             --
     Accounts payable                               (51,797)       (30,515)
     Accrued and other liabilities                  (10,150)       (17,454)
     Income taxes payable                            (1,406)          (143)
     Other                                                12            289
     Net cash provided by operating activities       133,130         90,592

    Investing activities:
     Purchases of property and equipment             (3,742)        (2,023)
     Purchases of short-term investments           (179,673)      (190,665)
     Sale of short-term investments                   98,823         76,483

     Net cash used in investing activities          (84,592)      (116,205)

    Financing activities:
     Cash used to purchase treasury stock               (37)             --
     Proceeds from the exercise of stock options
      and employee stock purchase plan                 1,346          3,201
     Net cash provided by financing activities         1,309          3,201

    Effect of exchange rate changes on cash            (645)        (2,804)
    (Decrease) Increase in cash and
     cash equivalents                                 49,202       (25,216)
    Cash and cash equivalents at beginning
     of period                                        48,422         60,559
    Cash and cash equivalents at end of period       $97,624        $35,343

    Supplemental Disclosure of Cash Flow Information
    Cash paid during the period for income taxes,
     net of refunds                                     $788           $376

    Supplemental Disclosure of Non-Cash Investing
     and Financing Activities
     Issuance of restricted stock to employees           $--           $289

SOURCE LeapFrog Enterprises, Inc.
CONTACT: investors, Eileen VanEss, +1-510-420-5361, or evaness@leapfrog.com, or media, Cherie Stewart, +1-510-596-3343, or cstewart@leapfrog.com, both of LeapFrog Enterprises, Inc./
Web site: http://www.leapfrog.com/

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Statements in this press release regarding LeapFrog Enterprises, Inc.'s business which are not historical facts are "forward-looking statements" that involve risks and uncertainties. For a discussion of such risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see "Risk Factors" in the Company's Annual Report or Form 10-K for the most recently ended fiscal year.