Leapfrog Enterprises (LF) 8-K LeapFrog Reports Second Quarter 2006 Financial Results

Exhibit 99.1

Investor Contact:	Media Contact:
Eileen VanEss	Sara Lanza Hickman
(510) 420-5361	(510) 596-5406
evaness@leapfrog.com	shickman@leapfrog.com

LeapFrog Reports Second Quarter 2006 Financial Results

Highlights

• Net sales for the quarter were $68.1 million, down 22% from the second quarter of 2005, with sales declines in all segments;

• Operating loss was $34.6 million for the second quarter of 2006, compared to an operating loss of $15.1 million for the second quarter of 2005;

• Loss per share for the second quarter of 2006 was $0.41 compared to a loss of $0.16 per share in the second quarter of 2005;

• Cash and short-term investments increased to $181 million from $160 million at the end of the second quarter of 2005 and $72 million at year-end 2005.

Emeryville, Calif. – August 2, 2006 – LeapFrog Enterprises, Inc., a leading developer of innovative technology-based educational products, today reported financial results for the quarter ended June 30, 2006. For the quarter, the company recorded a net loss of $25.7 million, or ($0.41) per share, compared to a net loss of $9.8 million, or ($0.16) per share, for the second quarter of 2005.

“The results speak for themselves – LeapFrog is a company with fundamentals that need to be addressed,” stated Jeffrey G. Katz, President and Chief Executive Officer of LeapFrog. “While the numbers are very disappointing, I believe in the future of this company. We have a brand that continues to resonate strongly with parents and kids, impressive technology, and the financial wherewithal to do what we need to do. We’ve got a great deal of work to do,” continued Katz, “and we are doing it.”

“Despite the weak performance, our financial condition remains strong with over $180 million of cash and short-term investments, up over $20 million from last year,” said Bill Chiasson, Chief Financial Officer of LeapFrog. “And, of course, we continue to be debt-free.”

Net Sales

Net sales for the second quarter of 2006 were $68.1 million, compared to $87.1 million for the second quarter of 2005, a decrease of 21.8%.

Segment Results

Net sales from the U.S. Consumer segment were $40.3 million in the second quarter, down 26.1% over the same period in 2005. Net sales from the International segment were $14.9 million in the second quarter, down 14.9% over the same period in 2005. Net sales from the SchoolHouse division were $12.9 million in the second quarter, down 14.0% from the same period in 2005. Sales declines were driven by lower sales of the LeapPad family of products, and to a lesser extent, increased sales discounts and allowances.

Gross Margin

Gross margin for the second quarter of 2006 was 25.1%, down 18.3 percentage points from the second quarter of 2005. Gross margin was unfavorably impacted by sales discounts and allowances and higher sales of closeout products. In addition, gross margins in the second quarter of 2005 benefited from the reduction of allowances for defective products, while allowances for defective products increased slightly in the second quarter of 2006.

Operating Expenses

Operating expenses decreased to $51.7 million for the second quarter of 2006 compared to $52.9 million for the second quarter of 2005. Declines in legal expenses and research and development costs were partially offset by higher advertising costs and increased charges for equity-based compensation as a result of the implementation of SFAS 123(R) at January 1, 2006.

Net Loss

The company recorded a net loss of $25.7 million, or a loss of $0.41 per share, for the second quarter of 2006, compared to a loss of $9.8 million, or a loss of $0.16 per share, for the second quarter of 2005.

Conference Call

A conference call will be held today, August 2, at 5:00 pm Eastern time (2:00 pm Pacific time) to provide further discussion of the results for the second 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. To participate in the call, please dial (706) 634-0183. A replay of the web cast will be available on these websites through August 1, 2007. A telephone replay is also available through September 2, 2006 at (706) 645-9291; I.D. No. 3235266.

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 16 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™ 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™ 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.

LEAPFROG, the LeapFrog Logo, LEAPFROG SCHOOLHOUSE, LEAPPAD, FLY, LEAPSTER and LEAPSTER L-MAX are trademarks or registered trademarks of LeapFrog Enterprises, Inc.^© 2006 LeapFrog Enterprises, Inc. All rights reserved.

LEAPFROG ENTERPRISES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

	June 30,						December 31, 2005
	2006			2005
	(Unaudited)						(Audited)
ASSETS
Current assets:
Cash and cash equivalents	$	69,749		$	36,020		$	48,422
Short-term investments		111,040			123,575			23,650
Restricted cash		—			—			150
Accounts receivable, net of allowances of $2,694; 1,655 and $1,328 at June 30, 2006 and 2005 and December 31, 2005, respectively		52,292			74,280			257,747
Inventories, net		186,100			182,555			169,072
Prepaid expenses and other current assets		22,544			15,986			21,319
Deferred income taxes		12,386			36,539			10,715
Total current assets		454,111			468,955			531,075
Property and equipment, net		23,289			23,886		��	23,817
Deferred income taxes		24,590			7,296			16,588
Intangible assets, net		26,732			28,566			27,574
Other assets		10,916			4,015			6,775
Total assets	$	539,638		$	532,718		$	605,829
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	62,040		$	84,739		$	74,329
Accrued liabilities and deferred revenue		31,191			28,981			44,225
Income taxes payable		1,489			4,924			1,781
Total current liabilities		94,720			118,644			120,335
Deferred rent and other long term liabilities		19,570			2,270			19,171
Stockholders’ equity:
Class A common stock, par value $0.0001; 139,500 shares authorized;
shares issued and outstanding: 35,317; 34,309 and 34,853 at June 30, 2006 and 2005 and December 31, 2005, respectively		4			3			3
Class B common stock, par value $0.0001; 40,500 shares authorized;
27,614 shares issued and outstanding at June 30, 2006 and 2005, and December 31, 2005 respectively		3			3			3
Treasury stock		(185	)		—			(148	)
Additional paid-in capital		339,490			332,474			342,595
Deferred compensation		—			(7,500	)		(9,855	)
Accumulated other comprehensive income		2,578			1,182			925
Retained earnings		83,458			85,642			132,800
Total stockholders’ equity		425,348			411,804			466,323
Total liabilities and stockholders’ equity	$	539,638		$	532,718		$	605,829

LEAPFROG ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

Unaudited

	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Net sales	$	68,118		$	87,066		$	134,668		$	158,926
Cost of sales		51,000			49,274			92,761			93,362
Gross profit		17,118			37,792			41,907			65,564
Operating expenses:
Selling, general and administrative		27,989			29,013			60,836			62,222
Research and development		12,871			14,580			25,311			29,319
Advertising		8,445			6,949			14,603			13,442
Depreciation and amortization		2,418			2,361			4,947			4,791
Total operating expenses		51,723			52,903			105,697			109,774
Loss from operations		(34,605	)		(15,111	)		(63,790	)		(44,210	)
Interest expense		(4	)		(25	)		(103	)		(29	)
Interest income		2,173			1,251			3,549			2,104
Other (expense) income, net		(1,245	)		12			(784	)		68
Loss before provision for income taxes		(33,681	)		(13,873	)		(61,128	)		(42,067	)
Benefit for income taxes		7,935			4,092			11,786			12,409
Net loss	$	(25,746	)	$	(9,781	)	$	(49,342	)	$	(29,658	)
Net loss per common share:
Basic and Diluted	$	(0.41	)	$	(0.16	)	$	(0.79	)	$	(0.48	)
Shares used in calculating net loss per common share:
Basic and Diluted		62,758			61,610			62,617			61,400

LEAPFROG ENTERPRISES, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended June 30,
	2006			2005
Net loss	$	(49,342	)	$	(29,658	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		8,146			7,972
Amortization		842			931
Unrealized foreign exchange loss		185			4,087
Loss on disposal of property and equipment		373			74
Provision for doubtful accounts		(180	)		(760	)
Deferred income taxes		(9,666	)		(12,243	)
Stock-based compensation		3,837			25
Tax benefit from stock-based compensation		—			1,232
Other changes in operating assets and liabilities:
Accounts receivable		205,635			153,259
Inventories		(17,028	)		(52,786	)
Prepaid expenses and other current assets		(1,225	)		(2,714	)
Other assets		(4,151	)		(46	)
Accounts payable		(12,289	)		22,182
Accrued liabilities		(12,640	)		(25,331	)
Income taxes payable		(292	)		(2,086	)
Other		(336	)		1,180
Net cash provided by operating activities		111,869			65,318
Investing activities:
Purchases of property and equipment		(7,990	)		(6,092	)
Purchases of investments		(200,187	)		(225,415	)
Sale of investments		112,947			138,453
Net cash used in investing activities		(95,230	)		(93,054	)
Financing activities:
Purchase of treasury stock		(37	)		—
Proceeds from the exercise of stock options and employee stock purchase plan		3,257			6,038
Net cash provided by financing activities		3,220			6,038
Effect of exchange rate changes on cash		1,468			(2,841	)
Increase in cash and cash equivalents		21,327			(24,539	)
Cash and cash equivalents at beginning of period		48,422			60,559
Cash and cash equivalents at end of period	$	69,749		$	36,020
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Income taxes, net of refunds	$	1,670		$	628
Noncash investing and financing activities:
Restricted stock and restricted stock units granted to employees		5,146			6,564
Assets acquired under capital lease		—			1,192