1138951--3/7/2006--LEAPFROG_ENTERPRISES

related topics

{customer, product, revenue}

{product, market, service}

{stock, price, share}

{property, intellectual, protect}

{provision, law, control}

{product, liability, claim}

{personnel, key, retain}

{stock, price, operating}

{system, service, information}

{regulation, change, law}

{financial, litigation, operation}

{operation, natural, condition}

{control, financial, internal}

{operation, international, foreign}

If we fail to predict consumer preferences and trends accurately, develop and introduce new products rapidly or enhance and extend our existing core products, our sales will suffer. Our advertising and promotional activities may not be successful. If we are unable to compete effectively with existing or new competitors, our sales and market share could decline. Our business depends on three retailers that together accounted for approximately 64% of our consolidated net sales in 2005, and 80% of the U.S. Consumer segment sales, and our dependence upon a small group of retailers may increase. Our business is seasonal, and therefore our annual operating results depend, in large part, on sales relating to the brief holiday season. If we do not maintain sufficient inventory levels or if we are unable to deliver our product to our customers in sufficient quantities, or if our retailers inventory levels are too high, our operating results will be adversely affected. We depend on our suppliers for our components and raw materials, and our production or operating margins would be harmed if these suppliers are not able to meet our demand and alternative sources are not available. We rely on a limited number of manufacturers, virtually all of which are located in China, to produce our finished products, and our reputation and operating results could be harmed if they fail to produce quality products in a timely and cost-effective manner and in sufficient quantities. Increases in our component or manufacturing costs could reduce our gross margins. Any errors or defects contained in our products, or our failure to comply with applicable safety standards, could result in delayed shipments or rejection of our products, damage to our reputation and expose us to regulatory or other legal action. We have had significant challenges to our management systems and resources, particularly in our supply chain and information systems, and as a result we may experience difficulties managing our business. We depend on key personnel, and we may not be able to hire, retain and integrate sufficient qualified personnel to maintain and expand our business. Our international consumer business may not succeed and subjects us to risk associated with international operations. Our future growth will depend in part on our Education and Training group, which may not be successful. Our intellectual property rights may not prevent our competitors from using our technologies or similar technologies to develop competing products, which could weaken our competitive position and harm our operating results. Third parties have claimed, and may claim in the future, that we are infringing their intellectual property rights, which may cause us to incur significant litigation or licensing expenses or to stop selling some of our products or using some of our trademarks. We are subject to international, federal, state and local laws and regulations that could impose additional costs or changes on the conduct of our business. From time to time, we are involved in litigation, arbitration or regulatory matters where the outcome is uncertain and which could entail significant expense. Weak economic conditions, armed hostilities, terrorism, natural disasters, labor strikes or public health issues could have a material adverse effect on our business. If we are unable to improve our system of internal controls, we may not be able to accurately report our future financial results and our management may not be able to provide its report on the effectiveness of our internal controls as required by the Sarbanes-Oxley Act. One stockholder controls a majority of our voting power as well as the composition of our board of directors. The limited voting rights of our Class A common stock could negatively affect its attractiveness to investors and its liquidity and, as a result, its market value. Provisions in our charter documents, Delaware law and our credit facility agreement may delay or prevent an acquisition of our company, which could decrease the value of our Class A common stock. Our stockholders may experience significant additional dilution upon the exercise of options or issuance of stock awards. Our stock price could become more volatile and your investment could lose value.

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1138951--3/7/2006--LEAPFROG_ENTERPRISES_INC