EMERYVILLE, Calif., Aug. 4 /EMWNews/ -- LeapFrog

Enterprises, Inc. (NYSE: LF), a leading developer of technology-based

learning products, today announced financial results for the second quarter

ended June 30, 2008.






    Second Quarter Financial Highlights



    -- Increased year-over-year net sales by 22% to $68.3 million

    -- Improved net loss to $20.6 million, or $0.32 per share

    -- Improved gross margin to 39.3%

    -- Decreased operating expenses to $49.0 million, including a 13%

       reduction in SG&A



    "We completed a very important milestone in the second quarter with the

on-time launch of our new Tag Reading System in June, and we also launched

our two new web-connected educational gaming systems, Leapster2 and Didj,

in early July," said Jeffrey G. Katz, president and chief executive officer

of LeapFrog. "The early sell-through of Tag and Tag books is good and our

overall second quarter U.S. Consumer sales were strong, reflecting initial

sales to retailers of Tag, Leapster2 and Didj. Leapster continues to sell

well and early online results for Leapster2 are also good. That said, the

second half of the year will be much more important with respect to

sell-through of these products, particularly given the seemingly endless

bad economic news impacting consumers. Looking ahead to the second half, we

are locked and loaded to support our biggest ever product launch year.

We'll be focused on continued supply chain execution, the launch of the

LeapFrog Learning Path in August, and a broad media and promotional

campaign consistent with the large scope of products we are bringing to

market."



    Second Quarter 2008 Financial Results



    Net Sales and Segment Results



    Net sales for the quarter ended June 30, 2008 were $68.3 million,

compared with $56.0 million for the quarter ended June 30, 2007, an

increase of 22.0%. Net sales from the U.S. Consumer segment totaled $50.0

million for the second quarter 2008, compared with $31.9 million for the

second quarter 2007. The increase from 2007 was the result of initial

shipments of new products. Net sales from the International segment

declined to $12.3 million for the second quarter 2008, compared with $13.9

million for the second quarter 2007. The International segment's sales do

not reflect the impact of new products, as they will be introduced in the

second half of 2008. Net sales from the School segment totaled $6.0 million

for the second quarter 2008, down from $10.2 million for the second quarter

2007 due to the continuing effects of strong competition compounded by weak

school funding levels.



    Gross Profit and Gross Margin



    Gross profit improved to $26.9 million in the second quarter 2008,

compared with $20.3 million for the second quarter 2007. Gross margin for

the quarter ended June 30, 2008 increased to 39.3%, compared with 36.2% for

the second quarter 2007, reflecting the accretive effect of new,

higher-margin product sales and reduced discounts.



    Operating Expenses



    Operating expenses decreased 3.3% to $49.0 million for the second

quarter 2008, compared with $50.7 million for the second quarter 2007.

Selling, general and administrative expense decreased 13.0% to $26.0

million for the second quarter 2008 and research and development expense

decreased 7.9% to $12.9 million. These declines were driven by previously

implemented headcount reductions. Advertising expense nearly doubled

year-over-year to $7.8 million for the second quarter 2008, supporting the

initial roll-out of the Tag Reading System in June.



    Other Income/(Expense)



    Other income/(expense) included a $1.6 million write-down of the

company's investment in auction rate securities to a carrying value of $9.8

million.



    Provision for/(Benefit from) Income Tax



    LeapFrog recognized an income tax benefit of $2.8 million for the

second quarter 2008 compared with an expense of $0.4 million for the second

quarter 2007. The 2008 quarter includes a $1.9 million benefit from the

completion of the examination by the IRS of claims for research and

experimentation credits as well as a tax benefit from year-to-date losses

on foreign operations.



    Net Loss



    The company recorded a net loss of $20.6 million, or $0.32 per share,

for the second quarter 2008, compared with a net loss of $28.0 million, or

$0.44 per share, for the second quarter of 2007. Higher sales and gross

margin and lower operating expenses all contributed to the improved

financial results.



    Balance Sheet



    Inventories were $86.3 million at June 30, 2008, compared with $103.8

million at June 30, 2007 and $52.4 million at December 31, 2007. Cash and

investments totaled $78.1 million at June 30, 2008, compared with $153.8

million at June 30, 2007 and $104.4 million at December 31, 2007.



    Bill Chiasson, chief financial officer, stated, "We're pleased with

second quarter sales, which are a good early indicator of potential demand

for our new products. Second quarter Leapster sales were strong and Tag got

off to a good start. While we are encouraged by our second quarter results,

our guidance remains unchanged. It is still early in the selling season and

we continue to expect the majority of our 2008 shipments and consumer

purchases will occur in the second half of the year, as usual. In addition,

the outlook for consumer spending remains weak."



    The company reiterated its current expectations for full year 2008

results:






    -- New products introduced in 2007 and 2008 are expected to comprise

       approximately half of 2008 net sales;

    -- Net sales are expected to grow at an annual percentage rate in the

       mid-to-high teens;

    -- Gross margin is expected to continue to improve;

    -- Selling, general and administrative expenses and research and

       development expenses are expected to decrease approximately 10%-15%

       year-over-year;

    -- The company expects a nominal loss for the year; and

    -- Cash and investments are expected to be approximately $100 million at

       year-end.



    Conference Call and Webcast



    A conference call will be held today, August 4, at 5:00 p.m. Eastern

time (2:00 p.m. Pacific time) to provide further discussion of the results

for the second quarter of 2008. A live Web cast of the conference call will

be offered on LeapFrog's investor relations website at

http://www.leapfroginvestor.com and on http://www.earnings.com. To

participate in the call, please dial (706) 634-0183 and request Conference

ID 56966204. A replay of the Web cast will be available on these Web sites

through August 4, 2009. A telephone replay is also available through

September 4, 2008 at (706) 645-9291; I.D. No. 56966204.

    About LeapFrog



    LeapFrog Enterprises, Inc. 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 an

extensive library of 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 a

broad line of stand-alone educational products for children. LeapFrog's

award-winning products are available in six languages at major retailers in

more than 35 countries around the world. LeapFrog School's multisensory

products currently reach students in more than 100,000 classrooms across

the United States. LeapFrog School is a business division of LeapFrog

Enterprises, Inc.



    NOTE: LEAPFROG, the LeapFrog Logo, TAG, LEAPSTER, and DIDJ 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

the timing, scope and success of future product launches, expected benefits

of new products and services, anticipated 2008 financial results, including

expected net sales, margins, expenses, profitability, cash flow and cash

balances for 2008. These forward-looking statements involve risks and

uncertainties, including risks related to the company's ability to launch

and support new products, services and features on time and at anticipated

margin and profit levels; the acceptance by consumers, retailers and

schools of the company's new strategy related to Internet-connected

products and related Internet services, including with respect to the

LeapFrog Learning Path; the company's ability to launch and operate its

network infrastructure to support the new Internet-related business; the

effect of marketing on the sales of the company's products and services;

and overall consumer sentiment. These and other risks and uncertainties

detailed from time to time in the company's SEC filings, including its 2007

annual report on Form 10-K filed on March 13, 2008, 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.






     Contact Information:



     Investors:                    Media:

     Eileen VanEss                 Mischa Dunton

     Investor Relations            Corporate Communications

     (510) 420-5361                (510) 596-5441







                          LEAPFROG ENTERPRISES, INC.

                         CONSOLIDATED BALANCE SHEETS

                    (In thousands, except per share data)



                                           June 30,             December 31,

                                     2008            2007          2007

                                          (Unaudited)

    ASSETS

    Current assets:

      Cash and cash equivalents     $68,308         $64,260       $93,460

      Short-term investments              -          75,500             -

      Accounts receivable,

       net of allowances             50,880          35,456       126,936

      Inventories                    86,329         103,782        52,415

      Prepaid expenses and

       other current assets          25,136          21,482        20,427

      Deferred income taxes           3,481           3,959         3,405

        Total current assets        234,134         304,439       296,643

    Property and equipment, net      37,879          30,846        34,017

    Deferred income taxes               213             159           213

    Intangible assets, net           24,003          25,221        24,512

    Long-term investments             9,792          14,000        10,925

    Other assets                      3,843           9,139         4,152

        Total assets               $309,864       $ 383,804      $370,463



    LIABILITIES AND STOCKHOLDERS'

     EQUITY

    Current liabilities:

      Accounts payable              $56,414         $51,368       $46,868

      Accrued liabilities and

       deferred revenue              30,627          28,187        57,591

      Income taxes payable              118           1,405            93

        Total current liabilities    87,159          80,960       104,552

    Long-term liabilities            21,104          22,215        22,438

    Commitments and contingencies         -               -             -



    Stockholders' equity:

      Class A common stock,

       par value $0.0001; 139,500

       shares authorized; shares

       issued and outstanding:

       36,042, 35,317 and 35,857

       at June 30, 2008 and

       2007, and December 31,

       2007, respectively                 4               4             4

      Class B common stock,

       par value $0.0001; 40,500

       shares authorized; shares

       issued and outstanding:

       27,614 at June 30, 2008 and

       2007, and December 31, 2007,

       respectively                       3               3             3

    Treasury stock                     (185)           (185)         (185)

    Additional paid-in capital      358,994         348,712       353,857

    Accumulated other comprehensive

     income                           5,033           3,476         4,036

    Accumulated deficit            (162,248)        (71,381)     (114,242)

      Total stockholders' equity    201,601         280,629       243,473

      Total liabilities and

       stockholders' equity        $309,864        $383,804      $370,463







                          LEAPFROG ENTERPRISES, INC.

                    CONSOLIDATED STATEMENTS OF OPERATIONS

                    (In thousands, except per share data)

                                  Unaudited



                        Three Months Ended June 30,  Six Months Ended June 30,

                            2008         2007           2008         2007



    Net sales              $68,341      $55,995       $126,615    $ 116,919

    Cost of sales           41,454       35,711         78,597       71,932



    Gross profit            26,887       20,284         48,018       44,987



    Operating expenses:

      Selling, general

       and administrative   26,013       29,909         56,774       62,342

      Research and

       development          12,876       14,032         24,986       28,493

      Advertising            7,793        4,223         12,325        9,806

      Depreciation and

       amortization          2,366        2,510          4,717        4,929

    Total operating

     expenses               49,048       50,674         98,802      105,570



    Loss from operations   (22,161)     (30,390)       (50,784)     (60,583)



    Other income (expense):

      Interest income          749        2,205          1,897        4,439

      Interest expense         (20)         (66)           (33)         (74)

      Other (expense)

       income, net          (1,983)         637         (2,557)         417



    Total other income

     (expense)              (1,254)       2,776           (693)       4,782



    Loss before provision

     for income taxes      (23,415)     (27,614)       (51,477)     (55,801)



    Provision for

     (benefit from)

     income taxes           (2,846)         414         (3,471)       2,653



    Net loss              $(20,569)    $(28,028)      $(48,006)    $(58,454)



    Net loss per

     common share:

      Basic and diluted     $(0.32)     $ (0.44)       $ (0.75)      $(0.92)



    Shares used in

     calculating net

     loss per

     common share:

      Basic and diluted     63,679       63,325         63,645       63,280







                             LEAPFROG ENTERPRISES

                    CONSOLIDATED STATEMENTS OF CASH FLOWS

                                (In thousands)

                                 (Unaudited)



                                                    Six Months Ended June 30,

                                                       2008           2007



    Net loss                                        $(48,006)      $(58,454)



    Adjustments to reconcile net loss to

     net cash provided by operating activities:

      Depreciation and amortization                    9,256          8,764

      Unrealized foreign exchange (gain) loss            823         (2,084)

      Deferred income taxes                              (76)        (2,814)

      Stock-based compensation                         5,112          4,545

      Impairment of investment in auction rate

       securities                                      1,731              -

      Investment accretion                                 -           (778)

      Provision for (recovery on) doubtful accounts      569           (226)

    Other changes in operating assets and

     liabilities:

      Accounts receivable                             75,487        106,586

      Inventories                                    (33,914)       (30,762)

      Prepaid expenses and other current assets       (4,709)         1,857

      Other assets                                       310             (2)

      Accounts payable                                 9,546          4,648

      Accrued liabilities and deferred revenue       (27,351)       (21,814)

      Long-term liabilities                           (1,339)         2,545

      Income taxes payable                                25            681

      Other                                              (20)          (740)

        Net cash provided by operating activities    (12,556)        11,952

    Investing activities:

      Purchases of property and equipment            (12,591)       (11,097)

      Purchases of investments                             -       (442,341)

      Sale of investments                                  -        434,403

        Net cash used in investing activities        (12,591)       (19,035)

    Financing activities:

      Proceeds from the exercise of stock options

       and employee stock purchase plan                  419          1,588

        Net cash provided by financing activities        419          1,558

      Effect of exchange rate changes on cash           (424)         2,441

    Net change in cash and cash equivalents

     for the period                                  (25,152)        (3,054)

    Cash and cash equivalents at beginning

     of period                                        93,460         67,314

    Cash and cash equivalents at end of period       $68,308        $64,260