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1 Joseph J. Tabacco, Jr. (75484) Christopher T. Heffelfinger (118058) 2 Nicole Lavallee (165755) Julie J. Bai (227047) 3 BERMAN DEVALERIO PEASE TABACCO BURT & PUCILLO 4 425 California Street, Suite 2100 San Francisco, CA 94104-2205 5 Telephone: (415) 433-3200 Facsimile: (415) 433-6382 6 Email: [email protected] Liaison Counsel for the Class 7 Steven J. Toll (admitted pro hac vice) Elizabeth Berney (admitted pro hac vice) Matthew K. Handley (admitted pro hac vice) 8 COHEN, MILSTEIN, HAUSFELD & TOLL, P.L.L.C 9 1100 New York Avenue, N.W. West Tower, Suite 500 10 Washington, D.C. 20005 Telephone: (202) 408-4600 11 Facsimile: (202) 408-4699 Email: [email protected] 12 Lead Counsel for the Class 13 UNITED STATES DISTRICT COURT 14 NORTHERN DISTRICT OF CALIFORNIA

15 ) In re LEAPFROG ENTERPRISES, INC. ) CIVIL ACTION NO. C-03-05421-RMW 16 SECURITIES LITIGATION ) ) 17 ) AMENDED CONSOLIDATED CLASS This Document Relates To: ) ACTION COMPLAINT FOR 18 ) VIOLATIONS OF FEDERAL All Actions ) SECURITIES LAWS 19 ) ) DEMAND FOR JURY TRIAL 20 21 22 23 24 25 26 27 28

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1 TABLE OF CONTENTS

2 INTRODUCTION ...... 1 3 JURISDICTION AND VENUE ...... 13 4 THE PARTIES...... 14 5 CONFIDENTIAL WITNESSES ...... 20 6 DEFENDANTS KNEW AND CONCEALED MATERIAL ADVERSE INFORMATION...... 28 7 A. Background...... 28 8 B. Defendants Knew That Mattel’s Competing PowerTouch Product Had 9 Caused Leapfrog To Lose Sales And Lower Prices When Defendants Falsely Told Investors That PowerTouch Was Only A Potential Risk To 10 Leapfrog’s Sales...... 31 11 C. Defendants Knew There Were Numerous Problems With Leapfrog’s Distribution And Supply-Chain Operations...... 43 12 1. Defendants Knew That Its Third Party Logistics Suppliers, DSS 13 And CLI, Repeatedly Failed To Fulfill Customer Orders Which Caused The Sales Shortfall In 3Q03 And Other Problems...... 46 14 2. Defendants Knew Leapfrog Cancelled The Implementation Of 15 Supply-Chain Software Before 3Q03 That Was Needed To Accurately Forecast Customer Demand And To Meet Production 16 Requirements ...... 48 17 3. Defendants Schemed To Fabricate Sales To Avoid The 3Q03 Shortfall...... 50 18 4. Defendants Knew That Their Delays In Consolidating Warehouse 19 Operations, Changing Warehouse Providers And Implementing Supply-Chain And Warehouse Management Software Caused 20 Continuing Distribution And Supply-Chain Problems Throughout The Class Period ...... 51 21 5. Defendants Knew The Distribution And Supply-Chain Problems 22 Caused Leapfrog To Report Materially False And Misleading Financial Results That Were Not Prepared In Accordance With 23 GAAP Or The Company’s Publicly Reported Accounting Policies ...... 63 24 a. Improper Revenue Recognition ...... 64 25 b. Failure To Accurately Report Inventories ...... 66 26 c. Understatement Of Expenses And Liabilities...... 69 27 6. After The Class Period, Defendants Admitted There Were Numerous Material Weaknesses In Leapfrog’s Distribution And 28 Supply-Chain Operations That Prevented The Company From

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1 Accurately Forecasting Results And From Reporting The Company’s Financial Results In Accordance With GAAP ...... 70 2 D. Defendants Knew That Leapfrog’s Results Depended On A Few 3 Customers That Were Deferring Orders To Reduce Their Levels Of Leapfrog Inventory And Reducing Their Purchases Due To Leapfrog’s 4 Distribution Problems ...... 72 5 E. Defendants Obtained Millions Of Dollars From Sales Of Leapfrog Stock While Making Material Misrepresentations And Concealing Material 6 Adverse Information From Investors...... 75 7 DEFENDANTS ISSUED FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD...... 77 8 A. Between 7/24/03 And 10/20/03, Defendants Falsely Assured Investors 9 There Were No Impediments To Leapfrog Meeting 3Q03 Guidance, Misleadingly Listed And Concealed Actual Problems As Mere Risk 10 Factors, And Downplayed The Impact Of The Powertouch...... 77 11 B. Defendants Issued False And Misleading Statements Between 10/21/03 And 2/9/04, Including False And Misleading Financial Results For 3Q03, 12 False Assurances That The Distribution And Supply-Chain Problems That Caused The 3Q03 Revenue Shortfall Were Fixed, And False And 13 Misleading Risk Factors In Leapfrog’s 3Q03 10-Q ...... 90 14 C. Between 2/10/04 And 3/9/04 Defendants Falsely Portrayed Management Changes, Caused Leapfrog To Report False And Misleading Financial 15 Results For 4Q03 And FY03, And Provided Investors With Guidance For 2004 That They Knew Leapfrog Could Not Meet...... 100 16 D. Between 3/10/04 And 4/20/04, Defendants Preannounced 1Q04 Results 17 Just One Month After Providing Initial Guidance, Assured Investors That Supply-Chain Operations Are Being Strengthened, And Included 18 Materially False And Misleading Financial Results And “Risk Factors” In The FY03 10-K...... 108 19 E. Between 4/21/04 And 7/20/04 Defendants Cause Leapfrog To Report 20 False And Misleading Financial Results For 1Q04 And Include Materially False And Misleading Risk Factors In The Company’s 1Q04 10-Q...... 113 21 F. Between 7/21/04 And 10/18/04, Defendants Caused Leapfrog To Report 22 False And Misleading Financial Results For 2Q04 And Include Materially False And Misleading “Risk Factors” In The Company’s 2Q04 Form 10-Q...... 120 23 THE END OF THE CLASS PERIOD AND POST CLASS PERIOD EVENTS 24 FURTHER DEMONSTRATED DEFENDANTS’ FRAUD...... 130 25 DEFENDANTS FALSELY REPORTED LEAPFROG’S FINANCIAL RESULTS IN VIOLATION OF GAAP...... 135 26 A. Improper Revenue Recognition And Failure To Adequately Reserve For 27 Accounts Receivable With Doubtful Collectibility ...... 136 28 B. Defendants Improperly Accounted For Leapfrog’s Inventory ...... 137

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1 C. Defendants Failed To Report Expenses Related To Goods And Services Purchased From Leapfrog’s Vendors ...... 138 2 D. Defendants Falsely Represented And Certified That Leapfrog’s Financial 3 Reporting Was Reliable, Leapfrog’s Financial Statements Were Prepared In Accordance With Gaap And That Leapfrog’s Disclosure Controls And 4 Internal Controls Over Financial Reporting Were Effective ...... 139 5 E. Additional Violations Of GAAP And SEC Regulations ...... 140 6 PROXIMATE LOSS CAUSATION ...... 141 7 CLASS ACTION ALLEGATIONS ...... 143 8 FIRST CLAIM FOR RELIEF For Violation Of §10(B) Of The 1934 Act And Rule 10b-5 Against All 9 Defendants ...... 144 10 SECOND CLAIM FOR RELIEF For Violation Of §20(A) Of The 1934 Act Against The Individual Defendants...... 146 11 PRAYER FOR RELIEF ...... 146 12

13

14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

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1 Lead Plaintiff, individually and on behalf of all other persons who purchased the class A 2 common stock and options of LeapFrog Enterprises, Inc. (“LeapFrog” or the “Company”) between 3 July 24, 2003 and October 18, 2004 (the “Class Period”), by its undersigned attorneys, alleges the 4 following federal securities class action complaint against LeapFrog and certain of its officers and 5 directors (collectively with LeapFrog, “Defendants”) for violations of the Securities and Exchange 6 Act of 1934 (the “1934 Act”). This complaint is alleged upon personal knowledge as to Lead 7 Plaintiffs and its own acts, and upon information and belief as to all other matters, based upon, inter 8 alia, investigations conducted by and through Lead Plaintiffs’ attorneys, and additional counsel, 9 which included reviewing Defendants’ public documents and announcements, Securities and 10 Exchange Commission (“SEC”) filings, press releases, securities analysts’ reports, and LeapFrog’s 11 litigation with other parties, and interviewing knowledgeable former LeapFrog employees and other 12 confidential witnesses:

13 INTRODUCTION 14 1. LeapFrog describes itself as a designer, developer and marketer of technology-based 15 educational products and related proprietary content. The Company’s educational toy products are 16 marketed to retail outlets through LeapFrog’s consumer division (which is the Company’s largest 17 reporting segment, accounting for approximately 80% of the Company’s total net sales in 2003). 18 The Company also markets its learning devices to schools through LeapFrog’s “Schoolhouse” 19 division.

20 2. In 1999, LeapFrog introduced its LeapPad product—a hand-held or lap-held 21 electronic platform device—which was marketed with LeapPad content “books” that use game and 22 entertainment technology to teach children reading, writing and math skills. Prior to and during the 23 Class Period, LeapFrog’s largest retail product family consisted of the LeapPad and the LeapPad 24 content books. In 2002, LeapPad Books and the LeapPad system were the number one and number 25 two best-selling toys in the United States. Up until July 2003, the Company’s flagship LeapPad 26 products faced no significant competition. 27 3. LeapFrog went public on July 24, 2002, in what LeapFrog’s corporate fact sheet 28 describes as “the number one IPO of the year.” Before the Class Period, LeapFrog grew rapidly, and

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1 consistently reported quarterly revenues and earnings exceeding consensus analyst estimates. 2 LeapFrog’s reported annual net sales increased dramatically, from $160.1 million in 2000, to $314.2 3 million in 2001, to $531.8 million in 2002, to $680.0 million in 2003. 4 4. Defendants told investors that sales and earnings growth would continue in 2003 and 5 2004. On the first day of the Class Period, July 24, 2003, during a 2Q03 earnings conference call, 6 Wood falsely informed investors that LeapFrog was “enter[ing] the second half of 2003 with good

7 momentum, exciting new products and expanded distribution in each of our three business 8 divisions” and that “[Y]ou can expect to see increased shelf space for our products at our existing 9 retail partners and new distribution in such retail outlets as Radio Shack and Best Buy.” LeapFrog

10 Chief Executive Officer (“CEO”) Michael C. Wood (“Wood”) stated that LeapFrog was “ready to 11 keep [LeapFrog’s] customers in stock” as LeapFrog moved into the peak selling season. Wood also 12 assured investors that LeapFrog “continue[s] to make strong growth in supply-chain” and that 13 “there’s no boogie man out there” that would impede LeapFrog from reporting results in line with 14 its “very positive” guidance. 15 5. Thus, as of the beginning of the Class Period, Defendants’ statements had primed the 16 market to expect LeapFrog to report continued increasing sales and earnings. However, LeapFrog 17 was not “ready to keep [its] customers in stock,” as Defendants had assured investors, and the 18 Company now faced an array of severe difficulties impeding its performance. 19 6. Instead of disclosing the truth regarding these difficulties during the Class Period, 20 Defendants continually misled the investing public about LeapFrog’s operations, prospects and 21 results. Moreover, when the numbers announced on October 21, 2003, at the end of the first quarter 22 of the Class Period (3Q03), fell below expectations, which led to a partial sell-off of the Company’s 23 shares (which fell from $46.54 to $34.89 on October 22, 2003), Defendants attributed the decline to 24 the temporary issue of retailers shifting deliveries from the third quarter to the fourth quarter, and 25 revised their fourth quarter guidance upwards, assuring investors of future increased profits, while 26 concealing the roots and depths of LeapFrog’s problems. 27 28

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1 7. Meanwhile, each of the eight insider Defendants engaged in massive sell-offs of their 2 own LeapFrog shares. In total, Defendants sold over 4.3 million shares of their LeapFrog stock at 3 artificially inflated prices during the Class Period, for proceeds of more than $103 million. 4 8. While engaging in massive insider trading, Defendants knew – but failed to disclose - 5 that there were significant problems impeding LeapFrog from increasing (or even maintaining) its 6 sales and earnings during the Class Period. These difficulties included strong competitive forces; 7 customers’ delayed orders; critical infrastructure and IT deficiencies; LeapFrog management 8 decisions to delay product purchases and delay remedial actions; and warehouse difficulties. Severe 9 problems with LeapFrog’s distribution and supply-chain operations prevented LeapFrog from 10 shipping product to its retail customers, and damaged LeapFrog’s relationship with the retail 11 customers who comprised a majority of the Company’s sales. These problems resulted in millions 12 of dollars of lost sales, the imposition of “vendor violation” penalties on LeapFrog, and an 13 accumulation of obsolete excess inventories in LeapFrog’s warehouses.

14 9. Competition. During the Class Period, Defendants knew that LeapFrog—which had 15 no meaningful competition prior to July 2003 -- now faced significant competition from Mattel, 16 Inc.’s (“Mattel”) Fisher-Price division’s PowerTouch product. PowerTouch was Mattel’s largest 17 product launch in the company’s 73-year history. The launch included a television advertising 18 campaign, advertising in a Scholastic magazine, and obtaining licenses from Sesame Street, I Spy¸ 19 The Berenstain Bears, and Dora the Explorer. Mattel bundled two “books” with its product, 20 whereas the LeapPad system had been bundled with one “book.”

21 10. Defendants down-played any competitive threat from PowerTouch (and from other 22 competition) -- and even represented that the Company’s sales and market share would actually 23 increase. For instance, in a press release issued February 10, 2004, Defendant Wood assured 24 investors that “consumer demand for our learning products is more vibrant than ever,” and that 25 LeapFrog was proud of achieving “continuing success” with the LeapPad family platform products 26 despite increased competition. However, Defendants knew that LeapFrog’s products were being 27 severely impacted by this competition. In fact, LeapFrog was losing millions of dollars in sales and 28 profits to Mattel and other competitors.

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1 11. In LeapFrog’s SEC filings (including its 2003 Form 10-K and all of its Class Period 2 Form 10-Qs), Defendants merely represented that LeapFrog’s sales and market share could decline if 3 LeapFrog was unable to compete effectively with existing or new competitors, including Mattel’s 4 PowerTouch. However, LeapFrog’s patent infringement suit against Mattel, filed in October 2003, 5 demonstrated that Defendants’ representation to investors that a decline in sales and market share 6 was only a possibility, was highly misleading. Defendants’ sworn testimony and pleadings filed in 7 LeapFrog’s patent infringement suit against Mattel revealed Defendants’ knowledge that 8 competition from PowerTouch caused LeapFrog’s market share to decline 25%. 9 12. Moreover, Defendants knew that the decline in LeapPad family product sales was 10 immediate. Defendant Timothy M. Bender (“Bender”), after testifying that his responsibilities 11 included final authority for sales at LeapFrog, and that he tracked LeapPad sales and competitive 12 sales, further testified: 13 [O]nce the PowerTouch was introduced, and it was merchandised right next to the LeapFrog products, we immediately saw a depress in our sales on the hardware of 14 LeapPads and the My First LeapPads. Exhibit B, Bender direct testimony, May 18, 2005, pp. 667 and 720. 15

16 13. LeapFrog “drastically reduced” prices of LeapPad platforms and lost sales of one to 17 two million LeapPad platforms, id. at 737, and more than 2.9 million content books used with the 18 platforms. Defendants admitted that LeapFrog lost approximately $65 million in profits from the 19 time LeapFrog filed suit in October 2003, id. at 852 (testimony of LeapFrog damages expert Reed) 20 and, based on trial admissions, another $20 million in lost profits can be estimated for the portion of 21 the Class Period prior to LeapFrog filing suit against Mattel. Id. at 12 (admission of defense counsel 22 as to pre-October products sold). These losses equaled or exceeded the entire $66.2 million of net 23 income LeapFrog reported in 2003 and 2004 combined. 24 14. Moreover, the difficulties LeapFrog faced from competitive products were 25 compounded by LeapFrog’s difficulties in making timely deliveries to customers. LeapFrog’s 26 customers’ attitude was, “If we can’t get the product on time from LeapFrog, we’ll just buy from the 27 competition.” 28

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1 15. Customer Practices and LeapFrog’s Dependence on Certain Customers. During 2 the Class Period, LeapFrog’s sales were increasingly dependant on three U.S. retail customers – 3 Wal-Mart Corporation (“Wal-Mart”), Toys R Us Inc. (“Toys R Us”) and Target Corporation 4 (“Target”) – who accounted for more than two-thirds of LeapFrog’s total sales. In addition, 5 LeapFrog did not have long term agreements with the retailers, who were delaying orders to reduce 6 inventory levels. As a result, LeapFrog had to fill orders and supply product to these retailers within 7 shorter time periods. Customer requirements that LeapFrog fulfill orders quickly were a particular 8 challenge to LeapFrog for several reasons: The second half of the year (when such orders came in) 9 was the peak back-to-school and holiday selling season for LeapFrog, when the Company generated 10 80% of its sales. Moreover, LeapFrog’s delays in manufacturing product and lack of supply 11 infrastructure made it difficult to deliver product on a timely basis. Defendants tracked shipments of 12 its orders on a daily basis, and knew that LeapFrog and its third party logistics distributors could not 13 ship product within the short time-frames which its largest customers insisted upon.

14 16. LeapFrog Management’s Decisions To Delay Manufacturing Product. LeapFrog 15 senior management repeatedly directed LeapFrog’s purchasing department to delay product 16 manufacturing orders – and also delayed the implementation of forecasting systems for 17 manufacturing orders. LeapFrog’s delays in ordering product caused delays all the way down the 18 line: Late manufacturing of products caused delays in supplying LeapFrog’s warehouses, which in 19 turn caused delays in deliveries to customers, which in turn resulted in reduced sales as product 20 reached the market too late – when the product was no longer “hot,” which in turn resulted in returns 21 and LeapFrog’s accumulation of excess out-of-date (virtually unsaleable) inventories. 22 Manufacturing delays also significantly increased costs. For instance, LeapFrog flew product to the 23 U.S. by air, at great expense, while scrambling to meet delivery schedules.

24 17. Moreover, LeapFrog’s decisions to delay manufacturing product also made it difficult 25 to meet LeapFrog’s retail customers’ insistence upon fast deliveries. 26 18. In addition to senior management simply delaying manufacturing orders of products, 27 Defendant Wood frequently ordered design changes to product and product packaging at the last 28 possible minute, which were extremely costly and time-consuming to carry out, and resulted in

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1 product production and supply delays. In fact, witnesses reported that Wood was fired after 2 throwing a toy at a LeapFrog lawyer, at a meeting during which Wood was insisting that changes 3 needed to be made to the product.

4 19. Warehouse and IT Systems and Supply-Chain Infrastructure. LeapFrog’s 5 warehouse, information technology (“IT”) systems and supply chain infrastructure were rudimentary 6 and unable to support the Company’s rapid growth. By 2003, these deficiencies were having a 7 material negative effect on the Company’s ability to accurately forecast its results and to quickly and 8 efficiently ship products to its customers. 9 20. Throughout the Class Period, Defendants continually assured investors that LeapFrog 10 had taken the necessary steps to correct the problems in its IT system and supply chain, and that 11 these efforts had been successful. However, Defendants misrepresented and/or failed to disclose 12 that: (i) the Company had not in fact materially improved either its IT systems or its supply chain 13 infrastructure; and (ii) these issues were continuing to have a materially negative effect on its 14 business and on its ability to accurately forecast results and meet analysts’ sales and earnings 15 expectations. 16 21. LeapFrog was reliant upon outside companies (known in the industry as “third party 17 logistics suppliers” or “3PL”) to run its warehouse distribution operations, including receiving 18 manufactured product, tracking the product inventory in the warehouse, selecting from inventory the 19 product ordered by LeapFrog’s customers and delivering this product to trucks operated by trucking 20 companies or by LeapFrog’s customers. The trucks then delivered the product to LeapFrog’s 21 customers.

22 22. At the beginning of the Class Period, DSS was the 3PL which operated LeapFrog’s 23 main warehouse operations, located in a facility in Redlands, California. In 2003, LeapFrog’s 24 relationship with DSS deteriorated. DSS frequently shipped the wrong product to LeapFrog’s 25 customers, or shipped product late. According to witnesses, much of the deterioration in the DSS- 26 LeapFrog relationship resulted from LeapFrog ordering and shipping manufactured product late to 27 the DSS-run warehouse, and then blaming DSS for failing to deliver product to LeapFrog’s 28 customers on time. According to confidential witnesses, Defendant James P. Curley (“Curley”)

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1 frequently screamed at DSS for not delivering product on time to LeapFrog’s customers under such 2 circumstances. Part of the deterioration in the companies’ relationship resulted from DSS 3 prematurely learning that LeapFrog planned to change its 3PL, and, as a result, losing the incentive 4 to service LeapFrog’s account. 5 23. Further difficulties resulted from the fact that LeapFrog was utilizing several 6 warehouse facilities, including the Redlands facility run by DSS and a warehouse located in Ontario, 7 California, operated by Genco Distribution Systems (“Genco”). LeapFrog had to shuttle products 8 back and forth between different warehouses and the harbor. Deliveries to customers were 9 complicated by the need to locate and assemble product from several warehouse facilities. In 3Q03, 10 LeapFrog employees, operating under orders from senior management, located a reasonably-priced 11 new warehouse where the Company’s warehouse operations could be consolidated. LeapFrog 12 employees urged management to lease this new facility, in the fall of 2003, so that the transition 13 could be effected during the quiet early months of 2004. 14 24. However, against the advice of its own employees, LeapFrog senior management did 15 an “about face” and delayed the leasing of a new warehouse and delayed deployment of supply- 16 chain software needed to remedy the Company’s deficiencies. Meanwhile Defendant Curley assured 17 investors, in a March 10, 2004 press release, that LeapFrog was “strengthening [its] operations 18 group, supply chain management system and warehousing and logistics function” – while failing to 19 disclose the depth of LeapFrog’s supply chain problems, or the delays that assured that the transition 20 would be a disaster.

21 25. Management did not finally lease a new facility until approximately April 2004, and 22 at a much higher cost than the facility LeapFrog could have leased months before. These delays 23 caused the transition and implementation to occur during LeapFrog’s peak season in July 2004 24 through the fall 2004 -- a time when – as LeapFrog’s employees had warned the Company’s 25 management - implementation was assured of disaster. 26 26. There were also severe problems with LeapFrog’s other 3PL, Genco, delivering 27 product to LeapFrog’s customers late. As one confidential witness described, there were daily or 28 weekly telephone conference call meetings throughout 2003 to discuss problems at Genco, attended

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1 by Genco and LeapFrog representatives, including Defendant Paul A. Rioux (“Rioux”) at some of 2 these meetings. 3 27. In addition to the delays in leasing a physical warehouse, LeapFrog delayed the 4 implementation of “Highjump,” the warehouse management system (“WMS”) needed to operate the 5 warehouse (including tracking the in-flows, location, and out-flows of inventory from the 6 warehouse). 7 28. As of January 2004, LeapFrog had no existing procedures or requirements for 8 configuring the WMS. By April 2004, LeapFrog personnel had only identified requirements and 9 completed some preliminary phases of software development and implementation for the WMS. 10 LeapFrog’s employees advised senior management that implementation of Highjump was complex 11 and time-consuming, and could not possibly be achieved within a few months’ time. 12 29. Yet, Defendant Thomas J. Kalinske (“Kalinske”) misinformed investors during an 13 April 21, 2004 conference call: 14 “We are implementing supply chain information management systems in a new consolidated warehouse. All aspects of these initiatives are on track to be fully 15 operational at the end of the second quarter, and our new supply chain management system is up and running as we speak. . . . We believe our investment 16 and achievement of these operational initiatives bodes well for our execution in the 17 critical second half of this year.

18 30. The WMS was still not operational in July 2004, and warehouse receiving and 19 operations had to be entered manually without the software systems. The first phase of the WMS 20 operations began operations in late July to August 2004; other phases of the system began operations 21 thereafter. There were numerous problems with the WMS, including many days when the entire 22 system was down; days when the RF (radio frequency) readers of the product bar codes were not 23 functioning; and the need to manually record shipments when the system was not functional (and 24 then correct the system later). Numerous “bugs” remained and were still being worked on in 25 October 2004. 26 31. In addition to the delays in leasing the physical warehouse and delays in 27 implementing warehouse management systems, LeapFrog delayed finalizing its contractual 28 relationship with its new 3PL, Commodity Logistics West, Inc. (“CLI”), until approximately July

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1 2004. Part of the delay was due to a last-minute decision by LeapFrog management, including 2 Kalinske (who negotiated the contract with CLI) to attempt to renegotiate better terms for the CLI 3 contract at the last minute, in June 2004. The attempted renegotiation was unsuccessful in obtaining 4 better terms, and created further difficulties with the transition. 5 32. In July 2004, LeapFrog replaced DSS with CLI, and attempted to transfer warehouse 6 operations to a facility which LeapFrog leased in Fontana, California. However, before the 7 transition could be effected, DSS quit working for LeapFrog, leaving LeapFrog’s employees and top 8 management all scrambling to deliver product, at the height of peak season. LeapFrog officers, 9 including Defendants Bender and Rioux, and LeapFrog Chief Operating Officer (“COO”) 10 Fred Forsyth, were among the numerous LeapFrog employees and officials who were “drafted” or 11 volunteered to fly to Fontana to try to deliver product—from a warehouse in transition which lacked 12 functioning systems. 13 33. CLI first began hiring and training personnel for LeapFrog’s account in July and 14 August 2004. CLI was performing deliveries so badly that LeapFrog’s largest customers pulled 15 orders. Heated meetings took place throughout the rest of 2004 between LeapFrog senior 16 management (including LeapFrog president Jerry Perez) and CLI, during which LeapFrog 17 management screamed at CLI about the late deliveries. 18 34. The result of the warehouse transition debacle and WMS delays was that LeapFrog 19 was unable to deliver product to its customers, and lost millions of dollars of sales. Empty trucks 20 were lined up outside the warehouse for days, awaiting product from the warehouse for delivery to 21 LeapFrog’s customers. Eventually many of the trucking companies left, empty-handed, and refused 22 to do business with LeapFrog again.

23 35. Despite the virtual emergency state of affairs at LeapFrog stemming from its delayed 24 transition and non-to-barely-functional distribution operations and systems, in a July 21, 2004 press 25 release, Kalinske reiterated Defendants’ glowingly positive guidance for full year 2004 (i.e., net 26 sales of $770 to $800 million, gross profit margin of 48% to 49% of net sales; diluted net income per 27 share of $1.18 to $1.28), and concealed the supply-chain management difficulties with assurances of 28 “up and running” systems and a smooth transition:

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1 I would like to report that we are making progress with improvements to our supply chain management initiatives. Several of our new supply chain management 2 software programs are up and running. We are also continuing to consolidate our distribution centers and will complete our move into our new warehouse and begin 3 shipping from it at the end of the month. 4 * * * 5 We believe we are improving our infrastructure to become a world-class supplier of 6 learning products around the world. . . . We believe we’ve done appropriate contingency planning to make this a successful year for LeapFrog. 7

8 * * *

9 We will maintain a level of redundancy with our warehouses until the new facility has been fully tested. 10 11 36. In September 2004 (long after Defendants stated consolidation would be 12 implemented), LeapFrog started transferring product from its Ontario warehouse to Fontana. 13 However, LeapFrog stopped this consolidation process, renegotiated the Ontario warehouse lease for 14 another year, and moved the product back to Ontario. LeapFrog also only first started transferring 15 other inventories to the Fontana warehouse in September 2004. 16 37. In addition, LeapFrog’s distribution problems during the Class Period were 17 compounded by its use of frequently incorrect and random stock keeping unit (SKU) numbers, 18 instead of numbers which identified the product division, item and color. As a result, the 19 warehouses had to match components manually, causing delays and higher costs. 20 38. Forecasting Difficulties and Lack of Forecasting Software. Another severe 21 problem with LeapFrog’s supply chain infrastructure was its lack of ability to forecast production 22 needed to fulfill orders. Defendants suspended implementation of new supply-chain software 23 designed to, among other things, ensure that LeapFrog had sufficient levels of inventory to meet 24 actual and forecasted orders from LeapFrog’s retail customers. A confidential witness who was 25 supposedly hired to utilize supply-chain software to compare actual and projected levels of inventory 26 against current and forecasted customer orders, and thereby determine and forecast the products 27 needed by LeapFrog’s customers, spent his time “twiddling his thumbs” and could only report on 28 how orders were fulfilled after the fact – due to the lack of functional forecasting supply chain

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1 software at LeapFrog. Such software was merely in the planning stages in 2003, and was still not 2 implemented in mid-2004. Confidential witnesses reported that supply-chain software Manugistics 3 “never worked” (i.e., never performed its intended forecasting functions), and did not properly 4 communicate with the WMS software. 5 39. The lack of forecasting software and ability had severe consequences, including 6 delayed and insufficient product orders to meet demand. At the Genco facility, LeapFrog’s lack of 7 forecasting ability caused cost overruns of 30% per month for down time and overtime, and caused 8 Genco to insist on an expensive “cost plus” contractual arrangement with LeapFrog.

9 40. Excess and Obsolete Inventories. LeapFrog’s supply chain problems and losses to 10 competitors ultimately led to excess and obsolete inventories sitting in its warehouses. A 11 confidential witness estimated that $20 million of excess, obsolete inventories were counted as 12 current inventories. The huge quantities involved hampered LeapFrog’s warehouse operations, and 13 made it more difficult to locate current inventories in the warehouses for deliveries. Another 14 confidential witness, who was involved with inventory reporting, reported that Kalinske gave false 15 and misleading statements to LeapFrog’s auditors that inventories would be sold – even though the 16 same items remained in LeapFrog’s warehouse for years, and were in fact obsolete and excess 17 inventory.

18 41. Defendants Knew About the Problems Which They Concealed, Which Resulted In 19 Investors’ Losses. Confidential witnesses reported that Defendants were obsessed with making the 20 “numbers” to be reported to investors, so that Defendants could sell their personal shares of 21 LeapFrog stock at huge profits. Defendants even went so far as to deliver product to an empty 22 warehouse in October 2003, in order to provide a pretext for attempting to book a large sale to Toys 23 R Us in 3Q03 (which could not actually be delivered until 4Q03). When LeapFrog’s collections 24 department learned of the impropriety, Defendant Curley took retaliatory and other steps to attempt 25 to conceal the wrongdoing.

26 42. Defendants knew that LeapFrog’s distribution and supply-chain problems were 27 causing LeapFrog’s customers to continually complain about repeated failures to accurately fulfill 28 orders or deliver products on time. When the problems were not solved, LeapFrog’s customers

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1 reduced their purchases of LeapFrog’s products and imposed millions of dollars in “vendor 2 violation” penalties on LeapFrog. (For instance, virtually every invoice from Target had a $10,000 3 penalty for not getting product to Target on time.) Defendant Curley constantly “was on the back” 4 of LeapFrog’s collections department to try to lower the customer’s chargebacks for late deliveries. 5 Many of the Defendants went themselves to the Fontana warehouse during the disastrous 6 CLI/Fontana warehouse transition. 7 43. Defendants – including Wood, Kalinske, Curley and Bender, were also kept apprised 8 of shipping volumes and problems on a daily basis, through, inter alia, daily reports, and through 9 their attendance at daily morning telephone conferences to discuss these matters. These reports 10 revealed, early on, that LeapFrog would not “make the numbers” which Defendants had published, 11 and then reiterated as the Company’s guidance to investors. 12 44. Confidential witnesses reported that Defendants were very “hands on” managers, in 13 all aspects of LeapFrog’s business. Moreover, Defendant Wood came to the Los Gatos facility to 14 meet with employees there regularly, and in early 2004, Wood came to an employee meeting in Los 15 Gatos, and told employees that LeapFrog was not doing well and needed to layoff employees.

16 45. The Truth Emerges. On October 18, 2004, the last day of the Class Period, 17 LeapFrog announced that its 2004 earnings would miss its estimates by more than 60% due in large 18 part, to Defendants’ failure to correct the very same IT and supply chain problems that had led 19 LeapFrog to miss expectations a year earlier. The announcement shocked investors and prompted a 20 massive sell-off of LeapFrog shares, which fell 34% in a single day, to a then all-time low of $11.99. 21 Thereafter, LeapFrog also missed fourth quarter 2004 estimates by a wide margin and, having lost 22 credibility with analysts and investors, replaced three members of its senior management, including 23 its Chief Financial Officer and Chief Operating Officer. LeapFrog’s reported net sales for 2004 24 were $640.3 million, down $40 million from the previous year, and reported a net loss of $6.5 25 million in 2004 (0.11 net loss per common share). With the exception of brief spikes upon 26 acquisition rumors, LeapFrog’s shares continued their decline, setting a new all-time low of $9.20 on 27 April 29, 2005. LeapFrog’s shares currently trade in the $11.00 range, below the then-all-time-low 28 price of the shares at the end of the Class Period.

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1 46. After the Class Period, LeapFrog admitted that the above-described IT and supply 2 chain issues negatively impacted its forecasting ability and its financial performance. During a 3 10/18/04 investor conference call, Kalinske admitted: 4 [W]e have experienced several challenges getting our new distribution center up and running smoothly. As you will recall, we consolidated our distribution centers into 5 one, newer, larger facility this past July. At the same time, we also launched a number of new information management systems to build out our supply-chain. In 6 addition, we hired a new third-party logistics venture, Commodity Logistics, Inc., to 7 implement these operations. However, getting all this up and running during this peak time has been challenging and we have experienced negative financial 8 ramifications through this transition, ultimately impacting margin.

9 10 47. Kalinske also admitted during the Company’s 12/16/04 conference call, “we’ve been 11 so horrible at providing guidance I just don’t think there’s any benefit in continuing the practice for 12 the rest of this year.” 13 48. As a result of Defendants’ false and misleading statements and omissions described 14 herein, the price of LeapFrog’s stock was artificially inflated during the Class Period, causing harm 15 to Lead Plaintiff and other members of the Class. 16 49. The chart attached as Exhibit A illustrates LeapFrog’s inflated stock price caused by 17 Defendants’ false and misleading statements and omissions, Defendants’ insider selling, and the 18 declines in LeapFrog’s stock price which caused class members to suffer actual economic loss as the 19 adverse information was revealed to the market. 20 JURISDICTION AND VENUE 21 50. Jurisdiction is conferred by §27 of the 1934 Act. The claims asserted herein arise 22 under §§ 10(b) and 20(a) of the 1934 Act and Rule 10b-5. 23 51. (a) Venue is proper in this District pursuant to §27 of the 1934 Act. Many of the 24 false and misleading statements were made in or issued from this District. 25 (b) The Company’s principal executive offices are in Emeryville, California, where the 26 day-to-day operations of the Company are directed and managed. 27 28

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1 THE PARTIES 2 52. Lead Plaintiffs are the Parnassus Fund and the Parnassus Equity Income Fund 3 (“Parnassus”). Parnassus purchased LeapFrog’s class A common stock at artificially inflated prices 4 during the Class Period. 5 53. Defendant LeapFrog is a designer, developer and marketer of technology-based 6 educational products and related proprietary content, which are marketed both in retail stores and to 7 schools. During the Class Period, LeapFrog reported between 26.3 million and 33.2 million shares 8 of outstanding class A common stock which were traded on the New York Stock Exchange and 9 between 27.6 million and 31.6 million shares of class B common stock which were privately held. 10 According to the Company’s 2003 10-K, LeapFrog had 869 full time employees, including 11 11 executive officers. All of the Individual Defendants were executive officers. 12 54. According to the Company’s Reports on Form 10-K and Proxy Statements, 13 Defendant Michael C. Wood founded LeapFrog in 1995, served as President and Vice Chairman 14 since 9/97 and as Chief Executive Officer from 3/02 until 2/04 when he was demoted to Chief 15 Vision and Creative Officer. Wood was forced out of the Company in 9/04. According to the 16 Company’s Amended and Restated Bylaws, as President and CEO, Wood was the senior most 17 officer of the Company and responsible for the general supervision, direction and control of the 18 business and its officers. According to the Amended and Restated Employment Agreement between 19 Wood and LeapFrog, Wood was responsible for managing the day-to-day operations of the 20 Company, supervising staff, and developing programs. The Amended Employment Agreement also 21 stated Wood was a “key executive” of the Company whose services were material and significant to 22 LeapFrog’s success and placed Wood in a position of confidence and trust which allowed him access 23 to confidential information.

24 (a) The false and misleading statements alleged herein were made by or are attributable to 25 Wood. Wood participated in the preparation of the Company’s press releases, many of which 26 included quotes by Wood. Before his demotion to Chief Vision and Creative Officer, he participated 27 in the Company’s quarterly earnings conference calls on 7/24/03, 10/22/03 and 2/11/04. Wood signed 28

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1 the Company’s 2Q03 10-Q filed on 8/11/03, the 3Q03 10-Q filed on 11/10/03 and the FY03 10-K 2 filed on 3/10/04. 3 (b) According to the Company’s Proxy Statements and the Amended and Restated 4 Employment Agreement between Wood and LeapFrog, Wood received a salary of $277,100 in 2003 5 and a salary of $239,321 in 2004 prior to his forced resignation in 9/04. 6 (c) During the Class Period, Wood sold substantial amounts of his LeapFrog class A 7 common stock that were suspicious in timing and amount. Wood sold 3,475,588 shares, or 100% of 8 his class A common stock and vested options during the Class Period at inflated prices for 9 $76,701,710. His sales during the Class Period were dramatically out of line with prior trading 10 practices. Prior to the Class Period, Wood sold 1,026,084 shares for proceeds of $25,157,492. 11 Wood’s sales during the Class Period were at prices ranging from $25.32 to $45.16 - two to four times 12 higher than the $11.99 price the stock traded at on 10/19/04. 13 55. According to the Company’s Reports on Form 10-K and Proxy Statements, 14 Defendant Thomas J. Kalinske was the Chairman of the LeapFrog Board of Directors since 9/97 and 15 was CEO from 9/97 to 3/02, when Wood became CEO. Kalinske reassumed the position of CEO in 16 2/04 when Wood was demoted to Chief Vision and Creative Officer. Since 1996, Kalinske has also 17 served as President of Knowledge Universe, Inc., LeapFrog’s parent corporation. According to the 18 Company’s Amended and Restated Bylaws, as CEO, Kalinske was the senior most officer of the 19 Company and responsible for the general supervision, direction and control of the business and its 20 officers. According to the Employment Agreement between Kalinske and LeapFrog, Kalinske’s 21 services were deemed by the Company to be material and significant to LeapFrog’s success and 22 placed Kalinske in a position of confidence and trust which allowed him access to confidential 23 information.

24 (a) The false and misleading statements alleged herein were made by or are attributable to 25 Kalinske. Kalinske participated in the preparation of the Company’s press releases, many of which 26 included quotes by Kalinske. He participated in the Company’s quarterly earnings conference calls 27 on 2/11/04, 4/21/04, 7/21/04 and 10/18/04. He made presentations at the Bank of America Securities 28 33rd Annual Investment Conference and the ThinkEquity Partners Conference on 9/17/03. Kalinske

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1 signed the Company’s FY03 10-K filed on 3/10/04, the 1Q04 10-Q filed on 5/7/04 and the 2Q04 10-Q 2 filed on 8/6/04. 3 (b) According to the Company’s Proxy Statements and the original Employment 4 Agreement between Kalinske and LeapFrog, Kalinske received a salary of $269,000 in 2003. He 5 received a salary of $469,812 in 2004 after reassuming the job of CEO from Wood and entering into a 6 new Employment Agreement in 4/04. 7 (c) During the Class Period, Kalinske sold substantial amounts of his LeapFrog class A 8 common stock that were suspicious in timing and amount. Kalinske sold 122,777 shares, or 20% of 9 his class A stock and vested options during the Class Period at inflated prices for $4,286,831. His 10 sales during the Class Period were dramatically out of line with prior trading practices. Prior to the 11 Class Period, Kalinske sold just 30,000 shares of his LeapFrog class A common stock. Kalinske’s 12 sales during the Class Period were at prices ranging from $28.00 to $42.90-two to four times higher 13 than the $11.99 price the stock traded at on 10/19/04. 14 56. According to the Company’s Reports on Form 10-K and Proxy Statements, 15 Defendant James P. Curley was LeapFrog’s Chief Financial Officer (“CFO”) from 12/91 until 16 11/11/04, when he reportedly resigned. According to the Company’s Amended and Restated 17 Bylaws, as CFO, Curley was responsible for the financial reporting by LeapFrog. 18 (a) The false and misleading statements alleged herein were made by or are attributable to 19 Curley. Curley participated in the preparation of the Company’s press releases. He participated in the 20 Company’s quarterly earnings conference calls on 7/24/03, 10/22/03, 2/11/04, 4/21/04, 7/21/04 and 21 10/18/04. He made presentations at the Bank of America Securities 33rd Annual Investment 22 Conference and the Think Equity Partners Conference on 9/17/03. Kalinske signed the Company’s 23 FY03 10-K filed on 3/10/04, the 1Q04 10-Q filed on 5/7/04 and the 2Q04 10-Q filed on 8/6/04.

24 (b) According to the Company’s Proxy Statements and the original Employment 25 Agreement between Kalinske and LeapFrog, Kalinske received a salary of $269,000 in 2003. He 26 received a salary of $469,812 in 2004 after reassuming the job of CEO from Wood and entering into a 27 new Employment Agreement in 4/04. 28

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1 (c) During the Class Period, Curley sold substantial amounts of his LeapFrog class A 2 common stock that were suspicious in timing and amount. Curley sold 30,000 shares of his LeapFrog 3 class A common stock – 96.5% of his stock and 24% of his stock and vested options – at inflated 4 prices for $988,900. The sales were at prices ranging from $27.06 to $38.00 – two to three times 5 higher than the $11.99 price the stock traded at on 10/19/04. 6 57. According to the Company’s Reports on Form 10-K, Proxy Statements, and website, 7 Defendant Timothy M. Bender has served as LeapFrog’s President of Worldwide Consumer Group 8 since January 2002, and served as LeapFrog’s Senior Vice President of Sales and Marketing from 9 July 1999 to December 2001 and Senior Vice President of Sales from November 1997 to June 1999. 10 Prior to joining LeapFrog, Bender served as the Director of National Accounts at Yes! Entertainment 11 Corporation, a toy and entertainment products company, from October 1994 to January 1997, and as 12 Senior Vice President of Sales from February 1997 to October 1997. Prior to that, Mr. Bender was 13 at Lego Systems, Inc., serving in various positions, including Senior National Account Manager. 14 According to Bender’s 11/1/03 Employment Agreement, Bender reported to the President and CEO, 15 and was a key executive of LeapFrog whose services were deemed by the Company to be material 16 and significant to LeapFrog’s success, placing Bender in a position of confidence and trust which 17 allowed him access to confidential information. 18 (a) The false and misleading statements alleged herein were made by or are attributable to 19 Bender. Bender participated in the preparation of the Company’s press releases. He participated in 20 the Company’s quarterly earnings conference call on 7/24/03.

21 (b) According to the Company’s Proxy Statements, Bender received a salary of $263,900 22 in 2003 and a salary of $283,900 in 2004. 23 (c) During the Class Period, Bender sold substantial amounts of his class A common stock 24 that were suspicious in timing and amount. Bender sold 170,000 shares of his class A common stock, 25 98.7% of his stock and 77.1 % of his stock and vested options, for $4,415,300. The sales were at 26 prices ranging from $20.02 to $41.12, two to four times the $11.99 price the stock traded at on 27 10/19/04. 28

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1 58. Defendant Paul A. Rioux was Co-Vice Chairman of the Board and a director of 2 LeapFrog since 1/01, LeapFrog’s acting Chief Operating Officer from 10/02 to 8/03, an advisor to 3 the CEO, and Vice Chairman of the Board of Directors since 9/04. According to the Employment 4 Agreement between Rioux and LeapFrog, Rioux reported to the President of LeapFrog and was a 5 “key executive” of the Company whose services were material and significant to LeapFrog’s success 6 and placed Rioux in a position of confidence and trust which allowed him access to confidential 7 information. According to the Company’s Proxy Statements, Rioux emented LeapFrog’s planning, 8 manufacturing and operating strategy in 2001 and 2002. 9 (a) The false and misleading statements alleged herein were made by or are attributable to 10 Rioux. He participated in the preparation of the Company’s press releases and signed the 2003 10-K 11 filed on 3/10/04. 12 (b) According to the Company’s Proxy Statements, Rioux received a salary of $374,000 in 13 2003, a salary of $307,300 in 2004 and a $47,250 bonus in 2004. 14 (c) During the Class Period, Rioux sold substantial amounts of his LeapFrog class A 15 common stock that were suspicious in timing and amount. Rioux sold 180,000 shares of his class A 16 common stock, 93.2% of his stock holdings and 52.2% of his stock holdings and vested options, at 17 inflated prices for $5,928,450. The sales were at prices ranging from $26.78 to $40.15, two to four 18 times higher than the $11.99 price the stock traded at on 10/19/04. 19 59. According to the Company’s Form 10-K, Defendant James L. Marggraff 20 (“Marggraff’) was the Executive Vice President Worldwide Content of LeapFrog. During the Class 21 Period, Marggraff sold substantial amounts of his class A common stock that were suspicious in 22 timing and amount. Marggraff sold 69,432 shares of his LeapFrog class A common stock - 29.7% of 23 his stock and 15.2% of his stock and vested options - for $2,238,548.

24 60. According to the Company’s Form 10-K and website, Defendant Mark B. Flowers 25 (“Flowers”) has served as LeapFrog’s Executive Vice President, Chief Technology Officer since 26 January 2002. Previously, he served as LeapFrog’s Vice President of Technology from January 2001 27 to December 2001, and as Vice President of Engineering from July 1998 to December 2000. During 28 the Class Period, Flowers sold substantial amounts of his class A common stock that were suspicious

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1 in timing and amount. Flowers sold 145,000 shares of his LeapFrog class A common stock - 60.7% 2 of his stock and 34.2% of his stock and vested options - for $4,197,550. 3 61. According to the Company’s Form 10-K, Defendant Robert W. Lally (“Lally”) was 4 the Executive Vice President, Education and Training Group and President, SchoolHouse Division 5 of LeapFrog until his forced resignation on 12/14/04. He participated in the Company’s 7/21/04 6 conference call. During the Class Period, Lally sold substantial amounts of his class A common 7 stock that were suspicious in timing and amount. Lally sold 153,750 shares of his LeapFrog class A 8 common stock – 70.1 % of his stock and 54.2% of his stock and vested options – for $4,354,188. 9 62. The individuals named as Defendants herein are referred to herein as the “Individual 10 Defendants.” The Individual Defendants, because of their positions with the Company, possessed the 11 power and authority to control the contents of LeapFrog’s quarterly reports, press releases and 12 presentations to securities analysts, money and portfolio managers and institutional investors, i.e. the 13 market. Each Defendant was provided with copies of the Company’s reports and press releases 14 alleged herein to be misleading prior to or shortly after their issuance and had the ability and 15 opportunity to prevent their issuance or cause them to be corrected. Defendants regularly received 16 information on the status of LeapFrog’s sales, sales of Mattel’s PowerTouch and the Company’s 17 distribution and supply-chain operations. Bender testified in LeapFrog’s patent infringement trial 18 against Mattel that the Company (1) tracked sales of platforms, (2) tracked sales of content books by 19 platform and by year (the “tie ratio”), (3) tracked sales of Mattel’s competing PowerTouch product, 20 (4) conducted market research on the impact of Mattel’s competing PowerTouch product on the 21 market for educational toys, (5) tracked retail pricing of LeapFrog’s products, (6) had 20-30 22 executive team meetings to discuss reducing the price of the LeapPad family of platforms in 23 response to the PowerTouch, and (7) had online access to look at retail inventory levels for any item 24 by store and by chain from which the Company prepared reports. Ex. B at 714-15, 720-23, 730-31, 25 736-37. In addition, he testified that the Company tracked orders it was unable to ship due to the 26 distribution and supply-chain problems. Ex. B at 790-92.

27 63. Because of their executive positions and access to material non-public information 28 available to them but not to the public, each of these Defendants knew that the adverse facts

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1 specified herein had not been disclosed to and were being concealed from the public and that the 2 positive representations which were being made were then materially false and misleading. The 3 Individual Defendants are liable for the false statements pleaded herein, as those statements were 4 each “group-published” information, the result of the collective actions of the Individual Defendants. 5 Moreover, when Defendants sold their LeapFrog stock, they had a duty to disclose adverse 6 information that was not publicly available. 7 64. Each Defendant is liable for (i) making false statements or (ii) failing to disclose 8 adverse facts known to him about LeapFrog in connection with his stock sales. Defendants’ 9 fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of 10 LeapFrog common stock was a success, as it (i) deceived the investing public regarding LeapFrog’s 11 prospects and business; (ii) artificially inflated the prices of LeapFrog’s common stock; (iii) allowed 12 Defendants to arrange to sell and actually sell over $103 million worth of LeapFrog shares at 13 artificially inflated prices while in possession of material non-public information; and (iv) caused 14 plaintiffs and other members of the class to purchase LeapFrog common stock at inflated prices and 15 suffer economic loss when the inflation was removed from the stock price as Defendants’ fraud was 16 revealed.

17 CONFIDENTIAL WITNESSES 18 65. At least twelve reliable confidential witnesses (“CW”), whose accounts corroborated 19 one another and corroborated other information in this Complaint, provided information to plaintiffs’ 20 representatives. These witnesses included an employee of a LeapFrog third-party logistics supplier, 21 and eleven former LeapFrog employees, who worked at LeapFrog during the Class Period (with one 22 exception), in positions which provided them with personal knowledge of the matters of which they 23 spoke. These witnesses’ positions and responsibilities, and a summary of some of the detailed 24 information provided by these witnesses, follows:

25 66. CW-1 was an allocations analyst in LeapFrog’s corporate offices in Emeryville, 26 California, from June 2003 through June 2004, when CW-1 resigned. As an allocations analyst, 27 CW-1 was supposed to utilize supply-chain software to compare actual and projected levels of 28 inventory against current and forecasted customer orders, and thereby determine and forecast the

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1 products needed by LeapFrog’s customers and LeapFrog’s production requirements. However, CW- 2 1 was never able to perform the allocations analyst job function because, throughout CW-1’s entire 3 year at LeapFrog, LeapFrog did not successfully implement the necessary supply-chain software. 4 When CW-1 started working at LeapFrog, the software was merely in the planning stages. LeapFrog 5 tried and cancelled various systems throughout the year. CW-1 ended up “twiddling his thumbs” 6 much of the time, and merely reporting on orders made and delivered “after the fact” – instead of 7 being able to provide forecasts with supply-chain management software. CW-1’s “after-the-fact” 8 reports revealed that, every month, there were numerous orders that were supposed to ship which 9 were not shipped. For instance, LeapFrog’s smaller customers frequently only received 200 units on 10 a 1,000 unit order. CW-1 also stated that at the time CW-1 left the Company, LeapFrog had not yet 11 started the process of moving from the DSS warehouse to the consolidated CLI warehouse.

12 67. CW-2 was employed in several positions at LeapFrog, from December 1999 through 13 approximately June 2004, when CW-2 resigned. CW-2 began his tenure at LeapFrog as a director of 14 information technology, became a director of IT operations in 2002, and, commencing in the 15 beginning of 2004, worked as a director of strategic planning at LeapFrog. During the Class Period, 16 CW-2 reported to John Casella (“Casella”), LeapFrog’s Chief Information Officer (“CIO”), who 17 reported to Curley and Director of Credit John Forsythe (“Forsythe”). CW-2 was involved in all 18 aspects of LeapFrog’s IT infrastructure and was responsible for operations implementation of 19 LeapFrog’s supply-chain software, Manugistics, which was supposed to forecast supply. CW-2 20 confirmed that LeapFrog was using rudimentary supply chain modules and Excel spreadsheets, 21 which did not keep pace with the Company’s requirements. LeapFrog needed an enterprise-level 22 system to forecast supply and production requirements. CW-2 also confirmed that “big players,” 23 including Defendant Rioux and CIO Casella, were involved in the implementation decisions 24 regarding supply-chain software. CW-2 also confirmed that product was not manufactured quickly 25 enough in China, that there were delays shipping product to the boats, and that the entire product 26 development and supply cycle was late, resulting in missed sales opportunities and excess inventory. 27 CW-2 also reported numerous problems with late deliveries by Genco, and daily meetings to discuss 28 these problems attended by senior management, including Defendant Rioux at some of the meetings.

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1 CW-2 also confirmed, among other things, the delays in finalizing LeapFrog’s contractual 2 relationship with CLI, the delays in implementing supply-chain software, the problems with DSS, 3 and the delays in providing product to customers and in transitioning from DSS to CLI, and the fact 4 that CLI did not begin to implement and handle logistics functions until after LeapFrog’s peak 5 selling season began in July 2004.

6 68. CW-3 was a manager of credit and collections at LeapFrog from 7/04 through 2/05, 7 when CW-3 was laid-off as part of the Company’s 180-person reduction in force. CW-3 reported to 8 Director of Credit Forsythe who reported to Defendant Curley until Curley’s forced resignation in 9 11/04. CW-3 was responsible for the day-to-day operations of the credit and collection department 10 including (1) the release of customer orders after performing credit checks, (2) collecting past due 11 accounts, and (3) resolving disputes with customers about amounts owed to LeapFrog. CW-3 has 12 personal knowledge about LeapFrog improperly recognizing revenues and overstating receivables 13 due to problems with the Company’s distribution and supply-chain operations that resulted in 14 customers not receiving products they ordered and receiving products they had not ordered.

15 69. CW-4 was an accounts receivable accountant at LeapFrog from November 2000 16 through November 2004, when CW-4 resigned. CW-4 worked closely with LeapFrog’s collections 17 department, and reported to Director of Credit John Forsythe, who reported to Defendant Curley 18 until Curley’s forced resignation in 11/04. CW-4 was responsible for entering receivables, handling 19 bank information, invoicing customers, verifying proof of delivery of shipments, tracking cash 20 receipts from customers, dealing with “chargebacks” claimed by customers against LeapFrog 21 invoices, and dealing with pricing and advertising issues.

22 70. CW-4 has personal knowledge that problems with the Company’s distribution and 23 supply-chain operations caused sales shortfalls in 3Q03 and thereafter. CW-4 also reported that 24 Defendants were constantly focused on the “numbers” which would be reported to investors. 25 Defendants even tried (unsuccessfully) to make up the 3Q03 sales shortfall in LeapFrog’s “numbers” 26 by having DSS prematurely ship product (due to be shipped to Toys R Us in 4Q03) from a LeapFrog 27 warehouse to an empty warehouse around the corner, so that the sale could (improperly) be counted 28 as completed in the current quarter. When CW-4’s department discovered the impropriety and

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1 required LeapFrog to reverse the revenue, Defendant Curley demanded that the department keep 2 quiet about the impropriety, and attempted to bribe department members to be quiet with a fancy 3 lunch. Curley later took other retaliatory actions against department members, including 4 downgrading their salary reviews. 5 71. CW-4 also has personal knowledge that many of the delivery problems which 6 LeapFrog blamed on its 3PLs (and which Defendants, including Curley, screamed at 3PLs about) 7 were actually caused by Defendants’ delays in ordering product to be manufactured and Defendants’ 8 other delays. CW-4 also reported that the delays resulted in losses of sales revenue, and costly 9 “vendor violations.” For instance, CW-4 observed that almost every invoice from Target had a 10 $10,000 penalty for not getting product to Target on time. CW-4 reported that Defendant Curley 11 was constantly “on the back” of the collections department regarding the customer chargebacks – 12 even though the collection department had no control over LeapFrog’s customers’ right to penalize 13 LeapFrog for late deliveries. CW-4 also reported that Defendants Bender and Rioux attended many 14 of the frequent meetings at LeapFrog regarding sales, IT and warehouse problems. 15 72. In CW-4’s collections accounting position, CW-4 also observed that LeapFrog relied 16 on the income from its LeapPad products, and that Mattel “came in and wiped out LeapFrog with 17 Mattel’s competitive [PowerTouch] products and better delivery.” CW-4 and members of CW-4’s 18 department also constantly received complaints from customers regarding late and deliveries of the 19 wrong product. The situation with DSS was bad, and CLI even worse – CW-4 confirmed that CLI 20 “couldn’t even get product out.” CW-4 also reported the problems with trucks waiting outside the 21 Fontana warehouse for deliveries from July 2004 and afterwards, and having to leave empty handed, 22 and refusing to return to LeapFrog’s warehouse again. CW-4 also reported that LeapFrog’s 23 executives, including Defendants Bender and Rioux, flew to the Fontana warehouse to try to resolve 24 the extraordinary delivery problems in summer 2004 and thereafter. CW-4 also observed 25 LeapFrog’s frequent losses of $300,000 and $400,000 customer orders: the purchase orders had 26 been put into the collections system and had to be cancelled due to LeapFrog’s failure to deliver 27 product. Due to the location of their offices, CW-4 and others in the collections department also 28 overheard frequent arguments between Wood and other executives regarding how LeapFrog was

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1 run, and overheard the meeting where Wood threw a toy at a LeapFrog attorney in the midst of a 2 dispute as to whether the toy should go back to the manufacturer to be fixed.

3 73. CW-5 was a director of supply-chain finance and accounting, a contract position with 4 LeapFrog, from July 2004 through February 2005, when CW-5 was laid-off as part of the 5 Company’s 180-person reduction in force. CW-5 reported to Peter David (“David”), LeapFrog’s 6 senior director of supply-chain finance and accounting, who reported to LeapFrog’s controller and 7 Curley until Curley’s forced resignation in 11/04. CW-5’s position was a “hybrid” position, in 8 which he was involved in both supply-chain operations and high-level financial analysis. CW-5 was 9 also involved with LeapFrog’s inventory reporting, including whether there was excess and obsolete 10 inventory. CW-5 was also responsible for reviewing the bills from CLI to ensure the charges were 11 valid and determining the amount to accrue and report on LeapFrog’s financial statements. CW-5’s 12 personal knowledge about LeapFrog’s problems included observing that LeapFrog’s new supply- 13 chain software, Manugistics, was not even in the warehouse at first, and “never worked,” and 14 participating in numerous meetings regarding these issues through October 2004, during which Peter 15 David and LeapFrog’s controller stated that Kalinske was well-aware of the software problems. 16 CW-5 also reported that it was well-known that the delay in transitioning from DSS to CLI until the 17 peak selling season in 2004 would cause major problems with the transition. CW-5 also learned 18 during meetings with his supervisor and the COO that Kalinske (along with COO Fred Forsyth) 19 negotiated the contract with CLI – and that in June 2004, Kalinske was involved in putting off the 20 3PL transition to (unsuccessfully) try to renegotiate this contract. CW-5 also reported that there 21 were enormous coordination problems with getting orders delivered from several warehouses. CW- 22 5 also reported that LeapFrog did not even start physically transferring inventories to the new 23 Fontana warehouse until September 2004. CW-5 also reported on CLI’s inability to deliver product 24 to LeapFrog’s retail customers in accordance with the customers’ purchase orders, and how those 25 problems caused strained relations between LeapFrog and its retail customers and between LeapFrog 26 and CLI. CW-5 also reported that Kalinske gave false and misleading statements to LeapFrog’s 27 auditors that inventories would be sold – even though the same items remained in LeapFrog’s 28 warehouse for years, and were in fact obsolete and excess inventory.

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1 74. CW-6 was an operations analyst at LeapFrog from 10/00 through 2/05 when CW-6 2 was laid-off as part of the Company’s 180-person reduction in force. CW-6 worked on site at the 3 warehouse managed by DSS and provided support and assistance to CW-9, LeapFrog’s former 4 Director of National Distribution. CW-6 has personal knowledge of the problems with DSS and 5 problems caused by the delay in replacing DSS with CLI.

6 75. CW-7 was an engineering procurement analyst at LeapFrog’s Los Gatos research and 7 development facility from June 2001 through February 2005, when CW-7 was laid-off as part of 8 LeapFrog’s 180-person reduction in force. CW-7 supported ten different engineering divisions 9 (mechanical, hardware, quality assurance, general R&D, software, manufacturing, concept, toy, 10 documentation and facilities) and was responsible for handling engineering purchases, coding 11 budgets so they would reconcile with general ledger accounts, data entry of purchase orders and 12 fixing miscellaneous problems that occurred in the procurement process. CW-7 had personal 13 knowledge of the product development process, and how development delays resulted in delays 14 down the line, in manufacturing, supply and distribution. CW-7 reported top executives’ 15 involvement with detailed aspects of LeapFrog’s business – for instance, Defendants Wood and 16 Flowers and LeapFrog president Jerry Perez’s signatures were required on engineering department 17 orders exceeding $5,000. CW-7 worked with Flowers, who was very involved in the day-to-day 18 business of the Company in all areas, including new products. CW-7 stated that LeapFrog’s senior 19 management was very “hands on” in all aspects of LeapFrog’s business. CW-7 reported that 20 Defendant Wood came to the Los Gatos facility to meet with employees there regularly. In early 21 2004, Wood came to an employee meeting in Los Gatos, and told employees that LeapFrog was not 22 doing well and needed to lay off employees.

23 76. CW-8 was a director of international distribution at LeapFrog from January 2002 24 through November 30, 2004, when CW-8 was laid off. CW-8 was the director of international 25 distribution. During the Class Period, CW-8 was responsible for overseeing domestic and 26 international distribution, including distribution of products by DSS and CLI. CW-8’s duties were 27 expanded to oversee domestic distribution because of the severe operational problems with DSS in 28 3Q03. CW-8 also did special projects for, and reported to Andrew Murrer (“Murrer”) who reported

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1 to LeapFrog COO Fred Forsyth. CW-8 confirmed that LeapFrog senior management had the 2 opportunity to lease a new warehouse in October 2003, but instead decided to delay, resulting in the 3 disastrous peak-season 2004 transition. 4 77. CW-8 also prepared and distributed a summary spreadsheet to management every 5 day, with daily and cumulative shipping and sales figures and forecasts, prior to a daily morning 6 telephone conference to discuss shipping and sales figures and related issues. CW-8 emailed and 7 posted the spreadsheet on an internal Company website, to which top management had access. 8 Persons receiving the summary spreadsheet and attending the daily morning meetings included 9 Defendants Kalinske, Curley, and Bender, as well as COO Fred Forsyth, Murrer and CW-8. The 10 discussion at these meetings included shipping problems, including problems with 3PLs, trucks 11 showing up at the warehouse when orders were not ready, and lost sales, as well as orders needed to 12 “meet the numbers” projected to investors. The information which CW-8 and LeapFrog’s senior 13 management was privy to indicated, by the middle of August 2004, that LeapFrog did not have 14 enough orders to make its projected numbers for 3Q2004. CW-8 also confirmed that in the spring of 15 2004, LeapFrog did not have a software system that could forecast its production requirements, and 16 no existing procedures for configuring warehouse management systems. CW-8 also described the 17 delays and numerous problems with the implementation of WMS.

18 78. CW-9 was an operations manager and director of national distribution at LeapFrog 19 from early 2001 to approximately October 2004. CW-9 reported to Murrer, who in turn reported to 20 LeapFrog COO Fred Forsyth. CW-9 confirmed that CW-8 (who reported to CW-9) tracked the 21 shipping numbers daily throughout the Class Period, and placed the numbers on spreadsheets, which 22 were emailed and reported to top management, all the way up to Defendants Kalinske and Wood, 23 and that it was clear from these numbers that LeapFrog was not meeting its shipping goals and “Wall 24 Street numbers.” CW-9 confirmed that LeapFrog could not “make its numbers” because of, inter 25 alia, warehouse transition problems, and not having product manufactured and shipped on time, due 26 to LeapFrog senior management delaying buying product. CW-9 reported that LeapFrog had to 27 charter a whole plane to get the belatedly-ordered product to customers – and even then, the product 28 was not delivered on time.

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1 79. CW-9 also confirmed that at management’s request, CW-9 personally located a new 2 warehouse in Fontana in October 2003 which the Company could have moved to prior to peak 3 season – but that senior management put a hold on the project. LeapFrog then had to lease a new 4 warehouse, at much higher cost, months later, at the worst possible time for transition. CW-9 also 5 confirmed that LeapFrog continued to count as current inventory about $20 million of excess, 6 obsolete inventory that would not sell, which was held in a variety of locations during the Class 7 Period, including the DSS facility and another offsite building, the Genco facility, and then the 8 Fontana warehouse in October 2004. DSS’s distribution manager frequently complained to CW-9 9 about the enormous amount of excess inventory, which was counted as current inventory three years 10 in a row, and that this obsolete inventory impaired efficient warehouse operations. CW-9 also 11 confirmed that LeapFrog’s CFO appeared at DSS for the inventory counts.

12 80. CW-10 was a systems program manager at LeapFrog, working in the Emeryville 13 corporate offices, from early 2002 through March 2004. CW-10 worked with or was familiar with 14 software applications which LeapFrog used to manage design, development and production, and 15 described the great difficulty LeapFrog had in sorting out and managing production management 16 software programs in 2003 and 2004, which was compounded by institutional resistance to new 17 programs. CW-10 also described the production difficulties resulting from Defendant Wood’s last 18 minute changes to product designs.

19 81. CW-11 was a document-control manager at LeapFrog from October 2001 through 20 March 2003, who was able to report on conditions just prior to the Class Period. CW-11 explained 21 that LeapFrog had difficulty implementing supply-chain management systems due to internal 22 resistance to change, and refused to change a documentation system to keep more accurate tracking 23 of customized deliveries.

24 82. CW-12 was a former facility manager at Genco from March 2003 through April 25 2004. Genco was a warehouse and supply logistics management company which provided such 26 services to LeapFrog. CW-12 confirmed that in January 2004, LeapFrog shelved a plan to 27 consolidate its warehouses, and opted to keep the warehouses separate. CW-12 also confirmed that 28 in April 2004, when Defendant Kalinske was advising investors that the new supply-chain

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1 management system was “up and running as we speak,” the system was not yet developed, let alone 2 “up and running.” CW-12 also confirmed that the timetable which Kalinske provided to investors as 3 to when operations at the new warehouse would be implemented was wholly unrealistic in light of 4 all the issues LeapFrog was dealing with. CW-12 also confirmed that LeapFrog was unable to 5 forecast production and orders, and that this resulted in 30% cost overruns at the Genco facility for 6 unused staff at certain times, overtime at other times, and other related costs. Genco insisted on an 7 expensive “cost plus” contractual arrangement with LeapFrog, due to the costs engendered by 8 LeapFrog’s lack of forecasting. CW-12 sent monthly reports to LeapFrog’s controller setting forth 9 the extra warehouse and distribution costs caused by LeapFrog’s poor planning. Moreover, CW-12 10 confirmed that these problems were not unique to the Genco facility. For instance, in October 11 through December 2003, LeapFrog underestimated demand for its Leapster device, and ran out of 12 space at its DSS warehouse facility, and had to turn to Genco to scramble to create additional space. 13 CW-12 also confirmed that LeapFrog’s distribution problems were compounded by its use of 14 frequently incorrect and random stock keeping unit (SKU) numbers, instead of numbers which 15 identified the product division, item and color. As a result, the warehouses had to match components 16 manually, causing delays and higher costs.

17 DEFENDANTS KNEW AND CONCEALED MATERIAL ADVERSE INFORMATION 18 A. Background 19 83. LeapFrog is a designer, developer and marketer of technology-based educational 20 products and related proprietary content, which are marketed both in retail stores and to schools. 21 LeapFrog’s biggest retail product is its family of LeapPad products which are hand-held or lap-held 22 electronic platform devices which are marketed with a variety of content books that use a game and 23 entertainment technology to teach reading, writing and math skills. Prior to the Class Period, 24 LeapFrog reported substantial sales growth and enjoyed a near monopoly on the educational retail 25 electronic toy market until the beginning of the Class Period when Mattel introduced its competing 26 PowerTouch product. The financial press reported that LeapFrog had been “virtually unchallenged” 27 until Mattel introduced its competing PowerTouch product and the Company has admitted (in its 28 lawsuit against Mattel) that it had stable pricing and no meaningful competition before the

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1 introduction of the PowerTouch. As a result, by 2003 LeapFrog was the third largest toy 2 manufacturer, only behind Hasbro, Inc. (“Hasbro”) and Mattel. 3 84. The Company operated in three business segments—U.S. Consumer, Education and 4 Training, and International. The majority of LeapFrog’s significant sales growth from 2001 through 5 2003, was in the U.S. Consumer business segment (in millions):

6 2001 2002 2003 2004 U.S. Consumer $289 (92%) $458 (86%) $546 (80%) $432(67%) 7 International $16.3 (5%) $53.6 (10%) $97(14%) $153 (24%) 8 Educational & $8.8 (3%) $20.1 (4%) $38 (6%) $55 (9%) Training 9 Total $314.2 $532 $680 $640

10 11 85. Defendants knew that LeapFrog faced material problems affecting LeapFrog’s 12 operations and financial results, but continued to assure investors of continuing growth and favorable 13 financial results. Defendants merely reported existing problems as potential risks that could 14 adversely affect the Company’s financial results. The Company’s business and operating results 15 were increasingly dependent on sales to Wal-Mart, Toys R Us and Target as sales to those three 16 retailers accounted for 80% of the Company’s U.S. Consumer sales in 2002, 85% in 2003 and 95% 17 in 2004. The 10-Qs and 10-K issued during the Class Period merely warned that LeapFrog’s 18 business and operating results “could be” harmed if Wal-Mart, Target or Toys R Us reduced their 19 purchases of LeapFrog’s products. 20 86. LeapFrog’s results were dependant on its ability to ship product to Wal-Mart, Target 21 and Toys R Us in 3Q03 and 4Q03, the peak back-to-school and holiday selling seasons, when 22 approximately 79% of the Company’s sales and all of the Company’s earnings were realized. 23 Further, the Company did not have long term agreements with its retail customers, who were 24 reducing inventory levels by timing their orders, which required LeapFrog to fill the orders closer to 25 the time of purchase by consumers. Defendants knew that LeapFrog did not have the infrastructure 26 to timely fill the orders in the required time frames. Nonetheless, LeapFrog’s SEC reports merely

27 admitted that the Company’s sales “could” decline, shipping costs “could” increase and 28

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1 relationships with the retailers “could” be damaged if LeapFrog was unable to ship product to its 2 retail customers within the required shorter time periods. 3 87. The increased pressure to fill orders and supply product to retailers within shorter 4 time periods was particularly challenging to LeapFrog given the Company’s limited distribution and 5 supply-chain infrastructure. LeapFrog outsourced substantially all of its finished goods 6 manufacturing to multiple companies in China and relied on four contract ocean carriers to ship the 7 finished goods to its primary distribution centers in California, which were managed by third party 8 logistics suppliers, including DSS, until July 2004 when CLI started to take over the management of 9 the Company’s warehouse operations. Defendants knew that LeapFrog had numerous problems with 10 the third-party logistics suppliers that LeapFrog relied upon to fulfill the purchase orders from 11 LeapFrog’s retail customers on time and accurately. 12 88. Defendants also knew that LeapFrog’s supply chain software and other management 13 systems were completely inadequate, and that LeapFrog lacked, and needed to implement supply- 14 chain software that would provide information on actual and projected orders, inventory levels and 15 manufacturing, to allow the Company to accurately forecast and produce adequate product to fulfill 16 retailer orders. The Company’s SEC filings merely disclosed that LeapFrog’s operating results

17 “could” suffer “if” LeapFrog failed to develop and maintain management systems that were 18 sufficient to keep pace with the Company’s rapid growth. 19 89. Defendants knew that LeapFrog was being severely impacted by competition, 20 commencing at the beginning of the Class Period, and continuing throughout the Class Period, 21 particularly Mattel’s PowerTouch, launched in July 2003. However, Defendants assured investors of 22 continued growth despite the competition, and merely reported in the Company’s SEC filings that

23 LeapFrog’s sales and market share could decline if the Company was unable to effectively compete 24 with Mattel and other toy companies,.

25 90. In the four quarters that followed LeapFrog’s July 2002 IPO, Defendants reported 26 quarterly financial results that exceeded consensus estimates. The Company’s stock price increased 27 from $13 on the date of the IPO to $34 on 7/8/03. For example, on 7/23/03, Merrill Lynch analyst 28 Lauren Rich Fine issued a Research Bulletin following LeapFrog’s release of its 2Q03 financial

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1 results entitled “LF Bounds Past Estimates Again” which reported that LeapFrog’s earnings per 2 share (“EPS”) was $0.08 better than consensus estimates and constituted the “fourth consecutive 3 quarter of large positive surprises.” 4 91. Ms. Fine and other analysts noted, however, that the price of the Company’s stock 5 had declined 17% over the past two weeks due to the shipping of Mattel’s competing PowerTouch 6 product, general industry retail softness and recent insider selling following the expiration of the 7 180-day lock-up period following LeapFrog’s 7/02 IPO. As a result, the analysts cautioned investors 8 to wait for the Company to provide details on product sales trends at retail and 2003 market share 9 gains. In addition, the analysts wanted to see if the Company would be changing its previous 10 guidance of 3Q03 revenues of $225-$235 million, 3Q03 EPS of $0.55-$0.58, 4Q03 revenues of 11 $277-$297 million, and 4Q03 EPS of $0.68-$0.74. During a conference call on July 24, 2003, the 12 first day of the Class Period, Defendants indeed reiterated their guidance, and Defendant Wood

13 assured investors that “there’s no boogie man out there” that would impede LeapFrog from 14 reporting results in line with its “very positive” guidance.

15 B. Defendants Knew That Mattel’s Competing PowerTouch Product Had Caused Leapfrog To Lose Sales And Lower Prices When Defendants Falsely 16 Told Investors That PowerTouch Was Only A Potential Risk To Leapfrog’s Sales 17 18 92. Throughout the Class Period, Defendants downplayed the impact of Mattel’s 19 competing PowerTouch product and represented that LeapFrog was not changing its marketing 20 strategy in any way and that sales of the PowerTouch would actually have a positive impact on 21 LeapFrog’s sales by drawing buyers into stores. In every 10-Q and 10-K filed by LeapFrog during 22 the Class Period, Defendants merely represented that the Company’s sales and market share “could” 23 decline if LeapFrog was unable to compete effectively with existing or new competitors. Ex. E. 24 Defendants specifically listed PowerTouch (introduced by Mattel’s Fisher-Price division/subsidiary 25 in July 2003) - as merely a potential, but not actual, threat to LeapFrog’s sales and market share. Id. 26 93. On 10/3/03, LeapFrog sued Fisher-Price (a subsidiary of Mattel) for patent 27 infringement, claiming that Fisher-Price’s competing PowerTouch product infringed LeapFrog’s 861 28 patent related to its LeapPad family of products. The complaint, other pleadings filed in the

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1 infringement suit and the trial testimony of Wood, Bender and Brett Reed (“Reed”), LeapFrog’s 2 damage expert, show that Defendants misled investors by downplaying the impact of Mattel’s 3 competing PowerTouch product and by representing that a decline in sales and market share was 4 only a possibility - because their pleadings and testimony revealed that Defendants tracked and 5 immediately knew that LeapFrog had already lost sales to PowerTouch, and LeapFrog drastically 6 reduced prices and offered additional books with its LeapPad products in response to the 7 introduction of the PowerTouch. 8 94. In the 10/3/03 complaint, LeapFrog alleged that Fisher-Price’s selling of its 9 PowerTouch Learning System (1) infringed LeapFrog’s patent, (2) had damaged LeapFrog, and (3) 10 would irreparably injure LeapFrog unless such infringing activities were enjoined. In LeapFrog’s 11 proposed jury instructions and trial brief, LeapFrog claimed damages of more than $84 million 12 because sales of the PowerTouch which began in 7/03 (1) “took away sales of LeapFrog products 13 that LeapFrog would have made had Fisher-Price and Mattel not sold the PowerTouch learning 14 system” and (2) caused LeapFrog to lower the price at which it actually sold its competing LeapPad 15 products. Ex. F at 1, 10-12. Specifically, Defendants stated that (1) LeapFrog would have sold at 16 least one million more units of its product if Mattel did not sell the PowerTouch, and (2) the 17 Company took “significant competitive actions in response to [Mattel’s] entry into the market” 18 including “drastic reductions in price” and including an extra book with its LeapPad systems because 19 Mattel advertised and promoted that the PowerTouch system included an extra book. Id.

20 95. During his opening statement at the patent infringement trial, LeapFrog’s lawyer, Ron 21 Shulman (“Shulman”), told the jury that “[t]he evidence will show that LeapFrog’s sales and profits 22 went down when Fisher-Price began selling PowerTouch” in 7/03. Ex. B at 136. Indeed, 23 Mr. Shulman stated that LeapFrog lost $65 million due to lost sales (after 10/3/03) and reduced 24 prices. Id. at 135-136, 814. He told the jury that the release of the PowerTouch “hit LeapFrog 25 where it really hurts” and that “LeapFrog took it in the gut when Fisher-Price introduced their 26 PowerTouch.” Id. at 135. During his closing statement, Mr. Shulman told the jury it was not 27 possible to believe that the PowerTouch did not impact sales of LeapFrog’s products. Id. at 1699. 28

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1 96. Moreover, Defendants knew that the decline in LeapPad family product sales was 2 immediate. Defendant Bender, after testifying that his responsibilities included final authority for 3 sales at LeapFrog, and that he tracked LeapPad sales and competitive sales, further testified: 4 [O]nce the PowerTouch was introduced, and it was merchandised right next to the LeapFrog products, we immediately saw a depress in our sales on the hardware of 5 LeapPads and the My First LeapPads. Ex. B, Bender direct testimony, May 18, 2005, at 667 and 720. 6

7 97. LeapFrog drastically reduced prices of LeapPad platforms and lost sales of one to two 8 million LeapPad platforms, id. at 737, and more than 2.9 million content books used with the 9 platforms. Defendants admitted that LeapFrog lost approximately $65 million in profits from the 10 time LeapFrog filed suit in October 2003, id. at 852 (testimony of LeapFrog damages expert Reed) 11 and, based on trial admissions, another $20 million in lost profits can be estimated for the portion of 12 the Class Period prior to LeapFrog filing suit against Mattel. Id. at 12 (admission of defense counsel 13 as to pre-October products sold). These losses equaled or exceeded the entire $66.2 million of net 14 income LeapFrog reported in 2003 and 2004 combined. 15 98. During the trial, Wood testified that the PowerTouch caused three problems for 16 LeapFrog: 17 Q: Now, did the PowerTouch have any impact on LeapFrog’s ability to sell LeapPad? 18 19 A: Yes, it did. 20 Q: Briefly, can you explain what that impact was? 21 A: Well, it created three problems for us. The first was we learned that Fisher- 22 Price was going to include two books with the PowerTouch. We didn’t know they were going to be real skinny books. But we knew that on the cover, it said two 23 books. So we did some research and we found out that we needed to include two 24 books with our LeapPad. And that created two problems for us. One, it was a little bit expensive for the second book. But secondly, it turned out lots of parents, when 25 they bought a LeapPad, normally they would buy a second book. But when they learned there were two included, they didn’t buy a second book. That was the first 26 problem. 27 28

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1 The second problem was that, at least in my opinion, every family that bought a PowerTouch should have bought a LeapPad. So we lost a sale of the LeapPad for 2 each one they sold. 3 Then finally, my recollection is at the end of the year going into 2004 we reduced our 4 prices significantly, so we lost a lot of profitability on the LeapPad. 5

6 Ex. B, Wood Testimony, at 199-200. 7 99. Bender testified that LeapFrog tracked the sales of the PowerTouch in 2003 and 2004. 8 and that LeapFrog lost sales immediately after the PowerTouch was introduced in 7/03: 9 Q: In 2003, did you track competitive sales of PowerTouches in the marketplace? 10 11 A: Yes, we did.

12 Q: Did you track the sales of the LeapPads in the marketplace? 13 A: Yes, we did. 14 Q: Did that information give you any sort of a basis to have any understanding 15 as to what was happening with respect to PowerTouch sales and LeapPad sales ? 16 A: Yes 17 18 Q: What was that understanding ? 19 A: We had a pretty good trend line of sales increases on the LeapPad business 20 through July. And once the PowerTouch was introduced, and it was merchandised right next to the LeapFrog products, we immediately saw a depress in our sales on 21 the hardware of LeapPads and the My First LeapPads. 22 Ex. B, Bender Direct Testimony, May 18, 2005, at 720. 23 100. Bender also testified that sales lost to the PowerTouch caused retailer channel 24 inventories to increase which resulted in the retailers reducing their purchases of LeapPads: 25 Q: So what if anything specifically happened to the retail sales of the LeapPad 26 and the My First LeapPad after the PowerTouch came out?

27 A: They declined. 28

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1 Q: And where did they decline? 2 A: Well, they declined at retail - in the U.S. market. We shipped a lot of product 3 into the consumers, because the buyers had, you know, believed we were going to sell this product, and we of course were increasing advertising to make sure that we 4 were going to get our message across to consumers. But the products didn’t sell through at the rate that we had estimated or the buyers. 5 6 Q: Do you have any understanding as to why it was the - was why it was the PowerTouch that significantly affected the sales of the LeapPad, the My First 7 LeapPad ? 8 A: They are going after the same audience, the same messaging, it was a learn to 9 read experience. Moms had another choice. So being merchandised right next to LeapFrog, with a great brand name of Fisher-Price, they definitely took sales from 10 us. 11 * * * 12 [W]e have access to online, to look at inventory levels at any given time of the year. 13 We can see it by store. We can see it by chain, for any item. 14 So at the end of the year, particularly, we do audits that make sure that we know 15 what the inventory levels are at retail. This spread sheet [PX-1123] here is a compilation of that data that comes directly out of the customers’ systems. It is the 16 most accurate information for determining information at retail. 17 Q: Does this accurately reflect retailer inventory levels of LeapPads and My 18 First LeapPads at the end of 2003? 19 A: Yes, it does. 20 Q: What does it show about that? 21 22 A: Well, nobody can see that because you need a telescope. But if you could look at the detail here, you could see that our carryforward inventory, which means 23 the ending inventory, on the LeapPads and the My First LeapPads, was pretty significant, meaning it was high. Much higher than at any previous years, and 24 much higher than our plan, and far higher than what the retailers plan was. 25 * * * 26 27 Q: Is this consistent with your recollection that there was excess retail inventory? 28

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1 A: Yes, absolutely. The retailers, you know, were disappointed that the buyers have plans that they are supposed to have a certain amount of inventory. Everybody 2 had expectations that LeapFrog trends were going to continue and they would be solid at inventory through. And the Fisher-Price product did not add to the market. 3 It took LP sales, so the inventory we shipped sat in retail stores. 4

5 Ex. B, Bender Direct testimony, May 18, 2005 at 727-28, 737-39. 6 101. Moreover, Bender revealed that LeapFrog’s sales slowed in the face of the 7 competition from PowerTouch, and LeapFrog’s retail channel inventory consequently increased. 8 Bender admitted that LeapFrog had distribution and supply-chain problems that prevented the 9 Company from shipping products to the retailers in September 2003, Ex. B, Bender cross-exam 10 testimony, May 19, 2005, at 792, but pointed to the PowerTouch competition as a major source of 11 LeapFrog’s sales losses: 12 Q: Is it your understanding that LeapFrog lost 1.2 million in LeapPad Pink orders for the quarter, unable to ship? Is that your understanding, sir? 13

14 A: For that quarter, yes. But I believe those would have shipped in early October. 15 16 * * *

17 Q: And in the first bullet point there it says lost 2.8 million in LeapPad and 18 LeapPad Paint orders for the quarter due to availability. Is that correct, sir?

19 A: That’s correct. 20

21 Ex. B, Bender cross-exam testimony, May 19, 2005, at 791. 22 Our retail sales slowed down when the PowerTouch product was introduced. And retailers reorder based upon sales. So we definitely lost some shipments there. But 23 a lot of the purchases are made far in advance by retailers for Christmas season. So they are importing it from China in large quantities. 24

25 So in the case of 2003, although we missed some shipments, we shipped in a lot more product than actually sold. So what happened was, we really felt the shipment 26 decreased in 2004 more than we did in 2003, although we had falloff, because so much product was left over after Christmas on the shelves. 27

28 Ex. B, Bender re-direct, May 19, 2005, at 813. [C-03-05421-RMW] AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS - 36 -

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1 102. LeapFrog’s damage expert, Brett Reed, testified that the PowerTouch very quickly 2 took away 25% of LeapFrog’s market share: 3 PowerTouch quickly got very strong distribution at the major retailers in America. And it also had very strong sales through to end customers in 2003. There was a 4 study by Fisher-Price personnel that showed in 2003, the PowerTouch in terms of sales to end customers achieved about 25 percent in the way Fisher-Price was 5 measuring that market. So it was a very quick, very strong performance. 6 * * * 7 8 But PowerTouch was able to achieve 25 percent of the market. So this would show the products in the market were really the PowerTouch, My First LeapPad and 9 LeapPad, and that PowerTouch was able to take away 25 percent of the share from these LeapPad products. 10 11 Ex. B, Reed direct testimony, at 822-825. Reed also testified there were 460,000 LeapPad units in 12 the retail channel at the end of 2003 due to the lost sales and that sales to retailers declined 13 dramatically in 2004: 14 In fact, I show here, the inventories increased at retailers compared to the end of 2002 to the end of 2003. There was 190,000 additional My First LeapPad platforms 15 and there was 270,000 additional LeapPad platforms. So these would have been available to sell to the customers, the actual consumers, at the end of 2003. 16

17 Ex. B, Reed direct testimony, at 833. 18 [I]n late 2003, sales of the LeapPad buttoned and in 2004 sales to retailers declined 19 dramatically. 20 Ex. B, Reed direct testimony, at 827. Reed testified that LeapFrog lost a total of 630,000 LeapPad 21 sales after 10/3/03 due to the PowerTouch: 22 During the damage period, Fisher-Price sold about 780,000 PowerTouch units, in my 23 view, approximately 80 percent of that would be associated with lost LeapPad products. That translates into 630,000 units, approximately. Also I concluded that 24 approximately half of those would be My First LeapPad lost sales and the other half would be LeapPad. 25

26 Ex. B, Reed direct testimony, at 834. 27 103. Although Defendants represented that LeapFrog’s book sales were increasing as 28 shown by an increase in the “tie ratio,” Bender testified that LeapFrog lost 2.9 million book sales and [C-03-05421-RMW] AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS - 37 -

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1 that the tie ratio declined significantly after LeapFrog added a second book to the LeapPad platform, 2 in response to Mattel including two books with the PowerTouch: 3 Q: Does LeapFrog track [the] amount of additional books the typical owner of a LeapPad platform purchases? 4 5 A: Yes, we do.

6 * * *

7 Well, the average consumer in our research shows that they will purchase between 8 six and seven additional LeapFrog books after they buy the LeapPad.

9 * * *

10 Q: Do you also track book purchases per platform but on an annual basis? 11 A: Yes. We call that the tie ratio. That is the number of books the consumer is 12 buying against the platform. 13 Q: Can you just take a look at this and let me know if this exhibit [PX-1876] 14 accurately reflects the annual tie ratios for those years?

15 A: Correct. So you can see, in ‘99, when we launched the LeapPad, it was seven 16 [sic] for each LeapPad. And then it increased to 1.6 in 2000, 2.4 in 2001, and 3.9 in 2002. 17 My point is, we had more books in the library. Plus we had more consumers on the 18 system. They were both buying more books. It fell off in ‘03 and then you can see, 19 a pretty significant drop in ‘04.

20 * * * 21 For the LeapPad, the tie ratio goes from a high of 3.9 in 2002 and it falls in 2003 to 22 3.7 and falls again to 2.9 in 2004. 23 Q: Why did that happen? 24 25 A: In 2003, about July, we added a second book into the LeapPad. You buy the LeapPad, there was one book in there, it was a sampler. Consumers would 26 immediately either at that time buy a book, soon after, once the child is through that book, they are going to buy more. There was a competitive product in the market, 27 the PowerTouch, and they were going to have two books in theirs. So we added a 28

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1 second book in 2003 to meet that competitive force that was coming into the market. 2 3 Q: If you added the second book in 2003, why is the ratio so much different in 2004? 4 5 A: Well, because consumers will buy the LeapPad, a good part of them are the Christmas period, the holiday period, October and December is really the big selling 6 season. But the content, they really start coming after the content and buying a lot more in the first quarter, which would be January through March. 7 8 So we really saw the falloff because the children were playing with the included two books longer than they did when they got one. So they didn’t come back to the store 9 as quickly for the next book. 10 Q: If Fisher-Price had not included a second book with the PowerTouch, would 11 LeapFrog have bundled a second book with its LeapPad bundles?

12 A: No. 13 Q: What effect would the second book have on LeapFrog sales? 14 15 A: We measured we lost between about 2.8 and 2.9 million books that normally would have been sold to the consumers. 16 17

18 Ex. B, Bender direct testimony, May 18, 2005 at 714-717. 19 104. Although Defendants represented that LeapFrog was not changing its marketing 20 strategy in any way despite Mattel’s marketing blitz, Bender testified that LeapFrog increased the 21 marketing budget following the launch of the PowerTouch in addition to adding a second book: 22 Q: Did LeapFrog’s marketing budget change when you learned that the PowerTouch was coming out in 2003? 23 A: Yes. 24 25 Q: How? 26 A: We generally do most of our advertising starting mid-October and it comes 27 through the beginning of December, when consumers are deciding what’s the best gift for their children and who they are going to give gifts to for Christmas or 28

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1 holiday. In the case of 2003, we knew Fisher-Price was coming out with a very aggressive ad campaign starting in September. 2 3 And we didn’t want to be late getting our share of message to the consumer, so we felt it was important that LeapFrog get additional advertising expenditures in the 4 month of September and for the back half of that year, so that consumers could hear from LeapFrog, what our products were. 5 6 Q: Did the budget for your marketing expenditures go up or down? 7 A: They went up. 8 Ex. B, Bender direct testimony, May 18, 2005 at 726-727. 9 105. Bender also testified that LeapFrog substantially reduced prices on all LeapPad 10 products in 1/04 and that it would not have done so if the PowerTouch was not an available 11 competing product: 12 [I]t appeared that Fisher-Price was helping push down the retail pricing of the 13 PowerTouch to effectively undercut the LeapPad pricing. 14 Q: Did LeapFrog take any action with respect to LeapPad pricing because of 15 this ? 16 A: Yes. 17 Q: What was that? 18

19 A: Well, in January of 2004, we reduced the price of the LeapPad and My First LeapPad, and the QuantumPad and LeapPad Plus Microphone. 20 21 Q: For all of those products - let me ask you this: Why did the prices of all those products go down then? 22 23 A: Well, there is like a value proposition or chain. So the LeapPad is the core reading item. And then the next item is the LeapPad Plus Writing. So they can’t be 24 too much apart from each other. If the price of the LeapPad is coming down, then the price of the LeapPad Plus Writing needs to be no more than about $10, according 25 to our consumer research. 26 * * * 27 28

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1 Q: Prior to this price change, had LeapFrog ever dropped the price to the retailers of the LeapPad products ? 2 3 A: No.

4 * * * 5 Q: Prior to making that change, at the beginning of 2004, did LeapFrog conduct 6 any analysis to determine whether it should change prices in response to the PowerTouch? 7

8 A: Yes. This was a, you know, a subject we are very passionate about because it is the most important part of our business, the LeapPad. We did a number of studies 9 of various retail prices and what would happen with LeapFrog’s share versus competitors. And we must have had 20 to 30 meetings as an executive team to 10 decide, you know, what should we do to address the pricing of the LeapPad 11 * * * 12 13 Q: In the absence of the PowerTouch, would LeapFrog have reduced the prices of the LeapPad family of products? 14 15 A: No.

16 * * * 17 Q: How important to LeapFrog’s business was the LeapPad family platform in 18 2004? 19 A: Well, it’s the largest segment of our business. 20 Q: After LeapFrog took down the prices on the LeapPads in January, what if 21 anything happened to LeapFrog’s profitability? 22 A: Well, 2004 was the first year since I was there in 1997 that the company 23 didn’t make its plan. We had a bad year. We missed our profit plan by over $70 24 million dollars. And it was a tough year.

25 Q: Has LeapFrog had to take any actions because of missing the plan last year? 26 A: Yes. After the 2004 year ended, which we ended with a large loss, in the 27 millions, we had to cut a large number of educational products, we were developing some new technologies and new content for educational products for kids, that was 28

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1 the first thing. Then the second thing is we had to let go about 170 great people that helped build this company. 2 3 Ex. B, Bender direct testimony, May 18, 2005 at 728-33. 4 106. Although Defendants represented that the sale of the PowerTouch could have a 5 positive impact on LeapFrog’s sales by drawing buyers into stores, Bender testified Defendants 6 knew that would not occur: 7 Q: In your marketing research, did you come to have any understanding as to 8 whether or not the Fisher-Price brand name helped Fisher-Price make sales of the PowerTouch ? 9 10 A: Yes, it was very important to consumers.

11 Q: In your understanding of the market, do you have any understanding as to 12 whether or not the Fisher-Price brand name on the PowerTouch brought people onto the learning aisle that otherwise would never have been there? 13 A: I don’t believe so. 14 15 Q: Why not? 16 A: LeapFrog is the number one thought of educational background. Consumers 17 have come to shop that aisle, looking for educational products. Fisher-Price is not known, like LeapFrog, as the number one educational brand. 18 19 Ex. B, Bender direct testimony, May 18, 2005 at 721-22. 20 107. LeapFrog’s damage expert, Reed, testified that LeapFrog’s damages totaled $65.34 21 million due to the lost sales and price reductions caused by the sale of the PowerTouch. Ex. B at 22 819. Specifically, he testified that LeapFrog lost $35.4 million of profits because the Company lost 23 630,000 LeapPad sales and 2,768,000 book sales after 10/3/03. Id. at 834-839. He also testified that 24 LeapFrog lost $28.36 million of profits by lowering the price of the LeapPad platforms by $8.69 in 25 1/04. Id. at 839-44. Reed also testified that LeapFrog lost royalties of $1.58 million for the 157,600 26 sales of the PowerTouch after 10/3/03 that did not result in lost sales of LeapPads. Id. at 844, 852. 27 28

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1 C. Defendants Knew There Were Numerous Problems With Leapfrog’s Distribution And Supply-Chain Operations 2 3 108. On 7/24/03, during the Company’s 2Q03 earnings conference call, Defendants 4 reported that LeapFrog’s 2Q03 financial results exceeded consensus estimates for the fourth 5 consecutive quarter since the 7/02 IPO and reiterated guidance for 3Q03 and 4Q03. In addition, 6 Defendants assured investors that they felt “very positive” and that there were “no impediments” to 7 reporting sales and earnings in line with the reiterated guidance. Defendants knew these positive 8 statements were false and misleading. Defendants knew problems with LeapFrog’s distribution and 9 supply-chain operations were very real impediments to reporting financial results in line with 10 guidance; indeed, Defendants knew that LeapFrog’s distribution and supply-chain operations were in 11 total disarray. 12 109. Witness accounts, other documents and information and Defendants’ admissions 13 during and after the Class Period show that Defendants knew there were material weaknesses with 14 LeapFrog’s distribution and supply-chain operations throughout the Class Period that prevented 15 LeapFrog from (1) shipping retailers’ product within the shorter time periods they required, (2) 16 shipping the retailers’ products they actually ordered, (3) reporting LeapFrog’s financial results in 17 accordance with Generally Accepted Accounting Principles (“GAAP”) and the Company’s publicly 18 reported accounting policies, and (4) forecasting the Company’s future financial results. CW-2 19 stated that the problems included: delays in manufacturing in China; delays in transporting the 20 product from China to the U.S.; and delays in getting product designs to the manufacturers in China 21 – in short, “the whole product cycle was off.” CW-4 stated that the top executives knew that there 22 were problems with the distribution center, but hid the problems rather than fixing them. CW-4 23 further explained that late design changes, often requested by Wood, delayed the product 24 development, manufacturing and distribution cycle – and that LeapFrog ultimately fired Wood 25 because Wood threw a toy at a lawyer at a meeting, during which there had been an argument in 26 which Wood was insisting a product be returned to the manufacturer because more design changes 27 needed to be made to the product. 28

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1 110. According to CW-4, DSS ultimately quit on LeapFrog because LeapFrog repeatedly 2 blamed DSS for problems that were LeapFrog’s fault. CW-4 stated that a lot of the problems with 3 DSS were due to lack of supply of product. The DSS warehouses couldn’t ship to customers what 4 the customers wanted because of lack of supply, and because Defendants instructed DSS to ship first 5 to LeapFrog’s largest customers, such as WalMart and Toys R Us, and to ignore LeapFrog’s other 6 customers. Curley often called DSS screaming orders to ship first to the large customers (“because 7 that’s where the most money was”). Curley then later would blame DSS when DSS couldn’t ship to 8 smaller customers, even though the reason DSS couldn’t ship to the smaller customers was that all of 9 the supply had been shipped to the large customers. 10 111. According to several former LeapFrog employees, DSS’s, and subsequently CLI’s, 11 repeated failure to ship product ordered by LeapFrog’s U.S retail customers within the required 12 shorter time periods (or at all), and repeated shipping of the wrong product, damaged LeapFrog’s 13 relationship with its retail customers. LeapFrog’s customers repeatedly complained about 14 LeapFrog’s inability to fulfill their orders, returned and refused to pay for product they had not 15 ordered, threatened to, and did, reduce and cancel their orders when the problems were not fixed, 16 and imposed tens of millions of dollars of vendor violation penalties. 17 112. The shipping problems also caused LeapFrog to improperly recognize revenues in 18 violation of GAAP and the Company’s publicly reported revenue recognition policy, which only 19 permitted revenue to be recognized upon shipment if collection was reasonably assured. Defendants 20 knew collection was not reasonably assured because DSS and CLI were shipping product to the 21 retailers that they did not order and would not pay for. After the Class Period, LeapFrog admitted in 22 its 2004 10-K that it could not reasonably assure the reliability of its financial reporting or that its 23 financial statements were prepared in accordance with GAAP because there were numerous material 24 weaknesses with the Company’s internal controls related to, inter alia, revenues and accounts 25 receivable and the distribution and supply-chain operations.

26 113. Defendants also knew the failure to implement supply-chain software during the 27 Class Period caused LeapFrog to overstate inventory in violation of GAAP and LeapFrog’s publicly 28 reported inventory policy. Confidential witnesses described how the lack of supply-chain software

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1 prevented LeapFrog from accurately reporting inventory levels and from establishing sufficient 2 reserves for excess and obsolete inventory. After the Class Period, the Company increased the 3 reserve for excess and obsolete inventory by 400%, or $14 million. During the 10/18/04 conference 4 call, Curley admitted that the lack of supply-chain software during the Class Period prevented

5 LeapFrog from identifying obsolete and excess inventory: “as we started getting into our supply- 6 chain system, we also identified, you know, inventory-excess component inventory that we never 7 had visibility clearly on before, but now that we’ve, you know, have a system that’s not manual, 8 it’s giving us longer-term visibility.” In addition, the Company admitted in its 2004 10-K that it 9 could not reasonably assure the reliability of its financial reporting or that LeapFrog’s financial 10 statements were prepared in accordance with GAAP because of numerous material weaknesses in 11 the areas of costs of goods sold and inventory and distribution and supply-chain operations. 12 114. The witness accounts show that Defendants also knew LeapFrog was underreporting 13 expenses and liabilities because the Company’s engineering department was purchasing materials 14 and components from vendors that were used to manufacture and assemble products without a 15 written purchase order. As a result, the purchases were not reflected in the Company’s financial 16 statements. After the Class Period, the Company admitted in its 2004 10-K that it could not 17 reasonably assure the reliability of its financial reporting or that its financial statements were 18 prepared in accordance with GAAP due to material internal control weaknesses related to the 19 creation of purchase orders, inventory purchasing, the purchase of materials and components used to 20 manufacture and assemble products and payments to vendors.

21 115. Defendants also knew the shipping problems and the impact of Mattel’s PowerTouch 22 on the Company’s sales and lack of supply-chain software precluded LeapFrog from accurately 23 forecasting and fulfilling customer orders which in turn prevented the Company from accurately 24 forecasting LeapFrog’s future financial results. As detailed herein, the Company repeatedly missed 25 or revised guidance during the Class Period due to the shipping problems and lost sales. After the 26 Class Period, Defendants stopped providing guidance, effectively admitting they never had a 27 reasonable basis for the guidance provided during the Class Period. Indeed, as Kalinske admitted 28

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1 during the Company’s 12/16/04 conference call, “we’ve been so horrible at providing guidance I 2 just don’t think there’s any benefit in continuing the practice for the rest of this year.”

3 1. Defendants Knew That Its Third Party Logistics Suppliers, DSS And CLI, Repeatedly Failed To Fulfill Customer Orders Which Caused 4 The Sales Shortfall In 3Q03 And Other Problems 5 116. Several witnesses, including CW-1, CW-2, CW-4, CW-6 and CW-8 stated that third- 6 party logistics supplier DSS managed and oversaw the receipt, warehousing and shipping of goods 7 from 2000 until July 2004 when LeapFrog replaced DSS with CLI. The witnesses also stated that 8 DSS repeatedly failed to ship product ordered by LeapFrog’s retail customers and also shipped them 9 the wrong product. 10 117. CW-6, the former operations analyst who worked at the DSS warehouse, stated that 11 LeapFrog had to closely monitor DSS throughout the time DSS managed the Company’s warehouse 12 operations to ensure DSS fulfilled its obligations. Because DSS did not provide reports showing 13 what products had been shipped to the Company’s retail customers, LeapFrog maintained staff, 14 including CW-6, on-site at the warehouse to make sure products were shipped in accordance with 15 the retail customers’ purchase orders. CW-6 stated that LeapFrog management was unhappy with 16 the degree of oversight required and wanted a warehouse provider that did not require the same level 17 of oversight. As a result, LeapFrog decided to change warehouse providers sometime before 3Q03. 18 118. CW-6 stated that after DSS found out LeapFrog intended to change warehouse 19 providers their performance deteriorated and became unacceptable during 3Q03 and 4Q03, the 20 critical peak selling season for LeapFrog’s products. CW-8 also stated DSS management knew 21 LeapFrog had decided to replace DSS with CLI by 11/03 because the decision was discussed with 22 the DSS senior managers, and because LeapFrog was looking for a new warehouse, and “everyone 23 in the local area knew what everyone else was doing” as to real estate matters. CW-6 stated that 24 DSS failed to fulfill many customer orders during the peak selling season including $12-$13 million 25 of orders from Toys R Us in 3Q03. CW-6 stated that Toys R Us sent its trucks to the DSS 26 warehouse on multiple occasions to pick-up orders but DSS was unable to deliver the product. 27 During LeapFrog’s patent infringement trial against Mattel, Defendant Bender admitted that 28

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1 LeapFrog lost $1.2 million in LeapPad orders from Target and $2.8 million LeapPad orders from 2 Toys R Us in 3Q03 because of the inability to ship the product. Ex. B at 790-92. 3 119. Other witnesses confirmed that DSS was unable to ship product to the Company’s 4 retail customers. CW-2, the former LeapFrog information technology director, said that the primary 5 reason for the 3Q03 sales shortfall was the deteriorating relationship between LeapFrog and DSS. 6 CW-4, the former accounts receivable specialist, also stated that LeapFrog began experiencing a lot 7 of warehouse problems in 3Q03 and that DSS’s inability to fulfill customer orders caused the 3Q03 8 sales shortfall. CW-4 stated that DSS “quit on LeapFrog” because DSS knew LeapFrog was going 9 to switch warehouse providers. CW-4 stated that the 3Q03 sales shortfall was also caused by 10 LeapFrog not having sufficient amounts of product available to fill customer orders. CW-8, the 11 former director of international distribution, stated the inability of DSS to ship product to fulfill 12 customer orders in 3Q03 was the reason that CW-8’s duties were expanded to include the oversight 13 of domestic distribution. CW-8 also said the problems continued in 4Q03. CW-8, who worked at 14 the DSS warehouse in 4Q03, stated that most of the orders that were not shipped in 3Q03 and 15 additional orders that DSS was unable to ship in 10/03 were lost and not shipped at a later date. 16 120. CW-4 stated that LeapFrog had “tons of charge-backs” for failing to meet its 17 timeliness and other shipping criteria. CW-4 stated that Target threatened to quit and almost did end 18 its relationship with LeapFrog in 2004 because LeapFrog never delivered product to Target on time 19 for Target’s advertisements. CW-4 stated that almost every invoice from Target had a $10,000 20 penalty for not getting product to Target on time. CW-4 further stated that Wood, Kalinske, Curley, 21 and Bender were all aware of this and involved in trying to prevent Target’s withdrawal.

22 121. CW-4 said that the shipping problems were even worse with LeapFrog’s new 3PL, 23 CLI, which started working with LeapFrog in July 2004. Wood, Kalinske, Curley and Bender all 24 flew to the new warehouse in Fontana, managed by CLI, to try to take care of the severe delivery 25 problems there during the months of August through October 2004. 26 122. CW-4 also stated that customers calls regarding shipping problems increased when 27 the Fontana warehouse opened. CW-4 stated that trucks parked and waiting for shipments for days 28 and finally left without a shipment. CW-8 also stated that trucks would show up at LeapFrog’s

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1 warehouse and the order would not be ready because: items were late at arriving at the distribution 2 center; there were problems with the third party logistics supplier and/or LeapFrog had not made the 3 product available to the warehouse. CW-4 stated that “It got so bad that when LeapFrog would call 4 companies to go to LeapFrog to pick up a shipment, the trucks would not even go” because “the 5 truckers only received payment if they delivered a shipment. The truckers didn’t go to the LeapFrog 6 warehouse because they would probably not get a shipment to deliver. The trucking companies 7 didn’t want to handle LeapFrog’s business.” 8 123. CW-4 stated that ultimately LeapFrog executives -- Bender, Rioux, and other 9 executives and directors -- personally flew down to the new warehouse in Fontana to get product out. 10 CW-4 stated that LeapFrog recruited any LeapFrog employee or executive it could get to go to the 11 warehouse because as everyone at the Company knew, LeapFrog was in trouble due to its ability to 12 get products delivered from its new warehouse in Fontana. 13 124. In October 2003, LeapFrog reported 3Q03 sales of $203.9 million, which was 14 substantially less than the $225-$235 million that Defendants previously claimed that there were no 15 impediments to achieving. Defendants then admitted shipping problems caused the shortfall. 16 During the Company’s 10/22/03 conference call, Wood stated that the inability to ship product to the 17 Company’s retailers caused the sales miss and that Defendants knew about the problems much 18 earlier in the quarter. In fact, Wood admitted LeapFrog “thought about pre-announcing and made 19 the decision not to.”

20 2. Defendants Knew Leapfrog Cancelled The Implementation Of Supply-Chain Software Before 3Q03 That Was Needed To Accurately 21 Forecast Customer Demand And To Meet Production Requirements 22 125. In addition to LeapFrog’s shipping problems, Defendants knew that LeapFrog had not 23 developed, implemented or maintained adequate supply-chain and warehouse management software 24 to ensure that LeapFrog had sufficient inventory to meet actual and projected demand. As explained 25 by CW-8, at the beginning of the Class Period, LeapFrog did not have a software system which 26 could forecast LeapFrog’s production requirements. Manugistics was supply-chain software 27 designed to address production requirements. Manufacturers such as LeapFrog must forecast and 28 identify the amount and type of product units which it must produce to meet orders. Information

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1 necessary for forecasting the amount of product needed includes: current inventory, items being 2 manufactured, hard orders from customers, and sales forecasts (from the sales department). 3 Manugistics was supposed to handle such forecasting and production planning – adding these 4 capabilities to LeapFrog. 5 126. CW-8 also explained that at the beginning of the Class Period, LeapFrog lacked 6 warehouse management software (“WMS”). WMS is a software system used to track receipt of 7 inventory, to manage the location of inventory, and to allow for picking (pulling product from an 8 inventory position to a location where it can be shipped). Once the product is shipped the WMS 9 reduces that amount of product from the inventory, thus keeping close tabs on the position of the 10 inventory. Highjump was the software chosen as LeapFrog’s WMS, and was supposed to be 11 implemented during the Class Period. 12 127. CW-8 explained that LeapFrog had an additional software system already running at 13 the beginning of the Class Period. Known as the Oracle system, it was primarily for financial 14 management and sales order releasing, not for production planning, forecasting and availability 15 planning. Sales order releasing consisted of receipt of an order, entry of the order into Oracle, and 16 then release of the order to the warehouse that ships it. 17 128. According to CW-1, LeapFrog was supposed to implement supply-chain logistics 18 software applications from Manugistics in 2003, that were designed to link up and synchronize 19 orders and projected orders from the Company’s retailers to the inventory on hand and projected 20 inventory, to enable LeapFrog to forecast production requirements. The software applications were 21 also intended to extract information from LeapFrog’s Oracle database and to generate tailored 22 reports that the Oracle system could not generate. CW-2 stated that the Oracle supply-chain module 23 was very lacking and very rudimentary. The Manugistics software was also supposed to allow CW-l 24 to compare inventory on hand and inventory expected to arrive against current and forecasted orders 25 so that CW-1 could allocate available inventory to the Company’s customers. CW-1 stated that 26 Wal-Mart, Toys R Us and Target were “Tier One” customers that received priority over LeapFrog’s 27 other customers to ensure they received their orders in full. Other customers would only receive 28 product that was not needed to fulfill orders received from Wal-Mart, Toys R Us and Target.

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1 129. CW-1 and CW-2 stated that LeapFrog cancelled the implementation of the 2 Manugistics software prior to 3Q03. As a result, CW-1 was unable to perform a forward-looking 3 allocation analysis. Instead, CW-1 simply extracted data from the Oracle database and prepared 4 spreadsheet reports that compared the products shipped in a particular period to what had been 5 forecasted after the fact. CW-1 noted that when he/she left LeapFrogs’ employ in June 2004, 6 Manugistics was still not working, and there was still no operative production forecasting end 7 allocation system. Thus, as CW-2 stated, LeapFrog’s software applications did not keep pace with 8 the increasingly complex requirements that accompanied the Company’s rapid growth. CW-2 stated 9 that the Company’s business systems required ever-increasing amounts of manual processes because 10 the software applications did not perform needed functions, and because there was concern that the 11 information generated by the software was inaccurate. As a result, LeapFrog used manually 12 prepared spreadsheets to support its operations. 13 130. Other sources corroborated these witnesses. In a 10/30/03 article in Baseline 14 magazine, LeapFrog spokesperson Cherie Stewart (“Stewart”), stated that LeapFrog suspended

15 deployment of new supply-chain logistics software (version 6.15) before the beginning of 3Q03. On 16 11/13/03, Bear Stearns analyst Jennifer Childe (“Childe”) reported that LeapFrog began deploying 17 Manugistics supply-chain software in the first half of 2003 but could not complete the 18 implementation and ultimately abandoned it prior to 3Q03.

19 3. Defendants Schemed To Fabricate Sales To Avoid The 3Q03 Shortfall 20 131. Defendants’ advance knowledge that 3Q03 would fall far short of their “guidance” to 21 investors was evidenced by Defendants’ unsuccessful attempt to fabricate sales at the end of 3Q03. 22 CW-4 stated that LeapFrog tried unsuccessfully to fabricate sales in 3Q03 to make-up the shortfall 23 caused by the problems with DSS and the cancelled implementation of the supply-chain software. 24 According to CW-4, DSS shipped product in 3Q03 (that was scheduled to be shipped to Toys R Us 25 in 4Q03) to an empty warehouse around the corner from the warehouse managed by DSS. Curley 26 then caused LeapFrog to improperly recognize the revenue on the fabricated sales. However, CW-4 27 and LeapFrog’s collection department discovered the scheme after receiving a call from Toys R Us 28 questioning an invoice for product it had not received in 3Q03. LeapFrog was required to reverse

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1 the improperly recognized revenue. CW-4 also stated that DSS and the freight company told CW-4 2 and others in the collection department that the product had simply been shipped around the corner 3 to an empty warehouse. 4 132. In October 2003, Defendant Curley and credit and collections department manager 5 John Forsythe informed CW-4 and others in the credit and collections department that they were 6 going to have to work long hours to reverse the improperly recognized revenue. CW-4 and other 7 collections personnel began reviewing numerous invoices that had been generated to book the Toys 8 R Us orders prematurely, to reverse the revenue. CW-4 stated this project was a “mad scramble” 9 and was not completed until just two days before the Company announced 3Q03 results on 10/21/03. 10 Curley cautioned the collections department personnel who worked on reversing the improperly 11 recognized revenue, including CW-4, that they must never speak about what happened. After the 12 project was completed, Curley treated CW-4 and the collections department personnel to lunch at 13 Trader Vics restaurant in Emeryville as a reward for having to work such long hours and as a “bribe” 14 to not speak about what had transpired. 15 133. CW-4 stated that CW-4 “knew that what took place was definitely fraud.” CW-4 16 further stated that the talk around the Company was that LeapFrog needed to get the sales numbers 17 up for LeapFrog’s executives to sell millions of dollars of stock. CW-4 stated that Curley was very 18 upset over the discovery of this scheme by the collection department, and blamed and took 19 retaliatory action against CW-4 and then the collection department. CW-4 also feared that there 20 would be reprisals for providing this information to Lead Plaintiffs’ counsel, even now after CW-4 21 no longer works for LeapFrog.

22 4. Defendants Knew That Their Delays In Consolidating Warehouse Operations, Changing Warehouse Providers And Implementing 23 Supply-Chain And Warehouse Management Software Caused Continuing Distribution And Supply-Chain Problems Throughout 24 The Class Period 25 134. As evidenced by witnesses’ statements, CLI’s suit against LeapFrog (Ex. C), and 26 statements by Defendants after the Class Period, Defendants knew that delays in (1) replacing DSS 27 with CLI, (2) consolidating warehouse operations, and (3) implementing supply-chain software until 28 the 2004 peak selling season would cause LeapFrog’s distribution and supply-chain problems to

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1 continue and worsen. Defendants’ delays in finalizing the contractual relationship with CLI resulted 2 in DSS managing the Company’s warehouses through 7/04. CW-2 stated that CLI was supposed to 3 take over warehouse operations from DSS in 3Q03 but the change was delayed. CW-6 and CW-8 4 also stated that LeapFrog decided to replace DSS with CLI in late 10/03 or 11/03, but postponed 5 executing and finalizing a contract with CLI until about July 2004. 6 135. CLI’s lawsuit against LeapFrog (filed on 1/12/05 in the U.S. District Court, Southern 7 District of Ohio) corroborates the witness accounts and confirms the delays. Ex. C. In its complaint, 8 CLI stated that LeapFrog and CLI began discussions about CLI overseeing and managing the 9 receipt, warehousing and shipping of goods from LeapFrog’s Fontana warehouse in or around 11/03 10 but did not execute the warehouse management agreement (which is attached to the complaint) until 11 7/1/04. Defendant Curley, former COO Fred Forsyth, LeapFrog’s Senior Vice President of 12 Operations and Logistics Andrew Murrer, signed the warehouse agreement on behalf of LeapFrog. 13 136. Delays in consolidating LeapFrog’s warehouse operations from several warehouses to 14 one warehouse located in Fontana, California contributed to the supply-chain problems and the delay 15 in replacing DSS with CLI. According to CLI’s suit against LeapFrog, when LeapFrog began 16 discussions with CLI in 2003 about CLI taking over management and operation of LeapFrog’s 17 warehouses, the plan was to have CLI manage one warehouse located in Fontana. Ex. C. But 18 LeapFrog did not execute the lease for the Fontana warehouse until 3/31/04 and the term of the lease 19 did not commence until the latter of 6/15/04 or substantial completion of required tenant 20 improvements. Defendant Curley, along with Fred Forsyth and Murrer also signed the Fontana 21 warehouse lease on behalf of LeapFrog.

22 137. According to CW-9, Defendants ordered CW-9 to locate a new warehouse in the fall 23 of 2003. However, after CW-9 located such a warehouse in October, 2003, Defendants put a hold on 24 the project. Defendants finally moved forward with locating a new warehouse a few months later, 25 but had to pay more for the lease. Moreover, CW-9 explained Defendants’ delays resulted in the 26 transition occurring at the worst possible time, during the 2004 peak season. 27 28

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1 138. CW-9 further stated that in September 2004 (long after Defendants stated 2 consolidation would be implemented), LeapFrog began transferring product from its Ontario 3 warehouse to Fontana, but stopped this process and moved product back to Ontario soon after. 4 139. Due to the delays, DSS continued to manage LeapFrog’s warehouse operations 5 through 7/04. CW-4, CW-6 and CW-8 stated that problems with DSS continued in 4Q03 and that 6 LeapFrog was scrambling in an attempt to repair customer relationships after the shipping problems 7 in 3Q03. For example, CW-4 stated that in 11/03, Target threatened to stop doing business with 8 LeapFrog because Target was not receiving the products it had ordered. 9 140. CW-6 stated that LeapFrog management was furious at DSS for the problems in 10 3Q03 and sent down additional reinforcements during 4Q03 in an attempt to salvage the remainder 11 of 4Q03. Those reinforcements included CW-8, CW-9, Defendant Wood, COO Forsyth and Murrer. 12 CW-6 stated that the problems became a crisis in 11/03 when large numbers of LeapFrog personnel 13 were sent to the DSS warehouse to resolve various issues impeding the fulfillment of orders. 14 141. In 11/03, Murrer told CW-8 to go to the DSS warehouse to help fix the shipping 15 problems that occurred in 3Q03 and 10/03. CW-8 said that a number of additional LeapFrog 16 personnel, including Murrer and COO Forsyth, were on-site at the DSS warehouse on a regular basis 17 in 4Q03. CW-8 initiated daily conference calls between the sales and operations personnel in 18 LeapFrog’s Emeryville headquarters building and personnel at the DSS facility in an attempt to 19 make sure there were clear communications regarding what product needed to be shipped to each 20 customer and when the shipments needed to be made.

21 142. CW-8 said that LeapFrog also had to ship products by air from the manufacturing 22 plants in China to be able to fulfill orders received late in 4Q03 which increased shipping costs. 23 143. According to several witnesses, there were numerous reasons why Defendants knew, 24 or should have known problems would continue or worsen with CLI. However, CW-5, the former 25 director of supply-chain finance and accounting, said LeapFrog chose CLI based on a 26 recommendation from Wal-Mart, which used CLI for some of its operations. However, CW-5 noted 27 that CLI only managed a few of Wal-Mart’s warehouses and was not a national warehouse 28 management company that could handle the national distribution requirements for a company such

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1 as LeapFrog. CW-5 also reported that CLI had never started a warehouse operation as it was doing 2 for LeapFrog in the new 600,000 square foot Fontana warehouse. CW-5 said that CLI continued to 3 assign its most skilled personnel to the warehouses it managed for Wal-Mart, CLI’s primary 4 customer, and assigned less skilled and less competent personnel to the LeapFrog account. 5 144. As several witnesses noted, the biggest problem was that Defendants’ delay caused 6 the transition to CLI to occur during LeapFrog’s peak selling season in 2004. CW-1 stated that 7 when CW-1 left LeapFrog in July 2004, LeapFrog had not yet started the process of transitioning the 8 warehouse from DSS to CLI. According to CW-5 and CW-8, part of the delay in transitioning to CLI 9 occurred because Kalinske and other senior executives at LeapFrog delayed the CLI contract for 10 several months to try to renegotiate more favorable terms. The attempted renegotiation was 11 unsuccessful at reducing the contract cost. However as CW-5 and CW-8 stated, the delay made it 12 impossible for CLI and LeapFrog to get the supply-chain operations up and running smoothly by the 13 time the 2004 peak selling season began. According to CW-8, the delayed transition (until 7/04) 14 meant that CLI did not have time to thoroughly master its responsibilities and could not begin 15 shipping product until the peak selling season was underway. 16 145. As CW-5 explained, in July 2004, the new Fontana warehouse managed by CLI had 17 no properly-running supply-chain or warehouse management software running successfully, no 18 finalized agreement, and there were no shipments from this new warehouse – “not one item had been 19 shipped from there in July 2004.” CW-5 further stated that even by 1Q05, when CW-5 left 20 LeapFrog, Manugistics (the supply-chain software) was still not doing what it was supposed to be 21 doing and that Manugistics and HighJump (the warehouse management software) did not properly 22 communicate with each other.

23 146. From CW-5’s discussions with CW-5’s superior, Peter David and the controller, 24 Dawn Albery, CW-5 learned that Kalinske knew about the software problems. CW-9 further 25 explained that implementation of the warehouse management system, HighJump, during peak 26 season—July 2004 caused numerous problems because of the massive amount of learning for CLI 27 employees required to become comfortable with the software. CW-9 stated that in July 2004, the 28

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1 WMS was not up and running, and in October, 2004, when CW-9 left LeapFrog, the system was 2 barely getting fine-tuned. 3 147. CW-2 stated that it takes three to four months to accomplish a major transition from 4 one logistics provider to another and that the delay meant CLI did not begin to implement and handle 5 logistics functions for LeapFrog until after the Company’s peak selling season began. Similarly, 6 CW-6 said the delay meant that CLI did not begin managing LeapFrog’s warehouse until the peak 7 selling season in 2004 and that the transition was a major undertaking that should have begun 6-9 8 months earlier to allow sufficient time to identify and address operational problems. CW-5 stated 9 that the transition to CLI needed to occur prior to the peak selling season so any bugs and problems 10 could be eliminated before the peak selling season began. CW-8 stated that the delay in transitioning 11 to CLI had severe consequences and that the transition should have been completed several months 12 before 7/04 to ensure that CLI could handle LeapFrog’s shipping requirements during the peak 13 selling and shipping season. As CW-2 further explained, there were also severe problems with 14 LeapFrog’s other 3PL, Genco delivering product to LeapFrog’s customers late. As CW-2 described, 15 there were daily or weekly telephone conference call meetings throughout 2003 to discuss problems 16 at Genco, attended by Genco and LeapFrog representatives, including Defendant Rioux at some of 17 these meetings. 18 148. CW-8 also said that shipping problems stemming from the delay in transitioning to 19 CLI compounded the problems with DSS, and delayed LeapFrog from removing inventory from the 20 DSS-managed warehouses to the Fontana warehouse. Although in a July 21, 2004 conference call 21 with analysts, Defendants assured investors that the shipping problems that caused the 3Q03 sales 22 shortfall would not reoccur in 3Q04 because LeapFrog was keeping inventory with DSS as a back- 23 up, DSS had prematurely stopped working for LeapFrog. As Merrill Lynch reported on 11/4/04 and 24 CW-8 confirmed, DSS “shut [LeapFrog] down given the decision to go with CLI and their [DSS] 25 ability to find replacement customers, which meant that LeapFrog had to quickly move all of its 26 inventory into the new warehouse.”

27 149. CW-8 also explained that there were many problems with implementation of 28 HighJump, the warehouse management software (WMS). CW-8 stated that HighJump was a very

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1 complicated system, taking six months to implement. CW-8 further stated that senior management 2 delayed commencement of HighJump’s implementation until ¼, meaning that full implementation 3 would not be realized until, at the earliest, mid-2004, at the beginning of the peak season. There 4 were many days when the entire system was down, because the WMS was on the same server as the 5 other LeapFrog modules (such as Manugistics), and power was drained from the servers. There 6 were days when the warehouse management system’s essential RF (radio frequency) readers were 7 not functioning, because the equipment was sensitive and required calibrations to operate properly. 8 There were problems where the system wasn’t working and product was very hot (much in demand), 9 necessitating that the hot product arrive and be turned around and shipped to the customer within a 10 short time frame. When the system was not working, the warehouse personnel needed to manually 11 enter the product for it to be received and for it to be shipped. This created problems with software 12 integration. These were some of the many problems resulting from implementing the WMS during 13 the peak season. CW-8 further stated that problems with the WMS continued in September and 14 October 2004. 15 150. After the Class Period, Defendants admitted they knew the delay in changing 16 warehouse providers, consolidating warehouses and implementing supply-chain and warehouse 17 management software would harm the Company’s financial results. During the 10/18/04 conference 18 call, Kalinske stated: 19 [W]e have experienced several challenges getting our new distribution center up and running smoothly. As you will recall, we consolidated our distribution centers 20 into one, newer, larger facility this past July. At the same time, we also launched a number of new information management systems to build out our supply-chain. In 21 addition, we hired a new third-party logistics venture, Commodity Logistics, Inc., to 22 implement these operations. However, getting all this up and running during this peak time has been challenging and we have experienced negative financial 23 ramifications through this transition, ultimately impacting margin. 24 During LeapFrog’s 10/27/04 conference call, LeapFrog Jerome Perez (“Perez”) stated: 25 “[I]n our commitment to improving the supply-chain, we attempted too many 26 improvements at one time and too close to our key selling season.” 27 28

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1 151. CW-3, the former credit and collections manager, also confirmed that the problems 2 with LeapFrog’s warehouse operations continued after CLI replaced DSS in July 2004, and that, CLI 3 was unable to fill sales orders received from the Company’s retail customers. CW-2, CW-5, CW-6 4 and CW-8 also reported that the delay in finalizing the relationship with CLI until July 1, 2004, just 5 as LeapFrog was entering the busy back-to-school and holiday seasons when 80% of the Company’s 6 sales occurred, caused severe delivery problems. CW-4 reported that customers called constantly 7 complaining and shipping problems with DSS – and even more often regarding shipping problems at 8 CLI. 9 152. CW-5 also explained that CLI “screwed up so many times” by failing to fulfill orders 10 for Wal-Mart, Target and K-Mart in 3Q04 and 4Q04. A common problem was that CLI shipped 11 orders to the wrong customers, i.e., CLI would ship Wal-Mart’s orders to K-Mart and K-Mart’s 12 orders to Wal-Mart. CW-5 also stated that CLI failed to ship all of the product ordered by 13 LeapFrog’s retail customers in some instances, and in other instances, shipped more product than 14 had been ordered. CW-5 further stated that CLI’s bills (which CW-5 personally reviewed) indicated 15 that CLI was first hiring and training staff in July and August, rather than actually shipping product. 16 153. CW-5 stated there were so many problems with CLI that LeapFrog sent many of its 17 own executives and employees to the Fontana warehouse to attempt to solve them, including Peter 18 David (“David”), Murrer, and Mara Still (“Still”), a LeapFrog accountant. In fact, CW-5 reported 19 that Murrer fired several employees he felt were not sufficiently helping rectify the problems in 20 Fontana.

21 154. Daily shipping reports which CW-8 emailed and provided to LeapFrog executives, 22 including Defendants Wood, Curley, Bender and Kalinske, revealed by mid-August 2004 that 23 LeapFrog would not meet 3Q04 projections. As a result of the problems described herein, there 24 were huge variances between daily shipments and Defendants’ “guidance” to investors. 25 155. CW-8 also had daily conversations with Murrer and COO Forsyth regarding CLI’s 26 inability to fulfill customer orders. After the Class Period, Defendants admitted they knew about 27 CLI’s inability to correctly ship product to LeapFrog’s retail customers no later than 8/04. Kalinske 28 admitted during the Company’s 2/15/05 conference call that Defendants knew CLI was unable to

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1 ship orders correctly by 8/04: “[t]he shortages occurred – the inability to ship correctly occurred in 2 the August, September, October period.” 3 156. Peter David, LeapFrog’s senior director of finance, global supply-chain, who CW-5 4 reported to, told CW-5 that Wal-Mart told LeapFrog in 9/04 that if LeapFrog’s next scheduled 5 shipment was wrong in any way, that Wal-Mart would refuse the order and stop ordering products 6 from LeapFrog. But the next shipment to Wal-Mart was incorrect. CW-5 stated that Wal-Mart did 7 not completely stop purchasing product from LeapFrog as threatened, but the relationship between 8 Wal-Mart and LeapFrog became more strained and compromised, and Wal-Mart substantially 9 reduced its purchases from LeapFrog. LeapFrog’s SEC reports later showed that Wal-Mart reduced 10 its purchases by more than $30 million from 2003 to 2004. 11 157. In addition, CW-5 stated that the incorrect shipment to Wal-Mart led to meetings 12 between LeapFrog representatives (including Perez, Murrer, COO Forsyth and David) and CLI in 13 11/04 which deteriorated into shouting matches between the two companies. CW-5 stated that 14 LeapFrog, at David’s direction, began withholding payments to CLI due to the delivery problems 15 and because CLI’s bills lacked sufficient detail for CW-5 to determine if the charges were valid. 16 158. CW-5 demanded detailed bills from CLI so that LeapFrog could determine whether 17 or not CLI’s bills made sense and LeapFrog belatedly received boxes of supporting documentation 18 for the bills after CLI hired a new CFO. LeapFrog continued to withhold payment, however, 19 because CW-5 and LeapFrog executives “were aghast at CLI’s expenses, which were way out of 20 line.” CLI abused its “cost-plus” contract with LeapFrog (which allowed CLI to pass its costs to 21 LeapFrog, by billing LeapFrog for airfare and luxury hotels for flying CLI personnel to Los Angeles 22 from Minnesota to manage the Fontana warehouse. CW-5 put together expense report spreadsheets 23 listing all these expenses. CW-5’s superior, Peter David, was also aghast at the expenses. CW-5, 24 overheard phone calls while in David’s office, during which David spoke with Curley about the 25 inappropriateness of the warehouse expenses.

26 159. According to CW-5, LeapFrog refused to pay CLI’s bills until CLI provided more 27 detail. CW-5 stated that it took until October or November, 2004 for CLI to send documentation 28

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1 LeapFrog insisted upon. CLI threatened to shut the warehouse because LeapFrog was not paying the 2 bills. 3 160. David told CW-5 that the conversations with CLI regarding CLI’s bills and 4 performance involved Defendant Kalinske and Jerry Perez, president of LeapFrog. CW-5 explained 5 that during a large meeting, Jerry Perez, went “ballistic” on CLI because CLI was “screwing up so 6 badly that LeapFrog was in jeopardy of losing 10s or 100s of millions of dollars of sales from major 7 customers.” CW-5 stated that the large customers were starting to cancel orders, and threatening to 8 cancel more orders, and to reassess LeapFrog as a supplier. CW-6 explained that in approximately 9 October 2004, large customers gave LeapFrog an ultimatum that if the delivery issues occurred 10 again, the customers would consider cutting back orders. 11 161. These witness accounts about the problems with CLI are corroborated by CLI’s suit 12 against LeapFrog and by admissions made by LeapFrog after the Class Period. In its complaint, CLI 13 stated that it was not retained until 7/04 and had to hire temporary help in the summer of 2004 to 14 accommodate the busy holiday season. Ex. C. Further, CLI alleged that LeapFrog failed to timely 15 pay CLI $4.3 million for work performed under the warehouse agreement in 9/04 and 10/04 and 16 failed to pay CLI $2,924,221.95 for work performed under the warehouse agreement after 10/04. Id. 17 According to the complaint and a 1/12/05 letter to Kalinske from CLI’s CEO (James D. Thomas), 18 Peter David, LeapFrog’s senior director of finance, global supply-chain, told Norm Murphy 19 (“Murphy”), CLI’s CFO, that LeapFrog would not make any payments to CLI on the 9/04 and 10/04 20 invoices until after Thomas traveled to California for a meeting with Kalinske, Perez and others. 21 David also told Murphy that LeapFrog would not pay CLI until senior management from LeapFrog 22 and CLI reached some agreement as to allocating losses that LeapFrog contended it suffered in 23 connection with the Fontana warehouse.

24 162. Several witnesses stated that the failure to complete implementation of supply-chain 25 software before the peak selling season in 2004 also contributed to LeapFrog’s inability to accurately 26 forecast and fill customer orders. CW-1 stated that LeapFrog tried to implement Manugistics or 27 Valdero supply-chain software, but that LeapFrog never completed implementation of any of this 28 software during the time CW-1 was employed by the Company (6/03 through 6/04). As a result, as

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1 was the case in 2003, CW-1 was unable to perform a much-needed forward looking allocation 2 analysis to enable LeapFrog to meet product and shipping requirements. Instead, CW-1 continued to 3 prepare spreadsheet reports that compared product shipments with what had been forecasted, after 4 the fact. CW-1 also stated that the director of his department, Susie Schuman (“Schuman”), knew 5 that the supply-chain software was not working, and that the Defendants “should have known” that 6 the software was not working. CW-1 stated that there was no reason why Schuman would not have 7 reported this to Defendants. CW-1 also stated that it was well known throughout LeapFrog that the 8 software was not working. 9 163. CW-5 and CW-8 stated that the attempt to implement new supply-chain software 10 during the peak selling season in 2004 did not allow sufficient time to test and de-bug the software. 11 164. CW-8 was directly involved with the efforts to implement the Highjump warehouse 12 management software that was supposed to allow CLI and LeapFrog to receive orders and track 13 inventory and shipments, in addition to other functions. CW-8 said there was intense, unrealistic 14 pressure from LeapFrog senior management to implement the Highjump software by the end of 15 2Q04 but that the software was definitely not up and running until 8/04. CW-8 and other LeapFrog 16 employees repeatedly told Murrer and Forsyth that the Highjump software would not be completed 17 by the end of 2Q04. CW-8 said the shipping function of the Highjump software did not begin to 18 operate until the second week of 8/04, during the peak shipping season, which directly resulted in 19 CLI being unable to fulfill customer orders in 3Q04. CW-8 said that there were additional problems 20 operating the Highjump software caused by high turnover at CLI. As a result, CLI personnel were 21 inexperienced and had to be trained to use the software during the peak shipping season.

22 165. LeapFrog recently admitted that it still has not completed implementation of the 23 supply-chain software. In LeapFrog’s 2004 10-K, filed on 3/28/05, LeapFrog reported that it was 24 still “upgrading existing and implementing new operational information systems, including supply- 25 chain management systems.” Yet, throughout the Class Period, Defendants assured investors that 26 the Manugistics supply-chain software would be implemented by the end of 2Q04. 27 166. CW-8 also stated that CW-8 provided a daily summary spreadsheet setting forth the 28 dollar volumes shipped by LeapFrog. This spreadsheet was provided to management (including the

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1 Defendants) prior to their arrival at a daily telephone meeting. CW-8 distributed the summary 2 spreadsheet by email and also posted it to a drive on the company’s ERP (“Enterprise Resource 3 Planning”) drive, which was available to LeapFrog personnel for posting documents so that others at 4 LeapFrog could access the information. CW-9 confirmed that the shipping numbers were placed on 5 a spreadsheet, and were reported all the way to Woods and Kalinske. CW-9 also explained that COO 6 Forsyth told him and CW-8 that the spreadsheet had to be accurate because it would be furnished to 7 top management. 8 167. CW-8 explained that the summary document distributed to management every day 9 included: LeapFrog’s shipping forecast; open orders; shipping outbounds; business which LeapFrog 10 had on the table; and how much was shipped on a daily cumulative basis worldwide. CW-8 stated 11 that if Kalinske and Curley were at the morning meeting, the summary document was printed and 12 given to them. There was a daily telephone conference discussion of the summary document, using 13 a conference call number, at 8:30 a.m. PST every morning, which included Curley, Kalinske, 14 Murrer, COO Forsyth and Bender. Curley, Bender and Kalinske often attended 2 to 3 times a week, 15 with Kalinske attending between 5 and 10 of the 20 monthly meetings and Curley attending the 16 meetings between 10 and 15 times per month out of the 20 monthly meetings. During these morning 17 telephone conferences, the participants discussed shipping results, on a macro and micro basis, and 18 often by customer, for what happened the previous day. Shipping problems were also discussed 19 during these morning meetings, including logistical problems, whether LeapFrog had product needed 20 for the orders, and whether trucks were showing up and being loaded in a timely manner.

21 168. After the Class Period, Defendants admitted that the delay in transitioning to CLI and 22 consolidating warehouses caused substantial problems. During the Company’s 10/18/04 conference 23 call, Kalinske stated that LeapFrog had “experienced several challenges getting our new distribution 24 center up and running smoothly” which caused “negative financial ramifications” and that LeapFrog 25 had brought in “outside consultants, such as Accenture” to help LeapFrog “significantly improve and 26 strengthen our supply-chain management.” In addition, Kalinske admitted that LeapFrog would now 27 “focus[] on building the infrastructure necessary for future success,” whereas during the Class Period 28

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1 “the emphasis was on feeding [LeapFrog’s] rapid growth with new products delivered to market as 2 quickly as possible.” 3 169. Similarly, Curley stated that LeapFrog “experienced a significant amount of 4 disruption in the third quarter. Just – we had the demand from the retailers, we had the inventory, 5 and our supply-chain, you know, problems did cause us not to be able [to] ship the full demand that 6 was out there. And it was significant.” 7 170. During the Company’s 10/27/04 conference call, Kalinske stated that LeapFrog “had 8 several challenges getting our new distribution center and supply-chain systems up and running 9 smoothly during this peak season.” Curley stated that “logistics issues hampered third quarter sales, 10 and caused us to under ship the third quarter sales demand.” Perez also confirmed that LeapFrog 11 “couldn’t execute in the shipping windows.” On 11/4/04, Merrill Lynch analyst Fine issued a report 12 after meeting with Kalinske and other LeapFrog management. During the meeting Kalinske

13 admitted that he and the other Defendants knew since at least 7/04 that there were numerous 14 problems with the warehouse and 3PL transition: 15 LF outsources its distribution. In 2003, LF used a company DSS; it was determined that their facility was too small, so after careful consideration and input from LF’s 16 largest customer, the company switched to CLI. However, almost anything that could have gone wrong in the process did. The building wasn’t ready on time, the 17 electricity didn’t get turned on, the inspections were late and equipment was 18 delivered late. The result was a late July move in date and instead of a month of training, shipments and training were being done simultaneously. Furthermore, LF 19 had kept inventory with DSS as backup, expecting to duplicate its efforts in case of any issues with the new warehouse, but DSS shut them down given the decision to 20 go with CLI and their ability to find replacement customers, which meant that LF had to quickly move all of its inventory into the new warehouse. Not only did this 21 cost a lot, but more consultants have also had to be involved. The system is still not 22 perfect but it is improving daily. Compounding these issues are the problems with the ports at Long Beach, CA, which do not have enough dock workers, and shortages 23 in truckers. Management indicated that they may need to look into another distribution facility outside of Long Beach since it seems like they will continue to 24 have issues there. 25 Management estimates that they lost about $20MM plus in sales due to LF’s 26 inability to ship; at this juncture, given the need to improve relationships combined with the abrupt change in sell-through at retail, these sales are viewed as permanently 27 lost. LF must now build back credibility with retailers, who had placed orders that 28 LF couldn’t fill; this is particularly unfortunate as this was exactly the area LF was

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1 seeking to improve upon this year as it had increased inventory levels to focus on improving order fill rates. The good news is that LF continues to expect shelf space 2 gains this year and the retailers were excited about LF’s ‘05 line-up, according to the company. Management changes have taken place both at LF and at the 3 warehouse. 4

5 171. During LeapFrog’s 2/15/05 conference call, Kalinske admitted that CLI was unable to

6 ship product to its retailers correctly beginning in 8/04, just one month after CLI began managing 7 the Company’s Fontana warehouse: “[T]he inability to ship correctly occurred in the August, 8 September, October period.” Kalinske also acknowledged that these operational issues “negatively 9 impacted [LeapFrog’s] business,” and that the Company’s supply-chain processes had “not been 10 very effective.” In LeapFrog’s 2004 10-K, the Company also admitted that delays in transitioning to 11 CLI caused significant difficulties and adversely impacted 2004 results: 12 [I]n the second half of 2004, we had operational difficulties related to our new U.S. 13 distribution center, which had an adverse impact on our 2004 financial results.

14 * * * 15 During the second half of 2004, we had significant difficulties operating our 16 management systems and the new consolidated distribution center during our peak shipping season. This expansion has presented, and continues to present, significant 17 challenges for our management systems and resources and has resulted in a 18 significant adverse impact on our operating and financial results.

19 5. Defendants Knew The Distribution And Supply-Chain Problems Caused Leapfrog To Report Materially False And Misleading 20 Financial Results That Were Not Prepared In Accordance With GAAP Or The Company’s Publicly Reported Accounting Policies 21 22 172. In every 10-Q and 10-K issued during the Class Period, it was represented that 23 LeapFrog’s financial results were prepared in accordance with GAAP and that the Company’s 24 internal controls over financial reporting - a process designed to provide reasonable assurance that 25 the Company’s financial reporting was reliable and that the Company’s financial statements were 26 prepared in accordance with GAAP - were effective. 27 173. In addition, as required by §302 of the Sarbanes-Oxley Act (“Sarbanes-Oxley”), 28 Curley, and Wood or Kalinske certified that: (1) every 10-Q and 10-K filed during the Class Period [C-03-05421-RMW] AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS - 63 -

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1 did not contain any untrue statement of a material fact or omit to state a material fact necessary to 2 make the statements made, in light of the circumstances under which such statements were made, not 3 misleading, (2) the financial statements included in the 10-Qs and 10-K fairly presented in all 4 material respects the financial condition, results of operations and cash flows of LeapFrog, (3) they 5 were responsible for designing and evaluating the Company’s disclosure controls and (4) they had 6 disclosed all significant deficiencies and material weaknesses in the design or operation of the 7 Company’s internal controls over financial reporting which were reasonably likely to adversely 8 affect LeapFrog’s ability to record, process, summarize and report financial information. 9 174. Defendants knew these representations and certifications were false and misleading 10 because there were numerous material weaknesses in the Company’s internal controls over financial 11 reporting that prevented LeapFrog from reporting its financial results in accordance with GAAP.

12 a. Improper Revenue Recognition 13 175. Defendants represented that LeapFrog recognized revenue in accordance with GAAP 14 and LeapFrog’s publicly reported revenue recognition policy which allowed revenue recognition 15 upon shipment provided there were no significant post-delivery obligations to the customer and 16 collection was reasonably assured. Defendants knew, however, that LeapFrog’s revenues, earnings 17 and receivables were overstated and not prepared in accordance with GAAP or LeapFrog’s publicly 18 reported revenue recognition policy because Defendants knew DSS and CLI were not fulfilling 19 customer orders at all or shipping product the customers had not ordered and would not pay for. 20 Therefore, they knew collection on these sales was not reasonably assured when the revenue was 21 recorded upon shipment. 22 176. According to CW-3, LeapFrog’s credit and collections manager, there were a host of 23 operational and personnel problems at LeapFrog that prevented the Company from ensuring revenue 24 was appropriately recognized. For example, CW-3 stated that LeapFrog recognized revenue when it 25 generated an invoice upon shipment of the product to the customer. CW-3 stated that LeapFrog 26 often generated invoices and recorded revenue in a quarter even though the product was not 27 supposed to ship until the following quarter. CW-3 stated the improper revenue recognition was 28 primarily due to the operational problems at LeapFrog’s distribution center managed by CLI. Like

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1 the other witnesses, CW-3 stated that CLI was unable to ship product properly or on time to meet 2 customer requirements. CW-3 learned of the ongoing and serious problems with CLI in meetings 3 with David and Murrer. 4 177. CW-3 also found out about the premature shipments when attempting to collect a 5 receivable that appeared to be past due. According to CW-3, customers often informed CW-3 and 6 CW-3’s subordinate collectors that they would pay LeapFrog based on the terms of the purchase 7 order, not the incorrect terms included in LeapFrog’s invoice. In addition, CW-3 stated that 8 customers often said they had not even received the product for which they had been invoiced. 9 Customers also told CW-3 that their accounts were overstated because LeapFrog had not credited 10 (reduced) the accounts for product returns. 11 178. CW-3 said that the increase in LeapFrog’s days sales outstanding (“DSO”) was 12 caused by the Company having to extend payment terms for premature shipments and by customers 13 refusing to pay for (1) product they received but had not ordered, (2) incomplete shipments that did 14 not include all of the product the customer ordered and (3) substitution products, i.e., product 15 LeapFrog shipped that the customer had not ordered to replace product ordered that LeapFrog did 16 not have in stock. 17 179. According to CW-3, LeapFrog’s inability to ship all of the product the customers 18 ordered, shipping the wrong product and missing delivery dates constituted “vendor violations” 19 which resulted in purchase price reductions. CW-4, the former accounts receivable specialist, also 20 stated that retailers assessed charge-backs for vendor violations such as shipping the incorrect 21 product. CW-3 explained that LeapFrog’s customers had vendor guides that included rules that 22 LeapFrog had to follow on numerous issues including how products were packaged and tagged, and 23 delivery standards and expectations. CW-3 said there were so many problems fulfilling customer 24 orders that LeapFrog faced upwards of $10 million in vendor violation price reductions in 2004. 25 CW-3 had serious concerns by 8/04 that 3Q04 was in jeopardy and stated that it was well known 26 throughout the Company that the quarter was in jeopardy and that LeapFrog’s customers would be 27 assessing substantial vendor violation price reductions. 28

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1 b. Failure To Accurately Report Inventories 2 180. Defendants also knew the Company’s inventories were materially misstated and not 3 reported in accordance with GAAP or LeapFrog’s publicly reported inventory policy. GAAP 4 Accounting Research Bulletin (“ARB”) No. 43 required, and the Company represented that 5 LeapFrog’s inventories were stated as the lower of cost, on a first-in, first-out basis, or market value 6 and that the carrying value of inventories was reduced by an allowance for slow-moving, excess and 7 obsolete inventories. LeapFrog further represented that the estimate for slow-moving, excess and 8 obsolete inventories was based on management’s review of on-hand inventories compared to their 9 estimated future usage and demand for the Company’s products. Defendants knew LeapFrog’s 10 inventories were misstated during the Class Period for several reasons. 11 181. Defendants knew inventories were understated because DSS and CLI shipped product 12 to the Company’s retail customers that the customers had not ordered, would not pay for and 13 subsequently returned. 14 182. CW-9 confirmed that LeapFrog counted about $20 million of excess inventory that 15 would not sell as current inventory. CW-9 explained that the inventory remained in LeapFrog’s 16 various warehouses for years (including DSS, Genco, Fontana, and an additional building), and that 17 DSS complained about the excess inventories every month. DSS’s distribution manager asked every 18 month why LeapFrog did not just sell the obsolete inventory at a huge discount, and complained that 19 the inventory impaired warehouse operations, as it interfered with the 3PL’s ability to access current 20 inventories. CW-5, who was involved with inventory reporting, reported that for 2 or 3 years 21 (covering the Class Period), Kalinske gave false and misleading statements to LeapFrog’s auditors 22 that inventories would be sold – even though the same items remained in LeapFrog’s ware house for 23 years, and were in fact obsolete and excess inventory. The senior Vice President wrote a letter, 24 which was kept in the MD&A file, saying that LeapFrog could sell the inventory, even though the 25 inventory was obsolete – and even though the next year, the same inventory was still in LeapFrog’s 26 warehouses. 27 183. Defendants also knew inventories were understated because LeapFrog did not 28 establish sufficient allowances for slow-moving, excess and obsolete inventories. In 2003, LeapFrog

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1 actually reduced inventory allowances from $5.3 million as of 12/31/02, to $3.3 million as of 2 12/31/03. LeapFrog did not establish any allowances for excess and obsolete inventory in 1Q04 and 3 established approximately $2.0 million of allowances in 2Q04. After the Class Period, LeapFrog 4 increased inventory allowances by more than 300%, or $14.1 million, to $18.9 million. The 5 Company increased the allowance by $3.5 million in 3Q04, an additional $9 million in 4Q04, and an 6 additional $1.6 million in 1Q05. 7 184. CW-5, who was responsible for determining the allowances for excess and obsolete 8 inventory, stated that there were significant variances between the amount of inventory LeapFrog 9 reported and the results of physical inventory counts at year end 2004 which required multiple 10 counts and recounts by CLI and the Company’s auditors. CW-5 stated that the need for the multiple 11 recounts meant the inventory levels reported by LeapFrog before 12/31/04 were not reliable or 12 accurate. In the 2004 10-K, LeapFrog admitted it could not reasonably assure the reliability of its 13 inventory reporting or that inventories were reported in accordance with GAAP due to numerous 14 material internal control weaknesses in the area of costs of good sold and inventory. 15 185. CW-5 further explained that LeapFrog accumulated inventory of older products that 16 were no longer sellable and needed to be written-off as excess and obsolete. CW-5 said that some of 17 the excess and obsolete inventory in the warehouse was three years old and covered with an inch of 18 dust. In addition, CW-5 said that marketing materials such as product displays set up at retail stores 19 were improperly capitalized as inventory rather than expensed and had to be reserved. In 7/04, 20 David instructed CW-5 to “look into” the obsolete inventory because it had become an issue of 21 mounting importance. CW-5 stated that one reason for the mounting importance was an email 22 prepared by one of the Company’s sales senior vice presidents at the end of 1Q04 in which the sales 23 senior vice president said he could sell three types of potentially obsolete inventory items, including 24 the Company’s MindStation product, by the end of 2Q04. CW-5 was forwarded this email in 7/04. 25 CW-5 stated, however, that the excess and obsolete inventory was not sold by the end of 2Q04. As a 26 result, the Company and its auditors reevaluated the allowances.

27 186. CW-5 estimated the allowance for excess and obsolete inventory by inputting the 28 amounts of excess and obsolete inventory and a demand forecast for the Company’s various

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1 products into the manufacturing resource planning (“MRP”) system. The estimate of excess and 2 obsolete inventory was based on age of the inventory and which products were showing slower or 3 declining sales. The demand forecast was based on historical sales and anticipated demand provided 4 by the Company’s sales personnel. The MRP system then generated an estimate of obsolete and 5 excess inventory on hand at the end of the year. CW-5 then had additional discussions with sales 6 personnel about whether the identified excess and obsolete inventory could be sold and at what 7 prices. If the price at which the excess and obsolete inventory could be sold was less than the book 8 value of the inventory, the difference would be included in the allowance. 9 187. CW-5 tried to use the Manugistics software to estimate the allowance for excess and 10 obsolete inventory but stated the software was unreliable because it would produce radically 11 different estimates of excess and obsolete inventory. In a 1/05 meeting, CW-5 told Kalinske that 12 there was $7-$9 million of potentially excess and obsolete inventory. Kalinske pressured CW-5 to 13 reduce that estimate but the Company eventually added $9 million to the allowance in 4Q04. 14 188. After the Class Period, the Company admitted the lack of supply-chain software 15 prevented LeapFrog from reporting inventory in accordance with GAAP and the Company’s 16 publicly reported inventory policy. During the 10/18/04 conference call, Curley said the lack of 17 supply-chain software during the Class Period prevented LeapFrog from identifying obsolete and 18 excess inventory: 19 [A]s we started getting into our supply-chain system, we also identified, you know, inventory – excess component inventory that we never had visibility clearly on 20 before, but now that we’ve, you know, have a system that’s not manual, it’s giving us long term visibility. 21

22 During the Company’s 10/27/04 conference call, Perez stated the $3.5 million added to the reserve for 23 excess and obsolete inventory in 3Q04 was only identified as a result of new supply-chain software 24 that was still not providing complete visibility into the Company’s inventories: 25 We booked during the quarter 3.5 million in excess and obsolete inventory, specifically you know, that really came as a benefit from our supply-chain initiatives 26 and we’re starting to get visibility into the components that we use in the 27 manufacturing process, and we went from a manual system now we’re rapidly going to a very, you know, comprehensive automated system that will help us control 28 inventories, so that gave us insight into, you know, definitely slow-moving

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1 components that we viewed this quarter as the quarter once we became aware of the charge. 2 3 c. Understatement Of Expenses And Liabilities 4 189. Defendants also knew that LeapFrog was understating expenses because of material 5 internal control weaknesses related to the purchase of materials and components used to manufacture 6 and assemble the Company’s products. According to CW-7, the former engineering procurement 7 analyst responsible for handling engineering purchases, engineering personnel verbally ordered 8 goods and services from the Company’s vendors without approval and without issuing a purchase 9 order. 10 190. CW-7 regularly received invoices from the Company’s various vendors for monies 11 owed related to goods and services that were not recorded in LeapFrog’s financial statements as an 12 account payable because no purchase order had been issued. As a result, CW-7 regularly created 13 purchase orders after the invoice was received. CW-7 stated that purchase orders were not generated 14 when goods and services were ordered verbally because the engineering department was operating 15 under tight deadlines to develop and build new products. Therefore, engineers would disregard 16 creating a purchase order to expedite procurement of the goods or services which in turn would help 17 the engineering department meet its deadlines. 18 191. CW-7 stated that before incurring an expense by ordering goods and services from the 19 Company’s vendors, a process was supposed to be followed. A purchase requisition was supposed 20 to be submitted to CW-7 who would forward it for approval to a supervisor, department director or 21 Wood based on the dollar amount of the proposed purchase. Wood had to approve requisitions over 22 $5,000. After the requisition was approved, it would be sent to the purchasing department where a 23 purchase order was created and sent to CW-7 and the vendor. CW-7 then entered the purchase order 24 into the general ledger system. 25 192. Because engineers were verbally ordering goods and services from vendors without 26 first getting approval, CW-7 would obtain approval, generate a purchase order and enter the order 27 into the general ledger after the invoice was received and after the expense and payable should have 28 been accrued. CW-7 stated that everybody in the engineering department knew the department was

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1 not complying with LeapFrog’s purchasing policy because the purchase of goods and services from 2 the Company’s vendors without an approved purchase order was a regular practice that occurred for 3 years until the end of 2004. At that time, CW-7 stated the Company completed the Sarbanes-Oxley 4 audit which concluded there were material weaknesses in the Company’s internal controls related to, 5 among other things, (1) the creation of purchase orders. (2) inventory purchasing, (3) the purchase 6 of materials and components used to manufacture and assemble products, (4) the manufacture and 7 assembly of the products and (5) LeapFrog’s payments to its vendors. Those material weaknesses, 8 and numerous others, were belatedly publicly disclosed by LeapFrog after the Class Period, when 9 the Company filed its 2004 10-K on 3/28/05.

10 6. After The Class Period, Defendants Admitted There Were Numerous Material Weaknesses In Leapfrog’s Distribution And Supply-Chain 11 Operations That Prevented The Company From Accurately Forecasting Results And From Reporting The Company’s Financial 12 Results In Accordance With GAAP 13 193. After the Class Period, Defendants disclosed in LeapFrog’s 2004 10-K that there were 14 numerous material weaknesses in internal controls over financial reporting which precluded them 15 from providing reasonable assurance that LeapFrog’s financial reporting was reliable or that the 16 Company’s financial statements were prepared in accordance with GAAP. LeapFrog admitted that 17 there were insufficient controls that constituted material weaknesses in the areas of (1) revenue and 18 accounts receivable, (2) cost of goods sold and inventory and (3) information technology controls 19 related to the manufacturing, distribution, invoicing and sale, and remittance of payments by the 20 Company’s vendors and customers. Ex. D. 21 194. In the area of revenue and accounts receivable, after the Class Period LeapFrog 22 identified the following insufficient controls that constituted material weaknesses in the aggregate: 23 • Lack of segregation of duties between accounts receivable and order entry staff and possession by those persons of broad access to the Company’s 24 revenue and accounts receivable information technology systems, including access to system areas controlling revenue recordation, cash application, 25 credit memo issuance, credit authorization, invoice pricing and collections. 26 • Lack of effective controls over receivables credit memo review and approval process to monitor compliance with existing policies and procedures related 27 to authorization of credit memos to customers. 28

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1 • Lack of consistent and timely reconciliation and review processes related to sales discounts and allowances, shipment and invoicing, and cash receipts. 2 • Inadequate staffing to determine that internal controls over reconciliations, 3 review of account balances and closing procedures are performed consistently and on a timely basis. 4

5 195. In the area of cost of goods sold and inventory, LeapFrog identified the following 6 insufficient controls that constituted material weaknesses in the aggregate: 7 • Lack of segregation of duties between inventory and purchasing staff and 8 possession by those persons of broad access to information technology systems, including access to system areas controlling the set-up of new 9 vendors, the creation of purchase orders, and inventory purchasing and receiving functions. 10 • Inadequate preparation and review of reconciliations of physical inventory 11 results to inventory ledgers and related cost of goods sold accruals.

12 • Inconsistent use of standard recordkeeping systems and formats to record and report inventory transactions. 13 • Inadequate control procedures to determine that work-in-process inventories 14 are correctly summarized, estimated and recorded.

15 • Insufficient communication procedures between accounts payable and operations staff regarding returns of inventory back to vendors. 16 • Inadequate input and review controls over changes to bills of materials and 17 work orders.

18 • Inadequate review of purchase price and production variances included in inventories and cost of sales. 19 • Inadequate staffing to ensure that internal controls over reconciliations, 20 review of account balances and closing procedures are performed consistently and on a timely basis. 21

22 196. In the area of information technology controls, LeapFrog identified the following 23 insufficient controls that constituted material weaknesses in the aggregate:

24 • Ineffective logical access and change management controls related to information technology systems, data and programs that are used to monitor, 25 record and transfer information. These controls relate to the purchase of materials and components used to manufacture and assemble products, the 26 manufacture and assembly of products, the distribution, invoicing and sale of products and the remittance of payments by vendors, customers and the 27 Company related to these activities. 28

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1 • Pervasive inadequacies in enterprise resource planning, or ERP, application controls related to appropriate assignment of functions and segregation of 2 duties, which allowed employees to access system programs and data or initiate transactions inconsistent with their assigned duties. ERP systems 3 contain design deficiencies that do not adequately segregate and control access, and lack sufficient human oversight over the assignment of system 4 access and authorities.

5 • Lack of appropriate training of personnel throughout the organization causing system users to be less effective due to insufficient understanding of the 6 systems they manage and depend upon. 7 197. The Company’s auditors agreed with LeapFrog’s conclusion that it did not maintain 8 effective internal control over financial reporting. 9 The Board of Directors and Stockholders of LeapFrog Enterprises, Inc.

10 We have audited management’s assessment, included in the accompanying 11 Management’s Report on Internal Control Over Financial Reporting, that LeapFrog Enterprises, Inc. did not maintain effective internal control over financial reporting as 12 of December 31, 2004, because of the effect of the three material weaknesses identified in management’s assessment and described below, based on criteria 13 established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). 14 LeapFrog Enterprises, Inc. management is responsible for maintaining effective 15 internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion 16 on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit. 17 18 * * * 19 In our opinion, management’s assessment that LeapFrog Enterprises, Inc. did not 20 maintain effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO control criteria. Also, in 21 our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, LeapFrog Enterprises, Inc has 22 not maintained effective internal control over financial reporting as of December 31, 23 2004, based on the COSO control criteria.

24 D. Defendants Knew That Leapfrog’s Results Depended On A Few Customers That Were Deferring Orders To Reduce Their Levels Of Leapfrog Inventory 25 And Reducing Their Purchases Due To Leapfrog’s Distribution Problems

26 198. LeapFrog’s SEC reports admitted that LeapFrog’s business depended on three 27 retailers (Wal-Mart, Toys R Us and Target) that together accounted for approximately 69% of net 28

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1 sales in 2002, 68% in 2003 and 64% in 2004. Ex. G. However, Defendants merely represented that

2 LeapFrog’s business and operating results “could” be harmed if any of the retailers reduced their 3 purchases, changed the terms on which LeapFrog conducted business with them or experienced a 4 future downturn in their business. LeapFrog also merely represented that its business and operating

5 results “could” be significantly harmed if any retailer (1) reduced its overall purchases of the 6 Company’s products, (2) reduced the number and variety of products that it carried and the shelf 7 space allotted for LeapFrog’s products, (3) decided not to incorporate versions of the Company’s 8 Learning Center shelf displays in its stores or (4) otherwise materially changed the terms of their 9 current relationship. Ex. H. Defendants misled investors by representing that a change in the terms 10 of their current relationships with retailers was only a potential risk, because Defendants knew that 11 Wal-Mart, Toys R Us and Target were actually reducing their purchases of LeapFrog product. 12 199. The Company’s SEC reports later confirmed that Wal-Mart and Toys R Us, 13 LeapFrog’s two largest retail customers, substantially reduced their purchases of LeapFrog product 14 by more than $54 million from 2003 to 2004. According to LeapFrog’s 2004 10-K, sales to Wal- 15 Mart declined by $31.5 million  from $210.8 million in 2003 to $179.3 million in 2004. Similarly, 16 sales to Toys R Us declined by $22.7 million – from $170 million in 2003 to $147.3 million in 2004. 17 200. Defendants knew that the Company’s retailers planned to and did reduce or defer 18 their purchases of LeapFrog product beginning no later than 3Q03. In their SEC reports, Defendants 19 later admitted that the Company’s retail customers were deferring orders to reduce inventory levels 20 which shifted a significant portion of inventory risk and carrying costs to LeapFrog and required 21 LeapFrog to supply product within shorter time frames. Ex. I. As detailed herein several former 22 LeapFrog employees stated that LeapFrog’s retail customers cancelled existing orders and reduced 23 their purchases of LeapFrog product due to LeapFrog’s inability to ship the product at all or to ship 24 the product that was actually ordered.

25 201. Defendants’ admission regarding their close involvements with customers indicate 26 that Defendants were aware of adverse sales information which Defendants did not disclose to 27 investors. In LeapFrog’s 2003 and 2004 Forms 10-K, Defendants admitted that LeapFrog worked 28 closely with its retail customers to forecast demand for its products:

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1 Our sales team works in conjunction with store buyers from our key retailers to forecast demand for our products, develop the store floor footprint, secure retail shelf 2 space for our products and agree upon pricing components, including cooperative advertising allowances. The large retail chains generally provide us with a 3 preliminary forecast of their expected purchases of our products early in the year. 4 While these and subsequent forecasts are not contractually binding, they provide important feedback that we use in our planning process throughout the year. We 5 work closely with our key retailers during the year to establish and revise our expected demand forecasts and plan our production and delivery needs accordingly. 6 Most retailers issue purchase orders to us, as they need product. Based upon these orders, we prepare shipments for delivery through various methods. 7

8 202. Bill Ganey, LeapFrog’s Vice President of U.S. sales, stated in a 5/14/03 LeapFrog 9 press release, the Company “work[ed] very closely with our retail partners to exceed our shared sales 10 goals and to provide the consumer with an excellent shopping experience and product value.” In an 11 8/04 article on inboundlogistics.com, John Casella, LeapFrog’s former Chief Information Officer, 12 stated the following: 13 We [LeapFrog] assign account teams to each customer. The teams work closely with the [retailer’s] buyers to make sure supply and demand are in alignment. As a result, 14 LeapFrog has a tighter connection with buyers regarding forecasts. . . . We put 15 increasing emphasis on our sales forecasting process.

16 It was also reported in the article that LeapFrog’s executive team reviews the sales forecasts and 17 information from marketing and then develops a consensus forecast that the Company adopts. 18 203. Defendants also knew that Wal-Mart began providing substantial price discounts on 19 LeapFrog’s (and other toy manufacturer’s) products in 9/03 as part of a price war to capture market 20 share during the 2003 holiday season. Although toy price wars had always been part of the holiday 21 season, the financial press reported that it was even more brutal than expected in 2003 as shown by 22 Wal-Mart’s dramatic price reductions in 9/03 which occurred six weeks earlier than usual. In fact, 23 the financial press reported the price wars contributed to the bankruptcies of FAO, Inc. and KB Toys 24 Inc. Tom Pritchard, LeapFrog’s senior vice president of marketing, confirmed that Wal-Mart 25 reduced the prices of LeapFrog’s products to help establish Wal-Mart as a destination for those 26 products.

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1 because of a significant increase in channel inventories caused by sales of the PowerTouch. Ex. B at 2 736-39, 813.

3 E. Defendants Obtained Millions Of Dollars From Sales Of Leapfrog Stock While Making Material Misrepresentations And Concealing Material 4 Adverse Information From Investors 5 205. Defendants had actual knowledge that their public statements were materially false 6 and misleading. Thus, Defendants’ insider sales are not necessary to establish their scienter in this 7 case. However, Defendants’ insider sales are clearly probative of their knowledge and strengthen 8 the already strong inference of scienter. The Individual Defendants sold enormous amounts of their 9 LeapFrog stock during the Class Period that were suspicious in timing and amount. As detailed in 10 Ex. J, Defendants sold 4,346,547 shares of their LeapFrog stock and received proceeds in excess of 11 $103 million. Defendants’ sales were at prices that were two to four times higher than $11.99, the 12 closing price of the stock at the end of the Class Period on 10/19/04, after declining more than 34% 13 from the previous day’s closing price. LeapFrog’s stock price has not recovered and continues to 14 trade in the $11.00 range. 15 206. In addition, the sales represented a substantial percentage of the Individual 16 Defendants’ stock and vested options. 17 Defendant Shares Stock % of Vested % Sales to Total Sold Holdings Sales to Options Stock Proceeds 18 Stock Holdings and Holdings Vested 19 Options Wood 3,475,588 3,476,588 100% 0 100% $76,701,710 20 Curley 30,000 31,212 96.4% 96,250 23.6% $988,900 Kalinske 122,777 463,953 26.5% 152,639 19.9% $4.286.831 21 Bender 170,000 172,181 98.7% 49.249 77.1% $4,415.300 Rioux 180,000 193,133 93.2% 152,000 52.2% $5,928,450 22 Lally 153,750 212,285 70.1% 64,313 54.2% $4,354,188 Flowers 145,000 238,699 60.7% 185,895 34.2% $4,197,550 23 Marggraff 69,432 233,518 29.7% 224,084 15.2% $2,238,548 Total 4,346,547 5,028,478 86.4% 923,450 73.0% $103,111,477 24

25 207. The sales by Wood and Kalinske were also dramatically out of line with their sales 26 prior to the Class Period. Wood sold 3,475,588 shares during the Class Period, more than three 27 times the 1,026,084 shares he sold before the Class Period. Kalinske sold 122,777 shares during the 28 Class Period, more than four times the 30,000 shares he sold prior to the Class Period. [C-03-05421-RMW] AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS - 75 -

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1 208. The timing of the sales was also suspicious. Between 7/24/03 and 10/21/03, when 2 LeapFrog’s stock price was trading at its all time high and when Defendants knew that the shipping 3 problems and that PowerTouch sales were causing declining LeapPad sales, all of the Defendants 4 sold 688,318 shares for $24,921,291. Between 10/22/03 and 2/10/04, when Defendants knew that 5 the shipping problems were continuing, that LeapFrog was losing additional sales to the 6 PowerTouch, that LeapFrog had “drastically reduced” prices on all LeapPad platforms, and that the 7 tie ratio was declining, Defendants unloaded an additional 702,031 shares for $21,163,627. 8 209. Wood’s sale of 2.7 million shares in 9/04 for $51 million was particularly suspicious. 9 Wood sold the stock in a private transaction and did not file a Form 4. Wood filed Form 144 on 10 9/7/04 which indicated he intended to sell all of his remaining class A stock, 2,688,642 shares, for 11 $51 million. But Wood never filed a Form 4 disclosing he had actually sold the stock. LeapFrog’s 12 2004 and 2005 Proxy Statements later confirmed the sale. The Proxy Statements show that Wood 13 owned 2,663,417 class A shares as of 4/8/04 and just 1000 shares as of 4/11/05. The undisclosed 14 $51 million sale occurred when Wood knew that the problems with CLI were significantly and 15 adversely impacting LeapFrog’s operating and financial results, and just a few weeks before the 16 Company announced the sales and profits shortfall on 10/18/04. 17 210. The financial press noted the suspicious nature of Wood’s private sale. On 10/18/04, 18 after LeapFrog announced that 3Q04 sales and earnings would be sharply below expectations, Herb 19 Greenberg wrote: 20 SAN DIEGO (CBS.MW) - The writing was on the wall for a blowup at LeapFrog Enterprises. 21 22 There are plenty of reasons, which I’ve detailed in multiple columns over the past year and a half or so. 23 24 But the biggest red flag came a little over a month ago. As I wrote in Herb Greenberg’s RealityCheck at the time, the buzz in my channel was that former 25 LeapFrog . . . CEO and founder Michael Wood sold 2.5 million shares of stock in a private transaction. 26 27 The company wouldn’t confirm that Wood, was the seller and Wood-chief vision officer, chief creative officer and vice chairman of the board immediately prior to his 28

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1 departure -never returned my call. (But by the same token, he also never called to complain about the story!). 2 3 According to the company’s April proxy, Wood who left the company Sept. 1 after being demoted in February, had 2.6 million shares. As I wrote at the time, “If Wood 4 indeed was the seller, the timing of the sale would definitely be an eyebrow raiser. Did he sell because he decided it’s time to get out while the getting is good, which 5 would be a negative? Or did he sell because he’s miffed he was pushed out and 6 wanted nothing more to do with the company, which would be less of a negative?”

7 Based On Monday’s warning that third quarter and 2004 sales and earnings will be sharply below expectations, it looks like it might have been both. 8

9 DEFENDANTS ISSUED FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD 10 A. Between 7/24/03 And 10/20/03, Defendants Falsely Assured Investors There 11 Were No Impediments To Leapfrog Meeting 3Q03 Guidance, Misleadingly Listed And Concealed Actual Problems As Mere Risk Factors, And 12 Downplayed The Impact Of The Powertouch 13 211. On 7/24/03, the first day of the Class Period, defendants Wood, Curley and Bender 14 participated in LeapFrog’s 2Q03 earnings conference call attended by various analysts that followed 15 the Company. During the conference call, Defendants made the following false statements: 16 (a) Defendant Wood stated that LeapFrog “experienced strong growth in all three

17 of [LeapFrog’s] divisions, U.S. consumer, international consumer and U.S. SchoolHouse,”

18 that LeapFrog was “optimistic about the second half of this year,” and that “[w]e believe we 19 enter the second half of 2003 with good momentum, exciting new products and expanded 20 distribution in each of our three business divisions.” Wood also stated, “[w]e believe our 21 new product offerings, which include three new platforms, 31 new software titles and 15 new 22 23 stand-alone products in the U.S. consumer division will help maintain LeapFrog’s 24 momentum for the second half.” Wood also stated that “[o]ur product offerings this fall

25 have created considerable buyer enthusiasm. You can expect to see increased shelf space 26 for our products at our existing retail partners and new distribution in such retail outlets as 27 Radio Shack and Best Buy.” 28

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1 (b) Defendant Curley reaffirmed the Company’s previous guidance for 3Q03,

2 4Q03 and FY03 as follows: 3 We are reaffirming our third and fourth quarter guidance. Note that the guidance 4 for the third and fourth quarters is unchanged from that published in our fourth quarter press release on February 10th. So to reiterate it, it’s as follows: third 5 quarter 2003 net sales in a range from 225 to 235 million. Operating income, a range of 54 to 57 million. And diluted net income per share, a range of 55 to 58 6 cents. Fourth quarter 2003, net sales 277 to 297 million. 7 Operating income, 66 million to 71 million. And diluted net income per share of 68 8 cents to 74 cents. Now, for the full year, as we have exceeded expectations in the second quarter, our full-year guidance should be revised as follows: net sales for the 9 full year will be in a range of 647 to 683 million. Gross profit margin, 52 to 53% of 10 net sales. Operating expenses, a range of 37 to 38% of sales. Our effective tax rate is 37%. Net income, we estimate 71 to 76 million. And our fully diluted share count 11 is 60.6 million shares, and this results in a diluted net income per share for the full year of $1.17 to $1.25.... 12 13 (c) In response to a question from Bank of America Securities analyst Howard 14 Block, Wood stated that LeapFrog was ready to keep the Company’s retail customers in

15 stock as LeapFrog moved into the peak selling season: 16 [A]s you know, we’re right in the middle of the fall recess in all of our retailers. And 17 given the expanded space that we’ve got and the expanded disproportionate number of new items, this is a natural time for us to be building up inventory. Just want to 18 characterize, we think this is the appropriate place to be with inventory. One, very little risk on a carrying cost of inventory at this time. And secondly, we’re ready to 19 keep our customers in stock as we move forward in this critical third period. . . . 20

21 (d) In response to a question from Salomon Smith Barney analyst Jill Krutick

22 (“Krutick”) about the Company’s supply-chain initiatives, Wood stated the Company had 23 successfully launched improvements in the supply-chain operations: 24 We continue to make strong growth in supply-chain. As I mentioned, our director 25 of IT has implemented a supply-chain strategy both here and in our Hong Kong office, and now increasingly throughout our international divisions. And we all feel 26 good about the successful launch of that improvement for this fall. . . . 27 28

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1 (e) In response to another question from Krutick about the Company’s guidance,

2 Defendant Wood stated there were no impediments to reporting results in line with guidance. 3 We feel very positive. We’re going to stick with our guidance until we continue to 4 eliminate those uncertainties that remain ahead of us throughout the year. And that would be true on net sales and on net income. But there’s no boogie man out there in 5 either of those of which we’re aware. 6 Krutick: No impediments in terms of retail inventory levels being a little bit higher 7 heading into the holiday season?

8 Wood: No. 9

10 212. The foregoing statements were materially false and misleading because, as 11 Defendants knew, there were numerous impediments that would preclude LeapFrog from reporting 12 the financial results reiterated during the 7/24/03 conference call, which have been described 13 throughout this Complaint, and include: 14 (a) The problems with LeapFrog’s distribution and supply-chain operations, particularly the inability of LeapFrog’s 3PLs, Genco and DSS, to ship product to 15 LeapFrog’s customers, and LeapFrog’s inability to supply its 3PLs with product for 16 the 3PLs to distribute, were very significant impediments to LeapFrog achieving sales approximating the guidance Defendants reiterated during the 7/24/03 17 conference call. As witnesses recounted, Defendants knew that the 3PLs were unable to ship product to the Company’s retail customers within the shorter time 18 periods the customers required; and that DSS was shipping product to Wal-Mart, Target and Toys R Us that they had not ordered and would not pay for. In addition, 19 Defendants knew the Company’s retail customers repeatedly complained about the 20 inability to accurately fulfill orders, and consequently reduced their purchases of LeapFrog product. In fact, Defendants had already decided to replace DSS with 21 another warehouse management company because of these problems. Moreover, the falsity of Defendants’ statements is evidenced by the fact that, just three months 22 later, on 10/21/03, LeapFrog reported 3Q03 sales of $203.9 million, or 11% less than the $225-$235 million Defendants told investors there were no impediments to 23 achieving. 24 (b) During LeapFrog’s 10/22/03 conference call, Defendants admitted that they 25 knew about the sales miss well before they disclosed it publicly on 10/21/03. During the conference call Wood admitted that the sales shortfall was due to the Company’s 26 inability to ship product in response to orders received in the last 10 days of the quarter. In addition, Wood stated that LeapFrog would have needed more orders 27 earlier in the quarter to have met guidance because DSS could not ship orders 28

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1 received in the last 10 days of the quarter. In fact, Wood admitted that LeapFrog thought about preannouncing 3Q03 results but decided not to. 2 (c) As revealed in the pleadings and trial testimony of Wood, Bender and Reed, 3 in LeapFrog’s patent infringement suit against Mattel/Fisher-Price, Defendants knew 4 “immediately” (which would mean in July 2003, when PowerTouch was launched) that sales of Mattel’s competing PowerTouch product was another impediment to 5 LeapFrog reporting 3Q03 results in line with the reiterated guidance. LeapFrog’s trial brief admitted that (i) LeapFrog would have sold at least 1 million more units of 6 product if Mattel did not sell the PowerTouch and (ii) LeapFrog took significant competitive actions in response to Mattel’s market entry including “drastic 7 reductions in price” and including an extra book with its LeapPad systems because 8 Mattel advertised and promoted that the PowerTouch system included an extra book. Ex. F. The testimony of Wood, Bender and Reed shows that Defendants knew 9 LeapFrog lost 450,000 sales prior to 10/3/03. Bender testified that LeapFrog tracked sales of the PowerTouch and LeapPads in 2003 and that “once the PowerTouch was 10 introduced [in 7/03], and it was merchandised right next to the LeapPad products, we 11 immediately saw a depress in our sales on the hardware of LeapPads and the My First LeapPads.” Ex. B at 720. 12 (d) Defendants also knew that the Company was facing competition from 13 Publications International LLC (“PIL”), a company LeapFrog had just settled a lawsuit with in 2/03. PIL introduced two new products, the ActivPad, a stylus driven 14 electronic workbook system that competed with the LeapPad and Story Reader, a 15 portable electronic storybook reader that competed with the Leapster – a product that LeapFrog did not introduce until 11/03. Further, Defendants knew, as was reported 16 in the financial press, that PIL’s competing products retailed for $30 which was substantially less than the price of LeapFrog’s products. 17 (e) The distribution and supply-chain problems and the lost sales caused by 18 Mattel meant Defendants could not accurately forecast LeapFrog’s future financial 19 results. Thus, Defendants knew they had no reasonable basis for reiterating the guidance for 3Q03, 4Q03 and FY03. As CW-7 noted, Wood, Kalinske and Curley 20 repeatedly told LeapFrog employees during quarterly meetings that the Company was not doing well and would not meet its goals. After failing to accurately forecast 21 the Company’s 3Q03 financial results, LeapFrog substantially lowered guidance for 1Q04 on 3/10/04, just one month after providing initial guidance. The Company 22 lowered guidance again on 4/21/04 and 10/18/04. On 12/16/04, LeapFrog not only 23 withdrew guidance but failed to provide any new guidance because as Kalinske stated, “we’ve been so horrible at providing guidance I just don’t think there’s any 24 benefit in continuing the practice for the rest of this year.” The Company’s new CFO also conceded LeapFrog could not forecast its results: “[W]e’re withdrawing 25 our guidance for 2004 . . . it’s been difficult to provide useful financial guidance. Specifically, we are faced with a number of factors that make this type of analysis 26 even more complicated. . . . [W]e have not had all the processes in place to give us 27 adequate visibility to provide more accurate information . . . therefore, we are not in a position to provide guidance.” 28

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1 (f) Defendants’ sales of 688,318 shares for $24.9 million between 7/24/03 and 10/21/03 when LeapFrog’s class A stock traded at its all time high evidences their 2 knowledge that there were impediments to LeapFrog meeting 3Q03 guidance.

3 (g) Defendants received daily shipping and financial reports revealing shortfalls 4 in actual results.

5 (h) Defendants were the “hands-on managers” and senior-most officers of the Company, and knew that competition from Mattel and the inability to ship product to 6 LeapFrog’s retail customers were impeding the Company’s business and operating results. 7

8 9 213. Stock Price: After declining 17% in the two weeks leading up to the 7/24/05 10 conference call, Defendants’ false positive statements on 7/24/05 caused LeapFrog’s stock price to 11 increase 8.5%, from a closing price of $28.30 on 7/23/03, to a closing price of $30.70 on 7/24/03. 12 That increase compared favorably with a 0.7% decline in the S&P 500 and a 0.2% decline in the 13 S&P Consumer Discretionary Index (the “proxy peer group”) - the indices LeapFrog used in its 14 Proxy Statements as a comparative peer group. On 7/24/03, Reuters reported that LeapFrog’s shares 15 jumped more than 8% after the conference call. LeapFrog’s stock price continued to increase, 16 closing at $31.16 on 8/19/03, a 10.1% increase from 7/23/03, compared to a 1.3% increase in the 17 S&P 500 and a 3.7% increase in the proxy peer group. 18 214. On 8/11/03, Defendants filed LeapFrog’s 2Q03 Form 10-Q with the SEC, which was 19 signed by defendants Wood and Curley. The 10-Q included false and misleading statements 20 portraying actual problems which Defendants knew were occurring as mere “risk factors” that 21 “could” occur. The problems falsely portrayed as mere risks pertained to LeapFrog’s (a) ability to 22 ship product to its customers within shorter time periods, (b) ability to compete effectively with 23 existing or new competitors, and (c) dependence on Wal-Mart, Toys R Us and Target for a majority 24 of the Company’s sales. 25 (a) Defendants merely represented that LeapFrog’s relationships with its retail customers 26 “could” be damaged, shipping costs “could” increase and sales opportunities “could” be delayed or 27 lost if the Company was unable to meet tight shipping schedules and fill retail orders: 28

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1 Our business is seasonal, and therefore our annual operating results will depend, in large part, on sales relating to the brief holiday season. 2 3 Sales of consumer electronics and toy products in the retail channel are highly seasonal, causing the substantial majority of our sales to U.S. retailers to occur 4 during the third and fourth quarters. In 2002, approximately 81 % of our total net sales occurred during this period. This percentage of total sales may increase as 5 retailers become more efficient in their control of inventory levels through just-in- 6 time inventory management systems. Generally, retailers time their orders so that suppliers like us will fill the orders closer to the time of purchase by consumers, 7 thereby reducing their need to maintain larger on-hand inventories throughout the year to meet demand. While these techniques reduce retailers’ investments in their 8 inventory, they increase pressure on suppliers to fill orders promptly and shift a significant portion of inventory risk and carrying costs to suppliers like us. The 9 logistics of supplying more product within shorter time periods will increase the risk 10 that we fail to meet tight shipping schedules, which could damage our relationships with retailers, increase our shipping costs or cause sales opportunities to be delayed 11 or lost. 12 Ex. I. Defendants further merely represented that LeapFrog’s operating results could suffer if it 13 failed to develop and maintain management systems and resources sufficient to manage the 14 Company’s rapid growth: 15 Our rapid growth has presented significant challenges to our management systems 16 and resources, and we may experience difficulties managing our growth.

17 Since the introduction of our first platform, we have grown rapidly, both domestically and internationally. Our net sales have grown from $71.9 million in 18 1999 to $531.8 million in 2002. . . . This expansion has presented, and continues to 19 present, significant challenges for our management systems and resources. If we fail to develop and maintain management systems and resources sufficient to keep 20 pace with our planned growth, our operating results could suffer. 21

22 Ex. K. 23 (b) Defendants also merely represented that sales and market share “could” decline if 24 LeapFrog was unable to compete effectively: 25 If we are unable to compete effectively with existing or new competitors, our sales and market share could decline. 26 27 We currently compete primarily in the infant and toddler and preschool categories and electronic learning aids category of the U.S. toy industry and, to some degree, in 28 the overall U.S. and international toy industry. . . . Each of these markets is very

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1 competitive and we expect competition to increase in the future. For example, in July 2003, Mattel, Inc. introduced under its Fisher-Price brand a product called 2 “PowerTouch” having functionality similar to that of our Leappad platform. . . . Many of our direct, indirect and potential competitors have significantly longer 3 operating histories, greater brand recognition and substantially greater financial, 4 technical and marketing resources than we do. These competitors may be able to respond more rapidly than we can to changes in consumer requirements or 5 preferences or to new or emerging technologies. They may also devote greater resources to the development, promotion and sale of their products than we do. We 6 cannot assure you that we will be able to compete effectively in our markets.

7

8 Ex. E. Defendants also merely represented that sales of LeapPad platforms, the product that Mattel’s

9 PowerTouch competed with, “may” be of particular importance to LeapFrog’s financial results “if” 10 such LeapPad sales failed to grow as expected: 11 We currently rely, and expect to continue to rely, on our LeapPad platform and related interactive books for a significant portion of our sales. 12 13 Our LeapPad platform and related interactive books accounted for approximately 48% of our net sales in 2002. No other product line, together with its related 14 software, accounted for more than approximately 10% of our net sales [in] 2002. A significant portion of our future sales will depend on the continued commercial 15 success of our LeapPad Platform and related interactive books. If the sales for our 16 Leap Pad platform are below expected sales or if sales of our LeapPad interactive books do not grow as we anticipate, sales of our other products may not be able to 17 compensate for these shortfalls and our overall sales would suffer. 18

19 Ex. L. 20 (c) Defendants also represented that LeapFrog’s business and operating results “could” 21 be harmed “if” Wal-Mart, Toys R Us or Target, the three retailers that accounted for 79% of the 22 Company’s U.S. Consumer sales in 2003 and 86% in 2004, reduced their purchases, changed the 23 terms on which they conducted business with LeapFrog or experienced a downturn in their business: 24 Our business depends on three retailers that together accounted for approximately 69% of our net sales in 2002, and our dependence upon a small group of retailers 25 may increase. 26 Wal-Mart (including Sam’s Club), Toys “R” Us, and Target accounted in the 27 aggregate for approximately 69% of our net sales in 2002. We expect that a small number of large retailers will continue to account for a significant majority of our 28 sales and that our sales to these retailers may increase as a percentage of our total

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1 sales. At December 31, 2002, Wal-Mart (including Sam’s Club) accounted for approximately 33% of our accounts receivable and Toys “R” Us accounted for 2 approximately 30% of our accounts receivable. If any of these retailers experience significant financial difficulty in the future or otherwise fail to satisfy their 3 accounts payable, our allowance for doubtful accounts receivable could be 4 insufficient. If any of these retailers reduce their purchases from us, change the terms on which we conduct business with them or experience a future downturn in 5 their business, our business and operating results could be harmed. 6 We do not have long-term agreements with our retailers and changes in our 7 relationships with retailers could significantly harm our business and operating results. 8 9 We do not have long-term agreements with any of our retailers. As a result, agreements with respect to pricing, shelf space, cooperative advertising or special 10 promotions, among other things, are subject to periodic negotiation with each retailer. Retailers make no binding long-term commitments to us regarding purchase 11 volumes and make all purchases by delivering one-time purchase orders. If the number of our products increases as we have planned or the roll out of versions of 12 our Learning Center shelf displays in selected retail stores proceeds as we anticipate, 13 we will require more retail shelf space to display our various products. Any retailer could reduce its overall purchases of our products, reduce the number and variety 14 of our products that it carries and the shelfspace allotted for our products, decide not to incorporate versions of our Learning Center shelf displays in its stores or 15 otherwise materially change the terms of our current relationship at any time. Any such change could significantly harm our business and operating results. 16

17 Exs. G and H. 18 215. Defendants also falsely represented in the 2003 Form 10-Q that LeapFrog’s financial 19 results were prepared in accordance with GAAP and that the Company’s internal controls over

20 financial reporting (a process designed to provide reasonable assurance that the Company’s financial 21 reporting was reliable and that the Company’s financial statements were prepared in accordance with 22 GAAP) were effective. Ex. D. As required by §302 of Sarbanes-Oxley, Curley and Wood certified 23 that (1) the 10-Q did not contain any untrue statement of a material fact or omit to state a material 24 fact necessary to make the statements made, in light of the circumstances under which such 25 statements were made, not misleading, (2) the financial statements included in the 10-Q fairly 26 presented in all material respects the financial condition, results of operations and cash flows of 27 LeapFrog, (3) they were responsible for designing and evaluating the Company’s disclosure controls 28 and (4) they had disclosed all significant deficiencies and material weaknesses in the design or

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1 operation of the Company’s internal controls over financial reporting which were reasonable or 2 likely to adversely affect LeapFrog’s ability to record, process, summarize and report financial 3 information. Ex. M. 4 216. The statements contained in the 2Q03 Form 10-Q were materially false and 5 misleading because, inter alia, as Defendants knew: 6 (a) LeapFrog’s relationships with its retail customers had already been damaged, shipping costs had already increased and sales had already declined 7 because LeapFrog’s 3PLs were unable to ship product to the Company’s retail customers within required shorter periods, and because DSS shipped product to the 8 retailers that they had not ordered and would not pay for. 9 (b) LeapFrog’s operating results were already suffering because 10 LeapFrog had not developed and maintained sufficient management systems to keep pace with planned growth. As admitted by Defendants after the Class Period and as 11 explained by the confidential witnesses, LeapFrog’s failure to implement supply- chain software impeded LeapFrog from producing sufficient levels of inventory to 12 fill customer orders, and caused a significant adverse impact on the Company’s 13 operating and financial results.

14 (c) The statement that competition “could” cause sales and market share to decline was false and misleading because LeapFrog’s suit against Fisher- 15 Price/Mattel demonstrated, Defendants immediately knew that LeapFrog was losing 16 millions of dollars in sales and profits due to the sale of PowerTouch, including the loss of 450,000 LeapPad sales before 10/3/03. Competition already had caused a 17 reduction in sales and profitability at LeapFrog.

18 (d) Defendants’ representations that LeapFrog’s business and operating results “could” be harmed if Wal-Mart, Toys R Us or Target reduced their 19 purchases, changed the terms on which they conducted business with LeapFrog or 20 experienced a downturn in their business, were materially false and misleading because, as Defendants knew, LeapFrog’s retail customers had actually reduced 21 orders of LeapFrog’s products and imposed millions of dollars of vendor violation penalties because LeapFrog’s 3PLs were unable to ship product within shorter time 22 periods, and shipped product that the retailers had not ordered and would not pay for.

23 (e) Defendants’ certifications that LeapFrog’s disclosure controls and 24 internal controls over financial reporting were sufficient to ensure the reliability of the Company’s financial reporting and that the Company’s financial statements were 25 prepared in accordance with GAAP were false and misleading because, as witness accounts and post-Class Period admissions in the 2004 Form 10-K show, and as 26 Defendants knew, there were numerous material weaknesses in LeapFrog’s revenues and accounts receivable, costs of goods sold and inventory, and information 27 technology controls. 28

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1 217. On 8/20/03 Bear Stearns issued a report entitled, “Takeaways from Upbeat Meetings 2 with Management” that was based on and repeated statements by Defendants: 3 Our recent meetings with management of LeapFrog enhanced our conviction that the second half of the year will be a blow out and the company’s long term prospects 4 remain bright. 5 Sales momentum remains strong, shelf space is increasing at retail, manufacturing 6 costs are dropping and distribution channels continue to expand. 7 Management was nonchalant over Mattel’s launch of its competing product and the 8 marketing blitz that will accompany it. 9

10 * * *

11 Management also believe[s] [Mattel’s PowerTouch] could have a positive impact. Mattel’s marketing spend will surely elevate consumer awareness and potentially 12 draw buyers into stores which could, in fact, stir sales of the LeapPad or other LeapFrog products which tend to show better at retail. Furthermore, management 13 believes that Mattel’s PowerTouch will prove to have less staying power than LeapFrog’s products. . . 14 15 Management indicated that it is not changing its marketing strategy in any way despite Mattel’s marketing blitz for its competing PowerTouch product. . . . 16 17 218. The statements by Defendants reflected in Bear Stearns’ 8/20/03 report to investors 18 were false and misleading because: 19 (a) The second half of 2003 would not be a blowout and that sales momentum was not strong because as, Defendants knew, LeapFrog’s retailers were deferring 20 orders; LeapFrog was losing millions of dollars in sales and profits as a result of Mattel’s competing PowerTouch product; and LeapFrog’s ongoing infrastructure and 21 shipping problems would prevent LeapFrog from achieving a “blowout” second half of the year. 22

23 (b) Contrary to their representations, Defendants were not nonchalant about Mattel’s competing PowerTouch product. The competition forced Defendants to 24 change marketing strategies. Wood and/or Bender testified that LeapFrog immediately added another book to the LeapPad platforms, increased the marketing 25 budget, and started its holiday advertising campaign earlier than usual, in response to 26 Mattel including two books with the PowerTouch. These Defendants also testified that LeapFrog immediately saw a decline in sales of LeapPad platforms and content 27 books after the PowerTouch was launched in 7/03. Moreover, Bender’s testimony in the patent infringement suit shows that Defendants knew that the PowerTouch would 28 not have a positive impact by drawing buyers into stores: [C-03-05421-RMW] AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS - 86 -

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1 Q: In your understanding of the market, do you have any understanding as to 2 whether or not the Fisher-Price brand name on the PowerTouch brought people onto the learning aisle that otherwise would never have been there? 3

4 A: I don’t believe so. 5 Q: Why not? 6 A: LeapFrog is the number one thought of educational background. Consumers 7 have come to shop that aisle, looking for educational products. Fisher-Price is not 8 known, like LeapFrog, as the number one educational brand.

9 Ex. B, Bender direct testimony, May 18, 2005, at 722. 10 219. Stock Price: As reported by The Wall Street Journal on 8/20/03, LeapFrog’s stock 11 price increased $2.40 or 7.6% from $31.61 on 8/19/03 to $34.01 on 8/20/03 after Bear Stearns issued 12 the report repeating Defendants’ positive statements. LeapFrog’s stock price increased 7.6% 13 compared to a 0.2% decline in the S&P 500 and a 0.1% increase in the proxy peer group. 14 LeapFrog’s stock price continued to increase and closed at $37.95 on 9/16/03, a 20% increase from 15 the closing price of $31.61 on 8/19/03. During the same time period, the S&P 500 increased 2.7% 16 and the proxy peer group increased 1.3%. In fact, on 9/8/03, Bear Stearns issued a report lowering 17 its buy rating on LeapFrog’s stock due to the 30% increase in the stock price over the previous three 18 weeks. 19 220. On 9/17/03, defendants Kalinske and Curley made a presentation at the Bank of 20 America Securities 33rd Annual Investment Conference and the ThinkEquity Partners Growth 21 Conference. During both conferences, Kalinske and Curley gave what Citigroup Smith Barney 22 analyst Jill Krutick (“Krutick”) described in her 9/17/03 report as “very positive” presentations. 23 Kalinske and Curley touted LeapFrog’s historical growth and stated that the introduction of three 24 new platforms in the second half of 2003 would result in continued growth and a very big second 25 half year for LeapFrog: 26 This is going to be a very big second half for us with the launch of three new platforms. So that brings our platform family from six to nine. So we think that will 27 drive a lot of new platform sales. 28

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1 At the same time we’re selling – our library of software’s become bigger and bigger. So we’ll see continued success with that. We haven’t broken out guidance on what 2 we estimate the mix to be. But have said that we expect growth in all three categories -you know software, hardware and stand-alone products. 3

4 * * * 5 Right now we’re in a black-out period. It’s the last month of the quarter. So we’re 6 refraining from any kind of discussion even about previously published guidance.

7

8 Curley represented that LeapFrog was a financially disciplined company: 9 I’d like to demonstrate that we’re also financially disciplined company. You may say, well, how do you get financial discipline in a creative, innovative environment? 10 And I think you have to approach the product innovation with the strong ROI mentality, and that’s what we try to do. Here we have consistent sales growth over 11 the last three years, compound annual growth of 82%. The first half of this year a 12 43%, so it’s been consistently growing. . . .

13 In addition, Curley represented that LeapFrog was improving inventory management by purchasing 14 a supply-chain management system from Manugistics: 15 We do have our ways to improve, as far as inventory management, to be at least like 16 our peers. So we bought Manugistics, a supply-chain management system. We thought we’d install it this year. It was getting too close to busy season so we really 17 delayed it so we wouldn’t disrupt the business, and we’re on target for that for next year. 18 19 221. Citigroup Smith Barney analyst Jill Krutick’s 9/17/03 report was based on and 20 repeated the statements made by Kalinske and Curley during their presentations. Krutick reiterated 21 the positive statements made by Kalinske and Curley (although she referred to them as “LeapFrog’s 22 senior management” rather than identify them by name) and reported that LeapFrog should report 23 sales growth and margin improvements. Specifically, Krutick reported 24 [o]verall, a very positive story and one that will likely continue to percolate.

25 Despite some risks of profit taking, rising competition in the interactive education niche, and concerns about the expiring lock-up stock overhang, we believe LeapFrog 26 should at least continue to appreciate with its peer group. . . . 27 28

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1 Sales growth this year should be aided by the introduction of three new platforms in the second half of 2003, as well as an array of new software titles and standalone 2 products. . . 3

4 222. The statements made by Kalinske and Curley during the 9/17/03 conferences, that 5 were repeated to investors in the Citibank Smith Barney report, were false and misleading because, 6 as Defendants knew: 7 (a) Kalinske’s comments relating to Defendants’ previously issued guidance and that it was going to be “a very big second half” with “growth in all three categories” 8 of LeapFrog’s business were false and misleading because Kalinske and Curley knew that LeapFrog’s 3Q03 results would be significantly less than the guidance 9 reiterated during the 7/24/03 conference call for the reasons set forth in ¶212. 10 (b) During the Company’s 10/22/03 conference call, Wood admitted that he and 11 the other Defendants knew LeapFrog needed additional orders before 9/20/03 to meet guidance because the Company did not have the ability to adequately fulfill 12 orders received in the last 10 days of the quarter. Further, as witnesses recounted, Kalinske and Curley knew sales to LeapFrog’s retail customers were not sufficient to 13 meet guidance because DSS was unable to ship product to the Company’s retailers 14 within the required shorter time periods and because DSS was shipping product that the retailers had not ordered and would not pay for. Moreover, as Curley knew, 15 LeapFrog tried to avoid reporting the sales miss by improperly recognizing revenues on product DSS shipped to an empty warehouse. 16 (c) LeapFrog was not a “financially disciplined company” as Curley represented 17 during the conferences because, as Defendants knew LeapFrog lacked the ability to 18 ship product in accordance with retail customers’ purchase orders. After the Class Period, LeapFrog acknowledged that it was not a financially disciplined company by 19 admitting there were numerous material weaknesses with the Company’s internal controls that prevented LeapFrog from ensuring that its financial reporting was 20 reliable and its financial statements were prepared in accordance with GAAP. 21 (d) Curley’s representation that the purchase of the Manugistics supply-chain 22 software was delayed to avoid disruption of the business was false and misleading because, as Defendants knew, Defendants failed to disclose to investors that the 23 delayed implementation of the software precluded LeapFrog from accurately forecasting and meeting customer demand and was contributing to the disruption of 24 the business that caused the 3Q03 sales miss. 25 223. Stock Price: Following Kalinske’s and Curley’s positive statements on 9/17/03; the 26 price of LeapFrog’s stock continued to increase. On 9/17/03, the stock price increased $1.40 or 27 3.7% to $39.35, compared to a 0.3% decline in the S&P 500 and a 0.4% decline in the proxy peer 28

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1 group. Between 9/16/03 and 10/21/03, LeapFrog’s stock price increased $8.60 or 22.6%, closing at 2 a Class Period high price of $46.54. During the same time period, the S&P 500 increased just 1.65% 3 and the proxy peer group increased just 1.75%. 4 224. On 10/3/03, LeapFrog filed suit against Mattel alleging that PowerTouch infringed 5 LeapFrog’s patent. On 10/7/03, Merrill Lynch analyst Fine issued a research note that reported the 6 suit could raise questions as to whether Mattel’s competing PowerTouch product was having an 7 impact on current LeapPad sales, but that she did not believe the lawsuit was a reflection of current 8 sales trends and was more a standard industry practice than anything else. On the same day, Pacific 9 Growth Equities analyst Natalie Walrond (“Walrond”) issued a report stating the lawsuit was 10 “unlikely to impact LeapFrog’s operations, financials or the competitive outcome of the ELA space 11 over the near term.” On 10/8/03, Bear Stearns analyst Childe reported that the suit “looks to us like 12 an admission that the PowerTouch is or could do some damage” because LeapFrog alleged that it 13 had “been damaged and will be “irreparably injured” unless the court stopp[ed] Mattel from selling 14 the product.”

15 B. Defendants Issued False And Misleading Statements Between 10/21/03 And 2/9/04, Including False And Misleading Financial Results For 3Q03, False 16 Assurances That The Distribution And Supply-Chain Problems That Caused The 3Q03 Revenue Shortfall Were Fixed, And False And Misleading Risk 17 Factors In Leapfrog’s 3Q03 10-Q 18 225. On 10/21/03, LeapFrog reported sales of $203.9 million, 11% less then the $225- 19 $235 million that Defendants had previously told investors to expect previously: 20 LeapFrog Earns $0.55 per share in Third Quarter, Net Income up 25% Increases Sales and Earnings Guidance for Fourth Quarter and Reaffirms Full Year Guidance 21 22 Emeryville, Calif - October 21, 2003 - LeapFrog Enterprises, Inc. (NYSE:LF), a leading developer of innovative technology-based educational products, today 23 reported financial results for the third quarter ended September 30, 2003. The company also increased its sales and earnings guidance for the fourth quarter and 24 reaffirmed its guidance for the full year 2003. 25 Net Income Up 25% For 3rd Quarter and Up 102% YTD 26 27 The company recorded increased net income for the third quarter of 2003 of $33.4 million, or $0.55 per share, up 25% from net income of $26.7 million, or $0.50 per 28 share over the same period in 2002. In the first nine months of 2003, net income was

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1 $28.5 million, or $0.47 per share, up 102% from net income of $14.1 million, or $0.30 per share, in the first nine months of 2002. 2 3 Net Sales Up 12% For 3rd Quarter and Up 23% YTD

4 Net sales for the third quarter of 2003 were $203.9 million, up 12% over the same 5 period in 2002. For the first nine months of 2003, net sales were $348.7 million, up 23% over the same period in 2002. 6 Segment Results 7

8 Net sales from the U.S. Consumer segment were $167.1 million in the third quarter, up 4% over the same period in 2002. . . . 9 10 In the first nine months of 2003, net sales from the U.S. Consumer segment were $272.6 million, up 14% over the same period in 2002. . . . 11 12 “While we were satisfied with the sales growth in our International and Education and Training divisions, late building demand from our key retailers resulted in lower 13 net sales growth for the third quarter in our U.S. Consumer business. This resulted in a shift of deliveries from the third quarter to the benefit of the fourth quarter,” said 14 Mike Wood, President and Chief Executive Officer. “Our underlying sell-through at the retail level remained very strong throughout the third quarter. The strength of our 15 U.S. retail sell-through across all of our product lines, coupled with the anticipated 16 fourth quarter launch of our Leapster platform product, has led us to revise our fourth quarter guidance upward and to reiterate our full year guidance.” 17 “This demand for engaging learning products remains high among children, teachers 18 and parents, and leads us to believe we will have a strong holiday season,” Wood 19 concluded.

20 Guidance for the Fourth Quarter and 2003 21 The company is increasing its guidance for the final quarter and reaffirming its 22 guidance for full year 2003 as follows: 23 Fourth Quarter 2003 24 Net sales $316 million to $334 million 25 Net income $42 million to $47 million 26 Diluted net income per share $0.69 to $0.76 27 Full Year 2003 28 Net sales $665 million to $683 million

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1 Gross profit margin 51 % to 52% of net sales

2 Net income $70 million to $75 million

3 Fully diluted share count of 61 million shares

4 Diluted net income per share $1.17 to $1.25

5 226. During a 10/22/03 conference call, defendants Wood and Curley repeated the 6 Company’s 3Q03 financial results and made additional false statements about the reasons for the 7 3Q03 revenue miss and the Company’s business and operations: 8 (a) Wood and Curley provided revised guidance and stated that the sales shortfall in 9 3Q03 was primarily due to timing, and would be recognized in the fourth quarter: 10 [W]e believe that our shortfall in U.S. sales in the third quarter was primarily timing, and that those sales not recognized in the third quarter will be recognized 11 in the fourth quarter. As a result we’ve increased our fourth quarter guidance and are reiterating our full year guidance. So I look forward to what we believe will be a 12 very strong fourth quarter in both sell-through and sell-in.

13 * * *

14 We are raising our fourth quarter guidance as follows. Net sales, we’re guiding 15 you towards $316 million to $334 million for the fourth quarter, net income in a range of $42 to $47 million, and diluted net income per share of 69 cents to 76 16 cents.

17 * * *

18 Our new fourth quarter guidance results in full year guidance of the following. Net sales in a range of $665 million to $683 million. Gross profit margin of 51% to 52% 19 of net sales. Net income in a range of $70 million to $75 million. A fully diluted share count of 61 million shares, and a diluted net income per share range of $1.17 20 to $1.25. 21

22 (b) In response to analysts’ questions, Wood assured that the distribution and supply- 23 chain problems that contributed to the sales shortfall in 3Q03 had been fixed: 24 Krutick: Mike, I was hoping you could give us a flavor for your supply-chain, your distribution process, your logistics, how would you sort of describe where you are, 25 where you expect to be, and your order fill rates, when did the orders come in for 26 those sort of last sales that are being translated into the fourth quarter, when did those orders come in, how were they filled, and what kind of management systems you 27 have in place to be monitoring this very closely. Thank you. Wood: Well, as we mentioned last time, we work through, I believe it’s seven 28 factories in China. We have four warehouses in Los Angeles, we use Manugistics. [C-03-05421-RMW] AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS - 92 -

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1 We have an extensive and experienced operating team, many of whom have been 2 with Tom Kalinske and Paul Rioux for over 20 years.

3 Having said all that, there are lots of areas of improvement within LeapFrog and 4 operations is clearly one of them, which is why we hired Fred Forsyth as COO about two months ago and Fred spent the last two months in Asia and down in our 5 warehouse and throughout the operations looking for ways to improve so that we can become best of breed in operations. 6 * * * 7 We’ve done some soul searching in terms of could we have done better in terms of 8 shipping. The answer is yes, but I don’t want to use that as an excuse. Suffice it to 9 say that we’re in position to take the orders that we have and the orders which we’re projecting in our guidance and to ship those efficiently in the fourth quarter. 10 Krutick followed up and asked Wood to share some of the changes made to avoid 11 any sort of replay of missed shipments in the fourth quarter. In response Wood stated the following: 12 [W]e’ve buttressed up the team and we’ve actually increased the warehousing and 13 distribution capability for the fourth quarter.

14 (c) In response to questions from Piper Jaffray analyst Tony Gikas (“Gikas”), Wood 15 represented that pricing was not a challenge during the quarter and did not account for any of the 16 revenue miss. He also represented that competition, including Mattel’s PowerTouch product, did not 17 contribute to the revenue miss: 18 Your second question is was pricing a challenge and do we anticipate lowering prices on our hardware. The answer is no to both. 19 * * * 20 So do I think competition had an effect? Of course I did. But net-net of the effect 21 I’ve just given you, the increase on the demand in our product in the third quarter. 22

23 Wood further downplayed the competitive effects of Mattel’s PowerTouch:

24 No, just to calibrate something. PowerTouch is one item for one purchaser of one of 25 our platforms. We’ve got substantial infant/toddler items, substantial preschool items, substantial EL.A items, platforms for kids under 3. Quantum Pads for kids in 26 the third, fourth, fifth grades, Turbotwist for kids in the first, second, third, fourth, fifth grades, I-quest in the fifth, sixth, seventh and eighth grade, so certainly 27 PowerTouch is one of our competitors but there is competition for parents and relatives’ dollars for every one of their kids in every category. 28

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1 227. The false and misleading statements made in the 10/21/03 press release and during 2 the 10/22/03 conference call were repeated in reports issued on 10/22/03 by CSFB, Deutsche Bank, 3 Bear Stearns, Pacific Growth Equities, U.S. Bancorp, Piper Jaffray, Merrill Lynch and Citigroup 4 Smith Barney. The analysts noted that LeapFrog management expected a strong fourth quarter and 5 was taking steps to fix the problems, and the need to monitor competition and LeapFrog’s ability to 6 manage growth: 7 • CSFB analyst Brandon Dobell (“Dobell”) maintained his outperform rating 8 on LeapFrog’s stock and stated that the decline in the stock price presented a buying opportunity. In addition he stated that CSFB was comfortable that 9 timing rather than structural deficiencies drove the revenue shortfall but also noted that management had not explained how their supply-chain worked in 10 enough detail.

11 • Merrill Lynch analyst Fine maintained her neutral rating on the stock and wrote that half of the revenue miss was a non-issue and that the price decline 12 was an overreaction to the 3Q03 revenue miss. On 10/23/03, Merrill Lynch analyst Fine issued a report that stated the revenue shortfall mystery would 13 only make sense once the fourth quarter was completed. She stated that all would be forgiven if LeapFrog made its fourth quarter revenue target but that 14 if there was a shortfall, serious questions regarding the Company’s growth prospects and management’s credibility would be expected. 15 • Citigroup Smith Barney analyst Krutick repeated Wood’s statements that the 16 revenue shortfall was due to insufficient logistics and distribution controls but noted that Wood failed to identify critical factors and solutions that would 17 avoid these problems in the future. She specifically identified competition and the Company’s ability to manage its growth, including logistics, 18 distribution and inventory as Company-specific risks to LeapFrog’s success and noted these areas needed to be monitored closely and that LeapFrog’s 19 ability to fix the problems and satisfy customer demand had been called into question. 20 • The next day, Pacific Growth Equities analyst Walrond issued a report 21 upgrading its rating on LeapFrog’s stock and noting that steps were being taken to improve logistics management and that the outlook for the 22 December quarter was strong. In addition, she wrote that management indicated better than expected product demand and suboptimal inventory 23 levels at retailers could drive December revenues to higher than originally anticipated. 24 25 228. The statements in the 10/21/03 press release and during the 10/22/03 conference call 26 were false and misleading for the reasons set forth in ¶212, and because, as Defendants knew: 27 (a) LeapFrog’s 3Q03 financial results, particularly revenues, earnings and 28 receivables, were materially false and misleading and not prepared in conformance [C-03-05421-RMW] AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS - 94 -

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1 with GAAP because LeapFrog was recognizing revenues (and recording receivables) on sales where collection was not reasonably assured. Collection was not reasonably 2 assured because LeapFrog’s 3PLs were shipping product to LeapFrog’s retail customers that they had not ordered and would not pay for. As a result, as 3 Defendants knew, that revenues, earnings and receivables were overstated and that 4 inventories were understated.

5 (b) LeapFrog’s inventories were misstated because, as confidential witnesses reported, Defendants counted excess and obsolete inventories as current. Moreover, 6 the Company did not have systems and procedures in place – including the lack of supply-chain software caused by the cancelled implementation of the Manugistics 7 software - to reconcile reported inventory with actual inventory on hand or to assure 8 the Company had established sufficient allowances for excess and obsolete inventory. Notwithstanding these deficiencies, Defendants improperly caused 9 LeapFrog to reduce the allowances for excess and obsolete inventory in 2003.

10 (c) LeapFrog’s expenses and liabilities (accounts payable) were understated 11 because, as Defendants knew, LeapFrog was ordering materials without creating purchase orders. As a result, the expenses and liabilities were not reflected in the 12 Company’s financial statements.

13 (d) As LeapFrog admitted after the Class Period, Defendants could not reasonably assure the reliability of LeapFrog’s financial reporting or that its financial 14 results were reported in accordance with GAAP because there were numerous 15 material weaknesses in the Company’s internal controls over financial reporting in the areas of revenues and accounts receivable, costs of goods sold and inventory, and 16 information technology related to the manufacture and distribution of the Company’s products. 17 (e) Wood’s representation that the reason for the 3Q03 sales miss was “late 18 building demand from our key retailers,” was false and misleading because, as 19 Defendants knew, Wood concealed from investors that the real reasons were the inability of LeapFrog’s 3PLs to ship the correct product to the Company’s retailers or 20 to ship product within the shorter time periods required by LeapFrog’s retail customers, problems with supplying the 3PLs with the product needed for shipment, 21 and competition from PowerTouch.

22 (f) Wood’s assurances that the missed 3Q03 sales would be recognized in 4Q03 23 and that LeapFrog was in a position to ship all orders -actual and projected - efficiently in 4Q03 were false and misleading because, inter alia, as Defendants 24 knew, the problems with LeapFrog’s 3PLs and supply chain had not been resolved. Indeed, witness accounts showed that the problems continued in 4Q03 and 25 deteriorated to crisis levels. Target threatened to stop doing business with LeapFrog and the Company was forced to send reinforcements to the DSS managed 26 warehouses to help address the problems. Further, as CW-8 stated, most of the 27 orders that were not shipped in 3Q03 were lost and not shipped at a later date.

28

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1 (g) Wood’s representation that LeapFrog did not anticipate lowering prices on hardware in response to Mattel’s competing PowerTouch product was false and 2 misleading because, as Wood and Bender testified in the suit against Mattel, LeapFrog lost millions of dollars of sales, and “drastically reduced prices.” 3

4 (h) There was no reasonable basis for the revised guidance included in the press release and repeated during the conference call because, as Defendants knew, the 5 numerous problems with LeapFrog’s distribution and supply-chain operations, the lost sales caused by the PowerTouch, and the numerous material weaknesses in the 6 Company’s internal controls over financial reporting prevented LeapFrog from accurately forecasting future results, and made the revised guidance unrealistic. 7

8 229. Stock Price: On 10/22/03, following the issuance of the 10/21/03 press release and the 9 10/22/03 conference call, the price of the Company’s stock declined $11.65, or 25%, from $46.54 on 10 10/21/03, to $34.89 on 10/22/03, removing some, but not all of the inflation in the stock and causing 11 class members to suffer economic loss. The S&P 500 declined 1.6% and the proxy peer group 12 declined 1.1% from 10/21/03 to 10/22/03. Although the price of LeapFrog’s stock declined 13 substantially in response to the disappointing 3Q03 financial results causing class members to suffer 14 economic losses, it continued to trade at inflated prices due to the false and misleading statements 15 made by Defendants in the 10/21/03 press release and during the 10/22/03 conference call. 16 230. On 10/24/03, Citigroup Smith Barney analyst Krutick issued a report based on and 17 repeating statements made by Kalinske during her meeting with Kalinske earlier in the day to further 18 address the reasons for LeapFrog’s 3Q03 sales shortfall as well as the state of the retail industry for 19 toy products. 20 At a management meeting this afternoon, LeapFrog Chairman Tom Kalinske 21 addressed reasons for the company’s sales shortfall in the third quarter as well as the state of the retail industry for toy products and other initiatives the company is 22 taking to pursue growth.

23 With respect to the shortfall, management highlighted 2 key sources of the shortfall: (1) poor forecasting of 3Q03 orders based on 3Q02 strength in the face of 24 the dockworkers’ strike which brought orders earlier in 2002 than is typical, and (2) 25 problems in managing distribution and logistics.

26 The company believes it is addressing this logistical issues, having moved distribution between locations and making progress in the implementation of its 27 Manugistics system (an automated logistics system that optimizes the match 28 between retail order flow and production/inventory decisions).

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1 2 231. Kalinske’s statements repeated to the market in Krutick’s 10/24/03 report were 3 materially false and misleading because, inter alia, as Kalinske and the other Defendants knew, 4 LeapFrog had postponed moving its warehouse location, and was not making progress in the 5 implementation of the Manugistics supply-chain software system. The witness accounts show that 6 the implementation was delayed for months and that the Manugistics software had still not been 7 implemented by 7/04 when CLI took over management of the Company’s Fontana warehouse. In 8 addition, the Company admitted in its 2004 10-K, filed in 2005, that it was still in the process of 9 “upgrading existing and implementing new operational information systems, including supply-chain 10 management systems.” 11 232. On 11/10/03, LeapFrog filed its 3Q03 Form 10-Q with the SEC, which was signed by 12 Defendants Wood and Curley. The 10-Q repeated the false and misleading financial results reported 13 on 10/21/03 and included the same false and misleading “risk disclosures” contained in the 2Q03 10- 14 Q: 15 (a) Defendants represented that LeapFrog’s relationships with its retail customers “could” be damaged, shipping costs could increase and sales opportunities could be 16 delayed or lost “if” the Company was unable to meet tight shipping schedules and fill retail orders. Ex. I. 17

18 (b) Defendants further represented that LeapFrog’s operating results “could” suffer “if” LeapFrog failed to develop and maintain management systems and 19 resources sufficient to manage the Company’s planned growth. Ex. K.

20 (c) Defendants represented that sales and market share “could” decline “if” LeapFrog was unable to compete effectively. Ex. E. 21

22 (d) Defendants also represented that overall sales “could” suffer “if” sales of LeapPad platforms and books, the products that Mattel’s PowerTouch competed 23 with, declined. Ex. L.

24 (e) Defendants also represented that LeapFrog’s business and operating results “could” be harmed “if” Wal-Mart, Toys R Us or Target, the three retailers that 25 accounted for 79% of the Company’s U.S. Consumer sales in 2003 and 86% in 2004, 26 reduced their purchases, changed the terms on which they conducted business with LeapFrog or experienced a downturn in their business. Exs. G and H. 27 28

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1 (f) Defendants also represented that LeapFrog’s financial results were prepared in accordance with GAAP and that the Company’s internal controls over financial 2 reporting—a process designed to provide reasonable assurance that the Company’s financial reporting was reliable and that the Company’s financial statements were 3 prepared in accordance with GAAP—were effective. Ex. D. 4 (g) As required by §302 of Sarbanes-Oxley, Curley and Wood certified that (1) 5 the 10-Q did not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances 6 under which such statements were made, not misleading, (2) the financial statements included in the 10-Q fairly presented in all material respects the financial condition, 7 results of operations and cash flows of LeapFrog, (3) they were responsible for 8 designing and evaluating the Company’s disclosure controls and (4) they had disclosed all significant deficiencies and material weaknesses in the design or 9 operation of the Company’s internal controls over financial reporting which were reasonably likely to adversely affect LeapFrog’s ability to record, process, 10 summarize and report financial information. Ex. M. 11 233. The statements contained in LeapFrog’s 3Q03 10-Q were false and misleading 12 because, inter alia, as Defendants also knew: 13 (a) The financial results reported in the 10-Q were not reliable and not prepared 14 in accordance with GAAP as represented.

15 (b) Defendants’ representations that LeapFrog’s relationships with its customers “could” be damaged, shipping costs “could” increase and sales opportunities “could” 16 be lost “if” the Company was unable to meet tight shipping schedules and fill retail 17 orders were false and misleading because as detailed herein, in witness accounts and in the Company’s admissions after the Class Period, and as Defendants knew, 18 LeapFrog’s relationships with its retail customers had already been damaged, shipping costs had already increased and sales had already declined because 19 LeapFrog’s 3PLs were unable to ship product to the Company’s retail customers within shorter periods, and shipped product to the retailers that they had not ordered 20 and would not pay for, and LeapFrog was unable to supply its 3PLs with product to 21 distribute. These problems continued in 4Q03 and became a crisis. Target threatened to stop doing business with LeapFrog and the Company was forced to 22 send reinforcements to the DSS managed warehouses to help address the problems.

23 (c) Defendants’ representation that LeapFrog’s operating results “could” suffer “if” LeapFrog failed to develop and maintain management systems and resources 24 sufficient to manage planned growth was false and misleading because LeapFrog’s 25 operating results were already suffering because the Company had not developed and maintained sufficient management systems to keep pace with planned growth. 26 As admitted by Defendants after the Class Period and as explained by the witnesses, LeapFrog’s failure to implement supply-chain software caused a significant adverse 27 impact on the Company’s operating and financial results and ability to meet production requirements to fill customer orders. 28

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1 (d) Defendants’ representation that competition “could” cause sales and market 2 share to decline was false and misleading because, as evidenced by pleadings and trial testimony in LeapFrog’s suit against Fisher-Price/Mattel, Defendants 3 immediately knew that LeapFrog was losing millions of dollars in sales and profits 4 due to the sale of PowerTouch that began in 7/03. Thus, competition already had caused a reduction in sales and profitability at LeapFrog. 5 (e) Defendants’ representations that LeapFrog’s business and operating results 6 “could “be harmed “if” Wal-Mart, Toys R Us or Target reduced their purchases, changed the terms on which they conducted business with LeapFrog or experienced a 7 downturn in their business, were materially false and misleading because, as 8 Defendants knew, these retail customers had already reduced orders of LeapFrog’s products and imposed millions of dollars of vendor violation penalties because 9 LeapFrog’s 3PLs were unable to ship product within requisite shorter time periods, and because DSS shipped product that the retailers had not ordered and would not 10 pay for, and because LeapFrog had already lost sales to these customers due to the 11 PowerTouch.

12 (f) Defendants statements that LeapFrog’s disclosure controls and internal controls over financial reporting were sufficient to ensure the reliability of the 13 Company’s financial reporting, and that the Company’s financial statements were prepared in accordance with GAAP were false and misleading because, as witness 14 accounts and post-Class Period admissions in LeapFrog’s Forms 10-K show, and as 15 Defendants knew, there were numerous material weaknesses in the areas of revenues and accounts receivable, costs of goods sold and inventory, and information 16 technology controls related to the purchase of materials and components used to manufacture and assemble products, the manufacture and assembly of products, the 17 distribution, invoicing and sale of products and the remittance of payments by vendors, customers and LeapFrog. 18 19 234. Stock Price: The false and misleading statements and omissions included in the 20 10/24/04 Citigroup Smith Barney report and the 3Q03 10-Q filed on 11/10/03 caused LeapFrog’s 21 stock price to trade at inflated prices. On 11/13/03, Reuters reported that the price of the Company’s 22 stock increased 6% on 11 /13/03 after Bear Stearns predicted a strong holiday season for LeapFrog. 23 The S&P 500 did not change and the proxy peer group declined 0.5%. The stock price, however, 24 declined 14% to $29.9 by 11/19/03. Analysts, including Krutick from CitiGroup Smith Barney and 25 Lauren Rich Fine from Merrill Lynch, reported the decline was due to steeper and earlier price 26 reductions on toys by Wal-Mart, insider selling by Michael Milken, and the closing of 182 specialty 27 stores by Toys R Us and retailers reducing inventories. The analysts noted that LeapFrog relied on 28 Wal-Mart for more of its sales than competitors Mattel and Hasbro and that there was concern about

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1 whether LeapFrog would be able to meet retailer demand given the problems with its logistics 2 management system that caused the 3Q03 sales shortfall. 3 235. The price of LeapFrog’s stock continued to decline to as low as $24 by 12/15/03. On 4 12/10/03, CitiGroup Smith Barney analyst Krutick raised her risk rating on the stock to “speculative” 5 due to concerns about retailers’ more conservative inventory builds and modest holiday sales. On 6 12/15/03, CSFB analyst Dobell lowered his price target on LeapFrog’s stock to $34 from $48 due to 7 (1) management credibility issues caused by the 3Q03 revenue miss, (2) concerns about channel 8 inventory and (3) the two-month lack of information from LeapFrog that would exist until LeapFrog 9 announced 4Q03 results in February. LeapFrog’s stock price then rebounded following an upgrade 10 by US Bancorp Piper Jaffray analyst Gikas on 12/19/03.

11 C. Between 2/10/04 And 3/9/04 Defendants Falsely Portrayed Management Changes, Caused Leapfrog To Report False And Misleading Financial 12 Results For 4Q03 And FY03, And Provided Investors With Guidance For 2004 That They Knew Leapfrog Could Not Meet 13 14 236. On 2/10/04, LeapFrog issued a press release announcing that Wood had been 15 appointed Chief Vision and Creative Officer by the Company’s Board of Directors. In addition, the 16 press release disclosed that Kalinske replaced Wood as CEO, and Jerome Perez replaced Wood as 17 President: 18 LeapFrog Enterprises, Inc. Announces the Appointment of Mike Wood to Chief Vision and Creative Officer; Tom Kalinske Moves from Chairman to CEO; Jerry 19 Perez Joins as President; Director Steve Fink Appointed Chairman

20 Emeryville, Calif. - February 10, 2004 - LeapFrog Enterprises, Inc. (NYSE: LF), a 21 leading developer of innovative, technology-based educational products, today reported the appointment of founder Mike Wood to Chief Vision and Creative 22 Officer. The company also announced that Tom Kalinske would resume the role of CEO. Jerry Perez joins LeapFrog as President. Director Steve Fink has been 23 appointed Chairman of the Board of Directors.

24 “LeapFrog has achieved extraordinary success over the past nine years, starting from 25 a simple belief that learning can be effective and engaging for all ages, and transforming that commitment into a $680 million company,” said Mike Wood. “I 26 believe that going forward I can maximize my contribution to the company and its shareholders by serving as LeapFrog’s Chief Vision and Creative Officer. This 27 new role will enable me to pursue my passion – helping children to learn – while allowing me to continue to develop new products that achieve that goal.” 28

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1 * * * 2 “I welcome the opportunity to return to the role of CEO as LeapFrog continues to 3 expand into new categories and geographies as a truly global education company,” said Kalinske. “This move will enable LeapFrog to continue to benefit from 4 Mike’s genius in creative product development, his first love, and it allows me to 5 focus on preparing the company for global education leadership in the consumer and school markets.” 6 237. Defendants’ statement that the appointment of Wood to Chief Vision and Creative 7 Officer would allow Wood to continue to develop new products and enable LeapFrog to benefit from 8 Wood’s genius in creative product development was false and misleading because, as Defendants 9 knew, Wood had actually been demoted from his position as CEO and President due to the continued 10 problems with LeapFrog’s distribution and supply-chain operations and that his role with LeapFrog 11 was being greatly diminished with little to no involvement in product development. The Company 12 admitted as much several months later when Wood was forced out of the Company. On 9/1/04, 13 when Wood was forced to resign from LeapFrog, Merrill Lynch analyst Fine reported that Wood 14 “had no direct reports and was not as involved in product development” as Chief Vision and 15 Creative Officer. CSFB analyst Dobell reported that Wood had “not been actively involved since his 16 transition from the CEO position in February ‘04” and Merriman Curhan Ford analyst Sharma 17 reported Wood’s “role in the company had been greatly diminished in the last six months” and 18 Wood “had only been working two and a half days a week and had no one reporting to him.” 19 238. On 2/10/04, Defendants issued a press release announcing LeapFrog’s 4Q03 and 20 FY03 results. Reported 4Q03 sales were in line with Defendants’ revised guidance, which suggested 21 that the 3Q03 sales shortfall was made up in 4Q03 as Defendants previously assured investors would 22 occur. The Company’s EPS came in $0.01 less than consensus estimates. 23 LeapFrog Enterprises, Inc. Reports 2003 Net Income up 67% on Sales Increase of 24 28% 25 LeapFrog becomes Market Leader in Entire US Preschool Category in Critical 26 Fourth Quarter 27 28

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1 Emeryville, Calif -February 10, 2004-LeapFrog Enterprises, Inc. (NYSE: LF), a leading developer of innovative technology-based educational products, today 2 reported financial results for the fourth quarter and year ended December 31, 2003.

3 Net Income up 67% for Full Year, Up 50% in Fourth Quarter 4 Net income for 2003 increased 67% to $72.7 million compared with net income of 5 $43.4 million for the year ended December 31, 2002. Net income per fully-diluted share increased to $1.20 compared with $0.86 per fully-diluted share in the prior 6 year.

7 The company recorded net income for the fourth quarter ended December 31, 2003 8 of $44.2 million, up 50% compared with net income of $29.4 million for the fourth quarter of 2002. Net income per fully-diluted share was $0.72 in the fourth quarter 9 of 2003, compared with $0.50 per fully-diluted share in the fourth quarter of 2002. . . . 10 * * * 11 Net Sales up 28% for Full Year, Up 33% in Fourth Quarter 12

13 Net sales for 2003 were $680.0 million, up 28% compared with $531.8 million for 2002. Net sales for the fourth quarter of 2003 were $331.3 million, up 33% 14 compared with $248.4 million in the fourth quarter of 2002.

15 * * * 16 Segment Results

17 For 2003, net sales from the U.S. Consumer segment were $546.0 million, up 19% from 2002. . . . 18

19 For the fourth quarter of 2003, net sales from the U.S. Consumer segment were $273.4 million, up 25% from the fourth quarter of 2002. . . . 20 Gross Margin 21 22 For 2003, gross profit margin was 50.0%, down 80 basis points compared with 50.8% in 2002. For the fourth quarter of 2003, gross profit margin was 47.9%, 23 down 310 basis points from 51.0% in the fourth quarter of 2002. The gross profit margin decrease for the fourth quarter and all of 2003 can be attributed primarily 24 to the lower margin on the sales of the Leapster platform, which was introduced at 25 the end of October 2003 and which included in its cost of sales the airfreight incurred in the holiday season. 26 * * * 27 “As we expected, strong holiday sales of our new platform and software learning 28 products produced solid results and growth for LeapFrog in 2003,” said Mike

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1 Wood, President and Chief Executive Officer of LeapFrog. “We are very pleased that our fourth quarter results soundly verified what we said on our third quarter 2 conference call. Namely, while the retail toy industry appears to be shifting its ordering practices more toward the back end of the year, consumer demand for our 3 learning products is more vibrant than ever. . . . 4 Outlook for 2004

5 * * * 6 LeapFrog’s full-year guidance for 2004 is as follows: 7

8 Net sales of $800 to $850 million 9 Effective tax rate of approximately 34% for all of 2004 10 Net income of $88 to $95 million 11 12 Fully diluted share count of approximately 63 million shares 13 Diluted net income per share of $1.39 to $1.51 14 In addition, the company provides the following discussion to assist in understanding 15 the seasonality anticipated during the year: 16 Consistent with reported trends, the company expects that its 2004 sales growth will 17 be lower in the first half and higher in the second half, as compared to 2003. The company expects 2004 sales seasonality to be about 20% of full year sales in the first 18 half, spread equally between the first two quarters. Gross profit margin is expected to be approximately 50% in each quarter in 2004. Operating expenses are expected 19 to grow approximately 20% to 25% for the full year, but the rate of growth of 20 operating expenses in the first quarter of 2004 is expected to be 10% to 15% over the first quarter of 2003. 21 LeapFrog’s guidance is reflective of the company’s current expectations, which are 22 based on information available at the time of this release, and are subject to changing conditions, many of which are outside the company’s control. 23

24 239. On 2/11/04, Defendants Wood, Curley and Kalinske participated in LeapFrog’s 25 earnings conference call attended by various analysts that followed the Company. During the 26 conference call, Defendants repeated the Company’s 4Q03 and FY03 financial results and the 27 guidance for 2004 included in the 2/10/04 press release. In addition, Defendants made the following 28

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1 false statements, in which Curley represented that LeapFrog’s decline in the gross profit margin was 2 entirely attributable to sales of the Company’s Leapster product: 3 Our gross profit margin was 47.9% in the quarter, down 310 basis points from 51 last year. We estimate that Leapster had a 330 basis point negative impact on 4 consolidated fourth quarter gross profit margin which included the cost of air freight to expedite delivery of our new platform late in the quarter. . . . 5

6 Curley also misrepresented the reason for the increase in receivables and DSOs:

7 Our accounts receivable at December 31, 2003 were $281.8 million, an increase of $112.1 million from last year’s year end position. On a percentage basis accounts 8 receivable increased 66% over last year. At quarter end we were 77 day sales outstanding compared to 61 day sales outstanding last year. 9

10 The increase is primarily related to the timing of sales occurring later in the fourth quarter of 2003 versus last year’s fourth quarter of 2002. . . . 11 12 240. Curley made additional misrepresentations about the Company’s 4Q03 sales and 13 receivables in response to a question from Merrill Lynch analyst Fine: 14 FINE: [G]iven the surge in receivables at the end of the year, and the cash flow really not improving barring exercise of stock option proceeds, it has the feel that sales 15 were very, very late in the quarter, and I am wondering if you could address whether this stole, potentially from the first quarter given your guidance of equal 16 revenue first to second quarter which has not been the historic pattern . . . . 17 * * * 18 CURLEY: Yes. The increase in receivable, and specifically how it equates down to 19 DSOs, really does relate solely to the timing of both the sales shipped from the third quarter into the fourth quarter, so it made the fourth quarter much bigger. But then 20 since our terms are less than the 90 days of the fourth quarter, it really happened within the quarter. There was a shift in sales later in the quarter, especially 21 Leapster product, that put a bigger shift year-over-year at the back end of the 22 fourth quarter. That is just timing and it will be collected in the first quarter of next year. And so of the 15 days increase in days sales outstanding, I calculated about 23 12 days of the increase was just about related to that timing. We had another day related to K-B, which is still included in our receivables and obviously, that is not 24 getting paid and at current. And we had about two days of shipping issues that are pretty normal at this time of year but we’re just working through and giving proof 25 of deliveries to customers. Looking at it a different way from an aging standpoint we 26 actually had a more current receivable balance this year at year end than we did last year when you look at any receivables over one day past due, and so I feel very good 27 about our receivable balance and collectability. . . .

28

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1 241. The false statements made by Defendants in the 2/10/04 press releases and during the 2 2/11/04 conference call were repeated to the market in numerous articles and in reports issued by (1) 3 CSFB analyst Lobell on 2/10/04 and 2/11/04, (2) Citigroup Smith Barney analyst Jill Krutick on 4 2/10/04 and 2/11/04, (3) Piper Jaffray analyst Gikas on 2/11/04, (4) Merrill Lynch analyst Fine on 5 2/11/04, (5) Bear Stearns analyst Childe on 2/11/04, (6) Pacific Growth Equities analyst Walrond on 6 2/11/04 and 2/12/04, and (7) Deutsche Bank analyst Jeetil Patel (“Patel”) on 2/12/04. 7 242. The statements made in the 2/10/04 press release and during the 2/11/04 conference 8 call were materially false and misleading because, inter alia, as Defendants knew: 9 (a) The statements regarding the Company’s conformance with GAAP were false and misleading because LeapFrog was recognizing revenue (and recording 10 receivables) on sales where collection was not reasonably assured because LeapFrog or its 3PLs shipping product to its retailers that the retailers had not ordered and 11 would not pay for. 12 (b) LeapFrog’s inventories were misstated because Defendants counted excess 13 and obsolete inventory as current inventory, and because the Company did not have systems and procedures in place-including the lack of supply-chain software caused 14 by the cancelled implementation of the Manugistics software - to reconcile reported inventory with actual inventory on hand or to assure the Company had established 15 sufficient allowances for excess and obsolete inventory. Notwithstanding these 16 deficiencies, Defendants caused LeapFrog to reduce the allowances for excess and obsolete inventory in 2003. 17 (c) LeapFrog’s expenses and liabilities (accounts payable) were understated 18 because LeapFrog was ordering materials and components used to manufacture and 19 assemble products without creating purchase orders. As a result, the expenses and liabilities were not reflected in the Company’s financial statements. 20 (d) As LeapFrog admitted after the Class Period, Defendants could not 21 reasonably assure the reliability of its financial reporting or that its financial results were reported in accordance with GAAP because there were numerous material 22 weaknesses in the Company’s internal controls over financial reporting in the areas 23 of revenues and accounts receivable, costs of goods sold and inventory, and information technology related to the manufacture and distribution of the Company’s 24 products.

25 (e) LeapFrog’s 4Q03 and FY03 financial results were materially false and misleading because the Company had stuffed the channel and stolen sales from 26 1Q04, as suspected by Merrill Lynch analyst Fine who asked Defendants about the 27 suspicious timing of the sales, and subsequently issued a report, in which she stated Merrill Lynch was concerned that “Q4 sales stole from Q1’04.” Ms. Fine suspected 28 LeapFrog had stolen sales from 1Q04 to meet guidance for 4Q03 based on the

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1 Company’s high accounts receivable position, the channel, the Company’s cash flow position, and the FY04 guidance that projected sales in 1 Q04 that were lower than 2 historical patterns. This was evidenced by the following:

3 (i) LeapFrog’s receivables almost doubled during the quarter to $281.8 4 million which represented 85% of 4Q03 revenues ($331.4 million), an all- time high for LeapFrog and substantially higher than the percentage of 5 receivables to revenues, 66%, reported in 4Q02. In addition, DSOs increased from 61.5 days at 12/31/02 to 76.5 days at 12/31/03. 6 (ii) LeapFrog’s 2004 guidance also indicated that LeapFrog stole sales 7 from 1Q04 to meet guidance in 4Q03 because LeapFrog’s 2004 guidance 8 indicated that 1Q04 revenues would be equal to 2Q04 revenues when historically first quarter revenues were greater than second quarter revenues. 9 LeapFrog reported revenues of $57.8 million in 1Q02 compared to $43.1 million in 2Q02 and reported revenues of $76.7 million in 1Q03 compared to 10 $68 million in 2Q03. Just one month later LeapFrog disclosed that 1Q04 11 sales and earnings would be much lower, further indicating Defendants knew LeapFrog stole sales from 1Q04 to meet 4Q03 and FY03 guidance. 12 (iii) During the conference call, Defendants confirmed that many of the 13 Company’s 4Q03 sales occurred late in the quarter, but denied LeapFrog stole sales from 1Q04 by stuffing the channel. The denial of channel stuffing 14 was false and misleading because, just one month later, Defendants 15 essentially admitted they stole sales from 1Q04 by stuffing the channel in 4Q03. On 3/10/04, LeapFrog announced that 1Q04 sales would be $66-$72 16 million, more than $20 million less than expectations of $87.9 million. The Company also disclosed the net loss in 1Q04 would be $0.18-$0.22, more 17 than three times expectations of $0.06. On 3/10/04, Ms. Fine reported that her suspicions that LeapFrog had stolen from 1Q04 to meet 4Q03 guidance 18 were “borne out” by LeapFrog’s preannouncement notwithstanding 19 Defendants’ denials of channel stuffing in 4Q03. After talking to the Company, she issued a report on 3/11/04 that stated, “LF acknowledged 20 Leapster demand in early 2004 may have been fulfilled in 4Q03.” During the Company’s 2/15/05 conference call, Perez admitted that LeapFrog “began the 21 year with some buildup of inventory at the beginning of the year at retail.” During the Mattel trial, Bender testified that there were significant and high 22 levels of inventory in the retail channel that were higher than any previous 23 year and Reed testified that there were 460,000 LeapPad units in the retail channel at the end of 2003. 24 (f) There was no reasonable basis for the FY04 guidance because, as Defendants 25 knew, there were problems with the 4Q03 channel stuffing, numerous problems with the distribution and supply-chain operations, and competition which was causing 26 LeapFrog to lose sales and incur additional expenses. As Defendants knew, revenues 27 would be negatively impacted by Defendants’ decision in ¼ to substantially reduce prices on all LeapPad products, the bankruptcies of FAO Schwartz and KB Toys, the 28 closing of more than 182 specialty toy stores (Kids R Us and Imaginarium), and

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1 pressure from Wal-Mart to reduce prices. The Company’s warning just one month later that 1Q04 sales and earnings would be substantially worse than analysts’ 2 forecasts evidences that Defendants had no reasonable basis for the guidance, as does the magnitude of the revision. The 3/10/04 preannouncement indicated that 1Q04 3 sales would be $66-$72 million, $20 million less than LeapFrog’s 2/10/04 guidance 4 of $80-$85 million. After the Class Period, the Company admitted it did not have the ability to provide guidance. 5 (g) Curley’s statement that the 310 basis point decline in LeapFrog’s gross profit 6 margin was entirely due to sales of the Leapster, including the cost of air freight to expedite delivery of the new platform late in the quarter, was false and misleading 7 because, as Defendants knew, the problems with the Company’s distribution and 8 supply-chain operations were the reason LeapFrog had to ship products by air rather than by the less expensive but slower contract ocean carriers. Defendants also knew 9 that the supply-chain problems required LeapFrog to ship product other than the Leapster by air. In addition, as Defendants knew, Wal-Mart’s dramatic price 10 discounting in its effort to increase market share, and the competition from 11 PowerTouch which necessitated lower prices and “tie ratios” for LeapFrog’s products, also caused the gross margin to decline. 12 (h) Curley’s statement that the increase in receivables and DSOs was “primarily 13 related to the timing of sales occurring later in the fourth quarter of 2003” was false and misleading because, as Defendants knew, receivables and DSOs had increased 14 because LeapFrog had stolen sales from 1Q04 to report sales and earnings in line 15 with previously issued guidance, and because the Company’s retail customers refused to pay for product they had not received or received but did not order. 16 (i) The statement in the 2/10/04 press release that consumer demand for 17 LeapFrog’s learning products was more vibrant than ever was false and misleading because, as Defendants knew and Bender testified in the Mattel patent infringement 18 suit, LeapFrog immediately lost sales after the introduction of the PowerTouch in 19 7/03, and retail channel inventories at the end of 2003 were higher than any previous year and higher than LeapFrog’s plan due to the lost sales caused by PowerTouch. 20 243. Stock Price: The price of LeapFrog’s stock declined $3.39, or 11%, from $30.4 on 21 2/10/04, to $27.01 on 2/11/04 compared to a 1.1% increase in the S&P 500 and a 1.2% increase in 22 the proxy peer group. Reuters reported that the stock declined due to concerns that sales growth 23 could slow in 2004. Analysts reported that the decline was due to the deterioration in the gross 24 margin in 4Q03, the 2004 guidance that projected sales growth but a flat 50% gross margin which 25 was the same as 2003, operating expenses growing 20%-25%, and concerns about the level of 26 receivables and DSOs. Although the price decline removed some of the inflation from the stock and 27 caused class members to suffer economic losses, the stock continued to trade at inflated prices due to 28

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1 Defendants’ false and misleading statements and omissions regarding the numerous problems with 2 the Company’s distribution and supply-chain operations, the numerous material weaknesses with the 3 Company’s internal controls and the lost sales and profits caused by competition from Mattel. 4 Following the price decline on 2/11/04, LeapFrog’s stock traded in the $26-$27 range through 5 3/10/04.

6 D. Between 3/10/04 And 4/20/04, Defendants Preannounced 1Q04 Results Just One Month After Providing Initial Guidance, Assured Investors That 7 Supply-Chain Operations Are Being Strengthened, And Included Materially False And Misleading Financial Results And “Risk Factors” In The FY03 10- 8 K 9 244. On 3/10/04, Defendants issued a press release warning that LeapFrog’s 1Q04 sales 10 and net income would be worse than the guidance Defendants provided on 2/10/04 (1Q04 sales of 11 $80-$85 million) and analysts’ forecasts: 12 LeapFrog Enterprises, Inc (NYSE: LF), a leading developer of innovative technology based educational products, today issued guidance for the first quarter 13 of 2004. Despite positive sell-through data to date in the first quarter, LeapFrog expects net sales in the first quarter to be between $66 million and $72 million. 14 This, coupled with reduced gross margin for the quarter and continued strong 15 investment in research development and supply chain initiatives, results in an expected net loss for the quarter of between $(0.18) per share and $(0.22) per 16 share.

17 Kalinske urged investors not to read too much into the revised and substantially lower guidance and 18 assured investors the problems with the distribution and supply-chain operations were being 19 strengthened: 20 “The first quarter is a very small portion of our overall year. In fact, we had expected the first quarter to represent just 10 percent of 2004 net sales,” said Thomas 21 Kalinske, LeapFrog’s Chief Executive Officer. “However, the first quarter is 22 particularly vulnerable to trends that impact our net sales, margin and net income, including the shifting of retail orders to later in the year, and the difficult financial 23 position of certain retailers.” “We believe that it is premature to draw conclusions with respect to the entire year 24 based upon our sell-in results to date,” added Kalinske.

25 * * *

26 “We remain committed to innovation and improvements in operations that provide superior long term value to our stockholders, said Kalinske. . . . We are also 27 strengthening our operations group, supply-chain management system and 28 warehousing and logistics functions.

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1 2 * * * 3

4 The company believes all of these expenditures are in the best long-term interests of its stockholders and will result in a stronger business. While these investments in 5 the business will result in significantly higher operating expenses in 2004, 6 LeapFrog expects that they will lead to improved margins and reduced costs in the long run. 7

8 245. Following the Company’s preannouncement, analysts issued reports downgrading the 9 stock and attacking Defendants’ credibility. Reports were issued by (1) Merrill Lynch analyst Fine 10 on 3/10/04 and 3/11/04, (2) Citigroup Smith Barney analyst Krutick on 3/11/04, (3) Piper Jaffray 11 analyst Gikas on 3/11/04, (4) CSFB analyst Dobell on 3/11/04, (5) Deutsche Bank, (6) Bear Stearns 12 analyst Childe, and (7) Pacific Growth Equities analyst Walrond. 13 246. Piper Jaffray, CSFB, Bear Stearns, Deutsche Bank, and Pacific Growth Equities all 14 downgraded the stock and substantially reduced their price targets on the stock.

15 247. Analysts attacked Defendants’ credibility. CSFB reported “the fact that this 16 announcement comes less than a month after the 4Q earnings report is discouraging and wipes 17 out credibility management had left.” Bear Stearns stated that management credibility was 18 severely damaged because preannouncement was just one month after initial guidance. Pacific 19 Growth Equities wrote that the preannouncement was yet another example of management’s

20 inability to accurately forecast its own business and manage street expectations, that Pacific 21 Growth Equities was fed up with management’s poor job of executing the operating and cash cycle, 22 and that it was unacceptable for LeapFrog as public company to conveniently move into the quiet 23 period and provide little to no information about the reason for the shortfall. 24 248. The statements contained in the 3/10/04 press release were materially false and 25 misleading because, as Defendants knew: 26 (a) Kalinske’s statements that it was premature to draw conclusions with respect to the entire year based on the preannouncement, and that gross margins and costs 27 would improve in the long run were false and misleading because LeapFrog’s 28 financial results during the remainder of 2004 were already being adversely

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1 impacted, and would continue to be adversely impacted by: (1) the numerous problems with the Company’s distribution and supply-chain operations which were 2 causing retail customers to reduce their purchases of LeapFrog product, (2) lost sales caused by competition from Mattel and other competitors, (3) price reductions by the 3 Company’s retail customers, (4) lost sales from KB Toys and FAO, Inc. due to their 4 bankruptcies, (5) lost sales from Toys R Us due to its financial difficulties, (6) increased legal costs caused by the Company’s suit against Mattel, and (7) increased 5 operating expenses related to the attempts to fix the problems with the distribution and supply-chain operations, and increased R&D costs. In fact, just a few weeks 6 later, on 4/21/04, LeapFrog revised and lowered guidance for the remainder of 2004, confirming that Defendants knew Kalinske’s reassurances were false. 7

8 (b) Kalinske’s statements that LeapFrog was strengthening its operations group, supply-chain management system and warehousing and logistics function were false 9 and misleading because the ongoing problems with the Company’s distribution and supply-chain operations were far from being fixed. By 3/10/04, changes to the 10 Company’s distribution and supply-chain operations were being delayed until the 11 peak selling season commenced in July 2004. LeapFrog had decided to replace DSS as the Company’s warehouse operator due to the problems with DSS, but still needed 12 to retain DSS’s services due to the transition delays. Moreover, (1) Defendants had been negotiating with CLI to replace DSS since 11/03 but still had not executed a 13 contract (the contract with CLI was not executed until 7/l/04), (2) Defendants were in the process of executing the lease for the Fontana warehouse which would not be 14 available until 7/04 at the earliest, and (3) Defendants still had not implemented the 15 supply-chain software that was necessary to accurately forecast and fulfill customer demand and to accurately report the Company’s inventories. Indeed, after the Class 16 Period, Defendants admitted in the 2004 10-K that there were still material weaknesses in the Company’s distribution and supply-chain operations and that 17 LeapFrog was still “upgrading existing and implementing new operational information systems, including supply-chain management systems.” 18 19 249. Stock Price: Following the 3/10/04 preannouncement, LeapFrog’s stock price 20 declined $6.40, or 24.6%, from $26 on 3/10/04, to $19.6 on 3/11/04. Reports that Al Qaeda had 21 taken responsibility for the recent Madrid bombings caused the S&P 500 to decline 1.5% and the 22 proxy peer group to decline 1.2%. However, the 24.6% decline in LeapFrog’s stock price shows that 23 the Company’s preannouncement, not the general market decline caused by the A1 Qaeda report, 24 was the cause for the much steeper decline in the price of LeapFrog’s stock. Although the price 25 decline removed some of the inflation from the stock causing class members’ economic loss, the 26 stock continued to trade at inflated prices due to Defendants’ materially false and misleading 27 statements and omissions regarding LeapFrog’s financial results, the numerous problems with the 28

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1 Company’s distribution and supply-chain operations, the numerous material weaknesses with the 2 Company’s internal controls, and the lost sales and profits caused by competition from Mattel. 3 250. On 3/10/04, Defendants also filed LeapFrog’s Form 10-K for the year ending 4 12/31/03. The 2003 10-K was signed by Defendants Kalinske, Curley, Wood and Rioux, and 5 reported the Company’s 2003 financial results, represented that those financial results conformed 6 with GAAP, and included the same false and misleading “risk disclosures” contained in the 2Q03 7 10-Q and 3Q03 10-Q: 8 (a) Defendants represented that LeapFrog’s relationships with its retail customers “could” be damaged, shipping costs “could” increase and sales opportunities could 9 be delayed or lost “if” the Company was unable to meet tight shipping schedules and fill retail orders. Ex. I. 10

11 (b) Defendants also represented that the Company “might” experience difficulties managing growth and that LeapFrog’s operating results “could” suffer 12 “if” it failed to develop and maintain management systems and resources sufficient to keep pace with planned growth. Ex. K. 13 (c) Defendants represented that sales and market share “could” decline “if” 14 LeapFrog was unable to compete effectively. Ex. E. 15 (d) Defendants represented that overall sales “could” suffer “if” sales of LeapPad 16 platforms and books, the products that Mattel’s PowerTouch competed with, declined. Ex. L. 17 18 (e) Defendants represented that LeapFrog’s business and operating results “could” be harmed “if” Wal-Mart, Toys R Us or Target, the three retailers that 19 accounted for 85% of the Company’s U.S. Consumer sales in 2003 and 45% in 2003, reduced their purchases, changed the terms on which they conducted business with 20 LeapFrog or experienced a downturn in their business. Exs. G and H.

21 (f) Defendants represented that LeapFrog’s financial results were prepared in 22 accordance with GAAP and that the Company’s internal controls over financial reporting - a process designed to provide reasonable assurance that the Company’s 23 financial reporting was reliable and that the Company’s financial statements were prepared in accordance with GAAP - were effective. Ex. D. 24 (g) As required by §302 of Sarbanes-Oxley, Curley and Kalinske certified that: 25 (1) the 10-K did not contain any untrue statement of a material fact or omit to state a 26 material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading; (2) the financial statements 27 included in the 10-K fairly presented in all material respects the financial condition, results of operations and cash flows of LeapFrog; (3) they were responsible for 28 designing and evaluating the Company’s disclosure controls; and (4) they had [C-03-05421-RMW] AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS - 111 -

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1 disclosed all significant deficiencies and material weaknesses in the design or operation of the Company’s internal controls over financial reporting which were 2 reasonably likely to adversely affect LeapFrog’s ability to record, process, summarize and report financial information. Ex. M. 3

4 251. The statements contained in the 2003 10-K were false and misleading because, as 5 Defendants knew: 6 (a) The financial results reported in the 10-K were not reliable and not prepared in accordance with GAAP as represented, for the reasons set forth above. 7 (b) Defendants’ representations that LeapFrog’s relationships with its customers 8 “could” be damaged, shipping costs “could” increase and sales opportunities “could” be lost “if” the Company was unable to meet tight shipping schedules and fill retail 9 orders were false and misleading because LeapFrog’s relationships with its retail 10 customers had already been damaged, shipping costs had already increased and sales had already declined because LeapFrog was unable to supply its 3PLs with sufficient 11 product for timely distribution, and LeapFrog’s 3PLs were unable to ship product to the Company’s retail customers within shorter periods, and shipped product to the 12 retailers that they had not ordered and would not pay for. As witness accounts 13 showed, the problems continued in 4Q03 and became a crisis. Target threatened to stop doing business with LeapFrog and the Company was forced to send 14 reinforcements to the DSS managed warehouses to help address the problems.

15 (c) Defendants’ representation that operating results “could” suffer “if” LeapFrog failed to develop and maintain management systems and resources 16 sufficient to manage planned growth was false and misleading because LeapFrog’s 17 operating results were already suffering because, as Defendants also knew, the Company had not developed and maintained sufficient management systems to keep 18 pace with planned growth. The representations that LeapFrog was upgrading existing and implementing new supply-chain systems and consolidating warehouse 19 operations were false and misleading because they concealed from investors the problems with LeapFrog’s 3PLs, Defendants’ decision to replace DSS with CLI, 20 Defendants’ decisions to delay replacing DSS with CLI until the 2004 peak selling 21 season, the delays in the warehouse transition, as the warehouse would not be available until 7/04, and that the implementation of the new-supply-chain software 22 was being delayed and would not be completed before the peak selling season in 2004. As admitted by Defendants after the Class Period and as explained by the 23 witnesses, LeapFrog’s failure to implement supply-chain software caused a significant adverse impact on the Company’s operating and financial results, and its 24 ability to meet production and customer delivery requirements. 25 (d) Defendants’ representation that overall sales would suffer “if” sales of 26 LeapPad platforms and books, the products that Mattel’s PowerTouch competed with, declined was false and misleading because, as Defendants knew, as evidenced 27 by pleadings and trial testimony in LeapFrog’s suit against Fisher-Price/Mattel, Defendants immediately knew that LeapFrog was losing millions of dollars in sales 28

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1 and profits due to the sale of PowerTouch that began in 7/03. Thus, competition already had caused a reduction in sales and profitability at LeapFrog. Ex. L. 2 (e) Defendants’ representations that LeapFrog’s business and operating results 3 “could “be harmed “if” Wal-Mart, Toys R Us or Target reduced their purchases, 4 changed the terms on which they conducted business with LeapFrog or experienced a downturn in their business, were materially false and misleading because, as 5 Defendants knew, these retail customers had already reduced orders of LeapFrog’s products and imposed millions of dollars of vendor violation penalties because 6 LeapFrog’s 3PLs were unable to ship product within requisite shorter time periods, and because DSS shipped product that the retailers had not ordered and would not 7 pay for, and because LeapFrog had already lost sales to these customers due to the 8 PowerTouch.

9 (f) Defendants’ statements that LeapFrog’s disclosure controls and internal controls over financial reporting were sufficient to ensure the reliability of the 10 Company’s financial reporting, and that the Company’s financial statements were 11 prepared in accordance with GAAP were false and misleading because, as witness accounts and post-Class Period admissions in LeapFrog’s Forms 10-K show, and as 12 Defendants knew, there were numerous material weaknesses in the areas of revenues and accounts receivable, costs of goods sold and inventory, and information 13 technology controls related to the purchase of materials and components used to manufacture and assemble products, the manufacture and assembly of products, the 14 distribution, invoicing and sale of products and the remittance of payments by 15 vendors, customers and LeapFrog.

16 E. Between 4/21/04 And 7/20/04 Defendants Cause Leapfrog To Report False And Misleading Financial Results For 1Q04 And Include Materially False 17 And Misleading Risk Factors In The Company’s 1Q04 10-Q 18 252. On 4/21/04, Defendants issued a press release announcing the Company’s 1Q04 19 results, which were in line with the revised guidance issued on 3/10/04: 20 Net sales for the first quarter of 2004 were $71.6 million, compared with $76.7 million in the first quarter of 2003, down 7%. 21 * * * 22 Gross margin was 44.6% in the first quarter of 2004, down from 53.0% in the first 23 quarter of 2003. Gross margin declined largely due to a shift in the mix of products sold in the quarter from higher margin software to platforms and standalone products 24 and a loss of sales leverage against fixed costs. 25 * * * 26 The company recorded a net loss for the first quarter of 2004 of $(11.8) million, or 27 $(0.20) per share, compared with a net loss for the first quarter of 2003 of $(969,000), or $(0.02) per share. 28 [C-03-05421-RMW] AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS - 113 -

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1 * * *

2 “While we are disappointed in the low sales in the first quarter, we are very pleased that retail consumer sales for our top four retailers (representing over 80% of our 3 U.S. Consumer net sales) are up over 20% year-to-date,” said Tom Kalinske, chief executive officer. “Clearly retailer orders in this quarter do not match our strong 4 consumer over-the-counter sales. We also have new research that reports that the 5 consumer ownership software-to-hardware tie ratio for our LeapPad family (My First LeapPad, LeapPad, Quantum Pad, and LeapPad Plus Writing) has increased 6 from a year ago, indicating a healthy business.

7 “This year we are actively engaged in a number of projects that bode well for the long term success of the company. We are investing in increasing our installed base 8 of platform products, expanding our software offering, increasing our software 9 marketing efforts, and improving our operations and systems infrastructure. We believe these steps are important to our company’s market leadership in 2004 and 10 beyond as we continue to provide enjoyable and effective learning products for all stages of a child’s life.” 11 12 The company is revising its published guidance to incorporate first quarter actual results and 13 revised full year expectations based on more conservative expectations for the remainder of the year, 14 as follows: 15 Outlook for 2004

Net Sales of $770-$800 million 16 Gross Profit Margin of 48% to 49% of net sales 17 Operating expenses of 33% to 35% of net sales 18 Fully diluted share count of approximately 63 million 19 Diluted net income per share of $1.18 to $1.28 20 253. On 4/21/04, Defendants Kalinske and Curley participated in LeapFrog’s 1Q04 21 earnings conference call that various analysts reported had a very positive and in-control tone to it. 22 Kalinske and Curley repeated the financial results and guidance included in the 4/21/04 press release 23 and also made the following false and misleading statements: 24 (a) Kalinske stated that increased sales of higher margin software would improve 25 the Company’s results: 26 We are committed to taking this company, which has come so far so fast, to the next 27 level by focusing on the following four business initiatives. First, we are driving our high margin software business across platforms by continuing to expand our 28

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1 libraries and increasing our software marketing efforts. The software side of the business and our improving consumer tie ratio are the most direct tools we have 2 for bolstering our gross margin. We expect that gross margin will improve in subsequent quarters as retailers sell through the current retail inventory, and as we 3 more aggressively market software to customers and sell more in. 4

5 We have new propriety research that indicates that the software to hardware tie 6 ratio improves the longer the LeapPad has been in the home. The same research revealed that consumer software tie ratios to the installed base of LeapPad 7 platforms, and I’m including the classic LeapPad, the LeapPad Plus Writing, the My First LeapPad and the Quantum Pad, has increased from 5.1 to 1 to 6.5 to I over the 8 last year.

9 10 (b) Kalinske also stated that all aspects of improving the Company’s supply-chain 11 and information technology systems were “up and running” or on track to be fully 12 operational at the end of 2Q04: 13 Our second initiative focuses on improving our internal systems in the areas of supply-chain and information technology. Specifically, we are implementing 14 supply-chain information management systems in a new consolidated warehouse. All aspects of these initiatives are on track to be fully operational at the end of the 15 second quarter, and our new supply-chain management system is up and running as we speak. 16 17 These improvements are essential to our long-term growth and will benefit the U.S. 18 Consumer division in the second half of this year with increasing returns accruing in coming years. We believe our investment and achievement in these operational 19 initiatives bodes well for our execution in the critical second half of this year. 20

21 (c) Curley stated that LeapFrog’s “days sales outstanding increased about 19 days 22 year-over-year,” and that there was “a pattern of slower paying by the large retailers.” 23 (d) Curley also stated that the increase in inventory was caused by lower than 24 expected sales and increases in ordering lead times in the Company’s manufacturing process. 25 Our net inventory of March 31, 2004 was 115.1 million, up 41% from 81.9 million last year. About 7 million of the increase came from our lower than expected first 26 quarter sales. The balance of the increase is due to increasing ordering lead times in our manufacturing process. Our operations group has see[n] increased ordering lead 27 times for chips, ASIC and LCD touch-screens. This has caused [for] us to increase inventory earlier in the cycle as we ramp our manufacturing for the fall. 28

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1 2 We feel that our earlier investment in inventory is prudent in light of the our supply- 3 chain initiatives. We are insuring that inventory is in place earlier than last year to maximize customer fill rates and take the pressure off the automated supply-chain 4 through the transition period.

5 254. The statements made in the 4/21/04 press release and during the 4/21/04 conference 6 call were materially false and misleading because, as Defendants knew: 7 (a) LeapFrog’s 1Q04 financial results, particularly revenues, earnings and 8 receivables, were materially false and misleading and not prepared in conformance 9 with GAAP because LeapFrog was recognizing revenues (and recording receivables) on sales where collection was not reasonably assured, because, inter alia, LeapFrog’s 10 3PLs were shipping product to LeapFrog’s retail customers that they had not ordered and would not pay for. As a result, revenues, earnings and receivables were 11 overstated, and inventories were understated.

12 (b) LeapFrog’s inventories were misstated because Defendants counted excess 13 and obsolete inventories as current, and the Company did not have systems and procedures in place - including the lack of supply-chain software caused by the 14 delayed implementation of the Manugistics software – to reconcile reported inventory with actual inventory on hand or to assure the Company had established 15 sufficient allowances for excess and obsolete inventory. Notwithstanding these deficiencies, Defendants caused LeapFrog to reduce the allowances for excess and 16 obsolete inventory in 2003. Moreover, as explained by CW-5, no allowances were 17 established in 1Q04 even though the Company identified excess and obsolete inventory because a salesman claimed the excess inventory could be sold by the end 18 of 2Q04. When the inventory was not sold, the Company established a $2 million reserve in 2Q04. 19 (c) LeapFrog’s expenses and liabilities (accounts payable) were understated 20 because LeapFrog was ordering materials and components used to manufacture and 21 assemble products without creating purchase orders. As a result, the expenses and liabilities were not reflected in the Company’s financial statements. 22 (d) After the Class Period, LeapFrog admitted that it could not reasonably assure 23 the reliability of its financial reporting or that its financial results were reported in accordance with GAAP because there were numerous material weaknesses in the 24 Company’s internal controls over financial reporting in the areas of revenues and 25 accounts receivable, costs of goods sold and inventory, and information technology related to the manufacture and distribution of the Company’s products. 26 (e) Curley misled investors when he represented the increase in DSOs was 27 caused by slower paying retailers because Curley knew retailers would not pay at all 28

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1 for product they received but had not ordered due to the problems with LeapFrog’s distribution and supply-chain operations. 2 (f) Defendants’ representations that all aspects of the Company’s supply-chain 3 and information technology initiatives were up and running or on track to be fully 4 operational by the end of 2Q04 were false and misleading because, as the witness accounts and post-Class Period admissions show, and Defendants knew, there were 5 numerous problems that delayed the opening of the Fontana warehouse, the transition from DSS to CLI and the upgrading and implementation of supply-chain software. 6 During the 10/18/04 conference call Kalinske belatedly admitted that LeapFrog had “experienced several challenges getting our new distribution center up and running 7 smoothly” which negatively impacted the Company’s financial results. That 8 admission and the admissions in the 2004 10-K that LeapFrog was still in the process of upgrading and implementing supply-chain software confirms that Defendants 9 knew the supply-chain and information technology initiatives were not up and running or on track to be fully operational by the end of 2Q04. 10 11 (g) Defendants’ representation that retail consumer sales by LeapFrog’s top retailers were up over 20% was false and misleading because Defendants concealed 12 from investors that retailers were reducing their purchases, delaying orders for purchases they planned to make in order to reduce inventories, and reducing 13 purchases due to the numerous problems with LeapFrog’s distribution and supply- chain operations that prevented the Company from filling retailer orders. 14 15 (h) Defendants’ representation that there was an increase in higher margin software sales, as shown by a purported increase in the tie ratio, indicating a healthy 16 business for the Company and that the tie ratio increased from 5.1 to 1 to 6.5 to 1 over the last year, was false and misleading because the tie ratio and margins were in 17 fact decreasing. After the Class Period, the Company admitted, and Merrill Lynch reported in a 11/4/04 report, that the decision in 4Q03 to offer two books in response 18 to the PowerTouch hurt the tie ratio, causing it to decline to 3.5:1. Moreover, Bender 19 testified during the Mattel trial that the tie ratio actually declined to 3.7 in 2003 and that it declined significantly to 2.9 in 2004 after LeapFrog decided to include a 20 second book with each LeapPad platform.

21 (i) There was no reasonable basis for the guidance provided for the remainder of 2004 given the numerous problems with the distribution and supply-chain operations 22 and the millions of dollars in lost sales and profits caused by the PowerTouch which 23 prevented the Company from accurately forecasting or meeting customer demand. Further, during the Company’s 7/21/04 conference call Defendants admitted they 24 knew - and purposely did not disclose-that gross margins would decline in 2Q04 because retailers were not going to purchase the Company’s higher margin software 25 due to large changes to software packaging being made by the Company that would not be available until 8/04: 26

27 In terms of the software side, I would like to make one comment. We have been quiet about this, but we have been doing a large packaging change on software. So if you 28 were a U.S. retailer in April, May and June, you did not have any incentive to

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1 purchase software from us because we are about to implement the change of new packaging which isn’t available until August to ship into the market. 2 3 In fact, during the 7/21/04 conference call, Defendants said the packaging change was the 4 reason LeapFrog reported only a marginal increase in the gross margin to 45.1 %, which was less 5 than the 48%-49% they told investors to expect during the 4/21/04 conference call. 6 255. Stock Price: On 4/22/04, following the issuance of the 4/21/04 press release and the 7 very positive conference call, the price of LeapFrog’s stock increased as much as 9% and closed at 8 $23.19, up $1.40, or 6.4% from $21.79, the closing price on 4/21/04. By comparison, the S&P 500 9 increased 1.4% and the proxy peer group increased 1.7%. 10 256. On 5/7/04, Defendants filed LeapFrog’s 1Q04 Form 10-Q, which was signed by 11 defendants Kalinske and Curley. The 10-Q repeated the financial results that were initially reported 12 by the Company on 4/21/04 and included the same false and misleading risk disclosures contained in 13 the 2Q03 10-Q, the 3Q03 10-Q, and the 2003 10-K: 14 (a) Defendants represented that LeapFrog’s relationships with its retail customers 15 “could “be damaged, shipping costs “could “ increase and sales opportunities “could” be delayed or lost “if” the Company was unable to meet tight shipping 16 schedules and fill retail orders. Ex. I. 17 (b) Defendants also represented that the Company “might “ experience 18 difficulties managing growth and that LeapFrog’s operating results “could “ suffer “if “ it failed to develop and maintain management systems and resources sufficient 19 to keep pace with planned growth. Ex. K.

20 (c) Defendants represented that sales and market share “could” decline “if” 21 LeapFrog was unable to compete effectively. Ex. E.

22 (d) Defendants also represented that overall sales “could” suffer “if “ sales of LeapPad platforms and books, the products that Mattel’s PowerTouch competed 23 with, declined. Ex. L.

24 (e) Defendants represented that LeapFrog’s business and operating results could 25 be harmed if Wal-Mart, Toys R Us or Target, the three retailers that accounted for 85% of the Company’s U.S. Consumer sales in 2003 and 95% in 2003, reduced their 26 purchases, changed the terms on which they conducted business with LeapFrog or experienced a downturn in their business. Exs. G and H. 27 28

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1 (f) Defendants represented that LeapFrog’s financial results were prepared in accordance with GAAP and that the Company’s internal controls over financial 2 reporting - a process designed to provide reasonable assurance that the Company’s financial reporting was reliable and that the Company’s financial statements were 3 prepared in accordance with GAAP - were effective. Ex. D. 4 (g) As required by §302 of Sarbanes-Oxley, Kalinske and Wood certified that : 5 (1) the 10-Q did not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances 6 under which such statements were made, not misleading; (2) the financial statements included in the 10-Q fairly presented in all material respects the financial condition, 7 results of operations and cash flows of LeapFrog; (3) they were responsible for 8 designing and evaluating the Company’s disclosure controls; and (4) they had disclosed all significant deficiencies and material weaknesses in the design or 9 operation of the Company’s internal controls over financial reporting which were reasonably likely to adversely affect LeapFrog’s ability to record, process, 10 summarize and report financial information. Ex. M. 11 257. The statements contained in the 1Q04 Form 10-Q were false and misleading because, 12 as Defendants knew: 13 (a) The financial results reported in the 10-Q were not reliable and not prepared 14 in accordance with GAAP as represented, for the reasons set forth in the GAAP section of this Complaint. 15 (b) Defendants’ representations that LeapFrog’s relationships with its customers 16 “could” be damaged, shipping costs “could” increase and sales opportunities “could” 17 be lost “if” the Company was unable to meet tight shipping schedules and fill retail orders were false and misleading because as witness accounts and the Company’s 18 admissions after the Class Period show, and Defendants knew, LeapFrog’s relationships with its retail customers had already been damaged, shipping costs had 19 already increased and sales had already declined because LeapFrog’s 3PLs were unable to ship product to the Company’s retail customers within shorter periods and 20 because the 3PLs shipped product to the retailers that they had not ordered and would 21 not pay for. In addition, LeapFrog’s operating results were already suffering because the Company had not developed and maintained sufficient management systems to 22 keep pace with planned growth. Moreover, the representations that LeapFrog was upgrading existing and implementing new supply-chain systems, and consolidating 23 warehouse operations were false and misleading because they concealed LeapFrog’s problems with furnishing its 3PLs with supply for distribution, and concealed the 24 problems with DSS and the Company’s decision to replace DSS with CLI. The 25 representations were also false and misleading because Defendants knew that CLI would not replace DSS until the peak selling season in 2004 and that the warehouse 26 would not be available until 7/04. Defendants also knew the implementation of new supply-chain software was being delayed and would not be completed before the 27 peak selling season in 2004. As admitted by Defendants after the Class Period and as explained by the witnesses, LeapFrog’s failure to implement supply-chain software 28

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1 caused a significant adverse impact on the Company’s operating and financial results. LeapFrog was unable to assure it had sufficient levels of inventory to fill 2 customer orders because the Company did not upgrade existing or implement new operational information systems, including supply-chain management systems. 3

4 (c) Defendants’ representation that competition “could” cause sales and market share to decline was false and misleading because, as evidenced by pleadings and 5 trial testimony in LeapFrog’s suit against Fisher-Price/Mattel, Defendants immediately knew that LeapFrog was losing millions of dollars in sales and profits 6 due to the sale of PowerTouch that began in 7/03. Thus, competition already had caused a reduction in sales and profitability at LeapFrog. 7

8 (d) Defendants’ representations that LeapFrog’s business and operating results “could “be harmed “if” Wal-Mart, Toys R Us or Target reduced their purchases, 9 changed the terms on which they conducted business with LeapFrog or experienced a downturn in their business, were materially false and misleading because, as 10 Defendants knew, these retail customers had already reduced orders of LeapFrog’s 11 products and imposed millions of dollars of vendor violation penalties because LeapFrog’s 3PLs were unable to ship product within requisite shorter time periods, 12 and because DSS shipped product that the retailers had not ordered and would not pay for, and because LeapFrog had already lost sales to these customers due to the 13 PowerTouch.

14 (e) Defendants’ statements that LeapFrog’s disclosure controls and internal 15 controls over financial reporting were sufficient to ensure the reliability of the Company’s financial reporting, and that the Company’s financial statements were 16 prepared in accordance with GAAP were false and misleading because, as witness accounts and post-Class Period admissions in LeapFrog’s Forms 10-K show, and as 17 Defendants knew, there were numerous material weaknesses in the areas of revenues and accounts receivable, costs of goods sold and inventory, and information 18 technology controls related to the purchase of materials and components used to 19 manufacture and assemble products, the manufacture and assembly of products, the distribution, invoicing and sale of products and the remittance of payments by 20 vendors, customers and LeapFrog.

21 F. Between 7/21/04 And 10/18/04, Defendants Caused Leapfrog To Report False And Misleading Financial Results For 2Q04 And Include Materially False 22 And Misleading “Risk Factors” In The Company’s 2Q04 Form 10-Q 23 258. On 7/21/04, Defendants issued a press release announcing the Company’s 2Q04 24 results: 25 LeapFrog Reports 2nd Quarter 2004 Results; Net Sales Up 19% 26 EMERYVILLE, Calif., July 21-LeapFrog Enterprises, Inc. (NYSE:LF), a leading 27 developer of innovative technology-based educational products, today reported financial results for the second quarter ended June 30, 2004. 28 [C-03-05421-RMW] AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS - 120 -

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1 Net Sales 2 Net sales for the second quarter of 2004 were $80.8 million, compared with $68.0 3 million in the second quarter of 2003, up 19%. Segment Results 4 5 Net sales from the U.S. Consumer segment were $47.7 million, up 4% from $45.8 million in the second quarter of 2003. . . . 6 Gross Margin 7 8 Gross margin was 45.1 % in the second quarter of 2004, compared with 52.7% in the second quarter of 2003. Gross margin declined largely due to lower gross profit 9 margins in the U.S. Consumer segment, which saw a shift in the mix of products sold in the quarter from higher margin software to newer lower margin platforms. The 10 company expects its gross margins to improve in the second half of the year as new software titles become increasingly available and software sales comprise a larger 11 portion of the company’s total sales mix. 12 Net Loss 13 14 The company recorded a net loss for the second quarter of 2004 of $(7.4) million, or $(0.12) per share, compared with a net loss for the second quarter of 2003 of 15 $(3.9) million, or $(0.07) per share.

16 “We are pleased with our progress in the second quarter and with about 80% of the sales year still ahead of us, we are prepared for the second half of 2004,” said Tom 17 Kalinske, Chief Executive Officer. “We are excited about strategically expanding our 18 product line within both our Consumer business and our Education and Training business. Our progress in penetrating the U.S. school market is particularly 19 encouraging and, in a mature business model, will support a more even, year-round selling cycle for us over the long term. On the Consumer side, while the U.S. retail 20 environment remains challenging, we are pleased that our POS data indicates that sell through at retail is up over 20% to date, which should bode well for the busy fall 21 and holiday selling season. We believe that the work we are doing in 2004 to build 22 our brand, company, infrastructure and product line will position LeapFrog to become a universally-recognized global leader in the future.” 23 The company’s published guidance for the ful1 2004 year remains unchanged as 24 follows:

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1 Fully diluted share count of approximately 63 million 2 Diluted net income per share of $1.18 to $1.28 3 259. On 7/21/04, defendants Kalinske, Curley and Lally participated in LeapFrog’s 2Q04 4 earnings conference call attended by various analysts that followed the Company. Kalinske and 5 Curley repeated the 2Q04 financial results and guidance for the remainder of 2004 included in the 6 7/21/04 press release, and made additional materially false and misleading statements: 7 (a) Kalinske reiterated the Company was prepared for the second half of the year and that 8 the gross margin would improve in 3Q04: 9 While our gross margin in the quarter improved slightly to 45.1 percent from 44.6 percent in the first quarter of 2004, we fully expect further improvement in the 10 second half if this year as our new software titles are released, as retailers restock their software sections with our new packaging, and we begin to realize expected 11 efficiencies in producing our new learning platform products.

12 * * * 13 We are committed to delivering solid second half with well-managed inventor, good 14 cash flow and a strong balance sheet at the end of the year. We are pleased with our 15 progress in the second quarter, and with about 80 percent of the sales here still ahead of us, we are prepared for the second half of the year. 16

17 (b) Kalinske also stated that LeapFrog was improving the distribution and supply-chain 18 operations, including the completed implementation of supply-chain management software 19 programs: 20 In an update to our last call, I would like to report that we are making progress with improvements to our supply-chain management initiatives. Several of our new 21 supply-chain management software programs are up and running. We are also continuing to consolidate our distribution centers and will complete our move into 22 our new warehouse and begin shipping from it at the end of the month. We will 23 maintain a level of redundancy with our warehouses until the new facility has been fully tested. 24 Last year we believed that too little available inventory resulted in lost opportunity 25 with our retailers. Consequently, we have planned early and provided for contingencies, including redundant shipping capacity and a larger amount of 26 inventory entering the third quarter. We are focused on improving our delivery and 27 our fulfillment performance in the critical second half of this year. Next year we will shed this warehouse redundancy and the need for an inventory buffer and expect to 28 reap additional operation performance benefits.

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1 (c) Lally stated that pilot programs LeapFrog had conducted with school districts over 2 the past several years were generating large purchases, including a $1 million sale to the Prince 3 George County School District in Maryland: 4 The pilots that LeapFrog SchoolHouse has been conducting over the past several 5 years with school districts throughout the country are beginning to pay off by generating larger purchases from both existing and new customers. 6 7 For example, earlier this month we announced a $1 million contract with Prince George’s County Maryland, where our LeapTrack system will be installed in every 8 Title 1 kindergarten classroom together with a one-to-one ratio of LeapPad platforms to students. 9 260. The false and misleading statements made by Defendants in the 7/21/04 press release 10 and during the 7/21/04 conference call were repeated to the market in analysts reports issued on 11 7/21/04 by Citigroup Smith Barney and on 7/22/04 by Piper Jaffray, CSFB, Merrill Lynch, Bear 12 Stearns, Deutsche Bank and Merriman Curhan Ford. 13 261. The statements made in the 7/21/04 press release and conference call were materially 14 false and misleading because, as Defendants knew: 15 (a) LeapFrog’s 2Q04 financial results, particularly revenues, earnings and 16 receivables, were materially false and misleading and not prepared in conformance 17 with GAAP because LeapFrog was recognizing revenues (and recording receivables) on sales where collection was not reasonably assured, because, inter alia, LeapFrog’s 18 3PLs were shipping product to LeapFrog’s retail customers that they had not ordered and would not pay for. As a result, revenues, earnings and receivables were 19 overstated and inventories were understated.

20 (b) LeapFrog’s inventories were misstated because Defendants counted excess 21 and obsolete inventories as current, and because the Company did not have systems and procedures in place - including the lack of supply-chain software caused by the 22 delayed implementation of the Manugistics software - to reconcile reported inventory with actual inventory on hand or to assure the Company had established sufficient 23 allowances for excess and obsolete inventory.

24 (c) LeapFrog’s expenses and liabilities (accounts payable) were understated 25 because LeapFrog was ordering materials and components used to manufacture and assemble products without creating purchase orders. As a result, the expenses and 26 liabilities were not reflected in the Company’s financial statements.

27 (d) After the Class Period, LeapFrog admitted that it could not reasonably assure the reliability of its financial reporting or that its financial results were reported in 28

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1 accordance with GAAP because there were numerous material weaknesses in the Company’s internal controls over financial reporting in the areas of revenues and 2 accounts receivable, costs of goods sold and inventory, and information technology related to the manufacture and distribution of the Company’s products. 3

4 (e) Kalinske’s representations that (1) LeapFrog was making progress with improvements to the Company’s distribution and supply-chain initiatives, (2) supply- 5 chain software was up and running, and (3) the Company had provided for redundant shipping capacity by retaining DSS were false and misleading because, as 6 Defendants knew and witnesses recounted, LeapFrog had not completed the implementation of necessary supply-chain software, including the Highjump 7 warehouse management software which did not go live until approximately 8/04. 8 Further, as Defendants admitted after the Class Period (as reported by Merrill Lynch on 11/4/04), there were numerous problems with the initiatives, including delays in 9 opening the warehouse and DSS requiring LeapFrog to quickly move inventory in their warehouses to the Fontana warehouse. After the Class Period, the Company 10 reported in the 2004 10-K that it was still in the process of upgrading existing and 11 implementing new supply-chain software.

12 (f) There was no reasonable basis for reiterating the guidance for 2004 and representing that LeapFrog was prepared for the second half of 2004 when 80% of 13 the Company’s sales were generated because, as Defendants knew, there were numerous problems that delayed the transition from DSS to CLI and the upgrade and 14 implementation of supply-chain software that would cause the distribution and 15 supply-chain problems to continue, and LeapFrog was losing millions of dollars in LeapPad sales and profits due to the PowerTouch. 16 (g) The representation that gross margins would improve in the second half of 17 2004 as higher margin software sales comprised a larger portion of the Company’s sales mix was false and misleading and had no reasonable basis because, as 18 Defendants knew, the delays in transitioning to CLI, consolidating warehouse 19 operations and implementing supply-chain software until the peak selling season would prevent the Company from fulfilling customer orders. Kalinske admitted 20 during the Company’s 2/15/05 conference call that he knew CLI was unable to ship product to LeapFrog’s retailers correctly by 8/04. In addition, as Bender’s testimony 21 in the patent infringement trial demonstrates, Defendants knew that software sales would not comprise a larger portion of the Company’s sales. Bender testified that 22 the decision to add a second book to LeapPad platforms caused a substantial decline 23 in software sales, of 2.9 million lost book sales. Defendants tracking of book purchases per platform, i.e., the tie ratio, showed the tie ratio was declining. 24 (h) Lally’s representation that the $1 million sale to the Prince George County 25 School District was a result of pilot programs conducted over the past several years was false and misleading because the sale was the result of LeapFrog salesperson 26 Sienna Owens’ (“Owens”) personal relationship with Andre Hornsby (“Hornsby”), 27 the head of the school district. Moreover, the sale violated LeapFrog’s internal code of conduct and is currently being investigated by the FBI and other authorities. The 28 sale was approved by Hornsby without disclosing he lived with LeapFrog

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1 saleswoman Owens. Deborah Adam (“Adam”), another LeapFrog salesperson, received a $40,000 commission on the sale, a portion of which was apparently shared 2 with Owens. Owens and the other salesperson left LeapFrog following an internal ethics investigation. On 12/14/04, LeapFrog announced that Lally had also been 3 forced to resign “in response to an internal investigation under LeapFrog’s code of 4 conduct.”

5 262. Stock Price: LeapFrog’s stock price was artificially maintained at $18.55 by the false 6 and misleading statements made by Defendants in the 7/21/04 press release and during the 7 conference call that were repeated to the market in several analyst reports. The stock price would 8 have declined (as it did on 10/19/04) if the market knew (as it did on 10/18/04) the truth about the 9 distribution and supply-chain operations, the lost sales caused by sales of the PowerTouch and the 10 distribution and supply-chain problems, the numerous internal control deficiencies and the inability 11 to forecast future results. 12 263. On 8/6/04, Defendants filed LeapFrog’s 2Q04 Form 10-Q with the SEC, which was 13 signed by defendants Kalinske and Curley. The l0-Q repeated the false and misleading financial 14 results issued on 7/21/04 and included the same false and misleading “risk disclosures” contained in 15 the 2Q03 10-Q, the 3Q03 10-Q, the 2003 10-K, and the 1Q04 10-Q: 16 (a) Defendants represented that LeapFrog’s relationships with its retail customers “could” be damaged, shipping costs “could” increase and sales opportunities “could” 17 be delayed or lost if the Company was unable to meet tight shipping schedules and fill retail orders. Ex. I. 18

19 (b) Defendants also represented that the Company “might” experience difficulties managing growth and that LeapFrog’s operating results “could” suffer 20 “if” it failed to develop and maintain management systems and resources sufficient to keep pace with planned growth. Ex. K. 21 22 (c) Defendants represented that sales and market share “could” decline “if” LeapFrog was unable to compete effectively. Ex. E. 23 (d) Defendants also represented that overall sales “could” suffer “if” sales of 24 LeapPad platforms and books, the product that Mattel’s PowerTouch competed with, declined. Ex. L. 25 26 (e) Defendants also falsely represented that LeapFrog’s business and operating results “could” be harmed if Wal-Mart, Toys R Us or Target, the three retailers that 27 accounted for 86% of the Company’s U.S. Consumer sales in 2004 and 79% in 2003, reduced their purchases, changed the terms on which they conducted business 28 with LeapFrog or experienced a downturn in their business. Exs. G and H. [C-03-05421-RMW] AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS - 125 -

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1 (f) Defendants represented that LeapFrog’s financial results were prepared in 2 accordance with GAAP and that the Company’s internal controls over financial reporting - a process designed to provide reasonable assurance that the Company’s 3 financial reporting was reliable and that the Company’s financial statements were 4 prepared in accordance with GAAP - were effective. Ex. D.

5 (g) As required by §302 of Sarbanes-Oxley, Curley and Kalinske certified that: (l) the 10-Q did not contain any untrue statement of a material fact or omit to state a 6 material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading, (2) the financial statements 7 included in the 10-Q fairly presented in all material respects the financial condition, 8 results of operations and cash flows of LeapFrog, (3) they were responsible for designing and evaluating the Company’s disclosure controls and (4) they had 9 disclosed all significant deficiencies and material weaknesses in the design or operation of the Company’s internal controls over financial reporting which were 10 reasonably likely to adversely affect LeapFrog’s ability to record, process, 11 summarize and report financial information. Ex. M.

12 264. The statements contained in the 2Q04 Form 10-Q were false and misleading because , 13 as Defendants knew: 14 (a) The financial results reported in the 10-Q were not reliable and not prepared 15 in accordance with GAAP as represented for the reasons set forth in the GAAP and other sections of this Complaint. 16 17 (b) Defendants’ representations that LeapFrog’s relationships with its customers “could” be damaged, shipping costs “could” increase and sales opportunities “could” 18 be lost “if” the Company was unable to meet tight shipping schedules and fill retail orders were false and misleading because, as witness accounts and the Company’s 19 admissions after the Class Period show and as Defendants knew, LeapFrog’s relationships with its retail customers had already been damaged, shipping costs had 20 already increased and sales had already declined because DSS was unable to ship 21 product to the Company’s retail customers within shorter periods and because DSS shipped product to the retailers that they had not ordered and would not pay for. 22 During LeapFrog’s 2/15/05 conference call, Kalinske admitted that he and the other Defendants knew CLI was unable to ship product to LeapFrog’s retail customers 23 beginning in 8/04.

24 (c) Defendants’ representation that LeapFrog’s operating results “could” suffer 25 “if” LeapFrog failed to develop and maintain management systems and resources sufficient to manage planned growth was false and misleading because LeapFrog’s 26 operating results were already suffering because the Company had not developed and maintained sufficient management systems to keep pace with planned growth. The 27 representations that LeapFrog was upgrading existing and implementing new supply- chain systems, and consolidating warehouse operations were false and misleading 28

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1 because they concealed that the implementation of new supply-chain software was being delayed and would not be completed. As admitted by Defendants after the 2 Class Period and as explained by the witnesses, the Company is still in the process of upgrading existing and implementing new supply-chain software and LeapFrog’s 3 failure to implement supply-chain software in 2004 caused a significant adverse 4 impact on the Company’s operating and financial results.

5 (d) Defendants’ representation that competition “could” cause sales and market share to decline was false and misleading because, as evidenced by pleadings and 6 trial testimony in LeapFrog’s suit against Fisher-Price/Mattel, Defendants immediately knew that LeapFrog was losing millions of dollars in sales and profits 7 due to the sale of PowerTouch that began in 7/03. Thus, competition already had 8 caused a reduction in sales and profitability at LeapFrog.

9 (e) Defendants’ representations that LeapFrog’s business and operating results “could “be harmed “if” Wal-Mart, Toys R Us or Target reduced their purchases, 10 changed the terms on which they conducted business with LeapFrog or experienced a 11 downturn in their business, were materially false and misleading because, as Defendants knew, these retail customers had already reduced orders of LeapFrog’s 12 products and imposed millions of dollars of vendor violation penalties because LeapFrog’s 3PLs were unable to ship product within requisite shorter time periods, 13 and because DSS shipped product that the retailers had not ordered and would not pay for, and because LeapFrog had already lost sales to these customers due to the 14 PowerTouch. 15 (f) Defendants’ statements that LeapFrog’s disclosure controls and internal 16 controls over financial reporting were sufficient to ensure the reliability of the Company’s financial reporting, and that the Company’s financial statements were 17 prepared in accordance with GAAP were false and misleading because, as witness accounts and post-Class Period admissions in LeapFrog’s Forms 10-K show, and as 18 Defendants knew, there were numerous material weaknesses in the areas of revenues 19 and accounts receivable, costs of goods sold and inventory, and information technology controls related to the purchase of materials and components used to 20 manufacture and assemble products, the manufacture and assembly of products, the distribution, invoicing and sale of products and the remittance of payments by 21 vendors, customers and LeapFrog.

22 265. On 8/11/04, Merriman Curhan Ford & Co. analyst Raj Sharma issued a report after 23 speaking at length with Kalinske and others who told her that they felt better about the outlook for 24 LeapFrog than they had in months as the Company was receiving excellent responses from retailers 25 and winning over the competition: 26 Management Visit Confirms Bullish Thesis; Better Q3 Visibility; Reiterate Buy 27 • We visited with management yesterday, and spoke at length on new products, 28 retailer relationships, and outlook for the year. Management now feels far better

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1 about the outlook and the business than they did three months ago. The company has better visibility now that they are halfway through Q3, and is receiving an 2 excellent response from retailers on new products.

3 266. The statements made by Defendants that were included in the 8/11/04 analyst report 4 were false and misleading for the reasons set forth in ¶¶261 and 264, and because, in fact, as 5 Kalinske admitted during the 2/15/05 post-Class Period conference call, he and the other Defendants 6 felt worse about the outlook for the business because by 8/04 they knew that CLI was unable to ship 7 product to LeapFrog’s retailers correctly. 8 267. Stock Price: LeapFrog’s stock price was artificially maintained at $18.25 by 9 Defendants’ misrepresentations and omissions, including the false representations included in 10 Sharma’s 8/11/04 report. The stock price would have declined, as it did on 10/19/04, if the market 11 knew (as it did on 10/18/04) the truth about the distribution and supply-chain operations, the lost 12 sales due to competition and the shipping problems, the numerous internal control deficiencies and 13 the Company’s inability to accurately forecast its results. 14 268. On 9/l/04, LeapFrog issued a press release announcing that Wood had resigned from 15 the Company. Just a few days later, when Wood and the other Defendants admitted they knew CLI 16 was unable to ship product correctly to LeapFrog’s retail customers, Wood sold all of his remaining 17 stock - 2.7 million shares - for $51 million. In a 9/7/04 article titled, “Did LeapFrog’s founder dump 18 shares?” Herb Greenberg noted the suspicious nature of the sale: 19 Leaping leapfrogs: Buzz in my channels today is that 2.5 million shares of 20 LeapFrog stock was sold in a private transaction this morning through Merrill Lynch. The buyers were said to be existing holders, who no doubt would rather 21 buy than see the impact of so many shares being dumped on the market at once.

22 And the seller? Word is it was none other than LeapFrog founder and former CEO Michael Wood, who resigned last week as chief vision and creative officer 23 and vice chairman of the board. As of LeapFrog’s (LF: news, chart, profile ) last 24 proxy statement, on April 8, Wood had 2.6 million shares.

25 If Wood indeed was the seller, the timing of his sale would definitely be an eyebrow raiser. Did he sell because he decided it’s time to get out while the getting was 26 good, which would be a negative? Or did he sell because he’s miffed he was pushed out and wanted nothing more to do with the company, which would be less 27 of a negative? And if he wasn’t the seller, who was - and why sell now? 28

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1 Interestingly, LeapFrog today issued an announcement about “a major contract” by its SchoolHouse division. (To counter any impact of chatter related to the stock 2 sale?)

3 LeapFrog’s comment? Haven’t heard back yet, but will let you know when and if I 4 do.

5 269. On 9/24/04, Merriman Curhan Ford & Co. analyst Raj Sharma issued a report that 6 was based on and repeated positive statements made by Kalinske about the Company’s sales and 7 expected financial results in 3Q04 and 4Q04: 8 Management Update Positive; Improved Sell-ins and Dynamic Management Execution; Reiterate Buy 9 • Q3 sales indicate to be better than last year. Positive tone from 10 management. We believe retailer product response has been positive and Q3 sell- 11 ins have been good and that Q4 may look even better.

12 270. The statements made by Defendants that were included in the 9/24/04 analyst report 13 were false and misleading, because, inter alia, as Defendants knew, LeapFrog’s sales were 14 continuing to be adversely impacted by Power Touch, and, during the last two months of 3Q04, as 15 Defendants later admitted during the post-Class Period 2/15/05 conference call, LeapFrog’s 3Q04 16 results would be substantially less than guidance because of the distribution and supply-chain 17 problems. During the 2/15/05 conference call, Kalinske admitted, inter alia, that Defendants knew 18 by 8/04 that CLI was unable to ship product to LeapFrog’s retailers correctly. 19 271. Stock Price: LeapFrog’s stock price was artificially maintained at $20.76 by 20 Defendants’ misrepresentations and omissions, including the false representations included in 21 Sharma’s 9/24/04 report. The stock price would have declined, as it did on 10/19/04, if the market 22 knew (as it did on 10/18/04) the truth about the distribution and supply-chain operations, the 23 additional lost sales due to competition and the shipping problems, the numerous internal control 24 deficiencies and the Company’s inability to accurately forecast its results. 25 272. On 10/15/04, Merrill Lynch analyst Lauren Rich Fine issued a report which referred 26 to LeapFrog’s distribution and supply-chain problems: 27 We believe the company-specific issues related to fulfilling demand and inventory management are being addressed, although we hope to learn more about how the new 28 warehouse and supply-chain management implementations are going when LF [C-03-05421-RMW] AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS - 129 -

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1 reports Q3 results, as these systems are being tested for the first time this season. This is a risk, but a solid effort has been made and we are hopeful there isn’t a repeat 2 of last year.

3 273. Three days later, Defendants admitted what they had known all along - that LeapPad 4 sales were declining and that there were numerous problems with the distribution and supply-chain 5 operations that prevented LeapFrog from fulfilling customer demand, managing inventory, 6 accurately forecasting the Company’s results and assuring the reliability of LeapFrog’s financial 7 reporting. 8 THE END OF THE CLASS PERIOD AND POST CLASS PERIOD EVENTS FURTHER 9 DEMONSTRATED DEFENDANTS’ FRAUD 10 274. On 10/18/04, after repeatedly assuring investors that LeapFrog would report solid 11 financial results in 3Q04 and 4Q04 and that the distribution and supply-chain problems had been 12 fixed, Defendants shocked investors yet again by preannouncing that 3Q04 results would be 13 significantly worse than the guidance previously provided by Defendants. Moreover, Defendants 14 revealed that the reasons for the shortfall included soft sales and problems with the Company’s 15 distribution and supply-chain operations: 16 LEAPFROG PROVIDES REVISED OUTLOOK FOR 2004 AND PRELIMINARY RESULTS FOR THIRD QUARTER 17 EMERYVILLE, Calif -October 18, 2004-LeapFrog Enterprises, Inc. (NYSE: LF), a 18 leading developer of innovative technology-based educational products, today announced its revised full year financial outlook for 2004 and preliminary results for 19 the third quarter of 2004. 20 “The operating climate in the United States is tougher than we anticipated, and we 21 expect to see this continue through the Holiday season,” said LeapFrog Chief Executive Officer Tom Kalinske. “In addition, we are experiencing softness in our 22 basic LeapPad business in the United States, and we have had several challenges getting our new distribution center and supply-chain systems up and running 23 smoothly during this peak season.” 24 “As a result, we believe that it is prudent to adjust our outlook for 2004 accordingly,” 25 continued Kalinske. “While we had a more optimistic view of the second half of the year three months ago, we believe that 2004 will be less profitable than we had 26 previously expected. Clearly, this is not acceptable to us and we are taking immediate action to ensure a healthy company and a strong product line for 2005.” 27

28 Preliminary Results for Third Quarter of 2004

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1 The company also announced that it expects to report net sales for the September 2 quarter 2004 of approximately $225 to $230 million o gross margins of 40% to 41% and operating expenses of 27% to 28%. Based on a fully diluted share count of 3 approximately 61.5 million, the company also expects to report earnings per share on 4 a fully diluted basis of approximately $0.32 to $0.34 per share. Complete financial results for the third quarter of 2004 will be released on October 27. 5

6 Outlook for 2004 7 The company’s published guidance for the full 2004 year is revised as follows: 8 9 Net sales of $680 to $710 million

10 Gross profit margin of 42% to 43% of net sales 11 Operating expenses of 36% to 37% of net sales 12 13 Fully diluted share count of approximately 61.5 million

14 Diluted net income per share of $0.40 to $0.60 15 275. During the Company’s conference call later that day, Kalinske admitted again that 16 there were problems with LeapFrog’s distribution and supply-chain operations that the Company 17 needed help to correct. In addition, contrary to the risk disclosures contained in every Form 10-Q 18 and 10-K issued during the Class Period, Kalinske’s statements during the conference call showed 19 that LeapFrog, in fact, had numerous infrastructure problems which had “negative financial 20 ramifications”: 21 [W]e have experienced several challenges getting our new distribution center up 22 and running smoothly. As you will recall, we consolidated our distribution centers into one, newer, larger facility this past July. At the same time, we also launched a 23 number of new information management systems to build out our supply-chain. In addition, we hired a new third-party logistics venture, Commodity Logistics, Inc., to 24 implement these operations. However, getting all this up and running during this 25 peak time has been challenging and we have experienced negative financial ramifications through this transition, ultimately impacting margin. 26 * * * 27 28

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1 [W]e are working closely with our distribution partner, Commodity Logistics, Inc., to significantly improve and strengthen our supply-chain management at our new 2 consolidated warehouse, using our new IT systems, so that we may effectively deliver and efficiently deliver our products to our U.S. retail partners. We have also 3 brought in outside consultants, such as Accenture, to help us through these 4 changes. All in all, we know that we are going to have to work very hard to restore faith with our key retail customers. 5 We’re working to improve and perfect our organization, processes, and infrastructure 6 to properly support this new phase of our company’s growth. LeapFrog is a business that has grown astronomically over the last several years. During that time, the 7 emphasis was on feeding that rapid growth with new products delivered to market 8 as quickly as possible. As we enter a new phase of our company’s growth, this management team is focused on building the infrastructure necessary for future 9 success, including developing an efficient, team-oriented organization implementing internal systems designed to give us better visibility and control over our businesses 10 and developing business planning processes to ensure consistent future growth and 11 profitability.

12 276. Following the 10/18/04 announcement, LeapFrog’s stock price declined $6.21, or 13 34% from $18.20 on 10/18/04, to $11.99 on 10/19/04, causing class members to suffer economic 14 losses. By comparison, the S&P 500 declined 1% and the proxy peer group declined by 0.7%. 15 277. Following the 10/18/04 announcement, incredulous analysts issued scathing reports 16 that stated management credibility had sunk to new lows because LeapFrog management had 17 botched the Company’s distribution and supply-chain operations for at least a year and a solution did 18 not appear at hand: 19 • Bear Stearns analyst Childe slashed EPS estimates and stated “[looking forward, execution remains the biggest risk to the story, with management credibility 20 hitting new lows. LF has now struggled with supply-chain issues for a full year now and we have limited confidence in the company’s ability to execute on 4Q 21 plans.” 22 • In her report, Merriman Curhan Ford analyst Sharma stated that LeapFrog management “admits to botching up supply-chain and distribution execution in 23 Q3. This should clearly affect management credibility and call for changes in the management structure.” 24 • Piper Jaffray analyst Gikas downgraded the stock and wrote “for one year now LF 25 has struggled with product sales and supply-chain problems - it’s unlikely a solution is at hand.” 26 • Merrill Lynch analyst Fine downgraded the stock and noted that LeapFrog management “cited . . . challenges with its distribution and supply-chain system 27 during the peak season with LF unable to fill all of its orders. . . management credibility has taken an even bigger step down at this juncture.” 28

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1 • Citigroup Smith Barney analyst Krutick noted that the distribution and supply- chain problems were far from fixed: “LeapFrog is working closely with 2 distribution partners and consultants and implementing new IT systems to improve efficiency of distribution in order to better deliver product to retail.” 3

4 278. On 10/27/04, LeapFrog reported financial results in line with the revised guidance 5 provided two weeks earlier and reiterated the revised guidance for FY04 that was provided on 6 10/18/04. In addition, during the conference call, Kalinske and Perez tried to convince investors, 7 again, that LeapFrog was taking steps to address the problems. Analysts, however, remained 8 skeptical: 9 • Citigroup Smith Barney analyst Jill Krutick issued a report that stated, “[o]ur cautious outlook for LeapFrog is unchanged at this time, as we note that the third 10 quarter was the third of the last five quarters in which the company pre-announced disappointing results. On the company’s conference call, management tried to 11 dispel concerns by outline [sic] steps they are taking to address the issues, but as 12 they itemized the issues, we did not gain a comfort level that everything has been pinpointed.” 13 • CSFB analyst Dobell issued a report that stated, “we continue to remain cautious on Q4 and FOS numbers because we believe industry fundamentals and LeapPad 14 issues have the potential to bring down numbers again.” 15 • Bear Stearns analyst Jennifer Childe issued a report that stated, “visibility remains unquestionably weak and management credibility both in its ability to execute and 16 in its ability to accurately forecast the business has dropped to new lows.” • In his 10/28/04 report. Piper Jaffray analyst Anthony N. Gikas stated, “[o]ur 17 concerns remain and include: 1) Significant execution risk; 2) management credibility; 3) CY05 estimates not firm; 4) increasing materials and systems costs; 18 5) margin pressure during CY05; 6) cornerstone LeapPad product line at risk; 7) 19 limited visibility; and 8) lack of near term catalyst.” • In a 10/28/04 report, Merrill Lynch analyst Fine stated, “the dramatic misses of 20 late and the lack of management credibility make it difficult to have conviction on the shares.” 21

22 279. On 12/16/04, the analysts and investors learned that their skepticism about LeapFrog 23 was well founded. On 12/16/04, LeapFrog withdrew its FY04 guidance again and disclosed that 24 FY04 financial results would be “significantly below” the substantially reduced guidance provided 25 on 10/18/04. Moreover, the Company failed to provide any new guidance for FY04 or 2005 26 because, as LeapFrog’s new CFO admitted during the 12/16/04 conference call, and as was reported 27 by Merrill Lynch analyst Fine in a 12/17/04 report, LeapFrog was unable to provide accurate 28 forecasts in the past and still did not have processes in place to provide more accurate information. [C-03-05421-RMW] AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS - 133 -

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1 280. On 2/15/05, LeapFrog announced 4QO4 and FY04 financial results that were 2 substantially worse than the revised guidance provided on 10/18/04, which was subsequently 3 withdrawn on 12/16/04. Net sales in 2004 were $640.3 million, $70 million less than the revised 4 guidance provided on 10/18/04. In addition, LeapFrog reported a net loss of $7.9 million, or $0.13 5 per share, compared to the guidance of $36 million or $0.60 EPS provided on 10/18/04. 6 281. In addition to the withdrawn guidance and poor financial results, Defendants’ fraud 7 caused the Company to substantially reduce its workforce and make numerous management changes. 8 In addition to Class Period workforce reductions in early 2004 and throughout 2004 described by 9 confidential witnesses, after the Class Period, on 10/27/04, the Company announced that it was 10 eliminating approximately 11% of the workforce, or approximately 100 jobs. On 2/15/05, the 11 Company announced it was eliminating another 180 jobs, or approximately 20% of the workforce. 12 282. There have also been numerous management changes at the Company. In addition to 13 the forced resignation of Wood, Curley’s forced resignation was announced on 11/11/04, just before 14 the Company withdrew its guidance for 2004 and as the Company was preparing to disclose that 15 there were numerous material weaknesses in the Company’s internal controls that precluded 16 reasonable assurance that LeapFrog’s financial statements had been prepared in accordance with 17 GAAP. Curley was replaced by William B. Chiasson (“Chiasson”) because, as Chiasson and Curley 18 reportedly told Merrill Lynch analyst Fine, it was time to transition from an early stage CFO to one 19 with more experience and interest in employing management processes, and experience with supply- 20 chain management and financial modeling.

21 283. On 12/14/04, the Company announced the forced resignation of Lally in response to 22 the internal investigation under LeapFrog’s code of conduct relating to a $40,000 commission paid 23 to a sales representative on a $1 million sale to the Prince George County School District. The 24 transaction is under investigation by the FBI and other authorities because the school district’s CEO, 25 Hornsby, authorized the purchase in 6/04 without disclosing he lived with LeapFrog saleswoman 26 Sienna Owens. Owens and another LeapFrog salesperson who apparently shared some of the 27 $40,000 commission with Owens, left LeapFrog following the internal ethics investigation. 28

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1 284. On 2/2/05, LeapFrog announced the resignation of Forsyth, the COO hired in 8/03 to 2 fix the distribution and supply-chain problems. On 2/15/05, the Company announced it had hired a 3 new Chief Information Officer, and on 4/l/05, the Company announced it had hired a new senior 4 vice president of supply-chain and operations. 5 285. On 2/14/05, LeapFrog announced that Jeffrey Berg (“Berg”) resigned from the 6 Company’s Board of Directors and was therefore no longer a member of the audit, compensation, 7 and nominating and corporate governance committees. As a result, LeapFrog was not in compliance 8 with NYSE rules which required audit committees to have at least three members. The resignation 9 of Berg occurred just one month before Defendants disclosed they could not reasonably assure 10 LeapFrog’s financial results were accurate or prepared in accordance with GAAP because of the 11 numerous material weaknesses in the Company’s internal controls in the areas of revenue and 12 accounts receivable, cost of goods sold and inventory and information technology including 13 distribution and supply-chain operations. 14 286. On 3/28/05, LeapFrog filed its 2004 Form 10-K and admitted that there were 15 numerous material weaknesses with the Company’s distribution and supply-chain operations that 16 prevented the Company from reasonably assuring LeapFrog’s financial reporting was reliable or that 17 the Company’s financial statements were prepared in accordance with GAAP.

18 DEFENDANTS FALSELY REPORTED LEAPFROG’S FINANCIAL RESULTS IN VIOLATION OF GAAP 19 20 287. LeapFrog’s financial results during the Class Period were materially false and 21 misleading. Defendants caused LeapFrog to report inflated financial results during the Class Period 22 by (1) improperly recognizing revenues upon shipment of products to its U.S. retail customers that 23 they did not order and would not pay for, (2) improperly recording receivables on those sales, (3) 24 failing to adequately reserve for obsolete, defective and excess inventory, and (4) failing to report 25 expenses related to the purchase of goods and services used to manufacture the Company’s products. 26 After the Class Period, LeapFrog admitted in its 2004 10-K that it could not reasonably assure the 27 reliability of its financial reporting or that its financial statements were prepared in accordance with 28 GAAP because there were numerous material weaknesses in the areas of: (1) revenue and accounts

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1 receivable, (2) costs of goods sold and inventory and (3) information technology controls, including 2 the Company’s distribution and supply-chain operations. 3 288. GAAP are those principles recognized by the accounting profession as the 4 conventions, rules and procedures necessary to define accepted accounting practice at a particular 5 time. SEC Regulation S-X (17 C.F.R. §210.4-01(a)(1)) states that financial statements filed with the 6 SEC which are not prepared in compliance with GAAP are presumed to be misleading and 7 inaccurate, despite footnote or other disclosure. Regulation S-X requires that interim financial 8 statements must also comply with GAAP, with the exception that interim financial statements need 9 not include disclosure which would be duplicative of disclosures accompanying annual financial 10 statements. 17 C.F.R. §210.10-01(a).

11 A. Improper Revenue Recognition And Failure To Adequately Reserve For Accounts Receivable With Doubtful Collectibility 12 13 289. Pursuant to GAAP, as set forth in Financial Accounting Standards Board (“FASB”) 14 Statement of Financial Accounting Concepts (“FASCON”) No. 5, SEC Staff Accounting Bulletin 15 No. 101 and LeapFrog’s publicly reported revenue recognition policy, revenues can not be 16 recognized upon shipment unless the following criteria are met: (1) persuasive evidence of an 17 arrangement exists, (2) delivery has occurred, (3) the fee is fixed and determinable; and (4) 18 collection is reasonably assured. 19 290. Further, pursuant to GAAP as set forth in FASB’s Statement of Financial Accounting 20 Standards (“SFAS”) No. 48, revenues can not be recognized at the time of sale where the buyer has 21 the right to return the product unless (1) the price is substantially fixed or determinable at the time of 22 sale, (2) the buyers payment obligation is not contingent on resale, and (3) the amount of future 23 returns can be reasonably estimated. 24 291. Defendants knew collection of the revenues recognized during the Class Period was 25 not probable because they knew that LeapFrog’s 3PLs DSS and CLI were delivering product to the 26 Company’s U.S. retail customers that they had not ordered, would not pay for and would return. 27 292. GAAP, as set forth in SFAS No. 5, Accounting for Contingencies, states that any loss 28 to be expected from an uncollectible receivable should be accrued when it is probable and when the

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1 amount of such loss can be reasonably estimated. See SFAS No. 5, ¶8. According to SFAS No. 5, 2 ¶22: 3 Losses from uncollectible receivables shall be accrued when both conditions in paragraph 8 are met [the loss is probable and the amount of loss can be reasonably 4 estimated]. Those conditions may be considered in relation to individual receivables or in relation to groups of similar types of receivables. If the conditions are met, 5 accrual shall be made even though the particular receivables that are uncollectible 6 may not be identifiable.

7 293. Although receivables should not have been accrued at all on the sales of product to 8 LeapFrog’s retail customers that they had not ordered and would not pay for, Defendants caused 9 LeapFrog to violate GAAP by failing to make timely and adequate accrual for these uncollectible 10 receivables despite knowing the Company’s U.S. retail customers would not pay for product they 11 were delivered but did not order. 12 294. After the Class Period, the Company admitted that it could not reasonably assure the 13 reliability of its financial reporting or that the Company’s financial statements were prepared in 14 accordance with GAAP because there were numerous material weaknesses in the areas of revenue 15 and accounts receivable.

16 B. Defendants Improperly Accounted For Leapfrog’s Inventory 17 295. GAAP, as set forth in ARB No. 43, Chapter 4, Inventory Pricing, and LeapFrog’s 18 publicly reported inventory policy required inventories to be recorded at the lower of cost or market. 19 ARB No. 43, Chapter 4, Statement 5, states: 20 A departure from the cost basis of pricing the inventory is required when the utility of the goods is no longer as great as its cost. Where there is evidence that the utility 21 of goods, in their disposal in the ordinary course of business, will be less than cost, whether due to physical obsolescence, changes in price levels or other causes, the 22 difference should be recognized as a loss in the current period. This is generally 23 accomplished by stating such goods at a lower level commonly designated as market. 24

25 (Emphasis in original.) 26 296. During the Class Period, Defendants counted excess and obsolete inventory as current 27 inventory, misstated the value of such inventories to LeapFrog’s auditors and investors, and knew 28 that LeapFrog had not implemented supply-chain software that was needed to evaluate and [C-03-05421-RMW] AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS - 137 -

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1 determine if additional allowances for obsolete and excess inventory were needed. Pursuant to 2 GAAP, the Company was required to evaluate its inventory at each quarter-end and record losses for 3 the excessive inventory. LeapFrog actually reduced the allowance in 2003 and added just $2 million 4 to the allowance in 2Q04. After the Class Period, LeapFrog increased the allowance for excess and 5 obsolete inventory by $14 million from approximately $5 million as of 6/30/04, to $19.0 million as 6 of 3/31/05. 7 297. After the Class Period the Company admitted that it could not reasonably assure the 8 reliability of its financial reporting or that the Company’s financial statements were prepared in 9 accordance with GAAP because there were numerous material weaknesses in the areas of costs of 10 goods sold and inventory.

11 C. Defendants Failed To Report Expenses Related To Goods And Services Purchased From Leapfrog’s Vendors 12 13 298. GAAP, as set forth in ARB No. 43. Chapter 3, §A, Current Assets and Liabilities, 14 required LeapFrog to report a current liability for payables incurred in the acquisition of materials 15 and supplies to be used in the production of goods. ARB No. 43, Chapter 3, T7. During the Class 16 Period, Defendants knew LeapFrog violated GAAP because the engineering department was 17 ordering goods and services from vendors without creating or submitting approved purchase orders. 18 As a result, LeapFrog did not report a liability for the payables incurred. 19 299. After the Class Period, LeapFrog admitted it could not reasonably assure the 20 reliability of its financial reporting, or that its financial statements were prepared in accordance 21 GAAP due to numerous material weaknesses related to (1) the creation of purchase orders, (2) 22 inventory purchasing, (3) the purchase of materials and components used to manufacture and 23 assemble products, (4) the manufacture and assembly of products and (5) LeapFrog’s payments to 24 vendors. 25 26 27 28

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1 D. Defendants Falsely Represented And Certified That Leapfrog’s Financial Reporting Was Reliable, Leapfrog’s Financial Statements Were Prepared In 2 Accordance With Gaap And That Leapfrog’s Disclosure Controls And Internal Controls Over Financial Reporting Were Effective 3 4 300. As required by SEC rules and regulations, LeapFrog represented and Wood, Curley 5 and Kalinske (as the Company’s CEO and CFO) certified that (1) the Company’s 10-Qs and 10-Ks 6 did not contain any false or misleading statements, (2) the financial statements included in the 10-Qs 7 and 10-Ks fairly presented in all material respects the financial condition, results of operations and 8 cash flows of LeapFrog, and (3) based on their most recent evaluation of LeapFrog’s internal 9 controls over financial reporting, they had disclosed all significant deficiencies and material 10 weaknesses in the design or operation of LeapFrog’s internal controls over financial reporting which 11 were reasonably likely to adversely affect the Company’s ability to record, process, summarize and 12 report financial information. 17 C.F.R. §§240.13a-14, 240.13a-15, 240.15d-15. 13 301. Throughout the Class Period, Defendants knew those representations and 14 certifications were materially false and misleading. They knew that the inability of LeapFrog’s 3PLs 15 to fulfill customer orders accurately or within required shorter time periods caused the Company to 16 misreport revenues, receivables and earnings. Defendants knew the failure to implement supply- 17 chain software systems prevented LeapFrog from accurately reporting inventory and assuring there 18 was sufficient inventory to fulfill customer orders. Defendants knew that LeapFrog was 19 underreporting expenses and liabilities because engineering was purchasing goods and services from 20 vendors without issuing a purchase order. 21 302. Defendants made the false representations and certifications and concealed the 22 internal control deficiencies until after the Class Period when the Company admitted there were 23 numerous material weaknesses in the Company’s internal controls over financial reporting which 24 prevented LeapFrog from reasonably assuring the reliability of its financial reporting or that the 25 Company’s financial statements were prepared in accordance with GAAP. 26 27 28

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1 E. Additional Violations Of GAAP And SEC Regulations 2 303. Due to the foregoing accounting improprieties, Defendants presented LeapFrog’s 3 financial results and statements in a manner which violated GAAP, including, the following 4 fundamental accounting principles: 5 (a) The principle that interim financial reporting should be based upon the same 6 accounting principles and practices used to prepare annual financial statements was violated (APB 7 No. 28, ¶ 10. 8 (b) The principle that financial reporting should provide information that is useful 9 to present and potential investors and creditors and other users in making rational investment, credit 10 and similar decisions was violated (FASCON No. 1, ¶34); 11 (c) The principle that financial reporting should provide information about the 12 economic resources of an enterprise, the claims to those resources, and effects of transactions, events 13 and circumstances that change resources and claims to those resources was violated (FASCON No. 14 1, ¶40); 15 (d) The principle that financial reporting should provide information about how 16 management of an enterprise has discharged its stewardship responsibility to owners (stockholders) 17 for the use of enterprise resources entrusted to it was violated. To the extent that management offers 18 securities of the enterprise to the public, it voluntarily accepts wider responsibilities for 19 accountability to prospective investors and to the public in general (FASCON No. 1, ¶50); 20 (e) The principle that financial reporting should provide information about an 21 enterprise’s financial performance during a period was violated. Investors and creditors often use 22 information about the past to help in assessing the prospects of an enterprise. Thus, although 23 investment and credit decisions reflect investors’ expectations about future enterprise performance, 24 those expectations are commonly based at least partly on evaluations of past enterprise performance 25 (FASCON No. 1,¶ 42); 26 (f) The principle that financial reporting should be reliable in that it represents 27 what it purports to represent was violated. That information should be reliable as well as relevant is 28 a notion that is central to accounting (FASCON No. 2, ¶¶58-59);

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1 (g) The principle of completeness, which means that nothing is left out of the 2 information that may be necessary to insure that it validly represents underlying events and 3 conditions was violated (FASCON No. 2, ¶79); and 4 (h) The principle that conservatism be used as a prudent reaction to uncertainty to 5 try to ensure that uncertainties and risks inherent in business situations are adequately considered 6 was violated. The best way to avoid injury to investors is to try to ensure that what is reported 7 represents what it purports to represent (FASCON No. 2, ¶¶95, 97). 8 304. The failure of the Company to report its financial results also violated Regulation S- 9 X, which states that financial statements filed with the SEC that are not prepared in conformance 10 with GAAP will be presumed to be misleading. 17 C.F.R. §§210.4-01(a)(1), 210.10-01(a). 11 305. Further, the undisclosed adverse information concealed by Defendants during the 12 Class Period is the type of information which, because of SEC regulations, regulations of the 13 national stock exchanges and customary business practice, is expected by investors and securities 14 analysts to be disclosed and is known by corporate officials and their legal and financial advisors to 15 be the type of information which is expected to be and must be disclosed.

16 PROXIMATE LOSS CAUSATION 17 306. As alleged herein, during the Class Period Defendants misled the public regarding (1) 18 the problems with the Company’s distribution and supply-chain operations, (2) the Company’s 19 financial results, (3) the effectiveness of the Company’s internal controls over financial reporting, (4) 20 declining sales due to the distribution and supply-chain problems and the sale of competing products 21 including Mattel’s PowerTouch, and (5) the Company’s ability to accurately forecast its future 22 results given the distribution and supply-chain problems, competition and the material weaknesses in 23 the Company’s internal controls over financial reporting.

24 307. Defendants’ scheme to deceive investors and the market through the issuance of 25 materially false and misleading statements and omissions caused LeapFrog’s class A common stock 26 to trade at artificially inflated prices and operated as a fraud and deceit on Class Period purchasers of 27 the stock. Lead plaintiffs and the class suffered actual economic loss and were damaged when the 28 problems with the distribution and supply-chain operations, the numerous material weaknesses with

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1 the Company’s internal controls over financial reporting, the lost sales and the inability to accurately 2 forecast results were disclosed to the market causing the inflation to be removed from the 3 Company’s stock price. 4 308. Throughout the Class Period Defendants issued partial disclosures of problems with 5 the Company’s distribution and supply-chain operations, declining LeapPad sales, and the 6 Company’s inability to accurately forecast its results. These announcements caused significant 7 declines in the price of LeapFrog’s class A common stock on 10/22/03 (disclosure of 3Q03 sales 8 shortfall due to distribution and supply-chain problems caused stock to drop 25%), 2/10/04 9 (disclosure of 4Q03 and FY03 results and guidance for 2004 that projected slower growth and flat 10 gross margins caused stock to drop 11.2%), and 3/10/04 (disclosure that 1 Q04 results would be less 11 than guidance provided on 2/10/04 caused stock to drop 24.6%). Each of these partial disclosures, 12 however, was accompanied by numerous false and misleading statements concerning the Company’s 13 distribution and supply-chain operations, reported and future financial results, effects of competition, 14 and internal controls. None of the partial disclosures revealed the full extent of the problems, and 15 none of the partial disclosures caused the price of LeapFrog stock to trade at non-artificially inflated 16 prices causing partial inflation to remain in LeapFrog’s stock price. 17 309. On 10/18/04, Defendants admitted that the distribution and supply-chain problems 18 and soft LeapPad sales would cause LeapFrog to report 3Q04 results significantly less than the 19 Company’s prior guidance. LeapFrog’s stock collapsed, declining by 34%, removing the artificial 20 inflation from the price of the stock. The 34% decline in the stock price was a direct result of the 21 revelation to the market about the extent of the distribution and supply-chain problems and lost 22 LeapPad sales that had been concealed by Defendants’ prior misstatements and fraudulent conduct. 23 As a result of their purchases of LeapFrog class A common stock at artificially inflated prices during 24 the Class Period and the disclosures that caused the stock price to decline, thereby removing the 25 artificial inflation from the price of the stock, lead plaintiffs and the class suffered economic loss, 26 i.e., damages under the federal securities laws. 27 28

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1 CLASS ACTION ALLEGATIONS 2 310. Plaintiffs bring this action as a class action pursuant to Rule 23 of the Federal Rules 3 of Civil Procedure on behalf of all persons who purchased LeapFrog Class A common stock and 4 options (the “Class”) on the open market during the Class Period. Excluded from the Class are 5 Defendants, the officers and directors of the Company, at all relevant times, members of their 6 immediate families and their legal representatives, heirs, successors or assigns and any entity in 7 which Defendants have or had a controlling interest. 8 311. The members of the Class are so numerous that joinder of all members is 9 impracticable. The disposition of their claims in a class action will provide substantial benefits to 10 the parties and the Court. During the Class Period, LeapFrog reported there were between 26.3 and 11 32.2 million shares of LeapFrog’s class A common stock outstanding, owned by hundreds if not 12 thousands of persons. 13 312. LeapFrog’s stock traded on the New York Stock Exchange, the most developed and 14 efficient stock market in the United States. As alleged herein there was a cause and effect 15 relationship between unexpected information about LeapFrog released to the market and the price 16 movement in the Company’s stock. The average weekly trading volume in the Company’s stock 17 during the Class Period was approximately 4.8 million shares. The Company was followed by 18 numerous securities analysts who attended the Company’s conference calls and issued reports on the 19 Company throughout the Class Period. There was significant institutional ownership of the 20 Company’s stock and LeapFrog was eligible to register securities on SEC Form S-3.

21 313. There is a well-defined community of interest in the questions of law and fact 22 involved in this case. Questions of law and fact common to the members of the Class which 23 predominate over questions which may affect individual Class members include: 24 (a) Whether the 1934 Act was violated by Defendants; 25 (b) Whether Defendants omitted and/or misrepresented material facts; 26 (c) Whether Defendants’ statements omitted material facts necessary to make the 27 statements made, in light of the circumstances under which they were made, not misleading; 28

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1 (d) Whether Defendants knew or deliberately disregarded that their statements 2 were false and misleading; 3 (e) Whether the price of LeapFrog common stock was artificially inflated; and 4 (f) The extent of damages sustained by Class members and the appropriate 5 measure of damages. 6 314. Lead Plaintiffs’ claims are typical of those of the Class because Lead Plaintiffs and 7 the Class sustained damages from Defendants’ wrongful conduct. 8 315. Lead Plaintiffs will adequately protect the interests of the Class and have retained 9 counsel who are experienced in class action securities litigation. Lead Plaintiffs have no interests 10 which conflicts with those of the Class. 11 316. A class action is superior to other available methods for the fair and efficient 12 adjudication of this controversy. 13 FIRST CLAIM FOR RELIEF For Violation Of §10(B) Of The 1934 Act And Rule 10b-5 Against All Defendants 14 15 317. Plaintiffs incorporate the foregoing allegations by reference. 16 318. During the Class Period, Defendants disseminated or approved the false statements 17 specified above, which they knew or deliberately disregarded were misleading in that they contained 18 misrepresentations and failed to disclose material facts necessary in order to make the statements 19 made, in light of the circumstances under which they were made, not misleading. Defendants also

20 failed to disclose material adverse information in connection with their insider sales of LeapFrog 21 stock. 22 319. Defendants violated § 10(b) of the 1934 Act and Rule 10b-5 in that they: 23 (a) Employed devices, schemes, and artifices to defraud; 24 (b) Made untrue statements of material facts or omitted to state material facts 25 necessary in order to make the statements made, in light of the circumstances under which they were 26 made, not misleading; or 27 28

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1 (c) Engaged in acts, practices, and a course of business that operated as a fraud or 2 deceit upon plaintiffs and others similarly situated in connection with their purchases of LeapFrog 3 common stock during the Class Period. 4 320. Plaintiffs and the Class have suffered damages in that, in reliance on the integrity of 5 the market, they paid artificially inflated prices for LeapFrog common stock. Plaintiffs and the Class 6 would not have purchased LeapFrog common stock at the prices they paid, or at all, if they had been 7 aware that the market prices had been artificially and falsely inflated by Defendants’ misleading 8 statements. 9 321. The market for LeapFrog Class A common stock and options was open, well- 10 developed and efficient at all relevant times. As a result of the materially false and misleading 11 statements alleged above and failures to disclose, LeapFrog’s Class A common stock and options 12 traded at artificially-inflated prices during the Class Period. Lead Plaintiffs and other members of 13 the Class purchased or otherwise acquired LeapFrog Class A common stock and options relying 14 upon the integrity of the market price of LeapFrog Class A common stock and options, and market 15 information relating to LeapFrog, and have been damaged thereby. 16 322. At all relevant times, the material misrepresentations and omissions particularized in 17 this Complaint directly or proximately caused or were a substantial contributing cause of the 18 damages sustained by Lead Plaintiffs and other members of the Class. As described herein, during 19 the Class Period, Defendants made or caused to be made a series of materially false or misleading 20 statements about LeapFrog’s business, prospects and operations. These material misstatements and 21 omissions had the cause and effect of creating in the market a falsely positive assessment of 22 LeapFrog and its financial results and internal controls, thus causing the Company’s Class A 23 common stock and options to be overvalued and artificially-inflated at all relevant times. 24 Defendants’ materially false and misleading statements during the Class Period resulted in Lead 25 Plaintiffs and other members of the Class purchasing the Company’s Class A common stock and 26 options at artificially-inflated prices. As alleged herein, when the truth about Defendants’ 27 misrepresentations and omissions were revealed, the Company’s stock declined dramatically, 28 directly causing investors’ losses.

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1 323. As a direct and proximate result of these Defendants’ wrongful conduct, plaintiffs and 2 the other members of the Class suffered damages in connection with their purchases of LeapFrog 3 common stock during the Class Period. 4 SECOND CLAIM FOR RELIEF For Violation Of §20(A) Of The 1934 Act Against The Individual Defendants 5 6 324. Plaintiffs incorporate the foregoing allegations by reference. 7 325. The Individual Defendants acted as controlling persons of LeapFrog within the 8 meaning of §20(a) of the 1934 Act. By reason of their positions as officers and/or directors of 9 LeapFrog, and their ownership of LeapFrog stock, and their “hands on” management of the 10 Company, the Individual Defendants had the power and authority to cause LeapFrog to engage in the 11 wrongful conduct complained of herein. By reason of such conduct, the Individual Defendants are 12 liable pursuant to §20(a) of the 1934 Act.

13 PRAYER FOR RELIEF 14 WHEREFORE, plaintiffs pray for judgment as follows: 15 A. Declaring this action to be a proper class action pursuant to Rule 23(a) and (b)(3) of 16 the Federal Rules of Civil Procedure on behalf of the Class defined herein and certifying Lead 17 Plaintiffs as the Class’s representative; 18 B. Awarding Lead Plaintiffs and the members of the Class compensatory damages, 19 interest and costs;

20 C. Awarding Lead Plaintiffs and members of the Class pre-judgment and post judgment 21 interest, as well as reasonable attorneys’ fees, expert witness fees, and other costs; 22 D. Awarding extraordinary, equitable or injunctive relief as permitted by law or equity; 23 and 24 E. Awarding such other relief as the Court may deem just and proper. 25 /// 26 /// 27 /// 28 /// [C-03-05421-RMW] AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS - 146 -

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1 JURY DEMAND 2 Plaintiffs demand a trial by jury.

3 DATED: January 27, 2006 BERMAN DEVALERIO PEASE TABACCO BURT & PUCILLO 4 5 /s/ 6 Nicole Lavallee Joseph J. Tabacco, Jr. 7 425 California Street, Suite 2100 San Francisco, CA 94104-2205 8 Telephone: (415) 433-3200 Facsimile: (415) 433-6382 9 Liaison Counsel for Lead Plaintiffs and the 10 Putative Class

11 COHEN, MILSTEIN, HAUSFELD & TOLL, P.L.L.C. 12 Steven J. Toll 13 Elizabeth Berney Matthew K. Handley 14 1100 New York Avenue, N.W. West Tower, Suite 500 15 Washington, D.C. 20005 Telephone: (202) 408-4600 16 Facsimile: (202) 408-4699 - 17 Lead Counsel for Lead Plaintiffs and the 18 Putative Class

19 20 21 22 23 24 25 26 27 28

[C-03-05421-RMW] AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS - 147 -

CaseCase 5:03-cv-05421-RMW 5:03-cv-05421-RMW Document Document 121-1 191 Filed Filed 06/17/2005 01/27/2006 Page Page 135 2 of of 2 135

LeapFrog Enterprises Inc. July 2, 2003 to April 20, 2005

$55 10/22/03: LF reports false and misleading financial results including sales of $203.9 million that were 11% less than expectations. Stock price declines 24% or $11.65 to $34.89; $50 defendants assure sales will be made up in 7/24/03 - 10/21/03: 4Q03. Defendants sell 688,318 shares for 11/10/03: LF issues 3Q03 10-Q with $24,921,291. false and misleading financial results, risk factors and certifications. $45 9/7/04: Wood sells 2.7 million shares for $51 million; Bender sells 10/22/03 - 2/10/04: Defendants sell 50,000 shares for $1,001,500. 702,031 shares for $21,163,627 while falsely assuring distribution and supply chain problems are fixed. $40 9/24/04: Defendants state 3Q04 sell ins have been good and 2/10/04: Stock price declines $3.39 or 11.2% to 4Q04 may look even better. $27.01 after LF reports Wood demotion and disappointing initial 2004 guidance; but LF also reports false and misleading 4Q03 and FY03 10/18/04: Stock price declines $6.21 or $35 results. 34.1% to $11.99 after LF preannounces 3Q04 3/10/04: Stock price declines $6.40 or 24.6% results due to soft LeapPad sales and after LF pre-announces 1Q04 results; but LF distribution and supply chain problems. assures supply chain being strengthened and issues 2003 10-K with false and misleading 10/27/04: LF reports 3Q04 results $30 financial results, risk factors and and 11% RIF. certifications. 7/21/04: LeapFrog reports 12/16/04: LF withdraws guidance and admits it 7/24/03-10/21/03: Stock false and misleading 2Q04 lacks the ability to forecast future results. price increases 65% to results and reiterates Dollars Per Share Per Dollars $25 $46.54 as defendants guidance for 3Q04 and 4Q04. 2/15/05: LeapFrog reports horrible FY04 assure there are no results, 16% RIF and admits distribution and impediments to reporting supply chain problems continue. 3Q03 results in line with guidance and conceal 3/28/05: LeapFrog issues 2004 $20 distribution and supply 10-K that states distribution and chain problems and lost supply chain problems continue sales to Mattel’s and that LF cannot reasonably PowerTouch. 4/21/04: LF reports false and assure financial reporting is misleading 1Q04 results and 8/6/04: LeapFrog reliable or financial statements reduces guidance for 2004. issues 2Q04 10-Q prepared in accordance with $15 with false and GAAP. misleading financial 9/1/04: Wood results, risk factors resignation 5/7/04: LeapFrog issues announced. 1Q04 10-Q with false and and certifications. misleading financial results, $10 risk factors and certifications. 8/11/04: Defendants state they feel better about outlook 11/11/04: Curley than they did 3 months ago. resignation announced. Class Period: 7/24/03 - 10/18/04 $5 07/02/2003 09/12/2003 11/21/2003 02/05/2004 04/19/2004 06/30/2004 09/10/2004 11/19/2004 02/02/2005 04/15/2005 08/07/2003 10/17/2003 12/30/2003 03/12/2004 05/24/2004 08/05/2004 10/15/2004 12/28/2004 03/10/2005

EXHIBIT B IN THE UNITED STATES DISTRICT COURT

IN-AM FOR THE DISTRICT OF D91AMARE

FF'ROG E 1TLR 'R Es, INC . : Civil Actio n, a Delaware corporation

Plaintiff

V .

FISHER-PRICE, INC, , a Delaware corporation ,

Defendant . No . 03-927 (GMS)

Wilmington, De3 aware ' 'Monday,, May 16, 2005 8 .15 a .n~ .

BEFORE : HONOR?,' LE 'GREGORY M . SLEET, U . S . D . C . J , and a Jury

APPEARANCES :

RICHARD H . MORSE, ESQ . Young Conaway Stargatt & Taylor, L T42 -a3nd- RON E. SHUN N, ESQ ., 'TERRY KE r,RNEY . r ESQ = r MICA BERTA, ESQ ., and STEPHEN SQLMES r ESQ . Wilson Sonsini Goodrich & Rosati r A Proffessional . Corporp.tion (Palo. Altoo r California )

Counsel for Plaintiff

FIRST DAY OF TRIAL 12

I MR . Ste : It was in our initial damage s

2 expert report .

3 THE COURT : Do we have that?

4 I think it's an important issue . Somebody wrote

5 somewhere that 35 percent of LeapFrog ' s damages --

6 MR . SAN : That goes to the -- the 35 percent

7 was in their brief they just subm itted . That is just th e

8 number of uni ts that were sold pre-notice . 35 percent of

9 all the units that they have ever sold were sold pre-notice .

10 I don ' t know if we have it in the courtroom ,

11 Your Honor . We didn't anticipate this coming up, the expert

12 report . It may take us --

13 N . BERTA : We can try to locate it on the

14 system . I can tell you the language .

15 THE COURT : What is your name?

16 MR . BERTA : Mike Berta .

17 What our damages expert said in his opening

18 report , pretty unequivocally , was that it ' s his belief that

19 the continued ability of Fisher-Price to sell componen t

20 books by themselves after notice to the extent they would

21 have been-combined with pre-notice units , that that would --

22 that had Fisher-Price not been allowed to do that because of

23 the notice issue , and thus it was an infringement, tha t

24 people would have quickly switched to LeapFrog device s

25 because selling books was a part of the value proposition of 10 1

THE. COURT : Yes' .

Mkt .. SHF N Thank you, . tour Honor . Once

again, my name is Ron Shulman . I sin a lawyer . I represent

Leapfrog in this .case

Earlier today, I introduced you to the seven

executives from LeapFrog who are here today .' LeapFrog is a

7 Delaware . company . But they are actually headquartered in

California . These seven executiv a. that I introduced you to

9 have felony across the country today to be here . for the

10 beginning. of this trial, because this case is a very

important case to .LeapFrog, as I will explain . in a€ew

12 minutes .

13 Again .some of the .people weren't here when I

14 introduced them by name, Let me introduce you . to some of

15 the lawyers that are going to be participating in the trial .

There is Mike Berta that, who is right here . Terry Kearney .

I7 Richard Morse . And Sassha Fes-ic, who is from LeapFrog . And 1$ the most important,guy is . that guy in the corner, who

1 9 runs. --- `Bill Smith, who will . be running all the equipmen t

2.0 here in the.' courtroom ,

2 1 So you have heard that this is a patent case . A

22 .patent case sounds .ccaplicated . I admit, it sounds

23 complicated- But let me assure you that this particular

24 patent case is not very complicated at all . The reason the

25 case is, not very -complicated is that it boils down to just a 110

1 This is where we will hit LeapXcog ..

2 Slide. 3, please .

3 What did Fisher-Price do? They, made : a -decision .

4 • s you can see on the screen, the evidence awil1 show,} they

5 decided to develop a product that directly competed th

S LeapFrog!s LeapPad . .

7 Now, the evidence will also show that beginning

in the year 2000, they began-their effort to design the

9 directly competing product, the PowexTouch . And after- three

10 years of effort, they came up with their directly competing

13 product, and in the summer of 2003, slightly less than two

12 years ago, they launched the PowerTouch ; which 'they promated

13 with the largest -advertising campaign in the history . of

14 their company . ,

15 So let me show you the PowerTouch .

As you can see, this is how it works . You open

it up . Again, it will be demonstrated during the trial, I

am not going to play it . It comes with a book . You open up

the book to whatever . page you want.,. like this page . You can

touch a letter, like the letter B here . Arid when you touch

21 the letter B here, the device will play the, sound of the

22 letter B as it's made in the word Baker .

23 You touch the letter, A, you will hear the sound

2 4 of the letter A, as well as some other sounds . But you

25 always get the phonetic sound of the letter that you touch . .13 4

Fisher-Price went to another lawyer, named Mr . Wallace, and .

they were. 'thinking of hiring Mr . Wallace as their trial

lawyer" €ar this particular case . He is going " to testify

here, Hr . ..Wallace will .

The evidence will show that the first question

that Fisher-Price asked Mr` . Wallace was, are there any

problems with Mr . Jamieson, a: earlier opinion ; the one he

8 wrote without ever looking at the product? The evidence

9 will show that M . Wallace told Fisher-Price that there were

10 problems with Mr . Jamieson's opinion . And finally,-the

11 evidence wall show that after Wallace . told fisher-Price

12 about the problems, guess what? Fisher-Price decided not to

1 3 hire. him for this case .

14 Now, LeapFrog believes that this evidence will

15 establish that-Fisher-Price did not reasonably rely upon Mr .

16 JantiesonIs opinion . For that reason, LeapFrog believes that

the evidence will show that Fisher-Price willfully infringe d

18 the patent .

1 9 Now, one last issue, I will be very brief, the

2 0 last topic is the, issue of damages . The damages refers to,

21 the amount, of damage that LeapFrog has suffered because of

22 Fisher Price's infringement . I won't spend a lot of "time,

2 3 because it's "a pretty" simple issue . LeapFrog will call Mr .

24- Brett Reed as a witness .- He is a recognized expert i n

25 calculating damages in patent infringement cases . Sometimes 13 5

1 he,, calculates damages €or . the defendants, like Fisher-Price .

2 And sometimes he ' works for the plaintiff-, like we are i n

3 this case-.

4 go. Mr . Reed has calculated the damages in th e

5 case . Ile will explain those calculations to you .

6 Now, as we saw earlier, the . evidence will show

7 that Fisher-Pri.ce designed-the PowerTouch product to

8 directly, compete with the LeapPad . The evidence will show

9 that the PawerTauch 'wasp Fisher-Price's opportunity to hi t

10 LeapFkvg where it really hurts, saw that exhibit earlier ,

11 The evidence :will show that is precisely what

12 happened when they released the PowerTouch . Mr . Reed wil l

13, explain how LeapFzog. took it in the gut when Fisher-Price

14 introduced their Power ouch. . And the evidence will show

15 that Fisher-Price planned for that to happen .

16 Slide 27, please .

17 Let's look at one of the Fisher--Price plannin g

.18 documents . from 2002,-shortly before they released the

19 product .-

20 The evidence will show that in this document ,

21 Fisher-Price was planning for the launch of the PowerTouch .

22 And as you can see on the screen, Fisher-Price said that th e

23 only pro of launching the PowerTouch, the only advantage o f

24 launching the.PowerTouch, was the competitive hit t o

25 LeapFrog . 136

1 The ;evidence will shorn that LeapFrog ' s sales :, and. •

.2 profits -went down when Fisher-Price began selling

3 P'dwerTouch . ' Why did that happen? :Because there is only one

4: pto.duat on the market that coiapetes with the LeapPad, afi d

5 that's the Po rTouch

6 So when Fisher-Price sells an infringin g

7 P'owerTouch , LeapFrog loses a sale o€ its LeapPad . If you

8 want to buy this kind of product, you have two choices : ti •

them or us . By infringing our patent , we say , ire: were

10 deprived of the right to sell our product .

1 1• As Mr . Reed will explain , . because PowerTouch is

.12 the , only product that directly competes . with . the LeapPad,

13 the damages calculation in this case is not .that .

14 complicated .

15, The evidence will show that when you do the

16 arithmetic and add up our lost . sales-and our lost profits, .

17 the damages come to appro ximately 78 mi llion dollars . , That

18 is the damage which LeapFrog has. suffered from

19 Fisher -Price ' s infringement .

20 With that, I .ann . finished talking about what the

2 evidence will show in . this case .

22 T want to thank you for listening closely . Good

23 luck during. the trial and you will nor have an opportunity

24 to hear from the Fisher -Price lawyer ,

25 THE COURT : Ladies and gentlemen of the jury, 198 i

1 (indicating) , so in t ►is .case , we go (indicating), or gave

2 Q . Thank y'ou ,

3 Now, 'you, mentioned that it doesn ` t have reader .

4 And You dhow that you have to touch that green circle , X

5 think it was, to tell, it what page it 's on?-

6 A. Yes-.

7 Q, Apart from the reader, did -LeapFrog .design this

product to include all of the other elements of Claim 25 ?

9 A . LeapFrog and the predecessor, yes . And I believe that

10 it includes all of the elements of Claim 25, excluding, that

11 is except thr:'reader .

12 Q . Why did LeapFrog decide not to include a reader . in

13 this- particular product?

1 4 A . Well, we considered it . But we thought that the cost

1 5 of including it was significant enough that the price that

16 we need to charge to make a reasonable profit would be too

17 high-for some parents and kids to . afford .

1.8 Q . Now, how many LeapPads has LeapFrog sold . since the

19 product was Introduced?

2 0 A . I believe Wood -- direct 20 million .

21 Q . And the product was introduced when ., sir?

22 A . In 1999 .

23 Q . And since its introduction, have there been any

24 products that directly compete with the LeapPad?

25 A. Yes,-there have been . 19 9

Q . And were Any. - such, direct competition ' in . existence in

2 1099?

3 A . No, not to my knowledge .

4 How about in 2000 ?

A . No .

Q.. 2001?

7 A . loo .

2002 ?

9 A . No .

10 Q. When did the first competition come . into the

11 marketpiace?

12 A : The first direct competition came in the fall of 2003 .

13 Q . What was that, sax?

14 A . There were two products, but the primary product wa s

15 the PowerTouch from Fisher-Price .

16 Q . . And that's the . product at issue here ?

17 A . That's why we. are here . .

18 Q . Now, did the PowerTouch have any . impact on LeapFrog' s

19 ability to sell LeapPad?

20 A . Yes, . it did .

21 Q . Briefly, can you explain what that impact was ?

22 A . Well, it created three problems for us . The first wa s

23 we learned that Fisher-Price was going to include two book s

24 with the PowerTouch . We didn't know they were going to be '

2.5 real skinny books . But we knew that on the cover, it said 20 0

1 two books .

2 So we did some research and we found out that we

3 needed to include two books with our LeapPad . And-that

4 created two problems for us . One, it was a little bit

5 . expensive for the second book . But secondly, it turned ou t

6 lots of parents, when they bought a LeapPad, normally they

7 would buy a second book . But when they learned there were

8 two included, they didn't buy a second book . That was the

9 first problem .

10 The second problem was that, .at least in my opinion,

11 every family that bought a PowerTouch should have bought a

12 LeapPad . So we lost a sale of the LeapPad for each one they

} 13 sold .

14 Then finally , my recollection is at the end of

15 the year going into 20 0 4 we reduced our prices

16 significantly, so we lost a lot of profitability on the

17 LeapPad .

is Q . Now, i believe Mr . DeLucia suggested that there are n o

1.9 patents on the LeapPad .

2 0 Can you pull up the LeapPad? .

21 A . Well, I think Mr . DeLucia said that the '861 paten t

22 was not on the LeapPad .

23 Q . That's correct, because of the reader, as you hav e

2 4 explained .

25 A . Right . 51 1

1 IN THE UNITED STATES DISTRICT COURT

2 IN AND FOR THE DISTRICT OF DELAWARE 3

4 LEAPFROG ENTERPRISES, INC . : Civil Action a Delaware corporatio n 5 Plaintiff, 6 7 V .

FISHER-PRICE, INC . , 8 a Delaware corporation,

9 Defendant . No . 03--927 (CMS )

10

11 Wilmington, Delaware Wednesday, May 18, 200 5 12 8 :30 a .m.

13

14 BEFORE : HONORABLE GREGORY M . SLEET , U .S .D .C .J,'and a Jury

15' APPEARANCES :

1.6 RICHARD B . MORSE, ESQ . Young Conaway Stargatt & Taylor, LLP . 17 -and- RON E . SHULMAN, ESQ ., 18 TERRY KEARNEY, ESQ ., MICHAEL BERTA, ESQ ., and 19 STEPHEN HOLMES, ESQ . Wilson Sonsini Goodrich & Rosati, 20 A Professional Corporation (Palo Alto, California ) 21 Counsel for Plaintiff 22

23 THIRD DAY OF TRIAL 24 .

25 515

1 THE ' C©URT : Let me ask you this , counsel : Does

2 this involve a mathematical calculus, a computation of

3 addition and subtraction ., is that what we are talking about

4 here , multiplication and some division possibly? Is that

5 what we are talking about ?

6 MR . HUTCHINS : Yes . But I have no idea bow he

7 arrived at his new numbers . For instance , if you look on

8 the slide that says summary of LeapFrog's lost sale s

9 damages, and he initially -- initially, if you look on the

10 top left , has 500 , 000 lost LeapPad and 500,000 lost My First

11 LeapPad . And you see those listings . Those are the los t

12 sales that LeapFrog says that they would --

13 THE COURT : I am looking at the wrong chart . I

14 have got you . Summary of LeapFrog ' s lost sales damages .

15 Right? 500 , 000 LeapPad ?

16 MR . HUTCHINS : Exactly . As you heard before ,

17 there were roughly 450,000 PowerTouch units sold pre-notice .

18 About one-third of the 1 .2 million were pre-notice .

19 He didn ' t exclude damages based on thos e

20 pre-notice units in his expert report . Now they say they

21 are excluding damages for the pre-notice units . However, he

22 only takes off -- there is 400 some thousand PowerTouch

23 units pre-notice . Yet he only reduces his lost sales by

24 30 , 000 LeapPad and 30 , 000 My First LeapPad . Be takes off

25 60,000 . 525

1 calculations that were in his expert report . Now-we are

2' being blamed for not questioning him about things admittedly

3 not in his .expert report .

4 More to the point , Your Honor , Fisher- Price did

5 not waive. any objection to their cla iming . damages on

6 pre -notice units overall , under any theory . And the motion

7 in limine .No . 8, which you granted at least in part on the

B morning, the conclusion, for the foregoing reasons ,

9 defendants move for an order that LeapFrog be prec luded from

10 introducing arguments or evidence about or referring to any

11 sales or damages related to sales made prior to October 3rd,

12 2003 .

13 That ' s precisely what we are talking about : . We

14 made 450,000 sales of profits before 2003 .

LS And we moved to have any reference to those

16 sales excluded . And we moved to have any reference about

17 damages related to those sales excluded , because we believed

18 that the marking statute and the notice requirement, ba r

19 none , precluded them .

20 Now , what we are talking about now is a sliver

21 of that argument .

22 THE COURT : That ' s a pretty significant sliver .

23 W. HUTCHINS : It is .

24 My point is this , Your Honor . Had you granted

25 our motion in toto , which we were urging at the time -- 525

1 calculations that were in hi s expert report . Now-we are

2 being blamed for not questioning him about things admittedly

3 not in his expert report .

4 More to the point, Your Honor , Fisher-Price did

5 not waive any objection to their claiming damages on

6 pre-notice units overall , under any theory . And the motion

7 in la mine No . $ , which you granted at least in part on the

8 morning , the conclusion , for the foregoing reasons ,

9 defendants move for an order that LeapFrog be,precluded from

10 introducing arguments or evidence about or referring to any

11 sales or damages related to sales made prior to October 3rd,

12 2003 .

13 That' s precisely what we are talking about : We

14 made 450 , 000 sales of profits before 2003 .

15 And we moved to have any reference to those

16 sales excluded . And we moved to have any reference about

17 damages related to those'sales excluded , because we believed

18 that the marking statute and the notice requirement, ba r

19 none , precluded them .

20 Now , what we are talking about now is a sliver

21 of that argument .

22 THE COURT : That ' s a pretty significant sliver .

23 MR . HUTCH NS : it is .' .

.24 My point is this, Your Honor . Had you granted

25 our motion in toto , which we were urging at the time -- 66 7 Bender -,direc t

.1 . Q . "Mr . Bender ; good morning, first .

2 A . -Good afternoon .

3 Q . Good atterrtooon .

4 Can you go ahead and state your name for the

5" record and introduce' yourself to the jury ?

6 A . Yes ., I" Tim Bender .

7 Q . Do you. work at LeapFrog?

8 A . Yes .

9 Q . What is your position at LeapFrog?" .

10 A . I am the president of the global consumer group .

11 Q . Can you just give ' us . a brief description of "what

12 the. -- the general nature of your duties and.

13 responsibilities as president of the global consumer group ?

14 A . I am responsible for worldwide sales for products tha t

15 go into retail, and for the international marketing of

16 LeapFrog products .

17 Q . How, long have you been at LeapFrog ?

18 A . . This is my"eighth year .

19 Q . Have you had responsibility for sales of the "LeapPad

20 line of products at LeapFrog?

21 A . Yes .

22 Q . - What level of responsibility?

23 A . Final authority for sales and sales programs .

24 Q . When did LeapFrog first introduce the LeapPad ?

25 A . Well, we first introduced it to our customers in -71 4 8etidet :-~ direct

1 books every year , We added more subject flatter . T 1e More

2 books we had on the . shelf and the deeper the .curriculum and

3 the longer the child could a play with it, the more

4 co"umers bought 'the teapPada .

5 So household penetration was directly increasing

with the number of books that we offered .

7 Q . 'Does LeapFrog track amount of" additional books, th e

8 typical owner of a LeapPad platform purchases ?

9. A . Yes , we, do .

10 Q . What information have you -- what was your

11 understanding of that amount ?

12 'A . Welly the .average consumer in our research shows .. that

13 they- wi1.l purchase between six and seven additional LeapFrog

14 books after they buy the LeapPad .

15 Q . What about . fox the My First LeapEad , do you track the'

16 same type of information for the My First LeapPad? -

17 . A . Yes, we do track that in--formation, it is slightly

18 less.. It is just .about six .

19 Q . Do you also track book purchases per platform but o n

20 an annual basis ?

21 A . Yes . We call that the tie" ratio . That i s the number

22 . . of books the consumer is buying against the platform .

23 MR . BERTA : Can I have PX-1876, please .

24 BY MR . BERTA

25 Q . Can you just take a look at this and let me know if 715 Bender -'direct

I this exhibit accurately reflects the annual tie" ratios for

2 those years? .

3 A . Correct .

4. So you can see, in . ' 99, when . w e launched the LeapPad, '

5 it was seven for .each LeappPad . And than it increased . t:o 1 .6 '

in 2000, 2 .4 in . 2001, and 3 . 9, 2002 .

7 My point is, we had more books in the library . Plus

8 we bad pore consumers on the system . They ' were both buying

9 more books . . it fell off in 103 and then you can see.; a

10 . pretty significant drop in ' 04 .

12 Q .' Now, the previous, when we were previously discussing

12 . book to platform purchases, you 'said that customers buy, Six,

13 . books per platform . Is that inconsistent with this here?

14 A . -They don't buy them all in the same year . So they

15 might buy three the first year . Then they may buy two the

.16. next year and three the next year . Some consumers are heavy .

17 users, which buy a 'lot of books, and some buy less .

18 But there is a pattern where they continue-'to buy them

19 at the rate when the child is growing . Some children are

20 much more learners and they are moving through, the content

21, quicker so they will tend to buy more books and-some use it

22 less often so -they will buy less books for those children .

23 For the LeapPad, the tie ratio goes f Om a high of 3 .9 in

24 2002 and it falls in 2003 to 3 .7 and falls again to 2 . 9 in

25 2004 . 716 Bender - direct

1 Q . Why did that happen ?

2 A . In 2003, about July, we added a second book into the

3 LeapPad .

4 You buy the LeapPad , there was one book in there, it

5 was a sampler . Consumers would immediately either at that

6 time buy a book , soon after , once the child is through that

7 book , they are going to buy more . ,

8 There was a competitive product in the market, th e

9 PowerTouch , and they were going to have two books in theirs .

10 So we added a second hook in 2003 to meet that competitive

11 force that, vas coming in the market .

12 Q . If you added the second book in 2003, why is the ratio

13 so much different in 2004 ?

14 A . Well , because consumers will buy the LeapPad, a good

15 part of them are the Christmas period , the holiday period,

16 October and December is really the big selling season . But

17 the content , they really start coming after the content and

18 buying a lot more in the first quarter , which would be

19 January through March .

20 So we really saw the falloff because th e

21 children were playing with the included two books longer

22 than they did when they got one . So they didn ' t come back

23 to the store as quickly for the next book .

24 Q . if Fisher-Price had not included a second book with

25 the PowerTouch, would LeapFr6g have bundled a second book 717 Bender - direct

1 with its LeapPad bundles?

2 A . No . -

3 Q . What ' effegt would the second book have on LeapFrog

4 sales ?

5 A . We measured we lost between about 2 .8 and 2 .9 million

6 books that normally would have been sold to the consumers .

7 Q . We talked about the Fisher -Price and the PowerTouch a

8 little bit .

9 When exactly did the PowerTouch launch ?

10 A . Well, it started showing up at retail in July of 2003 .

11 Q'. Do you have any understanding of what the marketing

12 promises of PowerTouch is ?

13 A . Yes .

14 Q . What is it?

15 A . Very similar to LeapPad . If you looked at the box, it

16 was a learn to read proposition , same as LeapPad , getting

17 kids engaged in a reading experience .

18 Q . What was the age range targeted of the PowerTouch?

19 A . Three to eight , I believe .

20 Q . You mentioned where LeapPads are sold . Can you tell

21 me what stores , if you have an understanding as to at what

22 stores the PowerTouch was being sold ?

23 A . Well , generally, the Fisher-Price and LeapFrog

24 products are sold in similar channels . The Toys R Us,

25 Wal-Marts , Targets . .720 Bender = direc t

THE GDPRT : ' : Well, you ,might want to get him to

2 say what -that understanding. is based upon .

3 BY MR . BERTA 4 ( . Is part of your duties and responsibilities with

5 , respect ' to marketing and sales, do you track sales of

competitive products?

7 A . Yes , . we do .

8 In the marketplace? 9 A . Yes , we do .

10 Q . In 2003 , did you track competitive sales of 11 ' Pc rfouohes in the marketplace ?

12 A . Yes, we did .

13 Did .you track the sales of the Leap Pads' in the

14 marketplace?

.5 A. Yes, we did .

16 Did that information give you any sort of a . basis to

17 have any understanding as to what was happening with respect

18 to PowerTouch sales . and LeapPad sales ?

3.9 A . Yes .

20 Q . What was that understanding ?

21 .A . . We had'a pretty good trend line of sales increases on

22 the LeapPad business- through July . And once the PowerTouch

23 was introduced, and . it was merchandised right next to the

24 LeapFrog products, we iammedai.ately saw. a depress in our sales .

25 on the hardware of LeapPads-and the My First LeapPads . 72 1 Bender -- direct

Di d you have any understanding as to what customers

2 perceived were the primary differences between the .

-.3 PowerTouch and tie ' LeapPad?

4 At Yes .

5 Mt. . C :A.: Objection .

F~ Hearsay.

7 THE COURT: Read the question , please .

8 (Question read. )

9 THE COURT : Do you have a basis for answering

10 it?

11 THE WITNESS : We have marketing research data ,

12 sir .

1 3 THE COURT : Overruled .

14 BY MR . BERTA:

15 Q . What was your understanding of what customer s

16 perceived to be the primary differences between the LeapPa d

17 and the PowerTouch ?

18, A . First and foremost , the Fisher-Price brand , it is a

19 well known and trusted brand . Moms have a great deal of

20 experience with the Fisher-Price products for infants and

21 toddlers . They have a good brand awareness that mom would

22 know when she saw the product . And secondly , their position

23 was that you could read with your finger, versus the

24 LeapFrog stylus that we had on our product .

25 'Q . . In your marketing researcTi , did you come to have any 722 Bender direc t

I understandi ng as to rvbether Or not the Fisher-Price brand

2 name helped "fisher-Price mates sales of the- PowiezTouch '

3 A . Yes , it was very important to consumers .

4 3d Xn your understanding of the market , do you ,have any

5 understanding as to whether or not. the ~ Fasher -Pra.ce brand

6 name . on the PowerTouch brought people onto the learning.

7 aisle 'ghat otherwise would never have been there?

8 . A . I don't believe so .

9 .Q.. Why not?

1 0 A .- LeapFrog is the: number one thought of educationa l

11 background . Consumers have come to shop that aisle , looking

1.2 for educational products . Fisher-Price is not known, like

13. LeapFrog, as the number one educational brand . Consumer s

14 are generally' shopping for those products in other aisles,

15 -such as infant,- toddler, some preschool aisles . So the

16 consumers are coming into our aisle , looking for LeapFro g

17 products, and they happen to find, there is the Fisher-Price

18 PowerTouch in our same area .

19 Q . Do you have any understanding as to whether some

20 people bought the PowerTouch because of the finger touch

21 feature of the product?

22 A . Yes .

23 Q . What is that understanding ?

24 A . Well, first and foremost , consumers are looking for a

25 reading product . 723 Bender - direc t

I Q . I might have been unclear . I don ' t know if you were

2 saying yes , you have an understanding or yes, that was true .

3 Let me ask it differently . First, do you have an -

4 understanding one way or the - other about whether people buy

5 the PowerTouch because of the finger touch feature ?

6 A . The most important thing consumers are looking for is

7 a learn to read product . That ' s the first and foremos t

8 thing they are shopping for . So the goal would have been to

9 seek a product that's claiming learn to read . It's possible

1 0 that some consumers would be influenced to buy a produc t

11 that uses finger versus stylus .

12 Q . Do you have any understanding as to whether the finger

13 touch feature is why those people buy this as a learn to

14 read device?

15 A . No .

16 Q . Why not?

17 A . Well, the LeapFrog penetration was incredible . So the

18 . number of households that were buying the LeapPad was as

19 strong as any product in the history of the toy industry .

-20 That only happens when consumers are very happy

21 wi th the product . It's working for the child , they are

22 playing with it . They are engaged .

23 And that general ly leads to great word -of-mouth .

24 An that ' s why LeapFrog continued to build sales every year,

25 because consumers were so happy . So here we have had a 726 Bender -' direc t

1 Message , and €:t worked effectively €o feu as ' well .

Z Q : What. was the product called before phonipss? 3

3 A . It was called tie Alphabet Desk . 4

4. Q. What. was it called at-ter the - -

5 A . It ' was called Phonics A to Z .

6 Q . Is that product still bet.ng sold?

7 A . No, its not . Not to my knowledge, at least not in

8 the U .S . market , I haven ' t seen it is : quite a while .

9 Q . Did Leaprrog' s marketing budget change when you .

10 . learned that the PowerTouch was .com xg out in 2003?

11 A . Yes ,

12 4 . How?

13 Ai, We generally do most of our advertising. starting

14 mid-October and it comes through the beginning of December,

15 when consumers awe deciding what's the best gift for their

16 children and who they are going to give gifts. to for

17 Christmas-or holiday . ' In the case of 2003, we knew

18 Fisher-Price was corning "out wi th a very aggressive ad

19 " campaign starting in-September .

2Q And we didn't want to be late getting our share

21 of message to the consumer, so we felt it was important that

22 LeapFrog get additional advertising expe nditures in the

23 month of September and for the back half of that year, so

24 that consumers could hear from LeapFrog, what our products

25 were . 727 Bender ' direct

1 '. 4 . : . 'Did- the . budget fox your marketing expenditures go up

.2 drdown ?

3 A . They went up .

4 Q . Before Fisher-Price was . on the market with the

5 PowerTouch , how many customers . Was LeapFrog reaching With

6 its advertisings?'

1 A . We were reaching about 95-percent of consumers that

8- are our target market . That is generally moms that are 25"

9 to 49 years old with , children , and they purchase educational

10 products . And we were reaching them. about 15 times . so

11 almost . everybody.

.2 Q . So what if anything -specifically happened to the

13 retail sales of the -LeapPad a nd the .My First L.eapPad after

14 the Powerxouch came out?

15 A . . They declined .

16 Q . And where did they decline ?

17 'A . Well, they declined at retail in the U . S . market .

18 We shipped a lot of product into the consumers , because the

19 buyers had, you know , believed we were going to sell ' this

20 product , and we of course were . increasing advertising to

21 mako , stare that we were going to got our message across to

22 consumers -. But the prodducts didn ' t sell through at the rate

23 that we, had estimated or the buyers .

24 Q . Do you have any understanding as to why it. was the ---

25 was why it was the PowerTouch that significantly affected 72 8 Bender --direct

1 the sales of the LeapPad, the My, First LeapPad?

2 . . They are. going after the same audience , the, same.

3 messaging, it wa a- learn to read experience . Moms . had

4 another choice .. -go being merchandised : right next to

5 Leaprrog, with. a great brand name of Fisher-Price, they

6 definitely took' . sales from us .

7 . Q . When a PowavTou h was launched , do you have any

8 understanding as to .whether it was pri ced the same as the

9 LeapPad?

10 A . Well, there is suggested retail price . Is that what

11 you are referring to?

12 . . Sure.

13 A . n .th;e market .' So the LeapPad ,and'Fisher-Pric e

14 Power 'ouch both had suggested' retail of 49 .9.9 .

5 Q . After launch of the PowerTouch, did you see any

16 evidence that Fisher-Price was cutting the price of th e

17 PowerTouch?: .

1s A. Well I don't know if Fisher-Price i mnediately wa s

19 cutting the price . But the retailers were taking the pric e

20 down, Target was immediately at about $45 . Then by the

21 beginning, of October there was pricing in the market that

22 was below 0.40 .

23 And then through the fall there was additiona l

24 retail activity which was below the Fisher-Price cost . And

25 so it appeared that Fisher-Price was helping push don : the 7.2 9 Bender - direc t

1. retail ptic :ng of the PowerTouch to effectively undercut the

2 .eapPad . pric .ng.

3 Q . Did LeapFrog take any action with respect to LeapPa d

4 . p2ticing . because of this?

5 . . Yes .

6 Q . What was that? .

7 A . Well, in January, of 2004 ; we reduced the price of the

8 LeapPad and, My First LeapPad ; and the QuantumPad and LeapPad

9' Plug Microphone .

10 Q . For all of those products --- let me ask . you this ;

11 Why did the prices of all of those products go down then ?

12 A . . Well-, there is like a value proposition or chain . So

13 the LeapPad is ' the core reading item . And then the next -

14 - item is the LeapPad plus writing . So they can't be too much

15 apart from each other . If the price of the'LeapPad i s

16 coming down, then the price of the LeapPad Plus Writin g

17 needs to be no more than about $10,'according to ou r

18 coos over research . . .

19 The'My First LeapPad doesn't have as rich of a

.20 curriculum as . the LeapPad . It only has 167 books, so th e

21 longevity of the product is less so consumers expect it to

22 'be less expensive . So we .need to put those all in line .

23 - But we'didn't do that until 2004 .

24 . Q . Prior to this price change, had LeapFrog ever droppe d

25 the price to the retailers of the LeapPad products? 730 Bender - direc t

. 1 A . 2o.. .

. 2 Q . What was the prase to ' reta Uers in 1999 ?

3 A.. In ' 99 when we launched,, the domestic price was $39,

4 Then you could buy - t out of China if you like, the

5 retailers were responsible for bringing it to the United

6 States, that price was $34 . We raised it the next year . .

7 Q In 2000 3

6 A . in. 2000 we raised the price ..' :

9 Q . What was that change from 1999 to 2000?

10 A . We took the price up . 50 . 34 . 50,from China and 33 .50

11 in the U . S . The primary reason we did that was, again, we

12 are still a pretty small company, don ', t have a lot o f

1 3 marketing funds . We wanted -to get the LcapFrog message out .

14 So we 'took'those additional funds to create mor e

15 advertising , to create more awareness for the I,AapFrog brand

16 and spend more .money on research and .development for more

17 books .

18 Q . After 2000 , from .200 0 and 2001, did the price of

19 LeapPad to retailers change?

20 A . No .

21 Q . 2001 and to 2002?

.22 A . No . -

23 Q . 2002 to 2003 ?

24 A . . No .

25 Q . Prior to making that change, at the beginning of 2004, 731 Bender - direct

1 did Leap `rog conduct any, analysis to determine whether i t

Z . . should change prices in response to the Po rTouch ?

.3 A . Yes , This was a, you know, a sub)ect , we are very

4 passionate about because-it is the most important part o f

5 our business , the LeapPad . We did & .number of studies of

6 various retail prices and what would happen, with, .LeapFrog' s

7 share versus competitors . And-we must have had 20 to 3 0

$ meetings as an executive . team to decide , you know, what

9 should we do to address the pricing of the LeapPad .

10 Q, Can you just take a look in your binder ? There is two

11, documents in there , Pk -427A and 427B . Do you see those ?

12 A. . I think you have, right got the, right one here' .

7 13 Q . 'So I guess not .

14 MR . BERTA :- Can I . be up here, Your Honor?

15 THE COt3RT : Yes .

16 . MR BERTA : Thank you . '

17 BY MR . BERTA :.

1$ Q . How about this one , then tell me if you see them .

19 A . Okay, yes .

20 Q . What are 427A and 427B ?

21 . A . This is ,a research study that we undertook in the fal l

22 of ' 03 .to learn more about-the market for LeapPad and its '

23 .competitive products that were in the market, or potentia l

24 competitive products in the market .

.25 Q . In the absence of the PowerTouch , . would LeapFrog have 732 Bender:- direct

1 red ed the pr .ces' 'of the. LeapPad €am ly of -produatsl

2 A . No .

3 Q . . Why not?

4 A It wouldn't have made any sense . The consumer wa s

5 . . happy 'Wi the product . It was selling well . Yau. -saw

6 increasing sales every year . The retailers were-happy

7 ,because they were selling more LeapPads . every year . Plus,

8 the attachment rate of the number- of books they bought were '

3 going ' up ' every year . So it would have made .no sense for u s

10 to reduce our costs . We would have had. less money to spend

11 on further development for books and other LeapFrog

12 products . So, no . .

13 Q, How "important to LeapFrog's business was-the LeapPad

14 . family platform in 2004 ?

15 A . Well, its the largest segment of our business ..

16 Q.. After LeapFrog took down the prices on the LeapPads i n

17 January., what if anything happened to LeapFrog' s

18 profitability ?

19 . A . Well, 2004 was the . .first year since I was there i n

20 1997 that the company didn't make its plan . We had a bad

21 . year . We missed our profit plan by over 70 million dollats .

22 And it was a tough year .

23 Q . Has LeapFrog had to take any actions because o f

24 missing the plan 'last year.?

25 A . Yes . After the 2004 year ended, which we ended with a 733 Bender - direc t

1 large loss, in the millions, we had to cut a large number of

2 educational products , we were developing some new

3 technologies and new content for educational products for

4 kids, that was the first thing .

5 Then the second thing is we had to let go about

6 1.70 great people that helped build this company .

7 Q . Have you seen any evidence that Fisher -Price has

B continued to out prices on the PowerTouch in the year 2005?

9 A . Yes .

10 Q . What evidence have you seen?

11 A . Well, there has been retail marketing programs thi s

12 year where the PowerTouch is at $19 .99 and the books are at

13 half price .

14 Q . Has LeapFrog cut the prices of the LeapPad family to

15 match this new decrease?

16 A . No .

17 Q . Why not ?

18 A . Well, if we did that , we would soon be out o f

19 business . We could never afford to match those prices .

20 Q . In 2003, just before the PoworTouch launched , how .many

21 learn to read book platforms were available in the marke t

22 besides LeapPad?

23 A . None .

24 Q . Have you ever heard'of a product called the Story

25 Reader? 736 Bender - direct

A . No i. 2 Q . Did any new products in 26.04, to .your knawIee e, have .

3. any effect on LeapPad .sales or pricing ?

4 A 6 No

5 Q . Do you have any understanding.. of whetser, it the

PowerTouch had not come out., would retailers- have sold more

7 LeapPads and My First Leapi'ads? .

8 A . Yes, sir .

9 Q . Why?

10 A . , Well, our research shows that the . sales for the

11 PowerTouch came right from 3.eapFrog' s sales and we-were --

12 they had the same . marketing- message',, the same positioning as

13 far .as the learn to read system . Enga9 ng for kids .

14 Powered by phonics and other activities . . .

15 So that was. di.rectly . taking sales from -LeapFrog .

15 So had those not been there, there is no doubt, . we would

17 have continued our trend in selling more LeapPads and books .

18 Q . In 2003-and 2004, did LeapFrog have the capacity to

19 manufacture more LeapPads and My First LeapPads ?

20- A . . Yes .

2 1 Q . How do you,know 9

22 A . Well, we have capacity plans .which allow us to make,

2 3 you know, certain number of units . We did not manufacture

2 4 in 2003 at our full capacity . So we had some .capacity i n

.25 ' 03 . But in ' 04, we manufactured fat less LeapPads . than we 737 Bender direct

I rid in ' 03 : So we had a great deal of capacity-in ' 0 4

2 Q. Can. you just give me an idea of how many extra LeapPad

3 and My First LeapPads you could-have shipped. in 2004?

4. A . emulatively' one -to two "M11,1:on .

.3' Q . Does Leap?rog track its inventory level at the

.6 retailers'

7 A . Yes, we do .

8 . Q . Can you take . a look at PX-112 3 .

9 A . Okay .

I0 . Q . What does this document . show? What is it a report of ?

11 A . This .: is information that we compiled that come s

12 directly from our customers ' point of sale data, for

13 companies dike Wal-Mart, we have access to online, to loo k

14 at inven tory levels at any given time of. the year . We can

15 see .:it by store.. We can sees it by. chain , .for any item .

16 So . at the end of the year , particularly; we do

17 audits that -make s ure that we know what the inventory ;levels

IS- axe at retail .

1 . 19 This , spread sheet here is a compilation of that

20 data that comes directly out of the customers' systems : It

21 is the most accurate information for determining informatio n

22 at retail .

23 Q . Does this accurately reflect retailer inventory level s

24 of LeapPads and My' First LeapP"ads at the end of 2003 ?

25 A. Yes-; it does . 738 Bender - direc t

Q . what dries ].t show about that? 2 A. Well,-nobody can see that because you need a

telescope . But if-you could look at the detail here, you

4 could see that our carryforward inventory, which . means the

5 ending inventory, on the LeapPads and the Me First LeapPads,

6 was pretty significant, . meaning it was high . Much .higher . than at any previous years, and much higher tltan our plan,

8 and far higher than what the retailers plan was .

Q . There it is . .

1Q A . There you go

.1 Q . I believe you, if that's what you-said,

.12 Let me ask you another question .

13 A . You would . have to move over a little bit more . These,

14 if you look at those beginning inventory levels for 2004

15 beginning inventory, that column showed the quantities ; I

16 think if .you move down, you-see the quantity of products .on

17 hand .

Q . Is this consistent with your recollection that there

.19 was excess retail inventory? .

2 0 A . Yes, absolutely . The retailers, you know, were .

21 disappointed that the buyers have plans that they ar e

22 supposed to have a certain amount . of inventory . Everybody,

23 had expectations . that LeapFrog trends were going to continue

24 and they, would be solid at inventory through . And the

25 Fisher-Price product did not add to the market . It took LP e 73 9 F•3

Bender -- direct Y : s sales, so the inventory we shipped sat in retail stores . ti Q. Are LP and Fisher-Price competitors?

A . Yes .

Q . Has LeapFrog faced competition in the market before

Fisher- Price came Out with the PowerTouch ?

A . Absolutely . We are , we are a company that-is still pretty young . We started growing , in like '97, ' 98-,.. slowly and surely . We had a lot less resources , less money, less people, less marketing resources . Through creativity and a

;j' lot of passion , . and good employees of our company , we worked a lot harder . We cared a lot more .

So we were scrappers . We fought hard to build the company that . we built, So, yeah, we . know what it's like to compete . We do it every day . That' s all we do, is educational products . That's our passion, and it's the business we know .

Q . Has LeapFrog ever licensed the '861 patent to any competitors in the toy industry ?

A . No .

Q . Why not?

A . Well, actually, there is probably two reasons . One is, we develop a lot of our intellectual property ourselves .

We spend a lot of money and time doing that . So we wouldn't want to license it out, particularly since we don't feel

that a lot of the competitors in our marketplace are really f S 790 Bender- cross

1 the PowerTouch product wan' t on the market . . Was that your

2 testi :onyl

3 A . Yes .

4 Q . Isn't it true, sir, that L.eapFrog was having some

5 major supply chain problems in 2003 7

6 A. We had some: issues with supply chain i 2003 that were

7 in-the third quarter, primarily September .

8 Q . That would have been right around, a couple mouth s

9 after. the PowerTouch product came on tote 'market . Correct?'

10 A . The two are unrelated . But the timeline is-correct .

.11 Q . So around September of 2003, LeapFrog couldn't even

12 fuif :1l its own orders . Correct ?

13 A . No. We were fulfilling orders . We were shipping

14 . all-time record shipments . We didn't ship everything tha t

15 we had hoped to in the month of September'. But we caught up . '

16 with those shipments two weeks later, far early enough t o

1 7 get, them in the retail chain'far Christmas .

18 Q . You didn't tell the jury that yesterday., did you, that

.19 you had these difficulties in September ?

20 A . If you would have asked me about those, I would tell

21 you . There is no secret there .

22 0 . Okay .

23 Can I get,DTX--97, please?

24 1 am going to hand .you DTX-97, Mr . Bender' .

25 If you turn to the second page of the document . 79 1 andder _ cros s

if I can get the Target paragraph, please :

2 Is it your understanding that LeapFrog lost 1 . 2

3 millionin 'LeapPad P .nk' .orders for the quarter, unable to

ship?

5 Is that your understanding, sir ?

6 A . For that €uarteer, yes, But I believe those would have

7 shipped in early October . -

8 Q.. . If 3 can get the last paragraph, the TRU, the TRU ,

9 what does that stand for

10 A . Toys R Us .

13 Q . That is one of your . major customers . Correct?

12 A . correct .

13 Q, And in the first bullet point there it says lost 2 . a

14 million it LeapPad and LeapPad Paint orders for the quarte r

'15 clue to availability .

16 Is that correct, sirs .

•17 A. 'hat's correct . Most of our .

18 Q . So in September of 2003, LeapFrog was unable to 'sh'ip

19 to both Target and "Toys RUs at that time . Correct ?

20 A . 70 percent of our Christmas sales happen in . the las t

21 two months .

22 Its. irrelevant what we are shipping In

23 September," as long .as the supply chain is full .

24 In this. case our in-stock levels were at a high

25 rate in most customers . So if you are not losing. consumer 79 2 Bender -- cross

sales, that'a the most important part of it . But we did

have issues shipping quantities in September due to issues

in our supply chain, that's correct .

Q . And those issues continued for Leapfrog in 2004 .

Isn'.t that correct?

A . They were different issues .

Q . Mr . Bender, I saga' going to hand to you DTX-628, which

8 is a conference call transcript . I would like to turn your

9 attention, sir, to Page 3 of that document .

10 If we can blow up the last paragraph .

1 1 Let me ask the question first . You are aware

1 2 that this is a Q4, 2003 Enterprises -- or LeapFrog

1 3 Enterprises, Inc .'s earnings conference call document ?

3.4 A . That's correct .

15 Q . On Page 3 of that document, down at the bottom it

16 says, simply, bur management processes such as planning, our

17 operating processes, such as supply chain, and our

18 information systems, have not been very effective .

19 Do you see that ?

20 A . Yes .

21 Q . Is it your understanding that the operating processes,

2 2 such as-supply chain, were not very effective for LeapFrog

23 as of the fourth quarter 2004 ?

24 A . There were particular items that we could have done a

25 much better job supplying . 81 3 Bender - re dir e t

3. Q Let me ask. you this- question, in . s retail: store

2 THE COURT : Why don't you, txy T,eapPad- €irst ?

3 TSB WITNESS : `- Let me start .

9 Our . retail' sales sloweddown when the PowerTouch

5 product was introduced'. And retailers reorder based upon

(' . sales . So we definitely lost some shipments there : D' ut 14 '

7 . lot of. the purchases~ ..are made far in advance by retailers

8 for Christmas season . So they are importing it €r Chin a

`9 in large quantities .

• 10 So in the . case: of 2003, although ire missed some.

11 shipments, we -shipped in a lot more product than 4ctially

12 sold. So what happened was, we really felt t ho shipmen t

13 decreased in 2004: more than we did in-2003, although we ha d

14 falloff , because so much product was left over after

15 Christmas on the shelve s

16 Sa we did lose shipments . . But they went over a

17 longer period than 2003 .

18 MR . BERTAr. I don't have any further questions ,

19 !our. Honor ,

20 THE COURT : Did" you want to ask any additiona l

21 questions, Mr . Canada?

22 MR . CANADA : No, your '} onor .

2 3 THE COURT : Thank you, air .

24 THE.WITNESS .: Thank you .

25 (Witness excused .) 814

1 Mkt:. SULYLW.N ;. Your Honor, may I make that brief

2 . statement we spoke about yesterday ?

3 T COURT : Sure

4 'MR . SI N N 'When I was before you in the

5 opening, .I told you that -- you realize wea.re now in the

6 damages part of the: case . • When I was before you during. the

7 opening .I told you that we would be .seeking 78 . million

.8 dollars 'in damages . I don't know if you recall that or not,

9 but. that, is what 1 : said. ,

10 As ybu recall yesterday, we adjourned earlier

.11 becat s:e the Judge told you he had made . some rulings and we

12 have to adjust certain things of our presentation . And the

13 rulings that Judge Sleet made affect how much money .we can

14 recover. '

15 So we have revised our claim for damages . It is

16 no longer 7 18 Mill 'ion dollars . But only its 65 millio n

.17 dollars, in light of what Judge Sleet has ruled . I simply

18 wanted to alert you to that .

19 So our next. witness is our damages expert, Mr .

20. Brett Reed, who will explain how damages are calculated .

21 BRETT REED, 'having been duly sworn as a

22 witness, was examined and testified as follows . . .

23 DIRECT EXAMINATION

24 BY MR . BERTA : -

25 • Q . Good morning, Mr . Reed . 819 -Reed - direc t

I am just asking, . why would you be looking at :0-Ks

2 for Mattel in -this` ca.se?.

3 A Because Fisher-Price is part of Mattel . So Mattel's

10-Ks 'would talk akbout its various businesses .

.i Q 5 . Thank.. you.

6 Can we just get the, first sl ide up there .

:7 All right, So can we just lay out first of all

8 . where . it is where- it is we are going with this analysis .

9 What is this?

10 A . This is a summary chart that at a very high l evel

11 shows the elements of damages,. and of course the total

12 damage amount that I calculated, which is 65 .34 million

13 dollars ..

14 Q . On. this; chart, you have two types of image, one is

15 -lost profits and one, is reasonable royalty . What is the

1 6 difference between those two?

17 A . Well, in patent damages , there can be different

18 circumstances that will give .rise to different types of

,9 damages . For example, if I am an inventor and I have a

20 patent and another . company uses that patent to make a

21 product, I can't claim that I lost sales'to .'them because I

22 am an inventor . I don't have a product to sell . In that

23 case, I am ent itled to damages , I am entitled, to what is

2 4 called a reasonable royalty .

25 On the other hand, if I am a large company 82 2 Reed - d reCt

Z 1 . Yes .

2 Q . Why don't we start of€, with the first one, - which, i s

3 demand for the patented product . What did, you look at .to

.4 determine whether or not there . was, demand for the patented

5 Product?-

6 A . I prepared . charts for the information I looked-at on

7 each of -thee: .

. . 8 Q . Why don't we go to the next chart, . ' ,en .

9 A . So with respect to the first Panduit factor, I looked

10 at information relating to the ' PowerTouch itself . The '

11 PowerTouch was a very success ful product . Again, in the

12 context of-dam ges, it would be found that the Power-Touc h

13 infringes the patent, so 'l am asses.sin how did the .

.14 PowerTouch do in the marketplace .

15 Of course, we will see, with those slides I wil l

16 address later, PowerTouch quickly got- very strong

17 distribution at the:"major retailers in America . And it als o

18 . had very strong sales through to and customers in 2003 .

19 There was a study by Fisher-Price personnel that showed i n

20, 2003, the PowerTouch in terms of sales to . end .customers

21 achieved about 25 percent in the way Fisher-Price wa s

22 measuring .'ghat market . So it was a very quick, very stron g

23 performance .

24 Q . Are there some other things you -looked at here i n

25 determining whether or not there was demand for the patented 825 Reed _ direct

the market that she was as e$aing ,

2 Bas ca . .y, she said -tie marke was the

3 #owerTouch, and My First LeapPad, and then preschoo l

4 apPads . And those Were really the products in the market, -

5 She viewed that, the 'market was: flat, according to the dat a

6 they were relying on,, the market was flat from 2002 to 2003 .

7 But Powertouch was able to achieve 25 percent o f

8L the market . So this would show the products iz the marke t

were really: the PowerTouch, My First LeapPad and LeapPad ,

.10 . and that Power Touch was able to take away 25 percent of tie

11 share from these LeapPad products .

12" Q . Were there any other appropriate products to be

13 considered •in . this market, ire lyour opinion ?

14 A . Well, there were other products . I certainly looke d

15 for information about other products" and the . success of

16 those other products . My analysis 'suggested these othe r

17 products were not successful, and in fact, Mr . .Bender

.18 related the same information tome

19 Q . What does that third bullet address ?

20 A . There is also the, sub-point . I also understand that

21 LeapFrog .viewed .these other products, such as the Activ e

22 Pad, the PIL, the . Active Pad would infringe LeapFro g

23 patents . That also raises a new question, whether it is a

24 noninftinging alternative .

25 1 am sorry, the third bullet addresses whether 82 7 Reed dir6ct

T A Yes, it does . I looked at 'in€orma on, dike sales

2 patterns, customer surveys . I considered, also, the. reviews

3 . of the Amazon, reviews particularly of the PowerTouch, a t

4 Amazon . com . The market share analysis by Fisher-Pr ce tha t

.5 I just mentioned. I also considered statements that wer e

6 made by Fisher-Price or Mattel executives .

7 Q . Do you have some slides on each of these points ?

B A . . Yes,, I do .

9 Q • Why don't we €1i a , to the next one .

1 0 What does this slide illustrate, hel p

1 1 illustrate ?

12 A . This slide shows the shipment patterns to retailers .

13 Again, this is not what is called point of sale . This i s

14 not sales to end customers 'like you and me, but rather

15 shipments to retailers. by LeapFrog.. It shows the LeapPa d

16 with the introduction in 1999, with increasing. sales' . Thes e

17 are in thousands . So it reached 2 .9 im ll on i 2002 . My

1$ First LeapPad came out in 2001 and also had very stron g

19 . success. through '20133 .

20 But in late 2003, sales of the LeapPad buttone d

21 . and in 2044 sales to retailers declined dramatically . I wa s

22 looking at this .decline in sales in 2004 and considering ., is

23 it associated with the PowerTouch shipments that took place i 24 largely in late 2003 and also 2604 .

25 Q . For the LeapPad line, which product does that include? 83 2 Reed - direct

I . s. ilarly-, with this my First Leapl?ad, there was.- a much

2 stronger level of actual shipments pmnts of these products t o

3 retailers .

4 In ray view, this clearly demonstrates that ther e

5 was enough capacity to ship more , in 2004 . . it' a sees, perhap s

6 more clearly with the next slide .

7 This next slide adds in what I view to be, th e , 8 lost sales of the LeapPad, sales that I believe, because of

9 the infringement in the case, the LeapPad would have lost to

.10 Power' ouch . And that 630,000 units in total, I believe i t

11 would . be roughly half and half between My First LeapPad an d

12 LeapPad .

13 Again, if I add those additional units tha t

14 would be lost, it is very strong evidence that LeapFrog ha d

15 enough ability to manufacture and ship products to meet th e

16 total units that would have . been applicable in 2004 .

17 Q . Okay . And I think you mentioned you had anothe r

18 • slide : What does this show ?

19 A. Yes . This goes to, who are these companies selling

2 to .- Mr . Bender addressed this . But it shows that very .

21 large proportions of the products, both the PowerTouch and .

22 the LeapFrog products generally, are being sold to really

23 the four major retailera in the 'United States .

24 So it's a question. o£, if PowerTouch wasn' t

25 being sold to Wal-Mart, it would be quite possible that 83 3 Reed - direct

1 LeapFroc would just sell additional to Wad-mart . Arid

2 obviously, this shows a very strong, correlation between the

3 customers .

4 If we Could go back to Slide 10..

5 I : think w6r have covered the first two bullets .

What .do the. last three bullets all, relate to?

7 A . They all relate to the ability to . manufacture more

8 product in the event thes lost sales would .have been made

9 . by LeapFrog . . Also, it covers inventory . Mr . Bende r

10 addressed the large inventories that occurred in late 2G03 .

11 In fact, I show here, the inventories increase d

.12 at retailers compared to the .eh-dof 2002 to the end of 2003 .

13 There was 190 ; 000 additional My First LeapPad . platforms and

14 there was 270,000 additional LeapPad platforms . So thes e

15 would have been available to sell to the customers, th e

16 actual consumers, at the end of 2003 .

17 Then in 2004., heapPad would have the ability t o

18 manufacture more units . to sell back to those retailers t o

19 replenish the supply and get ready for the next sellin g

20 season .

21 U . What is this evidence, or what dries the information ,

22 that you looked . at suggest about whether LeapFrog had th e

23 capacity to make the sales that you claim are, lost ?

24 A . I think . it clearly shows, that` LeapFrog did have the

25 capacity- . 834 Reed - direc t

1 Okay . what is the next step of the. analysis ?

2 A. The next step is" 'really to put it all together, to '

3 quantify the mount of the lost . sales and the "lost profits

associated with that .

Q .. Does this lay 'out the different- items that were lost "

6 because of the .PowerT.ouch?

7 A . Yes, it does su prize it.

8 Q . Why don't we just 'walk through it . It says LeaapFto g

9 would have sold more platforms, ' 315, 000 LeapPads, 315,000 My

10. First LeapPads . Why those numbers ?

11 A . During ,the damage period, Pi sher-Price sold abou t

12 780", 0O0 PowerTouch units, in my view, approximately 0 0

13 percent of that would be associated with lost LeapPa d

14 products . . That translates. into 630,000-units, -

15 approximately . Also I concluded that approxim4t6ly half of

16 those would be My First LeapPad lost sales and the othe r

17 half would be LoapPad .

1$ 1 assumed that would be ., the Classic LeapPad ,

19 because that is the lowest price of the LeapPad family . The

20 reason why roughly half and half 'has to do 'with the ag e

21 distribution, who was - buying the PowerTouch . The PowerTouch

22•, was directed towards younger children . In fact, the

23 AmazoiL corn review data suggested that 70 percent of th e

24 PowrerTouch reviewers verse, their children, when they bough t

25 the PowerTouch, were three years or less . 837 Reed' - direc t

How many did you determine ---• how .many lost: books did

2 you include in your analysis then ?

3 A . . I included only 'three books . . And I spread it out over

4 time . So the damage analysis takes into account, the detai l

5 that these books would be purchased by the consumers and

6 then ultimately cause LeapFrog to ship more books . .to

7 retailers over time .

8 4 . Why 4d you only pick three books ?

9 All Well, to be conservative, I applied only three books .

10 It could have been .a larger number . .

11 Q . Can wre. go back to Slide 14?

12 At the very bottom, it says -~ there 1:s a los t

' 13 profits reference .. What is that reference?,

14 A.. Well, this refers to what Mr . Wood and Mr . Sender

15 addressed in their testimony to the jury, that because o f

16 the PowerTouch, Leapfrog added an additional .book to the

17 LeapPad platform . It was only the LeapPad books, such a s

18 the Writing, the Microphone, Classic, the Pink LeapPad, no t

19 My First '.eapPad .

20 But a second book was added .' That resulted in a

21 decline in book sales, because 'consumers would then not be

22 purchasing as many books as they would otherwise . We saw a

23-- slide in Mr . Bender's testimony about the decline

24 Q . Now, after you have gone through and determined how

25 many of the sales were in fact lost to the 'PowerToueh, what 838 Reed - direct

I is the next -step here.?

2 : A . The next : step wa 1d be to quantify and apply the -

3- incremental profit rate for ' these losses .

4 Q . There it is . So you have lost platforms, lost books .,

5 Is this consistent with ghatyou have been explaining abou t

6 what'you° have inoluded in your analysis ?

7 A . Yes, it is .

8 So you have-a unit number, and are.-those the ones that

9 we were 'just talking about? .

10. A . Yes . The books reflect the three books for each o f

11 these platforms, including .the LeapPad upgrade platforms ,

12 then'the number with the LeapPad under lost books ,

13 2,768,000 . That is the number of platfor s 'that were sold

14 from July 2003 throuqrh Juiy 2004 .

15 Q :. Okay . What is the dollars per unit figure there ?

16 A . That reflects the incremental profit that LeapFro g

.17 earns when it sells additional . products .

-18 Q . What . did you .look at to determine what that numbe r

19. should be?

20 A . Well, I looked at the financial records ofLeapFro g

21 . that is associated with .the TLP document . I considered all

22 the variable costs that would be associated, all th e

23 incremental costs .

24 What that means is , for example, if additional

25' shipments have been made to Wal-Mart, what would be the 84 3 Reed - direct

1 So if the higher pricing applies for the damages

2 analysis, then you would also apply the price erosion pe r

3 unit to the lost LeapPad and the lost My First LeapPad

4 units ..

5 Q . The losses on the LeapPad and My First LeapPad on the

6 bottom row, those are losses that LeapFrog already had

7 suffered . Is that right? that I mean by that is, these are

8 not future losses of sales of platforms . Right ?

9 A . No . It doesn't include 2005 through today . It is

10 based on 2004 .

11 Q . Can we flip back to Slide 1 .

12 So that -- does that number match the -~- did we

13 suo this up ?

14 1 am sorry . I apologize . Can we go back to

15 Slide 19 .

16 Does this show the total with respect to the

17 present value of the lost profits that LeapFrog ha s

18 suffered ?

19 A . Yes . . It's all .ix 2004 . It is already in present

20 value . In fact, it's future . But it is 28 .36 million .

21 Q . Can we go back to Slide 1 . Is that number there for

22 price erosion ?

23 A . Yes, that's the second element on this chart .

24 Q . Okay . So with the remaining units, then, you look at

25 the reasonable royalty . Is'that correct? I

839 Reed 'direct ,

1 profit on those 'addition" shipments . • So" you wouldn ' t take .

2 "into account overhead expeuses, such as the 9mary . bill

3 facility where LeapFrog is . .located of the research an d

4 development on developing more content and developing . new

5 products . That is not an incremental cost . "

6 Q . . Is marketing expenses an incremental cost?

7 A. I don 't believe marketing is an incremental cost . In

8 fact, Mr . Bender addressed that in 2003 LeapFrog had to .

9 increase its marketing in part to clear up confusion about

10 different products in the marketplace .

11 Q . . Putting these together ,, then, you come to a total

12 -Mount of what is the total amount, of lost profits

.13 daumages that you were able to determine 7

14 A . . Well, the to tal is 36 .'75 . ' That includes some future

15, amounts , because some of these books would be sold in the

16 future . So I had to apply a discounting methodology . That

17 takes these future amounts and calculates it as of today .

18 And that figure is 35 . 4 million dollars .

19 Q . ' Can we go back to Slide I for a . second.

20 There is lost sales . is 'hhat that number there,

21 ' 35 . 4 million? ' .

22 A . Correct .

23 Q . You have an. entry for price erosion . Why don't we

24 walk through the price erosion . Can you explain what price

25 erosion is? 84 0 Reed w- direct

A . Yes .

2 In the previous calculation, when I was looking

3 at the lost profit per unit, the incremental profit, it was

4 based on 2004 pricing . As we will see on the next slide,

5 prices changed dramatically after the introduction of the

6 PowerTouch . So this chart shows two different data sources .

7 One that goes back further in time . So I included that to

8 show the stability of pricing in the 1999 to 2002 tim e

9 period .

10 This is pricing for the LeapPad, the basic

11. LeapPad platforms, including the Pink product that came out

12 later . You can see, from 1999 to 2002 the price was very

13 stable . In late 2003, there was some discounting that was

14 occurring . And in 2004, the LeapPad list price was reduced

15 to .retailers . It was quite a large decline . The decline in

1.6 price reflected by the red pricing was $8 .69, from 2003 to

17 2004 .

18 Q . If LeapFrog had reduced its prices on its LeapPad

19 platforms in response to Fisher-Price coming into the

20 market, in your opinion, is that a rational move b y

21 LeapFrog?

22 A, It can be a rational move when you are dealing with a

23 competitor like Fisher-Price that has a very large -- they

24 have the ability to introduce their product quickly, to a

25 large number of retai lers . And they have the resources to .842 Reed direct

1 Also , information about Fisher-Pricer reducing

2 their prow of, the BowerToioh , which, i Will `touch on later,

3 is very consistent' with that analysis . '

4 . Were you able quantify what the. damages should be

5 for price erosion? -

6 A . Yes , . I have .

7 Q . Does this lay that out ?

8 A. Yes . .

9 Q . What is the top row? What ;does. that show? '

I 0 A. The top two rows chow the actual sales that were made it by beapFrog to retailers in,2004 . And my price erosion: really 12 focuses analysis on 2 004 'and only .2004 .

13, So, the actual units . shipped to zeta.ilers 'of .

14' LeapPad in 2004, including the writ.=g, with . the various-

15 flavors of the LeapPad, were 2 , 164,000 units . I applied

1 6 that to my calculation of the price erosion per unit .

1 7 Similarly, I do the same thing for My First LeapPad,

1.8 actual units shipped to retailers in 2004 .

1 9 If. you would like, I .can move to the . bottom two .

20 Q . Okay .

21 A . The bottom two is another aspect . of the losses .

22 Remember, the lost .profit analysis, LeapFrog would have had

23 additional sales associated with the sales it lost to

24 PowerTouah . And so when, I calculated the losses for those,

25. it was at the lower .2004 pricing . 84 3 Reed - direc t

•1 So if the higher pricing . applies for the damages .

2 analysis , then you would also apply the price erosion pe r

3 unit to the lost LeapPad and the lost My First LeapPad

.4 units .

5 Q . The losses on the LeapPad and My First LeapPad on the

6 bottom row , those are losses that LeapFrog already ha d

7 suffered . Is that right? What I mean by that is , these are

8 not future losses of sales of platforms . Right ?

9 A . No . It doesn ' t include 2.005 through today . It is

10 . based on 2004 .

11 Q . Can we flip back to Slide 1 .

12 So that --- does that number match the -- did we

13 sum this up?

14 1 am sorry . I apologize.. Can we go back to

15 Slide 19 .-

16 Does this show the total with respect to the

17 present value of the lost profits that LeapFrog ha s

18 . suffered ?

19 A . Yes . It's all in 2004 . It is already in present

20 va lue . In fact , it's future . But it is 28 .36 million .

21 Q . Can we go back to Slide 1 . Is that number there for

22 price erosion ?

23 A . Yes , that's the second element on this chart .

24 Q . Okay . So with the remaining units, then, you look at

25 the reasonable royalty . Is that correct? 84 4 Reed - direc t

i A . Correct .

2 Q . So why don't we go through the reasonable royalty

3 analysis . Did you in fact do a reasonable royalty analysi s

4 with respect to certain of the PowerTouch units ?

5 A . Yes, I did . In fact, this slide shows the units .

6 There were about 787,000 units shipped during the damag e

7 period by Fisher-Price . 630,000 of which I view are los t

8 profit units,'the remaining are 157,600 .

9 Q . How does one approach a reasonable royalty analysi s

10 for the remaining units ?

11 A . Just, like there was this Panduit case, and Pandui t

12 factors to address for lost profits, there is also guidanc e

13 on reasonable royalty . It is called the Georgia-Pacifi c

14 case and the Georgia-Pacific factors .

15 Q . Does this lay out the Georgia-Pacific factors ?

16 A . Yes . It lays out the 15 factors, These are economi c

17 and financial and licensing factors that are . typicall y

16 addressed by people like me in addressing the issue of wha t

19 would be a reasonable royalty for the use of the patent .

20 THE COURT : Before we continue on with

21 Georgia-Pacific, why don't we take our morning break .

22 (Jury leaves courtroom at 11 :10 a .m . )

23 (Recess taken . )

24 THE COURT : Be seated .

25 Bring in the jury, please . 852 eed direct

I fairly takes into ' account all tie, book units .

2 { . by don't we just Walk through it . If it is a $1f3 .

3 royalty per unit, can you explain why it., is 157, a0 units

4 that you applied this' to?

5 A, Yes . Again, there Were, during the, d.-Ohage period.,

6 approximately 787, 0100' Flaber-Price . PowerTf.. uch units, that

7 were shipped to retailers .. And my lost profit 'analysis took

8 630,000. of those units . That leaves a Tema ndek.' of 157,.OQ0

9 units 4 That's what would apply to the $10 royalty per unit .'

- lO Q' . Can we go back to slide .1 . .

1 That is that number on the bottom . . a that

12 correct, the amount of damages for the reasonable royalty

} 13 ac dition?'

14 A . 1 .58 million .

15 . . Q . You come to a '' suia total of?

16 A . . 65 .34 million in total damages .

17 ' Q . Can,you give me an .idea on whether or not on the

18 spectrum ' this . is an aggressive or conservative number ?

19 A . Well, there are additional aspects of damages that I

20 alluded to that have been included and some.-others I haven't

21 discussed . There could be loss upgrades to the- QuantilmPad

22 or Leap 'rcgster and other products that LeapFrog sells that

23 'many customers of the LeapPad later on purchase . There

24 could be more books that would, be purchased by thes e

25 customers, the lost customers . All of these would give rise 152 5

1 IN . THE UNITED STATES DISTRICT COURT

2 IN AND FOR THE DISTRICT OF DELAWARE 3

4 LEAPFROG ENTERPRISES, INC . : Civil Action a Delaware corporatio n 5 Plaintiff, 6 V . 7 FISHER-PRICE, INC . , 8 a Delaware corporation,

9 Defendant, No . 03-927 (QHS )

1.0

Wilmington, Delaware Tuesday, May 24, 2005 12 9 :45 a..m .

1 13

14 BEFORE HONORABLE GREGORY M . SLEET, U .S .D .C .J,. and a Jury

15 APPEARANCES :

16 . RICHARD H . MORSE, ESQ . Young Conaway Stargatt &'Taylor, LLP 17 -and- , RON E . SHtULMAN, ESQ . , 18 TERRY KEARNEY, ESQ ., 19 MICHAEL BERTA, ESQ ., and STEPHEN HOLMES, ESQ . Wilson Sonsini Goodrich & Rosati, 20 A Professional Corporation (Palo Alto, California ) 21 Counsel for Plaintif f 22

23 SEVENTH DAY OF TRIAL 24 • .rf~ 25 ,L599

1 ignore these documents . She said, ignore them becaus e

2 Fisher-Price didn ' t really mean what it was saying .

3 Fi.sher-Price didn't mean it when they said they .want to hit

4 LeapFrog . Fisher-Price didn't mean it , Ms . Mancuso didn't

5 mean it when she said we must blunt LeapFrog's unbelievable

6 momentum . They didn ' t really mean it when they said th e

7 only advantage of introducing the PowerTouch was the

8 competitive hit it would have on Leapfrog .

9 You didn ' t hear anything about teaching kids how

.10 to read . The advantage of introducing this was th e

11 competitive hit on . LeapFrog .

12 What else did Ms . Mancuso ask you to believe?

13 She asked you to believe that sales of the

14 PowerTouch, see them right there, that sales of th e

15 PowerTouch had no impact at all, she said, on the sales of

16 the LeapPad .

17 Well, try as you might , that i sn't possible to

18 believe . Let's look at a 21-page market research report

19 written by Ms . Mancuso ' s own marketing department . As you

20 can see on the screen , Fisher-Price said that the PowerTouch

21 was introduced to di rectly compete with the LeapPad .

22 Now, is LeapFrog asking you to protect it from

23 fair competition? Absolutely not . You remember our

24 witness, Mr . Bender, he was the president of sales, the guy

25 who was dressed very nicely , he took the stand earlier . And EXHIBIT C IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF OHIO , EASTERN DIVISION . . : ''' . b ko COMMODITY LOGISTICS WEST, INC . 1500 Commodity Blvd . Case i$1 2 0 5 0 0 3 8 Lockbourne, Ohio 43137,

Plaintiff, Judge xtno vs. Magistrate tN!t~

LEAPFROG ENTERPRISES, INC . c/o Statutory Agent , JURY DEMAND ENDORSED CT Corporation System HEREIN 1300 East 9th Street Cleveland, Ohio 44114,

Defendant.

COMPLAINT

Now comes Plaintiff Commodity Logistics West, Inc . ("Plaintiff" or "CLWI"), by and through its counsel, Porter, Wright, Morris '& Arthur, LLP, and for its Complaint against

Defendant LeapFrog Enterprises, Inc. ("LeapFrog" or "Defendant"), avers as follows:

THE PARTIE S

1 . Plaintiff CLWI is an Ohio corporation with its principal place of business in

Lockboume, Ohio . CLWI is in the business of'providing logistics to businesses and overseeing and managing warehousing operations .

2. Defendant LeapFrog is a Delaware corporation with its principal place of business in Emeryville, California.' Leapfrog is in the business of manufacturing and sellin g toys and electronics designed for children and related software. JURISDICTION AND VENUE

3. This Court has subject matter ju risdiction over this matter pursuant to 2 8

U.S.C. § 1332 because complete diversity of citizenship exists between the parties .

4. Venue is proper in this Court pursuant to 28 U .S.C. § 1444, as CLWI has its principal place of business in this judicial district and some or all of the causes . of action giving rise to this dispute arose within this judicial district.

5. Finally, this Court may exercise personal jurisdiction over LeapFro g pursuant to Fed. R. Civ. P. 4 and Ohio's long arm statute, Ohio R..C. § 2307.382, becaus e

LeapFrog has transacted and transacts business in this judicial district and because the claim s giving rise to this dispute arose within this judicial district .

FACTUAL BACKGRO U

6. In or around November 2003, CLWI and LeapFrog began discussions abou t the possibility of CLWI overseeing and managing the receipt, warehousing and shipping o f goods from a warehouse facility in Fontana, California (the "Fontana warehouse") leased b y

LeapFrog.

A. The Patties' Agreement

7. Thereafter, in or around July 2004, CLWI and LeapFrog executed a

Warehouse Management Agreement (the "Agreement"). (A copy of the Agreement is attached hereto as Exhibit A)

8. Paragraph 3 of the Agreement requires LeapFrog to compensate CLWI for work performed under the Agreement During the first six months of the Agreemeint , pursuant to the rates and charges established in the Rate Schedule Appendix to the

2 Agreement (Appendix "A" to the Agreement), CLWI was to be paid based on performance ,

at "cost plus six percent."

.9. Under Paragraph 3 of the Agreement , LeapFrog is required to pay CLWI the

full amount of each invoice billed under the Agreement within thirty days of issuance of th e invoice .

10. Under the provisions of the Agreement, the parties agreed that the contrac t would be governed by the law of California .

B. LeapFrog's Failure To Timely Pay Previous Invoices

11 . The holiday sales season for most retailers begins around September and ends

in early December. In order to accommodate the busy holiday season, CLWI began hiring

temporary help in the summer of 2004.

12. On October 26, 2004, CLWI sent LeapFrog an invoice via electronic mail fo r

$1,717,879.40 representing work performed under the Agreement for September 2004. That

invoice, Invoice No . 6785, was due no later than November 26, 2004. The invoice was late r

revised to $1,415,552.11, with the same due date.

13. On November 16, 2004, CLWI sent LeapFrog . an invoice for $1,501,237 .42,

Invoice No. 6788, representing work performed under the Agreement for October 2004 .

The invoice was due no later than December 16, 2004.

14. LeapFrog failed to pay CLWI in a timely manner for both of these invoices.

15. As a result, on November 23, 2004, Senior Director of Finance, Global Suppl y

Chain of LeapFrog, Peter David, told the Chief Financial Officer of CLWI, Norm Murphy,

that LeapFrog would not make payment to CLWI on any invoices - including the Octobe r

3 2004 and September 2004 invoices - until after CLWI traveled to California for a meeting i n mid-December 2004 that would include the Chief Execu tive Officer of CLWI and the Chie f

Executive Officer and President of Leap Frog.

16. After further discussion, LeapFrog ultimately agreed to pay the two

outstanding invoices . However, upon information and belief, LeapFrog only agreed to pay

Invoice Nos. 6785 and 6788 because of the busy holiday season.

C. LeapFrog's Failure To Pay CLWI's November 2004 Invoice

17. On or about December 10, 2004, CLWI sent LeapFrog an invoice via

electronic mail for $1,424,221 .95 representing work performed under the Agreement fo r

November 2004, That invoice, Invoice No. 6798, was due no later than January 10, 2005 .

(A copy of that Invoice is attached hereto as Exhibit B).

18. On the evening of January 10, 2005, Senior Director of Finance, Globa l

Supply Chain of LeapFrog, Peter David, stated in a telephone call to the Chief Financial

Officer of CLWI, Norm Murphy, that LeapFrog would not pay that invoice until senior

management from LeapFrog and CLWI reached some agreement as to allocating losses that

LeapFrog contends it has suffered in connection with its Fontana warehouse .

19. To date, LeapFrog has failed to provide any documentation demonstratin g

that any of those losses are losses that CLWI is contractually obliged to bear.

20. In addition to the $1,424,2?1.95 owed to CLWI pursuant to Invoice No .

6798, it is expected that LeapFrog will owe CLWI approximately $1,500,000 for services

provided in December 2004 and January 2005 under the Agreement . Upon information and

belief, LeapFrog has no intention of paying CLWI for those services. D. CLWJ's Suspension of the.Agreement

21. In light of LeapFrog's breach of the Agreement, on January 12, 2005, CLWI

'sent notice to LeapFrog that CLWI was suspending its performance under the Agreement.

(A copy of that Notice of Suspension is attached hereto as Exhibit C) .

FIRST CAUS OF ACTION

(Breach of the Agreement and Constructive Termination )

22. Plaintiff re-avers and re-alleges the allegations contained in Paragraphs 1 through 21, as if fully pleaded herein.

23. CLWI fully and completely performed all of its obligations and duties under

the Agreement.

24. However, notwithstanding that performance, LeapFrog has refused to pay

an outstanding invoice, Invoice No. 6798, in the amount of $1,424,221.95.

25. By failing to pay Invoice No . 6798, LeapFrog has substantially and materially

breached the Agreement. In addition, upon information and belief, LeapFrog intends not to

pay CLWI for additional invoices for services'CLWI has provided for December 2004 and

January 2005 .

26. In addition, by its failure to pay this invoice, its previous resis tance in timely

paying CLWI' s previous invoices, and insistence that CLWI bear the cost of losses and

problems that are not the responsibility or obligation of CLWI, LeapFrog has constructively

terminated the Agreement without cause.

5 27. Under Paragraph 4 of the Agreement , should LeapFrog terminate the

Agreement without cause, LeapFrog is obliged to among other things, pay liquidated damages in the amount of $500,000 .00 to CLWI.

28. As a result of LeapFrog's material breach and constructive termination of the Agreement, CLWI has suffered damages in an amount to be determined at trial of at least $3,500,000.00, plus accrued interest and costs .

SECOND CAUSE OP ACTION

(Declaratory Judgment)

29. Plaintiff re-avers and re-alleges the allegations contained in Paragraphs 1 through 28 , as if fully pleaded herein.

30. LeapFrog has alleged CLWI is responsible for losses that LeapFrog alleges it incurred in connection with the Fontana warehouse .

31. Further,-LeapFrog has expressly and/or imp liedly a lleged, in words or conduct, that CLWI has breached the Agreement by failing to live up to performance standards set forth in the Agreement

32. CLWI has not breached the Agreement and has fu lly and faithfully performed all obligations undertaken by CLWI under the Agreement.

33. Based on LeapFrog's allegations of CLWI's breach of the Agreement,

LeapFrog has disclosed its intention to not pay CLWI under the Agreement.

34. CLWI is therefore entitled to a declaratory ruling by this Court, that CLWI

has not breached the Agreement and that, as a result, LeapFrog is obliged to pay CLWI fo r

services rendered.

G 35. Further, CLWI is entitled to a declaratory ruling that it is not responsible for the losses, if any, relating to the Fontana warehouse .

THIRD CAUSE OF ACTION

(Rescission of Agreement)

36. Plaintiff re-avers and re-alleges the allegations contained in Paragraphs 1

through 36, as if fully pleaded herein .

37. LeapFrog's conduct discussed above constitutes a breach so substantial and

fundamental that it undermined the Agreement

38. LeapFrog's refusal to pay CLWI for its continuing services completely

deprived CLWI of the benefit of the bargain of the Agreement with LeapFrog .

39. LeapFrog's various breaches have resulted in the failure of consideration

allegedly provided by LeapFrog to CLWI.

40. As a result of LeapFrog's substantial breach of the contract and the failure

of its consideration to CLWI, CLWI is entitled to rescission of the Agreement .

WHEREFORE, Plaintiff CLWI respectfully demands the following relief :

(i) Compensatory damages in excess of $3,500,000 .00 for LeapFrog's willful

breaches of the Agreement;

(ii) Rescission of the Agreement between CLWI and LcapFrog;

(iii) On the Second Claim for Relief, the Court issue judgment declaring that (1)

CLWI is not in breach of the Agreement; (2) that, as such, LeapFrog is

obliged to pay CLWI's invoices under the Agreement ; (3) LeapFrog's actions

7 in not paying CLWI constitute a breach of contract; and (4) that CLWI is not

responsible for the losses at the Fontana warehouse ;

(iv) An award of attorneys' fees and costs as well as pre-judgment and post-

judgment interest; and

(v) All such other relief that is just and appropriate .

Respectfully submitted ,

Mark K . Mer e, rial'Aftorney.(0023081) John F. Marsh (0065345) Porter, Wright, Morris & Arthur LLP 41 South High Street, 29th Floor Columbus, Ohio 43215 (614) 227-2000 (614) 227-2100 (fax) email: [email protected]

A ttorx~sfor Plaireiff C dity L ogistus We4 Inc OF COUNSEL:

David S. Bloomfield, Jr. (0068158) Porter, Wright, Morris & Arthur LLP 41 South High Street, 29th Floor Columbus, Ohio 4321 5 (614) 227-2000 (614) 227-2100 (fax) email: [email protected]

JURY DEMAND

Pursuant to Rule 38 of the Federal Rules of Civil Procedure, Plaintiff demands a tria l by jury on all issues .

John F. Marsh'(flb65345)

8 . COLUMBUS1I 189492 v.G± WAREHOUSE MANAGEMENT AGREEMENT

THIS WAREHOUSE MANAGEMENT AGREEMENT .(the "Agreement"), made and executed - as of July l.; 2004, is by and . between Commodity . Logistics West, Inc ., an Ohio corporation, with its principal place of business in the City of Columbus, Franklin County, Ohio (hereafter, "CLW I"), and LeapFrog Enterprises, Inc ., a Delaware corporation, with its principal place of business in the City of Emeryville, Alameda County, California (hereafter, "LeapFrog") .

STATEMENT OF PURPOSE

LeapFrog is the owner or lessee of a ce rtain warehouse facility, located in California, and is in need of a logistics company, such as CLWI, to oversee and manage the receipt, warehousing and shipping of goods, as well as other logistical functions , at said warehouse facility; and

CLW1 is a logistics company, generally engaged in the business of overseeing and managing warehousing operations, including, but not limited to, the receipt, warehousing and shipping of goods, as well as other logistical functions , at warehouse facilities, such as those owned or leased by LeapFrog; and

LeapFrog and CLWI are equally desirous of entering into this Agreement, whereby CLWI will oversee and manage, certain day-to-day warehousing -operations at the designated warehouse facility owned or leased by LeapFrog, and LeapFrog will pay CL W.I 'accordingly ;

AGREEMENT

In consideration of the mutual covenants herein, as well as other good and valuable consideration, receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:

1 . The terms and conditions relating to the term and termination of this Agreement are set forth in the following provisions :

A. The term of this Agreement shall begin on the date of execution, designated above, and shall end three (3) years thereafter (the "Initial Term"); provided; however, that if, on or before the end of the second full year of the Initial Term, CLWI receives written notice of LeapFrog's desire to renew the Agreement, then the Agreement shall remain effective for an additional two (2) years (the "Renewal Term"). The Initial Term and the Renewal Term are collectively referred to herein as the "Term ."

B. Either party may terminate this Agreement upon the other party's failure to cure a Default, as-defined herein, within sixty (60) days of receiving written notice of the same (hereafter, the "Cure Period") . The Cure Period shall begin to run on the day the defaulting party receives written notice, consistent with the terms an d

Exhibit A conditions of this Agreement governing notice, identifying the deficiency complained of and relief sought . If the Default is a payment Default, the non- defaulting party may terminate this Agreement at the end of the Cure .Period. For all other Defaults, if the Default is not cured within the Cure Period, the non- defaulting party may give notice of termination to the other party, such termination being effective thirty (30) days from such notice (the "Transition Period"). During the Transition Period, the-parties agree to fully cooperate in transferring the services being provided in this Agreement .

C. This Agreement : may be terminated without cause by either party at any time during the term of this Agreement by giving written . notice of at least' 180 days prior to the desired date of termination. Notice is to be accomplished by United States certified mail, return receipt requested, or national overnight delivery service to the parties specified in section 14 .

2. CLWI agrees to oversee and manage the day-to-day warehousing operations, including, but not limited to, receiving, warehousing and shipping of goods, at LeapFrog's warehouse facility, as further described in Appendix "A" (the "Facility') . In furtherance of its obligations hereunder, CLWI agrees to hire and employ necessary personnel and secure supplies to accomplish the same. LeapFrog will acquire and maintain all equipment required to operate the Facilities and sufficient for CLWI to perform its services pursuant to'this -Agreement . Further, CLWI shall be responsible for maintaining accurate, up-to-date records of all goods received by, stored in, or shipped from the Facility .- Both parties acknowledge and agree that CLWI is not a warehouseman, and CLWI's performance under this Agreement is not governed by laws pertaining to warehousemen, including, but not limited to, the Uniform Commercial Code or any state-adopted version thereof .

3 . In consideration of the services provided hereunder, LeapFrog agrees to compensate CLWI at the rates and charges established in the Rate Schedule Appendix, attached and incorporated herein as Appendix "A ." Where the rate is dependent upon volume of goods handled by CLWI, the volume of goods comprising any shipment received or sent by CLWI shall be determined by using the computer program devised, agreed upon, and implemented by the parties, which program takes in to consideration the size and number. of packages contained in a_single shipment. Charges relating to any shipment of goods shall accrue and be billed at the time CLWI receives such shipment. . An invoice reflecting such charges will be prepared and . forwarded' on a weekly basis. Additional rates, fees and charges may apply, as per the Rate Schedule Appendix, and will be invoiced on the first of each month . LeapFrog. shall .pay CLWI the full amount of each invoice within thirty . (30) days of its issue; provided,' however, that CLWI's failure to timely issue an invoice shall not relieve LeapFrog of its obligation to compensate CLWI for services performed . LeapFrog shall have the right to audit the "cost plus" or "additional charges" invoice amounts within 90 days following receipt of the invoice . Both parties acknowledge and agree it may be necessary, from time-to-time, to amend .the Rate Schedule Appendix, which amendment must . being in writing. The 'effective date will be specified in the agreement, and the parties may evidence their intent to execute the same via fax transmission .

2 4. If LeapFrog terminates this Agreement or discontinues services of CLWI at .the Facility, without cause, before the expiration of the Initial Term, or the Renewal Tenn, if extended, LeapFrog will reimburse CLWI for reasonable costs and expenses associated with the transfer of inventory and personnel, where the transfer is necessitated by any such discontinuation of services . To the extent discontinued services render personnel obsolete under this Agreement, and it is impractical or unprofitable to utilize such personnel at an alternate location, LeapFrog shall pay to .CLWI:

A. An agreed-upon, estimated amount for CLWI internal severance obligations and requirements, excluding relocation costs, which internal severance payments shall not exceed, for management level employees, two weeks per year of paid severance, prorated and calculated based upon the length of-time such manager had worked at or been utilized in support of the LeapFrog account, to CLWI employees directly affected by said discontinued operations, and/or such other amounts as otherwise required by applicable law ; and

B. in . additional to the foregoing, for the final thirty (30) days CLWI provides services, Leapfrog shall pay CLWI at the rate of cost plus six percent (6%) mark- up; and

C. Due to the difficulty of ascertaining other actual damages CLWI will suffer in the event LeapFrog terminates this Agreement without cause, in addition to The foregoing, LeapFrog agrees that it will pay CLWI as liquidated damages, and not as a penalty, the sum of $500,000 in cash during year one of the Initial Term, and the sum of $300,000 in cash du ring years two and three of the Initial Term, payable on the effective date of termination .

LeapFrog will .pay CLWI any amount coming due under this Paragraph .4 on or before the effective date of .such discontinued services. The provisions of this Paragraph 4 shall, as applicable, survive termination of this .Agreement and may be independently enforced as a contract, separate and apart from the remainder of this Agreement. Both parties agree to take those steps reasonably necessary to facilitate the transfer , when applicable, of inventory, equipment and personnel in an efficient, economical manner. Any rights or remedies afforded herein are exclusive of, and in addition to, any other rights or remedies available to either pa rty under this Agreement, or at law or in equity.

5. Leapfrog agrees to designate and provide, and CLWI agrees to use, . warehouse receipts, bills of lading, and other forms and documents deemed necessary by LeapFrog, in its sole discretion, for overseeing and managing its warehouse operations. CLWI is not responsible or liable. for the form or content of any of the afore=described forms or documents . Leapfrog and CLWI will work together in good faith to develop a Statement, of Responsibilities and Standard of Performance which will set forth the responsibilities of the parties with respect to operational procedures, certain costs, and standards of performance . LeapFrog shall be responsible for arranging for and scheduling inbound and outbound carriers and paying all corresponding freight charges and incidental costs associated with transportation of freight from and to the Facility . . 6. LeapFrog is the owner or lessee of the Facility and is solely responsible for all incidences regarding the same, except as provided in this Agreement . Accordingly, LeapFrog, as between LeapFrog and CLWI, at its sole cost and expense, agrees to : Pay all reasonable expenses of operating the Facility ; maintain, and pay for improvements or repairs to, the Facility, to the extent applicable, pay all real estate taxes related to the Facility; comply with all federal, state and local statutes and regulations applicable to the Facility. CLWI makes no representations or warranties, of any type or nature, as to the Facility or the Facility's capacity for the storage and handling of the goods covered by this Agreement .

7. A. CLWI agrees, to maintain Commercial General . Liability Insurance, Occurrence form CG 00 01, or equivalent, . with limits not less than $1,000,000 per occurrence!$2,000,000 aggregate. Such insurance shall remain in full force and effect throughout the contract term and all contract extensions . Such insurance shall include LeapFrog Enterprises, Inc . as an additional insured. In addition, CLWI agrees to maintain fidelity insurance, discovery form CR 00 22, or equivalent, with limits not-less than $1,000,000 . Collectively, the aggregate benefits described in this section are hereafter called the "Policy Limits" . CLWI agrees to provide LeapFrog with a certificate of insurance within 30 days of the date of execution of this Agreement, and within 30 days of each policy. expiration: CLWI's aggregate liability, under this Agreement or otherwise, for any and all losses, shall be limited to, and under no circumstances shall it exceed, the Policy Limits.

B. Further, under no circumstances shall CLWI be responsible or liable for damages to the Facility valued at . less than $10,000 per occurrence; damages valued at ;less than $10,000 per occurrence shall be considered ordinary wear and tear and the sole responsibility of LeapFrog, regardless of CLWI's negligence .

C. CLWI will carry Workers Compensation as required by law and CLWI agrees to provide LeapFrog with a certificate of insurance- within 30 days of the date of execution of this Agreement, and within 30 days of each policy expiration .

D. CLWI is not responsible, nor shall it be liable, for acts or omissions on the part of LeapFrog or events beyond CLWI's reasonable control, and. LeapFrog hereby agrees . to release, indemnify and hold harmless CLWI, its shareholders, officers, directors, employees, successors and assigns from and against any and all claims, actions, causes of action, damages or other liability directly or indirectly related to acts of active negligence LeapFrog, its employees, agents or assigns.

8. CLWI is . an independent contractor with respect to LeapFrog, and nothing in this Agreement or otherwise shall change or affect this relationship . Consistent with this. relationship, CLWI agrees to release, indemnify and hold harmless LeapFrog, its shareholders, officers, directors, employees, successors and assigns from and against any and all claims, actions, causes of action, damages or other liability directly or indirectly related to acts of active negligence of CLWI, its employees, agents or assigns. Likewise, LeapFrog agrees to release, indemnify'and hold harmless CLWI, its shareholders, officers, directors, employees, successors and assigns from and against any and all claims, actions, causes of action, damages or other liability directly or indirectly related to acts of active negligence, its employees, agents or assigns .

9. Neither party shall be responsible or liable, under any circumstances, for special, indirect, incidental or consequential damages. Further, neither party shall be responsible or liable for failure in the performance of the promises and covenants on its part to be performed hereunder, if such delay or failure is the result of any cause beyond its control, including, but not limited to, strikes, fires, floods, storms, accidents, scarcity of materials or fuel, transportation embargoes, scarcity of trailers, governmental regulations or orders, perils of navigation, acts . of terrorism, acts of war, acts of public enemies, mobs or rioters, or acts of God .

10. During the Term of this Agreement and fora period of 6 months following the termination of this Agreement, neither party shall directly or indirectly hire or attempt to hire any employee of the other'party or take any other action which would encourage any employee to leave the employment of the other, provided, however, that the .parties may, by written agreement, mutually waive the prohibition set forth herein as to any one or more employee(s), on a case-by-case basis.

11 . The following events shall constitute a "Default" by either party and, except as set forth in section 9, shall render the defaulting party liable to the other for any and all damage and loss arising from such Default, independent of and in addition to any other remedies or relief provided for herein or otherwise :

A. The non-payment of any compensation ,. charges, costs, debts, expenses or other obligations accruing and owed under this Agreement , after .notification and expiration of the cure period; or

B. The voluntary or involuntary bankruptcy, assignment for the benefit of creditors, receivership, insolvency or garnishment of a party ; or

C. The material breach of this Agreement by a party .

A "material breach" by CLWI shall include CLWI 's failure to perform in accordance with the Statement of Responsibilities and Standard of Performance to be developed pursuant to section 5 of this Agreement (the "Standards ") and failure to maintain insurance as required by this Agreement. Until the Standards are developed and agreed to by the parties and added as an amendment to this Agreement, the requirements of the Standards Schedule attached as Appendix 'B shall apply to define a material breach by CLWI.

12. No assignment or transfer of this Agreement, or any part thereof, shall be made by either party without the express, written consent . of the other, which ' consent shall not . unreasonably be withheld, and all purported assignments and transfers without such consent shall be void.

13. If either Party brings an action or .proceeding involving the Agreement to enforce the terms hereof or to-declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees . Such' fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment . The term, -"Prevailing- Party"' shall include, without limitation, a Party who substantially obtains or defeats-the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party of its claim or defense . The attorneys' fees award. shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably insured .

14. Any notice required or permitted herein may be served by United States certified mail, return receipt requested, or national overnight delivery service, to the parties at their respective addresses set forth below, or such other addresses of which the parties may notify each other in accordance herewith :

IF TO CLWI: IF TO LEAPFROG : James Haller, President Prior to Commencement Date : Commodity Logistics West, Inc. Leapfrog- Enterprises., Inc. PO Box 1827 6401 Hollis 'Street, Suite 150 Westerville, Ohio 43086- 1827 Emeryville, CA 94608 Attn: -Senior Vice President, Distribution and Logistics

With a copy to: Leapfrog Enterprises, Inc. 6401 Hollis Street, Suite 150 Emeryville, CA 9460 8 Attn: Chief Counsel

After Execution Date : Leapfrog Enterprises, Inc. 13479 Valley Blvd. Fontana, California 92335-5212 Attn: Director of Dist ribution Operations

15. If any term or provision of this Agreement or any application thereof shall be invalid or unenforceable, such term or provision shall be deemed to be severed from this Agreement, and the remainder of this Agreement and any other application of such term or provision shall not be affected or invalidated thereby.

16. The foregoing sets forth the entire agreement between the parties hereto . It shall be governed and construed in all respects in accordance with the laws of California applicable to contracts made and to be performed in the State of California, without regard -to principles of conflicts of law.

WHEREFORE, the parties; in acknowledging and agreeing to the terms and mutual covenants contained herein, have set their hands as of the date first above-written. COMMODITY LOGISTICS WEST, INC. LEAPFROG ENTERPRISES, INC.

Title: Sr. Vi Presid t of Operations and Logistics

y: erald F . Fors Title: Chief Operating Offic r

B ames P Cur ey e: Chief Financial Officer WAREHOUSE MANA GEMENT A GREEMENT APPENDIX "A " July 1, 2004 ORIGINAL PAGE 1 OF 1 PARTIES: CLWIand LEAPFROG Effective Date: July 1, 2004

FACILITY AND . RATE -SCHEDULE

This Appendix "A" is executed and entered . into as the result of a Warehouse Management Agreement, dated July 1, 2004, between CLWI and LeapFrog (the "Agreement") .

FACILITY:

13479 Valley Blvd. Fontana, California Address City, Stat e

RATE APPLIED:

For the initial six (6) months of. this Agreement, LeapFrog shall pay CLWI based on performance, at cost plus six percent (6%) . Thereafter, LeapFrog shall pay cost per case ("CPC") plus nine percent (9%).

Initial six-month period: Cost Plus 6% mark-up

After initial six-month period: CPC (Cost Per Case) Plus 9%

8 WAREHOUSE MANAGEMENT AGREEMENT APPENDIX "B" July I, 2004 ORIGINAL PAGE I OF I PARTIES: CLWI and LEAPFROG Effective Date: July 1, 2004

STANDARDS SCHEDULE

1 . Rate of Inventory Accuracy: '95%, defined as follows and measured as described in item .4 below:

"Rate of Inventory Accuracy" means the on hand amount of manufactured items received, inventoried, and recorded by the system compared to the actual quantity of audited manufactured items located in the Facility. The Rate of Inventory Accuracy will be calculated in Eaches for .comparison purposes.

"Eaches" means a single manufactured item unit within a case, carton, or box, e.g. there could be 6 units of a specific item within a case, carton, or box .

Example - If "Aisle I0" of the Facility is audited and the-expected system quantity is 1000 Eaches and the audited quantity through cycle counting is 999 Eaches, then the result will be 99.9% rate of Inventory Accuracy.

2. Rate of On Time Load Staging: either 99 % or 90%, defined and described as follows and measured as desc ribed in item 4 below :

"Load Staging" means the percent achieved in placement of orders into the load staging lanes prior to pickup, determined by the date and appointment time set for pickup.

Example - If the appointment date and time is Thursday July 151' at 11 :00 am then the load must be available and in the staging lanes by this day and prior to the appointment time. If at the end of-the month there were to be 100 loads staged p rior to the designated appointment times and all 1 00 met the designated c riteria, then the Load Staging accuracy would be 100% .

Percentage compliance required :

For LeapFrog's top three accounts (Toys"R"Us, Target, and Wal-Mart) 99%

For all other accounts 90%

3. Level of budget performance :

Starting October 1, 2004, CLWI's staffing budget will be within 15% of the variable cost rate of the budget agreed to by the parties (as described below and in the attached document called "CLI Staffing Budget/Budget Worksheet Dated July 1 . 2004"). This standard will cease to apply when CLWI is no longer, reimbursed on Cost of Performance plus 6% (as set forth in Appendix A) and is reimbursed on a Cost Per Case plus percentage basis per Appendix A, which the parties anticipate to be around December 31, 2004.

Variable Cost Rate: The variable cost rate is $0.20 per carton during peak (October .through December) and non -peak time periods, and for both shipping and receiving cartons.

Fixed Staff Rate: The Fixed Staff is 58 for peak (October through December) and 28 for non-peak time periods. If CLWI determines that these staffing levels are . not adequate, CLWI will notify LeapFrog for prior approval of changes in these staff numbers.

4. Measurement. Period: The measurement period for these standards shall be a calendar month average. Standards one . and two shall be in effect commencing October 1, 2004 until the Statement of Responsibilities and Standard of Performance is developed which will replace these standards . The parties have targeted the Statement of Responsibilities and Standard of Performance to be completed by February 1, 2005, however, standards one and two above shall remain in place until those standards are developed . Failure to meet the standards set forth in this Appendix B for one (1) month shall constitute a material breach and Default of this Agreement. Notwithstanding any other provision of this Agreement, the following procedures shall apply to CLWI's failure to meet the standards set forth in this Appendix B . Upon such material breach, Leapfrog shall deliver a Default notice, in accordance with the terms of this Agreement, to CLWI setting forth the nature of the deficiency . no later than the tenth (10' ) day of the month following the month in which such Default occurred . If CLWI meets the standards set forth in this Appendix B for the calendar month'next following the calendar month in which the notice was delivered (the "Cure Month"), the Default shall be deemed cured . If however CLWI fails to meet the standards set forth in this Appendix B during the Cure Month, Leapfrog shall have the right to deliver the 30-day termination notice referenced in section 1B . (By way of example, . if the Appendix B standards are not met for the month of November 2004, Leapfrog shall deliver its written Default notice on or before December 10, 2004 and the "Cure Month" shall be January 2005 .)

10 dated July 1, 2004 Appendix B, Schedule I Warehouse Management Agreement CL! Staffing Budget/Budget Worksheet Cost Standards July 1, 2004 CLWI .and LeapFrog Enterprises, Inc..

Peak Period t Mon -Fri Saturday. M-F Hours Sat Hrs Total Hours Total Cos Work Days (based on 6 day weeks) 23,920 $ 422,142 October 26 21 5 19,320 4,600 23,000 $ 399,924 November 25 21 4 19,320 3,680 21 .160 $ . 340;676 December 23 23 0 21,160 $ 1,162,742 Total Days 74 65 9 59,800 8,280 68,080 Markup $ 69,765 Total Shipping Rec'g Net Billing $ 1.232,507 Variable Staffing during Peak period 115 76 39 HoursIstaff/day 8 Total Hours: Oct-Dec 68,080 44,992 23,088 reconciiiaton Overtime $ 66,654 Carton Activity Markup $ 69,765 3-month total Oct-Dec 6,256,791 3,212,821 3,043,970 Total $ 136,419 . Average Month 1,070,940 $ per carton 0.022 Base $ 0.175 Hours per Carton 0.011 0.014 0.008 Rev.Total 0.197 Hours per M Cartons 10.9 14.0 7.6 Rounded _ 0.20 Carton per hour 91,90 71 .41 131.84 Hourly Rate Cost per Carton $ 16 .10 S . 0.175 $ 0.225 $ 0.122 excluding Mark-up and Overtime Proposed > $ 16.10 Variable budget proposal for Initial period $ 0.20 Proposed per carton lncludLng receiving and shipping

Off Peak

The same Variable Budget applies to Off Peak at 0.20/carton

Fixed Staff per Worksheet Is 28

Budget Schedule 1!1 CLI Stiffing Budget.Budget Worksheet.Juty 1.200.4 .xls 07114004 CLI Staffing Model Peak Period .

Budget Total Group Class Group Positions 1st Shift 2nd Shift 3rd Shift Personnel Total Fixed Variabl e Fixed 1 . General Manager 1 1 Fixed I Operations Manage r 1 1 2 2

Fixed 2 Receiving Superviso r 1 1 0 2 Fixed 2 Receiving Leads 1 1 0 2 Variable 2 Unloaders 10 10 0 2 0 Variable 2 Receiver 5 5 0 1 .0 Variable 2 Fork Lift Put Away 6 6 0 1 2 Fixed 2 Receiving Clerk 1 1 0 2 Fbced 2 Switchers 1 1 0 2 50 11 39

Fixed 3 AFO Planning Supervisor 1 0 0 1 Fixed 3 AFO Planner Coordinato r I 1 0 2 3 . 3

Fixed 4 Shipping Supervisor 1 1 0 2 Fixed 4 Shipping Lead s 3 2 0 5 Fixed 4 Shipping Cler k 1 1 0 2 Variable 4 Consolidator 39 10 0 49 Variable 4 Loader 3 2 0 5 63 11 52

Fixed 5 Inventory GA Superviso r 1 1 Fixed 5 Inventory GA Coordinator 1 1 0 2 Fixed 5 Inbound Auditors 2 1 0 3 Fixed 5 Outbound Auditors 3 1 0 4 Fixed 5 Cycle Counters 0 8 0 8 Fixed 5 Cyek Counters Lead 0 0 Fixed .5 QC Auditor(s) 5 3 0 8 26 26 0

Variable . 6 Pickers 10 3 0 1 3 Variable 6 Bulk Pickers 5 2 0 7 Variable 6 Restockers 3 1 0 '4 24 0 2 4

Fixed 6 MIS Supervisor 1' 1 Fixed B Human Resources Supervisor 1 . 1 Fixed 8 Safety Supervisor 1 1 Fixed 8 Maintenance Personne l 1 1 2 5 5

Total CU Associates 110 63 0 173 173 6111 11 5 33.5% 66.5% LeapFrog Associate s Fixed Routers 4 4 Fixed AFO 0 0 Total LeapFrog Associates 4 0 0 4 4 6

Grand Total 114 63 0 177 177 . 64 11 5 36.2% 65.0%

Peak Sufi g Sdiedule 1/1 CU Stamng eudget.Budget WortaheeUuly 1 .2004.n 07114!2004 CLI Staffing Model Off Peak Period

p Budget Total Grou Total Fixed Variabl e Class Group Positions 1st Shift 2nd Shift 3rd Shift Personnel Fixed 1 General Manager 1 1 1 2 2 Fixed I Operations Manager 1

Fixed 2 Receiving Supervisor 1 1 2 Fixed 2 Receiving Leads 0 Variable 2 Unloaders 4 2 6 Variable 2 Receiver 2 1 3 Variable 2 Fork Lift Put Away 2 1 3 Fixed 2 Receiving Clerk 1 1 2 Fixed 2 Switchers 1 1 17 5 . 1 2

Fixed 3 AFO Planning supervisor 1 0 1 Fixed 3 AFO Planner Coordinator 1 .1 2 2

Fixed a Shipping Supervisor 1 Fixed 4 Shipping Leads 0 Fixed 4 Shipping Clerk 1 1 Variable 4 Consolidator 4 2 6 Variable 4 Loader 1 1 2 10 2 8

F ixed 5 Inventory QA Supervisor 1 1 Fixed 5' Inventory QA Coordinator I . Fixed5 Inbound Auditors 1 1 Fixed 5 Outbound Auditors 1 1 Fixed . 5 Cycle Counters 0 5 5 Fixed 5 Cycle Counters Lead 1 1 Fixed 5 OC Auditor(s) 2 1 3 13 13 0

Variable 6 Pickers 2 2 4 Variable 6 Bulk Pickers 1 1 2 Variable 6 Restodcers 1 1 2 8 0 8

Fixed 8 MIS Supervisor 1 Fixed B Human Resources Supervisor 1 Fixed a Safety Supervisor 1 1 Fixed 8 Maintenance Personnel 1 1 4 4

Total CLI Associates 35 21 56 56 21i 26 50.0% 50.0% LeapFrog Associates Fixed Routers 4 4 Fixed AFO 0 Total LeapFrog Associates 4 0 4 4 6

Grand Total 39 21 60 80 34 28 56.7% 46.7 %

ON Peak Staffing Sdiedule 11 1 CU Sla" BudgetBudget Wo?$heet.tuy 1. 2004.7b 071 14/2004 COMMODITY LOGISTICS WEST, INC .

REMIT TO:

Commodity LogItics West. Ine . TIN 31- 1794287 NW 5074 PO Box 1450 A nwmpois. MN 5640545074

DETAIL OF COST PLU S

LABOR $1,188,531 .74 EQUIPMENT, SGBA $235,690.21 ESYNC $0.0 0 $1,424,221 .95

TOTAL $1,424,221 .95

$1,424,221 . 55

ORIGINAL INVOICE

Exhibit B Y, .1 _ r~A and v~/'sr t COMMODITY LOGISTICS WEST, INC .

REQT TO :

Cos modxr Logk6m west bw. TIN 31 -1794287 NW 5074 PO Box 1450 Unna.pc"a, MN 55485.5074

DETAIL OF COST PLUS

LABOR $1,188 ,531 .74 EQUIPMENT, SG&A $235,690.21 ESYNC 40.0 0 $1,424,221.95

$0.00

TOTAL $1,424,121.95

t ~q S 1,424, 221.95

FILE COPY COMMODITY LOGISTICS WEST, INC.

REMIT TO:

Commodity Low- West , hoc . TIN 31-179428 7 M 5074 PC 6mc1450 MWmpds, MN 55485;5074

DETAIL OF COST PLU S

LABOR $1,188,531 .74 EQUIPMENT, SG&A $235,690.21 ESYNC $0.00 $1,424,221 .95

0 $0.00

TOTAL $1,424,221 .95

-swans NEW= $ 1,424 221 .95 ACCOUNTS RECEIVABLE COPY 3§ . YtaBARR §

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ooe O'S000P O a loOt O . Z l~i 1 . Commod' isilcs West, Inc. Detail for November 2004 Leap Fr Cost Plus Invoice

6699HOI Date m e tlon Debit Arnt Credit Am Aul Fuel Ez e - LF 11/09/04 11/09/04 US Bank Cwd Services, Inc 11 .68 AUlO Fuel nse - LF 11/12/04 10/30/04 . 1111 . Wells One Commercial Card 42 .38 Auto Fuel Ex nse • LF 11/26/04 11113/04.11/2 Wells One Commercial Card e6 .63 Auto Fuel Ez nse • LF . 11/30/04 11/30/04 American Ex ess 50.28 Auto Fuel Ex nse - LF Total 169,97 0.0 0 Auto Rental • LF 11/09/04 11/09/04 US Banko Card Servkes Inc 4611,1 6 Auto Rental • LF 111 12/04 10/30/04 .11/12/ Wells One Commercial Card 1356.33 Auto Rental - LF 11/26/04 11/13104.11/26/ Wells One Commercial Card 604.0 9 Auto Rental • LF 11/30/04 11/30/04 American Ex ess 1 .201 .4 3 Auto Rental - LF Total 3,710.01 0.0 0 Bank Charges • LF 11/30104 MJE001 Amo rtizat io n Expense 195.7 2 Bank Charges • LF Total 195.72 0 .00 Com Mernet Exp - LF 11/01104 20280798 SBC Advanced Solutions 1,065.54 Com ntemet Exp - LF Total 1,065,64 0 100 Corp mf Fee • LF 11/30/04 47419 Commod itLogistic . Inc. 18,703.8 5 Corp M mt Fee • LF Total 18 703 .85 0 .00 W men' Ronal • LF 11/01ro4 30t3t3b4 Raymond Handling Solut ions • 10/25/04 1 280.07 E ul pmont Rental - LF 11101104 30131355 Raymond Handling Solutions - 10/25/04 1,280 .07 E ut ment Rental- LF 11101 104 30131619 Raymond Handling Solutions - 10/26/04 1 .307 .00 . Equipment Rental - LF I M1104 30132217 Raymond Handlin Solutions -10/29/04 711 .1 5 ment Rental - LF 11101/0 90132218 Hand) Solutions - 10/29/04 711 .1 5 E ui meat Rental - LF 11101/04 L01983-IN Ouanbonlx -10/26/04 1 574 .20 Equipment Rental - LF 11/03/04 ONT3023'3 Crown Equipment Corp 565 .68 Equipment Rental - LF 11103/04 ONT302324 Crown E ul ent Cor 605,69 Equipment Rental • LF 11/03104 ONT302325 Cr. E ul enl Cor 685.69 E ui , Ment Retdal • LLFF 11103/04 ONT302326 Crown Equipment Corp 665 .09 E uI ment Rental - 11!03104 ONT3 02327 Crown Equipment CorC. 568.89 Equipment Rental . 1 F 11/03/04 ONT3023 S Crown Equipment 585.69 Equipment Rental . LF 11/15104 30133601 Raymond Handl Solutions 711 .1 5 Equipment Rental • LF 11115/04 30133802 Raymond Handling Solutions 711 .15 Equipment Rental - LF 11/15/04 301 33803 Raymond Handli Solutions 711 .15 Equipment Rental - LF 11/15/04 30133804 Raymond Handli Solutions 711 .18 Equipment Rental - LF 1111`15/04130133806 Raymond Handll SdutIons 711,1 5 Equipment Rental - LF 1111&04 30133806 Raymond Handling Solutions 711 .1 5 Equipment Rental-LF 11/15/04 30133807 Raymond Handli Solutions 711 .15 E ui eM Rental • LF 11/15!04 30133508 Raymond Handling Sol utions 711 .16 E ui meM RBntal - LF 11/15/04 30133809 Raymonandd Handling Solutions 711 .15 E W maM Rental - LF 11116J04 30133611 Ra and Handli Sokrtbns 711 .1 5 E W ment Rental - LF 11/16/04 30133980 Ra and -129 Solutions 1,307.00 E W mart/ Rental - LF 11110104 30133961 Raymond Handi Solutions 1307,00 Raymond Handing Sol utions 1,280.0 7 Equipment Rental - LF Total 21,283.35 0 .00 Fuel Expense - L 11/07/04 11107/04 Muff Service 84.22 Fuel Expense • LF 11/14/04 11/14104 Multi Service 77.99 Fu61 Ex nee - LF 11/21!04 11/21/04 Multi Service 78 .07 Fuel Ex nee - LF 11128/04 11/28/04 Mu10 Service 115 .87 Fuel Expense - LF Total 357 .25 0 .00 Ins . Benefits • LF 11/01/04 11/01/04 Vision SWCe Plan 410 .22 Ins . Benefits • 11/30/04 11130/04 Vision Service Plan 360 .82 Ins. Benefits • LF Total 771 .04. 0.0 0 Janitorial Expense • LF 11103/04 14155 EaviroKleen 1,194 .24 Janitorial Ex nsa - LF 11/05/04 68581786 Wade Sanitay supply 758 .69 _ Janitorial Expense . LF 1 1/081041 66629775 Waxis Sanitay Supply 67 .68 Janitorial Expense - F 11/08/04 66837083 Waxle Sanitay Su 67.5 8 Janitorial Expense - LF 11110/04 4183 EnvlroKleen . 2,288 .00 JanBorlal Ex nee - LF 11/10104 4154 EnvlroKleen 2,620.00 Janitorial nse - LF 11110104 4166 EnvlroKleen 430.00 Janitorial Ex hsa - LF 11/12104 66695289 Waxle Sancta Supply 1,517 .49 Janitorial Expense - LF 11/16/04 66777137 Wade Sanka Su - Cred it 42.67 Janitorial E nse • LF 11/17104 86777152 Waxte Sanitay supply 42 .67 Janitorial Expense • LF Total 8.928 .115 , 110.23 Le aUProf. Ex p . • LF 11101/04 MJE007 Legal expense accrual 2188 .77 Le aYProf. Ex . • LF 11101/04 IN19a5 Amerlchek - 10/31/04 138.0 0 Le aVProf. Ex p . - LF 11/15/04 776424 Porter Wright Morris & Arthur 480.00 Le IIPro f. Ex p, • LF Total 616.00 2,188 .77 Mai Ex FacA' • F 11/01/04 10070 Baldy Electric • 8124104 4 300.0 0 Main[nt Ex FacAk - LFL 11/01/04 3-473 Advantage Asphalt - 10/26/04 1,200.00 Maktt Ex Facility - LF 11/09/04 54104 Catalina 88118at & Bulb Inc . 358.00. MaiM Ex Faclli - F 11112/04 06 443_510315.6 parking Lot Service 2 329.0 0 Malnt Ex Fec4 - LFL 11/15104 .430 W.W. Grainer, Inc, 25.96 Maint Ex Faclllt - LF Total 8,212.&5 0.00 Meale/Enter. Ez . - LF 11/091041 11/09/04 US Bankcor Card Serv~6s, Inc 148.4 6 Meals/Enter. E , - LF 11/12/041 10/30/04 . 11/1 Wells One Commercial Card 667.39 Meals/Enter. Ex p . -LF 1 1/28/oa 11/13/04.11/28/ Wells One Commercial Card 259.95 Meals/Enter. Ex p. - LF 11/30/04 11/30/04 American Express 226.97 Meals/Enter . Ex p, - LF Total 1,290.78 0 .00 Office Expense - LF 11/011041 0280936-30 DS Waters of America, LP - 10/19/04 740.4 4 Office Expense - LF 11/01/04 2591 Dependable Coffee & Water Serv - 9/21 348,34 Office Expense - LF 11/01/04 2592 Dependable Coffee & Water Serv - 9/21/0 114 .48 Office Expense • LF 11/011041 2612 DB able Coffee & Water Serv, - 9/27 202.93 Office Expense - LF 11/01104 3049753702 Staples. Credit Plan - 10/30/04 279.87 Office Expense - LF 11/01/04 3049753703 St les Credit Plan - 10130/04 273 .58 Office Expense • LF 11/01104 3049753704 Staples Credit Plan 348.34 Office Ex nee - LF 11/01/04 36104 Jawco Gra hfcs • 10/29/04 1,542 .65 Office Ex nse - LF 11/01104 44702 Dependable Coffee & Water Sery - 10119/ 261 .00 Off" Expense - LF 11/02/04 2738 Dependable Coffee & Water Serv 88 .45 Ofllce Ex nee • LF 11/11/04 44741 Dependable Coffee & Water Serv 183 .84 CCmmod L lsdce West Inc . Dotal for November 2004 Leap Fr Cost Plus Invoice

A lRefirence Trans Description Debit Amt - Cfodll Am Of ce Ex s0 - LF 11/15/04 11/15/04 Chadle Gray 10.46 C (600 Ex nso - LF 11,16/04 10284 Dependable Coffee 8 Water Serv 116,56 Office Ex rue • LF 11116/04 2776 De noble Coffees water Ser v 485 .37. Office Expense - IF 11124104 2007 Da ndable Coffee S Water Serv 50 .40 Offlu Ex se • lF Total 5.048.40 0.0 0 Poe a Ex nse - LF 11108104 OMF1(193545 4 Unilod Parcel Servic e 3.326.01 1 Poste a Expense - LF 11/2/04 DOOOOTTT3e474 United Parcel Service 77.42 Postage Expense - LF 11/20/04 0000r1T7T30474 United Parcel service 14 .15 Po a % nse • LF 11120104 OOOOFX1936474 United Parcel Se rv ice 48.01 58.5 5 Postage Expense - LF 11170104 7.878-46574 FedEx Post a Ex ense • LF Total 3,608.99 14 .1 5 Pa dl Grose - LF 11/07104 PE 110704 Weekt Pa dl Distribution 61832 .06 Payroll Gross - LF 11119/04 PE111404 - Weakl Pe dl Disrlbution 66 899.72 Pa dl Grose • LF 11126/04 PE112105 Week! Pa oil Distribution 50012.4 8 Pa I Gross - LF 11/30104 MJE0.1 4 Wages Pa big Accrual -Auto Reversing 181107.1 4 Pa dl Grow - LF 11130/04 MJE013 Monthly Re-aJocation of labor from CLI 19068 .36 Pa 1 Grose - LF 11/30/04 PE112804 Wee Pa I Dislnbutlon 52 553 .41 Payroll Gross • LF Total 277191 .16 0 .00 Pa dl Benefits - LF 11/07104PE110704 Weekly Payroll Distribution 1482.33 Pa Benefits • LF 11/19104 E111404 Wee kl PPayrolla Disribution 1,442.0 4 Payroll Benefits - LF 11/26/04 PE112105 Weekly Payroll Dlatrlbullon 1,563.9 9 Pa dl BeneflU • LF 11130104 MJEO10 ManthI Ex nse Dlabibution - UniCare M 9,021 .14 Pa dl Benofltc - LF 11/30!04 MJE01 I ontM Expense Distribution - AUL Lde 747.7 6 Payroll Benefta - LF 1 V30104 PE112804 Weekly Payroll Distribution 1,487 .73 Pa roll Benefits • L Total 19,768.90 5,976 .69 Payroll Taxes - LF 11/07104 PEI 10704 Weekly Pa "A Distribution 5,200 .66 Pa Taxes - L F 11/19104 PE11140 4 Weekly Payroll Dlsrlbution 5 .419.51 Pa dl Taxes • LF 11!28/04 PE112105 Weak! Payroll Distribution 4,832 .07 Pa 1 Taxes - L F 11/30/04 MJE004 ea Payable Accrual -Auto Reversi 1,514 .00 Payroll Taxes • LF 11/30/04 P5112804 Weekly Payroll Dis trI ution 4,305 .05 Payroll Taxes - LF Total 21,271 .32 0.00 Pa I WC - LF 11130/04 MJE008 Monthly Ex nse Dist. • Workers Comp 29151 .3 Pa roll WC - LF Total 29,181 .39 0.00 PB Admin. - LF 11!05104 426849 ADP, Inc . 47.93 Pa t Adm n. • LF 11172104 437294 ADP Inc . 51 .18 Pa Admin. - LF 11/19/04 447573 ADP Ina 47.19 Payroll Admin. - LF 11/20/04 457799 ADP Inc. 140.5 6 Pa Atlmfn. - LF 1112810 468817 ADP Inc . 46.0 9 Pa roll Admin. • LF Total 33293 0 .00 Pa oN 401K • LF 11107104 FE110704 Weekly Payroll Distribution 243.0 6 Pa 401K - LF 1111 PE111404 Weekly Payroll Dlaribullo n 352.1 8 Payroll 401K - LF 1112 E112105 Weekly Payroll Distribution 200.85 Payroll 401K • L F 11/30Ab4 M IE004 Wages Payable Accrual -Auto Reversing 63.1 4 Pa 401K - LF 11130)04 PEI 12804 Week) Payroll Distribution 197 .53 Pa roI40 LF Total 1,068 .46 0.0 0 Recruid Expense - LF 11/12104 12133749 Robert Hal Finance & Accound 342 .38 Rearuili Ex nse - LF Total 342.38 0.00 Re E I nt - LF 11/01/04 83077777 Tennant Sales & Servie, Co. - 10129104 2.812.50 Ra E I ant • LF 1/11/0419300682 Tennant Sales & Servle Co. 1 .181 .2 7 Ra ilrs E ut ent - LF Total 3.993.77 0.00 Safety Expense • LF i 1/01/04 134560.00 Emedco -10129/04 142.4 8 Safe Expense - LF 11101104136M Jawco Graphics 120.6 8 Safe Expense - LF 11/01/041439-373132.0 W.W. Grainger, Inc . - 10/29/04 820 Safety Expense - LF 11/01/041439-373133-5 W.W. Grainer, Inc. -10/29/04 105 .27 Safe nee - ULF 11/01/04 439.488630.6 W.W. Grainer, Inc . 58 .70 Safe Ex ae • 11!03/04 43a-BSa890 .9 W.W. Gra er Inc . 64 .65 safety Expense -LF 11/08/04 439.921069.1 W .W. Gra er Inc. 158 .2 1 Safe expense - LF 11/10/04 438.218341-3 W .W. Grainer, Inc. 206 .35 Safety Expense - LF 11/15/04 439-510313 .0 W .W . Grainger, Inc. 15 .47 Safe Expense - LF 11/18/04 439-609275 .3 W .W . Grainger, Inc. 119 .67 Safety Expense - LF Total 999.66 0.00 Pre Dru Teat • LF 11/01/04 0604265-CA US HealthWorks Medical Group, - 1012910 30.0 0 Pre Drug Test • LF 11/16!04 0584988 CA CR US HealthWorks Medical Group, 60.00 Pre O rug Tast • LF 11119ID4 081559' US HealthWorks Medical Group, 60.0 0 Pre Dru Test • LF Tota l 90. 60 .00 2CU Serv Ex - LF 11101104 206190 Shield Security, Inc . • 09/18/04 17.357.78 Security Serv Ex • LF 11/01/04 20629 1 Shield Securd Inc . -10/07/04 18 851 .1 7 Security Se rv Exp - LF 11/17/04 206590 Shield Sewnt Inc . 31 866.84 Security Se rv Ex - LF 11130/04 MJE007 A/P Accrual - auto reversi 31 .869 .00 Security Se rv Ex - LF Total 98 001 .79 0 .0 0 Su Ex , - LF 11101/04 439.219069-2 W.W . Grainer Inc . - 10/26/04 69 .6 Su s Ex . - LF 11/01104 .439-219070-0 W .W . Grainger, Inc . - 10/28/04 69 .82 Supplies Ex P . - LF 11/01/04 439 .219071-8 W .W . Grainger, Inc . - 10/28/04 17.9 1 Su Ilse Ex,, . - LF 11101/04 439 .373133. 8 W .W, Grainger, Inc . - 10/29104 203.26 Su les . - LF 11/01/04 439.485529.7 W .W: Grainger, Inc. 25.6 6 Supplies Ex p . - LF 11101/04 439.488530-5 W .W. Grainger, Inc. 520.24 Supplies Ex p . - LF 11/03/04 439.658890-9 W.W. Gra er Inc . 64.8 5 Su Iles Ex . • LF 11/04/04 0035809-IN Sabred International Pack in 2.419.3 7 Su iss Ex . - LF 17/01/04 0036810•IN Sabred International Packaging 2;388.1 9 Supplies Ex p . - IF 11/04/04 439.710948.1 W .W. Grainer, Inc. 8,495.01 Su Iles Ex . • LF 11/06/04 9104 Mrs Point Extinguisher Co 594.03 Su lea lxp-. • LF 11/08!04 10/28.11/3 Rocco Montreul •u S e s 196.29 Supplies Ex p. - LF 11/06/04 10/28-11/3 Rocco Montreul • Su a s 148,4 8 Supplies Exp . - LF 11106/04 10128-11/3 Rocco Montreuil - Supplies 18.86 Supplies Ex p . - LF 11106104 10/28.11/3 Rocco Montreul - Supplies 177.4 0 Supplies Ex p, • LF 11/08/04 0035822-IN Sabred International Packs In 612.02 Su lies Ex p . - LF 11/09/04 11/09104 I naclo Vazquez - Supplies 150 .83 Commoditf L isics West, Inc . DetaO for November 2004 Lea Fr Cost P lus Invoic e

...... Date Reference Trans Description Debit Am t Credit Amt LF 11/10/04 439-216346 .5 W .W. Graff er Inc. 47.09 F 11/12/04 10130/04 . 11/12/ Walla One Commercial Card 3,764.65 r1le . LF 11/15/04 439-510314-8 W,W, Grainer Inc. 104.98 • LF 11/1510 4 439.510318 .3 W.W. Grainger, Inc. 35.87 Su !es Ex p . - L F 11/18/0 4 003585aIN Sabred International Packaging 323.19 Su les x p . • LF 1111WU 0035850-IN Sabred Internat io nal Packaging - Cred it 188 .6 0 Su Ilea Ex p . - LF 1U18104 39 .894958.4 W.W, Grainger, Inc. 213 .68 u ies F,r . - LF 11/17/D4 111114-11/15 Stephen WUllame • Supplies 210.46 Su pplies Exp . - LF 11117/04 111/14-11/15 Ste n WYllams - Su Ies 15 .34 Supplies Ex . - LF 11117//14 11/14-11/15 Ste en Williams - Su Ales 51 .29 Supplies Ex p, - LF 11117/04 439.849910 .7 W.W. Gra er, Inc. 56 .66 SEX P . LF~ 11/18/04 439-762622-9 W,W. Gral er Inc . • Credit 213 .66 Supplies Ex p. LF 11/16/04 439.781;435 .9 W.W. Grainger, Inc. 147 .62 LF 11119/04 4937 EnvuoKlean 1415 .5t1 • LF Total 22 746 .58 1850 lea Ex . - LF 11/01/04 MJE007 ANP Accrual - auto revers ; JE 0,000 .00 les Ex . • LF 11/01/04 108263 H m Software LLC -10/2 1/04 5 988,98 les Ex , • LF 11102!04 849498 601 .25 ies Ex . • LF 11/03104 849638 intermec Technol ies 5 351 .0 8 ies Ex . - LF 11/08/04 0035823-IN Sabred International Packe ing 18,209.7 5 Supplies Ex p, • LF 11/09104 106450 H E 3 773.02 Su es EX P, - LF Total 33,924.06 6,000 .00 Tale hone Ex p, - LF 11/18/04 11/18104 SBC 356-9143 T 505.1 1 Tale hone Ex p. - LF 11120104 11120/04 Sprint 921590002 918.79 Telephone Ex . • LF Total 1,523.87 0100 Telephone - Cell - LF 11/04104 11/04/04 Nextsl Communications 2,63D.1 - - Telephone - Cell • LF Total 2,630 .10 0.00 Tem Labor • LF 11/01/04 MJE007 Tem Labor accrual 40,000.00 Tom labor - LF 1901/04 MJE007 Temp Labor accrual 140 000.0 0 Temporary Labor -.F 11101/04 11501080 Volt- 10/31/04 60,681 .70 Temporary Labor - LF 11/01/04 11501081 Volt • 10/31/04 1,250 .2 1 Tom Labor - LF 17/01/04 11501085 Volt - 10/31/04 513 .45 Tom a Labor - LF 11/01104 11525613 Volt - 10/31/04 252 .06 Tom ary Labor - LF 11/01104 11626615 Volt - 10/31/04 277 .20 Tern Labor - LF 11/01/04 11526616 Volt-10/31/04 68,158 .02 . Temporary Labor - LF 11/01104 11525817 Volt - 10/31/04 69 .30 jeMpM Labor - LF 11/01/04 11626018 Volt . 10/31/04 240.80 Temporary Labor - LF 11/01/04 11525619 Vdt - 10/31/04 W12,071 .40 1 Tom a bor - 11101/04 11626620 Volt - 10/31/04 11/01/04 11625719 Volt - 10/31/04 Tam labor - LF 11101104 1280063 Remedy - 10103 104 Tem Labor - LF 11/01/04 20882 Helpma Stafli Service - 10/06/04 Temporary Labor - LF 11/01104 21009 Helpmates Staffing Service - 10/13/04 ToTem. labor • LF 11/01104 21065 Helpmates Staffing Service - 10/16/04 Labor • LF 11/01/04 2087A Temporary Servlcas Inc • 10113/0 4 Tam a Labor-LF 11/01/04 2 Tem Services Inc Tom Labor - LF 1110i/04 12M Te Smvka Inc - 10/13104 157.50 Temporary Labor - LF 11/01/04 2736 Temporary Services. Inc -10/22104 157,5 0 Tem ore labor - LF 11/01104 2747 Temporary Services Inc - 10/22104 162.4 2 Tom a Labor - LF 11ro1104 2748 Temporary Services, Inc -10/22/04 180 .63 Tem Labor - LF 11/01/04 729414 Helpmates Staffing Se rvice - 10!17/04 2,026-53 Tem Labor- LF 11/01/04 729795 H males 53 Service- 10/24/0 4 1252, 4 ToTam. Labor - LF 11/01/04 780341 Hel males Stalls Service • 10/31/04 13 526.32 Labor - LF 11/02/04 21295 Hel males Staff Service 6,053 .86 Tag a labor • LF 11/02104 21317 Helpmates Ste Service 516 .40 Tom Labor- LF - 11/02104 21318 Helpmates Stall Se rv Moe 5,189,42 Tem Labor-LF 14/03/04 2784 Temporary Services, Inc 100.80 Teri1 a Labor • IF 11103/041 2793 Temporary Services Inc 151 .2D Tem Labor • LF 11!05/04 21340 Helpmates Staff Se rv ice 9,409 .37 Temporary Labor - LF _ 11/05/04 21341 Helpmates Staffing Serv ice 8,595.1 1 Tem a Labor • LF 11/06/04 21342 Hel mates Staffing Serv ice 745.5 2 Tem a Labor- LF 11/05104 21343 Helpmates Staffing Se rvice 4 .068.9 8 Temparv Labor - LF 11/05/04 2797 Temporary Services, Inc 41,602.30 Temporary Labor -LF 11/08/04 213se Het mates-Sta61n Servic e 3678.4 1 Tam Labor - LF _ 11/07/04 11540573 Volt 61,818.60 Tern are Labor 71F 11107104 11 640575 Volt 153.4 1 Temporary Labor- LF 11/07/04 11540576 Volt 214.20 Temporary Labor - LF 111/07/04 . 11640579 Volt 52900.67 Temporary Labor - LF 11/07/041 11540581 _ _ Volt 11592.8 2 Temporary Labor•tF 11/07/041 11540652 Volt 675.37 Temporary Labor - LF 11/07/04 11541029 Von 1258.1 8 Temporary LF 11/07/04 11581834 Volt 773.1 8 Tern raIt •, l .F 11/07/04 11661836 Vo lt 394.8 0 Tem a Labor • LF ' 11/07/04 11561837 Volt 170.1 0 Temporary Later - LF 11/07/04 11581838 Volt 33 .09 Tam ra Labor • LF 11/07/04 730600 Helpmates Staffing Service 315 .32 Tem Labor LF 11/07/04 730733 Hel mates Ste Service 11,622.78 Tam ra Labor - LF 11/09/04 21439 Hal males Stallin Serv ice _ 5,6 3 1 T9 Tempormy Labor - LF 11/10/04 21469 Hol mates Staffing Service 515 .80 Temporary Labor . LF 11/10/04 21488 Helpmates Stalling Service 413 .44 Tom a Labor - LF 11/10/04 2801 Temporary Services Inc 40 850 .98 Tom arYLabor-LF 11/10/04 2814 Tem a Servkas,Inc 128 .96 Tem Labor- LF 11/10/04 2815 Temporary Services . Inc 511 .70 Temporary Labor- LF 11/10/04 2816 Temporary Services, Inc 1,174 .96 em ra Labor - LF 11/10/04 2820 Temporary Services, Inc 50 .40 Temporary Labo r • LF 11/12/04 21493 Het mates Staffing Service 5,453 .60 Temporary Labor - LF 1 1/14/04 11578405 Volt 28 .35 Commodity isilcs West, Inc. Deta il for November 2004 Leap F r Cost Plus Invoice

Account o D Reference ran . Description Debit Arnt Credit Amt Tem a . Labor - LF 11/14/0411802857 Volt 64,630,1 2 Tom ore Labor - LF 11114/04 11802868 Volt- Credit 14 .7 7 Tem Labor-LF 11114/04 11602880 Vol t 434.70 Temporary Labor • LF 1 1114104 11802802 Volt 49 809.9 9 Temporary Labor- tt/14/04111I02863 Volt 270.90 1 a LabOr•IF 11/14/04 11602864 Volt 840.73 Tem a Labor - LF 11114/04 11802885 Volt 650.48 Tem Labor - LF 11114104 11002868 Volt 13 390.58 Tem Labor - L F 11/14104 1160286 9 Volt 144.90 Tam a Labor - L F 11114104 1160205 3 Volt 831 .65 Tem Lahor=LF 11/14/04 73109 9 Helpmate. Stalnn Service 11823 .29 Temporary Labor - LF 11/15/04 21518 Helpmates fling Service 3 .308,99 Temporary Labor -LF 11/1510421529 helpmate, Staffi service 7558 .8 7 Temporary Labor - LF 11/15/04 21561 Helpmates Slaf6 Service 832 .60 Temporary Labor - LF 11/15104 21562 Helpmate. Staffin Service 862.83 Temporary Labor - LF 111111104121576 Helpmate. Stalliin Service 5634,22 Temporary Labor- LF 11/1 /04 284 4 Temporary Services, Inc 158.64 Temporary Labor - LF 11/19/0412 1001 Hal mates StaHi Service 733.2 7 Temporary Labor • LF 11/19/04 21619 He mates Stefan Se rvice 7 428.9 1 TempoTry Labor - LF 11/19/04 21620 Hel mates Staffing Se rvice 4,894.7 6 Temporary Labor - LF 11/19/04 21648 Helpmates Staffing Service 3,935.37 Temporary Labor - LF 11/19/04 2839 Temporary Services Inc 740.25 Temporary Labor - LF 11/19/04 2839A Temporary Services Inc 39 189.03 Temporaq Labor - LF 11/19/04 2839A Temporary Se rvice,, Inc 10.4 6 Tem a Labor - LF 11/21/04 11614947 Volt 60906 .85 Tam Labor- CF 11/21/04 11614947 Volt 75.60 Temporary Later- LF 11/21/04 1161494 8 Volt 2,324 .5 Tempoilary Labor - LF 11/21/04 11614961 Volt 39 .838 .02 Temporary labor - LF 11/2110411614962 Volt 100,80 Temporary Labor • LF 11/21/04 11614953 Volt 316 .89 Temporary Labor - LF 11/21/04 11614955 Volt 9,354 .7 8 Tem Labor - LF 11/21/04 11615304 volt 626.2 2 Tem Labor-LP 11/21/0411640327 Volt 65.9 2 Tem Labor - LF 11/21/04 11640328 Volt 100.8 0 Tem a Labor - LF 11/21/04 731488 Helpmates Staffing Se rvice 6,273. 6 Tem labor • LF 11/22/04 21684 Helpmates Staffing Se rvice 4,780.71 Temporary Labor - LF 1 1/22/0421686 Helpmates Staffi Service 744.118 Temporary Labor- IF 11/22/04 21886 ", mates StafB Se rv ice 732.7 1 Temporary Labor • LF 11/23104121701 el males StaHin Service 631 .34 - LF 11/23/04 2863 Temporary Se rvices, Inc 28,748.93 TonTam Laboror • IF 11/26/04 21726 Helpmates Staffing Se rv ice 2 390 .58 Tempnry Labor - L F 11/211/04 21734 Helpmates Station Service 155 .04 Temporary Labor - L F 11/28/04 21737 Helpmates 5taflln Service 3,703.211 Temporary Labor - LF 1 1/28/04 731890 Helpmates Staffing Servic e 1 .441 .68 Temporary Labor- IF 11/28/04 731814 Helpmates Staffing Service 4,854 .96 Temporary Labor - IF 11/30/04 MJE007 Tamp Labor accrual 28,939.6 3 56113 Temporary Labor - LF 11/30/04 MJE007 Tem Labor accrual rvic .0 3 Temporary, Labor - LF 11/30/04 21762 Hel mates Staff Se e 594.8 5 Temporary Labor - LF 11/30104,21763 Helpmates Stain Service 3,710 .23 Temporary Labor • LF 11/30/04 21788 H.21gates SlaHin Service - 12/02/04 5,969 .70 Temporary Labor - LF 11/30/04 21822 ate. Sratll Service - 12/02/04 961 .51 Temporary Labor • LF 11/30/04 2877 Tem Services, Inc -12101/04 13 547 .48 Temporary Labor - LF 11/30/04 2877 TomRqEk Services Inc -12101/04 100.80 Tem Labor - LF 11/30/04 2892 Temporary Service s, Inc -1213/04 119 .70 Tem ra Labor - LF Total 934 722 .34 180 186.80 Temporary Driver - LF 11/07104 7564 TransGlabal Solutions, LLC _ 1 .110 .05 TempoNry Driver - IF 11114/04 7608 TransGlobal Solutions, LLC 1,279 .20 Temporary Driver - LF 11/21/04,766 1 TransGlobal Solutions . LLC 1 .011 .68 Temporary Driver - LF 11/23/04 0000017098 DC Complete Personnel Svcs In 1468.2 Tem n Driver • LF Total 4,869.16 0,00 Tolls 8 Parki - LF 11/05104 11/05/04 Fred Fraley - Fraley, Fred 108.00 Tolls & Parkin • LP Total 108.00 0.0 0 Travel Air Fare - LF 11/09/04 11/09/04 US Ban-koorp Card Services, Inc 835.1 7 Travel Air Fare - LF 11/12/04 10/30/04 -11/12/ Wells One Commercial Card 1,908.0 0 Travel Air Fare • LF 11/30104 11/30/04 American Ex esa 241 .71 Travel Air Fare - LF Total 2,784.85 - 0.00 Travel Lodging LF 11/09/04 11/09/04 US Bankcorp Card Se rvices, Inc 921 .64 Travel Lodging - LF 11/12104 10(30/04 . 11/12/ Wells One Commercial Card 1,813 .1 6 Travel Lodging - LF 11/28/04 1 11 13/04 .11/26/ Wells One Commercial Card 1240,60 Travel Lodging - LF 11130104 11/30/04 American Express 1490 .79 Travel Lodging - L.F Total 6465 .98 0 .00 Truck Supplies + LF 11/01/04 87452 P & S Truck Center - 10/14/04 362,33 Truck Supplies - LF 11/0 004 87893 P & S Truck Center - 10/21/04 18.94 Truck Supplies - LF Total 381 .27 0 .00 Waste Removal- LF 11/01104 811847 Trlco Disposal, Inc. 225650 .10/05/04 440.28 Waste Removal- LF 11/01/04 811848 Trico Dis sal Inc. 225560 -10/12/04 446.2 8 Waste Removal- LF 11/01104 811849 Trico Disposal, Inc. 225550 - 10/16 104 446.2 8 Waste Removal- LF 11101/04 811851 Trlco Disposal, Inc . 225550 . 10119/04 446.2 8 Waste Removal- LF 11/01/04 811852 Tr ico Disposal, Inc . 225550 . 10/23/04 448.28 Waste Removal- LF 11101/04,811853 Trko pis oral, Inc . 225550 . 10/28/04 448.28 Waste Removal- LF 11/01/04 811854 Trico Dis sal, Inc . 225550 - 10/30/04 446.28 WaSte Removal- LF To t I 3,123.96 - 0 .00 Grand Total 1,538,330.61 194 725 .20

1,538,330 .81 194 725 .20

1,343,606 .61 f

COMMODITY LOGISTICS WEST, INC. 1500 Commodity Blvd. Lockbourne, OH 43137

January 12, 2005

Via Facsimile (510-420-5001) & Federal Express

Thomas J. Kalinske Chief Executive Officer LeapFrog Enterprises, Inc. 640.1 Hollis Street, Suite 150 Emeryville, CA 94608

Director of Fontana Center LeapFrog Enterprises, Inc. 13479 Valley Blvd. Fontana, California 92335-521 2

Re: Notice of Default and Suspension

Dear Tom:

Pursuant to Section 3 of the Warehouse Management Agreerb~ent (the "Agreement") dated July 1, 2004 between LeapFrog Enterprises, Inc . ("LeapFrog") and Commodity Logistics West, Inc. ("CLWI"), LeapFrog is obligated to pay CLWI the full amount of each invoice from CLWI within 30 days of its issue .

LeapFrog has failed to timely pay CLWI's November 2004 invoice in the amount of $1,424,211 .95, which was due January 10, 2005 . On the evening of January 10, 2005, LeapFrog's Senior Director of Finance, Global Supply Chain, Peter David, told CLWI's CFO, Norm Murphy, that LeapFrog would not pay this invoice . Mr. David told Mr . Murphy that LeapFrog would not pay this invoice until senior management from LeapFrog and CLWI reached some agreement as to allocating losses that LeapFrog contends it has suffered in connection with its Fontana Distribution Facility . To date. LeapFrog has failed to provide any documentation or accounting demonstrating that any of those losses are losses that CLWI is contractually obliged to bear .

Accordingly, this letter constitutes CLWI's notice of default to LeapFrog for non- payment. CLWI demands payment in full of the November 2004 invoice immediately upon LeapFrog's receipt of this notice of default, and the full payment of all subsequent invoices within thirty (30) days of their issuance by CLWI .

By unequivocally refusing to perform its obligations under the Agreement, LeapFtog has effectively repudiated the Agreement . As LeapFrog has refused to perform its obligations under

Exhibit C the Agreement, CLWI has no choice but to suspend its services under the Agreement effective today, 3:00 p.m. P.S.T., Wednesday, January 12, 2005 .

Finally, CLWI is increasingly concerned that LeapFrog's continuing failure to perform under the Agreement amounts to a constructive termination of the Agreement . LeapFrog was late in paying its September 2004 and October 2004 invoices ; indeed, Mr. David initially told Mr. Murphy in late November 2004 that LeapFrog would "absolutely" not pay those invoices . By failing to pay CLWI's invoices now that the holiday season is over and physical inventory requested by LeapFrog has been completed, LeapFrog's latest refusal to pay could be reasonably construed as a material breach of the Agreement . Since CLWI has fully and faithfully performed under the Agreement, LeapFrog's refusal to pay would further operate as a termination without cause, in which event, LeapFrog would be required to pay, among other things, liquidated damages in the amount of $500,000.00'to CLWI.

If LeapFrog intends to fully and timely perform its obligations under the Agreement, CLWI demands immediate and adequate assurance from LeapFrog to that effect in writing. LeapFrog 's refusal to pay the outstanding invoice is causing and will continue to cause extreme undue hardship to CLWI, as CLWI cannot continue to incur the expense of performance under the Agreement without LeapFrog 's payment for those services. .M,,&

cc: LeapFrog Enterprises, Inc. 6401 Hollis Street, Suite 150 Emeryville, CA 94608 Attn: Chief Counsel EXHIBIT D LEAPFROG: 10-Q & 10-K STATEMENTS Internal Controls Over Financial Reportin g

8/11/03 11/10/03 3/10/04 2Q03 10-Q 3Q03 10-Q FY03 10-K Item 4 . Controls and Procedures . Item 4. Controls and Procedures . Item 9A . Controls and Procedures.

Evaluation of LeapFrog' s Disclosure Controls and Evaluation of LeapFrog's Disclosure Controls and Evaluation of LeapFrog's Disclosure Controls and Internal Controls Internal Controls Internal Controls

As of the end of the period covered by this quarterly report As of the end of the period covered by this quarterly report As of the end of the period covered by this annual report on on Form 10-Q, LeapFrog evaluated the effectiveness of the on Form 10-Q, LeapFrog evaluated the effectiveness of the Form 10-K, we evaluated the effectiveness of the design design and operation of its "disclosure controls an d design and operation of its "disclosure controls and and operation of our "disclosure controls and procedures," procedures," or "Disclosure Controls ." This evaluation, or procedures," or "Disclosure Controls ." This evaluation, or or "Disclosure Controls." This evaluation, or "Controls "Controls Evaluation," was performed under the "Controls Evaluation," was performed under the Evaluation," was performed under the supervision and with supervision and with the participation of management, supervision and with the participation of management, the participation of management, including our Chief including our Chief Executive Officer and Chief Financial including our Chief Executive Officer and Chief Financial Executive Officer and Chief Financial Officer . Officer. Officer. CEO and CFO Certification s CEO and CFO Certifications CEO and CFO Certification s Attached as exhibits to this annual report, there are Attached as exhibits to this quarterly report, there are Attached as exhibits to this quarterly report, there are "Certifications" of our CEO and the CFO required by Rule "Certifications" of the CEO and the CFO required by Rule "Certifications" of the CEO and the CFO required by Rule 13a-14(a) of the Securities Exchange Act of 1934, or the 13a-14(a) of the Securities Exchange Act of 1934, or the 13a- 14(a) of the Securities Exchange Act of 1934, or the Rule 13a-14(a) Certifications. This Controls and Procedures Rule 13a-14(a) Certifications . This Controls and Procedures Rule 13a-14(a) Certifications . This Controls and Procedures section of the annual report includes the information section of the quarterly report includes the information section of the quarterly report includes the information concerning the Controls Evaluation referred to in the Rule concerning the Controls Evaluation referred to in the Rule concerning the Controls Evaluation referred to in the Rule 13a-14(a) Certifications and it should be read in conjunction 13a-14(a) Certifications and it should be read in 13a-14(a) Certifications and it should be read in conjunction with the Rule 13a- 14(a) Certifications for a more complete conjunction with the Rule 13a-14(a) Certifications for a with the Rule 13a-14(a) Certifications for a more complete understanding of the topics presented. more complete understanding of the topics presented . understanding of the topics presented . Disclosure Controls and Internal Control Over Disclosure Controls and Internal Control Over Disclosure Controls and Internal Control Over Financial Reportin g Financial Reporting Financial Reporting Disclosure Controls are procedures designed to ensure that Disclosure Controls are procedures designed to ensure that Disclosure Controls are procedures designed to ensure that information required to be disclosed in our reports filed 8/11/03 11/10/03 3/10/04 FY03 10-K information required to be disclosed in our reports filed information required to be disclosed in our reports filed under the Exchange Act, such as this annual report, is under the Exchange Act, such as this quarterly report, is under the Exchange Act, such as this quarterly report, is recorded, processed, summarized and reported within the recorded, processed, summarized and reported within the recorded, processed, summarized and reported within the time periods specified in the U .S. Securities and Exchange time periods specified in the U .S. Securities and Exchange time periods specified in the U .S. Securities and Exchange Commission's rules and forms. Disclosure Controls are also Commission's rules and forms . Disclosure Controls are Commission's rules and forms. Disclosure Controls are also designed to ensure that such information is accumulated and also designed to ensure that such information i s designed to ensure that such information is accumulated and communicated to our management, including the CEO and accumulated and communicated to our management, communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding including the CEO and CFO, as appropriate to allow timely CFO, as appropriate to allow timely decisions regarding required disclosure . Internal control over financial reporting decisions regarding required disclosure . Internal control required disclosure. Internal control over financial reporting is a process designed by, or under the supervision of, an over financial reporting is a process designed by, or under is a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, the supervision of, the issuer's principal executive and issuer's principal executive and principal financial officers, and effected by the issuer's board of directors, management principal financial officers, and effected by the issuer's and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance board of directors, management and other personnel, to and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the provide reasonable assurance regarding the reliability of regarding the reliability of financial reporting and the preparation of financial statements for external purposes in financial reporting and the preparation of financial preparation of financial statements for external purposes in accordance with generally accepted accounting principles statements for external purposes in accordance with accordance with generally accepted accounting principles and includes those policies and procedures that: generally accepted accounting principles and includes those and includes those policies and procedures that : policies and procedures that: Pertain to the maintenance of records that in Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer ; transactions and dispositions of the assets of the issuer; issuer ; Provide reasonable assurance that transactions are Provide reasonable assurance that transactions are recorded as necessary to permit preparation of Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and accordance with authorizations of management and directors of the issuer ; an d directors of the issuer ; and Provide reasonable assurance regarding prevention or Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer's assets that could have a timely detection of unauthorized acquisition, use or disposition of the issuer's assets that could have a material effect on the financial statements . disposition of the issuer's assets that could have a material effect on the financial statements . 8/11/03 11/10/03 3/10/04 2Q03 10-Q 3Q03 10-Q FY03 10- K material effect on the financial statements . Limitations on the Effectiveness of Controls Limitations on the Effectiveness of Controls

Limitations on the Effectiveness of Controls Our management, including the CEO and CFO, does not Our management, including our CEO and CFO, does not expect that our Disclosure Controls or our internal control expect that our Disclosure Controls or our internal control Our management, including the CEO and CFO, does not over financial reporting will prevent all error and all fraud . over financial reporting will prevent all error and all fraud . expect that our Disclosure Controls or our internal control A control system, no matter how well designed and A control system, no matter how well designed and over financial reporting will prevent all error and all fraud . operated, can provide only reasonable, not absolute, operated, can provide only reasonable, not absolute, A control system, no matter how well designed and assurance that the control system's objectives will be met . assurance that the control system's objectives will be met . operated, can provide only reasonable, not absolute, Further, the design of a control system must reflect the fact Further, the design of a control system must reflect the fact assurance that the control system's objectives will be met . that there are resource constraints, and the benefits of that there are resource constraints, and the benefits of Further, the design of a control system must reflect the fact controls must be considered relative to their costs . Because controls must be considered relative to their costs . Because that there are resource constraints, and the benefits of of the inherent limitations in all control systems, no of the inherent limitations in all control systems, no controls must be considered relative to their costs . Because evaluation of controls can provide absolute assurance that evaluation of controls can provide absolute assurance that of the inherent limitations in all control systems, no all control issues and instances of fraud, if any, within all control issues and instances of fraud, if any, within our evaluation of controls can provide absolute assurance that LeapFrog have been detected . These inherent limitations company have been detected . These inherent limitations all control issues and instances of fraud, if any, within include the realities that judgments in decision-making can include the realities that judgments in decision-making can LeapFrog have been detected. These inherent limitations be faulty, and that breakdowns can occur because of simple be faulty, and that breakdowns can occur because of simple include the realities that judgments in decision-making can error or mistake. Controls can also be circumvented by the error or mistake . Controls can also be circumvented by the be faulty, and that breakdowns can occur because of simple individual acts of some persons, by collusion of two or individual acts of some persons, by collusion of two or error or mistake . Controls can also be circumvented by the more people, or by management override of the controls . more people, or by management override of the controls . individual acts of some persons, by collusion of two or The design of any system of controls is based in part upon The design of any system of controls is based in part upon more people, or by management override of the controls . certain assumptions about the likelihood of future events, certain assumptions about the likelihood of future events, The design of any system of controls is based in part upon and there can be no assurance that any design will succeed and there can be no assurance that any design will succeed certain assumptions about the likelihood of future events, in achieving its stated goals under all potential future in achieving its stated goals under all potential future and there can be no assurance that any design will succeed conditions. Over time, controls may become inadequate conditions . Over time, controls may become inadequate in achieving its stated goals under all potential future because of changes in conditions or deterioration in the because of changes in conditions or deterioration in the . conditions. Over time, controls may become inadequate degree of compliance with its policies or procedures . degree of compliance with its policies or procedures because of changes in conditions or deterioration in the Because of the inherent limitations in a cost-effective Because of the inherent limitations in a cost-effective degree of compliance with its policies or procedures. control system, misstatements due to error or fraud may control system, misstatements due to error or fraud may Because of the inherent limitations in a cost-effective occur and not be detected . occur and not be detected. control system, misstatements due to error or fraud may Conclusion s occur and not be detected . Conclusion s

Conclusions Based upon the Controls Evaluation, our CEO and CFO Based upon the Controls Evaluation, our CEO and CFO have concluded that, subject to the limitations noted above, have concluded that, subject to the limitations noted above, Based upon the Controls Evaluation, our CEO and CFO 8/11/0 3 11/10/0 3 3/10/04 2Q03 10-Q 3Q03 10-Q FY03 10-K have concluded that, subject to the limitations noted above, our Disclosure Controls are effective to ensure that material our Disclosure Controls are effective to ensure that materia l our Disclosure Controls are effective to ensure that material information relating to LeapFrog is made known to information relating to our business is made known to information relating to LeapFrog is made known to management, including the CEO and CFO, particularly management, including the CEO and CFO, particularly management, including the CEO and CFO, particularly during the period when our periodic reports are being during the period when our periodic reports are being during the period when our periodic reports are being prepared . prepared . prepared . There have been no changes in our internal control over There have been no changes in our internal control ove r There have been no changes in our internal control over financial reporting during the quarter ended September 30, financial reporting during the quarter ended December 31 , financial reporting during the quarter ended June 30, 2003 2003 that have materially affected, or are reasonably likely 2003 that have materially affected, or are reasonably likely that have materially affected, or are reasonably likely to to materially affect, our internal control over financial to materially affect, our internal control over financia l materially affect, our internal control over financial reporting. reporting . reporting. 10-Q at 28-29 . 10-Q at 44-45 . 10-Q at 27-28. 5/7/04 8/6/04 3/28/0 5 1Q04 10-Q 2Q04 10-Q FY04 10-K Item 4 . Controls and Procedures. Item 4 . Controls and Procedures . LeapFrog's 2004 10-K Internal Control Disclosures .

Evaluation of LeapFrog 's Disclosure Controls and Evaluation of LeapFrog 's Disclosure Controls and Item 9A . Controls and Procedures. Internal Controls Internal Controls Attached as exhibits to this Form 10-K are certifications o f As of the end of the period covered by this quarterly report As of the end of the period covered by this quarterly LeapFrog's Chief Executive Officer and Chief Financia l on Form 10-Q, LeapFrog evaluated the effectiveness of the report on Form 10-Q, LeapFrog evaluated the Officer, which are required in accordance with Rule 13a-14 of design and operation of its "disclosure controls and effectiveness of the design and operation of its the Securities Exchange Act of 1934, as amended . Thi s procedures," or "Disclosure Controls ." This evaluation, or "disclosure controls and procedures," or "Disclosure "Controls and Procedures" section includes informatio n "Controls Evaluation," was performed under the Controls ." This evaluation, or "Controls Evaluation," concerning the controls and controls evaluation referred to in supervision and with the participation of management, was performed under the supervision and with the the certifications . including our Chief Executive Officer and Chief Financial participation of management, including our Chief Officer . Executive Officer and Chief Financial Officer . Evaluation of Disclosure Controls and Procedures

CEO and CFO Certifications CEO and CFO Certifications As of the end of the period covered by this annual report o n Form 10-K, we evaluated the effectiveness of the design an d r Attached as exhibits to this quarterly report, there are Attached as exhibits to this quarterly report, there are operation of our disclosure controls and procedures o "Certifications" of the CEO and the CFO required by Rule "Certifications" of the CEO and the CFO required by disclosure controls . This controls evaluation was performe d f 13a-14(a) of the Securities Exchange Act of 1934, or the Rule 13a-14(a) of the Securities Exchange Act of 1934, under the supervision and with the participation o Rule 13a-14(a) Certifications. This Controls and Procedures or the Rule 13a-14(a) Certifications . This Controls and management, including our Chief Executive Officer and Chie f d section of the quarterly report includes the information Procedures section of the quarterly report includes the Financial Officer . Disclosure controls are controls an concerning the Controls Evaluation referred to in the Rule information concerning the Controls Evaluation referred procedures designed to reasonably assure that informatio n e 13a-14(a) Certifications and it should be read in conjunction to in the Rule 13a-14(a) Certifications and it should be required to be disclosed in our reports filed under th with the Rule 13a-14(a) Certifications for a more complete read in conjunction with the Rule 13a-14(a) Exchange Act, such as this report, is recorded, processed, n understanding of the topics presented . Certifications for a more complete understanding of the summarized and reported within the time periods specified i topics presented. the U.S . Securities and Exchange Commission's rules an d y Disclosure Controls and Internal Control Over forms. Disclosure controls are also designed to reasonabl d Financial Reporting Disclosure Controls and Internal Control Over assure that such information is accumulated an Financial Reporting communicated to our management, including the CEO an d Disclosure Controls are procedures designed to ensure that CFO, as appropriate to allow timely decisions regarding information required to be disclosed in our reports filed Disclosure Controls are procedures designed to ensure required disclosure . under the Exchange Act, such as this quarterly report, is that information required to be disclosed in our reports f recorded, processed, summarized and reported within the filed under the Exchange Act, such as this quarterly The evaluation of our disclosure controls included a review o time periods specified in the U .S. Securities and Exchange report, is recorded, processed, summarized and reported the controls' objectives and design, our implementation of the Commission's rules and forms. Disclosure Controls are also within the time periods specified in the U .S. Securities controls and the effect of the controls on the information 5/7/04 8/6/04 3/28/0 5 1Q04 10-Q 2Q04 10-Q FY04 10- K designed to ensure that such information is accumulated and and Exchange Commission's rules and forms . Disclosure generated for use in this report . In the course of the control s communicated to our management, including the CEO and Controls are also designed to ensure that such evaluation, we reviewed identified data errors and contro l CFO, as appropriate to allow timely decisions regarding information is accumulated and communicated to our problems and sought to confirm that appropriate correctiv e required disclosure . Internal control over financial reporting management, including the CEO and CFO, as actions, including process improvements, were being is a process designed by, or under the supervision of, the appropriate to allow timely decisions regarding required undertaken. This type of evaluation is performed on a issuer's principal executive and principal financial officers, disclosure . Internal control over financial reporting is a quarterly basis so that the conclusions of management, and effected by the issuer's board of directors, management process designed by, or under the supervision of, the including the CEO and CFO, concerning the effectiveness o f and other personnel, to provide reasonable assurance issuer's principal executive and principal financial the disclosure controls can be reported in our periodic report s regarding the reliability of financial reporting and the officers, and effected by the issuer's board of directors, on Form 10-Q and Form 10-K. preparation of financial statements for external purposes in management and other personnel, to provide reasonabl e accordance with generally accepted accounting principles assurance regarding the reliability of financial reporting Based upon the controls evaluation, our CEO and CFO have and includes those policies and procedures that : and the preparation of financial statements for external concluded that, as a result of the matters discussed below with purposes in accordance with generally accepted respect to our internal control over financial reporting, our • Pertain to the maintenance of records that in accounting principles and includes those policies and disclosure controls as of December 31, 2004 were no t reasonable detail accurately and fairly reflect the procedures that: effective . transactions and dispositions of the assets of the issuer; • Pertain to the maintenance of records that in Management Report on Internal Control Over Financial reasonable detail accurately and fairly reflect the Reporting • Provide reasonable assurance that transactions are transactions and dispositions of the assets of the recorded as necessary to permit preparation of issuer; Our management is responsible for establishing an d financial statements in accordance with generally maintaining adequate internal control over financial reporting . accepted accounting principles, and that receipts and • Provide reasonable assurance that transactions are Internal control over financial reporting is a process designe d expenditures of the issuer are being made only in recorded as necessary to permit preparation of by, or under the supervision of, our principal executive an d accordance with authorizations of management and financial statements in accordance with generally principal financial officers, and effected by our board o f e directors of the issuer; and accepted accounting principles, and that receipts directors, management and other personnel, to provid and expenditures of the issuer are being made only reasonable assurance regarding the reliability of financia l • Provide reasonable assurance regarding prevention or in accordance with authorizations of management reporting and the preparation of financial statements fo r timely detection of unauthorized acquisition, use or and directors of the issuer; and external purposes in accordance with generally accepte d disposition of the issuer's assets that could have a accounting principles and includes those policies an d material effect on the financial statements . Provide reasonable assurance regarding prevention procedures that: or timely detection of unauthorized acquisition, use • Pertain to the maintenance of records that in reasonabl e Limitations on the Effectiveness of Controls or disposition of the issuer's assets that could have detail accurately and fairly reflect the transactions an d a material effect on the financial statements . dispositions of the assets of our company . Our management, including the CEO and CFO, does not • Provide reasonable assurance that transactions ar e expect that our Disclosure Controls or our internal control Limitations on the Effectiveness of Controls recorded as necessary to permit preparation of financial over financial reporting will prevent all error and all fraud . 5/7/04 8/6/04 3/28/05 FY04 10-K A control system, no matter how well designed and Our management, including the CEO and CFO, does not statements in accordance with generally accepted operated, can provide only reasonable, not absolute, expect that our Disclosure Controls or our internal accounting principles, and that our receipts and assurance that the control system's objectives will be met . control over financial reporting will prevent all error and expenditures are being made only in accordance with Further, the design of a control system must reflect the fact all fraud . A control system, no matter how well designed authorizations of our management and directors. that there are resource constraints, and the benefits of and operated, can provide only reasonable, not absolute, • Provide reasonable assurance regarding prevention or controls must be considered relative to their costs . Because assurance that the control system's objectives will be timely detection of unauthorized acquisition, use or of the inherent limitations in all control systems, no met . Further, the design of a control system must reflect disposition of our assets that could have a material effect evaluation of controls can provide absolute assurance that the fact that there are resource constraints, and the on our financial statements . all control issues and instances of fraud, if any, within benefits of controls must be considered relative to their Management assessed our internal control over financial LeapFrog have been detected. These inherent limitations costs. Because of the inherent limitations in all control reporting as of December 31, 2004, the end of our fiscal year. include the realities that judgments in decision-making can systems, no evaluation of controls can provide absolute Management based its assessment on criteria established in be faulty, and that breakdowns can occur because of simple assurance that all control issues and instances of fraud, if Internal Control-Integrated Framework issued by the error or mistake . Controls can also be circumvented by the any, within LeapFrog have been detected. These inherent Committee of Sponsoring Organizations of the Treadway individual acts of some persons, by collusion of two or limitations include the realities that judgments in Commission, or COSO . Management's assessment included more people, or by management override of the controls . decision-making can be faulty, and that breakdowns can evaluation of such elements as the design and operating The design of any system of controls is based in part upon occur because of simple error or mistake. Controls can effectiveness of key financial reporting controls, process certain assumptions about the likelihood of future events, also be circumvented by the individual acts of some documentation, accounting policies, and our overall control and there can be no assurance that any design will succeed persons, by collusion of two or more people, or by environment. in achieving its stated goals under all potential future management override of the controls. The design of any conditions . Over time, controls may become inadequate system of controls is based in part upon certain An internal control material weakness is a deficiency, or because of changes in conditions or deterioration in the assumptions about the likelihood of future events, and combination of deficiencies, that results in more than a remote degree of compliance with its policies or procedures . there can be no assurance that any design will succeed in likelihood that a material misstatement of the annual or Because of the inherent limitations in a cost-effective achieving its stated goals under all potential future interim financial statements will not be prevented or detected. control system, misstatements due to error or fraud may conditions. Over time, controls may become inadequate occur and not be detected. because of changes in conditions or deterioration in the Based on management's assessment of our internal control degree of compliance with its policies or procedures . over financial reporting as of December 31, 2004, we have Conclusion s Because of the inherent limitations in a cost-effective identified the following material weaknesses in our internal control system, misstatements due to error or fraud may control over financial reporting . Based upon the Controls Evaluation, our CEO and CFO occur and not be detected . have concluded that, subject to the limitations noted above, In the area of revenue and accounts receivable, we identified our Disclosure Controls are effective to ensure that material Conclusion s the following insufficient controls which we believe constitute information relating to LeapFrog is made known to a material weakness in the aggregate. management, including the CEO and CFO, particularly Based upon the Controls Evaluation, our CEO and CFO • Lack of segregation of duties between our accounts during the period when our periodic reports are being have concluded that, subject to the limitations noted receivable and order entry staff and possession by those prepared. above, ou r Disclosure Controls are effective to ensure persons of broad access to our revenue and accounts 5/7/04 8/6/04 3/28/05 1004 10. 2Q04 10-Q FY04 10-K that material information relating to LeapFrog is made receivable information technology systems, including There have been no changes in our internal control over known to m anagement, including the CEO and CFO, access to system areas controlling revenue recordation, financial reporting during the quarter ended March 31, 2004 particularly during the period when our periodic reports cash application, credit memo issuance, credit that have materially affected, or are reasonably likely to are being prepared. authorization, invoice pricing and collections . materially affect, our internal control over financial • Lack of effective controls over our receivables credit reporting . There have been no changes in our internal control over memo review and approval process to monitor compliance 10-Q at 26-27. financial reporting during the quarter ended June 30, with existing policies and procedures related to 2004 that have materially affected, or are reasonably authorization of credit memos to our customers . likely to materially affect, our internal control over • Lack of consistent and timely reconciliation and review financial reporting. processes related to sales discounts and allowances, 10-Q at 33-34 . shipment and invoicing, and cash receipts . • Inadequate staffing to determine that internal controls over reconciliations, review of account balances and closing procedures are performed consistently and on a timely basis. In the area of cost of goods sold and inventory, we identified the following insufficient controls which we believe constitute a material weakness in the aggregate. • Lack of segregation of duties between our inventory and purchasing staff and possession by those persons of broad access to our information technology systems, including access to system areas controlling the set-up of new vendors, the creation of purchase orders, and our inventory purchasing and receiving functions . • Inadequate preparation and review of reconciliations of physical inventory results to inventory ledgers and related cost of goods sold accruals. • Inconsistent use of standard recordkeeping systems and formats to record and report inventory transactions . • Inadequate control procedures to determine that work-in- process inventories are correctly summarized, estimated and recorded . • Insufficient communication procedures between our accounts payable and operations staff regarding returns of in ventory back to our vendors. 5/7/04 8/6/04 3/28/0 5 1Q04 10-Q 2Q04 10- FY04 10- K • Inadequate input and review controls over changes to bill s of materials and work orders . • Inadequate review of purchase price and productio n variances included in inventories and cost of sales . • Inadequate staffing to ensure that internal controls over reconciliations, review of account balances and closing procedures are performed consistently and on a timel y basis. In the area of information technology controls, we identifie d the following insufficient controls which we believe constitut e a material weakness in the aggregate . • Ineffective logical access and change management controls related to information technology systems, dat a and programs that are used to monitor, record and transfer information . These controls relate to the purchase o f materials and components used to manufacture and assemble our products, the manufacture and assembly o f our products, the distribution, invoicing and sale of ou r products and the remittance of payments by our vendors , our customers and ourselves related to these activities . • Pervasive inadequacies in enterprise resource planning, or ERP, application controls related to appropriat e assignment of functions and segregation of duties, whic h allowed employees to access system programs and data o r initiate transactions inconsistent with their assigned duties . Our ERP systems contain design deficiencies that do no t adequately segregate and control access, and lac k sufficient human oversight over the assignment of system access and authorities . • Lack of appropriate training of personnel throughout th e organization causing system users to be less effective due to insufficient understanding of the systems they manag e and depend upon . Because of the material weaknesses described in th e recedin paragraphs, our mans ement believes that, as of 5/7/0 4 8/6/04 3/28/0 5 10-Q 2Q04 10-Q FY04 10- K December 31, 2004, our internal control over financia l reporting was not effective based on the COSO criteria .

Our independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on management' s assessment of the Company's internal control over financia l reporting, which is included below.

Completed and Planned Remediation Actions to Addres s Internal Control Weaknesses

Management believes that actions that we have taken since December 31, 2004 and actions that will be taken in 2005 , along with other improvements yet to be formally identified, will address the material weaknesses in our internal contro l over financial reporting noted above. Some of these remediation actions are discussed below.

In relation to the material weakness in the area of revenue an d accounts receivable, we have taken or plan to take th e following actions in 2005 : • Manual detective controls have been put in place in advance of systems controls to confirm the population o f credit memos are appropriately authorized . • Manual detective controls are being put in place i n advance of systems controls to ensure all revenu e transactions are valid and properly supported . • Manual detective controls have been put in place to confirm that adjustments to prices reflected on invoice s that we issue to our customers that have been properl y approved . • Duties will be segregated in the accounts receivable are a between persons who have control over credit and persons who have control over billing, and systems will b e im lemented that will allow our personnel access only to 5/7/04 8/6/04 3/28/05 I Q04 10-Q 2Q04 10-Q FY04 10- K those system areas to which they require access in th e normal execution of their duties. • A layer of automated controls will be applied to existin g and future information technology systems that wil l physically limit and restrict the ability of system users to enter, change, and view data within the system, and that will track and provide a detailed history of changes to ke y elements of the data. In relation to the material weakness in the area of cost o f goods sold and inventory, we plan to take the following actions in 2005 : • Supply chain leadership will be upgraded through the addition of a senior executive with overall responsibilitie s for the function . A formal search is underway . • Accounting capabilities will be strengthened throug h improved additional staffing and training . • Corporate ERP systems will be redesigned an d implemented to confirm the proper, necessary an d appropriate levels and breadth of access and control t o functional areas of our systems . • Quarterly test counts of physical inventories will b e conducted and appropriately reviewed and documented . • Reconciliations of physical inventory results to inventory ledgers and related cost of goods sold accruals will be properly reviewed and documented . • Estimations of work-in-process inventories will be adequately supported and properly reviewed . • Variances from standards will be separately tested an d reviewed for reasonableness in relation to calculate d amounts to ensure the general ledger balances ar e reasonable based on these calculations . • A formal return-to-vendor policy will be put in place t o confirm that systems appropriately reflect returns o f inventory back to our vendors. • Bill of material maintenance processes an d work order 5/7/04 8/6/04 3/28/05 1Q04 10-Q 2Q04 10-Q FY04 10- K processes will be changed to ensure accurate relief o f inventory . • Duties will be segregated between our inventory and purchasing staff to prevent our personnel from havin g inappropriate access to system areas controlling the set-u p of new vendors, the creation of purchase orders and acces s to our inventory purchasing and receiving functions . I n addition, software controls will be applied to our existing and future ERP systems to adequately enforce thi s segregation. In relation to the material weakness in the area of informatio n technology controls, we plan to take the following actions in 2005: • Our new Chief Information Officer will develop a comprehensive information technology system strategy that is in line with and supports our business strategy and our need for appropriate processes and policies related t o internal controls . • Corporate ERP systems will be re-designed an d implemented to properly align these systems wit h corporate business objectives . The re-design will be intended to ensure that these systems properly enable an d support our corporate business objectives and includ e appropriate levels of control and security . • The number of different software vendors and informatio n system architectures that constitute our current ERP systems will be reduced in order to decrease complexit y and increase the uniformity, usability, reliability , efficiency, security and effectiveness of these systems . • System end users will be formally identified and trained i n the proper set-up, testing and use of the corporate ER P systems, in order to establish functional accountability and responsibility for corporate ERP systems within a core o f educated and responsible end users across our company . • Proper controls for our ERP systems will be implemented 5/7/04 8/6/04 3/28/0 5 1Q04 10-Q 2Q04 10- FY04 10- K and documented that limit access to system function s consistent with appropriately segregated duties of our financial and operation staff in the normal execution o f their respective duties . • Information technology functional capabilities will be upgraded or added to establish stronger communicatio n and planning between the information technolog y department and the functional teams within the compan y that use the systems in order to provide decision makers with accurate, timely, and appropriate informatio n required for them to make proper business decisions . • Information technology department processes will be established, documented, and enforced to ensure that al l information system initiatives, including upgrades, patche s and bug fixes, are appropriately prioritized, approved, documented and reported.

Inherent Limitations on Effectiveness of Controls

LeapFrog's management, including our CEO and CFO, doe s not expect that our disclosure controls or our internal contro l over financial reporting will prevent or detect all error and al l fraud . A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assuranc e that the control system's objectives will be met. The design o f a control system must reflect the fact that there are resourc e constraints, and the benefits of controls must be considere d relative to their costs . Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to erro r or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faul and that breakdowns can 5/7/0 4 8/6/04 3/28/0 5 1Q04 10-Q 2Q04 10- FY04 10- K occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, b y collusion of two or more people, or by management override of the controls . The design of any system of controls is base d in part on certain assumptions about the likelihood of futur e events, and there can be no assurance that any design wil l succeed in achieving its stated goals under all potential future conditions . Projections of any evaluation of control s effectiveness to future periods are subject to risks . Over time, controls may become inadequate because of changes i n conditions or deterioration in the degree of compliance wit h policies or procedures.

Changes in Internal Control Over Financial Reportin g

There have been no changes in our internal control ove r financial reporting during the quarter ended December 31 , 2004 that have materially affected, or are reasonably likely t o materially affect, our internal control over financial reporting. The discussion above under "Completed and Planned Remediation Actions to Address Internal Contro l Weaknesses" describes a number of changes we have made since December 31, 2004 that we believe have materially improved our internal control over financial reporting, as wel l as other improvements that we plan to make in 2005 .

Rport of Independent Registered Public Accounting Fir m The Board of Directors and Stockholders of LeapFrog Enterprises, Inc.

We have audited management's assessment, included in th e accompanying Management's Report on Internal Contro l Over Financial Reporting, that LeapFrog Enterprises, Inc . did not maintain effective internal control over fin ancial reporting 5/7/04 8/6/04 3/28/05 I Q04 10-Q 2Q04 10-Q FY04 10- K as of December 31, 2004, because of the effect of the thre e material weaknesses identified in management's assessmen t and described below, based on criteria established in Internal Control-Integrated Framework issued by the Committee o f Sponsoring Organizations of the Treadway Commission (th e COSO criteria) . LeapFrog Enterprises, Inc. management i s responsible for maintaining effective internal control over financial reporting and for its assessment of the effectivenes s of internal control over financial reporting . Our responsibility is to express an opinion on management's assessment and a n opinion on the effectiveness of the company's internal contro l over financial reporting based on our audit .

We conducted our audit in accordance with the standards o f the Public Company Accounting Oversight Board (Unite d States) . Those standards require that we plan and perform th e audit to obtain reasonable assurance about whether effectiv e internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting , evaluating management's assessment, testing and evaluatin g the design and operating effectiveness of internal control, an d performing such other procedures as we considered necessary in the circumstances . We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regardin g the reliability of financial reporting and the preparation o f financial statements for external purposes in accordance wit h generally accepted accounting principles . A company' s internal control over financial reporting includes thos e policies and procedures that (1) pertain to the maintenance o f records that, in reasonable detail, accurately and fairly reflec t the transactions and dispositions of the assets of the company, 5/7/0 4 8/6/04 3/28/0 5 1Q0410- 2Q04 10-Q FY04 10-K (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financia l statements in accordance with generally accepted accountin g principles, and that receipts and expenditures of the compan y are being made only in accordance with authorizations o f management and directors of the company ; and (3) provid e reasonable assurance regarding prevention or timely detectio n of unauthorized acquisition, use, or disposition of th e company's assets that could have a material effect on the financial statements .

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements . Also, projections of any evaluation of effectiveness to futur e periods are subject to the risk that controls may becom e inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected . The following three material weaknesses have been identified and included in management's assessment : 1 . In the area of revenue and accounts receivable, the following insufficient controls were identified which management believes constitute a material weakness in th e aggregate :

• Lack of segregation of duties between accounts receivabl e and order entry staff and possession by those persons o f broad access to revenue and accounts receivable information technology systems, including access t o system areas controlling revenue recordation, cas h application- credit memo issuance, credit authorization, 5/7/04 8/6/04 3/28/05 1Q04 10-Q 2Q04 10- FY04 10- K invoice pricing and collections . • Lack of effective controls over receivables credit mem o review and approval process to monitor compliance wit h existing policies and procedures related to authorization o f credit memos to customers . • Lack of consistent and timely reconciliation and review processes related to sales discounts and allowances, shipment and invoicing, and cash receipts . • Inadequate staffing to determine that internal controls over reconciliations, review of account balances and closing procedures are performed consistently or on a timel y basis.

2. In the area of cost of goods sold and inventory, the following insufficient controls were identified whic h management believes constitute a material weakness in th e aggregate :

• Lack of segregation of duties between inventory and purchasing staff and possession by those persons of broa d access to systems, including access to system areas controlling the set-up of new vendors, the creation o f purchase orders, and inventory purchasing and receiving functions. • Inadequate preparation and review of reconciliations of physical inventory results to inventory ledgers and related cost of goods sold related accruals. • Inconsistent use of standard recordkeeping systems an d formats to record and report inventory transactions . • Inadequate control procedures to determine that work-in - process inventories are correctly summarized, estimated and recorded . • Insufficient communication procedures between accounts payable and operations staff regarding returns of inventor y back to vendors. 5/7/04 8/6/04 3/28/05 I Q04 10-Q 2Q04 10-Q FY04 10- K • Inadequate input and review controls over changes to bill s of materials and work orders . • Inadequate review of purchase price and productio n variances included in inventories and cost of sales . • Inadequate staffing to ensure that internal controls over reconciliations, review of account balances and closing procedures are performed consistently and on a timel y basis.

3 . In the area of information technology controls, the following insufficient controls were identified which management believe s constitute a material weakness in the aggregate :

• Ineffective logical access and change managemen t controls related to information technology systems, dat a and programs that are used to monitor, record and transfe r information. These controls relate to the purchase of materials and components used to manufacture and assemble products, the manufacture and assembly o f products, the distribution, invoicing and sale of products and the remittance of payments by vendors, customers and LeapFrog Enterprises, Inc. related to these activities . • Pervasive inadequacies in enterprise resource planning, o r ERP, application controls related to appropriat e assignment of functions and segregation of duties, which allowed employees to access system programs and data o r initiate transactions inconsistent with their assigned duties . The ERP systems contain design deficiencies that do not adequately segregate and control access, and lac k sufficient human oversight over the assignment of syste m access and authorities . • Lack of appropriate training of personnel throughout the organization causing system users to be less effective due to insufficient understanding of the systems they manage and de end upon. 5/7/04 8/6/04 3/28/0 5 1Q0410- 2Q04 10- FY04 10- K

These material weaknesses were considered in determinin g the nature, timing, and extent of audit tests applied in ou r audit of the 2004 financial statements, and this report does not affect our report dated March 25, 2005 on those financial statements .

In our opinion, management's assessment that LeapFro g Enterprises, Inc. did not maintain effective internal contro l over financial reporting as of December 31, 2004, is fairl y stated, in all material respects, based on the COSO contro l criteria. Also, in our opinion, because of the effect of th e material weaknesses described above on the achievement o f the objectives of the control criteria, LeapFrog Enterprises , Inc has not maintained effective internal control over financial reporting as of December 31, 2004, based on the COS O control criteria.

/s/ Ernst & Young LL P San Francisco, California March 25, 200 5

10-Q at 57-64 .

T:\CasesSF\LeapFrog\NorPldgs\Intemal Controls chart .doc EXHIBIT E LEAPFROG : 10-Q & 10-K STATEMENTS Competitio n

3/10/04 8/11/03 11/10/03 FY03 10-K are unable to compete effectively with existing or new If we are unable to compete effectively with existing or new If we are unable to compete effectively with existing or new If we competitors, our sales and market share could decline. competitors, our sales and market share could decline . competitors, our sales and market share could decline .

We currently compete primarily in the infant and toddler and We currently compete primarily in the infant and toddler and We currently compete primarily in the infant and toddler and preschool categories and electronic learning aids category of the preschool categories and electronic learning aids category of the preschool categories and electronic learning aids category of the .S . and . toy industry and, to some degree, in the overall U .S. and U.S. toy industry and, to some degree, in the overall U .S. and U.S. toy industry and, to some degree, in the overall U U .S . Our SchoolHouse division competes . Our SchoolHouse division competes in international toy industry. Our SchoolHouse division competes international toy industry international toy industry . Each of these the supplemental educational materials market. Each of these in the supplemental educational materials market . Each of these in the supplemental educational materials market markets is very competitive and we expect competition to increase markets is very competitive and we expect competition to markets is very competitive and we expect competition to For example, in July 2003, Mattel, Inc. in the future . For example, in July 2003, Mattel, Inc. introduced increase in the future. For example, in July 2003, Mattel, Inc increase in the future . introduced under its Fisher-Price brand a product called under its Fisher-Price brand a product called "PowerTouch" introduced under its Fisher-Price brand a product called having functionality similar to that of our LeapPad platform . "PowerTouch " having functionality similar to that of our "Power Touch" having functionality similar to that of our We believe that we are beginning to We believe that we are beginning to compete, and will LeapPad platform. We believe that we are beginning to LeapPad platform. increasingly compete in the future, with makers of popular game compete, and will increasingly compete in the future, with compete, and will increasingly compete in the future, with platforms and smart mobile devices such as personal digital makers of popular game platforms and smart mobile devices makers of popular game platforms and smart mobile devices . These companies are well assistants. These companies are well situated to compete such as personal digital assistants . These companies are well such as personal digital assistants effectively in our primary markets . Additionally, we are beginning situated to compete effectively in our primary markets . situated to compete effectively in our primary markets . to cross over into their markets with products such as our iQuest Additionally, we are beginning to cross over into their markets Additionally, we are beginning to cross over into their markets handheld device and our Leapster platform, which is expected to with products such as our Leapster platform and iQuest handheld with products such as our Leapster platform and Quest handheld be released by the end of 2003 . Many of our direct, indirect and device. Many of our direct, indirect and potential competitors device . Many of our direct, indirect and potential competitors potential competitors have significantly longer operating histories, have significantly longer operating histories, greater brand have significantly longer operating histories, greater brand greater brand recognition and substantially greater financial, recognition and substantially greater financial, technical and recognition and substantially greater financial, technical and technical and marketing resources than we do . These competitors marketing resources than we do . These competitors may be able marketing resources than we do. These competitors may be able may be able to respond more rapidly than we can to changes in to respond more rapidly than we can to changes in consumer to respond more rapidly than we can to changes in consumer consumer requirements or preferences or to new or emerging requirements or preferences or to new or emerging technologies . requirements or preferences or to new or emerging technologies . technologies . They may also devote greater resources to the They may also devote greater resources to the development, They may also devote greater resources to the development, development, promotion and sale of their products than we do . We promotion and sale of their products than we do . We cannot promotion and sale of their products than we do . We cannot cannot assure you that we will be able to compete effectively in assure you that we will be able to compete effectively in our assure you that we will be able to compete effectively in our our markets . markets. markets. 10-Q at 20 . 10-Q at 21 . 10-K at 36 . 5/7/04 8/6/04 3/28/05 1Q04 10-Q 2Q04 10-Q FY05 10-K

are unable to compete effectively with existing or new If we are unable to compete effectively with existing or new If we are unable to compete effectively with existing or new If we . competitors, our sales and market share could decline. competitors, our sales and market share could decline. competitors, our sales and market share could decline

We currently compete primarily in the infant and toddler and We currently compete primarily in the infant and toddler We currently compete primarily in the infant and toddler preschool categories and electronic learning aids category of the category, preschool category and electronic learning aids category, preschool category and electronic learning aids . toy industry and, to some degree, in the overall U .S. and category of the U.S. toy industry and, to some degree, in the category of the U .S. toy industry and, to some degree, in the U.S . Our SchoolHouse international toy industry . Our SchoolHouse division competes in overall U .S . and international toy industry . Our SchoolHouse overall U .S. and international toy industry the supplemental educational materials market. Each of these division competes in the U .S . supplemental educational division competes in the U.S. supplemental educational markets is very competitive and we expect competition to increase materials market. Each of these markets is very competitive and materials market . Each of these markets is very competitive and . For example, in the future . For example, in July 2003, Mattel, Inc. introduced we expect competition to increase in the future . For example, we expect competition to increase in the future under its Fisher-Price brand a product called "PowerTouch" Mattel, Inc. sells under its Fisher-Price brand a product called Mattel, Inc. sells under its Fisher-Price brand products called having functionality similar to that of our LeapPad platform . We "PowerTouch" having functionality similar to that of our "Power Touch"having functionality similar to that of our believe that we are beginning to compete, and will increasingly LeapPad platform. We believe that we are beginning to LeapPad and Little Touch LeapPad platforms . Also, VTech compete in the future, with makers of popular game platforms and compete, and will increasingly compete in the future, with Holdings Ltd. and Mattel under its Fisher-Price brand sell, smart mobile devices such as personal digital assistants . These makers of popular game platforms and smart mobile devices V.Smile and InteracTV, respectively, which are television-based companies are well situated to compete effectively in our primary such as personal digital assistants . These companies are well learning products that allow for video game-play similar to our markets . Additionally, we are beginning to cross over into their situated to compete effectively in our primary markets . Leapster learning system. We believe that we are beginning to markets with products such as our Leapster platform and iQuest Additionally, we are beginning to cross over into their markets compete, and will increasingly compete in the future, with handheld device. Many of our direct, indirect and potential with products such as our Leapster platform and iQuest makers of popular game platforms and smart mobile devices competitors have significantly longer operating histories, greater handheld device. Many of our direct, indirect and potential such as personal digital assistants . For example, we are brand recognition and substantially greater financial, technical and competitors have significantly longer operating histories, greater beginning to cross over into their markets with products such as marketing resources than we do. These competitors may be able to brand recognition and substantially greater financial, technical our Leapster handhelds, iQuest handheld and planned products, respond more rapidly than we can to changes in consumer and marketing resources than we do . These competitors may be such as our Fly pentop computer. These companies are well requirements or preferences or to new or emerging technologies . able to respond more rapidly than we can to changes in situated to compete effectively in our primary markets . Many of They may also devote greater resources to the development, consumer requirements or preferences or to new or emerging our direct, indirect and potential competitors have significantly promotion and sale of their products than we do . We cannot technologies . They may also devote greater resources to the longer operating histories, greater brand recognition and assure you that we will be able to compete effectively in our development, promotion and sale of their products than we do . substantially greater financial, technical and marketing resources markets . We cannot assure you that we will be able to compete than we do . These competitors may be able to respond more 10-Q at 19. effectively in our markets . rapidly than we can to changes in consumer requirements or l0-Q at 26 . preferences or to new or emerging technologies . They may also devote greater resources to the development, promotion and sale of their products than we do . We cannot assure you that we will be able to compete effectively in our markets . 10-K at 49 .

T :\CasesSF\LeapFrog\NonPldgs\LeapFrog Competition chart.doc EXHIBIT F IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWAR E

LEAPFROG ENTERPRISES, INC ., Plaintiff/Counterclaim Defendant,

V. Civil Action No . 03-927 (GMS) FISHER-PRICE, INC. and MATTEL, INC.,

Defendants /Counterclaim Plaintiffs.

LEAPFROG'S TRIAL BRIEF

Dated: April 1, 2005 YOUNG, CONAWAY, STARGATT & TAYLOR, LLP . Richard H . Morse (#53 1) 17th Floor, Brandywine Building 1000 West Street P.O. Box 391 Wilmington, Delaware 19899-0391 Telephone : (302) 571-6651 [email protected]

Attorneys for Plaintiff/Counterclaim Defendant LEAPFROG ENTERPRISES, INC . OF COUNSEL :

Ron E. Shulman Terry Kearney Stephen C. Holmes Michael A. Berta Wilson, Sonsini, Goodrich & Rosati PC 650 Page Mill Road Palo Alto, California 94304 Telephone : (650) 493-9300 TABLE OF CONTENTS

Page . I. SUMMARY OF THE CASE ...... 1

II. SUMMARY OF THE . ISSUES ...... 2

A. . Direct Infringement...... 2

B. Indirect Infringement ...... 2

C. Validity ...... 2

D. Damages...... 3

Ili. LEAPFROG'S THEORIES OF LIABILITY BASED ON CONTESTED'. AN D UNCONTESTED FACTS ...... 3

A. Defendants ' PowerTouch Directly Infringes Claim 25 ...... :. . 3

1. The PowerTouch Has A "Housing Including A Plurality Of Switches" ... . 4

2. The PowerTouch Has "A Sound Production Device In Communicatio n With The Switches And Including A Processor And A Memo . 4

3 . The PowerTouch Has "At Least One Depiction Of A Sequence Of Letters, Each Letter Being Associable With A Switch" ...... 4

4. The PowerTouch H as "A Reader Con figured To. Communicate The Identity Of The Depiction To The Processor "...... 5

5. The PowerTouch Allows "Selection Of A Depicted Letter Activates An Associated Switch To Communicate.With The Processor, Causing The Sound Production Device To Generate A Signal Corresponding . To A Sound Associated With The Selected Letter, The Sound Being . Determined By A Position Of The Letter In The Sequence Of Le tters" .... 6

B. Defendants Are Liable For Indirect Infringement Of Claim 25 ...... 7

1 . Defendants Are Liable For Inducing Patent Infringement By Their Vendors And End Users...... 7

2. . Defendants Are Liable For Contributo ry Infringement Because They Supplied Specially Designed Products. To Retailers And End Users For Use With The PowerTouch ...... 8

-i- TABLE OF CONTENTS (continued)

Page C. Defendants' "Prior Art" Does Not Invalidate Claim 25 ...... :...... 8

1. The Talking Tiles and Super Speak & Read Are Not Prior Art ...... 8

2. Obviousness ...... :...... 9

IV. DAMAGES ...... :...... 10

A. Lost Profits...... 10

B . Reasonable Royalty ...... 12

C. Willfulness And Increased Damages ...... 1 3

V. ANTICIPATED MOTIONS FOR DIRECTED VERDICT ...... 15

-ii- TABLE OF AUTHORITIES

Paze CASES

3M Co. v.. Johnson & 'Johnson Orthopaedics, Inc., 976 F.2d 1559 (Fed . Cir. 1992) ...... 1 4

Aro Mfg. Co. v. Convertible Top Replacement Co., Inc., 377iU.S. 476 (1964) ...... 7

Critikon, Inc. v. Becton Dickinson. Vascular Access, Inc., 120T. 3d 1253 (Fed. Cir. 1997) ...... 14

Datascope Corp. v. SMEC, Inc., 879 F.2d 820 (Fed. Cir. 1989) ...... 13, 1 4

Gambro Lundia AB v. Baxter Healthcare Corp., 110 F.3d 1573 (Fed. Cir. 1997) ...... 10

Georgia-Pacific Corp. v, U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970) modified andaff'd 446 F.-2d 295 (2d Cir. 1971) ...... :...... 12

Graham v. John Deere Co. of Kansas City, 383 U.S. 1 (1966).1 ..... I ...... I...... 9

Graver Tank & Mfg. Co. v. Linde Air Prods. Co., 339 U.S . 605 (1950) ...... 4,5, 6

Great N. Corp. v. Davis Core & Pad Co., 782 F.2d 159 (Fed. Cir. 1986) ...... :.. ... 13

Johns Hopkins Univ. v. Cellpro, Inc., 152 F.3d 1542 (Fed. Cir. 1998) ...... 14 Korl Corp. v. Wilco Marsh Buggies & Draglines, 761 F.2d 649 (Fed. Cir. 1985)

Lam, Inc. v. Johns-Mansville Corp., 718 F.2d 1056 (Fed. Cir. 1983) ...... :. .10, 11

Mahurkar v. C.R. Bard, Inc., 79 F.3d 1572 (Fed . Cir. 1996) ...... 8,10

McGinley v. Franklin Sports, .Inc., 262 F.3d 1339 (Fed . Cir. 2001)...... :.... 9

Minco, Inc. v. Combustion Eng'g, 903 F. Supp. 1204 (E.D. Tenn. 1995) ...... 14

Minco, Inc. v. Combustion Eng'g,.Inc., 95 F.3d 1109 (Fed . Cir: 1996) ...... :...10

Preemption Devices, Inc. v. 3M Co., 803 F.2d 1170 (Fed . Cir. 1986) ...... 8

Rite-Hite Corp., v. Kelley Co., Inc., 56 F.3d 1538 (Fed. Cir. 1995) ...... 10, 10,12 Ruiz v. A.B. Chance Co., 234 F.3d 654 (Fed. Cir. 2000) ...... 9

Seal-Flex, Inc. v. Athletic . Track and Court Constr., 172 F.3d 836 (Fed . Cir. 1999) ...... 3, 4, 7

Underwater Devices, Inc. v. Morrison-Knudsen Co ., 717 F.2d 1380 (Fed. Cir. 1983)...... 14

W.L. Gore & Assoc., Inc, v, Garlock, Inc., 721 F.2d 1540 (Fed. Cir. 1983) ...... 9

-iii- TA13LE OF AUTHORITIE S (continued)

pace W.R. Grace A Co.--Conn. v. Intercat, Inc., 60 F.Supp.2d 316 (D.Del. 1999) ...... 11,1 2

Water Techs. Corp v. Calco, Ltd., 850 F.2d 660 (Fed. Cir. 1988)...... 7

STATUTES

35 U.S.C. § 102 ...... 8

35 U.S.C. 102(a) ...... 8

35 U.S.C. § 103 ...... 2

35U.S.C.§27.1 ...... ,...... 2, 3 . 35 U.S.C. § 271(b) ...... 7 35 U.S.C. § 271(c) ...... 8 ' 35 U.S.C. §.284...... 10, 13, 1 4

35 U.S .C . § 285 ...... 1 4

35 U.S.C . §.287 ...... ,...... 10 35 U.S.C. § 287(a) ...... :...... 10

RULES .

Fed. R. Civ. P. 50(a) ...... :...... 1 5

-iv- 1. ' SUMMARY OF THE CASE LeapFrog asserts that defendants' "PowerTouch" product infringes Claim 25 of U.S. Patent

No. 5,813,86 1 . Claim 25 is straightforward. It describes an interactive learning device that fosters literacy by helping children understand the sounds that letters make in the context of written words .

Claim 25 was invented by LeapFrog's founder, Michael Wood . It is an improvement on work he began in 1990 to help his son learn how to read .

In 1995, Mr. Wood founded LeapFrog to. focus. solely on interactive educational products .

His first two products, the "Phonics Desk" and the "Phonics Traveler," .both embody the invention of Claim 25. They achieved immediate commercial success and won widespread critical acclaim .

Building on the success of those products, LeapFrog introduced the "LeapPad" in 1999 . Within three years, LeapPad sales increased by orders of magnitude . Those sales and LeapFrog's meteori c growth did not go unnoticed.

Mattel is the nation's largest toy manufacturer . Fisher-Price is its wholly-owned subsidiary.

In the wake of LeapFrog's successes, defendants' started work on the PowerTouch in 2000, and engaged in the most extensive product development project in Fisher-Price's history . During. all that time, defendants knew about LeapFrog's `861 patent and carefully analyzed the LeapPad' s features. In January 2001, Fisher-Price received an opinion of counsel that the features of an early, un-built prototype would not infringe Claim 25 of the '861 patent . In October 2003, within days of

LeapFrog filing the complaint in this, action, defendants received another opinion from different

counsel. The second counsel opined that the early 2001 opinion was "not clear ."

When defendants released the PowerTouch in July 2003, they did so with a marketing

campaign commensurate with their development efforts - again the largest in Fisher-Price's

history. Their goal was to produce a product "as good or better than the LeapPad" that would tak e

dollars and market share from LeapFrog. The result was a product that infringes Claim 25 and has .

damaged LeapFrog in an amount of more than $84 million. .

-1- LeapFrog filed this patent infringement action on October 3, 2003 against Fisher-Price fo r infringing Claim 25 of LeapFrog's `861 patent in violation of 35 U .S.C. § 271 . Mattel was joined as a defendant in September 2004. LeapFrog seeks compensatory and increased damages for past infringement, attorney fees and a permanent injunction. Fisher-Price served its Answer an d

Counterclaims on February 13, 2004 . Mattel served its Answer and Counterclaims on October 18 ,

2004. Both deny infringement, and as an affirmative defense, allege that Claim 25 of the _ 1861 patent is invalid as obvious under 35 U .S.C. § 103 .

II. SUMMARY OF THE ISSUES

A. Direct Infringement LeapFrog will prove at trial that the PowerTouch includes all the elements of Claim 25 of the `861 patent. Defendants admit that Fisher-Price has made, used, offered to sell and sold the PowerTouch within the United States and imported the PowerTouch into the United States .

Defendants deny that Mattel has done so. LeapFrog will prove at trial that both defendants hav e engaged in one or more of these acts .

B. Indirect Infringemen t

LeapFrog will prove at trial that defendants have purposefully aided and abetted other s

(including each other) to make, use, offer for sale and sell the Power.Touch within the United States and import the PowerTouch into the United States. LeapFrog will prove at trial inter alia that defendants have contributed to the use, offering for sale and sale of the PowerTouch by others with knowledge that the PowerTouch and related books .and cartridges were especially adapted for use in infringing the `861 patent.

C. Validity Defendants' evidence fails to establish that defendants' principle "prior art" references are, in fact, prior art. Specifically, defendants cannot clearly and convincingly prove that the "Talkin g

Tiles" software program and their samples of the "Super Speak & Read" toy apparently found o n

-2- the internet (and in Germany) were publicly known, used or sold in the United States before Mr. Wood' s invention.

Defendants admit that no single prior art reference includes all the elements (either expressly or inherently) of Claim 25 . Defendants cannot clearly and convincingly prove as teaching, suggestion or motivation to combine various pieces of prior art in the manner recited in

Claim 25 . LeapFrog will offer evidence at trial that Claim 25 is not obvious, for example, through proof of the commercial success LeapFrog's products embodying Claim 25 as well as critical acclaim for those products attributable to their incorporation of the features described in Claim 25 .

D. Damages LeapFrog will prove at trial that defendants' infringing acts caused LeapFrog to lose sales

of its competing products. LeapFrog will also prove at trial that defendants' infringing acts caused

LeapFrog to -lose profits on the competing products that LeapFrog did sell by, inter. alia, causing

price erosion. LeapFrog will prove at trial the amount of profits LeapFrog has lost as. a result of

defendants' actions. LeapFrog will also prove at trial that, at a minimum, LeapFrog is entitled to a

substantial reasonable royalty for defendants' infringement of Claim 25 . Lastly, LeapFrog will

prove at trial that defendants willfully engaged in their infringing activities despite having prior

knowledge of the `861 patent because defendants could not reasonably rely on a pre-infringement

written opinion of counsel.

Ill. LEAPFROG'S THEORIES OF LIABILITY BASED ON CONTESTED AND UNCONTESTED FACT S

A. Defendants' PowerTouch Directly Infringes Claim 25 LeapFrog will prove at trial by a preponderance of the evidence that defendants directly

infringed Claim 25 of the `861 patent by making using, offering to sell and selling within the

United States and importing into the United States the inventions defined by Claim 25 without

LeapFrog's authority. 35 U.S.C. § 271 (2004) ; Seal-Flex, Inc . v. Athletic Track and Court Constr.,

172 F.3d 836, 842 (Fed. Cir. 1999). Defendants' PowerTouch product infringes Claim 25 because

-3- it includes every element of the claim, both literally and under the doctrine of. equivalents. Id. An accused device infringes under the doctrine of equivalents if there are only insubstantial difference s between the claim elements and the accused structure . Graver Tank & Mfg. Co. v. Linde Air

Prods. Co., 339 U.S. 605, 608-9 (1950).

1. The PowerTouch Has A " Housing Including A Plurality Of Switches"

Defendants do not dispute that the PowerTouch's external plastic casing is the "housing" _ required by Claim 25 . Subject to the Court's claim construction ruling, the term "switch" in Claim

25 is not limited to mechanical switches. LeapFrog will prove at trial that the 512 capacitive cross- points and'attendant circuitry inside the PowerTouch's housing are switches . Also subject to the

Court's claim construction ruling, LeapFrog will prove at trial that the PowerTouch's capacitive cross-points and attendant circuitry infringe this claim element under the doctrine of equivalents because they are insubstantially different from an array of mechanical switches . For example, both provide information to the processor concerning a child's selection of letters by making, breaking

or changing electrical connection . See Graver Tank, 339 U.S. at 608-9.

2. The PowerTouch Has "A Sound Production Device In Communication With The Switches And Including A Processor And A Memory."

Defendants do not dispute that the PowerTouch includes a "sound production device,"

which includes one of two models of sound processors, attendant circuitry and an electromagnetic

speaker. Each sound "Processor" is a microcontroller that includes "memory" which generates the

sound of selected letters played through the PowerTouch's speaker . Defendants have not disputed

that the 'sound production device is "in communication with" the PowerTouch's 512 capacitiv e

cross-points and 'attendant circuitry.

3. The PowerTouch Has "At Least One Depiction Of A Sequence Of Letters, Each Letter Being Associable With A Switch"

LeapFrog will prove at trial that the PowerTouch books contain " at least one depiction of a

sequence of letters" (words) in which "each letter [is] associable with a switch" (grid cross-point s

-4- and attendant circuitry). Subject to the Court's claim construction ruling, Claim 25 does not require that each letter be associable with a different switch. However, LeapFrog will prove at trial that the PowerTouch books include words whose letters have a one-to-one relationships . with

switches.

If, for any reason, the PowerTouch is found not to literally infringe this claim element,

LeapFrog will-prove at trial that the PowerTouch includes words that infringe this claim elemen t

under the doctrine of equivalents because the relationship between the letters and switches in th e PowerTouch is insubstantially different from the relationship disclosed in the `861 patent

embodiments . For example, both one letter/one switch relationships and multiple letter/one switc h

relationships allow a child to draw a connection between selected a letter and that letter's sound b y

communicating a child's selection to the processor. See Graver Tank, 339 U.S. at 608-9 .

4. The PowerToueh Has "A Reader Configured To Communicate The Identity Of The Depiction To The Processor" LeapFrog will prove at trial that the PowerTouch's automatic page detection featur e

literally meets the "reader" element of Claim 25 . That feature consists of 14 pairs of optical

emitter/detector pairs and attendant circuitry . These optical pairs and attendant circuitry are

"configured" to identify the patterns of ovals on the PowerTouch book pages . Together they

"communicate the identity" of each "depiction" on a given "page" to the sound processor. If for any reason the PowerTouch's page detection feature is found not to literally infringe this claim

element, LeapFrog will prove at trial that it infringes this claim element under the doctrine o f

equivalents because it is insubstantially different from the reader described in the examples of `861

patent. For example, -both detect information encoded on the page to allow the device to accuratel y

respond to.a child's selection. See Graver Tank, 339 U.S. at 608-9.

-5- 5. The PowerTouch Allows "Selection Of A Depicted Letter- Activates An Associated Switch To Communicate With The Processor, Causing The Sound Production Device To Generate.A Signal Corresponding To A Sound Associated With The Selected Letter, The Sound Being . Determined By A Position Of The Letter In The Sequence Of Letters" LeapFrog will prove at trial that the PowerTouch allows "selection of a depicted letter" by touching letters in words contained in the PowerTouch books . By simply selecting a letter and observing the response of the PowerTouch, one can appreciate that the device generates a "signa l corresponding to a sound associated with the selected letter the sound being determined by a position of the letter in the sequence of letters," For example, touching the "C" in the word CA T produces the /k/ sound instead of the Al .-

Lea pFrog will prove at trial that selecting a letter depicted . in a PowerTouch book with one's finger "activates an associated switch." LeapFrog will also prove at trial that "a signal corresponding. to a sound associated with the selected letter" is generated, for example, both with respect to the coefficient in memory associated that letter's phoneme, and with respect to the signal that drives the speaker. LeapFrog will prove at trial examples of words that include letters that can . be selected and, when selected, produce the position-dependent phoneme of the. letter.

Subject to the Court's claim construction ruling, Claim 25 does not require that "only" th e sound associated with the selected letter be generated. If for any reason the PowerTouch system i s found not to literally infringe this claim element, LeapFrog will prove at trial that the sound generated by selecting a letter in the PowerTouch is insubstantially different then generating "only " the sound associated with the selected letter. LeapFrog will prove at trial that there is no substantial difference in selecting the letter "C" .in CAT and hearing "CAT, /k/ 1W /t/, CAT" (which is what the PowerTouch does) and selecting the letters "C" "A" and "T" in order and hearing "/k/

/a/ /t/, CAT." For example, both provide the child the correspondence between the letters in the word CAT and the sounds those letters make in that word . They both do so by requiring the child

'to physically interact with the letters of the word. See Graver, 339 U.S. at 608-9.

-6- B. Defendants Are Liable For Indirect Infringement Of Claim 2 5 Defendants sell the PowerTouch to retailers such as Toys-R-Us, Target, Wal-Mart and K- mart who then resell the products to end-user customers . LeapFrog will prove at trial that defendants are guilty of indirect infringement based on direct third-party infringing retail sales and customer use. See Aro Mfg. Co. v. Convertible Top Replacement Co., Inc., 377 U.S. 476, 483 .

(1964). LeapFrog will also prove at trial that Fisher-P rice's directly infringing acts are the basi s for indirect infringement by Mattel, as outlined below .

1 . Defendants Are Liable For Inducing Patent Infringement By Their Vendors And End Users Defendants' sales figures show that defendants' resellers have sold over one million unit s of the PowerTouch that have been used by end-user customers . Because the PowerTouch contains every element of Claim 25 of the `861 patent, such sales and use constitute direct infringement,

Seal-Flex, 172 F.3d at 842 . A party may induce infringement by .another by providing aid, encouragement or instructions to use the accused product in an infringing manner with the intent that the other party carry out the acts that constitute direct infringement. 35 U.S .C. § 271(b)

(2004) ; Water Techs. Corp v. Calco, Ltd. ; 850 F.2d 660, 668-69 (Fed. Cir. 1988). LeapFrog will

prove that defendants' inducing acts include advertising, marketing and providing instructions to

customers for use, such as the Parent's Guide sold with every PowerTouch and the verbal

instructions provided by the PowerTouch base unit as well as incentives and rebates to resellers for

selling the PowerTouch.

LeapFrog will also prove at trial that Mattel is further liable for inducing infringemen t

because it aided Fisher-Price in at least the importation of the PowerTouch into the United State s

and the sale of the PowerTouch to its vendors within the United States . For example, LeapFro g

will prove at trial that Mattel has (a) provided direct manufacturing support in Asia, (b) imported

the PowerTouch for Fisher-Price and (c) provided significant retail support through its Retai l

Services Organization.

-7- 2.. Defendants Are Liable For Contributory Infringement Because They Supplied Specially Designed Products To Retailers And End Users For Use With The PowerTouch In addition to the two "starter" books included by defendants with every PowerTouch "base

unit" sold, defendants supply additional books and cartridges to their resellers to be sold for us e with the PowerTouch. Defendants admit that they supplied additional PowerTouch books an d cartridges to retailers so that they could be used by end-user customers in their PowerTouch base units. Defendants do not dispute that end-user customers who purchase these books and cartridge s use them in their Power-Touch base units.

The use of these books and cartridges with the PowerTouch base unit constitutes direc t

infringement of Claim 25 . LeapFrog will. prove at trial that defendants' sale of the addition al books and cartridges contribute to that direct infringement because they are sold with knowledge

that (a) they will be used in an infringing manner, (b) they are specially made for use with the

PowerTouch and (c) they have no other substantial non-infringing use. 35 U.S.C. § 271(c) (2004) ;

Preemption Devices, Inc. v. 3M Co., 803 F.2d 1170, 1174 (Fed. Cir. 1986).

C. . Defendants' "Prior Art" Does Not Invalidate Claim 2 5

1. The Talking Tiles and Super Speak & Read Are Not Prior Art Defendants proffer four U.S. Patents, a computer program known as ".Talking Tiles" and a toy known as the "Super Speak & Read" as "prior art" within the meaning of 35 U.S.C. § 102.

LeapFrog disputes that Talking Tiles and Super Speak & Read are prior art within the meaning of the statute.

Defendants must prove at trial by clear and convincing evidence that the Talking Tiles an d Super Speak & Read were (1) "known or used by others in this country, or patented or described in

a printed publication in this or a foreign country" before Mr. Wood made his invention ; or (2) "patented or described in a printed publication in this or a foreign country or in public use , or on sale in this country; more than one year" before the filing of the '861 patent . 35 U.S.G. 102(a), (b)

(2004). Mahurkar v. C.R. Bard, Inc., 79 F.3d 1572, 1576 (Fed. Cir. 1996). Defendants cannot

-8- establish this critical threshold issue, The only evidence produced-by defendants during discovery relating to that alleged prior art is unauthenticated third party hearsay documents and things .

Evidence that a toy was bought on the internet or shipped from Germany' does not establish that the toy is prior art.

2. Obviousness In order to prove that Claim 25 of the `861 patent is obvious, defendants must show by clear and convincing evidence that a person of ordinary skill in the art at the time the invention was made would find that the prior art, when taken as a whole, taught the combination of elements in the manner set forth in Claim 25 . Ruiz v. A.B. Chance Co., 234 F.3d 654, 662-65 (Fed. Cir. 2000). Defendants' evidence does not prove that a person of ordinary skill in the art would have found

Claim 25 to be obvious . LeapFrog will establish that defendants' analysis of the prior art (disputed and undisputed) is infected with impermissible hindsight : they use Mike Wood's . invention as a guide through a. pile of discarded patents and failed ideas to argue that Mike Wood's invention i s obvious. McGinley v. Franklin Sports, Inc., 262 F.3d 1339, 1351 (Fed. Cir. 1001). .

Furthermore, the most probative evidence of non-obviousness, the objective indicia set forth in Graham v. John Deere, establish that the invention defined by Claim 25 is not obvious.

See Graham v. John Deere Co. of Kansas City, 383 U.S. 1, 17-18 (1966) ; Ruiz, 234 F.3d at 667.

LeapFrog will establish that its products that embody the invention of Claim 25 have enjoyed considerable commercial success and have won widespread critical acclaim - particularly for th e features they include from Claim 25 . See id.; W.L. Gore & Assoc., Inc, v. Garlock, Inc., 721 F.2d

1540, 1555-56 (Fed. Cir. 1983). LeapFrog also intends to establish the commercial success of the

PowerTouch and evidence of defendants' copying of LeapFrog's LeapPad product . Those factors

1 LeapFrog has moved in limine to exclude the German Super Speak & Read because defendants ' lack of diligence has prejudiced LeapFrog's discovery concerning that toy . MIL No. 2. -9- are also probative on the issue of non-obviousness . See Gambro Lundia AB v. Baxter Healthcare -Corp., 110 F.3d 1573, 1579 (Fed. Cir. 1997); Ruiz, 234 F.3d at 662-63 .

IV. DAMAGES

LeapFrog is entitled to recover actual damages, or lost profits,' it suffered due to defendants' infringement of the `861 patent that it can prove by a preponderance of the evidence.2 Minco, Inc. v. Combustion Eng'g, Inc., 95 F.3d 1109, 1118 (Fed. Cir. 1996). LeapFrog is entitled to a reasonable royalty for the portion. of infringing acts for which it cannot prove actual damages . . 35

U.S.C. §.284 (2004) ; Mahurkar, .79 F.3d at 1579 . The lost profits to which.LeapFrog is entitled are not the profits defendants made from the PowerTouch but the foreseeable actual profits

LeapFrog would have made but for the infringement . Rite-Hite Corp ., v. Kelley Co., Inc., 56 F.3d

1538, 1545 (Fed . Cir, 1995) (en bane); Lam, Inc. v. Johns-Manville Corp., 718 F.2d 1056, 106 5

(Fed. Cir. 1983). LeapFrog claims lost profits due to, inter alia, lost sales and price erosion. The amount of total damages that should be awarded to LeapFrog for defendants' infringing act s including both lost profits and reasonable royalties is more .than $80 million. LeapFrog should also receive treble damages and attorney fees because defendants' infringement was willful .

A. Lost Profits

LeapFrog is entitled to damages for th e lost sales of its competing products that it can show it would have made had defendants not sold the PowerTouch .3 Rite-Hite, 56 F.3d at 1545 ,

2 Leapfrog is entitled to collect damages for defendants' direct and indirect infringement from the time it gave notice to the defendants through the present . 35 U.S.C. § 287 (2004) . The notice date in this case is the -date LeapFrog filed the complaint, October 3, 2003 . Defendants are therefore liable for their directly infringing acts from that date . They are also liable for the infringing acts of third parties from that date forward that defendants either induced or to which they contributed. See 35 U.S.C. § 287(a).

3 The sales LeapFrog would have made include present lost sales and foreseeable convoyed sales from those present lost sales. A victim of patent infringement is entitled to all reasonably foreseeable damages. Rite-Hite, 56 F.3d at 1546. These may include sales of an unpatented product that competes with the infringing product. Id. at 1548-49. In addition, LeapFrog may also recover -10- LeapFrog must also show that it had or could have . implemented the production and marketing capacity to make the lost sales. W.R. Grace & Co.--Conn. v. Intercat, Inc., 60 F. Supp. 2d 316, 322 (D. Del. 1999).

The.market into which defendants introduced the PowerTouch has been dominated by . .

LeapFrog for years with its LeapPad family of products. Thus, for purposes of lost sales, LeapFro g will establish that the only relevant non-infringing products available to purchasers of a PowerTouch would havq been LeapFrog LeapPad. products and that LeapFrog would have sold LeapPad units in place of PowerTouch units, according to LeapFrog's actual or potential capacity, had defendants not infringed Claim 2.5 . Lam, 718.F.2d at 1065. LeapFrog will show at trial that, at a minimum, LeapFrog would have sold at, least one million of the 1,236,200 million PowerTouc h platforms sold by defendants through December 2004 .

damages for lost.sales of components or products that function together with the . competing product so as to produce a desired end product .or result. Id., 56 F.3d at 1549-50 . Defendants recognized from the beginning of their development of the PowerTouch that their product would compete directly with LeapFrog's LeapPad Learning System . In fact, defendants specifically developed the PowerTouch to capture some of LeapPad's success in the market . Therefore, making and selling the PowerTouch in violation of LeapFrog's `861 patent would necessarily have the foreseeable result of impacting sales of LeapPad platforms . Both parties admit that the nature of their learning systems centers on the books and cartridges sold for the learning systems that provide the content with which children interact . Selling as many books and cartridges as possible is the most profitable and important goal of each party in making its learning system available to the public . When a customer decides to buy a PowefTouch rather than a LeapPad Learning System, LeapFrog loses the sales of additional LeapPad books that, . it will show, it would have made subsequent to the original sale. in addition, LeapFrog has two related LeapPad family platforms targeted to different age groups : the My First LeapPad for younger children (2 to 3 years old) and the "classic" LeapPad for older children (approximately four years and older) . LeapFrog will also show at trial that many PowerTouch purchasers would have purchased a My First LeapPad in the absence of PowerTouch . LeapFrog will also show, according to extensive market research, that many of these My First LeapPad purchasers would have gone on to purchase a classic LeapPad when their children grew older, resulting in additional foreseeable damages to LeapFrog. -11- LeapFrog will also show . that it took significant competitive actions in response t o defendants' entry into the market with the infringing PowerTouch system . LeapFrog's actions necessitated by defendants' infringement included lowering its prices on LeapFrog's LeapPad products, and including an extra book with'its LeapPad systems . LeapFrog can prove price erosion by showing that defendants' infringement caused LeapFrog to charge lower prices than the market otherwise would have directed. See W.R. Grace, 60 F. Supp. 2d at 327 . LeapFrog will establish that this is what happened . LeapFrog had stable pricing and no meaningful competition before defendants introduced the PowerTouch,Defendants' infringement is the only significant reason for the drastic reductions in price LeapFrog had to .i.nstitute in 2004. With respect to LeapFrog's inclusion of an additional book in its LeapPad systems sold in 2003 and 2004, . LeapFrog will show that the only reason LeapFrog included an extra book was for competitive reasons : directly related to defendants entry in the market, including that defendants were advertising and promoting that the PowerTouch system included an extra book .

B. Reasonable Royalty

A reasonable royalty is the royalty to which a patent holder and an infringer would . agree, determined by the analysis of multiple factors in the context of a hypothetical license negotiatio n between the parties just before the start of infringement. Georgia-Pacific Corp. v. U.S. Plywood

Corp., 318 F. Supp. 1116, 1120 (S .D.N.Y. 1970), modified and aff'd, 446 F.2d 295 (2d Cir . 1971).

The factors relevant to the hypothetical negotiation include whether the pa rties were competitors and what the expected economic harm to LeapFrog would have been if it had been required to grant defendants a license to compete in the market that LeapFrog had previously dominated .

LeapFrog will show at trial that the royalty to which the parties would have agreed is a fixed $10 per unit for those infringing PowerTouch platforms defendants sold in the United States for which

LeapFrog is not claiming actual damages (approximately 250,000 of the PowerTouch unit sales).

See Rite-Hite, 56 -F.3d at 1544-45 . LeapFrog' s estimate of a reasonable royalty is conservative in light of defendants' . dramatic price reductions for the PowerTouch system - defendants hav e -12- slashed the p rice to retailers for the PowerTouch by approximately $20 in the space .of approximately one year.

C. Willfulness And Increased Damages

LeapFrog should receive trebled damages for defendants' willful infringement . See 35

U.S.C. § 284 (2004) . A party's infringement is willful if it knows about the asserted patent before making, using or selling the accused product and then proceeds without a good -faith belief that th e

asserted claim is invalid or that the accused product does not infringe . Great N. Corp. v. Davis

Core & Pad Co ., 782 F.2d 159, 166-67 (Fed. Cir. 1986). An important factor in determining

willfulness is whether defendants obtained and reasonably relied on an opinion of counsel

regarding claim 25 . Id. ; see Datascope Corp . v. SMEC, Inc., 879 F.2d 820, 828-29 (Fed . Cir.

1989).

Defendants knew about the `861 patent at least as early as October 2000 after defendant s

solicited a patent search regarding the product under development that eventually became th e

PowetTouch. Shortly thereafter, in January 2001, defendants obtained an opinion of counsel fro m

Akin Gump regarding infringement of claim 25_ as it related to an un-built prototype. Reasonable

and actual reliance on a particular opinion are relevant to whether a party willfully infringed. Kori

Corp. v. Wilco Marsh Buggies & Draglines, 761 F.2d 649, 56-57 (Fed . Cir. 1985). Clear and

convincing evidence will show at trial that under no circumstances was it reasonable for defendant s

to rely on the January 2001 opinion of counsel and that defendants actually did not rely on that

opinion.

For example, the following evidence illustrates the objective and subjective unreliability o f the January 2001 opinion from Akin Gump : opinion counsel admitted at deposition that -the opinion

was a mere summary not meant to be relied upon ; the opinion was based on an early un-built

prototype of the PowerTouch, not the product as actually sold ; opinion counsel did not examine

any of the actual PowerTouch books because they did not yet exist ; the opinion only covered

certain elements of Claim 25 and did not address the doctrine' of equivalents at all ; the opinion did -13- not address claim construction issues even though opinion counsel knew the construction of certain terms was a potential issue ; and defendants obtained a subsequent opinion that characterized the

2001 opinion as "not clear." See Datascope, 879 F.24 at 828-29; see also Underwater Devices,

Inc. v. Morrison-Knudsen Co., 717 F.2d 13 80, .13 90 (Fed. Cir. 1983). Despite the January 2001 opinion's failings, defendants never sought an updated opinion before engaging in infringing activity. V

Defendants' lack of good faith in proceeding with their infringing . acts is also borne out by other established factors including their admission that they had no intent and made no attempts to design around claim 25 of the `861 patent. See Minco, Inc . v. Combustion Engg, 903 F.Supp. 1204, 1221-22 (E .D. Tenn. 1995). . The extent to which defendants copied LeapFrog's competing products is also probative of the willful. nature of their infringement . See Johns Hopkins Univ. .v.

Cellpro, Inc., 152 F.3d 1342, 1352 n. 16 (Fed. Cir. 1998). Statements such as "if we are going to hit LeapFrog this is where we do it" and expressions of defendants' "NEED to blunt [LeapFrog's] momentum ASAP via our focus on PowerTouch" show their willfulness in infringing Claim 25 because defendants had an intent to harm LeapFrog. See id.

Finally, defendants' other alleged opinions of counsel either are irrelevant or are entitled to little weight . Defendants claim that they relied on oral opinions of counsel . However, . these opinions are uncorroborated and oral opinions of counsel are disfavored . 3M Co. v. Johnson &

Johnson Orthopaedics, Inc., 976 F.2d 1559, 1580 (Fed. Cir. 1992): With regard to a written opinion obtained in February 2004, months after defendants began to infringe Claim 25, and . months after suit was filed, that opinion was too late as outlined in LeapFrog's Motion in Limine

No. 3. See Critikon, Inc . v. Becton Dickinson Vascular Access, Inc ., 120 .F.3d 1253, 1259-60 (Fed . Cir. 1997).

Because Defendants' infringement is willful, this is an exceptional: case and LeapFrog should receive increased damages and reasonable attorney . fees. 35 U.S.C. §§ 284, 285 (2004).

-14- V. ANTICIPATED MOTIONS FOR-DIRECTED VERDIC T LeapFrog anticipates moving for judgment as a matter of law after defendants' case in chief on the theory that, based on the evidence presented, no reasonable jury could fail to find infringement or could .find'Clairn 25 of the 1 861 patent invalid. See Fed. R. Civ. P. 50(a).

LeapFrog anticipates -renewing its . motion at the end of all the evidence. See Id. If for any reason the jury finds for defendants contrary to the evidence, LeapFrog also anticipates renewing its motion after trial . See id. at (b).

Respectfully submitted ,

YOUNG, CONAWAY, STARGATT & TAYLOR, LLP

Dated: April 1, 2005 p~"~ `l e Richard H . Morse (#531 ) 17`h Floor, Brandywine Building 1000 West Street, P .O.. Box 391 Wilmington, Delaware 19899-0391 Telephone: (302) 571-6651 [email protected]

Attorneys for Plaintiff'Counterclaim Defendant LEAPFROG ENTERPRISES, INC. CERTIFICATE OF SERVICE

I, Richard H . Morse, hereby certify that on April 2, 2005 , I caused to be electronically filed .a true and correct copy .of the foregoing document with the Clerk of Court using CMIECF which will send notification that'such filing is available for viewing and

downloading to the following counsel of record :

Andre G. Bouchard, Esquire Karen L. Pascale, Esquire Bouchard Margules & Friedlander, P.A. 222.Delaware Avenue, Suite 1400, Wilmington, DE 1980 1

I further certify that on April 2, 2005 , I caused.copies of the foregoing

document to be served on the following non-registered pa rticipants in the manner indicated :

BY E-MAIL

John Flock, Esquire Jerry Canada, Esquire Kenyon & Kenyon One Broadway New York, NY 10004

Jeffrey Butler, Esquire Kenyon & Kenyon One Broadway New York, NY 10004

YOUNG, CONAWAY, STARGATT & TAYLOR, LLP

Richard H . Morse (LD. No. 531) John W. Shaw (I.D. No. 3362) 17'h Floor, Brandywine Building 1000 West Street P.O. Box 3 91 Wilmington, Delaware 19899-0391 (302) 571-6651 rmorse u(,ycst.com Attorneys for Plaintiff and Counterclaim Defendant LEAPFROG ENTERPRISES, INC.

WP3:980368.6 .62614 .1001 EXHIBIT G LEAPFROG: 10-Q & 10-K STATEMENTS Dependence on Three Retailers

8/11/03 11/10/03 3/10/04 2Q03 10- 3Q03 10-Q FY03 10-K Our business depends on three retailers that together Our business depends on three retailers that together Our business depends on three retailers that together accountedfor approximately 69% of our net sales in 2002, accountedfor approximately 69% of our net sales in accountedfor approximately 68% of our net sales in and our dependence upon a small group of retailers may 2002, and our dependence upon a small group of 2003, and our dependence upon a small group of increase retailers may increase. retailers may increase.

Wal-Mart (including Sam's Club), Toys "R" Us, and Target Wal-Mart (including Sam's Club), Toys "R" Us and Wal-Mart (including Sam's Club), Toys "R" Us an d accounted in the aggregate for approximately 69% of our Target accounted in the aggregate for approximately Target accounted in the aggregate for approximately 68 % net sales in 2002 . We expect that a small number of large 69% of our net sales in 2002 . We expect that a small of our net sales in 2003 . We expect that a small number retailers will continue to account for a significant majority number of large retailers will continue to account for a of large retailers will continue to account for a significant of our sales and that our sales to these retailers may increase significant majority of our sales and that our sales to majority of our sales and that our sales to these retailer s as a percentage of our total sales . At December 31, 2002, these retailers may increase as a percentage of our total may increase as a percentage of our total sales . A t Wal-Mart (including Sam's Club) accounted for sales . At December 31, 2002, Wal-Mart (including December 31, 2002, Wal-Mart (including Sam's Club ) approximately 33% of our accounts receivable and Toys Sam's Club) accounted for approximately 33% of our accounted for approximately 33% of our account s "R" Us accounted for approximately 30% of our accounts accounts receivable and Toys "R" Us accounted for receivable and Toys "R" Us accounted for approximately receivable . If any of these retailers experience significant approximately 30% of our accounts receivable . If any 30% of our accounts receivable. If any of these retailers financial difficulty in the future or otherwise fail to satisfy of these retailers experience significant financial experience significant financial difficulty in the future or their accounts payable, our allowance for doubtful accounts difficulty in the future or otherwise fail to satisfy their otherwise fail to satisfy their accounts payable, ou r receivable could be insufficient. If any of these retailers accounts payable, our allowance for doubtful accounts allowance for doubtful accounts receivable could be reduce their purchasesfrom us, change the terms on receivable could be insufficient . If any of these insufficient. If any of these retailers reduce their which we conduct business with them or experience a retailers reduce their purchases from us, change the purchasesfrom us, change the terms on which we future downturn in their business, our business and terms on which we conduct business with them or conduct business with them or experience a future operating results could be harmed experience a future downturn in their business, our downturn in their business, our business and operating 10-Q at 21 . business and operating results could be harmed results could be harmed 10-Q at 22. 10-Q at 37. 5/7/04 8/6/04 3/28/05 I Q04 10-Q 2Q04 10-Q FY04 10- K

Our business depends on three retailers that together Our business depends on three retailers that together Our business depends on three retailers that together accountedfor approximately 68% of our net sales in accountedfor approximately 68% of our net sales in accounted for approximately 64% of our net sales in 2003, and our dependence upon a small group of 2003, and our dependence upon a small group of 2004, and 86% of the U.S. Consumer segment sales, and retailers may increase. retailers may increase. our dependence upon a small group of retailers may increase. Wal-Mart (including Sam's Club), Toys "R" Us and Wal-Mart (including Sam's Club), Toys "R" Us and Target accounted in the aggregate for approximately Target accounted in the aggregate for approximately 68% Wal-Mart (including Sam's Club), Toys "R" Us and 68% of our net sales in 2003 . We expect that a small of our net sales in 2003 . We expect that a small number of Target accounted in the aggregate for approximately 64% number of large retailers will continue to account for a large retailers will continue to account for a significant of our net sales in 2004. In 2004, sales to Wal-Mart significant majority of our sales and that our sales to majority of our sales and that our sales to these retailers (including Sam's Club), Toys "R" Us and Target these retailers may increase as a percentage of our total may increase as a percentage of our total sales . At accounted for approximately 28%, 23% and 13%, sales . At December 31, 2002, Wal-Mart (including December 31, 2003, Wal-Mart (including Sam's Club) respectively, of our consolidated net sales. We expect that Sam's Club) accounted for approximately 33% of our accounted for approximately 35% of our accounts a small number of large retailers will continue to account accounts receivable and Toys "R" Us accounted for receivable, Toys "R" Us accounted for approximately 26% for a significant majority of our sales and that our sales to approximately 30% of our accounts receivable . If any of of our accounts receivable and Target accounted for these retailers may increase as a percentage of our total these retailers experience significant financial difficulty approximately 12% of our accounts receivable . If any of sales . In addition, if any of these retailers experience in the future or otherwise fail to satisfy their accounts these retailers experience significant financial difficulty in significant financial difficulty in the future or otherwise payable, our allowance for doubtful accounts receivable the future or otherwise fails to satisfy their accounts fails to satisfy their accounts payable, our allowance for could be insufficient. If any of these retailers reduce payable, our allowance for doubtful accounts receivable doubtful accounts receivable could be insufficient . For their purchases from us, change the term on which we could be insufficient. If any of these retailers reduce example, at December 31, 2004, Wal-Mart (including conduct business with them or experience a future their purchases from us, change the terms on which we Sam's Club) accounted for approximately 30% of our downturn in their business, our business and operating conduct business with them or experience a future accounts receivable, Toys "R" Us accounted for results could be harmed downturn in their business, our business and operating approximately 32% of our accounts receivable and Target 10-Q at 20 . results could be harmed accounted for approximately 14% of our accounts 10-Q at 27 . receivable . If any of these retailers reduce their purchasesfrom us, change the terms on which we conduct business with them or experience a future downturn in their business, our business and operating results could be harmed. 10-K at 50.

T :\CaesSF\LeapFrog\NonPldgs\LeapFrog Dep 3 Retailers chart .doc EXHIBIT H LEAPFROG: 10-Q & 10-K STATEMENTS Agreements with Retailers

8/11/03 11110103 3/10/04 2003 10-0 300310-0 FY03 10- K We do not have long-term agreements with our retailers We do not have long-term agreements with our We do not have long-term agreements with our retailers and changes in our relationships with retailers could retailers and changes in our relationships with and changes in our relationships with retailers could significantly harm our business and operating results. retailers could significantly harm our business and significantly harm our business and operating results. operating results. We do not have long-term agreements with any our We do not have long-term agreements with any of our retailers. As a result, agreements with respect to pricing, We do not have long-term agreements with any of our retailers . As a result, agreements with respect to pricing, shelf space, cooperative advertising or special promotions, retailers . As a result, agreements with respect to shelf space, cooperative advertising or special promotions, among other things, are subject to periodic negotiation with pricing, shelf space, cooperative advertising or special among other things, are subject to periodic negotiation with each retailer . Retailers make no binding long-term promotions, among other things, are subject to periodic each retailer. Retailers make no binding long-term commitments to us regarding purchase volumes and make negotiation with each retailer . Retailers make no commitments to us regarding purchase volumes and make all purchases by delivering one-time purchase orders . If binding long-term commitments to us regarding all purchases by delivering one-time purchase orders . If the number of our products increases as we have planned purchase volumes and make all purchases by delivering the number of our products increases as we have planned or or the roll out of versions of our Learning Center shelf one-time purchase orders . If the number of our the roll out of versions of our Learning Center shelf displays in selected retail stores proceeds as we anticipate, products increases as we have planned or the roll out of displays in selected retail stores proceeds as we anticipate, we will require more retail shelf space to display our versions of our Learning Center shelf displays in we will require more retail shelf space to display our various products. Any retailer could reduce its overall selected retail stores proceeds as we anticipate, we will various products . Any retailer could reduce its overall purchases of our products, reduce the number and variety require more retail shelf space to display our various purchases of our products, reduce the number and variety of our products that it carries and the shelf space allotted products. Any retailer could reduce its overall of our products that it carries and the shelf space allotted for our products, decide not to incorporate versions of purchases of our products, reduce the number and for our products, decide not to incorporate versions of our our Learning Center shelf displays in its stores or variety of our products that it carries and the shelf Learning Center shelf displays in its stores or otherwise otherwise materially change the terms of our current space allottedfor our products, decide not to materially change the terms of our current relationship at relationship at any time. Any such change could incorporate versions of our Learning Center shelf any time. Any such change could significantly harm our significantly harm our business and operating results. displays in its stores or otherwise materially change business and operating results. 10-Q at 21 . the terms of our current relationship at any time. Any 10-K at 37-38 . such change could significantly harm our business and operating results . 10-Q at 22 . 5/7/04 8/6/04 3/28/05 1Q04 10-Q 2Q04 10-Q FY04 10-K

We do not have long-term agreements with our We do not have long-term agreements with our retailers We do not have long-term agreements with our retailers retailers and changes in our relationships with and changes in our relationships with retailers could and changes in our relationships with retailers could retailers could significantly harm our business and significantly harm our business and operating results. significantly harm our business and operating results. operating results. We do not have long-term agreements with any of our We do not have long-term agreements with any of our We do not have long-term agreements with any of our retailers . As a result, agreements with respect to pricing, retailers. As a result, agreements with respect to pricing, retailers . As a result, agreements with respect to pricing, shelf space, cooperative advertising or special promotions, shelf space, cooperative advertising or special promotions, shelf space, cooperative advertising or special among other things, are subject to periodic negotiation among other things, are subject to periodic negotiation promotions, among other things, are subject to periodic with each retailer . Retailers make no binding long-term with each retailer. Retailers make no binding long-term negotiation with each retailer . Retailers make no commitments to us regarding purchase volumes and make commitments to us regarding purchase volumes and make binding long-term commitments to us regarding all purchases by delivering one-time purchase orders . If all purchases by delivering one-time purchase orders . If purchase volumes and make all purchases by delivering the number of our products increases as we have planned the number of our products increases as we have planned one-time purchase orders . If the number of our products or the roll out of versions of our Learning Center shelf or the roll out of versions of our Learning Center shelf increases as we have planned or the roll out of versions displays in selected retail stores proceeds as we anticipate, displays in selected retail stores proceeds as we anticipate, of our Learning Center shelf displays in selected retail we will require more retail shelf space to display our we will require more retail shelf space to display our stores proceeds as we anticipate, we will require more various products . Any retailer could reduce its overall various products . Any retailer could reduce its overall retail shelf space to display our various products . Any purchases of our products, reduce the number and purchases of our products, reduce the number and the shelf space retailer could reduce its overall purchases of our variety of our products that it carries and the shelf space variety of our products that it carries and not to incorporate products, reduce the number and variety of our allottedfor our products, decide not to incorporate allottedfor our products, decide displays in its products that it carries and the shelf space allotted for versions of our Learning Center shelf displays in its versions of our Learning Center shelf the terms of our our products, decide not to incorporate versions of our stores or otherwise materially change the terms of our stores or otherwise materially change current relationship at any time. Any such change could Learning Center shelf displays in its stores or current relationship at any time . Any such change could harm our business and operating results . otherwise materially change the terms of our current significantly harm our business and operating results. significantly . relationship at any time. Any such change could 10-Q at 27 . 10-K at 50 significantly harm our business and operating results. l0-Q at 20 .

T :\CasesSF\LeapFrog\NonPIdgs\LeapFrog Agt with Retailers chart .doc EXHIBIT I LEAPFROG : 10-Q & 10-K STATEMENTS Seasonality

8/11/03 11/10/03 3/10/04 2003 0 0 300310-0 FY03 10-K Our business is seasonal, and therefore our annual operating Our business is seasonal, and therefore our annual operating Our business is seasonal, and therefore our annual operating results will depend, in large part, on sales relating to the brief results will depend, in large part, on sales relating to the brief results depend, in largepart, on sales relating to the brief holiday season. holiday season. holiday season.

Sales of consumer electronics and toy products in the retail Sales of consumer electronics and toy products in the retail Sales of consumer electronics and toy products in the retail channel are highly seasonal, causing the substantial majority of channel are highly seasonal, causing the substantial majority of channel are highly seasonal , causing the substantial majority of our sales to U .S. retailers to occur during the third and fourth our sales to U .S. retailers to occur during the third and fourth our sales to U .S. retailers to occur during the third and fourth quarters . In 2002, approximately 81% of our total net sales quarters . In 2002, approximately 81% of our total net sales quarters . In 2003, approximately 79% of our total net sales occurred during this period. This percentage of total sales may occurred during this period. This percentage of total sales may occurred during this period. This percentage of total sales may increase as retailers become more efficient in their control of increase as retailers become more efficient in their control of increase as retailers become more efficient in their control of inventory levels through just-in-time inventory management inventory levels through just-in-time inventory management inventory levels through just-in-time inventory management systems . Generally, retailers time their orders so that suppliers systems . Generally, retailers time their orders so that suppliers systems. Generally, retailers time their orders so that suppliers like us will fill the orders closer to the time of purchase by like us will fill the orders closer to the time of purchase by like us willfill the orders closer to the time of purchase by consumers, thereby reducing their need to maintain larger on- consumers, thereby reducing their need to maintain larger on- consumers, thereby reducing their need to maintain larger on- hand inventories throughout the year to meet demand While hand inventories throughout the year to meet demand. While hand inventories throughout the year to meet demand. While these techniques reduce retailers' investments in their inventory, these techniques reduce retailers' investments in their inventory, these techniques reduce retailers' investments in their inventory, they increase pressure on suppliers to fill orders promptly and shift they increase pressure on suppliers to fill orders promptly and shift they increase pressure on suppliers to fill orders promptly and shift a significant portion of inventory risk and carrying costs to a significant portion of inventory risk and carrying costs to a significant portion of inventory risk and carrying costs to suppliers like us . The logistics of supplying more product within suppliers like us . The logistics of supplying more product within suppliers like us. The logistics of supplying more product within shorter time periods will increase the risk that we fail to meet shorter time periods will increase the risk that we fail to meet shorter time periods will increase the risk that we fail to meet tight shipping schedules, which could damage our relationships tight shipping schedules, which could damage our relationships tight shipping schedules, which could damage our relationships with retailers, increase our shipping costs or cause sales with retailers, increase our shipping costs or cause sales with retailers, increase our shipping costs or cause sales opportunities to be delayed or lost The seasonal pattern of sales opportunities to be delayed or lost. The seasonal pattern of sales opportunities to be delayed or lost. For example, in the second in the retail channel requires significant use of our working capital in the retail channel requires significant use of our working capital half of 2003, one of our largest retail customers changed its order to manufacture and carry inventory in anticipation of the holiday to manufacture and carry inventory in anticipation of the holiday pattern to occur later in the holiday season, which we believe season, as well as early and accurate forecasting of holiday sales . season, as well as early and accurate forecasting of holiday sales . delayed a significant portion of our net sales to this customer from Failure to predict accurately and respond appropriately to Failure to predict accurately and respond appropriately to the third quarter of 2003 to the fourth quarter of 2003 . The consumer demand on a timely basis to meet seasonal fluctuations, consumer demand on a timely basis to meet seasonal fluctuations, seasonal pattern of sales in the retail channel requires significant or any disruption of consumer buying habits during this key or any disruption of consumer buying habits during this key use of our working capital to manufacture and carry inventory in period, would harm our business and operating results . period, would harm our business and operating results . anticipation of the holiday season, as well as early and accurate 10-Q at 19-20 . 10-Q at 20 . forecasting of holiday sales . Failure to predict accurately and respond appropriately to consumer demand on a timely basis to meet seasonal fluctuations, or any disruption of consumer buyin g habits during this key period, would harm our business and operating results . 10-K at 36 . 5/7/04 8/6/04 3/28/05 1Q04 10-Q 2Q04 10-Q FYO 4 10- K

Our business is seasonal, and therefore our annual operating Our business is seasonal, and therefore our annual operating Our business is seasonal, and therefore our annual operating results depend, in large part, on sales relating to the brief holiday results depend, in largepart, on sales relating to the brief results depend, in large part, on sales relating to the brief season . holiday season. holiday season .

Sales of consumer electronics and toy products in the retail channel Sales of consumer electronics and toy products in the retail Sales of consumer electronics and toy products in the retail are highly seasonal, causing the substantial majority of our sales to channel are highly seasonal, causing the substantial majority of channel are highly seasonal, causing the substantial majority of U.S. retailers to occur during the third and fourth quarters . In 2003, our sales to U.S. retailers to occur during the third and fourth our sales to retailers to occur during the third and fourth quarters . approximately 79% of our total net sales occurred during this quarters . In 2003, approximately 79% of our total net sales In 2004, approximately 76% of our total net sales occurred during period. This percentage of total sales may increase as retailers occurred during this period. This percentage of total sales may this period . This percentage of total sales may increase as retailers become more efficient in their control of inventory levels through increase as retailers become more efficient in their control of become more efficient in their control of inventory levels through just-in-time inventory management systems . Generally, retailers inventory levels through just-in-time inventory management just-in-time inventory management systems. Generally, retailers time their orders so that suppliers like us will fill the orders closer systems . Generally, retailers time their orders so that suppliers time their orders so that suppliers like us will fill the orders to the time of purchase by consumers, thereby reducing their need like us will fill the orders closer to the time of purchase by closer to the time ofpurchase by consumers, thereby reducing to maintain larger on -hand inventories throughout the year to consumers, thereby reducing their need to maintain larger on- their need to maintain larger on-hand inventories throughout meet demand. While these techniques reduce retailers' investments hand inventories throughout the year to meet demand . While the year to meet demand. While these techniques reduce in their inventory, they increase pressure on suppliers to fill orders these techniques reduce retailers' investments in their inventory, retailers' investments in their inventory, they increase pressure on promptly and shift a significant portion of inventory risk and they increase pressure on suppliers to fill orders promptly and suppliers to fill orders promptly and shift a significant portion of carrying costs to suppliers like us . The logistics of supplying more shift a significant portion of inventory risk and carrying costs to inventory risk and carrying costs to suppliers like us . The product within shorter time periods will increase the risk that we suppliers like us . The logistics of supplying more products logistics of supplying more products within shorter time periods fall to meet tight shipping schedules, which could damage our within shorter time periods will increase the risk that we fail to will increase the risk that we fail to meet tight shipping relationships with retailers, increase our shipping costs or cause meet tight shipping schedules, which could damage our schedules, which could damage our relationships with retailers, sales opportunities to be delayed or lost. For example, in the relationships with retailers, increase our shipping costs or cause increase our shipping costs or cause sales opportunities to be second half of 2003, one of our largest retail customers changed its sales opportunities to be delayed or lost. In addition, in the delayed or lost. For example, in the second half of 2004, we had order pattern to occur later in the holiday season, which we believe second half of 2003, one of our largest retail customers changed operational difficulties related to our new U.S. distribution delayed a significant portion of our net sales to this customer from its order pattern to occur later in the holiday season, which we center, which had an adverse impact on our 2004 financial the third quarter of 2003 to the fourth quarter of 2003 . The seasonal believe delayed a significant portion of our net sales to this results. The seasonal pattern of sales in the retail channel requires pattern of sales in the retail channel requires significant use of our customer from the third quarter of 2003 to the fourth quarter of significant use of our working capital to manufacture and carry working capital to manufacture and carry inventory in anticipation 2003 . The seasonal pattern of sales in the retail channel requires inventory in anticipation of the holiday season, as well as early of the holiday season, as well as early and accurate forecasting of significant use of our working capital to manufacture and carry and accurate forecasting of holiday sales . Failure to predict holiday sales . Failure to predict accurately and respond inventory in anticipation of the holiday season, as well as early accurately and respond appropriately to consumer demand on a appropriately to consumer demand on a timely basis to meet and accurate forecasting of holiday sales . Failure to predict timely basis to meet seasonal fluctuations, or any disruption of seasonal fluctuations, or any disruption of consumer buying habits accurately and respond appropriately to consumer demand on a consumer buying habits during this key period, would harm our during this key period, would harm our business and operating timely basis to meet seasonal fluctuations, or any disruption of business and operating results . results. consumer buying habits during this key period, would harm our 10-K at 46-47 . 10-Q at 18-19 . business and operating results . 10-Q at 25 . EXHIBIT J LeapFrog Enterprises Inc . Summary of Defendants' Stock Sales Class Period : 7/24/03 - 10/18/04

DEFENDANT DATE PRICE SHARES PROCEEDS

WOOD 30-Jul-03 $29.770 6,594 $196,303 WOOD 30-Jul-03 $29.770 21'7 $6,460 WOOD 30-Jul-03 $29.770 .16,906 $503,292 WOOD 6-Aug-03 $29.470 8,254 $243,245 WOOD 6-Aug-03 $29.470 21,121 $622,436 WOOD 6-Aug-03 $29.470 217 $6,39 5 WOOD 13-Aug-03 $30.020 271 $8,135 . WOOD 13-Aug-03 $30.020 21,143 $634,71 3 WOOD 13-Aug-03 $30.020 8,232 $247,125 WOOD 20-Aug-03 $33.970 8,097 $275,055 WOOD 20-Aug-03 $33.970 271 $9,206 WOOD 20-Aug-03 $33.970 20,546 $697,948 WOOD 27-Aug-03 $36.280 271 $9,832 WOOD 27-Aug-03 $36.280 20,660 $749,545 WOOD 27-Aug-03 $36.280 8,033 $291,437 WOOD 3-Sep-03 $38.990 7,968 $310,67 2 WOOD 3-Sep-03 $38.990 271 $10,566 WOOD 3-Sep-03 $38.990 21,407 $834,65 9 WOOD 10-Sep-03 $35.650 8,049 $286,947 WOOD 10-Sep-03 $35.650 21,326 $760,272 WOOD 10-Sep-03 $35.650 271 $9,661 WOOD 17-Sep-03 $38.930 21,406 $833,336 WOOD 17-Sep-03 $38.930 7,969 $310,233 WOOD 17-Sep-03 $38.930 271 $10,550 WOOD 24-Sep-03 $40.120 271 $10,873 WOOD 24-Sep-03 $40.120 7,944 $318,71 3 WOOD 24-Sep-03 $40.120 21,431 $859,81 2 WOOD 1-Oct-03 $38.760 217 $8,41 1 WOOD 1-Oct-03 $38.760 . 6,366 $246,746 WOOD 1-Oct-03 $38.760 17,134 $664,114 WOOD 8-Oct-03 $43.950 17,202 $756,028 WOOD 8-Oct-03 $43.950 217 $9,537 WOOD 8-Oct-03 $43.950 6,298 $276,797 WOOD 15-Oct-03 $45.160 6,283 $283,740 WOOD 15-Oct-03 $45 .160 217 $9,800 WOOD 15-Oct-03 $45.160 17,217 $777,520 WOOD 22-Oct-03 $34.010 217 $7,38 0 WOOD 22-Oct-03 $34.010 6,477 $220,283 WOOD 22-Oct-03 $34.010 17,023 $578,952 WOOD 29-Oct-03 $33.790 217 $7,332 WOOD 29-Oct-03 $33.790 6,482 $219,027 WOOD 29-Oct-03 $33.790 17,018 $575,038 WOOD 5-Nov-03 $34.330 271 . $9,303 .WOOD 5-Nov-03 $34.330 8,086 $277,592 WOOD 5-Nov-03 $34.330 21,289 $730,85 1 WOOD 12-Nov-03 $33 .430 8,113 $271,21 8 WOOD 12-Nov-03 $33.430 21,262 $710,789 DEFENDANT DATE PRICE SHARES PROCEEDS

WOOD 12-Nov-03 $33.430 271 $9,060 WOOD 19-Nov-03 $29.520 271 $8,000 WOOD 19-Nov-03 $29.520 14,050 $414,756 WOOD . 19-Nov-03 $29.520 10,653 $314,477 WOOD 26-Nov-03 $30.550 10,653 $325,44 9 WOOD 26-Nov-03 $30.550 13,975 $426,936 WOOD 26-Nov-03 $30.550 271 $8,27 9 WOOD 3-Dec-03 $30.220. '217 $6,558 WOOD 3-Dec-03 $30.220 8,523 $257,565 WOOD 3-Dec-03 $30.220 9,308 $281,288 WOOD 10-Dec-03 $25.320 7,754 $196,33 1 WOOD 10-Dec-03 $25.320 8,523 $215,802 WOOD 10-Dec-03 $25.320 , . 217 $5,494 WOOD 17-Dec-03 $25.470 217 $5,527 WOOD 17-Dec-03 $25.470 8,523 $217,081 WOOD 17-Dec-03 $25.470 7,492 $190,821 WOOD 24-Dec-03 $27.630 8,762 $242,094 WOOD 24-Dec-03 $27.630 217 $5,996 WOOD 24-Dec-03 $27.630 8,523 $235,490 WOOD 31-Dec-03 $26.490 8,523 $225,774 WOOD 31-Dec-03 $26.490 14,977 $396,74 1 WOOD 31-Dec-03 $26.490 217 $5,748 WOOD 7-Jan-04 $29.060 8,271 $240,355 WOOD 7-Jan-04 $29.060 21,104 $613,282 WOOD 7-Jan-04 $29.060 271 $7,875 WOOD 14-Jan-04 $29.780 1,637 $48,750 WOOD 14-Jan-04 $29,780 6,605 $196,697 WOOD 14-Jan-04 $29.780 21,133 $629,34 1 WOOD 14-Jan-04 $29.780 271 $8,070 WOOD 21-Jan-04 $31 .340 271 $8,493 WOOD 21-Jan-04 $31 .340 8,182 $256,424 WOOD 21-Jan-04 . $31 .340 21,1.93 $664,189 WOOD 28-Jan-04 $29.920 8,236 $246,42 1 WOOD 28-Jan-04 $29.920 271 $8,108 WOOD 28-Jan-04 $29.920 21,139 $632,47 9 WOOD 4-Feb-04 $27.090 8,362 $226,527 WOOD 4-Feb-04 $27.090 21,013 $569,242 WOOD 4-Feb-04 $27.090 271 $7,341 WOOD 11-Feb-04 $27.000 20,552 $554,904 WOOD 11-Feb-04 $27.000 271 $7,31 7 WOOD 11-Feb-04 $27.000 8,823 $238,22 1 WOOD 18-Feb-04 $27.690 17,930 $496,482 WOOD 18-Feb-04 $27.590 271 $7,477 WOOD 18-Feb-04 $27.590 1,126 $31,066 WOOD 18-Feb-04 $27.590 2,625 $72,424 WOOD 18-Feb-04 $27.690 7,694 $213,047 WOOD 25-Feb-04 $26.700 264 $7,049 WOOD 7-Sept-04 $18.97 2.688,642 $51,016,982 3,475,588 $76,701,71 0

KALINSKE 1-Aug-03 $30.100 20,000 $602,000 KALINSKE 2-Sep-03 $36.550 25,000 $913,750 KALINSKE 7-Oct-03 $42.700 24,700 $1,054,69 0 KALINSKE 7-Oct-03 $42.900 300 $12,870 DEFENDANT DATE PRICE SHARES PROCEEDS

KALINSKE 4-Nov-03 $33.500 19,500 $653,250 KALINSKE 4-Nov-03 $33.760 500 $16,880 KALINSKE 7-Nov-03 $35.000 5,000 $175,000 KALINSKE 2-Dec-03 $32.100 500 $16,050 KALINSKE 2-Dec-03 $32:030 19,500 $624,585 KALINSKE 6-Jan-04 $28.000 7.777 $217,756 122,777 $4,286,831

BENDER 1-Aug-03 $30.040 20,000 $600,800 BENDER 5-Sep-03 $38.930 20,000 $778,600 BENDER 3-Oct-03 $41 .120 20,000 $822,400 BENDER 10-May-04 $20.380 30,000 $611,400 BENDER 14-Jun-04 $20.020 30,000 $600,600 BENDER 7-Sep-04 $20.030 50,000 $1,001,500 170,000 $4,415,300

CURLEY 1-Aug-03 $29.900 5,000 $149,500 CURLEY 2-Sep-03 $36.750 5,000 $183,750 CURLEY 1-Oct-03 $38.000 5,000 $190,000 CURLEY 3-Nov-03 534.570 5,000 $172,850 CURLEY 1-Dec-03 $31 .500 5,000 $157,500 CURLEY 2-Jan-04 $27.060 5,000 $135,300 30,000 $988,900

FLOWERS 1-Aug-03 530.170 5,000 $150,850 FLOWERS 1-Aug-03 $30.150 5,000 $150,750 . FLOWERS 5-Aug-03 $29.650 5,000 $148,250 FLOWERS 2-Sep-03 $37.090 10,645 $394,823 FLOWERS 2-Sep-03 $37.090 4,355 $161,527 FLOWERS 1-Oct-03 $38.760 10,000 $387,600 FLOWERS 7-Oct-03 $43.060 5,006 $215,300 FLOWERS 3-Nov-03 $34.060 10,000 $340,600 FLOWERS 4-Nov-03 $33.890 5,000 $169,45 0 FLOWERS 4-Nov-03 $25.590 5,000 $127,950 FLOWERS 10-Dec-03 $25.320 5,000 $126,600 FLOWERS 2-Jan-04 $26.780 10,000 $267,800 FLOWERS 21-Jan-04 $32.020 10,000 $320,200 FLOWERS 4-Feb-0.4 $27.090 10,000 $270,900 FLOWERS 1-Mar-04 $25.790 10,000 $257,900 . FLOWERS 1-Apr-04 $19.350 5,000 $96,750 FLOWERS 3-May-04 $21 .460 5,000 $107,300 FLOWERS 1-Jun-04 521 .200 5,000 $106,000 FLOWERS 1-Jul-04 $19.820 5,000 . $99,100 FLOWERS 2-Aug-04 519.560 5,000 $97,800 FLOWERS . 1-Sep-04 $19.620 5,000 $98,100 FLOWERS 1-Oct-04 $20.400 5,000 $102,000 145,000 $4,197,55 0

LALLY 28-Jul-03 $31 .740 6,250 $198,375 LALLY 4-Aug-03 $29.800 6,250 $186,250 LALLY 11-Aug-03 $29.500 6,250 $184,375 LALLY 18-Aug-03 $30.020 6,250 $187,625 LALLY 25-Aug-03 $34.380 6,250 $214,875 DEFENDANT DATE PRICE SHARES PROCEEDS

LALLY 2-Sep-03 $37 .090 6,250 $231,81 3 LALLY 8-Sep-03 $37.320 6 ,250 $233,250 LALLY 15-Sep-03 $36.370 2,500 $90,925 LALLY 22-Sep-03 $37.600 . 2,500 $94,000 LALLY 29-Sep-03 $39.040 2,500 $97,600 LALLY 6-Oct-03 $42.620 2,500 $106,550 LALLY 11-Dec-03 $25.140 6,250 $157,125 LALLY 15-Dec-03 $24.890 6,250 $ 155,563 LALLY 22-Dec-03 $27.910 6,250 $174,438 LALLY 29-Dec-03 $26.670 6,250 $166,688 LALLY 5-Jan-04 $27.430 6,250 $171,438 LALLY 12-Jan-04 $30.510 6,250 $190,688 LALLY 20-Jan-04 $29.770 6,250 $186,063 LALLY 26-Jan-04 $31 .040 6,250 $194,000 LALLY 2-Feb-04 $27.740 2,500 $69,350 LALLY 9-Feb-04 $29.520 2,500 $73,800 LALLY 17-Feb-04 $27.870 2,500 $69,675 LALLY 23-Feb-04 $26.040 2,500 $65,100 LALLY 1-Mar-04 $26. 150 2,500 $65,375 LALLY 8-Mar-04 $26. 510 2,500 $66,275 (ALLY 15-Mar-04 $19. 380 2,500 $48,450 LALLY 22-Mar-04 $19.330 2,500 $48,325 LALLY 29-Mar-04 $20.040 2,500 $50,100 LALLY 5-Apr-04 $19.960 2,500 $49,900 LALLY 12-Apr-04 $20.860 2,500 $52,150 LALLY 19-Apr-04 $22.050 2,500 $55,125 (ALLY 26-Apr-04 $23. 050 2,500 $57,625 LALLY 3-May-04 $21 .240 2,500 $53,100 LALLY 10-May-04 $20.430 2,500 $51,075 LALLY 17-May-04 $19.900 2,500 $49,750 LALLY 24-May-04 $20.090 2,500 $50,225 LALLY 1-Jun-04 $21 .210 2,500 $53,025 LALLY 7-Jun-04 $21 .500 2,500 $53,750 LALLY 14-Jun-04 $20.150 2,500 $50,375 153,750 $4,354,18 8

MARGGRAFF 30-Jul-03 $29.900 2,000 $59,800 MARGGRAFF 6-Aug-03 $29.700 360 $10,692 MARGGRAFF 6-Aug-03 $29. 700 1 ,640 $48,708 MARGGRAFF 13-Aug-03 $29. 750 2,000 $59,500 MARGGRAFF 20-Aug-03 $31 .860 2,000 $63,720 MARGGRAFF 27-Aug-03 $34.630 2,000 $69,260 MARGGRAFF 3-Sep-03 $38 .990 2,000 $77,980 MARGGRAFF 1.0-Sep-03 $35 .100 2,000 $70,200 MARGGRAFF 17-Sep-03 $38.970 2,000 $77,940 MARGGRAFF 24-Sep -03 $40.120 2,000 $80,240 MARGGRAFF 1-Oct-03 $38.760 2,000 $77,520 MARGGRAFF 8-Oct-03 $43.950 2,000 $87,900 MARGGRAFF 15-Oct-03 $45. 160 2,000 $90,320 MARGGRAFF 22-Oct-03 $34.010 2,000 $68,020 MARGGRAFF 29-Oct-03 $33.790 2,000 $67,58 0 MARGGRAFF 5-Nov-03 $34.330 2,000 $68,660 MARGGRAFF 11-Nov-03 $35 .210 2,716 $95,630 MARGGRAFF 11-Nov-03 $35 .220 2,716 $95,658 DEFENDANT DATE PRICE SHARES PROCEEDS

MARGGRAFF 12-Nov-03 $33.430 2,000 $66,860 MARGGRAFF 19-Nov-03 $29.520 2,000 $59,040 MARGGRAFF 26-Nov-03 $30.550 2,000 $61,100 MARGGRAFF 3-Dec-03 $30.220 2,000 .$60,44 0 MARGGRAFF 10-Dec-03 $25.320 2,000 $50,640 MARGGRAFF 17-Dec-03 $25.470 2,000 $50,940 MARGGRAFF 24-Dec-03 $27.630 2,000 $55,260 MARGGRAFF 31-Dec-03 $26.490 2,000 $52,980 MARGGRAFF 7-Jan-04 $29.060 2,000 $58,120 MARGGRAFF 14-Jan-04 $29.780 2,000 $59,560 MARGGRAFF 21-Jan-04 $31 .340 2,000 $62,680 MARGGRAFF 28-Jan-04 $31 .340 2,000 $62,680 MARGGRAFF 4-Feb-04 $27.090 2,000 $54,180 MARGGRAFF 11-Feb-04 $27.000 2,000 $54,000 MARGGRAFF 18-Feb-04 $27.590 2,000 $55,180 MARGGRAFF 25-Feb-04 $26.780 2,000 $53,560 MARGGRAFF 3-Mar-04 $26.000 2,000 $52,000 69,432 $2,238,548

RIOUX 1-Aug-03 $30.050 15,000 $450,750 RIOUX 7-Aug-03 $29.220 15,000 $438,300 RIOUX 2-Sep-03 $37.090 15,000 $556,350 RIOUX 4-Sep-03 $38.950 15,000 $584,250 RIOUX 1-Oct-03 $38.760. 15,000 $581,400 RIOUX 2-Oct-03 $40.150 15,000 $602,250 RIOUX 3-Nov-03 $34.060 15,000 $510,900 RIOUX 6-Nov-03 $34.320 15,000 $514,80 0 RIOUX 1-Dec-03 $31 .790 15,000 . $476,850 RIOUX 4-Dec-03 $27.280 15,000 $409,200 RIOUX 2-Jan-04 $26.780 30,000 $803,400 180,000 $5,928,450

TOTAL FOR ALL DEFENDANTS 4,346,547 $103,111,476

T:\CasesSF\LeapFrog\NonPldgs\insider .doc EXHIBIT K LEAPFROG: 10-Q & 10-K STATEMENTS Rapid Growt h

8/11/03 11/10/03 3/10/04 2Q03 10-Q 3Q03 10-Q FY03 10- K Our rapid growth has presented significant challenges to Our rapid growth has presented significant challenges Our rapid growth has presented significant challenges our management systems and resources, and we may to our management systems and resources, and we may to our management systems and resources, and we may experience difficulties managing our growth. experience difficulties managing our growth. experience difficulties managing our growth.

Since the introduction of our first platform, we have grown Since the introduction of our first platform, we have Since 2001, we have grown rapidly, both domestically rapidly, both domestically and internationally . Our net grown rapidly, both domestically and internationally . and internationally . Our net sales have grown from sales have grown from $71 .9 million in 1999 to $531 .8 Our net sales have grown from $71 .9 million in 1999 to $314.2 million in 2001 to $680.0 million in 2003 . million in 2002 . During this period, the number of $531 .8 million in 2002 . During this period, the number During this period, the number of different products we different products we offered at retail also increased of different products we offered at retail also increased offered at retail also increased significantly, and we have significantly . At December 31, 1999, we had 85 significantly . At December 31, 1999, we had 85 opened offices in Canada, France, Macau and Mexico . employees and at December 31, 2002 we had 690 employees and at December 31, 2002 we had 690 At December 31, 2001, we had 438 full-time employees employees. In addition, we plan to hire a significant employees . In addition, we plan to hire a significant and at December 31, 2003, we had 869 full-time number of new employees in 2003 . This expansion has number of new employees in 2004 . This expansion has employees . In addition, we plan to hire a significant presented, and continues to present, significant challenges presented, and continues to present, significant number of new employees in 2004. We are upgrading for our management systems and resources . If we fail to challenges for our management systems and resources . existing and implementing new operational software develop and maintain management systems and resources If we fail to develop and maintain management systems systems, including supply chain management systems. sufficient to keep pace with our planned growth, our and resources sufficient to keep pace with our planned Further, we are planning on consolidating multiple operating results could suffer. growth, our operating results could suffer. third party distribution warehouses into a single 10-Q at 24 . 10-Q at 25 . distribution warehouse to handle our needs. This expansion has presented, and continues to present, significant challenges for our management systems and resources. If we fail to develop and maintain management systems and resources sufficient to keep pace with our planned growth, our operating results could suffer . 10-K at 41 . 5/7/04 8/6/04 3/28/05 1Q04 10-Q 2Q04 10-Q FY04 10- K

Our rapid growth has presented significant Our rapid growth has presented significant challenges to Our rapid growth has presented significant challenges to challenges to our management systems and resources, our management systems and resources, and we may our management systems and resources, particularly in and we may experience difficulties managing our experience difficulties managing our growth . our supply chain and information systems, and as a result growth. we may experience difficulties managing our growth. Since 2001, we have grown rapidly, both domestically and Since 2001, we have grown rapidly, both domestically internationally . Our net sales have grown from $314.2 We have grown rapidly, both domestically and and internationally . Our net sales have grown from million in 2001 to $680 .0 million in 2003 . During this internationally . Our net sales were $314 .2 million in 2001 $314 .2 million in 2001 to $680.0 million in 2003 . period, the number of different products we offered at retail and $640 .3 million in 2004 . During this period, the number During this period, the number of different products we also increased significantly, and we have opened offices in of different products we offered at retail also increased offered at retail also increased significantly, and we Canada, France, Macau and Mexico . At December 31, significantly, and we have opened offices in Canada, have opened offices in Canada, France, Macau and 2001, we had 438 full-time employees and at December 31, France, Macau and Mexico . At December 31, 2001, we had Mexico . At December 31, 2001, we had 438 full-time 2003, we had 869 full-time employees . In addition, we 438 full-time employees and at March 9, 2005, we had 889 employees and at December 31, 2003, we had 869 full- plan to hire a significant number of new employees in our full-time employees. We are upgrading existing and time employees . In addition, we plan to hire a Asia-based offices in 2004 . We are upgrading existing implementing new operational information systems, significant number of new employees in our Asia- and implementing new operational software systems, including supply chain management systems. Further, in based offices in 2004 . We are upgrading existing and including supply chain management systems. Further, in July 2004, we began consolidating multiple third-party implementing new operational software systems, July 2004, we began consolidating multiple third party distribution warehouses into a single distribution including supply chain management systems. distribution warehouses into a single distribution warehouse to handle our needs, and this warehouse is Further, in mid-2004, we are planning on warehouse to handle our needs . This warehouse is being being operated by a new thirdparty logistics service consolidating multiple third party distribution operated by a new third party logistics service provider. provider. During the second half of 2004, we had warehouses into a single distribution warehouse to This expansion has presented, and continues to present, significant difficulties operating our management systems handle our needs. This warehouse will be operated significant challenges for our management systems and and the new consolidated distribution center during our by a new third party logistics service provider. This resources. If we fail to develop and maintain peak shipping season. This expansion has presented, and expansion has presented, and continues to present, management systems and resources sufficient to keep continues to present, significant challenges for our significant challenges for our management systems pace with our planned growth , our operating results management systems and resources and has resulted in a and resources. If we fail to develop and maintain could suffer. sijinificant adverse impact on our operating and financial management systems and resources sufficient to keep 10-Q at 30 . results. If we fail to improve and maintain management pace with our planned growth, our operating results systems and resources sufficient to keep pace with our could suffer. business needs, our operating results could continue to 10-Q at 24 . suffer. 10-K at 48 . EXHIBIT L LEAPFROG: 10-Q & 10 -K STATEMENTS Platform s

8/11/03 11/10/03 3/10/04 303 10-0 3003 10-1 FY03 10-K We currently rely, and expect to continue to rely, on our We currently rely, and expect to continue to rely, on our We currently rely, and expect to continue to rely, on our LeapPad platform and related interactive books for a LeapPad platform and related interactive books for a LeapPadfamily of platforms and related interactive significant portion ofour sales. significant portion of our sales. books for a significant portion ofour sales.

Our LeapPad platform and related interactive books Our LeapPad platform and related interactive books Our LeapPad, LeapPad Plus Writing and Quantum Pad accounted for approximately 48% of our net sales in 2002 accounted for approximately 48% of our net sales in platforms, each of which is based on our NearTouch No other product line, together with its related software, 2002. No other product line, together with its related technology, together with interactive books related to accounted for more than approximately 10% of our net software, accounted for more than approximately 10% of those platforms that are generally compatible with any of sales [in] 2002 . A significant portion of our future sales our net sales in 2002 . A significant portion of our future those platforms, accounted for an aggregate of will depend on the continued commercial success of our sales will depend on the continued commercial success of approximately 47% of our net sales in 2003 . Our My LeapPad platform and related interactive books . If the our LeapPad platform and related interactive books . If First LeapPad platform and My First LeapPad interactive salesfor our LeapPad platform are below expected sales the salesfor our LeapPad platform are below expected books accounted for an aggregate of approximately 12% or if sales of our LeapPad interactive books do not grow sales or if sales of our LeapPad interactive books do not of our net sales in 2003 . No other product line, together as we anticipate, sales of our other products may not be grow as we anticipate, sales of our other products may with any related software, accounted for more than able to compensatefor these shortfalls and our overall not be able to compensatefor these shortfalls and our approximately 10% of our net sales in 2003 . A sales would suffer. overall sales would suffer . significant portion of our future sales will depend on the 10-Q at 21 . 10-Q at 22 . continued commercial success of our LeapPad, LeapPad Plus Writing, Quantum Pad platforms and compatible interactive books, and our My First LeapPad platforms and related interactive books . If the sales for our LeapPad, LeapPad Plus Writing, Quantum Pad and My First LeapPad pla forms are below expected sales or if sales of their related interactive books do not grow as we anticipate, sales of our other products may not be able to compensatefor these shortfalls and our overall sales would suffer . 10-K at 37 . 5/7/04 8/6/04 3/28/05 1Q04 10-Q 2Q04 10-Q FY04 10- K

We currently rely, and expect to continue to rely, on We currently rely, and expect to continue to rely, on our We currently rely, and expect to continue to rely, on our our LeapPadfamily of platforms and related LeapPadfamily of platforms and related interactive books LeapPadfamily of platforms and related interactive books interactive books for a significant portion of our for a significant portion of our sales. for a significant portion ofour sales. sales. Our Classic LeapPad, LeapPad Plus Writing and Quantum Our Classic LeapPad, LeapPad Plus Writing and Quantum Our LeapPad, LeapPad Plus Writing and Quantum Pad Pad platforms, each of which is based on our NearTouch LeapPad platforms, each of which is based on our platforms, each of which is based on our NearTouch technology, together with interactive books related to those NearTouch technology, together with interactive books technology, together with interactive books related to platforms that are generally compatible with any of those related to those platforms that are generally compatible those platforms that are generally compatible with any platforms, accounted for an aggregate of approximately with any of those platforms, accounted for an aggregate of of those platforms, accounted for an aggregate of 47% of our net sales in 2003 . Our My First LeapPad approximately 37% of our net sales in 2004 . Our My First approximately 47% of our net sales in 2003. Our My platform and My First LeapPad interactive books LeapPad platform and My First LeapPad interactive books First LeapPad platform and My First LeapPad accounted for an aggregate of approximately 12% of our accounted for an aggregate of approximately 9% of our net interactive books accounted for an aggregate of net sales in 2003 . No other product line, together with any sales in 2004, and our Leapster learning system and its approximately 12% of our net sales in 2003 . No other related software, accounted for more than approximately interactive software accounted for an aggregate of product line, together with any related software, 10% of our net sales in 2003. A significant portion of our approximately 16% of our net sales in 2004 . No other accounted for more than approximately 10% of our net future sales will depend on the continued commercial product line, together with any related software, accounted sales in 2003 . A significant portion of our future sales success of our Classic LeapPad, LeapPad Plus Writing, for more than approximately 10% of our net sales through will depend on the continued commercial success of Quantum Pad platforms and compatible interactive books, 2004 . A significant portion of our future sales will depend our LeapPad, LeapPad Plus Writing, Quantum Pad and our My First LeapPad platforms and related interactive on the continued commercial success of our Classic platforms and compatible interactive books, and our books . If the sales for our Classic LeapPad, LeapPad LeapPad, LeapPad Plus Writing, Quantum LeapPad My First LeapPad platforms and related interactive Plus Writing, Quantum Pad and My First LeapPad platforms and compatible interactive books, our My First books . If the sales for our LeapPad, LeapPad Plus platforms are below expected sales or if sales of their LeapPad platforms and related interactive books, and our Writing, Quantum Pad and My First LeapPad related interactive books do not grow as we anticipate, Leapster learning system and related interactive software . platforms are below expected sales or if sales of their sales of our other products may not be able to compensate If the sales for our Classic LeapPad, LeapPad Plus related interactive books do not grow as we anticipate, for these shortfalls and our overall sales would suffer. Writing, Quantum LeapPad and My First LeapPad sales of our other products may not be able to 10-Q at 27 . platforms and our Leapster learning system are below compensate for these shortfalls and our overall sales expected sales or if sales of their related interactive books would suffer. do not grow as we anticipate, sales of our otherproducts 10-Q at 20 . may not be able to compensatefor these shortfalls and our overall sales would suffer. 10-K at 49 . chart.doc EXHIBIT M CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUAN T TO SECTION 302

CERTIFICATIONS

I, Michael C . Wood ; certify that:

1. . I have reviewed this quarterly report on .Forml0-Q of LeapFrog Enterprises, Inc .;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report ; 3: Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report ;-

4. The registrant's other certifying officer and I .are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rulesl3a - 15(e) and 1 5d-l5(e)) for the registrant and have : a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by o thers within those entities , particularly during the period in which this report is being prepared ; b) [intentionally omitted]

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure . controls and-procedures, as of the end of the. period covered by this report based on such evaluation ; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal .quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions) :

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record ; process, summarize and report financial information ; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date : August 11, 2003 IS/ MICHAEL C . WOOD

Michael C. Wood Chief Executive Officer CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT T O SECTION 302

CERTIFICATIONS

I, James P. Curley, certify that:

1 . I have reviewed this quarterly report on Form 10-Q of LeapFrog Enterprises, Inc. ; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report ; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules I3a-15(e) and 15d-15(e)) for the registrant and have : a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [intentionally omitted] c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation ; and

d) Disclosed in this repo rt any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer an d I have disclosed, based on our most recent evaluation of internal control over financial repo rting, to the registrant's auditors and the audit commi ttee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information ; and

b) ' Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting .

Date: August 11, 2003 Is/ JAMES P . CURLEY

James P. Curley Chief Financial Officer CERTIFICATION OF THE CHIEF EXECUTIVE AND FINANCIA L OFFICERS

CERTIFICATION PURSUANT TO SECTION 906 OF THE PUBLIC COMPANY ACCOUNTING REFORM AND INVESTOR PROTECTION ACT OF 2002 (18 U.S.C. § 1350, AS ADOPTED )

Pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U .S.C. § 1350, as adopted, the "Sarbanes-Oxley Act"), Michael C . Wood, the President and Chief Executive Officer of LeapFrog Enterprises, Inc . (the "Company"), and James P . Curley, the Chief Financial Officer of the Company, each hereby certifies that, to the best of his knowledge :

1. The Company's Quarterly Report on Form 10-Q for the period ended June 30, 2003, to which this Certification is attached as Exhibit 32 .01 (the "Periodic Report"), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by the Periodic Report and results of operations of the Company for the period covered by the Periodic Report.

Dated: August 11, 2003

/S/ MICHAEL C : WOOD /S/ JAMES P . CURLEY

Michael C. Wood James P. Curley Chief Executive Officer and President Chief Financial Officer

Note: This certification accompanies the Periodic Report pursuant to § 906 of the Sarbanes-Oxley Act and shall not be deemed "filed" by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended . i SECTION 302 CEO CERTIFICATION

CERTIFICATIONS I, Michael C . Wood, certify that: 1 . I have reviewed this quarterly report on Form 10-Q of LeapFrog Enterprises, Inc .; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report ; 3. Based on my-knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 1.5d-15(e)) for the registrant and have : a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report, is being prepared ; b) [intentionally omitted] c) Evaluated the effectiveness of the registrant's disclosure . controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation ; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to . materially affect, the registrant's internal control over financial reporting; and - 5. . The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions) : a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information ; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting . Date: November 1.0, 2003 /s/ Michael C . Woo d

Michael C. Wood Chief Executive Officer SECTION 302 CFO CERTIFICATION

CERTIFICATIONS I, James P . Curley, certify that: 1 . I have reviewed this quarterly report on Form 10-Q of LeapFrog Enterprises, Inc .; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report ; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and, for, the periods presented in this report ; 4. The'registrant's other certifying officer and I are responsible for establishing and maintaining . disclosure controls and procedures (as defined in Exchange Act Rules 13a-I5(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [intentionally omitted] c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and - 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions) : a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that*involves management or other employees who have a significant role in the registrant's internal control over financial reporting .

Date: November 10, 2003 /s/ James P. Curley -

James P. Curley Chief Financial Officer SECTION 906 CEO AND CFO CERTIFICATION S

CERTIFICATION PURSUANT TO SECTION 906 OF THE PUBLIC COMPANY ACCOUNTING REFORM AND INVESTOR PROTECTION ACT OF 200 2 (18 U.S.C. § 1350, AS ADOPTED) Pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U .S.C. § 1350, as adopted, the "Sarbanes-Oxley Act"), Michael C. Wood, the President and Chief Executive Officer of LeapFrog Enterprises, Inc . (the "Company"), and James P. Curley, the Chief Financial Officer of the Company, each hereby certifies that, to the best of his knowledge : 1. The Company's Quarterly Report on Form 10-Q for the period ended September 30, 2003, to which this Certification is attached as Exhibit 32 .01 (the "Periodic Report"), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended ; and 2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by the Periodic Report and results of operations of the Company for the period covered by the Periodic Report.

Dated: November 10, 2003 /s/ Michael C. Wood /s/ James P . Curley

Michael C . Wood James P . Curley Chief Executive Officer and President Chief Financial Office r

Note: This certification accompanies the Periodic Report pursuant to § 906 of the Sarbanes-Oxley Act and shall not be deemed "filed" by the Company for purposes of Section 18 of the Securities Exchange Act of 1934,as amended . CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUAN T TO SECTION 302

CERTIFICATION S I, Thomas J. Kalinske, certify that: I . I have reviewed this annual report on Form 1 .0-K of LeapFrog Enterprises, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations. and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 1Sd-IS(e)) for the registrant and have : a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,. to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the .period in which this report is being prepared; b) [intentionally omitted] c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation ; and . d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant'.s internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions) : . a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information ; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting .

Date: March 10, 2004 /s/ Thomas J. Kalinske

Thomas J . Kalinske Chief Executive Officer CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT T O SECTION 302

CERTIFICATION S I, James P . Curley, certify that: 1 . I have reviewed this annual report on Form 10-K of LeapFrog Enterprises, Inc .; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report ; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report ; 4. The.registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-I5(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, .is made known to us by others within those entities, particularly during the period in which this report is being prepared ; b) [intentionally omitted] c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation ; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and .I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions) : a). All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably. likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting .

Date: March 10,-2004 Is/ James P. Curley

James P. Curley Chief Financial Officer CERTIFICATION OF THE CEO AND THE CFO PURSUANT TO SECTION 906

CERTIFICATION PURSUANT TO SECTION 906 OF TIE PUBLIC COMPANY ACCOUNT ING REFORM AND INVESTOR PROTECTION ACT OF 2002 (18 U.S.C. § 1350, AS ADOPTED)

Pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U .S.C. § 1350, as adopted, the "Sarbanes-Oxley Act"), Thomas J . Kalinske, the Chief Executive Officer of LeapFrog Enterprises, Inc . (the "Company"), and James P . Curley, the Chief Financial Officer of the Company, each hereby certifies that, to the best of his knowledge: 1. The Company's Annual Report .on Form 10-K for the period ended December 31, 2003, to which this Certification is attached as Exhibit 32 .01 (the "Annual Report"), fully complies with . the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Annual Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by the Annual Report and results of operations of the Company for the period covered by the Annual Report. Dated: March 10, 2004

/s/ Thomas J . Kalinkse /s/ James P. Curley

Thomas J . Kalinske James P. Curley Chief Executive Officer Chief Financial Office r Note : This certification accompanies the Annual Report pursuant to § 906 of the Sarbanes-Oxley Act and shall not be deemed "filed" by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended . CERTIFICATION OF THE CEO PURSUANT TO SECTION 30 2

CERTIFICATIONS I, Thomas J . Kalinske, certify that: 1. I have reviewed this quarterly report on Foam 10-Q of LeapFrog Enterprises, Inc .; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have : a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [intentionally omitted ] c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation ; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent . evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date : May 7, 2004 /s/ THOMAS J. KALmsKE

Thomas J. Kalioske Chief Executive Officer ,. CERTIFICATION OF THE-CFO PURSUANT TO SECTION 30 2

CERTIFICATIONS

I, James P. Curley, certify that: 1 . I have-reviewed this quarterly report on Form 10-Q of Leapfrog-Enterprises, Inc .; 2. Based on my knowledge, this-report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report ; 3. Based on my knowledge, the financial statements, and other financial information included in this report, .fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report ; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-l5(e) and 15d-15(e)) for the registrant and-have : a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; . b) [intentionally omitted] c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report. based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions) : a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information ; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting .

Date : May 7, 2004 /s/ JAWS P . CURLEY

James P. Curley Chief FinancialOfficer CERTIFICATION OF THE CEO AND THE CFO PURSUANT T O SECTION 906

CERTIFICATION PURSUANT TO SECTION 906 OF THE PUBLIC COMPANY ACCOUNTING REFORM AND INVESTOR PROTECTION ACT OF 2002 (18 U.S.C. § 1350, AS ADOPTED)

Pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U .S.C. § 1350, as adopted, the "Sarbanes-Oxley Act"), Thomas J . Kalinske, the Chief Executive Officer of LeapFrog Enterprises, Inc . (the "Company"), and James P. Curley, the Chief Financial Officer of the Company, each hereby certifies that, to the best of his knowledge: 1 . The Company's Quarterly Report on Form 10-Q for the period ended March 31, 2004, to which this Certification is attached as Exhibit 32 .01 (the "Quarterly Report"), fully complies'with the requirements of Section 13(a) or Section 15 (d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by the Quarterly Report and results of operations of the Company for the period covered by the Quarterly Report . Dated: May 7, 2Q04

/s/ THOMAS J. KALINSKE /s/ JAMES P . CURLEY

Thomas J. Kalinske James P. Curley Chief Executive Officer Chief Financial Officer Note : This certification accompanies the Quarterly Report pursuant to § 906 of the Sarbanes-Oxley Act and shall not be deemed "filed" by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended . SECTION 302 CEO CERTIFICATION

CERTIFICATIONS .

I, Thomas J. Kalinske, certify that : 1. I have reviewed this quarterly report on Form 10-Q of LeapFrog Enterprises, Inc .; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report ; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report ; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have : a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [intentionally omitted] c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation ; and d) Disclosed in this report any change in the registrant's -internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions) : a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or o ther employees who have a signi ficant role in the registrant's internal control over financial reporting.

Date: August 6, 2004 /s/ Thomas J. Kalinske

Thomas J. Kalinske Chief Executive Officer SECTION 302 CFO CERTIFICATION

CERTIFICATION S I, James P . .Curley, certify that : 1. 1 have reviewed this quarterly report on Form 10-Q of LeapFrog Enterprises, Inc .; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were rmade, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as . of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared ; b) [intentionally omitted ] c) Evaluated the effectiveness of the registrant's disclosure .controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation ; and d) Disclosed in this report any change in the registrant's internal ) control over financial reporting that occurr&d during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5 . The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's . board of directors (or persons performing the equivalent functions) : a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting .

Date: August 6, 2004 /s/ James P. Curley

James P. Curley Chief Financial Officer SECTION 906 CEO CERTIFICATION

CERTIFICATION PURSUANT TO SECTION 906 OF THE PUBLIC COMPANY ACCOUNTING REFORM AND INVESTOR PROTECTION ACT OF 2002 (18 U.S.C. § 1350, AS ADOPTED)

Pursuant to Section 906 ofthe Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. § 1350, as adopted , the "Sarbanes -Oxley Act"), Thomas J. Kalinske, the Chief Executive Officer of LeapFrog Enterprises, Inc. (the "Company"), and James P. Curley, the Chief Financial Officer of the Company , eac1 hereby certifies that, to the best of his knowledge: 1 . The Company 's Quarterly Report on Form 10-Q. for the period ended June 30, 2004, to which this Certification is attached as Exhibit 32 .01 (the "Quarterly Report"), fully complies with the requirements of Section 13(a) or Section 15 (d) of the Securities Exch ange Act of 1934, as amended; and 2. The information contained in the Quarterly Report fairly presents , in all material respects , the financial condition of the Company at the end of the period covered by the Quarterly Report. and results of operations of the Company for the period covered by the Quarterly Report.

Dated: August 6, 2004

/s/ Thomas J. Kalinske /s/ James P . Curley

Thomas J . Kalinske James P. Curley Chief Executive Officer Chief Financial Officer

Note: This certification accomp anies the Quarterly Report pursuant to § 906 ofthe Sarb anes-Oxley Act and shall not be deemed "filed" by the Company for purposes of Section 18 of the Secu rities Exchange Act of 1934, as amended . CERTIFICATION OF CEO (PURSUANT 10 SECTION 30 2

CERTIFICATIONS I, Thomas J. Kalinske, certify that: 1 . 1 have reviewed this annual report on Form 10-K of LeapFrog Enterprises, Inc. ; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the .fmancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report ; • 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules l3a-15(f) and 15d-15(f)) for the registrant and have : a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed, under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared ; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles ; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures' and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this . report based on such evaluation ; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting ; and 5. The registrant's other certifying . officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions) : a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report fuiancial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting .

Date: March 28, 2005 /s/ Thomas J. Kalinske

Thomas J. Kalinske Chief Executive Officer CERTIFICATION OF CFO PURSUANT TO SECTION 30 2

CERTIFICATIONS

I, William B . Chiasson, certify that: 1 . I have reviewed this annual report on Form 10-T( of LeapFrog Enterprises, Inc .; 2. Based on my knowledge , this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made , in light ofthe circumstances under which such statements were made, not misleading with respect to the period covered by th is report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined .in Exchange Act Rules 13a-15(e) and 15d -15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15 (f) and 15d-15(f)) for the registrant and have : a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that-material information relating to the registrant, including its consolidated subsidiaries, is made known to us by o thers within those entities , particularly during the period in which this report is being prepared ; b) Designed such internal control over financial reporting, or caused such internal control over fin ancial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of fin ancial statements for external purposes in accord ance with generally accepted accounting principles ; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as ofthe end of the period covered by this report based on such evaluation ; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the.registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect , the registrant's internal control over financial reporting; and 5 . The regis trant's other certifying officer and I have disclosed, based on our most recent evaluation of inte rnal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies. and material weaknesses in the design or operation of inte rnal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process , summarize and report financial information ; and b) Any. fraud, whether or not material , that involves m anagement or o ther employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 28, 2005 Is/ William B . Chiasson

William B . Chiasson Chief Financial Officer CERTIFICATION OF CEO AND CFO PURSUANT TO SECTION 906

CERTIFICATION PURSUANT TO SECTION 906 OF THE PUBLIC COMPAN Y ACCOUNTING REFORM AND -INVESTOR PROTECTION ACT OF 2002 (18 U.S.C. § 1350, AS ADOPTED)

Pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. § 1350, as adopted, the "Sarbanes -Oxley Act"), Thomas J. Kalinske , the Chief Executive Officer of LeapFrog Enterprises, Inc. (the "Comp any"), and William B . Chiasson, the Chief Financial Officer of the Company, each hereby certi fies that, to the best of his knowledge : 1 . The Company's Annual Report on Form 10-K for the period ended December 31, 2004, to which this Certification is attached as Exhibit 32.01 (the "Annual Report"), fully complies wi th the requirements of Section- 13(a) or Section 15(d) ofthe.Securities Exchange Act of 1934 , as amended; and 2. The information contained in the Annual Report fairly presents, in all material respects, the financial condition of the Company at the end ofthe period covered by the Annual Report and results of operations of the Company for the pe riod covered by the Annual Report.

Dated: March 28, 200 5

/s/ Thomas J. Kalinske /s/ William B . Chiasson

Thomas J . Kalinske William B . Chiasson Chief Executive Officer Chief Financi al Officer

Note: This certification accomp anies the Annual Report pursuant to § 906 of the Sarbanes-Oxley Act and shall not be deemed "filed" by the Company for purposes of Section 18 of the Securities Exch ange Act .of 1934, as amended.