DEF 14A 1 v308157_def14a.htm DEF 14A

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



 

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934



 
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Filed by a Party other than the Registrant o

Check the appropriate box:

o Preliminary Proxy Statement
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x Definitive Proxy Statement
o Definitive Additional Materials
o Soliciting Material Pursuant to § 240.14a-12

LEAPFROG ENTERPRISES, INC.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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LEAPFROG ENTERPRISES, INC.
6401 Hollis Street, Suite 100
Emeryville, California 94608-1463

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To Be Held On Tuesday, June 5, 2012

Dear Stockholder:

You are cordially invited to attend the annual meeting of stockholders of LeapFrog Enterprises, Inc., a Delaware corporation. The meeting will be held on Tuesday, June 5, 2012 at 9:00 a.m. pacific daylight time at our headquarters located at 6401 Hollis Street, Suite 100, Emeryville, California.

Proposals to be considered at the annual meeting:

1. Election of our board’s eight nominees for director to serve for the ensuing year and until their successors are elected.
2. Ratification of the selection by the audit committee of our board of directors of Ernst & Young LLP as our independent registered public accounting firm for our fiscal year ending December 31, 2012.
3. Approval of an amendment to the LeapFrog Enterprises, Inc. 2011 Equity Incentive Plan.

These items of business are more fully described in the proxy statement accompanying this notice. The record date for the annual meeting is April 11, 2012. Only stockholders of record at the close of business on that date may vote at the meeting or any postponement or adjournment thereof.

We are providing our stockholders with access to the proxy materials over the Internet using the “Notice and Access” delivery model established by the Securities and Exchange Commission. This permits us to conserve natural resources and reduces our printing costs, while giving our stockholders a convenient and efficient way to access our proxy materials and vote their shares. On or about April 19, 2012, we intend to mail a Notice of Internet Availability of Proxy Materials to our stockholders, informing them that our notice of annual meeting and proxy statement, annual report to stockholders and voting instructions are available on the Internet. As described in more detail in that notice, stockholders may choose to access our materials through the Internet or may request to receive paper copies of the proxy materials.

By Order of the Board of Directors
[GRAPHIC MISSING]
Robert L. Lattuga
Vice President and General Counsel

Emeryville, California
April 19, 2012

You are cordially invited to attend the meeting in person. Whether or not you expect to attend the meeting, please vote on the matters to be considered as promptly as possible in order to ensure your representation at the meeting. You may vote via the Internet or by requesting a printed copy of the proxy materials and returning the proxy card that will be mailed to you. Even if you have voted by proxy, you may still vote in person if you attend the meeting. Please note, however, that if your shares are held of record by a broker, bank or other nominee and you wish to vote at the meeting, you must obtain a proxy issued in your name from that record holder.


 
 

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2012 ANNUAL MEETING OF STOCKHOLDERS
NOTICE OF ANNUAL MEETING AND PROXY STATEMENT
TABLE OF CONTENTS

 
QUESTIONS AND ANSWERS ABOUT THESE PROXY MATERIALS AND VOTING     1  
Why did I receive a notice regarding the availability of proxy materials on the Internet?     1  
Why are these proxy materials being made available?     1  
How do I attend the annual meeting?     1  
Who can vote at the annual meeting?     1  
What am I voting on?     2  
How do I vote?     2  
What if I return a proxy card or otherwise complete a ballot or give voting instructions
but do not make specific choices
    2  
Who is paying for this proxy solicitation?     3  
What does it mean if I receive more than one Notice?     3  
Can I change my vote after submitting my proxy?     3  
When are stockholder proposals due for next year’s annual meeting?     3  
What are broker non-votes? How do I vote if I hold my shares in street name?     3  
How are votes counted?     4  
How many votes are needed to approve each of the proposals?     4  
What is the quorum requirement?     4  
How many votes do I have?     4  
How can I find out the results of the voting at the annual meeting?     4  
PROPOSAL ONE—ELECTION OF DIRECTORS     5  
Nominees     5  
Required Vote     9  
Recommendation     9  
PROPOSAL TWO—RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM     10  
Independent Registered Public Accounting Firm Fee Information     10  
Pre-Approval Procedures of Audit and Non-Audit Services by the Independent Registered Public Accounting Firm     11  
Required Vote     11  
Recommendation     11  
PROPOSAL THREE—APPROVAL OF AN AMENDMENT OF THE
LEAPFROG ENTERPRISES, INC. 2011 EQUITY INCENTIVE PLAN
    12  
Background     12  
Summary of the Amended and Restated 2011 EIP     13  
U.S. Federal Tax Consequences     15  
Equity Compensation Plan Information     18  
Required Vote     18  
Recommendation     18  
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT     19  
TRANSACTIONS WITH RELATED PERSONS     23  
BOARD OF DIRECTORS AND CORPORATE GOVERNANCE     24  
Independence of the Board of Directors     24  
Board Meetings     24  
Board Leadership Structure     24  

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Role of Board in Risk Oversight     25  
Committees of the Board     26  
Audit Committee     27  
Report of the Audit Committee     28  
Compensation Committee     29  
Compensation Committee Interlocks and Insider Participation     30  
Nominating and Corporate Governance Committee     31  
Corporate Governance     32  
Stockholder Communications with Directors     33  
DIRECTOR COMPENSATION     34  
EXECUTIVE COMPENSATION     37  
Compensation Discussion and Analysis     37  
Report of the Compensation Committee     48  
Summary Compensation Information     49  
Grants of Plan-Based Awards     51  
Employment Arrangements     52  
Outstanding Equity Awards at December 31, 2011     53  
Option Exercises and Stock Vested     58  
Potential Payments Upon Termination or Change in Control     60  
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE     65  

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6401 Hollis Street, Suite 100
Emeryville, California 94608-1463

PROXY STATEMENT
FOR THE 2012 ANNUAL MEETING OF STOCKHOLDERS

QUESTIONS AND ANSWERS ABOUT THESE PROXY MATERIALS AND VOTING

Why did I receive a notice regarding the availability of proxy materials on the Internet?

As we have done in previous years, under rules adopted by the Securities and Exchange Commission, or SEC, we have elected to provide access to our proxy materials over the Internet. Accordingly, we are sending a Notice of Internet Availability of Proxy Materials, or the Notice, to our stockholders of record. All stockholders will have the ability to access the proxy materials on the website referred to in the Notice or to request to receive a printed set of the proxy materials. Instructions on how to access the proxy materials over the Internet or to request a printed copy may be found in the Notice. You will not receive a printed copy of the proxy materials unless you request one in the manner set forth in the Notice. This permits us to conserve natural resources and reduces our printing costs, while giving stockholders a convenient and efficient way to access our proxy materials and vote their shares.

We intend to mail the Notice and, as required, any other printed proxy materials, on or about April 19, 2012 to all stockholders of record entitled to vote at the 2012 annual meeting of stockholders, or annual meeting.

Why are these proxy materials being made available?

We are providing you with these proxy materials because the board of directors of LeapFrog Enterprises, Inc. (which we refer to in this proxy statement as LeapFrog, the Company, we or us) is soliciting your proxy to vote at the annual meeting. You are invited to attend the annual meeting and we request that you vote on the proposals described in this proxy statement. However, you do not need to attend the meeting to vote your shares. Instead, you may simply vote your shares by proxy via the Internet or, if you receive a paper copy of the proxy statement, by completing, signing and returning a paper proxy card.

How do I attend the annual meeting?

The meeting will be held on Tuesday, June 5, 2012 at 9:00 a.m. pacific daylight time at our headquarters located at 6401 Hollis Street, Suite 100, in Emeryville, California. Directions to the annual meeting may be found at www.leapfrog.com under About Us — Contact Us.

Who can vote at the annual meeting?

Only stockholders of record at the close of business on April 11, 2012 will be entitled to vote at the annual meeting. On the record date, there were 55,623,814 shares of Class A common stock and 11,113,354 shares of Class B common stock outstanding and entitled to vote.

  Stockholder of Record: Shares Registered in Your Name

If, on April 11, 2012, your shares of LeapFrog’s Class A common stock were registered directly with American Stock Transfer and Trust Company, our transfer agent for our Class A common stock, or your shares of LeapFrog’s Class B common stock were registered directly with LeapFrog, then you are a stockholder of record. As a stockholder of record, you may vote in person at the meeting or vote by proxy. Whether or not you plan to attend the meeting, we urge you to vote your proxy on the matters to be

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considered as promptly as possible in order to ensure your representation at the meeting. You may vote your proxy via the Internet or by requesting a printed copy of the proxy materials and returning the enclosed proxy card.

  Beneficial Owner: Shares Registered in the Name of a Broker or Bank

If, on April 11, 2012, your shares were held in an account at a brokerage firm, bank, dealer, or other similar organization, then you are the beneficial owner of shares held in “street name” and the Notice is being forwarded to you by that organization. The organization holding your account is considered the stockholder of record for purposes of voting at the annual meeting. As a beneficial owner, you have the right to direct your broker or other agent on how to vote the shares in your account. You are also invited to attend the annual meeting. However, since you are not the stockholder of record, you may not vote your shares in person at the meeting unless you request and obtain a valid proxy from your broker or other agent.

What am I voting on?

There are three matters scheduled for a vote and for which we are soliciting your proxy:

1. Election of our board’s eight nominees for director.
2. Ratification of the selection by the audit committee of our board of directors of Ernst & Young LLP as our independent registered public accounting firm for our fiscal year ending December 31, 2012.
3. Approval of an amendment to the LeapFrog Enterprises, Inc. 2011 Equity Incentive Plan, or 2011 EIP.

You may either vote “For” all the nominees to the board of directors or you may “Withhold” your vote for any nominee(s) you specify. For the proposal to ratify the selection of Ernst & Young LLP as our independent registered public accounting firm and the proposal to amend the 2011 EIP, you may vote “For” or “Against” the proposal or abstain from voting.

How do I vote?

The procedures for voting are as follows:

  Voting via the Internet

You can vote your shares via the Internet by following the instructions in the Notice. The Internet voting procedures are designed to authenticate your identity and to allow you to vote your shares and confirm your voting instructions have been properly recorded. If you vote via the Internet, you do not need to mail a proxy card.

  Voting by Mail

You can vote your shares by mail by requesting that a printed copy of the proxy materials be sent to your address. When you receive the proxy materials, you may fill out the proxy card enclosed therein and return it per the instructions on the card.

What if I return a proxy card or otherwise complete a ballot or give voting instructions but do not make specific choices?

If you return a signed and dated proxy card or otherwise complete a ballot or voting instructions without marking your selections, your shares will be voted, as applicable, “For” the election of all eight nominees for director, “For” the ratification of Ernst & Young LLP as our independent registered public accounting firm for our fiscal year ending December 31, 2012 and “For” approval of the amendment to the 2011 EIP. The board of directors knows of no other matters that will be presented for consideration at the annual meeting. If any other matter is properly presented at the meeting, your proxy (one of the individuals named on your proxy card) will vote your shares using his best judgment.

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Who is paying for this proxy solicitation?

We are paying for the entire cost of soliciting proxies. In addition to these proxy materials, our directors and employees may also solicit proxies in person, by telephone or by other means of communication. Directors and employees will not be paid any additional compensation for soliciting proxies. We may also reimburse brokerage firms, banks and other agents for the cost of forwarding proxy materials to beneficial owners.

What does it mean if I receive more than one Notice?

If you receive more than one Notice, your shares are registered in more than one name or are registered in different accounts. Please follow the voting instructions on the Notice and vote your shares for each name or account to ensure that all of your shares are voted.

Can I change my vote after submitting my proxy?

Yes. You can revoke your proxy at any time before the final vote at the meeting. If you are the record holder of your shares, you may revoke your proxy in any one of four ways:

You may submit another properly completed proxy card with a later date;
You may grant a subsequent proxy through our Internet voting site;
You may send a written notice that you are revoking your proxy to our Corporate Secretary at 6401 Hollis Street, Suite 100, Emeryville, California 94608-1463; or
You may attend the annual meeting and vote in person. Simply attending the meeting will not, by itself, revoke your proxy. Please remember, as mentioned above, if you are a beneficial owner of shares you may not vote your shares in person at the meeting unless you request and obtain a valid proxy from your broker, bank or other agent that holds your shares in street name.

If your shares are held by your broker, bank or another agent as a nominee or agent, you should follow the instructions provided by your broker, bank or other agent.

When are stockholder proposals due for next year’s annual meeting?

To be considered for inclusion in next year’s proxy materials, your proposal must be submitted in writing by December 21, 2012 to our Corporate Secretary at 6401 Hollis Street, Suite 100, Emeryville, California 94608-1463. If you wish to submit a proposal that is not to be included in next year’s proxy materials or nominate a director, you must do so between February 2, 2013 and March 4, 2013. You are also advised to review our bylaws, which contain additional requirements about advance notice of stockholder proposals and director nominations.

What are broker non-votes? How do I vote if I hold my shares in street name?

A “broker non-vote” occurs when a nominee holding shares for a beneficial owner does not vote on a particular proposal because the nominee does not have discretionary voting power with respect to that proposal and has not received instructions with respect to that proposal from the beneficial owner (despite voting on at least one other proposal for which it does have discretionary authority or for which it has received instructions).

If your shares are held by your broker as your nominee (that is, in “street name”), you will need to obtain a proxy form from the institution that holds your shares and follow the instructions included on that form regarding how to instruct your broker to vote your shares. If you do not give instructions to your broker, your broker can vote your shares with respect to routine “discretionary” items, but not with respect to “non-discretionary” items under the rules of the New York Stock Exchange, or NYSE, on which your broker may vote shares held in street name in the absence of your voting instructions. On non-discretionary items for which you do not give your broker instructions, the shares will be treated as broker non-votes. Under NYSE rules, elections of directors are considered

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to be non-routine and, therefore, brokers and other nominees will not be able to vote in the election of directors unless they receive instructions from the beneficial owners of the shares.

How are votes counted?

Votes will be counted by the inspector of election appointed for the meeting, who will separately count “For” and “Withhold” votes and any broker non-votes for the election of directors. Broker non-votes will not count for or against any nominees.

With respect to the ratification of Ernst & Young and the approval of the amendment to the 2011 EIP, the inspector of election will separately count “For” and “Against” votes. Abstentions will be counted towards the vote total for the proposal, and will have the same effect as “Against” votes. Broker non-votes will have no effect and will not be counted towards the vote total for the proposal.

How many votes are needed to approve each of the proposals?

Proposal 1 — Election of our eight nominees for director.  The eight nominees receiving the most “For” votes (among votes properly cast in person or by proxy) will be elected. Broker non-votes will have no effect.
Proposal 2 — Ratification of the selection by the audit committee of our board of directors of Ernst & Young LLP as the independent registered public accounting firm of LeapFrog for our fiscal year ending December 31, 2012.  This proposal must receive a “For” vote from the holders of a majority of the voting power present and entitled to vote either in person or by proxy on the proposal. If you “Abstain” from voting, it will have the same effect as an “Against” vote.
Proposal 3 — Approval of an amendment to the 2011 EIP.  This proposal must receive a “For” vote from the holders of a majority of the voting power present and entitled to vote either in person or by proxy on the proposal. If you “Abstain” from voting, it will have the same effect as an “Against” vote.

What is the quorum requirement?

A quorum of stockholders is necessary to hold a valid meeting. A quorum will be present if at the meeting there is present in person or represented by proxy the holders of outstanding shares of Class A and Class B common stock entitled to cast a majority of the votes that could be cast by all outstanding shares of Class A and Class B common stock voting together as a class. On the record date, there were 55,623,814 shares of Class A common stock outstanding and 11,113,354 shares of Class B common stock outstanding, all of which are entitled to vote and represent a total 166,757,354 votes. Thus, holders of shares representing at least 83,378,678 votes must be present in person or represented by proxy at the meeting to have a quorum.

Shares that are voted in person or by proxy are treated as being present at the meeting for purposes of establishing a quorum. Abstentions and broker non-votes will also be counted for purposes of calculating whether a quorum is present at the annual meeting. If there is no quorum, the holders of shares representing a majority of the votes present at the meeting may adjourn the meeting to another date.

How many votes do I have?

On each matter to be voted upon, for holders of our Class A common stock, you have one vote for each share of Class A common stock you owned as of April 11, 2012, and for holders of our Class B common stock, you have ten votes for each share of Class B common stock you owned as of April 11, 2012.

How can I find out the results of the voting at the annual meeting?

Preliminary voting results will be announced at the annual meeting. Final voting results will be published in a current report on Form 8-K that we expect to file within four business days after the annual meeting. If final voting results are not available to us in time to file a Form 8-K within four business days after the meeting, we intend to file a Form 8-K to publish preliminary results and, within four business days after the final results are known to us, file an additional Form 8-K to publish the final results.

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PROPOSAL ONE
  
ELECTION OF DIRECTORS

Pursuant to our certificate of incorporation, the number of authorized directors on our board of directors immediately following the 2012 annual meeting has been fixed at eight by a resolution of our board of directors. There are eight nominees for director at this annual meeting. Stockholders cannot submit proxies voting for a greater number of persons than the eight nominees named in this Proposal One. Each director to be elected will hold office until the next annual meeting of stockholders and until his successor is elected or until the director’s death, resignation or removal. Each nominee listed below is currently a director of LeapFrog. Each of these nominees was elected by the stockholders except for Randy O. Rissman, who was appointed by our board of directors on August 11, 2011.

Directors are elected by a plurality of the votes properly cast in person or by proxy. The eight nominees receiving the highest number of affirmative votes will be elected. Shares represented by executed proxies will be voted, if authority to do so is not withheld, for the election of the eight nominees named below. If any nominee becomes unavailable for election as a result of an unexpected occurrence, shares that would have been voted for such nominee will instead be voted for the election of a substitute nominee proposed by our board of directors and the nominating and corporate governance committee. Each person nominated for election has agreed to serve if elected. LeapFrog has no reason to believe that any nominee will be unable to serve.

Nominees

The following table sets forth information as of March 31, 2012 with respect to the nominees for election to our board of directors:

   
Name   Age   Position/Office Held with LeapFrog
John Barbour   52   Chief Executive Officer and Director
William B. Chiasson   59   Chairman of the Board
Thomas J. Kalinske   67   Vice Chairman of the Board
Paul T. Marinelli   44   Director
Stanley E. Maron   63   Director
E. Stanton McKee, Jr.   67   Director
Randy O. Rissman   64   Director
Caden C. Wang   59   Director

Our board and the nominating and corporate governance committee seek to assemble a board that possesses a diversity of background and experience in areas relevant to our business. To that end, the nominating and corporate governance committee has identified and evaluated nominees in the broader context of the board’s overall composition, with the goal of recruiting and nominating members who complement and strengthen the skills of other members and who possess the highest personal and professional ethics, integrity and values and have demonstrated excellence in his or her field, have the ability to exercise sound business judgment and have the commitment to rigorously represent the long-term interests of the Company’s stockholders. The brief biographies below include information regarding the specific and particular experience, qualifications, attributes or skills of each nominee that led the committee to believe that, as of the date of this proxy statement, that nominee should continue to serve on the board. However, each of the members of the committee may have a variety of reasons why he or she believes a particular person would be an appropriate board member, and these views may differ from the views of other members.

John Barbour has served as our Chief Executive Officer and as a member of our board of directors since March 2011. Prior to joining LeapFrog, he served as President of the GameHouse division of RealNetworks, Inc., a digital media company, from October 2008 to August 2010. From October 2006 to October 2008, Mr. Barbour served as the Managing Partner of Volta Capital, LLC, a strategy and investment consulting firm. From 1999 to June 2006, Mr. Barbour served in various capacities for Toys “R” Us, Inc., a retailer of children’s toys and products. He served as President, Toys “R” Us U.S. from August 2004 to June 2006, as

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President, Toys “R” Us International and Chairman, Toys “R” Us Japan from February 2002 to August 2004, and President and Chief Executive Officer of toysrus.com from 1999 to 2002. Mr. Barbour has also held senior level positions with Hasbro, Inc., Oddzon Products Inc., and Universal Matchbox Group, Ltd. Mr. Barbour holds a B.Sc. in Chemistry, with Honors, from the University of Glasgow.

Mr. Barbour’s in-depth knowledge and experience, both in the U.S. and globally, with the products, technologies, distribution channels, and consumer preferences in our core markets provides considerable value and expertise to the board of directors. He has spent 25 years building global consumer and Internet businesses in both traditional retail and direct-to-consumer environments. He has knowledge and experience with how our largest customers operate, having led the successful turnaround of the Toys “R” Us U.S. and International divisions. He also has leadership experience at other world class toy companies such as Hasbro, Russ Berrie and Matchbox. His online toy and gaming experience, building toysrus.com into a leading global online retailer of toys and while at the GameHouse Division of Real Networks, brings an experienced perspective necessary to the board of directors in Internet and e-commerce issues, an area that is of strategic importance to the Company.

William B. Chiasson has served as a member of our board of directors since March 2010 and as the Chairman of our board of directors since March 2011. Previously, Mr. Chiasson served as our Chief Executive Officer from September 2010 to March 2011, as President and Chief Executive Officer from March 2010 to September 2010 and as Chief Financial Officer from November 2004 to February 2010. Prior to joining LeapFrog, he served as Senior Vice President and Chief Financial Officer of Levi Strauss & Co., a marketer of apparel, from August 1998 to December 2003. From January 1988 to August 1998, Mr. Chiasson served in varying capacities with Kraft Foods, Inc., a division of Phillip Morris Companies and a manufacturer and seller of branded foods and beverages, most recently as Senior Vice President, Finance and Information Technology. From June 1979 to January 1988, Mr. Chiasson served in varying capacities with Baxter Healthcare, most recently as its Vice President and Controller for the Hospital Group. Mr. Chiasson received his B.A. from the University of Arizona and his M.B.A. from the University of Southern California.

Mr. Chiasson’s ongoing leadership role at LeapFrog contributes a deep understanding of our day-to-day operations to the board of directors. He brings many years of experience with branded consumer products companies through his experience at LeapFrog, Levi Strauss & Co. and Kraft Foods, Inc. Also, his long service as a public-company executive officer gives him extensive knowledge of and experience with business operations and strategy, including compensation and corporate governance matters, finance and accounting issues, regulatory requirements, and risk awareness and management. Mr. Chiasson also offers substantial finance and strategy experience, having served as our Chief Financial Officer and as the Chief Financial Officer of Levi Strauss & Co., and in other senior financial roles at other public companies.

Thomas J. Kalinske has served on our board of directors since September 1997, and has served as the Vice Chairman of our board of directors since July 2006. He was the Chairman of our board of directors from September 1997 to February 2004. Mr. Kalinske served as our Chief Executive Officer at two different times, first from September 1997 to March 2002 and again from February 2004 to July 2006. From April 2007 to May 2008, Mr. Kalinske served as Chief Executive Officer of cFares, Inc., an online meta search company. From 1996 to February 2004, Mr. Kalinske served as the President of Knowledge Universe (now Mounte LLC), a private company focused on building leading companies in areas relating to education, technology and career management and the improvement of individual and corporate performance. From 1990 to 1996, he served as President and Chief Executive Officer of Sega of America, a leading video game and entertainment company. Prior to that, he was President and Chief Executive Officer of the Universal Matchbox Group, a manufacture of games, toys and children’s vehicles, from 1987 to 1990. Prior to that, he served as President and Co-Chief Executive Officer of Mattel, Inc., a leading toy manufacturer and public company. Mr. Kalinske has served as Chair of the Toy Manufacturers Association of America and, in 1997, he was inducted into the Toy Industry Hall of Fame. Mr. Kalinske served as a director on the board of directors of Blackboard Inc., a publicly held company that provided enterprise learning software applications, from April 2007 until its acquisition in October 2011. He has served on the board of directors and audit committee of Cambium Learning Group, Inc., a publicly held company that provides research-based learning solutions for at-risk and special student populations, since February 2010. Mr. Kalinske also serves as Executive Chairman of the

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board of directors of Moonshoot, a privately held developer of online English language learning games for non-English speaking children. Mr. Kalinske earned a B.S. from the University of Wisconsin and an M.B.A. from the University of Arizona.

Mr. Kalinske has been a leader in a number of technology, toy and education companies, and brings extensive experience with electronic gaming and toys to LeapFrog and its board of directors. He has extensive experience in the toy industry, having served as Co-Chief Executive Officer of Mattel, and as chair of the Toy Manufacturer’s Association of America, and having later served as our Chief Executive Officer and Chairman. In addition, Mr. Kalinske has served in various leadership positions within LeapFrog since its inception. He brings to the board a deep understanding of the LeapFrog business and organization, and extensive experience in the areas of technology, toys, gaming and educational ventures, all areas that align closely with LeapFrog’s continuing strategic focus on technology-based multimedia learning platforms. His background in relevant industries and his long career of leadership as a director and as an officer of various companies, including as a director for multiple public companies provides the board with pertinent strategic and business insight. Mr. Kalinske is an independent director under Section 303A.02 of the NYSE listing standards.

Paul T. Marinelli has served as a member of our board of directors since March 2009. Mr. Marinelli has served as Vice President of Lawrence Investments, LLC, or Lawrence Investments, a private equity investment firm that is controlled by Lawrence J. Ellison, since May 2004. From September 1999 to May 2004, he held the position of Corporate Development Group Director at Cadence Design Systems, an electronic design automation software and services company, where he managed several dozen acquisitions and strategic investments. Prior to 1999, Mr. Marinelli held various financial roles at PricewaterhouseCoopers, a global professional services firm, AlliedSignal, an aerospace, automotive and engineering company, and EMCON, an environmental engineering firm. Mr. Marinelli earned a B.S. from the University of California, Berkeley, and an M.B.A. from Cornell University. Mr. Marinelli has served as a member of our nominating and corporate governance committee since March 2009.

Mr. Marinelli’s educational background and experience in finance and business development at various companies, including a major auditing firm, provide the board with extensive expertise in matters such as mergers and acquisitions and financings. In addition, Mr. Marinelli’s experience at Cadence Design Systems gives him insight into and experience at a technology-based business, which aligns with LeapFrog’s significant technology focus. Mr. Marinelli’s service as Vice President of Lawrence Investments also enables him to represent our stockholders and serve as a liaison between the board and one of our major stockholders.

Stanley E. Maron has served as a member of our board of directors since September 1997. Since 1994, Mr. Maron has served as a senior partner in the law firm of Maron & Sandler, a Professional Corporation, which he co-founded. He specializes in corporate and tax law. Prior to forming Maron & Sandler, he was a senior partner in the Los Angeles law firm of Buchalter, Nemer, Fields & Younger (now Buchalter Nemer), serving at the firm from 1975 to 1994. Mr. Maron currently serves as a director of Heron International, a privately held European real estate development company, and also serves as an officer and director of privately held companies affiliated with Knowledge Learning Corporation, a for-profit provider of early child care learning. Mr. Maron was previously a director of Nextera Enterprises, Inc., a consumer products company, until 2008. Mr. Maron earned a B.A. from the University of California, Berkeley and a J.D. from the University of California, Los Angeles. Mr. Maron has served on our audit committee since July 2006, and on our compensation and nominating and corporate governance committees since May 1, 2008.

Mr. Maron’s long tenure on our board of directors contributes continuity and a detailed understanding of LeapFrog’s business and industry to our board of directors and the three committees on which he serves. His ongoing work as a senior corporate and tax attorney gives him legal expertise and experience that are valuable to the board when analyzing issues that involve such legal considerations. His experience serving as a director of LeapFrog and other companies has also provided him with valuable knowledge regarding accounting and financial reporting matters. In addition, his experience as a corporate lawyer and his service as a director of other companies provides him with a broad perspective on corporate governance practices for boards of directors, knowledge and experience with board duties and responsibilities in the context of major corporate

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transactions and the phases of corporate existence, and insight into trends and best practices for areas like compensation and benefits, risk management and talent development. Mr. Maron is an independent director under Section 303A.02 of the NYSE listing standards, which permits him to serve on our audit committee. In addition, Mr. Maron qualifies as a “non-employee director” within the meaning of Section 16 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and as an “outside” director within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, which allows him to be part of our performance compensation award subcommittee, as discussed below under “Board of Directors and Corporate Governance — Committees of the Board — Compensation Committee.”

E. Stanton McKee, Jr. has served as a member of our board of directors since November 2003. From 1989 until his retirement in November 2002, Mr. McKee served in various positions at Electronic Arts Inc., a developer and publisher of interactive entertainment and a public company, most recently as Executive Vice President and Chief Financial and Administrative Officer. From 1982 to 1989, Mr. McKee was Chief Financial Officer of Digital Research, Inc., a privately held developer of operating systems, computer languages and applications. Mr. McKee also served in the consulting division of Arthur Andersen for seven years. Mr. McKee served on the board of directors and as Chair of the audit committee of ArcSight, Inc., a publicly held company that provided security and compliance management software and appliances to government and commercial entities, from February 2005 until its acquisition by Hewlett Packard in 2010. Mr. McKee has served on numerous private company and joint venture boards and currently serves on the board of a private company. Mr. McKee earned a B.A. and an M.B.A. from Stanford University. Mr. McKee has served as the Chair of our audit committee since November 2003 and as a member of our compensation committee since July 2009.

Mr. McKee has extensive financial reporting, financial transaction, investor relations, and general financial and management experience, having served as a chief financial officer for more than 20 years, including more than 13 years with a publicly held company. He has also had responsibility for manufacturing, supply chain, and some international operations, all of which are components of LeapFrog’s business. He has extensive experience with mergers and acquisitions and strategic transactions having been responsible for corporate development for a number of years at Electronic Arts Inc., executing many acquisitions, investments and joint ventures, both domestically and internationally, in addition to his chief financial officer duties. His experience in the electronic game business, including both content development and retail distribution oversight, has direct applicability to LeapFrog’s business. He is a financial expert as defined in applicable SEC rules, and the chairman of our audit committee based on his education and substantial experience in the field. His work at Electronic Arts and his service on the boards of directors of several companies give him broad-based knowledge in corporate governance, compensation and financial matters currently faced by companies operating in industries similar to LeapFrog’s. Mr. McKee is an independent director under Section 303A.02 of the NYSE listing standards, which permits him to serve on our audit committee. In addition, Mr. McKee qualifies as a “non-employee director” within the meaning of Section 16 of the Exchange Act, and as an “outside” director within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, which allows him to be part of our performance compensation award subcommittee, as discussed below under “Board of Directors and Corporate Governance — Committees of the Board — Compensation Committee.”

Randy O. Rissman has served as a member of our board of directors since August 2011. Mr. Rissman is currently managing director of Leo Capital Holdings, LLC, a venture capital fund he founded in 2000, which makes early stage investments in technology and media-based companies focused on consumer Internet and mobile applications. From 2005 to 2010, he was a director of 4Kids Entertainment, Inc., an American film and television production company. From 1978 to 1998, Mr. Rissman served as Chief Executive Officer of Tiger Electronics, Inc., an early pioneer of children’s electronic gaming he co-founded, which was sold to Hasbro, Inc. in 1998. Mr. Rissman currently serves on the board of several private companies in which Leo Capital Holdings has made an investment. Mr. Rissman holds a bachelor’s degree from the University of Michigan and an M.B.A. from the Harvard Business School.

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Mr. Rissman brings deep experience in manufacturing and marketing branded children’s products, including 20 year’s experience as chief executive officer of Tiger Electronics, Inc. His long service within the toy industry gives him extensive knowledge of and experience with business operations and strategy, including strategic planning, compensation plans, and sales and marketing. Mr. Rissman also offers substantial content and production experience, having served as a director of 4Kids Entertainment, Inc. and in other senior roles at privately funded companies focused on children’s content. Mr. Rissman was recommended to the board of directors by Mr. Kalinske, a non-management director. Mr. Rissman is an independent director under Section 303A.02 of the NYSE listing standards.

Caden C. Wang has served as a member of our board of directors since April 2005. From June 1999 until his retirement in December 2001, Mr. Wang served as Executive Vice President and Chief Financial Officer of LVMH Moët Hennessy Louis Vuitton S.A. Selective Retailing Group, which included various international retail holdings such as DFS, Sephora and Miami Cruiseline Services. He also served as the Chief Financial Officer for DFS Group Limited, a leading luxury retailer catering to the traveling public, Gump’s Corp., a luxury home furnishings and home décor retailer, and Cost Plus, Inc., a chain of specialty import/retail stores. Since October 2003, Mr. Wang has served on the board of directors of bebe stores, inc., a publicly held company that designs, develops and produces women’s apparel and accessories, chairs its audit committee and is a member of its nominating and corporate governance committee. From August 2005 through August 2007, Mr. Wang served on the board of directors of Fossil, Inc., a publicly held company that designs, develops, markets and distributes fashion-related consumer products, and was a member of its audit committee, nominating and corporate governance committee and a special committee advising on option backdating. He earned a B.A. and an M.B.A. from the University of California, Los Angeles. Mr. Wang has served as a member of our audit committee since April 2005 and a member of our nominating and corporate governance committee since November 2006 (and as the Chair since March 2009). He also served as a member of our compensation committee from March 2009 until July 2011, and previously as a member and the Chair of our compensation committee from April 2005 to November 2006.

Mr. Wang has extensive accounting, financial reporting and finance experience, having served as the chief financial officer of various private companies during his career and as the chair of the audit committee of a public company. He is a financial expert, as defined in applicable SEC rules, based on his formal education and substantial experience in the field. Mr. Wang’s experience as an executive officer of various consumer products and retail companies and as a director of multiple public companies gives him broad-based experience in corporate governance, compensation and financial matters currently faced by public consumer products companies. In addition, Mr. Wang brings extensive knowledge of and experience with business operations and strategy from his service with these companies, including international operations. Mr. Wang is an independent director under Section 303A.02 of the NYSE listing standards and he qualifies as a “non-employee director” within the meaning of Section 16 of the Exchange Act, which permits him to serve on the audit committee.

Required Vote

The eight nominees receiving the highest number of “FOR” votes shall be elected as directors. Under the rules of the NYSE, brokers are prohibited from giving proxies to vote on elections of directors unless the beneficial owner of such shares has given voting instructions on the matter. This means that if your broker is the record holder of your shares, you must give voting instructions to your broker with respect to the eight nominees in this Proposal One if you want your broker to vote your shares on the matter. Otherwise, your shares will be treated as broker non-votes. Broker non-votes will have no effect on the outcome of the vote.

Recommendation

The Board of Directors recommends a vote FOR each named nominee.

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PROPOSAL TWO
  
RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED
  
PUBLIC ACCOUNTING FIRM

The audit committee of our board of directors has selected Ernst & Young LLP, or Ernst & Young, as our independent registered public accounting firm for the fiscal year ending December 31, 2012, and has further directed that management submit the selection of an independent registered public accounting firm for ratification by the stockholders at the annual meeting. Ernst & Young has audited our consolidated financial statements since September 1997. Representatives of Ernst & Young are expected to be present at the annual meeting, will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions.

Neither our bylaws nor other governing documents or law require stockholder ratification of the selection of Ernst & Young as our independent registered public accounting firm. However, the audit committee is submitting the selection of Ernst & Young to the stockholders for ratification as a matter of good corporate practice. If the stockholders fail to ratify the selection, the audit committee will reconsider whether or not to retain that firm. Even if the selection is ratified, the audit committee in its discretion may direct the appointment of a different independent registered public accounting firm at any time during the year if they determine that such a change would be in the best interests of the company and our stockholders.

Independent Registered Public Accounting Firm Fee Information

In connection with the audit of our 2012 financial statements, we expect to enter into an engagement agreement with Ernst & Young that will set forth the terms by which Ernst & Young would perform audit services for us, including responsibilities of Ernst & Young and management in the conduct of the audit and estimated fees. Our engagement agreements with Ernst & Young are typically subject to alternative dispute resolution procedures.

The following table represents aggregate fees billed or to be billed to us for services performed for the fiscal years ended December 31, 2011 and 2010, by Ernst & Young, our independent registered public accounting firm.

   
  Fiscal Year
(in thousands)
     2011   2010
Audit Fees   $ 840     $ 1,142  
Audit-Related Fees     16        
Tax Fees     76       70  
All Other Fees            
Total Fees   $ 932     $ 1,212  

All services provided by Ernst & Young for the fiscal years ended December 31, 2011 and 2010 were approved by the audit committee.

  Audit Fees

The aggregate fees billed or expected to be billed by Ernst & Young for financial audit services totaled approximately $0.8 million for 2011 and $1.1 million for 2010.

  Audit-Related Fees

There were $16,000 in audit-related fees paid to Ernst & Young in 2011, corresponding to fees for auditor consents prepared in connection with two registration statements filed by the Company during the year. For 2010, there were no fees for audit-related services other than the audit fees specified above.

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  Tax Fees

The aggregate fees billed by Ernst & Young for tax services were $75,710 for 2011 and $70,419 for 2010, and included a review of our U.S. federal and California state tax returns. In addition, our 2011 fees also included a study of our 2010 research and development credits and our 2010 fees included a study of our 2009 research and development credits.

  All Other Fees

There were no other fees paid to Ernst & Young in 2011 and 2010.

Pre-Approval Procedures of Audit and Non-Audit Services by the Independent Registered Public Accounting Firm

The audit committee’s charter requires it to pre-approve all audit and non-audit services performed by the independent registered public accounting firm. As permitted by the charter, the audit committee has delegated to the Chair of the audit committee, Mr. E. Stanton McKee, Jr., the authority to grant such pre-approvals, provided that all approvals made by the Chair are presented to the full audit committee for its ratification at each of its scheduled meetings. In determining whether to approve audit and non-audit services to be performed by Ernst & Young, the audit committee takes into consideration the fees to be paid for such services and whether such fees would affect the independence of the independent registered public accounting firm in performing its audit function. In addition, when determining whether to approve non-audit services to be performed by Ernst & Young, the audit committee considers whether the performance of such services is compatible with maintaining the independence of the independent registered public accounting firm in performing its audit function, and confirms that the non-audit services will not include the prohibited activities set forth in Section 201 of the Sarbanes-Oxley Act of 2002. The audit committee has determined that the rendering of the services other than audit services by Ernst & Young in 2011 and 2010 was compatible with maintaining the registered public accounting firm’s independence.

Required Vote

Ratification of the appointment of Ernst & Young as our independent registered public accounting firm for the fiscal year ending December 31, 2012 requires a “FOR” vote from a majority of the voting power present and entitled to vote either in person or by proxy on the proposal in order to pass. If you “Abstain” from voting, it will have the same effect as an “Against” vote. If you return a signed and dated proxy card or otherwise complete a ballot or voting instructions without marking your selections, your shares will be voted “FOR” ratification of the appointment of Ernst & Young.

Recommendation

The Board of Directors recommends a vote FOR Proposal Two.

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PROPOSAL THREE
  
APPROVAL OF AN AMENDMENT TO THE LEAPFROG ENTERPRISES, INC.
2011 EQUITY INCENTIVE PLAN

On March 30, 2012, the board of directors adopted, subject to stockholder approval, an amendment to the LeapFrog Enterprises, Inc. 2011 Equity Incentive Plan, or the 2011 EIP. The amendment to the 2011 EIP makes the following changes:

increases the number of shares of Class A common stock reserved for issuance under the 2011 EIP by 2.7 million shares. These shares are in addition to the shares otherwise currently available for awards under the 2011 EIP and any shares subject to awards issued under the LeapFrog Enterprises, Inc. 2002 Equity Incentive Plan, or the Prior Plan, which are forfeited or otherwise returned to the share reserve of the 2011 EIP.
decreases the number of returning shares eligible to be included in the share reserve of the 2011 EIP by 1,508,447 shares. These shares correspond to shares which, at the time of the approval of the 2011 EIP, were subject to outstanding awards under the Prior Plan and were eligible to be added to the share reserve of the 2011 EIP, but which awards have since been exercised.
eliminates the fungible share reserve, so that all stock awards granted under the 2011 EIP count against the share reserve of the 2011 EIP on a 1:1 basis.

BACKGROUND

Equity Compensation Philosophy at LeapFrog

We believe that equity incentive awards are an effective way to attract and retain talented employees, to motivate and reward them for outstanding company and individual performance, and to align their interests with those of our stockholders. Having sufficient shares available under the 2011 EIP is critical to our ongoing effort to build stockholder value through retaining and motivating such employees. Like all technology companies, we actively compete for highly qualified employees. Traditionally, stock options have been the primary focus of our equity program. The potential value of stock options is realized only if our share price increases, and so we believe stock options provide a strong incentive for individuals to work to grow our business and build stockholder value, and are most attractive to individuals who share our entrepreneurial spirit. In addition, we have also granted RSUs in recent years in order to attract and retain employees. For a discussion of our executive compensation philosophy, see “Compensation Discussion and Analysis.”

Retiring of the 2002 Non-Employee Director Stock Award Plan

In the past, we have generally issued equity to our non-employee directors out of our 2002 Non-Employee Directors’ Stock Award Plan, or NEDSAP. Currently, the trend is for corporations of our size to issue all of their equity awards out of one plan to, among other things, ease the administrative and reporting burden associated with having two equity plans. There are currently 57,000 shares available for issuance under the NEDSAP. When all of the shares available for issuance under the NEDSAP have been awarded, our board of directors intends to suspend the NEDSAP such that no further grants will be made therefrom, and instead issue grants to non-employee directors under the 2011 EIP.

Reduction in Number of Shares from Prior Plan Eligible for Inclusion in 2011 EIP Share Reserve

The 2011 EIP replaced the Prior Plan. The Company has not issued any new awards under the Prior Plan since the adoption of the 2011 EIP. However, all stock awards outstanding under the Prior Plan at the time of the adoption of the 2011 EIP are still subject to the terms and conditions of the Prior Plan.

When it was approved, the share reserve of the 2011 EIP included up to 6,376,278 shares of Class A common stock (the “Returning Shares”) which were subject to outstanding stock awards granted under the Prior Plan but were eligible to return to the 2011 EIP share reserve if such outstanding stock award expired or terminated for any reason prior to exercise or settlement or if the shares were forfeited because of the failure

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to meet a contingency or condition required to vest such shares or were reacquired or withheld by the Company to satisfy a tax withholding obligation or as consideration for the exercise of an option. Since the adoption of the 2011 EIP, the number of shares subject to outstanding stock awards granted under the Prior Plan decreased by 1,508,447 shares as the result of the vesting or exercise of outstanding stock awards. These shares are no longer eligible to be included in the share reserve of the 2011 EIP as Returning Shares. Consequently, we are removing these shares from the calculation of the share reserve, which reduces the overall share reserve by 1,508,447 shares.

The Shares Available for Grant under the 2011 EIP are Insufficient for our Budgeting Purposes

As of March 31, 2012, the 2011 EIP has approximately 8.3 million shares remaining available for grant. Due in part to the planned termination and the reduction in the number of shares available as returning shares from our Prior Plan, and as a result of budgeting for future issuances of equity awards to our named executive officers, key employees, consultants and, now, our non-employee directors, we have decided to ask our stockholders to approve an increase in the shares available under the 2011 EIP to provide us with sufficient shares available for grant through our forecasted period. Equity awards are a more effective executive compensation vehicle than cash at a growth-oriented, entrepreneurial company because they deliver high potential value with a smaller impact on current income and cash flow. Therefore, we are asking our stockholders to approve the amendment to the 2011 EIP.

Elimination of Fungible Share Reserve

Currently, the number of shares available for issuance under the 2011 EIP is reduced by two shares for each share of Class A Common Stock issued pursuant to a restricted stock award, restricted stock unit award, performance stock award or other stock awards (not including stock options or stock appreciation rights), or Full Value Awards. This has a tendency to inflate the overhang of the 2011 EIP because this method requires us to reserve more shares than we will ultimately issue under our 2011 EIP to account for the issuance of Full Value Awards as part of our equity awards. Although we do not currently intend to increase the ratio of Full Value Awards we issue as part of our overall compensation package, we believe that decreasing the overall overhang of the 2011 EIP provides a more accurate measure of the shares that may be issued under the 2011 EIP.

We Manage Our Equity Award Use Carefully

We continue to believe that equity awards such as stock options are a vital part of our overall compensation program. However, we recognize that equity awards dilute existing stockholders and therefore we must responsibly manage the growth of our equity compensation program. We are committed to effectively managing our equity compensation share reserve, including our burn rate.

SUMMARY OF THE AMENDED AND RESTATED 2011 EIP

A summary of the principal features of the Amended and Restated 2011 EIP follows. The summary is qualified in its entirety by the full text of the Amended and Restated 2011 EIP that is attached as Appendix A to this proxy statement. Stockholders are encouraged to read the actual text of the Amended and Restated 2011 EIP in its entirety. For ease of reference, we refer to the Amended and Restated 2011 EIP as the 2011 EIP below.

Eligibility

Only employees (including officers), consultants and non-employee directors of LeapFrog and its affiliates are eligible to receive awards under the 2011 EIP. Pursuant to applicable tax law, we may only grant incentive stock options to our employees (including officers) and employees of our affiliates. The compensation committee, or a subcommittee thereof, determines who will participate in the 2011 EIP and the terms of those grants.

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Awards

The 2011 EIP allows the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards and other stock awards. Subject to plan limits, the compensation committee has the discretionary authority to determine the size of awards to employees, however the committee has adopted a series of equity award guidelines designed to manage the usage of the pool of shares available for future. The use of performance-based awards will be considered in the context of our total compensation program and the significant level of pay-for-performance requirements already incorporated into our compensation practices.

Shares Authorized and Share Reserve

The share reserve of the 2011 EIP consists of 2.7 million newly authorized shares, plus 10,183,697 shares which were part of the share reserve on the effective date, and any Returning Shares (as defined in the 2011 EIP), up to a maximum of 4,867,831 shares. The number of shares available for issuance under the 2011 EIP is reduced by one share for each share of common stock issued pursuant to all stock awards granted under the 2011 EIP.

Vesting and Exercise of Awards

The exercise price of stock options and SARs granted under the 2011 EIP may not be less than the fair market value of the common stock on the date of grant. The term of any stock option or SAR may not be longer than 10 years. For other types of awards under the 2011 EIP, the compensation committee will determine the vesting and exercisability (or settlement) terms for each award, including the establishment of any performance vesting criteria.

Eligibility Under Section 162(m)

Stockholder approval of the amendment to the 2011 EIP is designed to constitute approval of the plan’s material features for purposes of Section 162(m) of the Tax Code. Awards may, but need not, include performance criteria that satisfy Section 162(m). To the extent that awards are intended to qualify as “performance-based compensation” under Section 162(m), the performance criteria will be based on stock price appreciation (in the case of options or SARs) or on one or more of the other factors set forth in Section 13(kk) of the 2011 EIP (which may be adjusted as provided in the plan), applied on a Company-wide basis, with respect to one or more business units, divisions, affiliates, or business segments, and in either absolute terms or relative to the performance of one or more comparable companies or the performance of one or more relevant indices, in each case as specified by the compensation committee in the award.

Transferability

Awards granted under the 2011 EIP are transferable only by will or the laws of descent and distribution, or to the extent otherwise determined by the compensation committee. The compensation committee has sole discretion to permit the transfer of an award.

Administration

The compensation committee, which is made up of a majority of independent directors, has been delegated the authority by the board of directors to administer our equity compensation plans and will administer the 2011 EIP. The compensation committee, or a subcommittee thereof, will select the employees who receive awards, when and how the awards are granted, what type or combination of types of awards to be granted, the provisions of each award granted and the number of shares granted. The compensation committee may interpret the 2011 EIP and awards granted under it and establish, amend and revoke any rules relating to the 2011 EIP. The compensation committee may delegate to a committee of one or more directors the ability to grant awards and take certain other actions with respect to participants who are not executive officers, and may delegate certain administrative or ministerial functions under the 2011 EIP to an officer or officers. The compensation committee has delegated authority to a committee consisting of the Chief

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Executive Officer (“NEOSAC”) to grant awards to non-executive employees within limits and a budget pre-approved by the compensation committee.

Duration, Suspension, Termination, and Amendment

The board of directors may suspend or terminate the 2011 EIP at any time. Unless sooner terminated by our board of directors, the 2011 EIP shall automatically terminate on March 16, 2021, which is the day before the tenth anniversary of the date the 2011 EIP was adopted by the board of directors. No awards may be granted under the 2011 EIP while the 2011 EIP is suspended or after it is terminated.

The board of directors may amend the 2011 EIP at any time. However, no amendment or termination of the plan will adversely affect any rights under awards already granted to a participant unless agreed to by the affected participant. In addition we will obtain stockholder approval of any amendment to the 2011 EIP, if required by applicable law or listing requirement that would:

Materially increase the number of shares of Class A Common Stock available for issuance under the 2011 EIP;
Materially expand the class of individuals eligible to receive awards under the 2011 EIP;
Materially increase the benefits accruing to participants under the 2011 EIP or materially reduces the price at which shares of Class A Common Stock may be issued or purchased under the 2011 EIP;
Materially extend the term of the 2011 EIP; or
Expand the types of awards available for issuance under the 2011 EIP.

Adjustments; Corporate Transactions

In the event of a capitalization adjustment, the compensation committee shall appropriately and proportionately adjust the number and kind of shares available for grant under the 2011 EIP, and subject to the various limitations set forth in the 2011 EIP, the number and kind of shares subject to outstanding awards under the 2011 EIP, and the exercise or settlement price of outstanding stock options and of other awards.

In the event of a corporate transaction, the board of directors may arrange for the assumption of the outstanding awards, the acceleration of vesting of outstanding awards, the assignment of rights with respect to the awards, the cancellation of the awards or a payment to award holders, as determined by the board of directors. For purposes of the 2011 EIP, a corporate transaction will be deemed to occur in the event of (i) the consummation of a sale of all or substantially all of our consolidated assets, (ii) the consummation of a sale of at least 90% of our outstanding securities, (iii) the consummation of a merger or consolidation in which we are not the surviving corporation, or (iv) the consummation of a merger or consolidation in which we are the surviving corporation but shares of our outstanding common stock are converted into other property by the virtue of the transaction, as determined by the board of directors.

Tax Withholding

The board of directors may require a participant to satisfy any federal, state, local, or foreign tax withholding obligation relating to a stock award by (a) causing the participant to tender a cash payment; (b) withholding shares of common stock from the shares of common stock issued or otherwise issuable to the participant in connection with the award; (c) withholding cash from an award settled in cash or from other amounts payable to the participant; or (d) by other method set forth in the award agreement.

U.S. Federal Tax Consequences

The following is a summary of the principal U.S. federal income taxation consequences to participants and LeapFrog with respect to participation in the 2011 EIP. The information is based upon current federal income tax rules and therefore is subject to change when those rules change. Because the tax consequences to any recipient may depend on his or her particular situation, each recipient should consult the recipient’s tax adviser regarding the federal, state, local, and other tax consequences of the grant or exercise of an award or

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the disposition of stock acquired as a result of an award. The 2011 EIP is not qualified under the provisions of Section 401(a) of the Tax Code, and is not subject to any of the provisions of the Employee Retirement Income Security Act of 1974. Our ability to realize the benefit of any tax deductions described below depends on our generation of taxable income as well as the requirement of reasonableness, the provisions of Section 162(m) of the Tax Code and the satisfaction of our tax reporting obligations.

  Incentive Stock Options

The 2011 EIP provides for the grant of stock options that qualify as “incentive stock options,” as defined in Section 422 of the Tax Code. Under the Tax Code, an optionee generally is not subject to ordinary income tax upon the grant or exercise of an incentive stock option. If the optionee holds a share received on the exercise of an incentive stock option for more than two years from the date the option was granted and more than one year from the date the option was exercised, which is referred to as the required holding period, the difference, if any, between the amount realized on a sale or other taxable disposition of that share and the holder’s tax basis in that share will be long-term capital gain or loss.

If, however, an optionee disposes of a share acquired on exercise of an incentive stock option before the end of the required holding period, which is referred to as a disqualifying disposition, the optionee generally will recognize ordinary income in the year of the disqualifying disposition equal to the excess, if any, of the fair market value of the share on the date the incentive stock option was exercised over the exercise price. However, if the sales proceeds are less than the fair market value of the share on the date of exercise of the option, the amount of ordinary income recognized by the optionee will not exceed the gain, if any, realized on the sale. If the amount realized on a disqualifying disposition exceeds the fair market value of the share on the date of exercise of the option, that excess will be short-term or long-term capital gain, depending on whether the holding period for the share exceeds one year.

For purposes of the alternative minimum tax, the amount by which the fair market value of a share of stock acquired on exercise of an incentive stock option exceeds the exercise price of that option generally will be an adjustment included in the optionee’s alternative minimum taxable income for the year in which the option is exercised. If, however, there is a disqualifying disposition of the share in the year in which the option is exercised, there will be no adjustment for alternative minimum tax purposes with respect to that share. In computing alternative minimum taxable income, the tax basis of a share acquired on exercise of an incentive stock option is increased by the amount of the adjustment taken into account with respect to that share for alternative minimum tax purposes in the year the option is exercised.

We are not allowed an income tax deduction with respect to the grant or exercise of an incentive stock option or the disposition of a share acquired on exercise of an incentive stock option after the required holding period. If there is a disqualifying disposition of a share, however, we are allowed a deduction in an amount equal to the ordinary income includible in income by the optionee.

  Nonstatutory Stock Options

Generally, there is no taxation upon the grant of a nonstatutory stock option if the option is granted with an exercise price equal to the fair market value of the underlying stock on the grant date. On exercise, an optionee will recognize ordinary income equal to the excess, if any, of the fair market value on the date of exercise of the stock over the exercise price. If the optionee is employed by us or one of our affiliates, that income will be subject to withholding tax. Generally, the optionee’s tax basis in those shares will be equal to their fair market value on the date of exercise of the option, and the optionee’s capital gain holding period for those shares will begin on that date. We will generally be entitled to a tax deduction equal to the taxable ordinary income realized by the optionee.

  Restricted Stock Awards

Generally, the recipient of a restricted stock award will recognize ordinary compensation income at the time the stock is received equal to the excess, if any, of the fair market value of the stock received over any amount paid by the recipient in exchange for the stock. If, however, the stock is not vested when it is received

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(for example, if the employee is required to work for a period of time in order to have the right to sell the stock), the recipient generally will not recognize income until the stock becomes vested, at which time the recipient will recognize ordinary compensation income equal to the excess, if any, of the fair market value of the stock on the date it becomes vested over any amount paid by the recipient in exchange for the stock. A recipient may, however, file an election with the Internal Revenue Service, within 30 days of his or her receipt of the stock award, to recognize ordinary compensation income, as of the date the recipient receives the award, equal to the excess, if any, of the fair market value of the stock on the date the award is granted over any amount paid by the recipient in exchange for the stock.

The recipient’s basis for the determination of gain or loss upon the subsequent disposition of shares acquired from stock awards will be the amount paid for such shares plus any ordinary income recognized either when the stock is received or when the stock becomes vested.

Subject to the requirement of reasonableness, the provisions of Section 162(m) of the Tax Code and the satisfaction of a tax reporting obligation, we will generally be entitled to a tax deduction equal to the taxable ordinary income realized by the recipient of the stock award.

  Restricted Stock Units

Generally, no taxable income is recognized upon receipt of a restricted stock unit award. The participant will recognize ordinary income in the year in which the shares subject to that unit are actually issued to the participant in an amount equal to the fair market value of the shares on the date of issuance. Generally, we will be entitled to an income tax deduction equal to the amount of ordinary income recognized by the participant at the time the shares are issued.

  Stock Appreciation Rights

Generally, stock appreciation rights are subject to similar tax rules as nonstatutory stock options. This means that, generally, no taxable income is realized upon the receipt of a stock appreciation right. Upon exercise of the stock appreciation right, the fair market value of the shares (or cash in lieu of shares) received, less any strike price paid for such shares, is recognized as ordinary income to the participant in the year of such exercise. Generally, with respect to employees, we are required to withhold from the payment made on exercise of the stock appreciation right or from regular wages or supplemental wage payments an amount based on the ordinary income recognized. We will generally be entitled to an income tax deduction equal to the amount of ordinary income recognized by the participant.

  Section 162(m)

Section 162(m) of the Tax Code requires, among other things, that the maximum number of shares awarded to an individual under a stock awards, or the maximum value of any cash award, must be approved by stockholders in order for the awards granted under the plan to be eligible for treatment as performance-based compensation that will not be subject to the $1 million limitation on tax deductibility for compensation paid to certain specified senior executives. Accordingly, the 2011 EIP limits awards granted under the plan to an individual participant in any calendar year to: (1) No more than 3.5 million shares subject to stock options or SARs (or other stock awards whose value is determined by reference to an increase over an exercise or strike price) to an individual participant; (2) No more than 3.5 million shares subject to performance-based restricted stock or RSU awards to an individual participant; and (3) No more than $1 million subject to performance cash awards to an individual participant. These limits are greater than the number of shares or cash subject to any particular award that we have granted to any individual in the past.

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Equity Compensation Plan Information

Information, as of December 31, 2011, regarding equity compensation plans approved and not approved by stockholders is summarized in the following table:

     
Plan Category   Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a)
  Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
  Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
Equity compensation plans approved by security holders     6,388,175     $ 4.01       10,895,479 (1) 
Equity compensation plans not approved by security holders                  
TOTAL     6,388,175     $ 4.01       10,895,479  

(1) Includes 1,360,879 shares reserved for issuance under our Amended and Restated 2002 Employee Stock Purchase Plan, 9,477,169 shares reserved for issuance under our 2011 Equity Incentive Plan, and 57,431 shares reserved for issuance under our Amended and Restated 2002 Non-Employee Directors’ Stock Award Plan.

Vote Required

Approval of the amendment to the 2011 EIP requires affirmative “For” vote from a majority of the voting power present and entitled to vote either in person or by proxy on this Proposal Three at the Annual Meeting. Abstentions will be counted toward the tabulation of votes cast on the proposal and will have the same effect as “Against” votes. Under the rules of the NYSE, brokers are prohibited from giving proxies to vote on the implementation of any equity compensation plan unless the beneficial owner of such shares has given voting instructions on the matter. This means that if your broker is the record holder of your shares, you must give voting instructions to your broker with respect to this Proposal Three if you want your broker to vote your shares on the matter. If you do not give your broker voting instructions, your shares will be treated as broker non-votes. Broker non-votes will have no effect on the outcome of the vote.

Recommendation

The Board of Directors recommends a vote FOR Proposal Three.

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Beneficial Ownership of Our Common Stock

The following table sets forth certain information regarding the ownership of LeapFrog’s Class A common stock and Class B common stock (convertible into Class A common stock) as of March 31, 2012 by: (i) each director; (ii) each of the executive officers named in the Summary Compensation Table below; (iii) all executive officers and directors of LeapFrog as a group; and (iv) all those known by LeapFrog to be beneficial owners of more than five percent of our Class A or Class B common stock. Information with respect to beneficial ownership has been furnished by each director, executive officer or beneficial owner of more than five percent of the shares of our Class A or Class B common stock.

Beneficial ownership is determined in accordance with SEC rules, which generally attribute beneficial ownership of securities to each person who possesses, either solely or shared with others, the power to vote or dispose of those securities. These rules also treat as outstanding all shares of capital stock that a person would receive upon exercise of stock options held by that person that are immediately exercisable or exercisable within 60 days of March 31, 2012. These shares are deemed to be outstanding and to be beneficially owned by the person holding those options for the purpose of computing the number of shares beneficially owned and the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated and to the extent known, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to applicable community property laws.

             
 
  
Number of Shares
Beneficially Owned
 
  
Percentage of Shares
Beneficially Owned(1)
  Percentage of
Combined
Voting Power
of All Classes
of Stock(3)
Beneficial Owner   Class A   Class B   Total   Class A   Class B   Total(2)
Lawrence J. Ellison /
Mollusk Holdings, LLC(4)
    1,890,000       6,717,893       8,607,893       3.4 %      60.4 %      12.9 %      41.4 % 
Michael R. Milken(5)     601,789       3,076,516       3,678,305       1.1 %      27.7 %      5.5 %      18.8 % 
Sandra Milken(6)           796,335       796,335             7.2 %      1.2 %      4.8 % 
Lowell J. Milken(7)     315,137       532,914       848,051        *       4.8 %      1.3 %      3.4 % 
Franklin Resources, Inc.(8)     4,121,930             4,121,930       7.4 %            6.2 %      2.5 % 
BlackRock, Inc.(9)     3,306,678             3,306,678       5.9 %            5.0 %      2.0 % 
Capital Research Global Investors(10)     2,892,379             2,892,379       5.2 %            4.3 %      1.7 % 
Litespeed Management, L.L.C.(11)     2,780,942             2,780,942       5.0 %            4.2 %      1.7 % 
John Barbour(12)     410,744             410,744        *              *        *  
William K. Campbell(13)     261,863             261,863        *              *        *  
Michael Y. Chai(14)                                          
William B. Chiasson(15)     425,506             425,506        *              *        *  
Michael J. Dodd(16)     329,474             329,474        *              *        *  
Mark A. Etnyre(17)     269,460             269,460        *              *        *  
Thomas J. Kalinske(18)     384,028       1,107       385,135        *        *        *        *  
Paul T. Marinelli(19)     1,977,638       6,717,893       8,695,531       3.6 %      60.4 %      13.0 %      41.5 % 
Stanley E. Maron(20)     135,114       168       135,282        *        *        *        *  
E. Stanton McKee, Jr.(21)     117,846             117,846        *              *        *  
David C. Nagel(22)     113,110             113,110        *              *        *  
Randy O. Rissman(23)     382,603             382,603        *              *        *  
Philip B. Simon(24)     2,046,542       6,717,893       8,764,435       3.7 %      60.4 %      13.1 %      41.5 % 
Caden C. Wang(25)     118,231             118,231        *              *        *  
All directors and executive officers as a group (16 persons)(26)     5,115,519       6,719,168       11,834,687       8.9 %      60.5 %      17.3 %      42.9 % 

* Less than one percent.

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(1) Based on 55,611,461 shares of Class A common stock and 11,113,354 shares of Class B common stock outstanding as of March 31, 2012. Unless otherwise indicated in the footnotes to this table, the applicable address for each of our directors and executive officers is c/o LeapFrog Enterprises, Inc., 6401 Hollis Street, Suite 100, Emeryville, California 94608-1463.
(2) These percentages reflect the ownership of our Class A common stock and our Class B common stock on an as-converted basis, assuming the conversion of all Class B common stock to Class A common stock on a one-to-one basis.
(3) These percentages reflect the combined voting rights of our Class A common stock and our Class B common stock. On all matters submitted to a vote of our stockholders, our Class A common stock entitles its holders to one vote per share and our Class B common stock entitles its holders to ten votes per share.
(4) Includes 1,890,000 shares of Class A common stock and 6,717,893 shares of Class B common stock held indirectly by Mr. Ellison through Mollusk Holdings, which is controlled by Cephalopod Corporation and Lawrence Investments. These shares are also reported as beneficially owned by Messrs. Marinelli and Simon, as described in footnotes 19 and 24 to this table. The address for Mollusk Holdings is c/o Philip B. Simon, 101 Ygnacio Valley Road, Suite 320, Walnut Creek, CA 94596.
(5) Includes:
601,789 shares of Class A common stock and 3,064,937 shares of Class B common stock held directly by Mr. M. Milken; and
11,579 shares of Class B common stock held indirectly by Mr. M. Milken through Hampstead Associates, LLC, which are also beneficially owned by Mr. L. Milken and over which Mr. M. Milken has shared voting and investment power.

The address for Mr. M. Milken is c/o Maron & Sandler, 1250 Fourth Street, Suite 550, Santa Monica, California 90401.

(6) The address for Ms. Milken is c/o Maron & Sandler, 1250 Fourth Street, Suite 550, Santa Monica, California 90401.
(7) Includes:
315,137 shares of Class A common stock and 521,335 shares of Class B common stock held directly by Mr. L. Milken; and
11,579 shares of Class B common stock held indirectly by Mr. L. Milken through Hampstead Associates, LLC, which are also beneficially owned by Mr. M. Milken and over which Mr. L. Milken has shared voting and investment power.

The address for Mr. L. Milken is c/o Maron & Sandler, 1250 Fourth Street, Suite 550, Santa Monica, California 90401.

(8) Based solely on information provided in a Schedule 13G filed on September 12, 2011 by Franklin Resources, Inc., Charles B. Johnson, Rupert H. Johnson, Jr. and Franklin Templeton Investments Corp. The securities reported are beneficially owned by one or more open- or closed-end investment companies or other managed accounts that are investment management clients of investments managers that are direct and indirect subsidiaries of Franklin Resources, Inc. Charles B. Johnson and Rupert H. Johnson, Jr. each own in excess of 10% of the outstanding common stock, and are the principal stockholders of Franklin Resources, Inc. Under SEC rules and regulations, Franklin Resources, Inc. and its principal stockholders may be deemed to be beneficial owners of securities held by persons and entities for whom or for which Franklin Resources, Inc. subsidiaries provide investment management services. Franklin Templeton Investments Corp. is reported as having sole voting and dispositive power over 4,121,930 shares. Templeton Global Smaller Companies Fund (U.S.) is reported as having an interest in 4,121,930 shares. Each of the reporting persons disclaims any pecuniary interest in any of the securities reported therein. The address for Franklin Resources, Inc. is One Franklin Parkway, San Mateo, California 94403.
(9) Based solely on information provided in a Schedule 13G filed on February 13, 2012 by BlackRock, Inc. The address for BlackRock, Inc. is 40 East 52nd Street, New York, New York 10022.
(10) Based solely on information provided in a Schedule 13G filed on February 9, 2012 by Capital Research Global Investors. The address for Capital Research Global Investors is 333 South Hope Street, Los Angeles, California 90071.

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(11) Based solely on information provided in a Schedule 13G filed on February 14, 2012 by Litespeed Management, L.L.C. Litespeed Master Fund, Ltd., and Jamie Zimmerman. The reporting entities share dispositive and voting power over the shares reported therein. The address for Litespeed Management, L.L.C. is 237 Park Avenue, Suite 900, New York, New York 10017.
(12) Includes 258,749 shares of Class A common stock issuable to Mr. Barbour upon the exercise of options that are exercisable within 60 days after March 31, 2012 and 6,250 shares of Class A common stock issuable under restricted stock unit awards that are scheduled to be vested within 60 days after March 31, 2012.
(13) Includes 196,602 shares of Class A common stock issuable to Mr. Campbell upon the exercise of options that are exercisable within 60 days after March 31, 2012 and 8,333 shares of Class A common stock issuable under restricted stock unit awards that are scheduled to be vested within 60 days after March 31, 2012.
(14) Mr. Chai’s employment with the Company was terminated in March 2011 and, to the Company’s knowledge, he does not own shares of stock in the Company and he has no exercisable shares within 60 days after March 31, 2012.
(15) Includes 350,004 shares of Class A common stock issuable to Mr. Chiasson upon the exercise of options that are exercisable within 60 days after March 31, 2012.
(16) Includes 296,975 shares of Class A common stock issuable to Mr. Dodd upon the exercise of options that are exercisable within 60 days after March 31, 2012 and 16,667 shares of Class A common stock issuable under restricted stock unit awards that are scheduled to be vested within 60 days after March 31, 2012.
(17) Includes 161,922 shares of Class A common stock issuable to Mr. Etnyre upon the exercise of options that are exercisable within 60 days after March 31, 2012 and 6,250 shares of Class A common stock issuable under restricted stock unit awards that are scheduled to be vested within 60 days after March 31, 2012.
(18) Includes 172,236 shares of Class A common stock issuable to Mr. Kalinske upon the exercise of options that are exercisable within 60 days after March 31, 2012.
(19) Includes 1,890,000 shares of Class A common stock and 6,717,893 shares of Class B common stock presently held by Mollusk Holdings and 78,888 shares of Class A common stock issuable to Mr. Marinelli upon the exercise of options that are exercisable within 60 days after March 31, 2012. Mr. Marinelli is the Vice President of Lawrence Investments, which is one of the two managing members of Mollusk Holdings. These shares are also reported as beneficially owned by Mr. Ellison, as described in footnote 4 to this table. Mr. Marinelli disclaims beneficial ownership of these securities except to the extent of his pecuniary interest therein. The address for Mr. Marinelli is 101 Ygnacio Valley Road, Suite 320, Walnut Creek, California 94596.
(20) Includes 97,645 shares of Class A common stock issuable to Mr. Maron upon the exercise of options that are exercisable within 60 days after March 31, 2012 and 20,000 shares of Class A common stock issuable under restricted stock unit awards that are scheduled to be vested within 60 days after March 31, 2012, provided that pursuant to the terms of the grant, the shares will not be released by LeapFrog until three months following the expiration or termination of Mr. Maron’s term on LeapFrog’s board of directors. The address for Mr. Maron is 1250 Fourth Street, Suite 550, Santa Monica, California 90401.
(21) Includes 92,846 shares of Class A common stock issuable to Mr. McKee upon the exercise of options that are exercisable within 60 days after March 31, 2012 and 25,000 shares of Class A common stock issuable under restricted stock unit awards that are scheduled to be vested within 60 days after March 31, 2012, provided that pursuant to the terms of the grant, the shares will not be released by LeapFrog until three months following the expiration or termination of Mr. McKee’s term on LeapFrog’s board of directors.
(22) Includes 93,110 shares of Class A common stock issuable to Dr. Nagel upon the exercise of options that are exercisable within 60 days after March 31, 2012 and 20,000 shares of Class A common stock issuable under restricted stock unit awards that are scheduled to be vested within 60 days after March 31, 2012, provided that pursuant to the terms of the grant, the shares will not be released by LeapFrog until three months following the expiration or termination of Dr. Nagel’s term on LeapFrog’s board of directors.
(23) Includes 12,736 shares of Class A common stock issuable to Mr. Rissman upon the exercise of options that are exercisable within 60 days after March 31, 2012.

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(24) Includes:
78,888 shares of Class A common stock issuable to Mr. Simon upon the exercise of options that are exercisable within 60 days after March 31, 2012.
77,654 shares of Class A common stock presently held by the Simon-Neben Family Trust, a revocable trust of which Mr. Simon is a trustee.
1,890,000 shares of Class A common stock and 6,717,893 shares of Class B common stock presently held by Mollusk Holdings. Mr. Simon is the President of Lawrence Investments, which is one of the two managing members of Mollusk Holdings. These shares are also reported as beneficially owned by Mr. Ellison, as described in footnote 4 to this table. Mr. Simon disclaims beneficial ownership of these securities except to the extent of his pecuniary interest therein.

The address for Mr. Simon is 101 Ygnacio Valley Road, Suite 320, Walnut Creek, California 94596.

(25) Includes 98,231 shares of Class A common stock issuable to Mr. Wang upon the exercise of options that are exercisable within 60 days after March 31, 2012 and 20,000 shares of Class A common stock issuable under restricted stock unit awards that are scheduled to be vested within 60 days after March 31, 2012, provided that pursuant to the terms of the grant, the shares will not be released by LeapFrog until three months following the expiration or termination of Mr. Wang’s term on LeapFrog’s board of directors.
(26) Based on all existing executive officers and directors as a group. See footnotes 11 through 25 above, as applicable. Includes 1,890,000 shares of Class A common stock and 6,717,893 shares of Class B Common Stock held by Mollusk Holdings, as discussed in footnote 4 above, but such amount has been included only once in the calculation even though it is attributed to two directors elsewhere in the table. There are 6,395 shares of Class A common stock held by our executive officers who are not named in the table. Also includes 26,965 shares of Class A common stock issuable upon the exercise of options that are exercisable within 60 days after March 31, 2012 held by executive officers who are not named in the table.

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TRANSACTIONS WITH RELATED PERSONS

Related-Person Transactions Policy and Procedures

Our board has approved a written policy regarding transactions with related persons that sets forth our policies and procedures regarding the identification, review, consideration and approval or ratification of “related-persons transactions.” For purposes of our policy only, a “related-person transaction” is a transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) involving an amount that exceeds $120,000 in which LeapFrog and any “related person” (as defined below) are participants. Transactions involving compensation for services provided to LeapFrog as an employee, director, consultant or similar capacity by a related person are not covered by this policy. A related person is any executive officer, director, or more than 5% stockholder of LeapFrog (as determined by the combined voting power of all classes of stock), including any of their immediate family members, and any entity owned or controlled by such persons.

Under the policy, where a transaction has been identified as a related-person transaction, management must present information regarding the proposed related-person transaction to our board of directors for consideration and approval or ratification. The presentation must include a description of, among other things, the material facts, the interests, direct and indirect, of the related persons, the benefits to LeapFrog of the transaction and whether any alternative transactions were available. In considering related-person transactions, the board takes into account the relevant available facts and circumstances including, but not limited to (a) the risks, costs and benefits to LeapFrog, (b) the impact on a director’s independence if the related person is a director, immediate family member of a director or an entity with which a director is affiliated, (c) the terms of the transaction, (d) the availability of other sources for comparable services or products and (e) the terms available to or from, as the case may be, unrelated third parties or to or from employees generally. If a director has an interest in the proposed transaction, the director must recuse himself or herself from the deliberations and approval. The policy requires that, in determining whether to approve, ratify or reject a related-person transaction, the board must look at, in light of known circumstances, whether the transaction is in, or is not inconsistent with, the best interests of LeapFrog and its stockholders, as the board determines in the good faith exercise of its discretion.

Certain Related-Person Transactions

Mollusk Holdings is an entity controlled by Lawrence J. Ellison, Chief Executive Officer of Oracle Corporation. As of March 31, 2012, Mr. Ellison may be deemed to have had or shared the power to direct the voting and disposition and, therefore, to have beneficial ownership, of 6,717,893 shares of our Class B common stock, and 1,890,000 shares of our Class A common stock, which together represents approximately 41.4% of the combined voting power of our Class A common stock and Class B common stock. According to a Schedule 13G filed with the SEC on February 10, 2012, Mr. Ellison beneficially owned as of that date approximately 22.5% of Oracle Corporation’s outstanding common stock. In 2011, we purchased software products and support services from Oracle Corporation and its affiliated entities totaling approximately $2.7 million. For a more complete discussion of Mr. Ellison’s beneficial ownership of our Class A common stock, see “Security Ownership of Certain Beneficial Owners and Management.”

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BOARD OF DIRECTORS AND CORPORATE GOVERNANCE

Independence of the Board of Directors

Until December 27, 2011, we were a “controlled company” within the meaning of the NYSE listing standards because Mollusk Holdings held more than 50% of the voting power of our outstanding shares. On December 27, 2011, Mollusk Holdings converted, on a one-to-one basis, a number of shares of our Class B common stock into shares of Class A common stock, bringing its ownership under 50% such that LeapFrog was no longer a controlled company within the meaning of the NYSE listing standards.

“Controlled company” status provided an exception to the requirements of the NYSE that a majority of the members of a listed company’s board of directors qualify as “independent,” as defined in the NYSE listing standards, as affirmatively determined by the board of directors, and that our compensation committee and nominating and corporate governance committee be composed entirely of independent directors. Upon the loss of our status as a controlled company, the NYSE listing requirements provide that we have one year from the date of the loss of such status to have our board of directors consist of a majority of independent directors and fully independent committees.

After review of all relevant transactions or relationships between each director, or any of his family members and us, our senior management and our independent registered public accounting firm, our board of directors affirmatively determined in February 2012 that all of our continuing directors are independent within the meaning of the applicable NYSE listing standards, except for Mr. Barbour, our Chief Executive Officer, Mr. Chiasson, our former Chief Executive Officer, and Mr. Marinelli, Vice President of Lawrence Investments which controls Mollusk Holdings.

Board Meetings

During the fiscal year ended December 31, 2011, the board of directors held 12 meetings. Each of our incumbent directors attended at least 75% of the aggregate number of meetings of the board and of the committees on which the director served that were held during the portion of the last fiscal year in which he was a director or committee member. Board members are expected to regularly attend all meetings of the Board and committees on which they serve.

Our Chairman of the board presided over executive sessions of the board of directors. For executive sessions of committees, the presiding director is usually the chair of the committee. If our Chairman is absent for board executive sessions, the remaining directors select a temporary chairman to lead the meeting. If the committee chair is absent for a committee executive session, the remaining committee members determine as a group the presiding director for executive sessions on a case-by-case basis.

Board Leadership Structure

Our board of directors is currently composed of our Chief Executive Officer, John Barbour, and nine non-management directors. On June 5, 2012, immediately following our annual meeting of stockholders, the total size of the board of directors will be automatically reduced to eight directors. William B. Chiasson, who served as our Chief Executive Officer through March 2011, now serves as the Chairman of the Board. Mr. Katz, who preceded Mr. Chiasson as our Chief Executive Officer, served as Executive Chairman of the Board until March 2011. As Chairman, Mr. Chiasson continues to have an active role in consulting with our senior management and board regarding LeapFrog’s business strategy and technology and product direction. The regular duties of the Chairman of the Board are described in our bylaws, which provide that the Chairman presides over meetings of the board of directors and at meetings of our stockholders, and performs any other duties commonly incident to the office or designated by our board of directors. The Chairman role includes typical board of directors chair duties such as serving as a liaison between the other board of directors members and management, reviewing and approving materials to be sent to the board of directors, working with management and other directors to develop agendas for meetings of the board of directors, helping build consensus on proposed actions of the board of directors, and serving as the chair of meetings of the board of directors.

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In his position as Chairman, Mr. Chiasson has substantial authority to shape the work of the board of directors. Even though he is not “independent” within the meaning of the NYSE listing standards, we believe that his status as a non-management director performing this board leadership role will help to reinforce the board’s independence from management in their oversight of our business and affairs. In addition, we believe that having a non-management Chairman will serve to create an environment that is conducive to objective evaluation and oversight of management’s performance and related compensation, increasing management accountability and improving the ability of the board of directors to monitor whether management’s actions are in our best interests and those of our stockholders. As a result, we believe the current leadership structure of our board of directors contributes to its effectiveness as a whole and, as a result, is the most appropriate structure for us at the present time. In addition, we believe Mr. Chiasson’s role in consulting with senior management and members of the board of directors facilitates regular open and direct communication between directors and our management, helping to coordinate the actions of management with direction provided by the board of directors.

Thomas J. Kalinske, who served as our Chief Executive Officer from September 1997 to March 2002 and again from February 2004 to July 2006, serves as the Vice Chairman of the Board and would generally preside over any meetings and executive sessions of the board if Mr. Chiasson were not present. Mr. Kalinske provides industry experience and his perspective as a former CEO of LeapFrog to management as part of his Vice Chairman role.

Role of Board in Risk Oversight

One of the key functions of our board of directors is informed oversight of our risk management process. The board of directors does not have a standing risk management committee, but rather administers this oversight function directly through the board of directors as a whole, as well as through the audit committee, which is responsible for discussing guidelines and policies to govern the process by which risk assessment and management is undertaken. In addition, other standing committees of the board of directors address risks inherent in their respective areas of oversight. It is the responsibility of the committee chairs to report findings regarding material risk exposures to the board of directors as quickly as possible.

Our board of directors and board committees oversee risk, including operational risk, liquidity risk and credit risk, in a variety of ways, including the following:

The full board of directors engages in extensive discussion with our executive team on a regular basis concerning the risks facing the Company and how best to manage them. Board of directors meetings generally include detailed discussion among board members, management and professional advisors regarding material risks we face as an enterprise, including operational and financial risks. Our management provides information to the board of directors regarding our approach to material risks, both at meetings and in regular informal discussions, and takes extensive guidance from the board of directors in decision-making with respect to such matters.
The board of directors and audit committee generally review the disclosures in our Annual Report on Form 10-K, including the risk factors. The audit committee reviews the Annual Report on Form 10-K in detail and also reviews and discusses with management the disclosures in our Quarterly Reports on Form 10-Q and holds extensive discussions with management concerning whether all material risks have been identified. The discussion also provides a mechanism by which board members can evaluate and oversee our risk management practices, ask questions of our executive team concerning material risks we face and how we plan to manage them, and guide management’s actions with respect to such risk management.
Our audit committee reviews and discusses at regular meetings throughout the year our risk management policies and processes and material risk exposures, including financial risk exposures, facing our business, in addition to monitoring our compliance with legal and regulatory requirements. Audit committee meetings generally include extensive discussion between the committee members and our internal and external auditors, legal advisors and operational leads regarding the risks we face. The participants discuss in detail both the material risks identified by

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these parties in their capacities as advisors to or leaders of LeapFrog, and how we plan to address them. In addition, such reviews include evaluating the effectiveness of our risk management processes and how to improve them if and when necessary.
Our internal audit department and any internal audit consulting firm reports directly to the audit committee of the board on the adequacy and effectiveness of our system of internal control and risk management systems. The audit committee guides management and board of directors decisions concerning financial and operational matters based on the reports regarding risk management priorities. This information is delivered to the audit committee during the regular portion of the meeting and in a separate discussion among our audit committee members, internal audit representatives and external auditors during executive sessions of the audit committee.
Our compensation committee reviews our compensation programs with our management and external compensation consultants, and, in approving such programs, considers whether and to what extent they have a potential to encourage excessive risk taking by our employees, including our executives. In addition, the committee monitors these programs to evaluate on a regular basis whether the programs provide an appropriate balance of incentives and do not encourage employees to take unreasonable risks.
Our nominating and corporate governance committee monitors the effectiveness of our corporate governance guidelines. The committee also helps ensure that we are prepared to deal with risks and crises by evaluating the individual capabilities of the directors, nominating directors with risk management experience, committee structure and composition and considering the time each director and nominee has to devote to the company. The committee also works with our management to establish orientation programs for new directors and evaluates the effectiveness of our board of directors and its committees.

COMMITTEES OF THE BOARD

In 2011, our board of directors had three standing committees: an audit committee, a compensation committee and a nominating and corporate governance committee. The following table provides membership and meeting information for each of the board committees in 2011:

     
Member of our board of directors in 2011   Audit   Compensation   Nominating and
Corporate
Governance
Paul T. Marinelli                       X  
Stanley E. Maron     X       X       X  
E. Stanton McKee, Jr.     X*       X           
David C. Nagel              X*           
Philip B. Simon              X           
Caden C. Wang     X       X (1)      X*  
Total meetings in fiscal 2011(2)     7       11       4  

* Committee chair in 2011
(1) Mr. Wang served on our Compensation Committee until July 27, 2011.
(2) The board of directors and the compensation committee had one combined meeting during 2011. Compensation committee meeting totals do not include meetings of a performance compensation award subcommittee of the compensation committee (described in more detail below under “Compensation Committee,”) whether they were held concurrently with a compensation committee meeting or separately.

Below is a description of each committee of the board of directors. Each of the committees has authority to engage legal counsel or other experts or consultants, as it deems appropriate to carry out its responsibilities. The board of directors concluded that each of the board members serving on a committee was “independent” as defined in the NYSE listing standards, with the exception of Messrs. Simon and Marinelli. The committees to which Messrs. Simon and Marinelli were appointed (compensation committee and nominating and corporate governance committee, respectively) are not required to be composed entirely of independent

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directors until December 27, 2012, because we were a “controlled company,” as discussed in more detail above under “Board of Directors and Corporate Governance — Board of Directors — Independence of the Board of Directors.”

Audit Committee

The audit committee of our board of directors was established by our board of directors in accordance with Section (3)(a)(58)(A) of the Exchange Act, and oversees our corporate accounting and financial reporting process and the audits of our financial statements. For this purpose, the audit committee performs several functions. Among other things, the audit committee:

evaluates the performance of and assesses the qualifications of the independent registered public accounting firm;
determines the engagement of the independent registered public accounting firm;
determines whether to retain or terminate the existing independent registered public accounting firm or to appoint and engage a new independent registered public accounting firm;
reviews and approves the retention of the independent registered public accounting firm to perform any proposed permissible non-audit services;
monitors the rotation of partners of the independent registered public accounting firm on our engagement as required by law;
confers with management and the independent registered public accounting firm regarding the effectiveness of internal control over financial reporting;
reviews, assesses and approves the annual audit plan for our internal audit function;
establishes procedures, as required under applicable law, for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or auditing matters and the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters;
reviews the financial statements to be included in LeapFrog’s Annual Report on Form 10-K (and recommends to the board inclusion of the audited financial statements in the annual report) and in LeapFrog’s quarterly reports on Form 10-Q and other financial disclosures;
discusses policies with respect to risk assessment and risk management;
assists in board oversight of our compliance with legal and regulatory requirements; and
discusses with management and the independent registered public accounting firm the results of the annual audit and the results of LeapFrog’s quarterly financial statements.

The audit committee is currently composed of three directors: Messrs. McKee (Chair), Maron and Wang. The audit committee met seven times during our 2011 fiscal year. The board has determined that all members of LeapFrog’s audit committee are independent (as defined in Section 303A.02 of the NYSE listing standards). The audit committee has adopted a written audit committee charter that is posted on our website at www.leapfroginvestor.com under the heading “Corporate Governance.” None of our audit committee members simultaneously serves on the audit committees of more than three companies.

Our board of directors has determined that Mr. McKee, the Chair of our audit committee, and Mr. Wang, each qualify as an “audit committee financial expert,” as defined in applicable SEC rules. The board of directors made a qualitative assessment of Messrs. McKee’s and Wang’s level of knowledge and experience based on a number of factors, including their formal education and experience, in the case of Mr. McKee, as a chief financial officer for a public reporting company, and in the case of Mr. Wang, as chief financial officer for various privately held companies and as the chair of the audit committee of another public reporting company.

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REPORT OF THE AUDIT COMMITTEE(1)

The audit committee has reviewed and discussed with LeapFrog’s management the company’s audited consolidated financial statements for the fiscal year ended December 31, 2011. The audit committee has also discussed with Ernst & Young LLP, the company’s independent registered public accounting firm, the matters required to be discussed by the Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1. AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T.

The audit committee has received and reviewed the written disclosures and the letter from Ernst & Young LLP required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the audit committee concerning independence, and has discussed with Ernst & Young LLP its independence.

Based on the review and discussions referred to above, the audit committee recommended to the board that the audited consolidated financial statements be included in the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 for filing with the Securities and Exchange Commission.

Audit Committee

E. Stanton McKee, Jr. (Chair)
Stanley E. Maron
Caden C. Wang

(1) The material in this report is not “soliciting material,” is not deemed “filed” with the SEC, and is not to be incorporated by reference into any filing of LeapFrog under the Securities Act of 1933, as amended, or the Act, or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing.

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Compensation Committee

The compensation committee has the authority to review and approve the overall compensation strategy and policies for LeapFrog. This role includes review and approval of corporate performance goals and objectives relevant to the compensation of our executive officers and other senior management, and the compensation and other terms of employment of our CEO. In addition, the compensation committee administers LeapFrog’s equity incentive and stock purchase plans and other similar programs. It also reviews and recommends that the Compensation Discussion and Analysis section be included in this proxy statement. The compensation committee has authority to form and delegate authority to subcommittees, as appropriate.

The performance compensation award subcommittee of the compensation committee was established to provide greater assurance that equity compensation awards would, if intended to do so, fit within the appropriate exemptions from the “short-swing profits trading” rules of the Exchange Act and the deduction limits of Section 162(m) of the Internal Revenue Code. The performance compensation award subcommittee is authorized to approve and grant equity awards to employees who are not within the discretionary award authority of the non-executive officer stock award committee, as well as any other equity awards or performance-based compensation awards deemed appropriate by the compensation committee or the full board of directors. The performance compensation award subcommittee is currently composed of Messrs. Nagel, McKee and Maron, each of whom our board of directors has determined to be an independent director within the meaning of Rule 303A of the NYSE, a non-employee director within the meaning of Exchange Act Rule 16b-3 and an outside director under the regulations promulgated under Section 162(m) of the Internal Revenue Code.

Our board of directors has also established a non-executive officer stock award committee, the sole member of which is our CEO, Mr. Barbour. This committee may grant equity awards to employees who are not executive officers (as that term is defined in Section 16 of the Exchange Act and Exchange Act Rule 16a-1) of the Company, provided that this committee is authorized to grant only stock awards that meet the annual stock award grant guidelines approved by the compensation committee. These guidelines set forth the number of shares that may be granted to persons based on level and the total number of shares that may be granted in any given year.

Our policy is that we will not time or select the grant dates for any stock options or other stock awards in coordination with our release of material non-public information, nor will we have any program, plan or practice to do so. In addition, we have specific written policies regarding the selection of grant dates for stock options and other stock awards made to our executive officers and employees. See the section entitled “Executive Compensation — Compensation Discussion and Analysis — Elements of Executive Compensation  — Stock Award Grant Date Policy” in this proxy statement for more information relating to this policy.

The compensation committee reviews and considers evaluations and recommendations from our CEO submitted to the compensation committee and compensation consultants engaged by the committee with respect to the compensation of other executive officers. The compensation committee reviews and considers evaluations and recommendations from compensation consultants engaged by the committee and from our board of directors with respect to the compensation of our CEO. Our CEO is not present during any deliberations or decisions concerning his compensation.

The compensation committee is authorized under its charter to obtain, at the expense of the Company, advice and assistance from internal and external legal, accounting or other advisors and consultants that the compensation committee considers necessary or appropriate in the performance of its duties. During the past fiscal year, the compensation committee directly engaged Compensia Inc. as its compensation consultant. The compensation committee requested that the compensation consultant evaluate LeapFrog’s compensation practices and assist in developing and implementing our executive compensation program and philosophy. Compensia developed a competitive peer group and performed analyses of competitive performance and compensation levels. Having been previously engaged by the committee, Compensia is familiar with LeapFrog’s business operations and strategy, key performance metrics and target goals and the labor markets in which we compete. Compensia developed recommendations that were reviewed and approved by the

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compensation committee for 2011. The specific tasks and responsibilities in implementing the directive of the compensation committee are described in greater detail under the heading “Compensation Discussion and Analysis” later in this proxy statement.

Compensia (including its affiliates) did not perform any services for the Company or any of our affiliates other than compensation consulting services related to determining or recommending the form or amount of executive and director compensation, designing and implementing incentive plans and providing information on industry and peer group pay practices, which services were provided directly to the compensation committee and, in the case of the analysis of our director compensation arrangements, the nominating and corporate governance committee, which is tasked with reviewing non-employee director compensation.

Among other considerations in administering our compensation programs, the compensation committee considers whether and to what extent such programs have a potential to encourage excessive risk-taking by our employees, including our executive officers. Specific features of our compensation plans and programs identified by the compensation committee as discouraging or potentially mitigating excessive risk-taking behavior include:

Annual base salary, which is fixed compensation, constitutes the primary component of compensation for all employees, including for sales personnel and executives;
Performance-based bonuses are primarily designed to reward corporate performance, rather than purely individual performance;
In general, employees, including sales personnel, earn annual salaries and are eligible for bonuses based on individual sales performance and company performance rather than being paid on a commission basis;
Our internal controls over financial reporting and the measurement and calculation of compensation goals, such as corporate performance measures, and other financial, operational, and compliance policies and practices are designed to prevent compensation programs from being susceptible to manipulation by any employee; and
Our compensation programs are designed to encourage employees to remain focused on both short-term and long-term goals through the use of performance-based bonuses, which focus on annual and/or quarterly performance goals, and equity awards, which typically vest over a number of years and therefore encourage employees to focus on long-term performance.

The compensation committee monitors our compensation programs to evaluate, on a regular basis, whether they provide an appropriate balance of incentives and whether they encourage employees to take unreasonable risks. Based on these assessments in February 2011, the board of directors and the compensation committee concluded that our compensation policies and practices for our employees do not create risks that are reasonably likely to have a material adverse effect on the Company.

The compensation committee is currently composed of four directors, Dr. Nagel (Chair) and Messrs. Maron, McKee and Simon. Our board of directors has determined that all members of the compensation committee are independent (as independence is defined in the NYSE listing standards), except Mr. Simon, President of Lawrence Investments. As noted above, upon the loss of our status as a controlled company, the NYSE listing requirements provide that we have one year from the date of the loss of such status to have our committees consist of fully independent directors. The compensation committee met eleven times during 2011. The compensation committee has adopted a written charter that is posted on our website at www.leapfroginvestor.com under the heading “Corporate Governance.”

Compensation Committee Interlocks and Insider Participation

As noted above, in 2011, Dr. Nagel, Messrs. Maron, McKee and Simon and, until July 2011, Mr. Wang, served on our compensation committee. During the fiscal year ended December 31, 2011, none of these directors was an officer or employee of LeapFrog or any of our subsidiaries, nor are any of these directors former officers of LeapFrog or any of our subsidiaries.

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None of our other executive officers or directors serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee.

Nominating and Corporate Governance Committee

The nominating and corporate governance committee of the board of directors is responsible for identifying, reviewing and evaluating candidates to serve as directors on our board of directors (consistent with criteria approved by the board of directors), reviewing and evaluating incumbent directors, recommending to the board of directors for selection candidates for election to the board of directors, making recommendations to the board of directors regarding the membership of the committees of the board of directors, assessing the performance of the board of directors, reviewing the compensation paid to non-employee directors for their service on our board of directors and its committees, and developing a set of corporate governance principles. Our nominating and corporate governance committee is currently composed of three directors, Messrs. Marinelli, Maron and Wang. The board of directors has determined that all members of the nominating and corporate governance committee are independent (as defined in the NYSE listing standards), except for Mr. Marinelli, Vice President of Lawrence Investments. As noted above, upon the loss of our status as a controlled company, the NYSE listing requirements provide that we have one year from the date of the loss of such status to have our committees consist of fully independent directors. The nominating and corporate governance committee met four times during our 2011 fiscal year. Our nominating and corporate governance committee charter is posted on our website at www.leapfroginvestor.com under the heading “Corporate Governance”.

The nominating and corporate governance committee, together with the board of directors, evaluates the suitability of individual candidates for board membership by assessing the independence, character and acumen of candidates to collectively establish a diversity of background and experience in areas relevant to our business. Board membership qualifications include (i) any director “independence” requirements of the NYSE and other membership qualifications, including having sufficient time to devote to the affairs of the Company, (ii) demonstrated excellence in his or her field, (iii) having the ability to exercise sound business judgment and (iv) having the commitment to rigorously represent the long-term interests of the Company’s stockholders.

Candidates for director nominees are reviewed in the context of the current composition of the board of directors, the operating requirements of LeapFrog and the long-term interests of stockholders. In conducting this assessment, the nominating and corporate governance committee considers diversity, age, skills, and such other factors as it deems appropriate given the current needs of the board of directors and LeapFrog, to maintain a balance of knowledge, experience and capability. While our board of directors and nominating and corporate governance committee do not have a policy regarding the consideration of diversity in identifying director nominees, the nominating and corporate governance committee may include in its consideration of director candidates an assessment of the current composition of the board of directors, and how it may be possible to strengthen the diversity of the board of directors by adding individuals who could add to the breadth of the overall experiences and perspectives of the board of directors. This may include selecting candidates with gender, ethnic, national or other backgrounds that are different from those already represented on the board of directors at the time of consideration.

In the case of incumbent directors, the nominating and corporate governance committee reviews these directors’ overall service to LeapFrog during their terms, including the number of meetings attended, level of participation, quality of performance, and any other relationships and transactions that might impair such directors’ independence. In the case of new director candidates, the nominating and corporate governance committee also determines whether the nominee must be independent for NYSE purposes, which determination is based upon applicable NYSE listing standards, applicable SEC rules and regulations and the advice of counsel, if necessary.

The nominating and corporate governance committee uses its network of contacts to compile a list of potential candidates, but may also engage, if it deems appropriate, a professional search firm. The nominating

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and corporate governance committee conducts any appropriate and necessary inquiries into the backgrounds and qualifications of possible candidates after considering the function and needs of the board. The nominating and corporate governance committee meets to discuss and consider the candidates’ qualifications and then selects a nominee for recommendation to the board by majority vote.

The nominating and corporate governance committee will consider director candidates recommended by stockholders. The nominating and corporate governance committee does not intend to alter the manner in which it evaluates candidates, including the minimum criteria set forth above, based on whether or not the candidate was recommended by a stockholder. Stockholders who wish to recommend individuals for consideration by the nominating and corporate governance committee to become nominees for election to the board for next year’s annual meeting of stockholders may do so by delivering a written recommendation to the nominating and corporate governance committee at the following address: Chair of the nominating and corporate governance committee c/o Corporate Secretary of LeapFrog at 6401 Hollis Street, Suite 100, Emeryville, California 94608, by December 21, 2012. Submissions must include the full name of the proposed nominee, a description of the proposed nominee’s business experience for at least the previous five years, complete biographical information, a description of the proposed nominee’s qualifications as a director and a representation that the nominating stockholder is a beneficial or record owner of our Class A or Class B common stock. Any such submission must be accompanied by the written consent of the proposed nominee to be named as a nominee and to serve as a director if elected.

CORPORATE GOVERNANCE

Corporate Governance Guidelines

Our board has adopted written Corporate Governance Guidelines to assure that the board will have the necessary authority and practices in place to review and evaluate our business operations as needed and to make decisions that are independent of our management. The guidelines are also intended to align the interests of directors and management with those of our stockholders. The Corporate Governance Guidelines set forth the practices the board intends to follow with respect to board composition and selection, board meetings and involvement of senior management, CEO performance evaluations and succession planning, and board committees and compensation. The nominating and corporate governance committee assists the board in implementing and adhering to the Corporate Governance Guidelines.

Corporate Governance Materials

Our Corporate Governance Guidelines, as well as the charters for each committee of the board, are posted on the investor relations section of our website at www.leapfroginvestor.com under the heading “Corporate Governance.” In addition, stockholders may obtain a print copy of our Corporate Governance Guidelines as well as the charters of our audit committee, compensation committee and nominating and corporate governance committee by writing to our Corporate Secretary at 6401 Hollis Street, Suite 100, Emeryville, California 94608.

Code of Ethics

We have adopted the LeapFrog Code of Business Conduct and Ethics that applies to all officers, directors and employees. Our Code of Business Conduct and Ethics are available on the investor relations section of our website at www.leapfroginvestor.com under the heading “Corporate Governance.” Stockholders may also obtain a print copy of our Code of Business Conduct and Ethics and our Corporate Governance Guidelines by writing to our Corporate Secretary at 6401 Hollis Street, Suite 100, Emeryville, California 94608. If we make any substantive amendments to our Code of Business Conduct and Ethics or grant any waiver from a provision of the Code of Business Conduct and Ethics to any executive officer or director, we will promptly disclose the nature of the amendment or waiver on the investor relations section of our website at www.leapfroginvestor.com under the heading “Corporate Governance.”

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Stockholder Communications with Directors

LeapFrog’s board of directors has adopted a formal process by which stockholders may communicate with the board of directors or any of its directors, including the Chairman, or to the non-management or independent directors generally. Stockholders and other interested parties who wish to communicate with the board of directors or any of the directors may do so by sending written communications addressed to the Corporate Secretary of LeapFrog at 6401 Hollis Street, Suite 100, Emeryville, California 94608. The board of directors has established procedures to deal with all direct communications. The board of directors has directed that all communications will be compiled by our Corporate Secretary and submitted to the board of directors or the individual directors on a periodic basis. These communications will be reviewed by our Corporate Secretary, who will determine whether they should be presented to the board of directors. The purpose of this screening is to allow the board of directors to avoid having to consider irrelevant or inappropriate communications (such as advertisements and solicitations). The screening procedures have been approved by a majority of the non-management directors of the board of directors. Directors may at any time request that we forward to them immediately all communications received by us. All communications directed to the audit committee in accordance with the procedures set forth in this paragraph that relate to accounting, internal accounting controls or auditing matters involving LeapFrog will be promptly and directly forwarded to the audit committee. A summary of these communication procedures is posted on our website at www.leapfroginvestor.com under the heading “Corporate Governance”.

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DIRECTOR COMPENSATION

During the fiscal year ended December 31, 2011, our non-employee directors who served during 2011 received the following compensation for their service on our board of directors.

Director Compensation for Fiscal Year 2011

       
Name   Fees Earned or
Paid in Cash
($)(1)
  Stock Awards
($)(2)(3)(4)
  Option Awards
($)(2)(3)(4)
  Total
($)
Thomas J. Kalinske     43,000       37,500       37,499       117,999  
Jeffrey G. Katz(5)                        
Paul T. Marinelli     47,250       37,500       37,499       122,249  
Stanley E. Maron     81,750       37,500       37,499       156,749  
E. Stanton McKee, Jr.     91,250       37,500       37,499       166,249  
David C. Nagel     63,250       37,500       37,499       138,249  
Randy O. Rissman(6)(7)     5,495       99,998       100,001       205,495  
Philip B. Simon     57,500       37,500       37,499       132,499  
Caden C. Wang     88,000       37,500       37,499       162,999  

(1) Reflects board retainer fees, as well as committee, committee chair and subcommittee retainer fees. Also includes meeting fees which were paid prior to the implementation of our new director compensation framework, as described more fully below under the heading “Discussion of Director Compensation.”
(2) At December 31, 2011, the following non-employee directors each held stock awards and stock options covering the following aggregate numbers of shares:

       
  Stock Awards
(number of shares)
  Stock Options
(number of shares)
Name   Vested   Unvested   Total
Outstanding
  Total
Outstanding
Thomas J. Kalinske           8,721       8,721       211,949  
Paul T. Marinelli           8,721       8,721       102,455  
Stanley E. Maron     20,000       8,721       28,721       121,768  
E. Stanton McKee, Jr.     25,000       8,721       33,721       116,969  
David C. Nagel     20,000       8,721       28,721       117,233  
Randy O. Rissman           28,248       28,248       57,314  
Philip B. Simon           8,721       8,721       102,455  
Caden C. Wang     20,000       8,721       28,721       122,354  
(3) The amounts reported for the stock and stock option awards are based on the grant date fair value computed in accordance with FASB ASC Topic 718. The assumptions made in the valuation of the stock and stock option awards are discussed in Note 13, “Stock-Based Compensation,” of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2011 which was filed with the SEC on February 29, 2012

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(4) In July 2011, each of our non-employee directors was automatically granted an annual restricted stock unit award and nonstatutory stock option award pursuant to the NEDSAP. The stock option awards were granted at an exercise price of $4.30 per share. The awards vest on May 31, 2012, the last day of the month prior to the month of our 2012 annual meeting of stockholders, which is June 5, 2012. The grant date fair value of each of these restricted stock unit and stock option awards, as calculated under FASB ASC Topic 718 for financial statement reporting purposes, was as follows:

       
Name   Restricted
Stock Unit Awards (Number of Shares)
  Grant Date
Fair Value
($)
  Stock Option Awards
(Number of Shares)
  Grant Date
Fair Value
($)
Thomas J. Kalinske     8,721       37,500       17,455       37,499  
Paul T. Marinelli     8,721       37,500       17,455       37,499  
Stanley E. Maron     8,721       37,500       17,455       37,499  
E. Stanton McKee, Jr.     8,721       37,500       17,455       37,499  
David C. Nagel     8,721       37,500       17,455       37,499  
Philip B. Simon     8,721       37,500       17,455       37,499  
Caden C. Wang     8,721       37,500       17,455       37,499  
(5) Mr. Katz served as Executive Chairman of our board of directors until his resignation on March 2, 2011. Under the terms of his employment resignation and transition agreement, Mr. Katz was not entitled to compensation for his service on our board of directors.
(6) Reflects cash compensation paid to Mr. Rissman for a partial year of service on our board of directors. Mr. Rissman was appointed to our board of directors on August 11, 2011.
(7) Reflects the initial awards granted to Mr. Rissman. All directors are entitled to certain initial awards upon joining the board of directors, as described more fully below under the heading “Discussion of Director Compensation.”

Discussion of Director Compensation

On June 29, 2011, our board of directors approved a change in director compensation. From January 1, 2011 until June 28, 2011, each of our non-employee directors received a cash meeting fee of $1,500 for each board of directors and board committee meeting attended, even if the meetings occurred on the same day. In addition to this meeting fee, each non-employee director received the following annual retainer fees:

Each non-employee director received an annual retainer of $30,000;
Each non-employee director who served as a member of the audit committee received an annual retainer of $10,000, and the Chair of the audit committee received an annual retainer of $20,000 (in lieu of the annual retainer of $10,000);
Each non-employee director who served as the Chair of the compensation committee and nominating and corporate governance committee received an annual retainer of $5,000; and
Each non-employee director who served as a member of the performance compensation award subcommittee of our compensation committee received an annual retainer of $5,000.

Beginning on June 29, 2011, the cash meeting fee of $1,500 was eliminated for all board of directors and board committee meetings. In connection with the elimination of the meeting fees, the annual retainer fees were increased as follows:

Each non-employee director received an annual retainer of $40,000; except the Chairman of the board of directors who received an annual retainer of $60,000;
Each non-employee director who served as a member of the audit committee received an annual retainer of $20,000, except the Chair of the audit committee who received an annual retainer of $30,000;
Each non-employee director who served as a member of the compensation committee received an annual retainer of $10,000, except the Chair of the compensation committee who received an annual retainer of $15,000; and

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Each non-employee director who served as a member of the nominating and corporate governance committee received an annual retainer of $5,000, except the Chair of the nominating and corporate governance committee who received an annual retainer of $10,000.

Retainers are paid out in quarterly installments in arrears, such that each director received three prorated retainer payments under the previous structure (for the fourth quarter 2010, the first quarter 2011 and the second quarter 2011) and one prorated payment under the current structure (for the third quarter 2011) during 2011. Under both arrangements, in cases where a director served for a part of the year in a capacity entitling him to a retainer, the retainer was pro-rated to reflect his period of service in that capacity.

In the fiscal year ended December 31, 2011, the total cash compensation paid to non-employee directors was $516,162 (including payments made to William B. Chiasson in his capacity as a non-employee director, which payments are described in detail below under Executive Compensation — Summary Compensation Table, due to his service as our CEO until March 2011). The members of our board of directors are also eligible for reimbursement of their expenses incurred in attending board meetings.

The NEDSAP provides both for automatic annual stock option grants to our non-employee directors as well as discretionary equity awards. The NEDSAP provides for an initial stock award upon being elected to our board of directors and annual stock awards on the first day of the month following the annual stockholders meeting of each year (or the next business day if that date is a legal holiday or falls on a weekend day) in amounts to be determined by board resolution. On June 29, 2011, our board of directors passed a resolution providing that the initial awards for non-employee directors would have an accounting value of $200,000 and that the annual awards for non-employee directors would have an accounting value of $75,000, except that the accounting value of the annual award to the Chairman of the board of directors is $100,000. For both the initial and the annual award, 50% of the value of such award is granted in the form of a nonstatutory stock option and 50% of such award is granted in the form of a restricted stock unit award. The accounting value of these stock awards is calculated using the same methodology as is applied by the Company for purposes of determining the accounting charge associated with similar awards currently in effect.

The exercise price of stock options granted under the NEDSAP is 100% of the fair market value of the Class A common stock subject to the option on the date of the option grant. Nonstatutory stock options awards granted pursuant to initial awards under the NEDSAP vest in equal monthly installments over a three-year period in accordance with their terms. Restricted stock unit awards granted pursuant to initial awards under the NEDSAP vest as to one-third of the shares subject such awards on each annual anniversary of the grant over a three-year period in accordance with their terms. Stock awards granted pursuant to annual awards under the NEDSAP vest on the last day of the month prior to the month in which the annual meeting of stockholders occurs on the year following the year of such annual grant. For example, stock awards granted pursuant to the annual grant in 2011 will vest on May 31, 2012.

The term of NEDSAP options is 10 years unless earlier terminated based on termination of continuous service or other conditions. In the event of a merger of LeapFrog with or into another corporation or a consolidation, acquisition of assets or other change-in-control transaction, the vesting of options and stock awards granted under the NEDSAP will accelerate and become fully vested and immediately exercisable, if, as of the completion of the change-in-control transaction or within 12 months of such transaction, the non-employee director’s service terminates; provided that such acceleration will not occur if the termination was a result of the non-employee director’s resignation (other than any resignation contemplated by the terms of the change-in-control transaction or required by LeapFrog or the acquiring entity pursuant to the change in control).

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EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

Overview

In this Compensation Discussion and Analysis, or CD&A, we describe the key principles and approaches used to determine elements of compensation paid to, awarded to and earned by our named executive officers. For purposes of this proxy statement, our “named executive officers” are the two executives who served as our Chief Executive Officer (CEO) during 2011, our Chief Financial Officer (CFO), two other executive officers who were serving as executive officers at the end of 2011 and one former executive officer who would have been one of our three other most highly compensated executive officers had he been serving as executive officers at the end of 2011, all as reflected in our Summary Compensation Table below. Accordingly, this CD&A describes our executive compensation program and the compensation policies and decisions that we made in 2011 for:

John Barbour, our CEO (as of March 2011);
William B. Chiasson, currently the Chairman of the Board (formerly our CEO through March 2011);
Mark Etnyre, our CFO;
Michael J. Dodd, our President and Chief Operating Officer;
William K. Campbell, our President, Americas Sales; and
Michael Y. Chai, our former Executive Vice President, Product Development and Engineering (Mr. Chai’s employment with the Company terminated in March 2011).

Executive Compensation Philosophy

Our philosophy is to provide total compensation to our named executive officers that reasonably, equitably and responsibly meets the following objectives:

Motivates our executives to achieve or exceed established individual goals, which, in turn, result in meeting or exceeding established company operating targets;
Aligns the current contributions of our executives with the long term interests of our stockholders;
Ensures an adequate portion of executive total compensation is based on the achievement of overall Company performance targets, as well as short-term and long term individual goals;
Provides reasonable, equitable and responsible bonus opportunities that will maintain individual executive compensation at established competitive market levels; and
Avoids incenting excessive risk taking.

We implement this philosophy through the following key principles:

Provide a balanced mix of cash and equity-based compensation that we believe is suitable to motivate our executives to achieve our financial and strategic goals while aligning their short-term and long-term interests with the interests of our stockholders;
Ensure that a significant portion of each executive’s total compensation is “at risk,” subject primarily to our overall performance and secondarily to his or her achievement of short-term and long-term individual goals;
Pay base salaries that are competitive with the salaries in effect at companies with which we compete for talent;
Provide annual bonus opportunities that motivate our executives to achieve or exceed established operating goals and generate rewards that maintain their total compensation at competitive market levels;
Provide equity-based incentive compensation that motivates our executives over the long term to respond to our business opportunities and challenges as stakeholders in our company;

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Maintain unvested equity value as a percent of salary at a sufficient level to provide a significant retention motivation;
Target the key elements of executive compensation (base salary, annual bonus opportunity, and equity incentive awards) to provide total compensation packages for our executives individually and as a group at approximately the 50th percentile of similarly situated companies;
Provide flexibility such that target compensation for individual executives may vary above or below the median based on a variety of factors, such as the executive’s skill set relative to his or her peers, experience and time in the executive’s position, the importance of the executive’s role to us, the difficulty of replacement, the executive’s performance and internal pay equity considerations; and
Ensure our compensation plans and arrangements avoid incentives that might lead to excessive risk-taking.

Executive Compensation Decisions

  Role of Compensation Committee and Management

Our compensation committee is responsible for the design, implementation, and oversight of our executive compensation program. Generally, our CEO, CFO and the Vice President of Human Resources and Organizational Development make recommendations to the compensation committee regarding the short-term and long-term compensation for our named executive officers (other than with respect to compensation of our CEO). These recommendations are based on their assessment of our financial and operational results, each executive’s contribution to these results, the executive’s progress toward achieving his or her individual goals, and input from our Human Resources Department regarding internal pay equity and the compensation consultant retained by the compensation committee to provide information on competitive market practices. The compensation committee’s decisions regarding our CEO’s compensation are based on its assessment of our financial and operational results, his contributions to these results, and, to a lesser extent, his progress toward achieving his individual goals, and information on competitive market practices.

The authority to approve equity awards for our named executive officers has been delegated to the performance compensation award subcommittee of the compensation committee. For more information about the performance compensation award subcommittee, including its membership and functions, see “Board of Directors and Corporate Governance — Committees of the Board — Compensation Committee” above.

  Role of Compensation Consultant

The compensation committee has engaged Compensia, Inc., or Compensia, a national compensation consulting firm, to provide advice and guidance on our executive compensation policies and practices and to provide relevant information about the executive compensation practices of similarly situated companies. Compensia assists in the preparation of compensation materials on executive compensation proposals in advance of compensation committee meetings, including changes to compensation levels for our executives, the design of our equity programs and other executive benefit programs. In addition, Compensia reviews and advises the compensation committee on compensation materials relating to executive compensation prepared by management for its consideration.

In addition, Compensia, under the direction of the compensation committee, conducts an annual review of the competitiveness of our executive compensation program, including base salaries, annual bonus opportunities, equity awards, and other executive benefits, by analyzing the compensation practices of the companies in our compensation peer group (as described below), as well as data from third-party compensation surveys. The compensation committee uses the results of this analysis to assess the competitiveness and risks of our executives’ total compensation packages.

  Use of Competitive Data

To monitor the competitiveness of our executives’ compensation, the compensation committee uses a compensation peer group that reflects the pay of executives in comparable positions at similarly situated

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companies. Typically, this compensation peer group, or the Peer Group, is composed of a cross-section of direct competitors, as well as companies in related industries with a focus on toy, gaming and educational products. The Peer Group consists of both “direct peers” and “industry reference peers.” The direct peers include publicly traded companies with market positions and sizes that closely match our own and represent the group that the compensation committee uses to determine the competitiveness of our executive and director compensation programs.

To be included in the direct peer group, a company should be in the software or leisure products industries, have net sales in the range of $150 – 600 million and have a market capitalization between $200 – 800 million. These criteria represent general guidelines; not all of the Company’s direct peers will meet all selection criteria. Given the limited number of directly comparable companies, the selection criteria have been broadened for those companies that are the closest fits from an industry perspective.

The following companies comprised the direct peer group in 2011 approved by our compensation committee in February 2011:

   
Blackboard   Build A Bear Workshop   iRobot
JAKKS Pacific   K12   Kid Brands
NetSuite   RC2   Real Networks
Renaissance Learning   Rosetta Stone   THQ

In addition, an industry reference group is used as a secondary reference point for our executive and director compensation programs to identify compensation design trends and “best practices” in our industry. For 2011, the industry reference group is comprised of Activision Blizzard, Electronic Arts, Hasbro, Mattel and Take-Two Interactive Software; companies that provide toys, educational products or consumer packaged goods for children or games (handheld or electronic, hardware or software). Although they operate in a similar business or industry, these companies are included in the industry reference group rather than the direct peer group because they are significantly larger than we are and were not within the targeted range for net sales or market capitalization.

While the compensation committee does not believe that the Peer Group data is appropriate as a stand-alone tool for setting compensation due to the unique nature of our business, it considers this information to be a valuable reference during its decision-making process. In addition to reviewing analyses of compensation data from the Peer Group, the compensation committee employs the collective experience and judgment of its members and advisors (including Compensia, management and the Company’s human resource department) in determining the total compensation and the various components provided to our named executive officers.

For 2011, the compensation committee directed Compensia to conduct an analysis of the compensation of our executives using data compiled from the Peer Group, supplemented by data from the Radford 2010 Global Technology Survey, a broad-based third-party survey that reflects widespread compensation practices among more than 700 high technology companies. This analysis, which was updated to July 2011, indicated that the target total direct compensation for our executives (the sum of target total cash compensation and the value of annual equity awards) base salaries and equity award grant values was at the 70th percentiles of the competitive market. The analysis also indicated that our executives’ base salary aligned with the 40th percentile of the competitive market, overall, and that target bonus opportunities were generally between the 25th and 50th percentiles of the competitive market. While cash compensation for our executives was below the market median, the value of equity awards tended to bring their target total direct compensation above the market median.

The Radford Survey was used as a supplementary reference to gauge compensation trends and the market generally and to confirm that any conclusions drawn from the analyses of the compensation data from the Peer Group was not based on market outliers.

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  Compensation Design and Mix

The overall composition of an executive’s total compensation package is determined initially based on the competitive market data for the position described above and then adjusted to reflect the specific performance, contributions and experience of the individual. Each year, the compensation committee evaluates the total compensation of our executives with respect to our overall company performance, individual performance, changes in scope of responsibility and any changes in the competitive market for each position. The compensation committee does not have a pre-established policy or target for the allocation between cash and non-cash compensation or short-term and long-term incentive compensation. Rather, the compensation committee uses the compensation data provided by Compensia to determine the appropriate level and mix of incentive compensation, taking into consideration how that mix creates or awards incentives that might lead to excessive risk-taking. In general, the level of an executive’s variable compensation opportunity (short-term and long-term incentive compensation) increases with his or her level of responsibility. However, the compensation committee is careful (i) not to increase the variable compensation component to such an extent so as to unduly increase the associated level of risk-taking behavior by our executives and (ii) to select performance criteria for the variable compensation component that aligns individual performance with long-term stockholder interest.

  Economic and Risk Considerations

Members of our senior management, including the CEO, CFO and General Counsel, along with members of our Human Resources Department, with oversight by the compensation committee, conducted an assessment of our compensation programs and policies to determine whether the incentives provided by these programs and policies were appropriate or had the potential to encourage excessive risk-taking by our employees. The results of this assessment were discussed at and in conjunction with board and compensation committee meetings held in February and March 2011, and at a special risk review session of the board of directors in July 2011.

The assessment focused on the key terms of the Company’s equity compensation and variable cash compensation programs, such as bonus plans. Our compensation programs were analyzed to determine whether they introduced or encouraged excessive risk-taking or other behaviors that could have an adverse impact on our business and whether existing risk mitigation features were sufficient in light of the overall structure and composition of our compensation programs. In particular, the assessment focused on the ability of participants to affect the level of the variable component of their compensation and the controls over participant action and variable compensation. For more general information regarding the features of our compensation plans and programs that have been identified as discouraging or potentially mitigating excessive risk-taking behavior, see the information discussed under the heading “Compensation Committee” earlier in this proxy statement.

The compensation committee determined that, for all employees, our compensation programs do not encourage excessive risk-taking and instead encourage behaviors that support sustainable value generation.

  Advisory Vote on Executive Compensation

At our 2011 annual meeting of stockholders, our stockholders had the opportunity to provide an advisory vote on the compensation paid to our named executive officers, or a “say-on-pay” vote, and on the frequency with which they believed we should hold future say-on-pay votes. Over 99% of the votes cast by our stockholders approved the compensation of our named executive officers, as disclosed in our 2011 proxy statement. The board of directors and compensation committee reviewed these final vote results and determined that such results affirmed stockholder support of our approach to executive compensation and thus we did not believe any changes to our executive officer compensation program in response to the vote was necessary.

In addition, over 90% of the votes cast by our stockholders at the 2011 annual meeting of stockholders selected three years as the preferred frequency of future say-on-pay votes. Accordingly, our board of directors currently plans on holding its next say-on-pay vote at our 2014 annual meeting of stockholders.

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Elements of Executive Compensation

The compensation committee uses a mix of cash and equity compensation, along with severance, health, and other benefits, to develop total compensation packages for our executives that meet our compensation objectives. The elements of our executive compensation program are:

Base salary;
Performance-based bonuses;
Equity incentive awards;
Severance benefits; and
Other benefits and perquisites.

  Base Salary

The compensation committee reviews and adjusts, as necessary or appropriate, the base salaries of our executives on an annual basis, and makes decisions with respect to the base salaries of new executives at the time of hire. In making its determinations, the compensation committee considers several factors, including our overall financial performance, individual performance, the executive’s potential to contribute to our long-term strategic goals, his or her scope of responsibilities and experience and competitive market practices for base salary.

In April 2011, both Mr. Etnyre and Mr. Campbell received increases in their annual base salary of $15,000. In both cases, the raise was intended to bring the base salary compensation of Messrs. Etnyre and Campbell closer to the 50th percentile for base salary compensation for their position in our Peer Group. There were no other base salary changes of our named executive officers in 2011.

  Performance-Based Bonuses

We use performance-based bonuses to motivate our executives to achieve our short-term financial and operational goals and to reward exceptional company and individual performance. In 2011, our bonus plan was designed to encourage net sales growth and improve our operating income results, as described below.

Target Bonus Opportunity

For 2011, the target bonus opportunity for our named executive officers ranged from 65 – 100% of their 2011 base salaries (in each case subject to adjustment in the discretion of the board or compensation committee as described below under the heading “Bonus Award Decisions”). These target bonus opportunities are established in each executive’s employment agreement or offer letter and are based on competitive market practices for each individual’s position. The target bonus opportunity for Mr. Chiasson in 2011 was equal to 75% of his 2011 base salary. With respect to Mr. Barbour, it was equal to 100% of his 2011 base salary (prorated for the portion of the year during which he was employed at LeapFrog) and was guaranteed for 2011 because he joined the Company once the 2011 product planning and development cycle was already well under way. With respect to Messrs. Dodd and Chai, the target bonus opportunity was 75% of their 2011 base salary. With respect to Messrs. Campbell and Etnyre, the target bonus opportunity in 2011 was increased from 50% to 65% of their 2011 base salaries to bring their annual bonus compensation closer to the 50th percentile for annual bonus compensation for their position in our Peer Group.

Seventy percent of each executive’s target bonus opportunity was allocated to a Company performance component and 30% was allocated to an individual performance component.

 
Bonus Components   Total Target
Bonus
Opportunity
Company Performance     70 % 
Individual Performance     30 % 
Total     100 % 

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The allocation of total bonus opportunity between Company and individual performance for our executives is based on the compensation committee’s evaluation of competitive market practices, its assessment of the amount of compensation that should be based on company performance versus individual performance and our philosophy of mitigating excessive risk-taking.

Performance Goals and Achievement

Target Bonus Components.

The Company performance component was based on two financial measures, net sales and operating income, weighted as follows:

   
Company Goals   Percentage of
Total Bonus
Component
  Percentage of
Company
Performance
Component
Net Sales     21 %      30 % 
Operating Income     49 %      70 % 
Total Bonus     70 %      100 % 

As a proportion of each executive’s overall bonus opportunity, the individual performance component accounted for 30% of the total bonus opportunity for each executive, while the net sales measure was equal to 21% and the operating income measure was equal to 49%. The amount payable with respect to each performance component was to be calculated by assessing our 2011 performance against pre-established target levels for each of the financial measures. Each component and its corresponding level of achievement in 2011 is discussed below.

Net Sales Component.  With respect to the Company performance component of each executive’s target bonus opportunity, 30% depended upon achievement of a specified net sales target level, which was set by the compensation committee when the 2011 bonus plan was approved in April 2011. Threshold, target, and stretch levels for net sales were established based on our 2011 operating plan and data regarding our financial results and business expectations as of that time, including toy industry sales growth projections, Company resources and capabilities, and the inventory of Company products in the mass market retail channel at the end of 2011. In addition, these levels were consistent with the relative risk acceptable to the board of directors in approving the Company’s operating plan.

The compensation committee determined that each executive would be eligible for payout of 100% of their target bonus opportunity associated with the net sales measure for the Company performance component if the “target” level was achieved. However, if the target level was not achieved, executives would still be eligible for a payout of 50% of the corresponding target bonus if a lower “threshold” level were achieved. If the threshold level was not achieved, there would be no payout of target bonuses associated with this measure. However, if we exceeded the target level, executives would be eligible for a payout of 150% of the corresponding target bonus if the “stretch” level was achieved. In each instance, net sales achievement between the threshold, target and stretch levels would result in ratable payout eligibility for the net sales measure.

The net sales performance levels and related funding levels for 2011 were as follows:

   
Performance Levels   Net Sales   Percent of
Target Bonus
Eligibility
Net sales threshold   $ 415 million       50 % 
Net sales target   $ 435 million       100 % 
Net sales stretch   $ 460 million       150 % 

When it selected net sales as a measure for the 2011 bonus plan, the compensation committee believed that the measure was appropriate because the level of our net sales would be one of the most significant measures of the type of growth necessary to increase long-term stockholder value.

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The Company achieved actual net sales of $455 million in 2011, which meant that the executive officers were eligible to receive 140% of the target bonus associated with the net sales measure for the Company performance component.

Operating Income.  With respect to the other 70% of the Company performance component of each executive’s target bonus opportunity, bonus eligibility depended on the achievement, as of the end of the year, of an operating income target level. As with the net sales measure, threshold, target, and “stretch” levels for operating income were established based on our 2011 operating plan and data regarding our financial results and business expectations as of that time, including toy industry and technology company financial benchmarks for product margin, operating expenses and operating income of as a percentage of net sales, and Company resources and capabilities. In addition, these levels were consistent with the relative risk acceptable to the board of directors in approving the Company’s operating plan.

As with the net sales measure, the compensation committee determined that the operating income measure would be funded at a 50% level if the threshold operating income level was achieved, at a 100% level if the target level was achieved and at a 150% level if the stretch level were achieved. If the threshold level was not achieved, this measure would not be funded. In each instance, operating income achievement between the threshold, target and stretch levels would result in ratable funding for the operating income measure.

The operating income performance levels and related funding levels for 2011 were as follows:

   
Performance Levels   Operating
Income
  Percent of
Target Bonus
Eligibility
Operating income threshold     $12 million       50 % 
Operating income target     $18 million       100 % 
Operating income stretch     $24 million       150 % 

When it selected operating income as a measure for the 2011 bonus plan, the compensation committee believed that the measure was appropriate because the level of our operating income would be one of our most significant measures of the sustainability of our business results. While net sales is an important measure of company growth, the operating income financial measure indicates the profitable and sustainable growth necessary to maintain long-term stockholder value. Operating income was weighted more highly than net sales because the board of directors had established improving the profitability of the business as a key priority.

The Company achieved actual operating income of $23.7 million in 2011, which meant that the executive officers were eligible to receive 147% of the target bonus associated with the profitability measure for the Company performance component.

Individual Performance Component.  The remaining 30% of the target bonus opportunity consisted of the individual performance component. Executives would be eligible for this portion of their target bonus, based on their individual performance, if the Company achieved $8 million of operating income on a post-bonus basis. This meant that if the Company had sufficient operating income to fund this portion of the bonus pool and still have $8 million in operating income, executives would be eligible for the individual performance component of the target bonus, based on the compensation committee’s analysis of their achievement of their individual performance goals.

The Company achieved operating income in excess of $8 million after the proposed funding of this portion of the bonus pool and, as a result, the executive officers were eligible to receive this portion of their target bonus. Individual goals for the executive officers were divided into three categories: (i) Achievement of financial goals relevant to each executive officer’s department; (ii) successful execution of specific projects relevant to each executive officer’s department and (iii) successful execution of employee-related goals.

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Bonus Award Decisions

In February 2012, our CEO, Mr. Barbour, recommended bonus awards for each of our named executive officers (except for himself, or for Messrs. Chiasson and Chai who were no longer employed by the Company at that time) for 2011 consistent with the above formulas. These recommendations were then reviewed and approved by the compensation committee.

The decisions of the compensation committee were based on its analysis of the achievement of the different performance objectives of the company and, individually, for each of the named executive officers. With respect to the Company performance component, the compensation committee determined that our named executive officers were eligible for 145% of their target bonus opportunity (out of a possible 150%) based on achievement of both the net sales and operating income performance goals.

The compensation committee also conducted an evaluation of the individual performance of each named executive officer, primarily with respect to overall achievement of his respective goals for the year, while also taking into consideration any exceptional contributions and impact that his area of responsibility had on the performance of the Company. Under the bonus plan, the board of directors and compensation committee had discretion to vary the amount of the bonus awards paid to our named executive officers, but such discretion was not exercised this year.

Total Bonus Awards.  Based on the foregoing, our named executive officers received the following cash bonus awards for 2011:

           
        2011 Bonus Plan Elements and Payouts
Name   Eligible
Compensation
($)
  Target Bonus
Opportunity
(%)
  Incentive at
Target
($)
  Company
Component
($)
  Individual
Performance
Component
($)
  Total
Bonus Paid
($)
Mr. Chiasson(1)     450,000       75 %      337,500       n/a       n/a       n/a  
Mr. Barbour(2)     470,689       100 %      470,689       478,261       141,207       619,467  
Mr. Etnyre     311,875       65 %      202,718       205,980       56,559       262,538  
Mr. Dodd     408,000       75 %      306,000       310,922       87,210       398,132  
Mr. Campbell     311,875       65 %      202,718       205,980       55,950       261,930  
Mr. Chai(3)     361,188       75 %      270,891       n/a       n/a       n/a  

(1) Mr. Chiasson resigned as CEO of the Company in March 2011 and received a severance payment in connection with his resignation, as described below. In connection with his severance payment, Mr. Chiasson released his rights in any bonus payments for 2011 and therefore was not eligible for a bonus.
(2) Mr. Barbour’s employment agreement provided for a guaranteed bonus for 2011 equal to 100% of his base salary. The payout of this portion of his bonus was not dependent upon attainment of the different components of the bonus award. However, the compensation committee determined that the Company’s significant overachievement of both the net sales and operating income target performance levels was attributable to the performance of Mr. Barbour and awarded him a bonus of 132% of his eligible base salary.
(3) Mr. Chai’s employment with the Company terminated in March 2011. Mr. Chai received a severance payment in connection with his termination, as described below. In connection with his severance payment, Mr. Chai released his rights in any bonus payments for 2011 and therefore was not eligible for a bonus.

  Equity Incentive Awards

We believe that equity incentives are an effective way to attract and retain talented executives, to motivate and reward them for outstanding company and individual performance, and to align their interests with those of our stockholders. The compensation committee grants equity awards to our executive officers

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after taking into consideration our overall performance against short-term and long-term financial and strategic goals, the executive’s then-current equity holdings, his or her anticipated future contributions to our success, its assessment of the executive’s potential to contribute to the long-term value of our company and an analysis of the equity awards practices of the Peer Group.

Award Mix

Typically, we grant a mix of stock options and restricted stock unit awards, or RSUs, to our executives as part of their initial compensation packages at the time of hire and, thereafter, on an annual basis. These awards are generally subject to time-based vesting requirements.

Stock Options.  The compensation committee believes that stock options provide our executives with a strong incentive to ensure long-term corporate performance and the creation of stockholder value. Option grants made to our executive officers have an exercise price equal to 100% of the fair market value on the date of grant of the underlying Class A common stock, as defined under our 2011 EIP.

Restricted Stock Units (RSUs).  RSUs represent full-value shares of Class A common stock. Our practice is to grant fewer shares under RSUs as compared to options since RSUs have a greater fair value per share than options. Shares of our Class A common stock are not issued when an RSU award is granted. Instead, once an RSU award vests, one share of our Class A common stock is issued for each vested RSU. During 2011, under our 2011 EIP, when we granted RSUs, we deducted from the pool of shares available for issuance under the plan two shares for each RSU granted, compared to one share deducted for each option share granted.

Award Timing

The timing of equity awards is determined by the compensation committee based on its view, from time to time, regarding the sufficiency of executive equity holdings for purposes of retention and motivation. When granting equity awards, we do not seek to time or select the grant dates for our equity awards in coordination with the release of material non-public information, and we do not have any program, plan, or practice to do so. Our policy regarding equity award grant dates provides that the grant date is to be the 15th day of the month subsequent to the month in which the performance compensation award subcommittee approves an award (or, if not a business day, the next succeeding business day). In the case of new hire awards, the grant date is to be the 15th day of the month subsequent to the month in which the employee commences work if it is later than the month in which the relevant award is approved (or, if not a business day, the next succeeding business day). Accordingly, we generally have 12 pre-established grant dates during any calendar year. This policy also provides that the exercise price of each stock option is to be equal to the closing market price of our Class A common stock on the date of grant.

2011 Equity Awards

In March 2011, Mr. Barbour was granted a nonstatutory stock option and an RSU award in connection with his appointment as the chief executive officer of the Company. Mr. Barbour’s stock option vests over four years, with 25% of the option vesting on the one-year anniversary of his hire date and the remaining options vesting in 36 equal monthly installments. His RSU awards vest over four years, with 25% of the units vesting on the one-year anniversary of his hire date and the remaining units vesting in 36 equal monthly installments. After considering their outstanding equity awards and the awards granted in 2010, no other equity awards were granted to the other executive officers in 2011; the compensation committee believed that the existing equity grants were already above the 50th percentile for the peer groups and therefore no additional grants were necessary.

  Severance Benefits

Our named executive officers, with the exception of Messrs. Chiasson and Barbour, were eligible to receive payments and benefits under our Executive Management Severance and Change-in-Control Plan, or the Severance Plan.

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The Severance Plan is intended to achieve three objectives:

minimize distraction and risk of departure of our executives and other members of senior management in the event of a potential change-in-control transaction involving the Company;
provide consistency in benefits among our executives and other members of senior management; and
align our severance payments and benefits for our executives and other members of senior management with competitive practice.

Under the terms of the Severance Plan, each of our named executive officers (other than Messrs. Chiasson and Barbour) was eligible to receive payments and benefits if we terminated his employment “without cause” or if he resigned for “good reason.” In these situations, the Severance Plan provides for the continued payment of base salary for a period of 12 months (paid in semi-monthly installments) and COBRA benefits for a period of 12 months. In the event that the termination of employment occurs during the period beginning three months before and ending 12 months after a change in control of our company, the Severance Plan provides for a lump sum cash payment consisting of an amount equal to 24 months of base salary and an amount equal to 200% of his or her target bonus, COBRA benefits for a period of 24 months and acceleration of vesting of all outstanding unvested stock awards. None of our named executive officers is eligible to receive any tax “gross-up” or other tax payment under the Severance Plan.

In determining the amounts payable under the Severance Plan, the compensation committee took into consideration the severance practices of the companies in our Peer Group. In addition, the compensation committee considered the multi-year nature of our turnaround plan and the historic volatility of our stock price and operating results.

For more information about the terms and conditions of the Severance Plan, as well as the definitions of “cause” and “good reason,” and a discussion of the severance benefits for Messrs. Chiasson and Barbour, see “Potential Payments upon Termination or Change in Control” below.

  Other Benefits and Perquisites

We offer our executives various benefits, including healthcare coverage and the opportunity to participate in our Section 401(k) plan and employee stock purchase plan, on the same general conditions as are made available to all our full-time employees. We do not offer our executives or other employees guaranteed retirement or pension benefits.

In view of the high cost of housing in the San Francisco Bay Area relative to other parts of the country, we have, in the past, offered newly-hired executives reimbursement of relocation expenses and mortgage interest differential payments, where appropriate. Typically, the amount and duration of these payments is negotiated and set forth in the new executive’s employment agreement or offer letter. In connection with our hiring Mr. Barbour, we agreed to compensate him for travel and temporary housing assistance in the amount of $150,000, payable in quarterly installments, and provided him with certain other relocation benefits (“Other Relocation Benefits”), including travel for his wife to the San Francisco Bay Area to look for housing, shipment of his personal goods and vehicles from New York to San Francisco. Of the available Other Relocation Benefits, the Company has currently paid $15,869 in temporary housing for Mr. Barbour. Mr. Barbour was also eligible to receive a “tax gross up” for the Other Relocation Benefits, which was not incurred during 2011, and reimbursement for all legal fees actually and reasonably incurred by him in connection with the negotiation, review and finalization of his employment agreement, up to a maximum total reimbursement amount of $10,000, of which $9,675 was paid.

In addition, as a result of relocating from Texas to the San Francisco Bay Area, Mr. Campbell receives a monthly housing stipend of $3,500. The stipend payment began on May 1, 2010 and will continue for two years.

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Determination of Mr. Barbour’s Initial Compensation Package

Our named executive officers, other than Mr. Barbour, are employed at will. In March 2011, we executed an employment agreement with Mr. Barbour under which he became the Company’s new Chief Executive Officer. In connection with the negotiation of Mr. Barbour’s employment agreement, the Board drew upon CEO compensation benchmarking data compiled by Compensia. The Board also considered other sources of compensation data relevant to the CEO position, including employment agreements with the Company’s prior CEOs and executives and Mr. Barbour’s publicly reported compensation at other companies at which he was employed in an executive role. The Board sought to execute an agreement having terms consistent with the available compensation data and the executive compensation philosophy set forth above. The Board further worked with outside legal advisors familiar with executive compensation practices to prepare and negotiate Mr. Barbour’s employment agreement.

Tax and Accounting Considerations

  Compliance with Internal Revenue Code Section 162(m)

Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to a public reporting company for compensation exceeding $1 million paid to its chief executive officer and its three other most highly-compensated executive officers (other than its chief financial officer). This limitation applies only to compensation that is not considered to be “performance-based.”

Our 2011 EIP, includes various provisions designed to allow us to qualify stock options and other equity awards as “performance-based” compensation under Section 162(m), including a limitation on the maximum number of shares subject to awards that may be granted to an individual under the plan in any one year. The 2011 EIP currently includes a limit of 3.5 million shares as the maximum number of shares subject to awards that may be granted to an individual under the plan in any one year. Generally, we intend to grant stock options to our executives in a manner that satisfies the requirements for “performance-based” compensation to avoid any deduction disallowance for these awards under Section 162(m). In addition, the 2011 EIP provides for performance based cash compensation of up to $1 million per individual. We may elect to grant performance based cash awards under the 2011 EIP to our executive officers in the future.

The compensation committee believes that it is appropriate for us to retain the flexibility to pay compensation that is not necessarily deductible if it deems such compensation to be in the best interests of our company and stockholders. Accordingly, from time to time, we may pay compensation to our executives that is not deductible, including cash bonuses and equity awards.

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REPORT OF THE COMPENSATION COMMITTEE(2)

The compensation committee has reviewed and discussed with management the CD&A contained in this proxy statement. Based on this review and discussion, the compensation committee has recommended to the board of directors that the CD&A be included in this proxy statement and incorporated by reference into our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Compensation Committee

David C. Nagel (Chair)
Stanley E. Maron
E. Stanton McKee
Philip B. Simon

(2) The material in this report is not “soliciting material,” is not deemed “filed” with the SEC, and is not to be incorporated by reference into any filing of LeapFrog under the Securities Act or the Exchange Act, other than LeapFrog’s Annual Report on Form 10-K, where it shall be deemed to be “furnished,” whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing.

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Summary Compensation Information

The following table presents the compensation awarded, paid to or earned by, our named executive officers. The named executive officers for 2011 are our CEO from March through December 2011, our CEO from January through March 2011, our CFO, our two other most highly compensated executive officers who were serving as executive officers at the end of 2011 and one former executive officer who would have been one of the three other most highly compensated executive officers had he been serving as an executive officer at the end of 2011. The table shows compensation for 2011 and, where the individual was a named executive officer in the relevant prior year, 2010 and 2009.

SUMMARY COMPENSATION TABLE

               
Name and Principal Position   Year   Salary
Received
($)
  Bonus
($)*
  Stock
Awards
($)(1)
  Option
Awards
($)(2)
  Non-Equity
Incentive Plan
Compensation
($)*
  All Other
Compensation
($)
  Total
Compensation
($)
John Barbour
Chief Executive Officer(3)
    2011       470,689       470,689       685,500       1,888,700       148,778 (4)      198,059 (5)      3,862,415  
William B. Chiasson
Former Chief Executive Officer(6)
    2011       132,116             16,667       81,116             629,292 (7)      859,191  
    2010       427,133             948,000       522,945       120,452 (8)            2,018,530  
    2009       312,800                   387,833       37,536 (9)      2,000 (10)      740,169  
Mark Etnyre(11)
Chief Financial Officer
    2011       311,875                         262,538 (4)            574,413  
    2010       291,667             757,750             54,833 (8)      5,000 (12)      1,109,250  
William K. Campbell
President, Americas Sales
    2011       311,875                         261,930 (4)      42,000 (13)      615,805  
    2010       290,675             1,070,000             47,380 (8)      38,413 (14)      1,446,468  
    2009       244,050                   254,108       29,286 (9)      2,000 (10)      529,444  
Michael J. Dodd
President and Chief Operating Officer
    2011       408,000                         398,132 (4)            806,132  
    2010       349,033       306,000       1,824,000                         2,479,033  
    2009       292,200                   433,467       35,064 (9)            760,731  
Michael Chai(15)
Former Executive Vice President, Product Development and Engineering
    2011       131,945                               210,693 (16)      342,638  
    2010       316,040       270,891       1,368,000                         1,954,931  
     

* The amounts reported in the “Bonus” column represent guaranteed bonus payments made pursuant to employment agreements or similar arrangements with the executive officer. As required under the applicable rules of the SEC, performance-based bonus payments are reported in the “Non-Equity Incentive Plan Compensation” column, to the extent that they are based upon satisfaction of pre-established performance conditions the outcome of which was substantially uncertain.
(1) The amount reported in the “Stock Awards” column is based on the grant date fair value computed in accordance with FASB ASC Topic 718. The assumptions made in the valuation of the option awards are discussed in Note 13, “Stock-Based Compensation,” of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2011.
(2) The amount reported in the “Option Awards” column is based on the grant date fair value computed in accordance with FASB ASC Topic 718. The assumptions made in the valuation of the option awards are discussed in Note 13, “Stock-Based Compensation,” of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2011. To the extent that option awards were granted as part of our value-for-value stock option exchange program in 2009, the amounts reported for such option awards are their incremental fair values as of the date of the exchange, calculated in accordance with FASB ASC Topic 718. The option exchange programs were designed to result in no incremental accounting cost for the new options issued in the exchange and, as a result, the incremental fair value of such options was generally approximately zero.

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(3) Mr. Barbour was appointed as our Chief Executive Officer in March 2011.
(4) The amount reported is the sum of bonus payments to such individual under our 2011 bonus plan for company achievement of financial targets and personal achievement of individual performance goals.
(5) The amount reported consists of compensation for Mr. Barbour for travel and temporary housing assistance in the amount of $150,000, payments for temporary housing in the amount of $15,869, relocation expense paid to a moving company of $18,000 as well as certain other benefits pursuant to his employment agreement, which include legal fees related to the negotiation of his employment agreement and annual life insurance premiums.
(6) Mr. Chiasson resigned as our Chief Executive Officer in March 2011.
(7) Mr. Chiasson received $590,625 in severance payment in connection with his resignation as our Chief Executive Officer in March 2011. Mr. Chiasson also received $38,667 in non-employee director fees during 2011 for his role as Chairman of our board of directors beginning on March 2011.
(8) The amount reported is the sum of bonus payments to such individual under our 2010 bonus plan for company achievement of financial targets and personal achievement of individual goals.
(9) The amount reported is the sum of bonus payments to such individual under our 2009 bonus plan for company achievement of quarterly cash balance targets in the first, second and third quarters of 2009.
(10) The amount reported represents matching contributions to such individual’s Section 401(k) retirement savings account.
(11) Mr. Etnyre was not a named executive officer in 2009.
(12) As a relocation benefit, Mr. Etnyre received a $2,000 per month mortgage interest subsidy for the first two years of home ownership in the San Francisco Bay Area. The final subsidy payment was made on March 15, 2010.
(13) As a result of relocating from Texas to the San Francisco Bay Area, Mr. Campbell is receiving a monthly housing stipend of $3,500. The stipend payment began on May 1, 2010 and will continue for two years.
(14) As a result of relocating from Texas to the San Francisco Bay Area, Mr. Campbell is receiving a monthly housing stipend of $3,500. The stipend payment began on May 1, 2010 and will continue for two years. In 2010, Mr. Campbell received monthly housing stipends in the amount of $28,000. In 2010, the Company also paid $10,413 in moving expenses on Mr. Campbell’s behalf which was taxable to him.
(15) Mr. Chai’s employment with the Company terminated in March 2011.
(16) Mr. Chai received $210,693 in severance payment in connection with the termination of his employment in March 2011.

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Grants of Plan-Based Awards

The following table presents, for the fiscal year ended December 31, 2011, certain information regarding grants of plan-based awards to our named executive officers.

GRANTS OF PLAN-BASED AWARDS

             
Name   Grant
Date(1)
  Approval
Date of
Grant(1)
  All Other
Stock
Awards:
Number of
Shares of
Stock or
Units (#)
  All Other
Option
Awards:
Number of
Securities
Underlying
Options (#)
  Exercise or
Base Price
of Option Awards
($/Sh)(2)
  Closing
Market
Price on
Grant Date
($/Sh)(2)
  Grant Date
Fair Value of
Stock and
Option
Awards
($)(3)
John Barbour     3/7/2011       2/28/2011       150,000 (4)               0.00       4.39       658,500  
       3/7/2011       2/28/2011             850,000 (4)      4.39       4.39       1,888,700  
William B. Chiasson     7/1/2011                3,876 (5)            0.00       4.30       16,667  
       7/1/2011                      7,758 (6)      4.30       4.30       16,667  
       7/1/2011                      30,000 (7)      4.30       4.30       64,449  
Mark A. Etnyre                                          
William K. Campbell                                          
Michael J. Dodd                                          

(1) Our board of directors has adopted a policy regarding the grant dates of stock options and stock-based awards under which the grant date of awards to our named executive officers will be the 15th day of the month subsequent to the month in which the award is approved by the board or compensation committee (or the next succeeding business day that the NYSE is open). In 2011, pursuant to his employment agreement, Mr. Barbour was granted stock options on the first day of his employment with the Company. On July 1, 2011, Mr. Chiasson received grants as a non-employee director of the Company pursuant to the Company’s director compensation policy, described above under the heading Discussion of Director Compensation.
(2) As provided in the Prior Plan, we grant options to purchase shares of our Class A common stock at an exercise price equal to the closing market price of our Class A common stock on the date of grant.
(3) Represents the full fair value of the option or stock award computed as of the grant date in accordance with FASB ASC Topic 718. See Note 12 of Notes to Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2010 for a discussion of assumptions made in determining the grant date fair value and compensation expense of equity awards.
(4) In March 2011, Mr. Barbour was granted a nonstatutory stock option to purchase 850,000 shares and an RSU award of 150,000 shares in connection with his appointment as the chief executive officer of the Company. Mr. Barbour’s stock options and RSU award each vest over four years, with 25% of the options and units vesting on March 7, 2012 and the remaining options and RSUs vesting in 36 equal monthly installments
(5) Mr. Chiasson received a pro-rated annual grant of restricted stock unit awards in July 2011 under our Amended and Restated 2002 Non-employee Directors’ Stock Award Plan. This award vests on the last day of the month prior to the month of the Company’s 2012 annual meeting of shareholders.
(6) Mr. Chiasson received an initial grant of options in July 2011 under our Amended and Restated 2002 Non-employee Directors’ Stock Award Plan. The initial grant vests over three years in 36 equal monthly installments beginning on April 7, 2011.
(7) Mr. Chiasson received a pro-rated annual grant of options in July 2011 under our Amended and Restated 2002 Non-employee Directors’ Stock Award Plan. The annual grant award vests on the last day of the month prior to the month of the Company’s 2012 annual meeting of shareholders.

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Employment Arrangements

Our named executive officers are employed at will. In recent years, only the individual serving as our chief executive officer has had an employment agreement with the Company.

William B. Chiasson

Mr. Chiasson, our CEO until March 2011, had an employment agreement which was negotiated and approved by our board of directors when he was appointed as the Company’s CEO in March 2010. Mr. Chiasson’s employment agreement provided for an annual base salary of $450,000 and an annual performance-based bonus for each Company fiscal year with a target of 75%, and maximum of 150%, of his base salary for such fiscal year. The employment agreement also provided for him to receive an option to purchase 150,000 shares of the Company’s common stock and a restricted stock unit award covering 150,000 shares of common stock. The stock option was to vest in 48 equal monthly installments beginning on March 1, 2010, and one-half of the restricted stock unit award vested on March 1, 2011, with the other half to vest in 12 equal monthly installments beginning on April 1, 2011.

In March 2011, Mr. Chiasson stepped down as our CEO and became a non-employee director and the chairman of our board of directors. In connection with his transition from an employee to a non-employee director, we entered into an employment resignation and transition agreement with Mr. Chiasson, or the Transition Agreement, pursuant to which we agreed to pay Mr. Chiasson (i) all accrued salary and all accrued and unused vacation benefits and (ii) $787,500, in 12 equal monthly installments. These amounts were determined in accordance with the terms of Mr. Chiasson’s employment agreement. In addition, Mr. Chiasson’s outstanding equity awards continued to vest until March 15, 2011 and the stock options are exercisable for one year following the date his service as a member of the board of directors terminates. Pursuant to the terms of the Transition Agreement, the parties agreed to release each other from any and all claims that they may have against each other. For the actual compensation paid to Mr. Chiasson during the year, please see the “Summary Compensation Table” and the related footnotes.

John Barbour

Mr. Barbour joined the Company as our Chief Executive Officer in March 2011. He has an employment agreement with the Company which was negotiated and approved by our board of directors at that time. Mr. Barbour’s employment agreement provides for an annual base salary for Mr. Barbour in the amount of $575,000 and an annual performance-based target bonus of $575,000 per year. Mr. Barbour was guaranteed an incentive compensation payment for 2011 that was equal to 100% of his base salary, prorated based on the portion of the calendar year in which he was employed by the Company. Mr. Barbour is eligible to receive an additional bonus for exemplary performance pursuant to stretch-level objectives to be determined by our board of directors in its discretion. In addition, Mr. Barbour was entitled to receive travel and temporary housing assistance in the amount of $150,000, payable in quarterly installments, and certain relocation benefits. Mr. Barbour’s employment agreement also provided for him to receive a grant of a non-qualified stock options to purchase 850,000 shares of the Class A common stock, and a restricted stock unit award covering 150,000 shares of Common Stock. These equity awards provide that one-fourth (1/4) of the shares subject to the each award vest (and, in the case of the RSU, be delivered) upon completion of one year of continuous employment service, and one forty-eighth of the shares subject to each award vest (and, in the case of the RSUs, be delivered) upon completion of each month of continuous employment service thereafter.

Pursuant to their employment agreements, both Mr. Chiasson and Mr. Barbour were eligible for vesting acceleration rights and other severance payments and benefits upon certain terminations of employment or in connection with a change in control of the Company. A summary of these arrangements is set forth below in the section entitled “Potential Payments Upon Termination or Change In Control.”

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Outstanding Equity Awards at Fiscal Year End

The following table presents, for the fiscal year ended December 31, 2011, certain information regarding outstanding equity awards held by our named executive officers at December 31, 2011.

OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2011

               
               
  Option Awards(1)   Stock Awards
Name   Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
  Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
  Option
Exercise
Price
($)
  Option
Expiration
Date
  Number of
Shares or
Units of Stock
That Have
Not Vested
(#)
  Market Value
of Shares or
Units of Stock
That Have
Not Vested
($)(2)
  Equity
Incentive Plan
Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
(#)
  Equity
Incentive Plan
Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
($)
John Barbour                             150,000 (3)      838,500                    
             850,000 (4)               3/07/2021                                      
William B. Chiasson                             3,876 (5)      21,667                    
       42,459       (6)      3.79       11/11/2014                                      
       11,456       (7)       3.79       8/1/2015                                      
       9,873       (8)      3.79       3/27/2016                                      
       52,084       (9)       3.79       10/30/2016                                      
       19,361       (10)      3.79       10/30/2016                                      
       15,013       (11)      3.79       10/30/2016                                      
       13,574       (12)      3.79       9/17/2017                                      
       21,106       (13)      3.79       9/15/2018                                      
       115,912       (14)      2.75       5/15/2019                                      
       37,500       (15)      6.32       3/15/2020                                      
       7,500       22,500 (16)      4.30       7/1/2021                                      
             7,758 (17)      4.30       7/1/2021                                      
Mark A. Etnyre                                   93,750 (18)      524,063                    
       90,502       (19)      3.79       1/15/2018                                      
       7,397       1,707 (20)      3.79       9/15/2018                                      
       33,325       18,275 (14)      2.75       5/15/2019                                      
       18,229       16,771 (21)      4.04       11/16/2019                                      
Michael J. Dodd                             212,500 (22)      1,678,875                    
       11,560       (23)      3.79       4/18/2015                                      
       7,481       (24)      3.79       3/27/2016                                      
       44,909       (25)      3.79       10/30/2016                                      
       17,235       (26)      3.79       10/30/2016                                      
       13,680       (27)      3.79       10/30/2016                                      
       23,838       (28)      3.79       9/17/2017                                      
       28,649       6,612 (29)      3.79       9/15/2018                                      
       149,897       82,203 (14)      2.75       5/15/2019                                      
       18,229       16,771 (30)      4.04       11/16/2019                                      
Michael Y. Chai(31)                                                         

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  Option Awards(1)   Stock Awards
Name   Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
  Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
  Option
Exercise
Price
($)
  Option
Expiration
Date
  Number of
Shares or
Units of Stock
That Have
Not Vested
(#)
  Market Value
of Shares or
Units of Stock
That Have
Not Vested
($)(2)
  Equity
Incentive Plan
Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
(#)
  Equity
Incentive Plan
Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
($)
William K. Campbell                             109,375 (32)      611,406                    
       587       (33)      3.79       04/08/2012                                      
       1,883       (34)      3.79       02/12/2013                                      
       903       (35)      3.79       05/19/2014                                      
       6,352       (36)      3.79       04/12/2015                                      
       35,927       (37)      3.79       10/30/2016                                      
       13,788       (38)      3.79       10/30/2016                                      
       10,944       (39)      3.79       10/30/2016                                      
       4,907       (40)      3.79       03/15/2017                                      
       15,892       (41)      3.79       09/17/2017                                      
       11,405       2,633 (42)      3.79       09/15/2018