10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2009

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-31396

LeapFrog Enterprises, Inc.    (Exact name of registrant as specified in its charter)

DELAWARE	95-4652013
(State of incorporation)	(I.R.S. Employer Identification No.)

6401 Hollis Street, Emeryville, California	94608-1089
(Address of principal executive offices)	(Zip code)

510-420-5000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Class A common stock, par value $0.0001 per share	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨    Smaller reporting company  ¨

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The aggregate market value of the common equity held by non-affiliates of the registrant as of June 30, 2009 calculated using the closing market price as of that day, was approximately $83.3 million. Shares of common stock held by each current executive officer and director and by each person who is known by the registrant to own 5% or more of the outstanding voting power of the registrant’s common stock have been excluded from this computation in that such persons may be deemed to be affiliates of the registrant. Share ownership information of certain persons known by the registrant to own greater than 5% of the outstanding voting power of the registrant’s common stock for purposes of the preceding calculation is based solely on information on Schedule 13G filed with the Commission and is as of June 30, 2009. This determination of affiliate status is not a conclusive determination for other purposes.

The number of shares of Class A common stock and Class B common stock, outstanding as of February 19, 2010, was 36,915,547 and 27,140,794, respectively.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant has incorporated by reference in Part III of this report on Form 10-K portions of its definitive Proxy Statement for the 2010 Annual Meeting of Stockholders, to be filed with the Commission.

SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

This report on Form 10-K, including the sections entitled “Item 1—Business,” “Item 1A—Risk Factors,” and “Item 7—Management’s Discussion and Analysis of Financial Condition and Result of Operations,” contains forward-looking statements, including statements regarding, the effects of global economic conditions on our business, our expectations for sales trends, margins, profitability, liquidity, expenses, inventory or cash balances, capital expenditures, cash flows, or other measures of financial performance in future periods, future products and services we may offer, anticipated competitive benefits of our strategy or of current or future products or services, and the effects of strategic actions on future financial performance. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, achievements or the timing of events to differ materially from those expressed or implied by such forward-looking statements. These risks and other factors include those listed under “Risk Factors” in Item 1A of this Form 10-K and those found elsewhere in this Form 10-K. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, achievements or the timing of any events. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this report.

SPECIAL NOTE ON FISCAL PERIOD DATES

This report on Form 10-K presents information regarding LeapFrog’s performance during the fiscal years ended December 31, 2005, through the fiscal year ended December 31, 2009, as well as future financial obligations for the fiscal years ending December 31, 2010 through the fiscal year ending December 31, 2017. At the beginning of each Part of this report, and in all Tables, we remind the reader that our fiscal year ends December 31. Otherwise, we refer to each fiscal year as the year, for example: “2009” refers to the fiscal year ended December 31, 2009.

SPECIAL NOTE ON FINANCIALS

Unless otherwise noted all financial information is presented in thousands except for per share data and percentages.

TRADEMARKS AND SERVICE MARKS

ALPHABET PAL, CLICKSTART, the ClickStart logo, COUNTING CANDLES, CRAMMER, DIDJ, Didj (stylized), the Didj logos, FLY, the Fly logo, FLY FUSION, the Fly Fusion logo, FRIDGE PHONICS, FRIDGE FARM, LEAP, LEAPFROG, the LeapFrog logos, the LeapFrog Connect logo, the LeapFrog Learning Path logo, the LeapFrog School logo, LEAPPAD, LEAPSTER, the Leapster2 logo, LEAPTRACK, LEAPWORLD, the LeapWorld logo, LEARN & GROOVE, LEARNING FRIEND, LEARNING FRIEND TAD, LITTLE LEAPS, LITTLETOUCH, ODYSSEY, SEE THE LEARNING, TAG, the Tag logo, the Tag Junior logo, the Tag School logo, and WORD WHAMMER are some of our trademarks or service marks. This report on Form 10-K also includes other trademarks and service marks, as well as trade dress and trade names of ours. Other trademarks in this report on Form 10-K are the property of their respective owners.

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TABLE OF CONTENTS

		Page
PART I		1
Item 1.	Business	1
Item 1A.	Risk Factors	11
Item 1B.	Unresolved Staff Comments	20
Item 2.	Properties	21
Item 3.	Legal Proceedings	21
Item 4.	Submission of Matters to a Vote of Security Holders	21
PART II		22
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	22
Item 6.	Selected Financial Data	23
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 8.	Financial Statements and Supplementary Data	42
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	80
Item 9A.	Controls and Procedures	80
Item 9B.	Other Information	81
PART III		82
Item 10.	Directors, Executive Officers and Corporate Governance	82
Item 11.	Executive Compensation	82
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	82
Item 13.	Certain Relationships and Related Party Transactions, and Director Independence	83
Item 14.	Principal Accountant Fees and Services	83
PART IV		84
Item 15.	Exhibits and Financial Schedules	84
Signatures		85
Power of Attorney		86
Exhibit Index		87
Appendix A
Schedule II—Valuation and Qualifying Accounts and Allowances		A-1

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PART I

ITEM 1. BUSINESS

LeapFrog (“LeapFrog” or “we”), founded in 1995 and incorporated in 1997 in the State of Delaware, designs, develops and markets a family of innovative technology-based learning platforms and related proprietary content for infants through age twelve, both at home and in schools around the world. Our product portfolio consists of standalone learning toys, interactive reading systems, educational gaming systems, and software-based book and game content. LeapFrog has developed a number of learning platforms, including the Leapster Learning Game System and Tag and Tag Junior Reading Systems that support a broad library of software titles. These and other of our products are part of our proprietary online Learning Path, which provides parents with personalized learning feedback and children with richer interactive learning experiences. We have created more than 340 interactive software titles, covering subjects such as phonics, reading, writing, and math. Our products are available in four languages and are sold globally through retailers, distributors, directly to consumers via the leapfrog.com web-store, and directly to schools. Our mission at LeapFrog is to inspire children with a lifelong love of learning and reading and to empower parents with personalized tools that will help them advance their children’s learning progress.

Since April 2004 we have been a majority-owned subsidiary of Mollusk Holdings, LLC (“Mollusk”), an entity controlled by Lawrence J. Ellison, Chief Executive Officer of Oracle Corporation. LeapFrog is headquartered in Emeryville, California.

Business Overview

During the second half of 2008, the effects of a nearly unprecedented meltdown in the global economy began to accelerate. Consumer product companies were severely affected due to weaker consumer spending, particularly with respect to discretionary items. The prevailing adverse macroeconomic conditions continued to deteriorate into December of 2008. With 2008 holiday sales significantly below expectations, many retailers were left with a substantial inventory overhang heading into 2009.

High retailer inventory levels adversely impacted our 2009 net sales, particularly during the first three quarters, which, for our products, were 40% lower than the same period of 2008. Retailers generally responded to the economic crisis by reducing inventory levels and also delaying orders to more closely match the timing of their forecasted sell-through. Consumers also became increasingly price conscious purchasing a higher proportion of our lower priced or discounted items than in past years.

We employed several strategies in 2009 designed to respond to these trends including increased use of discount and promotion programs, tight inventory production management, the launch of several lower priced products and heightened focus on reducing our cost structure.

We closely managed our inventory production throughout 2009 in response to delayed retailer orders and to avoid over production. Closer production management, combined with a modestly stronger than forecasted retail environment during the fourth quarter, resulted in some items being out of stock during the holiday season. We ended 2009 with our lowest reported year-end inventory level since becoming a publicly traded company.

We launched our attractively priced Scout line of toys and discounted several products throughout 2009 in response to the shift in consumer preference toward lower priced items. Our learning toy business grew to 33% of total net sales for the year ended December 31, 2009, up from 26% for the same period of 2008.

As a result of our increased use of promotion and discounting programs, retail inventory levels were brought down to appropriate levels during the third quarter of 2009. However, these programs had a detrimental effect on our gross margin, which declined three percentage points through the first three quarters of 2009 as compared to the same period of 2008.

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Our 2009 operating expenses were reduced by 31% as a result of our heightened expense control. Headcount reductions occurred across all levels and business segments, resulting in a 14% reduction in fulltime employees during 2009. Advertising expenses declined 42% for the year as we leveraged less costly alternatives, such as direct-to-consumer marketing programs through the LeapFrog Learning Path, instead of traditional marketing programs.

The results for the fourth quarter of 2009 reflect dramatic improvements: net sales and gross profit improved by 37% and 73%, respectively, over the same period of 2008. Loss from operations and net income improved 172% and 165%, respectively, in 2009 resulting in a return to profitability for not only the fourth quarter of 2009, but also for the second half of 2009. We believe the stronger results validate that the strategies we put in place in response to the economic crisis were on point and successfully executed.

Business Segments and Operations

We organize, operate and assess our business in two primary operating segments: United States and International. Historically, we operated a School segment that sold products tailored for the United States educational market directly to schools, teacher supply stores and through catalogs and websites aimed at educators. During 2008, we significantly reduced our direct marketing to the educational channel, reduced headcount and direct facilities expenses accordingly, and transferred responsibility for this sales channel to the former U.S Consumer operating segment. This modification is consistent with how the chief operating decision maker reviews performance, allocates resources and manages the business. Accordingly, we have consolidated and reclassified the results of the operating segments formerly known as the U.S. Consumer and School segments into the United States segment for the fiscal years ended December 31, 2009, 2008 and 2007. See Note 19—“Segment Reporting” in our Consolidated Financial Statements included in this Form 10-K for certain detailed information on our segments and their financial results for the fiscal years ended December 31, 2009, 2008 and 2007. The information included throughout this Form 10-K reflects the reclassification of prior period segment information to conform to the presentation of the current period.

Overview of Business Segments

The operations of our business segments are described below.

• United States: The United States segment is responsible for the development, design, marketing and sales of our products, primarily through retail channels and through our website in the United States. We market and sell our products directly to national and regional mass-market and specialty retailers and other retail stores, distributors, and directly through sales representatives. We also sell our products through our online store and other Internet-based channels. The United States segment represented approximately 81%, 79% and 77% of LeapFrog’s consolidated net sales in 2009, 2008 and 2007, respectively. The vast majority of this segment’s sales are to a few large retailers. Sales invoiced to Wal-Mart, Toys “R” Us and Target in aggregate accounted for approximately 65%, 69% and 64% of the segment’s gross sales in 2009, 2008 and 2007, respectively. Each of these customers accounted for more than 10% of our consolidated and United States segment’s gross sales in each of 2009, 2008 and 2007. Accordingly, the loss of any of these three customers would have a material adverse effect on our business.

• International: The International segment is responsible for the localization, marketing and sales of our products originally developed for the United States, sold primarily in retail channels outside of the United States. We market and sell our products to retailers outside the United States primarily through various distribution arrangements. We have sales offices in Canada, France, Mexico and the United Kingdom, or U.K. We also maintain various distribution and marketing arrangements in countries such as Australia, Japan, Germany and Korea, among others. Our International segment represented approximately 19%, 21% and 23% of our consolidated net sales in 2009, 2008 and 2007, respectively. No single country represented 10% or more of LeapFrog’s consolidated net sales in any of the three

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years. In 2009 and 2008, Toys “R” Us and Wal-Mart accounted for 13% and 12%, and 10% and 13% respectively of our International segment’s gross sales. No single customer accounted for 10% or more of our International segment’s gross sales in 2007.

Product Portfolio

LeapFrog’s product portfolio for both of our business segments includes the following:

Interactive Reading Systems:

• Our Tag reading system, introduced worldwide in 2008 and designed for children ages four to eight, is a pen-based reading system that leverages the core technology of optical pattern reading hardware and software. The Tag reading system focuses on fundamental reading skills and offers an extensive library of 40 interactive software-based books featuring popular licensed characters such as Dr. Seuss’ Cat in the Hat, Disney Princess and Nickelodeon’s SpongeBob SquarePants, as well as internally-developed characters and content such as our Learn to Read Series. The Tag reading system is web-enabled and connects to the Learning Path.

• Our Tag Junior reading system was introduced worldwide in 2009 and leverages the same core technology as the Tag reading system but is geared toward younger children ages two to four and intended as an introduction to books and reading. The Tag Junior library includes 12 titles based on both licensed and internally-developed characters and content including 1-2-3 Dora and ABC Animal Orchestra.

Educational Gaming Systems:

Our Educational Gaming System products are primarily for children ages four to eight. These products embed learning skills into action-packed games often featuring well known licensed content.

• The Leapster educational gaming system, Leapster, or classic Leapster, was launched in 2003. The Leapster platform is a handheld device targeted at four to eight year olds, with a multi-directional control pad and a touch-screen enabled by a built-in stylus. During 2008 we introduced the next generation of the Leapster platform, Leapster2. Leapster2 is a web-connected version of Leapster that is integrated with the Learning Path. Our library of more than 40 Leapster software titles including licensed titles such as Disney Fairies and Star Wars, as well as our internally developed bestseller Pet Pals, is compatible with both Leapster and Leapster2.

• We expanded our educational gaming line in 2008 with the introduction of the Didj custom gaming system, or Didj. The Didj platform is a web-connected handheld device that allows for customization of curriculum and game play. Didj has higher resolution graphics than the Leapster platform, and is also integrated with the Learning Path. The Didj software library contains 15 titles, including popular licensed content, such as Star Wars: the Clone Wars.

• In October 2008, we introduced the Crammer Study and Sound System, or Crammer, a hybrid music player and study device. Targeted at children eight to twelve years old, Crammer is an electronic study device featuring custom flash cards, on-board games and free downloadable educational content, all playable while listening to music.

Learning Toys:

Our learning toys are products that help develop fine motor skills and color, sound and letter recognition for infants and children through age five. The products are generally more affordable and simpler to localize for foreign markets than our platform and content suites. Learning toys, because of their low price points and focus

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on younger children, create customer entry points to our Interactive Reading and Educational Gaming product families. Our learning toy strategy centers on products that are designed to “age up” with our child end users.

• Launched in 2009, our Scout collection is a line of toys themed around our proprietary Scout puppy dog character and targets children ages six months and up. The line includes My Pal Scout and My Pal Violet which are customizable, interactive plush puppies that are web-enabled and connect to the Learning Path. The line also includes Text & Learn, Scribble & Write and Chat & Count.

• Our Zippity learning system, or Zippity, is a TV-based gaming system with an interactive mat and oversized joystick that uses full-body movement to play educational games. Zippity is a co-branded product with Disney, has eight built-in games and three interactive software-based games, and it is integrated with Learning Path. Zippity was introduced in 2009 and targets children ages three to five.

• Our Fridge Collection was introduced in 2003 and is a line of magnetic toys that teaches letter names, letter sounds, spelling, and learning songs to children ages 12 months and up. The line includes Fridge Phonics Magnetic Alphabet, Fridge Words Magnetic Word Builder, Fridge Farm Magnetic Animal Set, and Fridge Wash & Go Magnetic Vehicle Set.

• Our Learn & Groove Collection features bilingual musical learning toys, including the popular Learn & Groove Musical Table, Alphabet Drum, Counting Maracas, Animal Sounds Guitar, and Medley Microphone. The Learn & Groove Collection was introduced in 2002 and targets children ages six months and up.

• Clickstart, My First Computer, launched in 2007, introduces computer and preschool skills by turning any TV into a child’s first computer. Clickstart features four built-in games, and has a cartridge slot for additional titles. We introduced five new Clickstart titles in 2008 including “Cars” by Pixar and “Thomas and Friends” by HIT Entertainment.

• We also have a line of products that address basic learning needs and milestones which includes Alphabet Pal, Sing & Spin Alphabet Zoo and our new Counting Candles Birthday Cake.

LeapFrog Learning Path:

In 2008, we introduced a web-based service, the LeapFrog Learning Path, or Learning Path, in the United States and Canada. Learning Path combines our proprietary curriculum and technology with the power of the web to bring new levels of engagement, customization and personalization to LeapFrog products. The Learning Path builds direct one-to-one customer relationships with parents by empowering them with personalized feedback about their children’s learning progress and by suggesting specific LeapFrog products that will further develop their children’s skills. The Learning Path is a key component of our strategy to build direct relationships with parents, keeping them engaged with us as their children grow.

The core of Learning Path is an online tool that helps parents track what their children are learning with our web-connected products including the Tag and Tag Junior reading systems, Leapster platform and Didj platform. Parents can “see the learning” and gain personalized insight into their child’s learning progress. Learning Path gives our consumers access to a variety of downloadable content and to online rewards programs that encourage learning. We believe that Learning Path adds value to all of our connected products and expands our relationships with existing customers by providing consumers with personalized product recommendations and other relevant information. My Pal Scout and My Pal Violet, customizable plush puppies, from our Scout collection of learning toys serve as the earliest entry point to Leaning Path.

LeapWorld was introduced on a limited basis in 2009, and is the latest addition to our Learning Path strategy. LeapWorld is an online learning world for children that enriches the LeapFrog product experience and increases engagement with our products by allowing children to play online games, customize their offline game experience, access new content, watch trailers for new games and view demonstrations. Currently compatible with Leapster2, LeapWorld will be introduced more broadly in 2010 and will also be compatible with additional LeapFrog products.

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For information on sales of products that constituted 10% or more of total net sales by segment, see Note 19—“Segment Reporting” in our Consolidated Financial Statements included in this Form 10-K.

For more information about the risks associated with our new products, particularly LeapFrog’s Learning Path software, see Part I, Item 1A.—Risk Factors—“Our business depends on highly changeable consumer preferences and toy trends” and “Our growing strategic focus on web-based products and customer relationship management may not yield the returns we expect, and may limit the adoption of our products in some international markets” in this Annual Report on Form 10-K. All references to risk factors throughout this Form 10-K are to risk factors contained herein.

Competition

Our products compete most directly in the toy industry in the pre-school toy and electronic learning aids categories, both in the United States and in select international markets. The educational toy category continues to attract new entrants as well as new innovative products, and competition is significant. We believe the principal methods of competition in our industry are performance, features, quality, brand recognition, price and learning content. We believe our learning toys, reading system, gaming platforms, and the related games and books, compete favorably on these bases, though we are aware that our products are sometimes viewed by consumers as premium goods, more expensive than our competitors’ products. We believe the LeapFrog brand is recognized for quality educational products, enabling us to compare favorably with many of our current competitors. In addition, we believe our learning toy product category is an important competitive differentiator because it introduces parents to the LeapFrog brand and provides an entry point to Learning Path, and our associated strategy to build direct relationships with customers.

We face the challenge of competitors introducing similar products or functionality soon after we introduce our new products or product lines, and these competitors may be able to offer their products at lower prices using cheaper manufacturing or materials, more limited functions, or larger volume. In addition, many of our direct, indirect and potential competitors have significantly longer operating histories, greater brand recognition and substantially greater financial, technical and marketing resources than us. As our competitors in the reading systems and learning toys categories seek competitive advantages and differentiation, they are increasing their investments in product research and development and advertising, focusing on global product launches and key distribution channels, expansion of retail shelf space and expansion of products sold through the web. Our principal competitors in the reading solutions and learning toy categories have included Mattel, Inc., primarily under its Fisher-Price brand, Hasbro, Inc. and its Playskool division, and Vtech Holdings Ltd.

Our learning toy product category is important strategically because it introduces parents to the LeapFrog brand. The educational toy category continues to attract new entrants as well as new innovative products, and competition is significant. We believe the LeapFrog brand is recognized for quality educational products, enabling us to compare favorably with many of our current competitors on some or all of these toy factors. As our competitors in the reading systems and learning toys categories seek competitive advantages and differentiation, they are increasing their investments in product research and development and advertising, focusing on global product launches and key distribution channels, expansion of retail shelf space and expansion of products sold through the web. Our principal competitors in the reading solutions and learning toy categories have included Mattel, Inc., primarily under its Fisher-Price brand, Hasbro, Inc. and its Playskool division, and Vtech Holdings Ltd.

As we pursue our strategies, we increasingly face a broader competitive arena with a variety of products including computer products, electronic and online games and interactive gaming systems. Products in our educational gaming category, such as our Leapster platform and related software, compete against handheld and console-based gaming platforms from Sony, Nintendo, Apple’s iPhone and iTouch and other mobile platforms, and against games and other software produced for these platforms. Online gaming and learning is also increasingly becoming a factor in our competitive environment.

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Our products must also compete for leisure time of children and discretionary spending of parents with other forms of media and entertainment. We design our products to bring fun to learning in order to compete favorably with these outside competitive influences. We believe that the educational content and innovation in our products allows us to compete favorably in these categories as well.

Manufacturing

LeapFrog is committed to designing and manufacturing products that meet applicable safety and regulatory requirements. As is the case with most toy manufacturers and many consumer electronics companies, most of our products are manufactured in China. We actively manage our supplier base, mandating compliance with local and international safety inspections and reinforcing our product standards. These standards require meeting or exceeding all applicable regulatory requirements regarding safety in the design, manufacture, packaging, and delivery into the hands of each product’s ultimate user, a child.

Our manufacturing and operations strategy is designed to maximize the use of outsourced services, particularly with respect to the actual production and physical distribution of our products. We use contract manufacturers located in Asia, primarily in China, to build all of our finished products. These suppliers are selected based on their technical and production capabilities and are matched to particular products to achieve cost and quality efficiencies. For information as to how this concentration of manufacturing could affect our business, see Part I, Item 1A.—Risk Factors—“We rely on a limited number of manufacturers, virtually all of which are located in China, to produce our finished products, and our reputation and operating results could be harmed if they fail to produce quality products in a timely and cost-effective manner and in sufficient quantities.”

We have established subsidiaries in Hong Kong and Shenzhen, China to work closely with the contract manufacturing service providers. These subsidiaries manage the supply of raw materials, labor and the assembly process.

Most of our products are manufactured from basic raw materials such as plastic and paper, and the majority of our products require electronic components. These raw materials are readily available from a variety of sources, but may be subject to significant price fluctuations. Some of our electronic components used to make our products, including our application-specific integrated circuits, or ASICs, currently come from single suppliers. We generally do not have long-term agreements with any suppliers. In addition, some of our suppliers are companies with relatively short operating histories and we cannot be sure of their long-term financial viability. For example, in 2009, we learned one of our sole-source suppliers of ASICs for one of our gaming platforms was winding down its operations, which required us to negotiate a license for the technology used in the chip and arrange to purchase it directly from the semiconductor fabrication plant. Also, in 2010, a sole-source supplier of an ASIC for one of our reading systems informed us that it is having financial difficulties, which could require us to make additional arrangements like those we made with respect to the chip for our gaming platform. If, for any reason, we were unable to make alternative arrangements, it is possible that we would have to re-design the relevant ASIC or other component and obtain from alternative sources, which could cause delays in our ability to manufacture the relevant product or products. If our suppliers were unable to meet our demand for components and raw materials, and if no alternative sources were available at a reasonable cost, or available at all, our ability to produce our products on a timely and cost-effective basis would be impaired. For information as to how this concentration of suppliers could affect our business, see Part I, Item 1A.—Risk Factors—“We depend on our suppliers for our components and raw materials, and our production or operating margins would be harmed if these suppliers are not able to meet our demand and alternative sources are not available.”

In 2006, we implemented a world-wide quality system that supports the strict European Risk of Hazardous Substances directive or “RoHS,” which banned certain substances, such as lead and mercury, in the production of consumer products. In addition, we monitor compliance with standards set by the United States Consumer Product Safety Commission, or CPSC and the International Council of Toy Industries.

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We are subject to the Consumer Product Safety Improvement Act of 1972, as amended in August 2008 by the Consumer Product Safety Improvement Act, or CPSIA, the Federal Hazardous Substances Act, the Flammable Fabrics Act, regulation by the CPSC, and other similar federal, state and international rules and regulatory authorities. While we believe we are currently in compliance with the CPSIA standards for lead and other substances, additional requirements under CPSIA will become effective through 2011. Any unanticipated failure to comply with those upcoming requirements could lead to products returns or inventory write-offs. For more information about the adverse effects that could result from possible errors or defects in our products, see Part I, Item 1A.—Risk Factors—“Any errors or defects contained in our products, or our failure to comply with applicable safety standards, could result in recalls, delayed shipments and rejection of our products and damage to our reputation, and could expose us to regulatory or other legal action.”

LeapFrog’s quality control system processes include product testing and verification for safety and reliability, starting in the design phase of a product’s life cycle and continuing through production and field support. Our testing for safety is generally more frequent than standards require, and focused testing for special areas of interest, such as chemical compliance controls is undertaken even more frequently. We set standards for supplier performance and we make routine assessments of and take steps to verify compliance with our quality standards. We communicate those expectations to our suppliers regularly and work with them to sustain the process of consistently producing safe products. We work with a relatively small group of contract manufacturers, some of which are specialized for the consumer electronics manufacturing sector.

Research and Development

LeapFrog designs its hardware platforms and related software-based content using in-house research and development resources and outside consultants as necessary. Generally, once the design phase of the product is complete, the remaining development and manufacturing of the products are outsourced to third parties. Our total research and development costs were $35.0 million, $48.5 million, and $59.4 million in 2009, 2008 and 2007, respectively.

• Hardware and Software Development: We believe that investment in research and development is a critical factor in strengthening our portfolio of products. We have assembled a team of specialists with backgrounds in a wide variety of fields including education, child development, hardware engineering, software development, video games and toys. We have internally developed each of our current platforms and stand-alone products, although we use licensed technology if warranted. For example, we use a version of Macromedia’s Flash player in our Leapster handheld platform. We also use optical pattern recognition hardware and software from Anoto AB in our Tag reading system.

• Content Development: Our content production department has developed large portions of the content for our interactive books, educational games, and stand-alone products, applying our proprietary pedagogical approach, which is based on established educational standards. Much of our content uses licensed characters, such as the Disney Princesses, Thomas the Tank Engine, Sonic the Hedgehog, SpongeBob SquarePants and characters from the movies “Indiana Jones,” “Hannah Montana,” “Star Wars: the Clone Wars” and “Wall-e.” We develop most of our concept designs in-house. Most members of our in-house content development and production team have prior experience in the education, entertainment and educational software or video game industries.

Some elements of our product development cycle and most of our game production are performed by third-party contractors to improve efficiency and control costs.

Advertising and Marketing

Our advertising and marketing strategy is designed to position LeapFrog as a leader in providing engaging, effective, technology-based learning solutions primarily for children. Our communication supports a strong brand that parents seek out to teach children in a fun and engaging way, with the goal of building their love of learning.

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We strive to utilize the best practices in integrated marketing campaigns. We shifted our strategy during the year to leverage less costly forms of advertisement, such as direct-to-consumer marketing programs via our Learning Path, with less dependence on traditional marketing programs such as television advertising.

We have well-established retailer relationships and communicate our messages and offers through advertisements in-store and in local newspapers. These advertisements run by our retail partners, such as Target, Toys “R” Us, and Wal-Mart, highlight promotional activities and the availability of particular LeapFrog products at these retailers’ outlets. In key retail stores, we use in-store demonstration display units to highlight LeapFrog products and demonstrate the features of our products through in-store user experience.

We leverage public relations globally as a strategy to gain additional momentum for our brand and products through media outreach focused on garnering both product-specific and corporate media coverage. We strive to utilize best practices in media outreach campaigns that target both traditional print and broadcast media with Internet/viral media outreach globally.

Distribution

Our customers generally fit into one of the following categories:

• Retailers that resell our products to consumers in the United States and some international regions;

• Distributors that purchase our products for resale to retailers, generally internationally:

• Direct consumers who purchase our products via our website, www.LeapFrog.com;

• U.S. schools and school districts that purchase our products for use in their classrooms either through education market resellers or directly, through our website, www.LeapFrog.com.

Retailers and distributors purchase our products either through free on board, or FOB, terms, in which case the products are picked up by our customer in China and the customer pays through pre-established letters of credit or upon payment terms, or via “domestic” terms, in which case we ship goods from our regional warehouses to the distributor or retailer. Distributors and retailers generally have payment terms based on the date of shipment. Generally we do not provide rights of return or extended payment terms to our customers, except for industry standard terms surrounding the return of defective merchandise. We direct our manufacturers to build products and we maintain inventories in our regional warehouses to meet expected short-term demand. Additional information regarding our inventory levels is included in Note 3—“Inventories” in our Consolidated Financial Statements included in this Form 10-K.

Intellectual Property and Licenses

We rely on a combination of patent, trademark, copyright and trade secret laws in the United States and other jurisdictions as well as confidentiality procedures and contractual provisions to protect our brand and our proprietary technology and information.

We maintain an active program to protect our investment in technology and brands by attempting to secure patent rights, trademark registrations and other intellectual property registrations. We have filed and obtained a number of patents in the United States and abroad. We believe that the duration of the applicable patents we are granted is adequate relative to the expected lives of our products. While our patents are an important element of the protection of our intellectual property, our business as a whole is not materially dependent on any one patent.

For a discussion of how our intellectual property rights may not prevent our competitors from using similar or identical technology, Part I, Item 1A.—Risk Factors —“Our intellectual property rights include licenses from third parties and may not prevent our competitors from using our technologies or similar technologies to develop competing products, which could weaken our competitive position and harm our operating results.” For a

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discussion of how our intellectual property rights may not insulate us from claims of infringement by third parties, see Part I, Item 1A.—Risk Factors—“Third parties have claimed, and may claim in the future, that we are infringing their intellectual property rights, which may cause us to incur significant litigation or licensing expenses or to stop selling some of our products or using some of our trademarks.”

In addition to proprietary materials we have developed, we use various licensed technologies in some of our key products, such as Leapster and Tag. For example, we use a version of Macromedia’s Flash player in our Leapster handheld platform and we use optical pattern recognition hardware and software from Anoto AB in our Tag reading systems. Our continued use of these rights is dependent on our continued compliance with applicable license terms. Any failure to do so could interrupt our supply chain and require us to modify our products or business plans. Please see Part I, Item 1A.—Risk Factors—“Our intellectual property rights include licenses from third parties and may not prevent our competitors from using our technologies or similar technologies to develop competing products, which could weaken our competitive position and harm our operating results” for further discussion of the risks we face in relying on third party technology licenses for our products.

Seasonality

Our business is highly seasonal in both of our segments, with our retail customers making a large percentage of all purchases in preparation for the traditional holiday season. Our business, being subject to these significant seasonal fluctuations, generally earns the majority of our net sales and all of our net income, if any, during the third and fourth calendar quarters. Our seasonal sales patterns for the years ended December 31, 2009, 2008 and 2007 are shown in the table below.

	Years Ended December 31,
	2009		2008		2007
Percent of total net sales:
1st quarter	8	%	13	%	14	%
2nd quarter	13	%	15	%	13	%
3rd quarter	29	%	43	%	32	%
4th quarter	50	%	29	%	41	%
Total	100	%	100	%	100	%

These seasonal purchasing patterns and their related production lead times create risk in our business due to possible under-production of popular items and over-production of items that do not match consumer demand. In addition, as the most recent recession progressed, our retail customers managed their inventories more stringently, requiring us to ship products closer to the time of expected consumer demand. If this trend continues, it could increase the risk that we would be unable to meet the demand for specific products at peak demand times. Similarly, this trend could have an adverse impact on our own inventory levels if we pre-build products to meet anticipated demand that does not materialize. For more information about the effects of seasonality on our business see Part I, Item 1A.—Risk Factors—“Our business is seasonal, and our annual operating results depend, in large part, on sales relating to the brief holiday season.”

Financial Information about Geographic Areas

Financial information regarding export sales and international operations versus United States sales and operations is included in Note 19—“Segment Reporting” in our Consolidated Financial Statements included in this Form 10-K. For information regarding risks attendant to our foreign operations upon which our international segment depends, see Part I, Item 1A.—Risk Factors—“Our international business may not succeed and subjects us to risks associated with international operations.

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Employees

As of December 31, 2009, we had 541 full-time employees. The total number of our full-time employees declined by 85, or 14%, from December 31, 2008 to December 31, 2009 due primarily to headcount reductions and to a lesser extent, migration of some of our product development cycle to external parties. We also retain independent contractors to provide various services, primarily in connection with our content development. Except as set forth below, we are not subject to any collective bargaining agreements and we believe that our relationship with our employees is good. Some of our foreign subsidiaries are subject to collective bargaining agreements whose benefits and terms are codified and required under local labor laws.

Executive Officers of the Registrant

The following table sets forth information with respect to our executive officers as of February 19, 2010:

Name	Age	Position Held
Jeffrey G. Katz	54	Chairman of the Board, Chief Executive Officer, and President
William B. Chiasson	57	Chief Financial Officer
William K. Campbell	48	Senior Vice President, Consumer Sales
Michael J. Dodd	50	Senior Vice President, Supply Chain and Operations

Jeffrey G. Katz has served as our Chief Executive Officer and President since July 2006, as a member of our board of directors since June 2005, and as the Chairman of the board since March 2009. From 2000 to 2004, Mr. Katz served as the Chairman and Chief Executive Officer of Orbitz, Inc., an online travel company. From 1997 to 2000, Mr. Katz was President and Chief Executive Officer of Swissair, a publicly held airline. From 1980 to 1997, he served in a variety of roles at American Airlines, a publicly held airline, including Vice President of American Airlines and President of the Computerized Reservation System Division of SABRE. Mr. Katz serves on the board of directors of Sojern, Inc., a privately held company that operates a targeted advertising network. Mr. Katz earned a B.S. in mechanical engineering from the University of California, Davis, and M.S. degrees from both Stanford University and the Massachusetts Institute of Technology.

William B. Chiasson has served as our Chief Financial Officer since November 2004. Prior to joining us, 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 for Kraft Foods, Inc. 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.

William K. Campbell has served as our Senior Vice President, Global Sales since December of 2009, as Senior Vice President of Consumer Sales from May 2006 to December of 2009, as Vice President, Consumer Sales from December 2002 to May 2006 and as Director of Sales from January 2000 to December 2002. Prior to joining LeapFrog, he served in varying capacities at Lego Systems, Inc., most recently as national account manager from February 1997 to December 1999. Mr. Campbell received his B.A. from Stephen F. Austin State University.

Michael J. Dodd has served as our Senior Vice President, Supply Chain and Operations since April 2005. Prior to joining us, he co-founded Executive Technology, Inc., a value-added reseller and system integrator of information technology products, and served as its Chief Operating Officer from September 2003 through April 2005. From May 2002 to September 2003, Mr. Dodd served as Executive Vice President, Chief Marketing Officer and Chief Operating Officer at Targus Group International, Inc., a provider of mobile personal computers and wireless accessories. Mr. Dodd was a Vice President, Operations at Juniper Networks, Inc., a manufacturer of internal protocol, or IP, routers from September 2000 to May 2002. From November 1989 to September 2000,

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Mr. Dodd served in various capacities at Compaq Computer Corporation, a manufacturer of personal computers, most recently as Managing Director of operations and strategic procurement for the Presario personal computer business. Mr. Dodd received his B.B.A. from Texas A&M University.

On February 11, 2010, we announced that, effective March 1, 2010, Jeffrey Katz, currently Chairman and CEO, will take on the role of Executive Chairman. Bill Chiasson, currently Chief Financial Officer, will become Chief Executive Officer and Mark Etnyre, currently Vice President and Corporate Controller, will become Chief Financial Officer.

Available Information

We are subject to the information requirements of the Securities Exchange Act of 1934, or the Exchange Act. Therefore, we file periodic reports, proxy statements and other information with the Securities and Exchange Commission, or SEC. Such reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, DC 20549. You may obtain information regarding the operation of the Public Reference Room of the SEC by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically.

We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, available (free of charge), or through the investor relations section of our website located at www.leapfroginvestor.com under “Financial Information—SEC Filings” as soon as reasonably practicable after they are filed with or furnished to the SEC. Information contained on or accessible through our website or contained on other websites is not deemed to be part of this report on Form 10-K.

ITEM 1A. RISK FACTORS

Our business and the results of its operations are subject to many factors, some of which are beyond our control. The following is a description of some of the risks and uncertainties that may affect our future financial performance.

Our business depends on highly changeable consumer preferences and toy trends.

Even our successful products typically have a relatively short period of high demand and then sales decrease as the products mature. For example, net sales of the classic LeapPad platforms in our U.S. consumer business peaked in 2002 and are no longer material to our overall sales. We operate in an industry where consumer preferences can change drastically from year to year. Unlike a subscription or other recurring revenue model, we depend on our ability to correctly identify changing consumer sentiments well in advance and supply new products that respond to such changes on a timely basis. Consumer preferences, and particularly children’s preferences, are continually changing and are difficult to predict. Since our products typically have a long development cycle, in some cases lasting many years, it can be difficult to predict correctly changing consumer preferences and technology, entertainment and education trends. To remain competitive, we must continue to develop new technologies and products and enhance existing technologies and product lines, as well as successfully integrate third-party technology with our own.

In 2008, we introduced a number of new products and services to the market. These new products represented a substantial portion of our 2008 and 2009 sales. Furthermore, in 2009, we introduced a new toy line and new variations on our gaming and reading platforms. We cannot be sure that any new products or services will be widely accepted and purchased by consumers, and if new products are not as successful as we expect, our business and operating results will be adversely affected. Some of the key products launched in 2008 and 2009 have a high price point compared to other children’s products. Consumers may be especially resistant in the

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current economic climate to purchasing higher-priced products and may elect to defer or omit these discretionary purchases, at least until the economy improves. This could limit or delay sales of our new products and services and create pressure to lower our prices.

Our business depends on three retailers that together accounted for the vast majority of the United States segment’s gross sales for the year, and our dependence upon a small group of retailers may increase.

Our top three retailers in 2009 were Wal-Mart, Toys “R” Us and Target, which continue to account for the vast majority of our total customer billings for the year to date. Sales invoiced to these three retailers, in the aggregate accounted for approximately 57% and 60% of the United States segment’s gross sales (total customer billings) in 2009 and 2008. For the foreseeable future, we expect to continue to rely on a small number of large retailers for the bulk of our sales and expect that our sales to these retailers may increase as a percentage of our total sales.

We do not have long-term agreements with any of our retailers. As a result, agreements with respect to pricing, shelf space, cooperative advertising or special promotions, among other things, are subject to periodic negotiation with each retailer. Retailers make no binding long-term commitments to us regarding purchase volumes and make all purchases by delivering one-time purchase orders. If any of these retailers reduce their purchases from us, change the terms on which we conduct business with them or experience a future downturn in their business or constraint on their credit and ability to pay their invoices as they become due, our business and operating results could be harmed.

Our growing strategic focus on web-based products and customer relationship management may not yield the returns we expect, and may limit the adoption of our products in some international markets.

Our efforts to build a marketing and sales model that relies more on linking directly to consumers through the Internet remains in its early stages and we cannot be sure whether we will realize our expected return on investment. Many of our current and planned key products, such as the Tag reading system, Leapster2 and its successors, and some of recent learning toys, are built as web-enabled products designed to be connected to a computer that has Internet access in order to access content and features. As our strategy shifts to web-enabled products and consumer relationship management, any resistance by parents to buying children’s products requiring installation of software and connecting the product to a computer could have a more pronounced effect on our business. Also, launch or adoption of web-enabled products may be limited in regions where broadband Internet access is not widespread, such as in some international markets. If parents fail to sign up for the Learning Path or to use it at the rates we expect, or choose not to permit us to send them marketing e-mail, or if our web efforts prove ineffective at generating repeat customers, our investment in building, maintaining and improving our web-based services may not yield the return on our investment that we anticipate. See also “System failures in our web-based services or store could harm our business.”

Economic declines have had a material adverse effect on our sales, and a slow recovery could prevent us from achieving our financial goals in 2010 and beyond.

The global economic crisis and the drastic deterioration of consumer sales in late 2008 led to a severe drop-off in our sales beginning in the fourth quarter of 2008 and continuing through the third quarter of 2009. We rely heavily on sales to retailers during the third and fourth quarters of each year to achieve our overall sales goals. Also, we rely on strong consumer sales in these periods to prevent build up of retail inventory. Any such inventory build-up can have a continuing negative effect on our sales in the first and second quarters of the next year. Both our sales to retailers and consumer sales for the fourth quarter of 2008 were significantly below our expectations and constituted a substantially smaller percentage of our annual sales than they have in previous years. Our first, second and third quarter net sales declined by 49%, 28% and 43% respectively in 2009 compared to 2008. We cannot predict the extent to which economic conditions will change and many economists predict that the economic decline will be prolonged, that any recovery may be weak, and that conditions may deteriorate further before there is any improvement or even after some improvement has occurred.

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To drive sales in 2009, we provided more pricing reductions, promotional incentives and other concessions in our sales terms in 2009 than we have in the past and may need to continue offering such concessions in 2010 to drive sales. Consumers may have become used to paying lower prices for some of our products and efforts to restore normal pricing may hamper sales. Continuing weak economic conditions in the United States or abroad as a result of the current global economic downturn, lower consumer spending (especially discretionary items), lower consumer confidence, continued high or higher levels of unemployment, higher inflation or even deflation, higher commodity prices, such as the price of oil, political conditions, natural disaster, labor strikes or other factors could negatively impact our sales or ability to achieve profitability in 2010, or beyond.

Our business is seasonal, and our annual operating results depend, in large part, on sales relating to the brief holiday season.

Sales of consumer electronics and toy products in the retail channel are highly seasonal, causing a substantial majority of our sales to retailers to occur during the third and fourth quarters. Even if we achieve a profit in future years, we expect for the foreseeable future that we will incur losses in the first and second quarters of such years. Approximately 79%, 72% and 73% of our total net sales occurred during the second half of the year during 2009, 2008 and 2007, respectively. The percentage of total sales in the second half of the year may increase as retailers become more efficient in their control of inventory levels through just-in-time inventory management systems, particularly as they remain cautious about over-ordering products prior to the holiday season. Generally, retailers time their orders so that suppliers will fill the orders closer to the time of purchase by consumers, thereby reducing their need to maintain larger on-hand inventories throughout the year to meet demand. If a decline in the economy, or other factors, lead to a decline of sales in the third or fourth quarter in particular, it can have a disproportionate negative impact on our results for the year. For example, with the severe economic downturn in the third and, particularly, the fourth quarter of 2008, our sales in the fourth quarter declined to 29% of total net sales for the year, compared to 41% and 37% of total net sales in 2007 and 2006, respectively. In addition, soft consumer sales in the holiday season can lead to ongoing weakness in sales to retailers well into the following year. For example, following the dramatic decline in our net sales in the fourth quarter of 2008, net sales for our first, second and third quarters of 2009 declined by 49%, 28% and 43% respectively, compared to the corresponding periods of 2008. Failure to predict accurately and respond appropriately to retailer and consumer demand on a timely basis to meet seasonal fluctuations, or any disruption of consumer buying habits during this key period, such as may result from the current economic crisis, would harm our business and operating results.

The unexpected loss of one or more members of our executive management team or other key employees could adversely affect our business.

We have an experienced executive management team, as well as many talented and proven employees in key areas including but not limited to product development, engineering, and marketing. We believe that these individuals understand our strategic priorities to revitalize our long-term growth and improve stockholder value. We cannot make any assurances that we can retain these individuals for the period necessary for us to return to significant profitability. Competition for high caliber personnel is strong in our area and industry, and the ability to retain key employees during a revitalization effort can be difficult. The unexpected future loss of services of members of our executive management team or other key employees could have an adverse effect on our business. If we are unable to retain key personnel, then it may be difficult for us to maintain a competitive position within our industry or implement our strategic priorities.

If we do not maintain sufficient inventory levels or if we are unable to deliver our products to our customers in sufficient quantities, or on a timely basis, or if retail inventory levels are too high, our operating results will be adversely affected.

The high degree of seasonality of our business places stringent demands on our inventory forecasting and production planning processes. This was especially true in the last part of 2009 as we maintained lower inventory

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levels and produced additional inventory only as we developed greater certainty about retailer demand for our products. This inventory management approach may be particularly challenging when combined with “just-in-time” inventory management systems increasingly used by retailers as they remain cautious about future inventory levels. See also “Our business is seasonal, and our annual operating results depend, in large part, on sales relating to the brief holiday season” below. If we fail to meet tight shipping schedules, we could damage our relationships with retailers, increase our shipping costs or cause sales opportunities to be delayed or lost. In order to be able to deliver our merchandise on a timely basis, we need to maintain adequate inventory levels of the desired products. If our inventory forecasting and production planning processes result in our maintaining manufacturing inventory in excess of the levels demanded by our customers, we could be required to record inventory write-downs for excess and obsolete inventory, which would adversely affect our operating results. If the inventory of our products held by retailers is too high, they may not place or may reduce orders for additional products, which would unfavorably impact our future sales and adversely affect our operating results in 2010.

We depend on our suppliers for our components and raw materials, and our production or operating margins would be harmed if these suppliers are not able to meet our demand and alternative sources are not available.

Some of the components used to make our products, including our application-specific integrated circuits, or ASICs, currently come from single suppliers. Additionally, the demand for some components such as liquid crystal displays, integrated circuits or other electronic components is volatile, which may lead to shortages.

If our suppliers are unable to meet our demand for our components and raw materials and if we are unable to obtain an alternative source or if the price available from our current suppliers or an alternative source is prohibitive, our ability to maintain timely and cost-effective production of our products would be seriously harmed and our operating results would suffer. In addition, as we do not have long-term agreements with our major suppliers and cannot guarantee their stability, they may stop manufacturing our components at any time, with little or no notice. For example, in 2009, we learned one of our sole-source suppliers of ASICs for one of our gaming platforms was winding down its operations, which required us to negotiate a license for the technology used in the chip and arrange to purchase it directly from the semiconductor fabrication plant. Also, in 2010, a sole-source supplier of an ASIC for one of our reading systems informed us that it is having financial difficulties, which could require us to make additional arrangements like those we made with respect to the chip for our gaming platform. If we are required to use alternative sources, we may be required to redesign some aspects of the affected products, which may involve delays and additional expense. If there are any significant interruptions in the supply of components, we may be unable to manufacture sufficient quantities of our finished products or we may be unable to manufacture them at targeted cost levels, and our business and operating results could be harmed.

We rely on a limited number of manufacturers, virtually all of which are located in China, to produce our finished products, and our reputation and operating results could be harmed if they fail to produce quality products in a timely and cost-effective manner and in sufficient quantities.

We outsource substantially all of our finished goods assembly, using several Asian manufacturers, most of which manufacture our products at facilities in the Guangdong province in the southeastern region of China. We depend on these manufacturers to produce sufficient volumes of our finished products in a timely fashion, at satisfactory quality and cost levels and in accordance with our and our customers’ terms of engagement. If our manufacturers fail to produce quality finished products on time, at expected cost targets and in sufficient quantities, or if any of our products are found to be tainted or otherwise raise health or safety concerns, our reputation and operating results would suffer.

Our intellectual property rights include licenses from third parties and may not prevent other companies from using our technologies or similar technologies to develop competing products, which could weaken our competitive position and harm our operating results.

Our success depends in large part on our proprietary technologies that are used in our learning platforms and related software. We rely, and plan to continue to rely, on a combination of patents, copyrights, trademarks,

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service trademarks, trade secrets, confidentiality provisions and licensing arrangements to establish and protect our proprietary rights. Among our rights are inbound licenses from third parties for content, such as characters, stories, illustrations and trade names, and for technologies we incorporate in our products including key technology used in our Tag and Tag Jr. reading systems. Our continued use of these rights is dependent on our ability to continue to obtain these license rights at reasonable rates. Any failure to do so could interrupt our supply chain and require us to modify our products or business plans. In addition, the contractual arrangements and the other steps we have taken to protect our intellectual property may not prevent misappropriation of our intellectual property or deter independent third-party development of similar technologies. The steps we have taken may not prevent unauthorized use of our intellectual property, particularly in foreign countries where we do not hold patents or trademarks or where the laws may not protect our intellectual property as fully as in the United States. Some of our products and product features have limited intellectual property protection, and, as a consequence, we may not have the legal right to prevent others from reverse engineering or otherwise copying and using these features in competitive products. In addition, monitoring the unauthorized use of our intellectual property is costly, and any dispute or other litigation, regardless of outcome, may be costly and time-consuming and may divert our management and key personnel from our business operations. However, if we fail to protect or to enforce our intellectual property rights successfully, our rights could be diminished and our competitive position could suffer, which could harm our operating results.

Third parties have claimed, and may claim in the future, that we are infringing their intellectual property rights, which may cause us to incur significant litigation or licensing expenses or to stop selling some of our products or using some of our trademarks.

In the course of our business, we periodically receive claims of infringement or otherwise become aware of potentially relevant patents, copyrights, trademarks or other intellectual property rights held by other parties. For example, in October 2009, TAG Toys, Inc. filed a complaint against us alleging, among other things, that our use of various logos and marks relating to our Tag Reading Systems infringes trademark rights held by TAG Toys, and seeking unspecified monetary damages, costs and attorneys’ fees, and injunctive relief. Responding to any infringement claim, regardless of its validity, may be costly and time-consuming and may divert our management and key personnel from our business operations. If we, our distributors or our manufacturers are adjudged to be infringing the intellectual property rights of any third party, we or they may be required to obtain a license to use those rights, which may not be obtainable on reasonable terms, if at all. We also may be subject to significant damages or injunctions against the development and sale of some of our products or against the use of a trademark or copyright in the sale of some of our products. Our insurance may not cover potential claims of this type or may not be adequate to indemnify us for all the liability that could be imposed.

Any errors or defects contained in our products, or our failure to comply with applicable safety standards, could result in recalls, delayed shipments and rejection of our products and damage to our reputation, and could expose us to regulatory or other legal action.

Our products may contain errors or defects that are discovered after commercial shipments have begun, which could result in the rejection of our products by our retailers, damage to our reputation, lost sales, diverted development resources and increased customer service and support costs and warranty claims. Individuals could sustain injuries from our products, and we may be subject to claims or lawsuits resulting from such injuries. There is a risk that these claims or liabilities may exceed, or fall outside the scope of, our insurance coverage. Moreover, we may be unable to retain adequate liability insurance in the future.

Concerns about potential public harm and liability may involve involuntary recalls or lead us to voluntarily recall selected products. For example, in June 2009, we announced a voluntary recall of our original My Pal Scout to replace the paw decals with embroidered paws because the decals, if removed, may have resulted in a safety issue. Recalls or post-manufacture repairs of our products could harm our reputation and our competitive position, increase our costs or reduce our net sales. Costs related to unexpected defects include the costs of writing down the value of our inventory of defective products and providing product replacement, as well as the

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cost of defending against litigation related to the defective products. Further, as a result of recent recalls and safety issues related to products of a number of manufacturers in the toy industry, some of our retailer customers have been increasing their testing requirements of the products we ship to them. These additional requirements may result in delayed or cancelled shipments, increased logistics and quality assurance costs, or both, which could adversely affect our operations and financial results. In addition, recalls or post-manufacturing repairs by other companies in our industry could affect consumer behavior and cause reduced purchases of our products and increase our quality assurance costs in allaying consumer concerns.

Privacy concerns about our web-connected products and related software and applications could harm our reputation and hinder adoption of these products.

By using the Internet-based LeapFrog Learning Path application, information captured by our web-connected products about a child’s performance and activities will be transferred and stored on our website servers. Due to privacy, confidentiality and security concerns, parents may not want our products collecting information about their child’s activities and performance and may not feel comfortable uploading and storing this information on our website servers. If these concerns prevent parents from accepting or adopting our connected products, the sales of our products and our business results could suffer. In addition, if the confidentiality of such information stored on our website servers is compromised or breached by third parties or our mismanagement, our reputation could be tarnished, which in turn could adversely affect our operating results.

System failures in our web-based services or store could harm our business.

The Internet-based aspects of our business have grown substantially in strategic importance to our overall business. However, we still have limited experience operating an e-commerce system and providing web services in connection with our products. Any failure to provide a positive user experience could have a negative impact on our reputation, sales and consumer relationships. If demand for accessing our websites exceeds the capacity we have planned to handle peak periods or if other technical issues arise when customers attempt to use these systems to purchase products or to access features or content for our increasing number of web-connected products, then customers could be inconvenienced or become dissatisfied with our products. For example, in the past, our website has suffered service disruptions and delays from time to time, particularly during the December holidays, due, for example, to the number of consumers attempting to access it and errors in the systems processing transactions and account creations. Any significant disruption to our website or internal computer systems or malfunctions related to transaction processing on our e-commerce store or content management systems could result in a loss of potential or existing customers and sales. This risk has become more acute as we rely increasingly on our web-based consumer relationship management efforts to drive sales and position our business. Any significant system failures in our web-based services or store could have a significant adverse effect on our sales and operating plan.

Although our systems have been designed to reduce downtime in the event of outages or catastrophic occurrences, they remain vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures, terrorist attacks, computer viruses, computer denial-of-service attacks, and similar events. Some of our systems are not fully redundant, and our disaster recovery planning is not sufficient for all eventualities. Our systems are also subject to break-ins, sabotage, and intentional acts of vandalism. Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems at our hosting facilities could result in lengthy interruptions in our services. We do not carry business interruption insurance sufficient to compensate us for losses that may result from interruptions in our service as a result of system failures. Any unplanned disruption of our systems could result in adverse financial impact to our operations.

If we are unable to compete effectively with existing or new competitors, our sales and market share could decline.

We currently compete primarily in the learning toy and electronic learning aids category of the U.S. toy industry and, to some degree, in the overall U.S. and international toy industry. We believe we compete to some extent,

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and may increasingly compete in the future, with makers of popular game platforms, electronic entertainment devices and smart mobile devices. We also compete in the U.S. supplemental educational materials market. Each of these markets is very competitive and we expect competition to increase in the future. Many of our direct, indirect and potential competitors have significantly longer operating histories, greater brand recognition and substantially greater financial, technical and marketing resources than we do. These competitors may be able to respond more rapidly than we can to changes in consumer requirements or preferences or to new or emerging technologies, and may be able to use their economies of scale to produce products more cheaply. Further, with greater economies of scale and more distribution channels, they may be successful even if they sell at a lower margin. Our larger competitors may also be able to devote substantially greater resources, including personnel, spending and facilities to the development, promotion and sale of their products than we do. We cannot assure you that we will be able to compete effectively in our markets.

Retailer liquidity problems could harm our liquidity and financial results.

If retailers encounter liquidity problems due to weak sales or their inability to raise sufficient capital because of credit constraints, we may not be able to collect the accounts receivable we generate based on the orders we fulfill. In 2008 and 2009, some retailers did not pay us in a timely manner and others indicated that they would be unable to pay any vendors. In addition, there were a number of bankruptcies among prominent retailers. Where retailers file for bankruptcy protection, we are likely to collect less money than we are owed, and may collect nothing, particularly when the retailer had significant secured debt ahead of our claims. If any of our retailers suspend or reduce payments to us or file for bankruptcy protection, the resulting bad debt expense we would incur would have an adverse effect on our results of operations. In our balance sheet as of December 31, 2009, our accounts receivable balance was reduced by an estimated allowance for doubtful accounts of $1.1 million, which could increase if retailers continue to struggle or more bankruptcies were filed. In addition to collection risk, we may decide not to accept orders from troubled retailers, which would further reduce sales.

In addition to harming our results of operations, an inability to collect on accounts receivable could create serious liquidity problems for us. We generally depend on our collections in the first and second quarters of each year to fund our operations for the rest of the year. If in 2010 or beyond we are unable to collect a material portion of our accounts receivable, and other sources of financing are not available on reasonable terms, we may be unable to execute our business plan or maintain operating levels. See “Our liquidity may be insufficient to meet the long-term or periodic needs of our business” below.

Our liquidity may be insufficient to meet the long-term or periodic needs of our business.

Global credit market fluctuations could increase the cost of capital or limit our ability to raise additional capital should we need it, and unforeseen events could stress or exceed our current or future liquidity. In addition to cash received from the collection of accounts receivable, from time to time, we may fund our operations and strengthen our liquidity through borrowings under our line of credit. Our line of credit has numerous financial tests and covenants that affect the amount we can borrow, and includes various events of default that could impair our ability to use the line. In addition, the line of credit terminates in August 2012 and we cannot be sure whether we will be able to renew it on similar terms or at all. If we are unable to borrow sufficient funds in a timely manner or at an acceptable cost, we may need to alter our business practices. For example, we may be required to manufacture at levels that lag rather than anticipate future order levels, which could limit our ability to sell and ship our products as demand increases, delaying our ability to benefit from improvements in the retail sales environment.

Our international business may not succeed and subjects us to risks associated with international operations.

We derived approximately 19% and 21% of our net sales from markets outside the United States during 2009 and 2008, respectively. Our efforts to increase sales for our products outside the United States may not be successful and may not achieve higher sales or gross margins or contribute to profitability.

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Our business is, and will increasingly be, subject to risks associated with conducting business internationally, including:

• developing successful products that appeal to the international markets;

• difficulties managing and maintaining relationships with vendors, customers, distributors and other commercial partners;

• political and economic instability, military conflicts and civil unrest;

• greater difficulty in staffing and managing foreign operations;

• transportation delays and interruptions;

• greater difficulty enforcing intellectual property rights and weaker laws protecting such rights;

• complications in complying with laws in varying jurisdictions and changes in governmental policies;

• trade protection measures and import or export licensing requirements;

• currency conversion risks and currency fluctuations, which have recently been more pronounced;

• public health problems, especially in locations where we manufacture or otherwise have operations;

• effectively monitoring compliance by foreign manufacturers with U. S. regulatory requirements for product safety;

• natural disasters; and

• limitations, including taxes, on the repatriation of earnings.

Currency conversion risks and fluctuations have recently become more pronounced. Sales to our international customers are transacted primarily in the country’s local currency. If foreign currency weakens compared to the U.S. dollar, our International segment sales results will suffer.

Any difficulties with our international operations could harm our future sales and operating results.

We are subject to international, federal, state and local laws and regulations that could impose additional costs or changes on the conduct of our business.

We operate in a highly regulated environment with international, federal, state and local governmental entities regulating many aspects of our business, including products and the importation of products. Regulations with which we must comply include accounting standards, taxation requirements (including changes in applicable income tax rates, new tax laws and revised tax law interpretations), trade restrictions, regulations regarding financial matters, environmental regulations, advertising directed toward children, safety and other administrative and regulatory restrictions. Compliance with these and other laws and regulations could impose additional costs on the conduct of our business. While we take steps that we believe are necessary to comply with these laws and regulations, there can be no assurance that we have achieved compliance or that we will be in compliance in the future. Failure to comply with the relevant regulations could result in monetary liabilities and other sanctions, which could have a negative impact on our business, financial condition and results of operations. In addition, changes in laws or regulations may lead to increased costs, changes in our effective tax rate, or the interruption of normal business operations that would negatively impact our financial condition and results of operations.

We are subject to the Consumer Product Safety Act of 1972, as amended by the Consumer Product Safety Improvement Act, or CPSIA, the Federal Hazardous Substances Act, the Flammable Fabrics Act, regulation by the Consumer Product Safety Commission, or CPSC, and other similar federal, state and international rules and regulatory authorities, some of which have conflicting standards and requirements. Our products could be subject to involuntary recalls and other actions by these authorities. We may also have to write off inventory and allow

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our customers to return products they purchased from us. In addition, any failures to comply could lead to significant negative media attention and consumer dissatisfaction, which could harm our sales and lead to widespread rejection of our products, particularly since we rely so heavily on the integrity of our brand. The CPSIA, which was enacted in August 2008, required our customers to remove from the stream of commerce certain of our products that did not meet the new federal standards for lead and other substances by February 10, 2009. Additional requirements under CPSIA will become effective through 2011, some of which could require additional product returns and inventory write-offs.

Our net loss would be increased and our assets would be reduced if we are required to record impairment charges related to the value of our intangible assets.

Our intangible assets include the excess purchase price over the cost of net assets acquired, or goodwill, capitalized website development costs, patents, trademarks and licenses. Goodwill arose from our September 1997 acquisition of substantially all the assets and business of our predecessor, LeapFrog RBT, and our acquisition of substantially all the assets of Explore Technologies in July 1998. Total intangible assets are fully allocated to our United States business segment. Goodwill and other intangibles with indefinite lives are tested for impairment at least annually. In determining the existence of impairment, we consider changes in our strategy and in market conditions, which could result in adjustments to our recorded asset balances. Specifically, we might be required to record impairment charges if the carrying values of our intangible assets exceeded their estimated fair values. Such impairment recognition would decrease the carrying value of intangible assets and increase our net loss. At December 31, 2009, intangible assets, net, totaled $22.2 million, of which $19.5 million was attributable to goodwill.

Natural disasters, armed hostilities, terrorism, labor strikes or public health issues could have a material adverse effect on our business.

Armed hostilities, terrorism, natural disasters, or public health issues, such as the recent outbreak of H1N1 flu, whether in the United States or abroad could cause damage and disruption to our company, our suppliers, our manufacturers, or our customers or could create political or economic instability, any of which could have a material adverse impact on our business. Although it is impossible to predict the consequences of any such events, they could result in a decrease in demand for our product or create delay or inefficiencies in our supply chain by making it difficult or impossible for us to deliver products to our customers, or for our manufacturers to deliver products to us, or suppliers to provide component parts.

Notably, our U.S. distribution centers, including our distribution center in Fontana, California, and our corporate headquarters are located in California near major earthquake faults that have experienced earthquakes in the past. In addition to the factors noted above, our existing earthquake insurance relating to our distribution center may be insufficient and does not cover any of our other operations.

One stockholder controls a majority of our voting power as well as the composition of our board of directors.

Holders of our Class A common stock will not be able to affect the outcome of any stockholder vote. 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 on all matters submitted to a vote of our stockholders.

As of December 31, 2009, Lawrence J. Ellison and entities controlled by him beneficially owned approximately 16.2 million shares of our Class B common stock, which represents approximately 52.4% of the combined voting power of our Class A common stock and Class B common stock. As a result, Mr. Ellison controls all stockholder voting power, including with respect to:

• the composition of our board of directors and, through it, any determination with respect to our business direction and policies, including the appointment and removal of officers;

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• any determinations with respect to mergers, other business combinations, or changes in control;

• our acquisition or disposition of assets;

• our financing activities; and

• payment of dividends on our capital stock, subject to the limitations imposed by our credit facility.

For example, at our last Annual Meeting of Stockholders, an entity controlled by Mr. Ellison introduced proposals to amend our Amended and Restated Bylaws to allow stockholders to fill Board vacancies and to provide that we will not be governed by Section 203 of the Delaware General Corporation Law, which imposes restrictions upon business combinations and specified other transactions between us and any “interested stockholder” (generally, a holder of shares representing 15% or more of our outstanding voting power). Our Board of Directors did not solicit proxies for or against these proposals, nor did the Board make any recommendation for or against the proposals. Both of these proposals were adopted.

In addition, two of our directors, Philip B. Simon and Paul T. Marinelli, are President and Vice President, respectively, of Lawrence Investments, LLC, an entity also controlled by Mr. Ellison.

Mr. Ellison could have interests that diverge from those of our other stockholders. This control by Mr. Ellison could depress the market price of our Class A common stock; deter, delay or prevent a change in control of LeapFrog; or affect other significant corporate transactions that otherwise might be viewed as beneficial for other stockholders.

Our stock price has been extremely volatile over the past several years and could decline in the future, resulting in losses for our investors and harming the employee-retention and recruiting value of our equity compensation.

Our stock price has been extremely volatile since the markets began suffering rapid declines in stock prices, particularly since the third quarter of 2008. Our closing stock price on the New York Stock Exchange declined to $1.14 during the first quarter of 2009, down from a high in 2008 of $10.63 during the third quarter, and, as of February 19, 2010, our closing stock price was $5.15. All the factors discussed in this section could affect our stock price. The timing of announcements in the public markets regarding new products, product enhancements or product recalls by us or our competitors, or any other material announcements could affect our stock price. Speculation in the media and analyst communities, changes in recommendations or earnings estimates by financial analysts, changes in investors’ or analysts’ valuation measures for our stock and market trends unrelated to our stock can cause the price of our stock to change. A significant drop in the price of our stock could also expose us to the risk of securities class action lawsuits, which could result in substantial costs and divert management’s attention and resources, adversely affecting our business.

Our future success depends partly on the continued contribution of our key executives and technical, sales, marketing, manufacturing and administrative personnel. Part of our compensation package includes stock and/or stock options. To the extent our stock performs poorly, it may adversely affect our ability to retain or attract key employees, potentially resulting in lost institutional knowledge and key talent. Changes in compensation packages or costs could impact our profitability and/or our ability to attract and retain sufficient qualified personnel.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not Applicable.

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ITEM 2. PROPERTIES

The table below lists our current significant properties. In addition to these properties, we have leased properties for administration, sales and operations in Canada, England, France, Mexico and China.

Location	Use	Segment	Condition	Type of Possession
Fontana, California	Distribution center	All	Satisfactory	Lease
Emeryville, California	Headquarters and operations	All	Satisfactory	Lease

ITEM 3. LEGAL PROCEEDINGS

From time to time, in the normal course of business, we are party to various pending claims and lawsuits. Currently, we are party to a claim regarding our use of various trademarks and logos in connection with our Tag reading systems. In October 2009, TAG Toys, Inc. filed a complaint against the Company in the United States District Court for the Central District of California, alleging that our use of various logos and marks relating to the our Tag Reading Systems infringes trademark rights held by TAG Toys, constitutes a false designation of origin for our products, and constitutes unfair competition under federal and California laws. TAG Toys is seeking unspecified monetary damages, costs and attorneys’ fees, and injunctive relief. In December 2009, we filed our answer to TAG Toys’ complaint, denying the material allegations and asserting affirmative defenses. We are continuing to evaluate TAG Toys’ claims and we intend to continue to defend ourselves vigorously.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to our stockholders during the fourth quarter of our 2009 fiscal year.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information and Holders

Our Class A common stock is listed on the New York Stock Exchange, or the NYSE, under the symbol “LF.” On February 19, 2010, there were 2,724 holders of record of our Class A common stock and nine holders of record of our Class B common stock.

The following table sets forth the high and low sales prices per share of our Class A common stock on the NYSE in each quarter during the last two years. The values stated below are actual high and low sales prices, inclusive of intra-day trading.

2009	High		Low
First quarter	$	3.69	$	0.84
Second quarter	$	3.33	$	1.28
Third quarter	$	4.77	$	1.91
Fourth quarter	$	4.45	$	2.88
2008
First quarter	$	7.75	$	4.95
Second quarter	$	9.38	$	7.09
Third quarter	$	10.63	$	7.51
Fourth quarter	$	10.47	$	3.14

Dividend Policy

We have never declared or paid any cash dividends on our capital stock. Our current credit facility prohibits the payment of cash dividends on our capital stock. We expect to reinvest any future earnings in our business and do not anticipate paying cash dividends on our common stock in the foreseeable future.

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ITEM 6. SELECTED FINANCIAL DATA

The following selected significant consolidated financial data for the five fiscal years from January 1, 2005 through December 31, 2009, have been derived from our audited consolidated financial statements. The following information is qualified by reference to, and should be read in conjunction with Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related Notes thereto.

	2009			2008 (1)			2007 (1)			2006 (1)			2005
	(In millions, except per share data)
Consolidated Statements of Operations Data:
Net sales	$	379.8		$	459.1		$	442.3		$	502.3		$	649.8
Gross profit		158.0			181.5			173.3			147.0			279.6
Operating expenses		166.4			241.7			275.6			272.6			258.6
Income (loss) from operations		(8.4	)		(60.2	)		(102.3	)		(125.5	)		21.0
Net income (loss)	$	(2.7	)	$	(68.3	)	$	(102.5	)	$	(145.9	)	$	17.5
Net income (loss) per common share:
Basic	$	(0.04	)	$	(1.07	)	$	(1.62	)	$	(2.32	)	$	0.28
Diluted	$	(0.04	)	$	(1.07	)	$	(1.62	)	$	(2.32	)	$	0.28
Shares used in calculating net income (loss) per share: *
Basic		63.9			63.6			63.4			62.8			61.8
Diluted		63.9			63.6			63.4			62.8			62.3

(1) Certain amounts have been revised. Refer to Note 1, “Summary of Significant Accounting Policies” for additional information.

* Weighted average shares outstanding of Class A and Class B common stock.

	2009		2008 (1)		2007 (1)		2006 (1)		2005
	(In millions)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments	$	61.6	$	79.1	$	93.5	$	148.1	$	72.1
Working capital **		148.3		140.0		192.1		290.0		410.7
Total assets		306.0		306.1		369.8		450.4		605.8
Total stockholders’ equity	$	192.7	$	179.9	$	243.5	$	334.0	$	466.3

(1) Certain amounts have been revised. Refer to Note 1, “Summary of Significant Accounting Policies” for additional information.

** Current assets less current liabilities.

	2009			2008 (1)			2007 (1)			2006 (1)			2005
	(In millions)
Consolidated Statements of Cash Flows Data:
Net cash provided by (used in):
Operating activities	$	(5.0	)	$	12.0		$	(15.4	)	$	90.4		$	(24.7	)
Investing activities		(13.3	)		(23.4	)		41.0			(77.5	)		—
Financing activities		(0.2	)		(0.2	)		1.9			4.2			10.3
Effect of exchange rate changes on cash		1.0			(2.8	)		(1.3	)		1.8			2.3
Increase (decrease) in cash and cash equivalents	$	(17.5	)	$	(14.4	)	$	26.2		$	18.9		$	(12.1	)

(1) Certain amounts have been revised. Refer to Note 1, “Summary of Significant Accounting Policies” for additional information.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management’s discussion and analysis of financial condition and results of operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of LeapFrog Enterprises, Inc. This MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying Notes to the Consolidated Financial Statements (“Notes”) in Part II, Item 8 of this report.

OVERVIEW

We design, develop and market a family of innovative technology-based learning platforms and related proprietary content for infants to children twelve years old for use at home and in schools around the world. We have created more than 340 interactive software titles, covering important subjects such as phonics, reading, writing and math. In addition, we have a broad line of stand-alone educational products, or learning toys, that do not require the separate purchase of software and are generally targeted at children from infancy through age five. Our products are available in four languages and are sold globally through retailers, distributors and directly to schools. Our goal is to create educational products that kids love, parents trust and teachers value.

We generate revenue from selling platform hardware, including our Tag and Tag Jr. reading systems, our classic Leapster, Leapster2 and Didj educational gaming platforms, and our Clickstart: My First Computer and Zippity learning systems, along with a range of learning toys. We also generate revenue from the sale of a wide range of content for our platforms that we develop based on licensed characters or using LeapFrog-owned characters.

We introduced the LeapFrog Learning Path, a web-based service that helps parents track what their children are learning with our web-connected products, in the United States and Canada in 2008 and in early 2009 in the United Kingdom. Learning Path gives our consumers access to a variety of downloadable content and to online rewards programs that encourage learning. Learning Path also makes it easier for our consumers to “age up” with our products. Parents are able to “see the learning” and gain personalized insight into their child’s learning progress. Many of our products, including the Tag reading system, launched in 2008, the Leapster2 handheld gaming system, launched in 2008, the Tag Junior reading system, launched in 2009, and My Pal Scout and My Pal Violet, also launched in 2009, are designed to connect to the Learning Path.

Our products compete most directly in the toy industry in the pre-school toy and electronic learning aids categories, both in the United States and in selected international markets. The educational toy category continues to attract new entrants as well as new innovative products, and competition is significant.

Our business is highly seasonal with a significant portion of our revenues occurring in the second half of the year. Given relatively low sales volumes in the first half of the year and the relatively fixed nature of many of our operating expenses, which occur fairly evenly throughout the year, our results of operations are generally stronger in our third and fourth quarters relative to our first and second quarters. Conversely, our cash flow from operations tends to be highest in the first quarter of the year when we collect the majority of our accounts receivable related to the prior year’s fourth quarter sales. Cash flow from operations generally tends to be lowest in our third quarter, as accounts receivables collections taper off and we are building inventory in preparation for the fourth quarter holiday season. The reduction in cash flow in the third quarter generally means that our available cash is at its lowest point for the year in the first month of the fourth quarter.

This pattern differed in 2008 based on declines in sales in the fourth quarter of 2008 as a result of the global economic crisis. As retailers reacted to sharply declining consumer spending, our sales for the fourth quarter of 2008 were significantly below our expectations and constituted a substantially smaller percentage of our annual sales than fourth quarter sales had in previous years. Fourth quarter sales in 2007 were 41% of total sales for the year as compared to the same period of 2008 in which sales made up only 29% of total net sales for the year, a 24% decline year over year. In 2009, we returned to our normal seasonal pattern with fourth quarter sales making up 50% of total sales for the year.

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In addition, weak retail consumer spending in the fourth quarter of 2008 generated unusually high retail inventory levels, which had an adverse impact on net sales for the first three quarters of 2009. Given the seasonality of our business, declines in sales in the third and fourth quarters generally have a disproportionate impact on our annual operating results for that year and for cash flows from operations at the beginning of the following year due to higher than anticipated retailer inventory levels. Stronger consumer demand during the fourth quarter of 2009 resulted in low retail inventory levels to close 2009. Although, in light of the current ongoing economic uncertainty, no assurance can be given, sales in the first quarter of 2010 should benefit as we anticipate increased shipments to replenish the lean retail inventories. Despite some signs of modest economic recovery, we may still face significant risk associated with reduced consumer spending. The potential business risk for us from macroeconomic conditions anticipated for 2010 is discussed further in Part II. Item 1A.—Risk Factors—“Economic declines has have had a material adverse effect on our sales, and a slow recovery could prevent us from achieving our financial goals in 2010 and beyond,” “Retailer liquidity problems could harm our liquidity and financial results,” and “Our liquidity may be insufficient to meet the long-term or periodic needs of our business.”

Reducing our cost structure to remain competitive in a historically severe economic environment was a priority in 2009. For example, during the second quarter of 2009, we sublet a portion of our headquarter facilities in Emeryville, California. During the fourth quarter of 2009, we consolidated the administrative operations of our subsidiaries in France and the United Kingdom. Further, throughout the year we continued to automate and simplify our operational processes, reduced staffing levels, and spent less, and plan to continue spending less, on non-targeted advertising. Driving further cost efficiencies in 2010 will continue to be a high priority.

We intend to focus our spending resources on building out our core product lines and improving the marketability and scope of our content library. We invest in research and development of existing and new lines of business that we believe will contribute to our long-term growth and profitability. For example, we continue to invest in developing new hardware platforms and content based on the latest relevant technologies that impact both offline and online play experiences. We believe delivering innovative and high-value experiences that are fun and that facilitate learning in kids who play with our products is the key to our future growth.

Our strategic priorities for 2010 and beyond are to invest in the core categories of interactive reading, educational gaming, our learning toy line and in our Learning Path. Our marketing will be aimed at increasing consumer sales in each of these lines, driving content sales to be a greater percentage of our overall sales, and catalyzing new growth in the children’s learning category. We launched new connected products and content in our reading and gaming lines, and we expanded our learning toy line in 2009. New learning toy products include our widely reviewed and relatively inexpensive Scout line of learning toys, and the Zippity learning system, a gaming system featuring full-body movement controls, which is our first co-branded product with Disney.

We organize, operate and assess our business in two primary operating segments: United States and International. Historically, we operated a School segment that sold products tailored for the United States educational market directly to schools, teacher supply stores and through catalogs and websites aimed at educators. During 2008, we significantly reduced our direct marketing to the educational channel, reduced headcount and direct facilities expenses accordingly, and transferred responsibility for this sales channel to the former U.S. Consumer operating segment. This modification is consistent with how the chief operating decision maker reviews performance, allocates resources and manages the business. Accordingly, we have consolidated and reclassified the results of the former U.S. Consumer and School segments into the United States segment for the fiscal years ended December 31, 2009, 2008 and 2007. See Note 19—“Segment Reporting” in our Consolidated Financial Statements included in this Form 10-K for certain detailed information on our segments and their financial results, our customers and our products for the fiscal years ended December 31, 2009, 2008 and 2007.

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RESULTS OF OPERATIONS

Revisions for the Years Ended 2008 and 2007

Subsequent to the issuance of our September 30, 2009 unaudited consolidated financial statements, we determined there was an error in the way our stock plan management and reporting software was calculating stock-based compensation expense. We became aware of the error as a result of an upgrade to a newer version of the software, which calculated stock-based compensation expense amounts for prior periods that were different from those calculated using the older version. Specifically, the older software version we had been using calculated stock-based compensation expense by incorrectly applying a weighted average forfeiture rate to the vested portion of stock option awards until the grant’s final vest date, rather than calculating stock-based compensation expense based upon the actual vested portion of the grant date fair value. As a result, stock-based compensation expense was understated in certain periods prior to the grant’s final vest date. Consequently, revision of the errors in the calculation and recognition of stock-based compensation expense increased operating expenses, and therefore, increased net loss by $0.1 million, $1.2 million and $0.8 million, for the fiscal years ended December 31, 2008, 2007 and 2006, respectively.

We have determined that the impact of these errors is not significant to the previously issued annual and interim financial statements as defined by Accounting Standards Codification (ASC) Topic 250, “Accounting Changes and Error Corrections.” The audited financial statements, related notes, tables and analyses for the years ended December 31, 2008 and 2007 have been revised in this Form 10-K filing. In addition, all references to results for the year ended December 31, 2006 have also been revised. All future filings, including interim financial statements, will be revised appropriately. Refer to Note 1, “Summary of Significant Accounting Policies” for more information.

SUMMARY OF CONSOLIDATED RESULTS FOR FISCAL YEARS ENDED DECEMBER 31, 2009, 2008 and 2007

	2009			2008			2007			% Change 2009 vs. 2008		% Change 2008 vs. 2007
	(Dollars in millions)
Net sales	$	379.8		$	459.1		$	442.3		-17	%	4	%
Gross margin *		42	%		40	%		39	%	2		1	**
Operating expenses		166.4			241.7			275.6		-31	%	-12	%
Loss from operations		(8.4	)		(60.2	)		(102.3	)	86	%	41	%
Net loss per share—basic and diluted	$	(0.04	)	$	(1.07	)	$	(1.62	)	96	%	34	%

* Gross profit as a percentage of net sales

** Percentage point change in gross margin

Fiscal Year 2009 Compared to Fiscal Year 2008

Net sales for 2009 declined 17% from those recorded in 2008. The decline was driven primarily by the high 2008 year-end retail inventory levels and depressed consumer spending due to the weakened economy, which led to lower shipments for the first three quarters of 2009. The 2008 year-end retail inventory levels impacted all business lines, but had the most profound impact on the gaming business, including both platforms and software-related content. Net sales for 2009 included a negative impact from changes in currency exchanges rates of one percentage point.

Gross margin improved two percentage points in 2009 to 42% as a result of a higher proportion of sales of high-margin products and reductions in sales returns allowances due lower retail inventory levels and the fact that we had no charges in 2009 related to the Consumer Product Safety Improvement Act as compared to 2008. In addition, we reduced our allowance for defective products, as claims have trended lower than expected. These increases were offset in part by increased use of discounting and promotions in 2009.

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Operating expenses decreased 31% in 2009 as compared to 2008, primarily due to reduced headcount, reductions in advertising, and lower bad debt expense. The number of total fulltime employees declined by 85, or 14%, from December 31, 2008 to December 31, 2009, due to a combination of reductions in force and the migration of certain aspects of our product development cycle to external parties. Advertising expense declined by 42%, driven by a reduction in the amount of television-based advertising and fewer new platform launches as compared to 2008. Finally, bad debt expense declined by $6.2 million, as the economy began to stabilize and fewer retailers declared bankruptcy as compared to 2008.

Basic and diluted net loss per share improved by $1.03 or 96% in 2009 as compared to 2008, reflecting primarily the decrease in our total net loss as well as a favorable tax benefit of $7.2 million in connection with the release of tax reserves based on expired statutes of limitations. The weighted average of basic and diluted common shares outstanding remained relatively level.

Fiscal Year 2008 Compared to Fiscal Year 2007

Net sales for 2008 increased by 4% from those recorded in 2007, primarily driven by the launch of several new product platforms including Tag, Leapster2 and Didj, the positive effect of which was partially offset by declining sales of our older products, some of which were being retired. Net sales for 2008 included a positive impact from changes in currency exchanges rates of one percentage point. Net sales related to new platform products and related content introduced in 2008 totaled approximately $121.2 million, or 26% of total net sales.

Gross margin percentage improved slightly in 2008 as compared to 2007 as new products launched in 2008 generally had higher margins and we did not experience the same level of asset write-offs as in 2007. Specifically, the large unamortized balances of the FLY Fusion-related assets were written down to reflect declining sales trends in 2007. These improvements to gross margin were partially offset by lower sales through the school channel, increased discounting, higher sales returns allowances related to weakening consumer demand and higher than expected retail inventory levels at the end of 2008, and costs associated with a voluntary recall of the Didj recharging station.

Operating expenses declined 12% in 2008 as compared to 2007 reflecting reduced headcount-related expenses and the absence of costs for legal settlements, offset slightly by an increase in bad debt expense. Over the past three years we have focused on reducing our cost structure through driving efficiencies. Total fulltime employees declined by 218, or 26%, from December 31, 2007 to December 31, 2008, due to a combination of reductions in force and the migration of certain aspects of our product development cycle to external parties. Legal costs were considerably lower in 2008 as 2007 included $11.4 million in patent defense and settlement expenses associated with a patent lawsuit. Bad debt expense increased by $5.3 million in 2008 due to several customer bankruptcies as well as an increase in the allowance for doubtful accounts given the weakening retail environment.

Our basic and diluted net loss per share improved by $0.55 in 2008 as compared to 2007 due primarily to the decrease in our total net loss, as the weighted average of basic and diluted common shares outstanding remained relatively level.

2010 Outlook

We expect continued, albeit modest, economic improvement in 2010, which should drive increased retail spending and stronger retail sales growth than we experienced in 2009. We believe additional factors, such as lean year-end 2009 retail inventory levels, our ability to leverage our Learning Path, new product introductions across all categories, and our entry into new distribution channels should accelerate 2010 net sales growth. Further, we expect that additional software-based content sales and our lower cost structure will result in positive operating income for 2010. However, our expectations for 2010 sales growth and operating income are subject to many uncertainties, including the timing and strength of any economic recovery and many other factors described below under “Risk Factors” in Item 1A of this Form 10-K, there can be no assurance that consumer demand for our products will improve in 2010 compared to 2009.

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OPERATING EXPENSES

Selling, General and Administrative Expenses

Selling, general and administrative, or SG&A, expenses consist primarily of salaries and related employee benefits including stock-based compensation expense and other headcount-related expenses associated with executive management, finance, IT, facilities, human resources, other administrative headcount, legal and other professional fees, indirect selling expenses, marketing expenses, systems costs, rent, office equipment and supplies.

	2009			2008			2007			% Change 2009 vs. 2008		% Change 2008 vs. 2007
	(Dollars in millions)
SG&A expense	$	81.7		$	114.8		$	142.8		-29	%	-20	%
As a percent of net sales		22	%		25	%		32	%	(3	)	(7	)*

* Percentage point increase (decrease)

Fiscal Year 2009 Compared to Fiscal Year 2008

SG&A expenses declined 29% during 2009, reflecting decreased headcount-related expenses and lower bad debt expense, offset in part by slightly higher severance expense than in 2008. Attrition and workforce reductions implemented during 2009 resulted in a 14% year-over-year decline in full time headcount, contributing to lower salary and bonus expenses. Bad debt expense declined by $6.2 million as the economy began to stabilize and fewer retailers declared bankruptcy in 2009.

Fiscal Year 2008 Compared to Fiscal Year 2007

SG&A expenses declined 20% during 2008, reflecting decreased headcount-related expenses and decreased legal fees and settlement expenses, offset slightly by higher bad debt expense and restructuring charges. Attrition and workforce reductions implemented during 2008 resulted in a 26% year-over-year decline in full time headcount. Legal fees and legal settlement expenses declined significantly due to the settlement reached in a patent lawsuit in 2007.

The 2008 decrease in employee-related expenses was partially offset by fourth quarter restructuring charges of $3.9 million, comprising $1.5 million in severance benefits and $2.4 million in costs associated with vacating space in Austin, Texas and part of our Emeryville, California facilities. Bad debt expense increased by $5.3 million in 2008 due to the escalating number of retailer bankruptcies in the US and the overall weakening financial environment in the fourth quarter of 2008.

Research and Development Expenses

Research and development, or R&D, expenses consist primarily of salaries, employee benefits, stock-based compensation and other headcount-related expenses associated with content development, product development, product engineering, third-party development and programming and localization costs to translate content for international markets. We capitalize external third-party costs related to content development, which are subsequently amortized into cost of sales in the statements of operations.

	2009			2008			2007			% Change 2009 vs. 2008		% Change 2008 vs. 2007
	(Dollars in millions)
R&D expense	$	35.0		$	48.5		$	59.4		-28	%	-18	%
As a percent of net sales		9	%		11	%		13	%	(2	)	(2	)*

* Percentage point increase (decrease)

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Fiscal Year 2009 Compared to Fiscal Year 2008

R&D expenses declined 28% in 2009, reflecting lower headcount-related expenses, lower web development and lower product development costs. Workforce reductions implemented in 2009 resulted in a 13% year-over-year decline in full time headcount contributing to lower salary and bonus expenses. Web development costs decreased in 2009 as compared to 2008; in 2008, we made significant investments to build out web capabilities supporting our connected product strategy. Finally, product development costs declined as our largest platform launch in 2009, Tag Jr., leveraged much of the underlying Tag platform technology developed in prior years.

Fiscal Year 2008 Compared to Fiscal Year 2007

R&D expenses decreased in 2008, reflecting improvements in our overall R&D process, increased reliance on third-party development partners and the timing of our platform development cycle. In 2007 we invested heavily in developing the Tag, Didj and Leapster2 platforms, while 2008 R&D activity was focused on developing content for these platforms.

Advertising Expenses

Advertising expense consists of costs associated with marketing, advertising and promoting our products, including customer-related discounts and promotional allowances.

	2009			2008			2007			% Change 2009 vs. 2008		% Change 2008 vs. 2007
	(Dollars in millions)
Advertising expense	$	39.3		$	67.4		$	64.0		-42	%	5	%
As a percent of net sales		10	%		15	%		14	%	(5	)	1	*

* Percentage point increase (decrease)

Fiscal Year 2009 Compared to Fiscal Year 2008

Advertising expenses declined 42% in 2009 primarily as a result of our continued focus on efficient spending, given the expected net sales decline and fewer key product launches. More specifically, our marketing strategy leveraged less costly alternatives, such as direct-to-consumer marketing programs through the LeapFrog Learning Path, instead of traditional marketing programs.

Fiscal Year 2008 Compared to Fiscal Year 2007

Advertising expense increased 5% during 2008 to support the Tag, Leapster2 and Didj product launches.

Other Income (Expense)

The components of other income (expense) were as follows:

	2009			2008			2007			% Change 2009 vs. 2008		% Change 2008 vs. 2007
	(Dollars in millions)
Other income (expense):
Interest income	$	0.6		$	2.3		$	6.9		-74	%	-67	%
Interest expense		(0.1	)		(0.4	)		(0.1	)	75	%	312	%
Other, net		(2.0	)		(8.2	)		(3.2	)	76	%	-156	%
Total	$	(1.5	)	$	(6.3	)	$	3.6		-76	%	-275	%

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Fiscal Year 2009 Compared to Fiscal Year 2008

Interest income declined in 2009 compared with 2008 due to lower average excess cash balances available for investment as well as lower interest rates in general.

The “other, net” category improved considerably as the fair value of our auction-rate securities (ARS) investment stabilized during the year, resulting in significantly lower impairment charges. This improvement was partially offset by higher bank commitment fee expense amortization associated with the renewal of our credit facility in August 2009.

Fiscal Year 2008 Compared to Fiscal Year 2007

Interest income declined in 2008 as compared to 2007, due both to lower average excess cash balances available for investment and a change in investment vehicles from a combination of money-market funds, commercial paper and other similar short-term instruments in 2007 to only money market funds invested in high quality short-term U.S. government obligations in 2008, which have lower yields due to their relatively low risk.

The “other, net” category consists primarily of impairment losses on our ARS, which losses increased in 2008 as the general economic uncertainty and adverse credit market conditions deepened, driving lower valuations of these securities.

SUMMARY OF RESULTS BY SEGMENT FOR FISCAL YEARS ENDED DECEMBER 31, 2009, 2008 and 2007

The net sales, gross margin, total operating expenses and operating loss amounts in this section are presented on a basis consistent with accounting principles generally accepted in the United States (“GAAP”) and on an operating segment basis consistent with our internal management reporting structure. During 2008 we significantly reduced our direct marketing to the educational channel, reduced headcount and direct facilities expenses accordingly, and transferred responsibility for this sales channel to the former U.S Consumer operating segment. Accordingly, we consolidated our School segment into our U.S. Consumer segment, which was renamed the United States segment. All prior year School segment-related data has been combined into the United States (“U.S.”) segment and prior period financial data has been recast to conform to the current presentation.

Certain corporate-level costs, including expenses related to corporate operations associated with broad-based sales and marketing, product support services, supply chain, human resources, legal, finance, information technology, corporate development and procurement activities, broad-based research and development costs, legal settlements and other corporate costs are charged entirely to our U.S. Segment, rather than allocated between the U.S. and International segments.

United States Segment

The U.S. Segment includes net sales and related expenses directly associated with selling our products to national and regional mass-market and specialty retailers, other retail stores and distributors, school-related distributors and resellers, and online store and other Internet-based channels.

	2009			2008			2007			% Change 2009 vs. 2008		% Change 2008 vs. 2007
	(Dollars in millions)
Net sales	$	306.5		$	363.4		$	338.9		-16	%	7	%
Gross margin *		41	%		40	%		40	%	1		—	**
Operating expenses		146.2			202.9			236.0		-28	%	-14	%
Loss from operations	$	(18.5	)	$	(55.9	)	$	(100.9	)	67	%	45	%

* Gross profit as a percentage of net sales

** Percentage point change in gross margin

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Fiscal Year 2009 Compared to Fiscal Year 2008

Net sales decreased 16% in 2009 as compared with 2008, primarily due to the impact of high 2008 year-end retail inventory levels and suppressed consumer spending due to the weakened economy, as well as continued contraction of the education channel, offset by lower return-related expenses. The 2008 year-end retail inventory levels impacted all business lines, but had the most profound impact on the gaming business, including both platforms and software-related content.

Gross margin improved one percentage point in 2009 to 41% as a result of a higher proportion of sales of high-margin products and reductions in sales returns allowances due to lower retail inventory levels and the fact that we had no charges in 2009 related to the Consumer Product Safety Improvement Act as compared to 2008. In addition, we reduced our allowance for defective products, as claims have trended lower than expected.

Operating expense decreased 28% in 2009 as compared to 2008, primarily as a result of reduced headcount-related expenses in line with the continued focus on reducing our cost structure, significantly reduced television-based advertising in 2009 as compared to 2008, reduced advertising-related costs driven by fewer new platform launches in the year as compared to the prior year and lower bad debt expense. The total number of fulltime employees declined by 14% from December 31, 2008 to December 31, 2009, due to a combination of reductions in force and the migration of certain aspects of our product development cycle to external parties. Bad debt expense declined by $3.4 million as the economy began to stabilize and fewer retailers that sell our products declared bankruptcy compared to 2008.

Loss from operations improved 67% in 2009 as the net sales decline was largely offset by the significant decrease in operating expenses.

Fiscal Year 2008 Compared to Fiscal Year 2007

Net sales increased 7% in 2008 as compared to 2007, primarily due to key product launches in 2008 of Tag, Leapster2 and Didj and related content, and solid net growth in LeapFrog.com, offset by declining sales of older products such as the classic Leapster, LeapPad, Little Leaps, LeapTrack and other school market-related products.

Net sales related to new platform products and related content introduced in 2008 totaled approximately $104.5 million, or 29% of total 2008 United States net sales. Additionally, the ratio of platforms sold as a percentage of total net sales increased to 42% in 2008 as compared to 36% and 34% in 2007 and 2006, respectively. The increase in the ratio of platforms to net sales in 2008 was driven by the Tag, Leapster2 and Didj launches; typically, new platform-related software sales lag platform adoption for a period after the platform is initially released for sale.

Gross margin remained level at 40% year-over-year reflecting a number of offsetting factors. The 2008 gross margin benefited from sales of new, higher margin products launched during the year, lower asset write-offs than those experienced in 2007, specifically the FLY Fusion assets which were written down to reflect declining sales trends in 2007, and reductions in the allowances for unclaimed reimbursements due to customers under promotional and co-operative advertising agreements. These improvements were essentially offset by lower sales through the school channel, increased discounting and higher sales returns allowances related to weakening consumer demand and higher than expected retail inventory levels at the end of 2008 and costs associated with a voluntary recall of the Didj recharging station.

Loss from operations improved, reflecting the net sales increase and a decline in operating expenses. The decrease in operating expenses is largely a result of lower headcount-related expenses due to headcount reductions and lower legal and settlement costs in 2008.

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International Segment

The International segment includes the net sales and related expenses directly associated with selling our products to national and regional mass-market and specialty retailers and other outlets through the LeapFrog offices in the United Kingdom, France, Canada and Mexico as well as through distributors in markets such as Spain, Germany and Australia.

	2009			2008			2007			% Change 2009 vs. 2008		% Change 2008 vs. 2007
	(Dollars in millions)
Net sales	$	73.3		$	95.7		$	103.4		-23	%	-7	%
Gross margin *		41	%		36	%		37	%	5		(1	)**
Operating expenses		20.2			38.8			39.6		-48	%	-2	%
Income (loss) from operations	$	10.1		$	(4.3	)	$	(1.4	)	335	%	-207	%

* Gross profit as a percentage of net sales

** Percentage point change in gross margin

Fiscal Year 2009 Compared to Fiscal Year 2008

Net sales decreased 23% in 2009 from 2008, primarily due to the management’s focus on profitability as well as the negative impact of higher than expected 2008 year-end retail inventory levels and suppressed consumer spending due to the weakened economy. Net sales for 2009 included a negative impact from changes in currency exchanges rates of two percentage points.

Gross margin improved five percentage points during 2009 due a higher proportion of sales of high-margin products and a reduction in our allowance for defective products, as claims have trended lower than expected, offset in part by increased discounting and promotions.

Operating expense decreased 48% in 2009 as compared to 2008, driven primarily by reduced headcount, reductions in advertising, and lower bad debt expense. The total number of fulltime international employees declined by 16% from December 31, 2008 to December 31, 2009, due to a combination of reductions in force and the consolidation of the administrative operations of our subsidiaries in France and the United Kingdom. The decline in advertising expense was driven by a reduction in television-based advertising and fewer new platform launches as compared to 2008. Bad debt expense declined by $2.8 million as the worldwide economy began to stabilize and fewer international retailers encountered liquidity problems or declared bankruptcy compared to 2008.

Income (loss) from operations improved significantly in 2009 as compared to 2008 as the gross margin improvement and significant decrease in operating expenses offset the decrease in net sales.

Fiscal Year 2008 Compared to Fiscal Year 2007

International segment net sales constituted 21% of LeapFrog’s total 2008 net sales as compared to 23% in 2007. Net sales decreased 7% in 2008 as compared to 2007, primarily due to declining sales of our mature and retiring products, partially offset by the launches of Tag in selected markets, and of Leapster2 during the third quarter of 2008. Net sales for 2008 included a positive impact from changes in currency exchanges rates of four percentage points. The sales declines were broad-based. Declines in our European markets were attributable to lower sales of older products, the effects of which were only partially offset by first year sales of Tag. Our Asian market sales declined significantly in 2008 as our new products were not introduced in those markets in 2008. We experienced only modest growth in the Mexico and Canadian markets.

Our gross margin percentage remained relatively constant, decreasing one percentage point in 2008. Although during the second half of 2008 there was an increase in sales of higher gross margin products, this improvement

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was offset by a weighted average decline in the value of the dollar during the fourth quarter of approximately 20%. The most significant decline in the dollar was against certain Asian currencies.

The increase in our loss from operations reflected declining net sales.

INCOME TAXES

Our income taxes (benefit) provision and our effective tax rates were $(7.2) million, $1.9 million and $3.7 million, and (72.8)%, 2.8 % and 3.8 % for the years ended December 31, 2009, 2008 and 2007, respectively. Our pretax losses were $9.9 million, $66.5 million and $98.8 million for the same periods, respectively. Calculation of the effective tax rates for all periods included a non-cash valuation allowance recorded against our domestic deferred tax assets.

The 2009 income tax benefit was largely related to the release of tax reserves due to expiring statutes of limitation. The income tax expense in 2008 and 2007 was primarily attributable to our foreign operations, which were offset partially by a US federal income tax refund. In 2008 we received an income tax refund from the IRS in settlement of an audit related to our research and development carry back claims for the years 2001 through 2003. The total 2008 tax benefit attributable to this refund was $1.9 million, including interest paid by the IRS.

LIQUIDITY AND CAPITAL RESOURCES

Financial Condition

Cash and cash equivalents totaled $61.6 million and $79.1 million at December 31, 2009 and 2008, respectively. In line with our investment policy, all cash equivalents were invested in money market funds that held only high-grade United States government obligations at December 31, 2009.

As of December 31, 2009, we held $3.7 million, stated at fair value, in long-term investments in auction rate securities. The uncertainties in the credit and financial markets since the fourth quarter of 2007 have prevented us from fully liquidating our ARS holdings as the number of securities submitted for sale in periodic auctions has exceeded the number of purchase orders. In the fourth quarter of 2009, we were able to tender a portion of our ARS holdings with original par value of $2.0 million. The fair value of our remaining ARS investment has declined by $8.3 million from its original par value of $12.0 million. Due to the illiquidity of these investments, we have not included and do not intend, for the foreseeable future, to include them as potential sources of liquidity in our future cash flow projections. Thus, we do not anticipate that future declines in value, if any, will have an adverse impact on our future ability to support operations and meet our obligations as they come due. Because the fair value of $3.7 million for the auction rate securities investment constitutes only 1.2% of our total assets at December 31, 2009, we also do not anticipate any material adverse impact on our overall capital position should the fair value of these investments decline to zero.

As of September 30, 2009, our agreements with contract manufacturers were modified such that title and risk of loss now transfer upon delivery of finished goods. Because we no longer hold title to any work-in-progress inventory, our overall inventory balance is, and will continue to be, lower than it would have been had we not modified our agreements.

We have an asset-backed revolving credit facility, which is discussed in more detail below, with a potential borrowing availability of $75.0 million. There were no borrowings outstanding on this line of credit at December 31, 2009.

Our accumulated deficit of $187.3 million at December 31, 2009 is not expected to impact our future ability to operate, given our anticipated cash flows from operations, our strong cash position and the availability of our credit facility.

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Future capital expenditures are planned to be primarily for new product development and purchases related to the upgrading of our information technology capabilities. We expect that capital expenditures in 2010, including those for capitalized content and website development costs, will be funded with cash flows generated by operations and will remain lower than in prior years. Capital expenditures were $14.3 million, $23.4 million and $26.6 million in 2009, 2008 and 2007, respectively.

We believe that cash on hand, cash flow from operations and amounts available under our revolving credit facility will provide adequate funds for our foreseeable working capital needs and planned capital expenditures over the next twelve months. Our 2010 strategies for capital expenditures will be focused on driving sales of our learn-to-read and educational gaming market platforms, introducing additional connected products, expanding our content library, establishing parents’ familiarity with the Learning Path and expanding our online play components. Our ability to fund our working capital needs and planned capital expenditures, as well as our ability to comply with all of the financial covenants of our credit facility, depend on our future operating performance and cash flows, which in turn are subject to prevailing economic conditions, including the limited availability of capital in light of the current economic downturn, and to financial, business and other factors, some of which are beyond our control.

Changes in Cash Flows

The table below shows our sources and uses of cash for the three fiscal years ended December 31, 2009, 2008 and 2007.

	2009			2008			2007			% Change 2009 vs. 2008		% Change 2008 vs. 2007
	(Dollars in millions)
Cash flows provided by (used in):
Operating activities	$	(5.0	)	$	12.0		$	(15.4	)	-142	%	178	%
Investing activities		(13.3	)		(23.4	)		41.0		43	%	-157	%
Financing activities		(0.2	)		(0.2	)		1.9		0	%	-111	%
Effect of exchange rate fluctuations on cash		1.0			(2.8	)		(1.3	)	136	%	-115	%
Increase (decrease) in cash and cash equivalents	$	(17.5	)	$	(14.4	)	$	26.2		-22	%	-155	%

Fiscal Year 2009 Compared to Fiscal Year 2008

Net cash flow from operations in 2009 declined by $17 million from 2008 as a result of a higher proportion of net sales in the fourth quarter of 2009, and the relative timing of sales within the fourth quarter. Net sales in the fourth quarter of 2009 increased 37% over the same period of 2008, with a significant portion of the sales occurring later in the quarter compared to the same period of 2008. While net inventory declined by $29.0 million as a result of the stronger 2009 fourth quarter sales and effective production management, net accounts receivable increased by $57.5 million. Given that a majority of the sales occurred later in the quarter, a larger proportion of 2009 sales were not due until 2010 as compared to sales at the end of 2008.

Net cash flow used in investing activities decreased by $10 million in 2009 driven by reductions in capital expenditures, principally property and equipment and capitalized content, as well as proceeds received from the sale of part of our investment in ARS.

Fiscal Year 2008 Compared to Fiscal Year 2007

Net cash flow from operations in 2008 improved over 2007 by $27.4 million. A primary contributor to the improvement in 2008 over 2007 was the $34.1 million decrease in our net loss from 2007 to 2008. Other significant operating cash flow changes included: an increase in 2008 of $27.0 million in accounts receivable-related allowances which included the amounts attributable to the effects of the 2008 financial crisis on our

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business, primarily the allowances for bad debts, sales and product returns; a decrease in inventories of $28.9 million in 2008, primarily attributable to increased allowances for potential product returns including those affected by the 2008 CPSIA safety regulations and a $30.2 million decrease in accrued liabilities and deferred revenue in 2008 caused by lower accruals for employee bonuses, legal settlement expenses and general marketing expenses in 2008.

Net cash flow used in investing activities increased by $64.3 million in 2008 as net proceeds from the sales and purchases of investments declined by $67.6 million, offset by a $3.3 million decline in capital expenditures.

Net cash used by financing activities increased by $2.1 million as proceeds from stock option exercises and employee stock purchase plans declined significantly due to the deteriorating stock price in 2008 which depressed stock purchases.

Seasonal Patterns of Cash Provided By or Used in Operations

The table below shows our seasonal patterns of cash flow provided by (used in) operations by quarter for the fiscal years ended December 31, 2009, 2008 and 2007.

	2009			2008			2007
	(Dollars in millions)
1st quarter	$	10.1		$	18.1		$	49.6
2nd quarter		(20.6	)		(30.7	)		(37.6	)
3rd quarter		(39.8	)		(35.4	)		(52.4	)
4th quarter		45.3			60.0			25.0
Total, net for fiscal year	$	(5.0	)	$	12.0		$	(15.4	)

Generally, our cash flow from operations tends to be highest in the first quarter of the year when we collect the majority of our accounts receivable booked in the fourth quarter of the prior year. Cash flow used in operations tends to be highest in our third quarter, as collections from prior accounts receivables taper off and we invest heavily in inventory in preparation for the fourth quarter holiday season. Cash flow generally turns positive again in the fourth quarter as we start to collect on the current holiday season accounts receivables.

Our 2008 quarterly cash flows also did not fully conform to our historical pattern. Net sales fell on a year-over-year basis from 2005 through 2007. This resulted in a decline in cash collected from accounts receivable from year to year for the three-year period, negatively impacting cash flows in the first quarter of each subsequent year. In 2008, this net sales-related cash flow decline was partially offset during the fourth quarter as we tightened our cash management practices in response to the economic crisis, resulting in an increase in accounts payable of approximately $10 million at the end of 2008 as compared to the end of 2007. Thus, cash flow provided by operations was higher in the fourth quarter of 2008 than in the first quarter of 2009.

Line of Credit and Borrowing Availability

On August 13, 2009, we, certain financial institutions (“Lenders”) and Bank of America, N.A., as agent for the Lenders (the “Agent”) entered into an Amended and Restated Loan and Security Agreement for a $75.0 million asset-based revolving credit facility (“Loan Agreement”). The maturity date of the facility is August 13, 2012, at which time any borrowings under the facility must be repaid. We may make voluntary prepayments of borrowings at any time. Provided there is no default under the Loan Agreement and subject to availability of additional credit, we may elect, without the consent of any of the Lenders, to increase the size of the credit facility under the Loan Agreement up to an aggregate of $150.0 million. The borrowing availability varies according to the levels of our eligible accounts receivable, eligible inventory and cash and investment securities deposited in secured accounts with the administrative agent or other lenders. Availability under this agreement was $75.0 million, and we had no borrowings outstanding as of December 31, 2009.

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This new credit facility supersedes and replaces our previous $100.0 million credit facility dated November 8, 2005 which would have otherwise expired in November 2010 and was terminated as of August 13, 2009 in connection with signing of the Loan Agreement.

The Loan Agreement includes the following terms, which are substantially similar to those of the Terminated Agreement:

• The borrowing availability varies according to the levels of our accounts receivable, inventory, and cash and investment securities deposited in secured accounts with the Agent or other Lenders. Subject to the level of this borrowing base, we may make and repay borrowings from time to time until the maturity of the facility.

• The interest rate is, at our election, the Agent’s prime rate (or base rate) or a LIBOR rate defined in the Loan Agreement, plus, in each case, an applicable margin. The applicable margin for a loan depends on the average daily availability for the most recent fiscal quarter and the type of loan

• The Loan Agreement contains customary events of default, including payment failures; failure to comply with covenants; failure to satisfy other obligations under the credit agreements or related documents; defaults in respect of other indebtedness; bankruptcy, insolvency and inability to pay debts when due; material judgments; change-in-control provisions and the invalidity of the guaranty or security agreements. If any event of default under the Loan Agreement occurs, the Agent or the other Lenders may terminate their respective commitments, declare immediately due all borrowings under the facility and foreclose on the collateral. A cross-default provision applies if a default occurs on other indebtedness in excess of $5.0 million and the applicable grace period in respect of the indebtedness has expired, such that the lender of, or trustee for, the defaulted indebtedness has the right to accelerate.

• We have granted a security interest in substantially all of our assets to the Agent as security for its obligations under the facility.

• We are required to maintain a ratio of EBITDA to fixed charges, each as defined in the Loan Agreement, of at least 1.1 to 1.0 when the covenant is required to be tested (compared to 1.0 to 1.0 under the Terminated Agreement). As with the Terminated Agreement, the ratio is measured only if certain borrowing-availability thresholds are not met.

Under the Loan Agreement for the new credit facility, the interest rate is, initially, for LIBOR rate loans, 4.00% over the LIBOR rate or, for base rate loans, 3.00% over the Agent’s prime rate. After six months, the interest rate will vary based on borrowing availability.

Contractual Obligations and Commitments

We have no off-balance sheet arrangements.

We conduct our corporate operations from leased facilities and rent equipment under operating leases. Generally, these have initial lease periods of three to twelve years and contain provisions for renewal options of five years at market rates. We account for rent expense on a straight-line basis over the term of the lease. The following table summarizes our outstanding long-term contractual obligations at December 31, 2009.

	Contractual Obligations at December 31, 2009
	Payments Due by Period
	(Dollars in millions)
	Total		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
Operating leases	$	29.4	$	8.0	$	12.5	$	3.9	$	5.0
Royalty guarantees		19.0		7.2		11.8		—		—
Total	$	48.4	$	15.2	$	24.3	$	3.9	$	5.0

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At December 31, 2009, we had no outstanding borrowings or letters of credit under our asset-backed line of credit facility with Bank of America, N.A. At December 31, 2009, we had $75.0 million of potential availability on the line. In addition, we had commitments to purchase inventory totaling approximately $42.3 million at December 31, 2009.

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP” or “GAAP”). Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. We believe that certain accounting policies, which we refer to as critical accounting policies, are particularly important to the portrayal of our financial position and results of operations and require the use of significant estimates and the application of significant judgment by our management. On an on-going basis, we evaluate our estimates, particularly those related to our critical accounting policies.

The following discussion highlights those policies and the underlying estimates and assumptions, which we consider critical to an understanding of the financial information in this report.

Revenue Recognition, Allowance for Doubtful Accounts, and Other Revenue Reserves

Revenue derived from sales of our technology-based learning products and related proprietary content is recognized when products are shipped and title passes to the customer, provided that there is evidence of a commercial arrangement, delivery has occurred, there is a fixed or determinable fee and collection is reasonably assured. For online content downloads, delivery is considered to occur when the download occurs. For professional training services, delivery is considered to occur when the training has been performed. Net sales represent gross sales less negotiated price allowances based primarily on volume purchasing levels, estimated returns, allowances for defective products, markdowns and other sales allowances for customer promotions. A small portion of our revenue related to subscriptions is recognized as revenue over the period of the subscription.

The accounts receivable balance is reduced by an allowance for amounts we believe may become uncollectible. Determining the amounts that may become uncollectible requires judgment, the result of which may have a significant effect on the amounts reported in accounts receivable. This allowance is an estimate based primarily on our management’s evaluation of the customer’s financial condition in the context of current economic conditions, past collection history and aging of the accounts receivable balances. If changes in the economic climate or in the financial condition of any of our customers impair or improve their ability to make payments, adjustments to the allowances may be required.

We provide estimated allowances against accounts receivable and revenue for product returns, defective products, charge-backs, promotions and cooperative advertising arrangements with customers in the same period that we record the related revenue. The allowances are estimated utilizing historical information, maximum known exposures and other available information including current retailer inventory levels, sell-through of its retailers and distributors, current trends in retail for its products, changes in customer demand for its products and other related factors.

Accounts receivable are reported on the balance sheet net of all provided allowances. Our provision for bad debts in 2009 was $1.2 million as compared to $5.0 million in 2008.

Fair Value of Financial Instruments

Fair value is defined by authoritative guidance as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of

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observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability. The authoritative guidance establishes three levels of inputs that may be used to measure fair value:

Level 1: Unadjusted quoted market prices for identical assets or liabilities in active markets that we have the ability to access.

Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, default rates, etc.) or can be corroborated by observable market data.

Level 3: Valuations based on models where significant inputs are not observable. The unobservable inputs reflect our assumptions about the assumptions that market participants would use.

Our Level 1 assets consist of money market funds and certificates of deposit with original maturities of three months or less. These assets are considered highly liquid and are stated at cost which approximates market value. Our Level 2 assets and liabilities consist of outstanding foreign exchange forward contracts with maturities of approximately one month used to hedge its exposure to certain foreign currencies including the British Pound, Canadian Dollar, Euro, and Peso. Our Level 3 assets consist of investments in auction rate securities (ARS). Currently, there is no active market for these securities; therefore, they do not have readily determinable market values. We have engaged a third-party valuation firm to estimate the fair value of the ARS investments using a discounted cash flow approach, which is corroborated by a separate and comparable discounted cash flow analysis prepared internally. The assumptions used in preparing the discounted cash flow model are based on data available as of the last day of the reporting period and include estimates of interest rates, timing and amount of cash flows, credit and liquidity premiums, and expected holding periods of the ARS. Given the current market environment, these assumptions are volatile and subject to change, and therefore could result in significant changes to the estimated fair value of our ARS. In 2009 and 2008 we recognized losses on our ARS of $0.4 million and $6.0 million, respectively.

Inventory Valuation

Inventories are stated on a first-in, first-out basis at the lower of cost or market value. Inventory valuation primarily involves our management’s estimation of slow-moving, obsolete or excess products. Our estimate of the write-down for slow-moving, excess and obsolete inventories is based on our management’s review of on-hand inventories compared to their estimated future usage, product demand forecast, anticipated product selling prices, the expected product lifecycle, and products planned for discontinuation. If actual future usage, demand for our products and anticipated product selling prices were less favorable than those projected by our management, additional inventory write-downs would be required resulting in a negative impact on our gross margin. We monitor the estimates of inventory write-downs on a quarterly basis. When considered necessary, we make additional adjustments to reduce inventory to its net realizable value, with corresponding increases to cost of goods sold. Inventories included write-downs for slow-moving, excess and obsolete inventories of $4.0 million and $10.6 million at December 31, 2009 and 2008, respectively.

Capitalization of Content Development Costs

We capitalize certain external costs related to the development of content for our learning products once technological feasibility has been established for the related projects. Our capitalized external costs generally relate to design, artwork, animation, layout, editing, voice, audio and software included in the learning products. We evaluate the future recoverability of capitalized content on a quarterly basis. Capitalized costs for products that are cancelled, abandoned or otherwise deemed impaired are charged to expense in the period of cancellation. Our evaluation in 2009 resulted in very few impairments while the 2008 evaluation identified capitalized costs related to several platforms that had recently been retired or discontinued. Accordingly, we accelerated the

38

amortization of these costs, resulting in an increase in cost of sales in the United States reporting unit of $0.3 million, $2.2 million, and$1.7 million in 2009, 2008 and 2007, respectively.

We also capitalize external website development costs, which presently comprise primarily third-party costs related to developing applications that are an integral component of certain products we market, as well as some costs incurred to develop or acquire and customize code for web applications, costs to develop HTML web pages or develop templates. We evaluate the future recoverability of website costs on a quarterly basis and if an impairment loss is considered to have occurred during the period, the loss is recorded in the statement of operations in the same period.

Our evaluations of capitalized content and website costs require us to make complex and subjective judgments, using currently available data as well as projections about the potential impact of possible future events and conditions, which judgments and projections are inherently uncertain. If future events and conditions do not meet expectations, we make additional adjustments to reduce the expected realizable value of the assets, with corresponding increases to cost of sales. Capitalized content and website costs are both included in “Capitalized product costs” on the balance sheet.

Goodwill and Other Intangible Assets

We evaluate goodwill for impairment at the end of each fiscal year and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the applicable reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors or operating performance indicators. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities including goodwill to those reporting units, and determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated using a combination of a market approach and a discounted cash flow methodology. The market approach requires considerable judgment in selecting comparable companies and estimating the multiples of revenues implied by their market values. The discounted cash flow methodology requires management to exercise judgment in selecting an appropriate discount rate and in making numerous assumptions in order to develop future business and financial forecasts and the related estimates of future net cash flows. Future net cash flows depend primarily on future sales of our products, which are inherently difficult to predict. This is especially true when a significant portion of our future net sales is expected to be generated by both mature products as well as products introduced in 2009 and planned to be introduced in 2010. After analyzing our goodwill at December 31, 2009 and 2008, we concluded no impairment charge was required in either period. At December 31, 2009 and 2008 we had $22.2 million and $22.6 million of goodwill and other intangible assets, respectively.

Income Taxes

We account for income taxes using the liability method. We calculate our deferred tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities, using enacted tax rates and laws that we expect will be in effect when the differences are expected to reverse. In determining our income tax assets and liabilities we make significant estimates and judgments in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our financial position, results of operations or cash flows. We provide valuation allowances when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Determining whether a valuation allowance is warranted requires judgment about factors such as prior earnings history, expected future earnings, carryback and carryforward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. Our financial statements also include accruals for the estimated amounts of probable future assessments that may result from the examination of federal, state or international tax returns. Our tax accruals, tax provision, deferred tax assets or income tax liabilities may be adjusted if there are changes in circumstances, such as changes in tax law, tax audits or other

39

factors, that cause management to revise its estimates. The amounts ultimately paid on any future assessments may differ from the amounts accrued and may result in an increase or reduction to the effective tax rate in the year of resolution. Such adjustments could have a material impact on our financial position, results of operations or cash flows.

Stock-based Compensation

Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized in compensation expense over the requisite service period. Determining the fair value of stock-based compensation awards at grant date requires significant judgment and estimates regarding valuation variables such as volatility, expected forfeiture rates and the expected term of the awards. Stock-based compensation expense may be significantly affected by changes in our stock price, our actual forfeiture rates and the extent of future grants of equity awards. If actual results differ significantly from our estimates, stock-based compensation expense and our results of operations could be materially affected.

Recent Accounting Pronouncements

On July 1, 2009, the FASB Accounting Standards Codification (ASC) became the exclusive reference for nongovernmental accounting principles generally accepted in the United States for use in financial statements issued for interim and annual periods ended after September 15, 2009, except for SEC rules and interpretive releases, which also are authoritative GAAP for SEC registrants. Accordingly, all references to legacy guidance issued under previously recognized authoritative literature have been removed or replaced by the relevant sections of the ASC.

Recently Adopted Guidance

In April of 2009, the FASB issued guidance codified within ASC 320 “Investments – Debt and Equity Securities” (ASC 320). This guidance amended the other-than-temporary impairment guidance in ASC 320 for debt securities to make it more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The guidance did not amend existing recognition and measurement guidance related to other-than-temporary impairment of equity securities. It was effective for interim reporting periods ending after June 15, 2009. Adoption of this guidance in the second quarter of 2009 had an immaterial impact on the way we record the credit portion of other-than-temporary impairments related to its investments in auction rate securities.

In May of 2009, the FASB issued guidance codified within ASC 855 “Subsequent Events.” This guidance established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance was effective for interim or annual reporting periods ending after June 15, 2009. Adoption of this guidance in the second quarter of 2009 did not impact our consolidated financial statements but did require additional disclosures.

Recently Issued Accounting Guidance Not Yet Adopted

In January of 2010, the FASB issued Accounting Standards Update (ASU) 2010-06, “Fair Value Measures and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” This guidance is intended to improve transparency with respect to recurring and nonrecurring fair value measurements through new disclosure requirements for transfers in and out of Level 1 and Level 2 and for activity in Level 3. Clarification of existing disclosure requirements is also provided. A majority of this guidance will be effective for interim or annual reporting periods ending after December 15, 2009. The remainder of the guidance will be effective for fiscal and interim periods beginning after December 31, 2010. Adoption of this guidance in 2010 and 2011 is not expected to impact our consolidated financial statements but may require additional disclosures.

40

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We develop products in the United States and market our products primarily in North America and, to a lesser extent, in Europe and the rest of the world. We are billed by and pay our third-party manufacturers in United States dollars (“USD”). Sales to our international customers are transacted primarily in the country’s local currency. As a result, our financial results have been and are expected to continue to be affected by factors such as changes in foreign currency rates or weak economic conditions in foreign markets.

We manage our foreign currency transaction exposure by entering into short-term forward contracts. The purpose of this hedging program is to minimize the foreign currency exchange gain or loss reported in our financial statements. The table below shows the results of our hedging program for the fiscal years ended December 31, 2009, 2008 and 2007.

	Years Ended December 31,
(Dollars in thousands)	2009			2008			2007
Gains (losses) on foreign exchange forward contracts	$	(55	)	$	874		$	(2,967	)
Gains (losses) on underlying transactions denominated in foreign currency		(404	)		(2,092	)		2,964
Net losses	$	(459	)	$	(1,218	)	$	(3	)

Our foreign exchange forward contracts generally have original maturities of one month or less. A summary of all foreign exchange forward contracts that were outstanding as of December 31, 2009 and 2008 follows:

	2009					2008
	Average Forward Exchange Rate per $1	Notional Amount in Local Currency	Fair Value of Instruments in USD			Average Forward Exchange Rate per $1	Notional Amount in Local Currency	Fair Value of Instruments in USD
		(1)	(2)				(1)	(2)
Currencies:
British Pound (USD/GBP)	1.615	628	$	(11	)	1.435	4,238	$	55
Euro (USD/Euro)	1.435	4,113		171		1.388	6,381		303
Canadian Dollar (CAD/USD)	1.048	5,586		(4	)	1.236	4,476		72
Mexican Peso (MXP/USD)	13.065	11,115		4		13.960	33,409		110
Total fair value of instruments in USD			$	160				$	540

(1) In thousands of local currency

(2) In thousands of USD

Cash and cash equivalents are presented at fair value on our balance sheet. We invest our excess cash in accordance with our investment policy. At December 31, 2009 and 2008 our cash was invested primarily in high-grade U.S. government obligations and money market funds.

We experience interest rate risk and impairment risk only on our long-term investment in auction rate securities, as we have no long-term borrowings. Due to the financial market collapse that commenced in the fourth quarter of 2007, the fair value of our remaining ARS investment has declined by $8.3 million from its original par value of $12.0 million. We evaluate this investment on a quarterly basis and will continue to recognize impairment losses in the statements of operations, if and when they occur.

41

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

LEAPFROG ENTERPRISES, INC.

FORM 10-K

Index to Consolidated Financial Statements

For the Fiscal Year Ended December 31, 2009

	Page
Reports of Independent Registered Public Accounting Firm	43
Consolidated Balance Sheets	45
Consolidated Statements of Operations	46
Consolidated Statements of Stockholders’ Equity	47
Consolidated Statements of Cash Flows	48
Notes to the Consolidated Financial Statements	49

42

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of

LeapFrog Enterprises, Inc.

We have audited the accompanying consolidated balance sheets of LeapFrog Enterprises, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedule listed in the index at Item 15. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of LeapFrog Enterprises, Inc. at December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.

As discussed in Note 8 to the consolidated financial statements, the Company adopted the guidance originally issued in Statement of Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (codified in ASC Topic 740, Income Taxes) effective January 1, 2007.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), LeapFrog Enterprises, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2010 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

San Francisco, California

February 22, 2010

43

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of

LeapFrog Enterprises, Inc.

We have audited LeapFrog Enterprises, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). LeapFrog Enterprises, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, LeapFrog Enterprises, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets, as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2009 of LeapFrog Enterprises, Inc. and our report dated February 22, 2010 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

San Francisco, California

February 22, 2010

44

LEAPFROG ENTERPRISES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

	December 31,
	2009			2008 (1)
ASSETS
Current assets:
Cash and cash equivalents	$	61,612		$	79,101
Accounts receivable, net of allowances for doubtful accounts of $1,119 and $3,872 respectively		147,378			89,918
Inventories		28,180			56,937
Prepaid expenses and other current assets		7,378			10,822
Deferred income taxes		2,066			3,189
Total current assets		246,614			239,967
Long-term investments		3,685			4,962
Deferred income taxes		1,263			497
Property and equipment, net		14,268			19,611
Capitalized product costs, net		14,917			16,227
Goodwill		19,549			19,549
Other assets		5,699			5,260
Total assets	$	305,995		$	306,073
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	58,263		$	55,098
Accrued liabilities		39,821			44,596
Income taxes payable		242			229
Total current liabilities		98,326			99,923
Long-term deferred income taxes		12,745			22,404
Other long-term liabilities		2,231			3,820
Stockholders’ equity:
Class A Common Stock, par value $0.0001 Authorized—139,500 shares; Issued and outstanding: 36,894 and 36,627, respectively		4			4
Class B Common Stock, par value $0.0001 Authorized—40,500 shares; Issued and outstanding: 27,141 and 27,141, respectively		3			3
Treasury stock		(185	)		(185	)
Additional paid-in capital		380,040			366,798
Accumulated other comprehensive income (loss)		158			(2,055	)
Accumulated deficit		(187,327	)		(184,639	)
Total stockholders’ equity		192,693			179,926
Total liabilities and stockholders’ equity	$	305,995		$	306,073

(1) Certain amounts have been revised for insignificant errors. Refer to Note 1, “Summary of Significant Accounting Policies” for additional information.

See accompanying notes

45

LEAPFROG ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Years Ended December 31,
	2009			2008 (1)			2007 (1)
Net sales	$	379,834		$	459,059		$	442,271
Cost of sales		221,827			277,574			268,965
Gross profit		158,007			181,485			173,306
Operating expenses:
Selling, general and administrative		81,702			114,811			142,789
Research and development		34,981			48,473			59,371
Advertising		39,331			67,361			64,013
Depreciation and amortization		10,406			11,044			9,464
Total operating expenses		166,420			241,689			275,637
Loss from operations		(8,413	)		(60,204	)		(102,331	)
Other income (expense):
Interest income		556			2,294			6,867
Interest expense		(60	)		(349	)		(111	)
Other, net		(1,959	)		(8,221	)		(3,178	)
Total other income (expense)		(1,463	)		(6,276	)		3,578
Loss before income taxes		(9,876	)		(66,480	)		(98,753	)
Provision for (Benefit from) income taxes		(7,188	)		1,874			3,723
Net loss	$	(2,688	)	$	(68,354	)	$	(102,476	)
Net loss per share:
Class A and B—basic and diluted	$	(0.04	)	$	(1.07	)	$	(1.62	)
Weighted average shares used to calculate net loss per share:
Class A and B—basic and diluted		63,914			63,641			63,361

(1) Certain amounts have been revised for insignificant errors. Refer to Note 1, “Summary of Significant Accounting Policies” for additional information.

See accompanying notes

46

LEAPFROG ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

	Years Ended December 31,
	2009			2008 (1)			2007 (1)
Common stock and paid-in capital:
Balance, beginning of year:
Class A shares	$	4		$	4		$	4
Class B shares		3			3			3
Treasury stock		(185	)		(185	)		(185	)
Paid-in capital		366,798			355,900			344,192
Total, beginning of year		366,620			355,722			344,014
Class A common shares issued upon exercise of employee stock-based awards and purchases made under the employee purchase plan		77			624			2,836
Net cash paid for payroll taxes on restricted stock unit releases		(275	)		(840	)		(921	)
Stock-based compensation expense		10,696			11,109			10,672
Other		2,744			5			(879	)
Balance common stock and paid-in capital, end of year		379,862			366,620			355,722
Accumulated other comprehensive income (loss):
Balance, beginning of year		(2,055	)		4,036			3,122
Cumulative translation adjustment		2,006			(6,689	)		1,512
Temporary impairment gain (loss) on investment in auction rate securities		207			598			(598	)
Balance accumulated other comprehensive income (loss), end of year		158			(2,055	)		4,036
Accumulated deficit:
Balance, beginning of year		(184,639	)		(116,285	)		(13,174	)
Cumulative effect of adopting ASC 740		—			—			(635	)
Net loss		(2,688	)		(68,354	)		(102,476	)
Balance accumulated deficit, end of year		(187,327	)		(184,639	)		(116,285	)
Total stockholders’ equity, end of year	$	192,693		$	179,926		$	243,473

(1) Certain amounts have been revised for insignificant errors. Refer to Note 1, “Summary of Significant Accounting Policies” for additional information.

See accompanying notes

47

LEAPFROG ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Years Ended December 31,
	2009			2008 (1)			2007 (1)
Operating Activities:
Net loss	$	(2,688	)	$	(68,354	)	$	(102,476	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		20,495			22,954			19,610
Unrealized foreign exchange (gain) loss		(1,940	)		3,146			2,448
Deferred income taxes		(7,351	)		(68	)		(2,314	)
Stock-based compensation expense		10,696			11,109			10,672
Impairment of investment in auction rate securities		431			6,561			2,477
Loss on disposal of long-term assets		1,100			434			2,014
Allowance for doubtful accounts		(1,194	)		5,045			(286	)
Other changes in operating assets and liabilities:
Accounts receivable, net		(54,746	)		27,750			4,324
Inventories		29,328			(7,919	)		20,784
Prepaid expenses and other current assets		3,605			8,950			(2,252	)
Other assets		(824	)		1,860			4,985
Accounts payable		2,496			11,463			148
Accrued liabilities		(5,368	)		(11,773	)		18,655
Long-term liabilities		(988	)		3,785			2,768
Income taxes payable		13			155			(631	)
Other		1,941			(3,140	)		3,642
Net cash provided by (used in) operating activities		(4,994	)		11,958			(15,432	)
Investing activities:
Purchases of property and equipment		(6,345	)		(11,434	)		(17,382	)
Capitalization of product costs		(7,977	)		(11,863	)		(9,243	)
Purchases of other long-term intangible assets		(235	)		—			—
Purchases of investments		—			—			(460,329	)
Sales of investments		1,282			—			527,949
Net cash provided by (used in) investing activities		(13,275	)		(23,297	)		40,995
Financing activities:
Proceeds from stock option exercises and employee stock purchase plans		77			624			2,836
Net cash paid for payroll taxes on restricted stock unit releases		(275	)		(840	)		(921	)
Borrowing on line of credit		—			30,000			—
Paydowns on line of credit		—			(30,000	)		—
Net cash provided by (used in) financing activities		(198	)		(216	)		1,915
Effect of exchange rate changes on cash		978			(2,804	)		(1,332	)
Net change in cash and cash equivalents for the period		(17,489	)		(14,359	)		26,146
Cash and cash equivalents at beginning of period		79,101			93,460			67,314
Cash and cash equivalents at end of period	$	61,612		$	79,101		$	93,460
Supplemental Disclosures of Cash Flow Information
Cash paid during year for:
Interest expense	$	117		$	247		$	—
Income taxes, net of refunds		(164	)		(5,654	)		3,727
Non-cash investing and financing activities:
Temporary gains (losses) on auction rate securities, net	$	435		$	598		$	(598	)
Assets acquired under capital lease		—			—			58

(1) Certain amounts have been revised for insignificant errors. Refer to Note 1, “Summary of Significant Accounting Policies” for additional information.

See accompanying notes

48

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

1. Summary of Significant Accounting Policies

Nature of Business

LeapFrog Enterprises, Inc. (collectively, the “Company” or “LeapFrog” unless the context indicates otherwise) designs, develops and markets a family of innovative technology-based learning platforms and related proprietary content for infants through children twelve years old at home and in schools around the world. LeapFrog has developed a number of learning platforms that support a broad library of software titles covering important subjects including phonics, reading, writing, and math. In addition, LeapFrog has created a broad line of “stand-alone” educational products (“toys”) that do not require the separate purchase of content and are generally targeted at young children—from infants to five year olds. In the United States, the Company’s products are sold through retailers, distributors, directly to consumers at our web store and directly to schools. LeapFrog products are available in six languages (including Queen’s English) and are sold in international markets, primarily through major global retailers.

Based on voting control, LeapFrog is a majority-owned subsidiary of Mollusk Holdings, LLC (“Mollusk”), an entity controlled by Lawrence J. Ellison, Chief Executive Officer of Oracle Corporation.

Principles of Consolidation and Basis of Presentation

The Company’s consolidated financial statements include the accounts of LeapFrog and its wholly owned subsidiaries organized in the United Kingdom, Canada, France, Mexico, Hong Kong and China. Inter-company accounts and transactions have been eliminated in consolidation.

Subsequent Events

The Company evaluated subsequent events through February 22, 2010, the date on which this Annual Report on Form 10-K was filed with the Securities and Exchange Commission (“SEC”).

Foreign Currencies

LeapFrog measures and records the assets, liabilities and operations of its foreign operations using the functional currency of the country in which the operations are located and utilizes the U.S. dollar as its reporting currency. Assets and liabilities recorded in foreign currencies are translated at the exchange rate as of the balance sheet date. Revenues and expenses are translated at average exchange rates prevailing during the period. Translation adjustments resulting from this process are charged or credited to “accumulated other comprehensive income,” an equity account. Foreign currency transaction gains and losses are included in income as incurred.

Use of Estimates

The preparation of financial statements in conformity with accounting principles that are generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. The accounting estimates that require management’s most significant, difficult, and subjective judgments include the evaluation of our accounts receivable-related allowances for doubtful accounts, sales returns, product returns and promotional and cooperative advertising arrangements with customers, the valuation and nature of impairments of financial instruments, valuation and amortization of capitalized product costs, inventory valuation, the recognition, measurement and valuation of current and deferred income tax assets and liabilities, valuation of goodwill and

49

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

stock-based compensation assumptions. These estimates involve the consideration of complex factors and require management to make judgments. The analysis of historical and future trends can require extended periods of time to resolve, and are subject to change from period to period. The actual results experienced may differ from management’s estimates.

Reclassifications

Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year’s presentation.

Revisions to Prior Years

Subsequent to the issuance of our September 30, 2009 unaudited consolidated financial statements, the Company determined there was an error in the way its stock plan management and reporting software was calculating stock-based compensation expense. The Company became aware of the error as a result of an upgrade to a newer version of the software, which calculated stock-based compensation expense amounts for prior periods that were different from those calculated using the older version. Specifically, the older software version we had been using calculated stock-based compensation expense by incorrectly applying a weighted average forfeiture rate to the vested portion of stock option awards until the grant’s final vest date, rather than calculating stock-based compensation expense based upon the actual vested portion of the grant date fair value. As a result, stock-based compensation expense was understated for fiscal years ended December 31, 2008, 2007 and 2006. These understatements had the following affect on the Company’s previously issued financial statements for the years ended December 31, 2008, 2007 and 2006:

As of and for the year ended December 31, 2008

Consolidated Balance Sheet: Accumulated deficit was increased by $2,141 from $(182,498) to $(184,639) and additional paid-in capital increased by $2,141 from $364,657 to $366,798.

Consolidated Statement of Operation: The following financial statement captions were revised by $98: Selling, general and administrative from $114,713 to $114,811, total operating expenses from $241,591 to $241,689, loss from operations from $(60,106) to $(60,204), loss before income taxes from $(66,382) to $(66,480) and, net loss from $(68,256) to $(68,354). Net loss per share was unaffected by the error.

Consolidated Statement of Cash Flows: Adjustments to reconcile net loss to net cash provided by operating activities for stock-based compensation expense was increased by $98 from $11,011 to $11,109, which was offset by a corresponding increase in net loss as indicated above under Consolidated Statement of Operation.

As of and for the year ended December 31, 2007

Consolidated Balance Sheet: Accumulated deficit was increased by $2,043 from $(114,242) to $(116,285) and additional paid-in capital increased by $2,043 from $353,857 to $355,900.

Consolidated Statement of Operation: The following financial statement captions were revised by $1,161: Selling, general and administrative from $141,628 to $142,789, total operating expenses from $274,476 to $275,637, loss from operations from $(101,170) to $(102,331), loss before income taxes from $(97,592) to $(98,753) and, net loss from $(101,315) to $(102,476). Net loss per share was revised from $(1.60) to $(1.62).

50

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

Consolidated Statement of Cash Flows: Adjustments to reconcile net loss to net cash used in operating activities for stock-based compensation expense was increased by $1,611 from $9,511 to $10,672, which was offset by corresponding increases in net loss as indicated above under Consolidated Statement of Operation.

As of and for the year ended December 31, 2006

Consolidated Balance Sheet—Accumulated deficit was increased by $882 from $(12,292) to (13,174), and additional paid-in capital increased by $882 from $343,310 to $344,192.

Consolidated Statement of Operation: The following financial statement captions were revised by $882: Selling, general and administrative from $131,928 to $132,810, total operating expenses from $271,697 to $272,579, loss from operations from $(124,663) to $(125,545), loss before income taxes from $(118,481) to $(119,363) and, net loss from $(145,092) to $(145,974). Net loss per share was revised from $(2.31) to $(2.32).

Consolidated Statement of Cash Flows: Adjustments to reconcile net loss to net cash used in operating activities for stock-based compensation expense was increased by $882 from $7,303 to $8,185, which was offset by corresponding increases in net loss as indicated above under Consolidated Statement of Operation.

The Company has determined that the impact of these errors is not significant to previously issued annual and interim financial statements as defined by Accounting Standards Codification (ASC) Topic 250, “Accounting Changes and Error Corrections.” The audited financial statements, related notes and analyses for the years ended December 31, 2008, 2007 and 2006 have been revised in the Form 10-K filing. All future filings, including interim financial statements, will be revised appropriately.

Revenue Recognition

The Company derives the majority of its revenue from sales of its technology-based learning products and related proprietary content. Revenue is recognized when products are shipped and title passes to the customer, provided that there is evidence of a commercial arrangement, delivery has occurred, there is a fixed or determinable fee and collection is reasonably assured. For online content downloads, delivery is considered to occur when the download occurs. For professional training services, delivery is considered to occur when the training has been performed. Amounts billed to customers for shipping and handling costs are recognized as revenue. Costs incurred to ship merchandise from warehouse facilities are recorded in cost of sales.

Net sales consist of gross sales less negotiated price allowances based primarily on volume purchasing levels, estimated returns, allowances for defective products, markdowns and other sales allowances for customer promotions and other cooperative advertising arrangements. Correspondingly, these allowances are recorded as reductions of gross accounts receivable.

Allowances for Doubtful Accounts, Sales Returns, Defective Products and Promotions

The Company reduces gross accounts receivable by an allowance for amounts it believes may become uncollectible. This allowance is an estimate based primarily on management’s evaluation of the customer’s financial condition in the context of current economic conditions, past collection history and aging of the accounts receivable balances. The provision for uncollectible accounts is included in selling, general and administrative expense in the statements of operations.

The Company also provides estimated allowances against revenues and accounts receivable for sales returns, defective products, charge-backs and co-operative promotional agreements in the same period that the related

51

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

revenue is recorded. The allowances are estimated utilizing historical information, maximum known exposures and other available information including current retailer inventory levels, sell-through of its retailers and distributors, current trends in retail for its products, changes in customer demand for its products and other related factors.

Accounts receivable are reported on the balance sheet net of all provided allowances.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and money market funds with original maturities of three months or less.

Fair Value of Financial Instruments

Fair values of the Company’s financial instruments, consisting of short-term money market funds and long-term investments in auction rate securities (“ARS”), reflect the estimates of amounts that would be either received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).

The Company recognizes impairments to the carrying values of its financial instruments when their fair values decline below their carrying values. A systematic methodology is employed on a quarterly basis that considers available quantitative and qualitative evidence in evaluating investments for potential impairment. If the cost of an investment exceeds its fair value, management evaluates, among other factors, general market conditions, the duration of and the extent to which the fair value is less than cost and the Company’s intent and ability to hold the investment. Further, the Company considers specific adverse conditions related to the financial health of and business outlook for the investees, rating agency actions, the overall financial health of the macro-economy and the financial markets, as well as the ability to liquidate the investments at par, given prevailing and anticipated circumstances. The Company retains qualified third parties to perform independent valuations of its ARS quarterly and considers these evaluations in its impairment evaluation process.

The Company bifurcates other-than-temporary impairments based on the portion of the loss related to credit factors and the portion of the loss that is not related to credit factors. The credit loss portion is the difference between the amortized cost of the security and the Company’s best estimate of the present value of the cash flows expected to be collected from the debt security. The noncredit loss portion is the residual amount of the other-than-temporary impairment. The credit loss portion is recorded as a charge to investment income, and the noncredit loss portion is recorded as a separate component of other comprehensive income. Prior to the second quarter of fiscal 2009, the entire other-than-temporary impairment charge was recognized in earnings for all debt securities. Subsequent recoveries in value are recorded to accumulated other comprehensive income.

Inventory Valuation

Inventories are stated at the lower of cost or market value, on a first-in, first-out basis. The Company records inventory costs on the balance sheet based on third-party contract manufacturer invoices, which include the contract manufacturers’ costs for materials, labor and manufacturing overhead related to our products. Inventory valuation primarily requires estimation of slow-moving, obsolete or excess products. The Company’s estimate of write-downs for slow-moving, excess and obsolete inventories is based on management’s review of on-hand inventories compared to their estimated future usage, product demand forecast, anticipated product selling prices,

52

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

the expected product lifecycle, and products planned for discontinuation. If actual future usage, demand for the Company’s products and anticipated product selling prices were less favorable than those projected by management, additional inventory write-downs would be required, resulting in a negative impact on the gross margin.

The Company monitors the estimates of inventory write-downs on a quarterly basis. When considered necessary, the Company makes additional adjustments to reduce inventory to its net realizable value, with corresponding increases to cost of sales.

Capitalized Product Costs

The Company capitalizes certain external costs related to the development of content for its learning products including design, artwork, animation, layout, editing, voice, audio and software included in the learning products. Such costs are capitalized once the technological feasibility of the product is established and costs are determined to be recoverable. Amortization of these costs begins when the products are initially released for sale and continues over a three-year life using the accelerated method referred to as the “sum of the years’ digits.” Capitalized content is included in capitalized product costs, net and the related amortization is included in cost of sales. The Company evaluates the future recoverability of capitalized amounts on a quarterly basis and recognizes write-downs of these amounts in the statements of operations as needed. Capitalized costs for products that are cancelled, abandoned or otherwise deemed impaired are charged to expense in the period of cancellation.

The Company capitalizes external website development costs (“website costs”), which primarily include third-party costs related to developing applications that are an integral component of certain products the Company markets, as well as costs incurred to develop or acquire and customize code for web applications, costs to develop HTML web pages or develop templates and costs to create initial graphics for the website that included the design or layout of each page. Website costs are amortized on a straight-line basis over two years. The Company evaluates the future recoverability of capitalized website costs on a quarterly basis and if an impairment loss is considered to have occurred during the period, records the loss in the statement of operations in the same period.

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation. Depreciation expense is calculated using the straight-line method over the estimated useful life of the assets, generally between two and three years, except for leasehold improvements, which are depreciated over the shorter of the estimated related useful life of the asset or the remaining term of the lease. Amortization of equipment under capital leases is included in depreciation expense. Depreciation expense for manufacturing tools is included in cost of goods sold.

Goodwill

The Company tests its goodwill for impairment at least annually, and between annual tests if indicators of potential impairment exist, using a two step test. When evaluating goodwill for impairment, the Company first compares the fair value of the reporting unit(s) to which the goodwill is allocated, to the carrying value of the unit(s) to determine if there is an impairment loss. If the fair value of the reporting unit exceeds its carrying value, goodwill allocated to that unit is considered not impaired. If the inverse is true, the unit is considered to be impaired and the Company must then complete the second step of the test which calls for a fair value analysis of

53

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

the individual assets and liabilities assigned to the reporting unit to determine the amount of impairment to record. Application of the goodwill impairment test requires significant judgment by management, including identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, determination of the fair value of each reporting unit and projections of future net cash flows, which projections are inherently uncertain.

The Company considers the results generated from using both of the following approaches to estimate the fair value of each relevant reporting unit to complete the first step of the impairment test:

1. The market approach is used to develop indications of fair value. This approach uses market values and revenue multiples of other publicly traded companies engaged in the same or similar lines of business as ours.

2. The discounted cash flow (“DCF”) methodology is used to develop an additional estimate of fair value. The DCF methodology recognizes that current value is premised on the expected receipt of future economic benefits. Indications of value are developed by discounting projected future net cash flows to their present value at a rate that reflects both the current return requirements of the market and the risks inherent in the specific investment.

The determination of whether goodwill is impaired involves numerous assumptions, estimates and the application of significant judgment. For the market approach, considerable judgment is required to select comparable companies and to estimate the multiples of revenues implied by their market values. For the DCF approach, management must exercise judgment in selecting an appropriate discount rate and must also make numerous assumptions in order to develop future business and financial forecasts and the related estimates of future net cash flows. Future net cash flows depend primarily on future sales of the Company’s products, which are inherently difficult to predict.

Research and Development Costs

Internal and external research and development costs incurred before a project reaches technological feasibility are expensed as incurred. External costs incurred after a project reaches technological feasibility are capitalized. Capitalized costs are amortized into cost of sales when the product is released to the market, generally using a three-year life and the “sum of the years’ digits” method. Capitalized research and development costs are reviewed for future recoverability on a quarterly basis. Impairment losses are charged to cost of sales in the period in which they occur.

Advertising Expense

Production costs of commercials and programming are expensed when the production is first aired. The Company’s direct costs of advertising, in-store displays and promotion programs are expensed as incurred.

Under arrangements with certain of its customers, the Company reduces the net selling price of its products as an incentive (sales allowances) for the customers to independently promote LeapFrog products for resale. If the benefits LeapFrog receives from the customer in these cooperative sales/advertising arrangements are not specifically identifiable, the Company recognizes the costs as a direct reduction of revenue earned from the customer during the period, with a corresponding reduction in accounts receivable. In those cases where the benefits received from the customer are sufficiently separable and can be specifically identified, these costs are included as advertising expense during the fiscal period in which the advertisements are run.

54

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

Royalty Expense

The Company licenses certain of its content from third parties under exclusive and nonexclusive agreements, which permit the Company to utilize characters, stories, illustrations and trade names throughout specified geographic territories. Royalty payments are typically calculated as a percentage of the unit product selling price. Royalty expense is recorded when the products are shipped to a customer and is reported under cost of sales in the statements of operations.

Derivative Financial Instruments

The Company transacts business in various foreign currencies, primarily in the British Pound, Canadian Dollar, Euro and Mexican Peso. As a safeguard against financial exposure from potential adverse changes in currency exchange rates, the Company engages in a foreign exchange hedging program. The program utilizes foreign exchange forward contracts that generally settle within 30 to 60 days to enter into fair value hedges of foreign currency exposures of underlying non-functional currency assets and liabilities that are subject to re-measurement. The exposures are generated primarily through inter-company sales in foreign currencies and through U.S. Dollar-denominated sales by the Company’s foreign affiliates. The hedging program is designed to reduce, but does not always eliminate, the impact of the re-measurement of balance sheet items due to movements of currency exchange rates.

LeapFrog does not use forward exchange hedging contracts for speculative or trading purposes. All forward contracts are carried on the balance sheet at fair value as assets or liabilities. The estimated fair values of forward contracts are based on quoted market prices for similar assets and liabilities. The corresponding gains and losses are recognized immediately in earnings as an offset to the changes in fair value of the assets or liabilities being hedged. These gains and losses are included in “other income (expense)” in the statements of operations.

The Company believes that the counterparties to these contracts, multinational commercial banks, are creditworthy; thus, the risks of counterparty nonperformance associated with these contracts are not considered to be significant. The Company updates its evaluation of the creditworthiness of its counterparties on a quarterly basis. Notwithstanding the Company’s efforts to manage foreign exchange risk, there can be no assurance that its hedging activities will adequately protect against the risks associated with foreign currency fluctuations.

Income Taxes

We account for income taxes using the liability method. Under the liability method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The determination of the Company’s income tax assets, liabilities and expense requires management to make certain estimates and judgments in the calculation of tax benefits, tax credits and deductions. Significant changes in these estimates may result in increases or decreases in the tax provision or benefit in subsequent periods.

Valuation allowances are provided when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Determination of whether or not a valuation allowance is warranted requires consideration of many factors, including prior earnings history, expected future earnings, carryback and carryforward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset.

The financial statements also include accruals for the estimated amounts of probable future assessments that may result from the examination of federal, state or international tax returns. The Company’s tax accruals, tax

55

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

provision, deferred tax assets or income tax liabilities may be adjusted if there are changes in circumstances, such as changes in tax law, tax audits or other factors, which may cause management to revise its estimates. The amounts ultimately paid on any future assessments may differ from the amounts accrued and may result in an increase or reduction to the effective tax rate in the year of resolution.

Stock-Based Compensation

Pursuant to the Company’s 2002 Equity Incentive Plan and its 2002 Non-Employee Directors’ Stock Award Plan (collectively, the “Plans”), the Company issues stock options, restricted stock awards and restricted stock units to its employees, directors and occasionally to non-employee service providers, to purchase shares of the Company’s Class A common stock. Share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the applicable vesting period of the stock award (generally four years) using the straight-line method.

The Company’s management reviews and updates its estimates of the variables used to calculate grant date fair values of the awards quarterly and adjusts its valuation model as necessary.

Comprehensive Loss

Comprehensive loss is comprised of the Company’s net loss, gains and losses on the translation of foreign currency denominated financial statements and temporary gains and non-credit losses on investments.

Net Income (Loss) per Share

Basic earnings per share is computed by dividing net income by the weighted average number of shares of Class A and Class B common stock (“common shares”) outstanding during the reporting period. Diluted earnings per share is computed by dividing net income by the combination of dilutive common share equivalents, which comprises common shares issuable under the Company’s share-based compensation plans, and the weighted average number of common shares outstanding during the reporting period. Dilutive common share equivalents include in-the-money common share equivalents; whether common share equivalents are “in-the-money” is calculated based on the average share price for each period using the treasury stock method. Under the treasury stock method, the exercise price of an option, the amount of compensation cost, if any, for future service that the Company has not yet recognized, and the estimated tax benefits that would be recorded in paid-in capital, if any, when the option is exercised are assumed to be used to repurchase shares in the current period.

Recently Issued Accounting Guidance

On July 1, 2009, the FASB Accounting Standards Codification (ASC) became the exclusive reference for nongovernmental accounting principles generally accepted in the United States for use in financial statements issued for interim and annual periods ended after September 15, 2009, except for SEC rules and interpretive releases, which also are authoritative GAAP for SEC registrants. Accordingly, all references to legacy guidance issued under previously recognized authoritative literature have been removed or replaced by the relevant sections of the ASC.

Recently Adopted Guidance

In April of 2009, the FASB issued guidance codified within ASC 320 “Investments—Debt and Equity Securities” (ASC 320). This guidance amended the other-than-temporary impairment guidance in ASC 320 for

56

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

debt securities to make it more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The guidance did not amend existing recognition and measurement guidance related to other-than-temporary impairment of equity securities. It was effective for interim reporting periods ending after June 15, 2009. Adoption of this guidance in the second quarter of 2009 had an immaterial impact on the way the Company records the credit portion of other-than-temporary impairments related to its investments in auction rate securities.

In May of 2009, the FASB issued guidance codified within ASC 855 “Subsequent Events.” This guidance established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance was effective for interim or annual reporting periods ending after June 15, 2009. Adoption of this guidance in the second quarter of 2009 did not impact the Company’s consolidated financial statements but did require additional disclosures.

Recently Issued Accounting Guidance Not Yet Adopted

In January of 2010, the FASB issued Accounting Standards Update (ASU) 2010-06, “Fair Value Measures and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” This guidance is intended to improve transparency with respect to recurring and nonrecurring fair value measurements through new disclosure requirements for transfers in and out of Level 1 and Level 2 and for activity in Level 3. Clarification of existing disclosure requirements is also provided. A majority of this guidance will be effective for interim or annual reporting periods ending after December 15, 2009. The remainder of the guidance will be effective for fiscal and interim periods beginning after December 31, 2010. Adoption of this guidance in 2010 and 2011 is not expected to impact the Company’s consolidated financial statements but may require additional disclosures.

2. Fair Value of Financial Instruments

Fair value is based on exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:

• Level 1 includes financial instruments for which quoted market prices for identical instruments are available in active markets. The Company’s Level 1 assets consist of money market funds with original maturities of three months or less. These assets are considered highly liquid and are stated at cost which approximates market value.

• Level 2 includes financial instruments for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument. Such inputs could be quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets with insufficient volume or infrequent transactions (less active markets) or model-driven valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data, including market interest rate curves, referenced credit spreads and pre-payment rates. The Company’s Level 2 assets and liabilities consist of outstanding foreign exchange forward contracts used to hedge its exposure to certain foreign currencies, including the British Pound, Canadian Dollar, Euro,

57

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

and Peso. The Company’s outstanding foreign exchange forward contracts, all with maturities of approximately one month, had notional values of $13,277, and $21,890 at December 31, 2009 and 2008, respectively. The fair market values of these instruments as of the same periods were $160 and $540, respectively. The fair value of these contracts was recorded in prepaid expenses and other current assets for all periods presented.

• Level 3 includes financial instruments for which fair value is derived from valuation techniques, including pricing models and discounted cash flow models, in which one or more significant inputs are unobservable, including the Company’s own assumptions. The Company’s Level 3 assets consist of investments in auction rate securities (ARS). Historically, liquidity for ARS was provided via an auction process that reset the applicable interest rate generally every 28 days, allowing investors to either roll over their investments or sell them at par. As a result of liquidity issues in the global credit and capital markets, auctions for all of the Company’s ARS began failing in the fourth quarter of 2007, when sell orders exceeded buy orders. Currently, there is no active market for these securities; therefore, they do not have readily determinable market values. The Company has engaged a third-party valuation firm to estimate the fair value of the ARS investments using a discounted cash flow approach, which was corroborated by a separate and comparable discounted cash flow analysis prepared internally. Based on this valuation, the ARS investments were valued at $3,685 at December 31, 2009, which represents an overall decline in value of $8,315 from par. The assumptions used in preparing the discounted cash flow model are based on data available as of December 31, 2009 and include estimates of interest rates, timing and amount of cash flows, credit and liquidity premiums, and expected holding periods of the ARS. Given the current market environment, these assumptions are volatile and subject to change, and therefore could result in significant changes to the estimated fair value of the ARS. Contractual maturity for the Company’s ARS investments ranges from 2025 to 2050.

The following table presents the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis as of December 31, 2009 and 2008:

	Estimated Fair Value Measurements
	Carrying Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2009:
Financial Assets:
Money market funds	$	42,801	$	42,801	$	—	$	—
Long-term investments		3,685		—		—		3,685
Forward currency contracts		160		—		160		—
Total financial assets	$	46,646	$	42,801	$	160	$	3,685
December 31, 2008:
Financial Assets:
Money market funds	$	53,502	$	53,502	$	—	$	—
Forward currency contracts		540		—		540		—
Long-term investments		4,962		—		—		4,962
Total financial assets	$	59,004	$	53,502	$	540	$	4,962

58

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

For the years ended December 31, 2009 and 2008, the Company accounted for gains and losses incurred on its ARS investment as follows:

	Long-term Investments			Accumulated Other Comprehensive Income			Accumulated Losses on Investments
	(Balance Sheets)			(Balance Sheets)			(Statements of Operations)
Balance at December 31, 2007	$	10,925		$	(598	)	$	(2,477	)
Loss for the year ended December 31, 2008		(5,963	)		—			(5,963	)
Temporary loss transferred to other-than-temporary		—			598			(598	)
Balance at December 31, 2008	$	4,962		$	—		$	(9,038	)
Gain (loss) for the year ended December 31, 2009		143			574			(431	)
Sale of ARS investments		(1,420	)		(139	)		143
Balance at December 31, 2009	$	3,685		$	435		$	(9,326	)

During the year ended December 31, 2009, there was a $431 decline in the Company’s estimated cash flows expected to be collected on its ARS investments, of which $409 was determined to be credit-related and therefore reported as a reduction to earnings. Also during the year, the Company tendered one of its ARS investments, which had been written down by $580 in prior years from the original par value of $2,000, resulting in a $143 gain.

The impairment losses recorded in 2008 include $598 of losses that had previously been accounted for as temporary at December 31, 2007 and recorded in “accumulated other comprehensive income (loss)” at that date. The loss of $598 was charged as an other-than-temporary loss to the statement of operations in the second quarter of 2008, as credit market conditions throughout the first half of 2008 worsened. The Company accounted for all losses incurred in 2008 as other-than-temporary in the statement of operations.

3. Inventories

The Company’s inventories, stated on a first-in, first-out basis at the lower of cost or market as of December 31, 2009 and 2008 were as follows:

	December 31,
	2009		2008
Raw materials	$	1,739	$	5,521
Work in process		—		1,621
Finished goods		26,441		49,795
Total	$	28,180	$	56,937

As of September 30, 2009, the Company’s agreements with contract manufacturers were modified such that title and risk of loss pass to the Company upon delivery of finished goods. As a result, the Company no longer holds title to any work-in-progress inventory. Related work in progress inventory held by the contract manufacturers approximated $4,590 as of December 31, 2009.

59

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

During 2009, 2008 and 2007, the Company recorded net sales of inventory written down in the previous year resulting in a benefit to gross margin of $2,899, $1,016 and $4,853, respectively.

At December 31, 2009 and 2008, the Company accrued liabilities for cancelled purchase orders totaling $0 and $751, respectively. The inventories related to these purchase orders are returned to the Company and recorded either in raw materials or work in process.

4. Property and Equipment

As of December 31, 2009 and 2008, property and equipment consisted of the following:

	December 31,
	2009			2008
Tooling, cards, dies and plates	$	14,053		$	17,331
Computers and software		30,920			38,515
Equipment, furniture and fixtures		3,939			5,399
Leasehold improvements		4,226			6,179
		53,138			67,424
Less: accumulated depreciation		(38,870	)		(47,813	)
Total	$	14,268		$	19,611

Property and equipment, with the exception of leasehold improvements is depreciated on a straight-line basis over a period of two to three years. Leasehold improvements are depreciated over the shorter of their useful life or the term of the lease. Depreciation expense for tooling cards, dies and plates and manufacturing equipment is charged to cost of sales in the statement of operations as the expense relates directly to the product manufacturing process. The expense charged to cost of sales was $3,193, $2,486 and $4,307 for the three years ended December 31, 2009, 2008 and 2007, respectively. During the years ended December 31, 2009 and 2008, the Company retired fully depreciated tooling cards, dies and plates with a cost of $4,301 and $7,524, respectively.

Depreciation expense related to the remainder of property and equipment is charged to selling, general and administrative expense in the statements of operations. The expense charged to selling, general and administrative expense was $7,395, $7,631 and $7,158 for the three years ended December 31, 2009, 2008 and 2007, respectively.

At December 31, 2009 and 2008 equipment, furniture and fixtures included $10 and $33, respectively, of assets acquired under capital leases. The year-to-date accumulated depreciation on these assets was $23 and $288 at December 31, 2009 and 2008, respectively. The related capital lease obligation is reflected on the balance sheet in accrued liabilities and deferred revenue.

5. Capitalized Product Costs

The Company’s capitalized product costs include third-party licensed content costs, consisting primarily of design, artwork, animation, layout, editing, voice, audio and software included in its learning products and third-party consulting and design costs related to the Company’s website. The Company’s website has an application designed specifically for use with certain of its products.

60

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

	December 31,
	2009			2008
Content costs	$	28,309		$	23,502
Website development costs		4,945			13,998
Less accumulated amortization		(18,337	)		(21,273	)
Total	$	14,917		$	16,227

The amortization expense related to content is charged to cost of sales in the statement of operations and totaled $6,896, $8,674 and $5,840 for the three years ended December 31, 2009, 2008 and 2007, respectively. Amortization expense related to website development is charged to selling, general and administrative expenses and totaled $2,391, $1,333 and $885 for the three years ended December 31, 2009, 2008 and 2007, respectively.

The Company performs a quarterly impairment evaluation of capitalized product development costs. The Company’s evaluation in 2009 resulted in minor impairments, while the 2008 evaluation identified capitalized costs related to several platforms that had recently been retired or discontinued. Accordingly, the Company accelerated the amortization of these costs, resulting in an increase in cost of sales in the United States reporting unit of $279, $2,197 and $1,716 in 2009, 2008 and 2007, respectively. Additionally, the Company wrote off $11,112 of fully amortized assets no longer in use in 2009.

6. Goodwill

The Company’s goodwill is related to its 1997 acquisition of substantially all the assets and business of our predecessor, LeapFrog RBT, and its 1998 acquisition of substantially all the assets of Explore Technologies. All of the goodwill is allocated to the Company’s United States reporting unit.

The Company performed the annual test for impairment as of December 31, 2009 and 2008 and concluded that its goodwill balance of $19,549 had not been impaired.

7. Accrued Liabilities

The Company’s accrued liabilities as of December 31, 2009 and 2008 were as follows:

	December 31,
	2009		2008
Royalties payable	$	10,581	$	9,037
Advertising and promotion		9,549		11,054
Employee-related expenses		4,210		8,455
Manufacturing and warehousing		3,968		3,945
Marketing, consulting and web-related		2,746		2,642
Deferred revenue		1,770		1,828
One-time termination benefits		1,587		1,401
Facilities-related closure costs		234		534
Other		5,176		5,700
Total	$	39,821	$	44,596

61

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

The total amount of royalty expense related to third-party license agreements was $15,711, $19,315, and $21,768, for 2009, 2008 and 2007, respectively.

During the fourth quarter of 2008, the Company implemented a company-wide reduction in force resulting in a significant reduction in employee-related expenses accrued at December 31, 2009 as compared to December 31, 2008. In addition, the bonus accrual for 2009 was significantly lower than for 2008 as performance targets were not met.

One-time termination benefits accrued at December 31, 2009 were as a result of consolidation of the Company’s France and United Kingdom administrative operations and the termination of several senior-level employees. The liabilities were recorded at fair value, which equaled the stated value of the benefits.

In the fourth quarter of 2008, the Company ceased using its school-related facility in Austin, Texas related to its former School segment and one of four suites in its Emeryville, California headquarters and vacated both office sites. The fair values of future lease expenses were calculated based on the net of the remaining contractual lease rental payments reduced by estimated sublease rentals that management believes could be reasonably obtained for the facilities, discounted to present value using the Company’s credit-adjusted risk-free rate of 5.37%, and then offset by deferred rent credits. During the second quarter of 2009, the Company sublet the vacated suite at its headquarters to a third party. As of December 31, 2009 and 2008, the facilities closure liabilities were $495 and $3,664, respectively, of which, $234 and $1,935 were included in current liabilities and $261 and $1,729 were included in other long-term liabilities.

8. Income Taxes

The Company’s loss before taxes included the following components:

	Years Ended December 31,
	2009			2008			2007
United States	$	(10,399	)	$	(63,509	)	$	(117,751	)
Foreign		523			(2,971	)		18,998
Total	$	(9,876	)	$	(66,480	)	$	(98,753	)

62

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

The components of the provision for (benefit from) income taxes were as follows:

	Years Ended December 31,
	2009			2008			2007
Current:
Federal	$	(367	)	$	(774	)	$	—
State		412			83			—
Foreign		(260	)		1,108			3,198
Total current		(215	)		417			3,198
Deferred:
Federal	$	85		$	854		$	411
State		43			43			63
Foreign		411			(874	)		(2,197	)
Total deferred		539			23			(1,723	)
Non-current
Federal	$	(7,602	)	$	402		$	346
State		(631	)		157			519
Foreign		721			875			1,383
Total non-current		(7,512	)		1,434			2,248
Grand total	$	(7,188	)	$	1,874		$	3,723

The differences between the provision for income taxes and the income tax determined by applying the statutory federal income tax rate of 35% were as follows:

	Years Ended December 31,
	2009			2008			2007
Income tax (benefit) at the statutory rate	$	(3,456	)	$	(23,268	)	$	(34,564	)
State income taxes		(219	)		283			582
Foreign operations		(137	)		588			(5,648	)
Interest and penalties		926			1,288			932
Nondeductible items		320			1,534			164
Research and development credits		(474	)		(600	)		(505	)
Release of unrecognized tax benefit		(7,804	)		—			—
IRS refunds		—			(1,918	)		—
Other		(32	)		1,965			1,625
Less: valuation allowance		3,688			22,002			41,137
Income tax provision (benefit)	$	(7,188	)	$	1,874		$	3,723

State income tax expense above included a valuation allowance of $1,080, $3,225 and $6,635 for 2009, 2008 and 2007, respectively. State income tax expense also included interest and penalties of $51, $157 and $124 for 2009, 2008 and 2007, respectively. The tax benefit for 2009 includes a $7,804 benefit from the recognition of previously unrecognized tax benefits including $3,143 of accrued interest, due to expiring statute of limitations.

Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $17,941 at December 31, 2009. The earnings are considered to be permanently reinvested and, accordingly, no deferred United States income taxes have been provided thereon. Upon distribution of these earnings in the form of

63

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

dividends or otherwise, the Company would not be subject to U.S. income tax due as any tax liability generated would be offset by net operating loss carryforwards.

Deferred income taxes reflect the impact of “temporary differences” between asset and liability amounts for financial reporting purposes and such amounts as determined based on existing tax laws. The tax effect of temporary differences and carryforwards which give rise to deferred tax assets and liabilities are as follows:

	December 31,
	2009			2008
Deferred tax assets:
NOL and credits carryover	$	96,747		$	88,709
Inventory and other reserves		5,981			16,424
Depreciation and amortization		14,699			7,644
Other		17,993			18,097
Less: valuation allowance		(132,018	)		(127,122	)
Total deferred tax assets	$	3,402		$	3,752
Deferred tax liabilities:
Goodwill and tax depreciation		2,993			2,637
Total deferred tax liabilities	$	2,993		$	2,637

Starting in 2006, the Company recorded a non-cash charge to establish a valuation allowance against its gross domestic deferred tax assets. The amount represents 100% of the domestic deferred tax assets as set out in the table below.

	December 31,
	2009			2008
Current deferred tax asset	$	8,286		$	18,627
Less: valuation allowance		(8,286	)		(18,627	)
Net total	$	—		$	—
Non-current deferred tax asset	$	123,732		$	108,496
Less: valuation allowance		(123,732	)		(108,496	)
Net total	$	—		$	—

Due to the Company’s domestic net operating losses for the most recent three year period, the Company has established a full valuation allowance against its domestic deferred tax assets. The valuation allowance in both 2009 and 2008 includes $8,503 related to excess tax benefits of stock option deductions prior to the adoption of ASC Topic No. 718. The benefits will increase additional paid-in capital when realized. The Company intends to maintain a valuation allowance until sufficient positive evidence exists to support its reversal. Should the Company determine that it would be able to realize all or part of its deferred tax asset in the future, an adjustment to the valuation allowance would be recorded in the period such determination was made. The majority of the Company’s domestic deferred tax assets generally have 10 to 20 years until expiration or indefinite lives.

As of December 31, 2009, the Company had federal net operating loss carryforwards of $215,436 which will expire between 2025 through 2029. State net operating loss carryforwards totaling $223,518 as of December 31,

64

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

2009, will expire in years 2010 through 2030. In addition, the Company had $2,215 related to excess tax benefits of stock option deductions which are not included in the net operating loss carryforward amounts above since they have not met the required realization criteria. The tax benefits from these deductions will increase additional paid-in capital when realized. As of December 31, 2009, the Company also had federal and California research and development credit carryforwards of $3,915 and $6,112, respectively. The federal research carryforwards will begin to expire in 2024, while the California research credits can be carried forward indefinitely. In addition, the Company has $3,955 in federal foreign tax credits that will begin expiring in 2018.

On January 1, 2007, the Company adopted new accounting provisions that changed the accounting for uncertainty in income taxes including the way companies should recognize, measure, present, and disclose uncertain tax positions in their financial statements. The new provisions allow recognition of the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. The provisions also provide guidance on the reversal of previously recognized tax positions, balance sheet classifications, accounting for interest and penalties associated with tax positions, and income tax disclosures. Initial adoption of the provisions resulted in an increase of $7,284 in the liability for unrecognized tax benefits as of January 1, 2007. Of this amount, $635 was accounted for as an increase in the January 1, 2007 opening accumulated deficit. The remaining amount decreased tax loss carryforwards in the United States, which are fully offset by a valuation allowance

The changes in the balance of gross unrecognized tax benefits, during the years ended December 31, 2009 and 2008 are set out in the following table:

	December 31,
	2009			2008
Balance at beginning of year	$	28,991		$	30,727
Gross increase—tax positions taken during a prior period		978			1,365
Gross decrease—tax provisions taken during a prior period		(1,214	)		(3,591	)
Tax positions taken during the current period		633			1,415
Decreases in the unrecognized tax benefits relating to statute of limitations expiration		(7,308	)		—
Decreases in the unrecognized tax benefits relating to settlements with taxing authorities		—			(925	)
Balance at end of year	$	22,080		$	28,991

The balances of gross unrecognized tax benefits at December 31, 2009 and 2008 are $22,080 and $28,991 respectively, of which $8,044 and $15,769 would affect our effective tax rate if recognized.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. Income tax expense for the years ended December 31, 2009, 2008 and 2007 includes $926, $1,821 and $1,091, respectively, of interest and penalties. As of December 31, 2009 and 2008 we had approximately $2,648 and $4,964, respectively, of accrued interest and penalties related to uncertain tax positions.

The Company is monitoring the statutes of limitation for the assessment and collection of income taxes. The Company believes it is reasonably possible that the total amount of unrecognized tax benefits in the future could

65

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

decrease by up to $226 related to its foreign operations over the course of the next twelve months due to expiring statutes of limitations. Of this amount, up to $226 could be recognized as a tax benefit and affect the effective tax rate.

Open and Resolved Tax Matters

The Company files income tax returns in the U.S. federal, various states and foreign jurisdictions. The Company has substantially concluded all U.S. federal and state income tax matters through 1999. During the quarter ended June 30, 2008, the Internal Revenue Service (“IRS”) completed its audit of the Company’s research and development carryback claims for the period of 2001-2003. As a result of the settlement, the Company received a $5,238 refund from the IRS in July 2008 and recognized $925 of previously unrecognized tax benefit. The total 2008 tax benefit attributable to this refund was $1,918, including interest paid by the IRS.

In 2009, the Mexico taxing authority notified the Company of an income tax audit for the 2007 tax year. The state of California (“state”) has notified the Company of a pending examination related to its research and experimentation credits claimed for the tax years 2002 and 2003; however, the Company has not been notified when the audit will commence. The outcome of the Mexico and state audit are not yet determinable.

With respect to open matters, the outcomes are not yet determinable. However, management does not anticipate that any adjustments would result in a material change to the Company’s results of operations, financial conditions or liquidity.

9. Borrowings Under Credit Agreements

On August 13, 2009, the Company, certain financial institutions (“Lenders”) and Bank of America, N.A., as agent for the Lenders (the “Agent”) entered into an Amended and Restated Loan and Security Agreement for a $75,000 asset-based revolving credit facility (“Loan Agreement”). The maturity date of the facility is August 13, 2012, at which time any borrowings under the facility must be repaid. The Company may make voluntary prepayments of borrowings at any time. Provided there is no default under the Loan Agreement and subject to availability of additional credit, the Company may elect, without the consent of any of the Lenders, to increase the size of the credit facility under the Loan Agreement up to an aggregate of $150,000. Availability under this agreement was $75,000 as of December 31, 2009.

This new credit facility supersedes and replaces the Company’s previous $100,000 credit facility dated November 8, 2005 which would have otherwise expired in November 2010 and was terminated as of August 13, 2009 in connection with signing of the Loan Agreement.

The Loan Agreement includes the following terms, which are substantially similar to those of the Terminated Agreement:

• The borrowing availability varies according to the levels of the Company’s accounts receivable, inventory, and cash and investment securities deposited in secured accounts with the Agent or other Lenders. Subject to the level of this borrowing base, the Company may make and repay borrowings from time to time until the maturity of the facility.

• The interest rate is, at the Company’s election, the Agent’s prime rate (or base rate) or a LIBOR rate defined in the Loan Agreement, plus, in each case, an applicable margin. The applicable margin for a loan depends on the average monthly usage and the type of loan.

• The Loan Agreement contains customary events of default, including payment failures; failure to comply with covenants; failure to satisfy other obligations under the credit agreements or related

66

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

documents; defaults in respect of other indebtedness; bankruptcy, insolvency and inability to pay debts when due; material judgments; change-in-control provisions and the invalidity of the guaranty or security agreements. If any event of default under the Loan Agreement occurs, the Agent or the other Lenders may terminate their respective commitments, declare immediately due all borrowings under the facility and foreclose on the collateral. A cross-default provision applies if a default occurs on other indebtedness in excess of $5,000 and the applicable grace period in respect of the indebtedness has expired, such that the lender of, or trustee for, the defaulted indebtedness has the right to accelerate.

• The Company has granted a security interest in substantially all of its assets to the Agent as security for its obligations under the facility.

• The Company is required to maintain a ratio of EBITDA to fixed charges, each as defined in the Loan Agreement, of at least 1.1 to 1.0 when the covenant is required to be tested (compared to 1.0 to 1.0 under the Terminated Agreement). As with the Terminated Agreement, the ratio is measured only if certain borrowing-availability thresholds are not met.

Under the Loan Agreement for the new credit facility, the interest rate is, initially, for LIBOR rate loans, 4.00% over the LIBOR rate or, for base rate loans, 3.00% over the Agent’s prime rate. After six months the interest rate will vary based on borrowing availability.

10. Employee Benefit Plan

LeapFrog sponsors a defined contribution plan under Section 401(k) of the Internal Revenue Code. Effective September 1, 2005, the 401(k) plan provides that employees may defer up to 100% of their annual compensation, not to exceed the IRS maximum contribution limit. LeapFrog matches 50% of employee contributions up to the lesser of $2 or 6% of the participant’s compensation per plan year, which vests over three years. During 2009, 2008 and 2007, the Company recorded total compensation expense of $578, $799 and $592, respectively, related to the defined contribution plan.

11. Stock-Based Compensation

Pursuant to the Company’s 2002 Equity Incentive Plan and its 2002 Non-Employee Directors’ Stock Award Plan, (collectively, the “Plans”), the Company issues stock options, restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) to its employees, directors and occasionally to non-employee service providers, to purchase shares of the Company’s Class A common stock. The maximum term of the stock-based awards is 10 years. The required vesting period is generally four years. Effective February 28, 2007, the Company terminated its performance share program after conducting a full review of the total compensation components for key executives. There were no performance shares outstanding at December 31, 2009 and 2008. The Company also has an employee stock purchase plan (“ESPP”).

On August 26, 2009, the stockholders of the Company approved a stock option exchange program, as described in the Company’s definitive proxy statement filed with the SEC on July 15, 2009. Under the option exchange program (“the Offer”), the Company offered to exchange, for new lower-priced options, certain outstanding options previously granted under either our 2002 Equity Incentive Plan or 2002 Non-Employee Director Stock Award Plan or under two non-plan options held by our Chief Executive Officer. Option holders eligible to participate in the Offer to exchange tendered, and the Company accepted for cancellation, options to purchase an aggregate of 6,372 shares of the Company’s Class A common stock from 214 participants, representing 96.5% of the total shares of Class A common stock underlying options eligible for exchange in the Offer.

67

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

In accordance with the Offer, except as described below for the Company’s CEO and members of the board of directors, the number of shares subject to each new option grant was determined using an exchange ratio designed to maintain approximately the same fair value, for accounting purposes, of the new option grant (at the time of grant) as the fair value of the corresponding eligible option grants surrendered for exchange (at the time immediately prior to cancellation). Accordingly, the Company granted new options to purchase an aggregate of 3,595 shares of Class A common stock in exchange for the cancellation of the tendered eligible options.

The exchange ratios were calculated using a Monte-Carlo simulation based on the closing price of the Class A common stock as reported on the New York Stock Exchange (the “NYSE”) for the business day prior to the expiration date of the Offer on August 26, 2009, which was $3.79 (the “Market Price”), as well as other valuation assumptions such as expected term, volatility, risk-free interest rate, and probabilities of exercise and forfeiture. The exercise price per share of the new options other than those granted to the CEO and directors was the Market Price. In the case of any new option grants issued to the Company’s CEO and directors, while the exercise price of such options was $6.25, the exchange ratio was determined using the Market Price to calculate the value of the new option grants, with the result that these individuals received grants covering fewer shares than they would have received had the value of the new option grants been calculated using $6.25. The exchange was designed to result in no additional compensation expense.

During the second quarter of 2009, the Company made two stock option grants to certain management employees and board members to purchase an aggregate of 2,705 shares of our Class A common stock that vest based upon a service condition and a market condition. The fair value of stock options with a market condition is estimated on the date of the grant using a Monte-Carlo simulation. The simulation generates a defined number of stock price paths to develop a reasonable estimate of future expected stock price ranges based on vesting requirements and the assumed exercise behavior of the grants. The model assumes options will be exercised uniformly over the remaining life if and when the vesting and market conditions are met. All other assumptions are consistent with option grants that vest solely upon a service condition.

On June 5, 2008, the stockholders of the Company approved a stock option exchange program, as described in the Company’s definitive proxy statement for its 2008 Annual Meeting of Stockholders, filed with the SEC on April 21, 2008. Under the option exchange program (“Program”) the Company offered to exchange, for new lower-priced options, certain outstanding options previously granted under the Company’s Plans and under two special inducement grants awarded to the Company’s Chief Executive Officer outside of the Company’s Plans upon his joining the Company. Option holders eligible to participate in the Program tendered, and the Company accepted for cancellation, eligible options to purchase an aggregate of 4,936 shares of the Company’s Class A common stock, and issued stock options to purchase 3,669 shares of the Company’s Class A common stock in exchange. In accordance with the terms of the Program, the number of shares subject to each new option grant was determined using an exchange ratio designed to result in the fair value of the new option grant (at the time of grant) being equal to the fair value of the eligible option grant tendered for exchange (at the time immediately prior to cancellation of the eligible option). Accordingly, the Company did not incur any additional stock-based compensation expense related to the Program.

The Company is authorized to issue up to a total of 24,000 shares of Class A common stock for any of the types of awards authorized under the Plans. At December 31, 2009 the remaining available for future grants was 4,691 for stock-based awards and 1,403 for the ESPP.

68

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

The Company accounts for stock-based compensation as follows:

Stock Options:

Stock-based compensation expense is calculated based on the fair value of each award on the grant date. In general, the fair value for stock option grants with only a service condition is estimated using the Black-Scholes option pricing model. The fair value for stock option grants with both a service and market condition is estimated using the Monte-Carlo simulation.

The assumptions underlying the calculation of grant date fair value of the stock options using the Black-Sholes option pricing model comprise:

• Volatility: The expected stock price volatility is based on a consideration of our stock’s historical and implied volatilities. Prior to July 1, 2008 the weighted-average expected volatility for the Company’s stock awards was calculated based on the weighted average of three stock market factors: the price volatility of LeapFrog’s common shares, LeapFrog’s implied volatility as indicated by our publicly traded long-term options, Long-Term Equity Anticipations Securities (“LEAPS”), with expiration dates as far as three years in the future, and competitor volatility. As of June 30, 2008, management believed it had sufficient historical financial market data to calculate volatility based on LeapFrog market data only.

• Risk-Free Interest Rate: The risk-free interest rate is based on the yield of the treasury security at grant date with a maturity closest to the expected term of the stock option.

• Expected Term: The expected life of the options represents the period of time the options are expected to be outstanding. Due to reductions in force, the Company does not yet have sufficient reliable historical data on exercise behavior, post-vesting termination patterns, options outstanding and future expected exercise behavior, and, as a result, it calculates expected life using a simplified method.

• Expected Dividend: The dividend yield is zero as the Company does not pay dividends.

• Annual Forfeiture Rate: When estimating pre-vesting forfeitures, the Company considers voluntary termination behavior as well as potential future workforce reduction programs. The Company reflects the impact of forfeitures for stock options in expense only when they actually occur based on analyses showing that the majority of all stock options vest on a monthly basis. With regard to restricted stock units, a forfeiture assumption of approximately 20% is currently being used. A zero forfeiture rate is used for restricted stock awards. These assumptions reflect historical and expected future forfeiture rates.

The underlying assumptions of a Monte-Carlo simulation are very similar to the Black-Scholes option pricing model in that they are both distributions of future stock price scenarios. However, a Monte-Carlo simulation allows for more customized modeling than the Black-Scholes formula which utilizes a few simplifying assumptions allowing it to be a closed-end formula.

69

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

The assumptions used in the Black-Scholes option valuation model and the weighted average grant date fair value per share for the three years ended December, 31, 2009, 2008 and 2007 were as follows:

	2009			2008			2007
Estimate of fair value for total awards using Black-Scholes	$	2,497		$	50,336	*	$	6,660
Expected term (years)		6.12			4.95			6.25
Volatility		51.8	%		41.1	%		40.0	%
Risk-free interest rate		2.5	%		3.1	%		4.5	%
Expected dividend yield		0	%		0	%		0	%

* Fair value in 2008 includes $33,433 for options granted in June 2008 pursuant to the stock option exchange program.

The fair value for the stock option grants with both a service and market condition is estimated using the Monte-Carlo simulation with the following weighted average assumptions:

	2009			2008	2007
Estimate of fair value for total awards using Monte-Carlo	$	12,955		n/a	n/a
Expected term (years)		3.25		n/a	n/a
Volatility		55.0	%	n/a	n/a
Risk-free interest rate		1.52	%	n/a	n/a
Expected dividend yield		0	%	n/a	n/a

RSUs and RSAs:

RSAs and RSUs are payable in shares of the Company’s Class A common stock. The fair value of these stock-based awards is equal to the closing market price of our stock on the trading day immediately prior to the date of grant. The grant date fair value is recognized on a straight-line basis in compensation expense over the vesting period of these stock-based awards, which is generally four years.

Non-Employee Stock-Based Awards:

Stock-based compensation arrangements to non-employees are accounted for using a fair value approach. The compensation costs of these arrangements are subject to re-measurement over the vesting terms.

The Company non-calculates employee stock-based compensation expense based on awards ultimately expected to vest and reduces compensation expense as necessary for estimated forfeitures. Stock-based compensation expense is a non-cash charge to employee compensation expense and a credit to additional paid-in capital.

70

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

The following table summarizes stock-based compensation expense charged to selling, general and administrative (“SG&A”) and research and development (“R&D”) expense for the three years ended December 31, 2009, 2008 and 2007.

	Years Ended December 31,
	2009		2008		2007
SG&A:
Stock options	$	7,952	$	7,069	$	6,510
RSUs/RSAs		1,316		2,498		2,956
Total SG&A		9,268		9,567		9,466
R&D:
Stock options		769		721		604
RSUs/RSAs		659		821		602
Total R&D		1,428		1,542		1,206
Total expense	$	10,696	$	11,109	$	10,672

Stock-based compensation expense related to RSUs and RSAs is calculated based on the market price of The Company’s common stock on the grant date. The total market value of restricted stock unit and stock awards granted in 2009, 2008 and 2007 as measured on the grant date was $147, $2,666, and $5,465, respectively.

For the years ended December 31, 2009, 2008 and 2007, stock option exercises, net of income taxes paid by the Company on restricted stock unit releases, used $275 and $216 in cash in 2009 and 2008, respectively, while in 2007 this activity provided $1,915 in cash proceeds.

The activity in the Company’s stock option plan for the years ended December 31, 2009 and 2008 was as follows:

	Number of Shares		Weighted Average Exercise Price		Average Remaining Contractual Life in Years	Aggregate Intrinsic Value
Stock options:
Outstanding at December 31, 2007	9,093			12.92
Grants	4,973			10.12
Exercises	(77	)		5.34
Retired or forfeited	(5,870	)		13.36
Outstanding at December 31, 2008	8,119		$	10.96	7.55	$	—
Grants	7,805		$	3.82
Exercises	—
Retired or forfeited	(7,921	)	$	10.99
Outstanding at December 31, 2009	8,003		$	3.97	8.23	$	258.00
Vested and exercisable at December 31, 2009	2,556		$	5.04	6.62	$	—
Vested and exercisable at December 31, 2008	2,180		$	13.66	6.53	$	—

71

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

Stock options outstanding that are expected to vest are shown net of estimated future option forfeitures. The price of a share of the Company’s Class A common stock was $3.91 and $3.50 as of December 31, 2009 and 2008, respectively. During 2009, options to purchase 2,556 shares of Class A common stock with an intrinsic value of $258 were fully vested. As of December 31, 2009, there was a total of $11,779 of unrecognized compensation cost related to stock options granted under the Plans. The unrecognized compensation cost is expected to be recognized over a weighted average period of 1.91 years.

The activity in the Company’s restricted stock units and restricted stock awards for the years ended December 31, 2009 and 2008 was as follows:

	Number of Shares		Weighted Average Grant Date Fair Value
Restricted stock units and awards:
Nonvested at December 31, 2007	1,117		$	9.31
Grants	319			8.37
Vested	(286	)		10.14
Retired or forfeited	(232	)		9.33
Nonvested at December 31, 2008	918			8.72
Grants	59			2.47
Vested	(314	)		9.51
Retired or forfeited	(142	)		8.39
Nonvested at December 31, 2009	521		$	8.16
Vested and deferred at December 31, 2009	80		$	10.78

As of December 31, 2009, there was a total of $2,680 of unrecognized compensation cost related to restricted stock units and awards granted under the Plans. The unrecognized compensation cost is expected to be recognized over a weighted average period of 1.92 years.

The table below shows information by range of exercise prices for the Company’s outstanding stock options as of December 31, 2009.

	Outstanding at December 31, 2009				Exercisable at December 31, 2009
Range of Exercise Prices	Number of Shares	Weighted Average Exercise Price		Average Remaining Contractual Life in Years	Number of Shares	Weighted Average Exercise Price
$1.41 – $2.75	3,230	$	2.55	9.35	75	$	2.44
$2.76 – $5.00	2,932		3.92	7.91	1,337		3.88
$5.01 – $7.32	1,725		6.28	6.75	1,069		6.27
$7.33 – $12.50	72		9.38	7.39	35		10.18
$12.51 – $19.74	44		11.99	6.08	40		18.61
Total	8,003	$	3.97	8.23	2,556	$	5.04

72

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

12. Derivative Financial Instruments

At December 31, 2009 and 2008, the Company had outstanding foreign exchange forward contracts with notional values of $13,277 and $21,890, respectively. The gains and losses on these instruments are recorded in “other income(expense), net” in the statements of operations. Gains and losses from foreign exchange forward contracts, net of gains and losses on the underlying transactions denominated in foreign currency, for the years ended December 31, 2009, 2008 and 2007 were as follows:

	Years Ended December 31,
	2009			2008			2007
Gains (losses) on foreign exchange forward contracts	$	(55	)	$	874		$	(2,967	)
Gains (losses) on underlying transactions denominated in foreign currency		(404	)		(2,092	)		2,964
Net losses	$	(459	)	$	(1,218	)	$	(3	)

13. Comprehensive Net Loss

The Company’s comprehensive net loss for the three years ended December 31, 2009, 2008 and 2007 was as follows:

	Years Ended December 31,
	2009			2008			2007
Net loss	$	(2,688	)	$	(68,354	)	$	(102,476	)
Currency translation adjustments		2,006			(6,689	)		1,512
Temporary impairment gain (loss) on investments		435			598			(598	)
Tax expense allocated to temporary gain (loss) on investments		(228	)		—			—
Comprehensive net loss	$	(475	)	$	(74,445	)	$	(101,562	)

14. Stockholders’ Equity

The Company is authorized to issue 180,000 shares of common stock at a par value of $0.0001 per share, of which 139,500 shares are designated as Class A and 40,500 shares are designated as Class B. Class A shares outstanding at December 31, 2009 and 2008 were 36,894 and 36,627, respectively. Class B shares outstanding at December 31, 2009 and 2008 were 27,141 and 27,141, respectively.

Class A stockholders are entitled to one vote per share and Class B stockholders are entitled to ten votes per share. The Class B stockholders have the right to convert their Class B shares into an equal number of Class A shares. In the fourth quarter of 2008, certain Class B stockholders elected to convert 473 shares of their Class B common stock into 473 shares of Class A common stock at par value. The transaction had no impact on the Company’s financial statements.

Class A and B stockholders are entitled to dividends paid in equal amounts per share on all shares of Class A and Class B common stock. The terms of the Company’s asset-backed line of credit facility prohibit the payment of cash dividends.

From the inception of the Company through the date of this report, no dividends have been declared or paid and management has no plans at this time to pay dividends in the foreseeable future.

In the event of liquidation, Class A and B common stockholders are equally entitled to all assets of the Company available for distribution.

73

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

15. Net Loss Per Share

For all periods presented, common share equivalents are excluded from the calculations of net loss per share, as their effect on net loss per share would be antidilutive. Outstanding weighted average common stock equivalents of Class A common stock excluded from the calculations were 168, 247 and 338 for the years ended December 31, 2009, 2008, and 2007, respectively.

The following table sets forth the computation of basic and diluted net loss per share for the periods presented.

	Years Ended December 31,
	2009			2008			2007
(Numerator)
Net loss	$	(2,688	)	$	(68,354	)	$	(102,476	)
(Denominator)
Weighted average shares outstanding during period:
Class A and B—basic and diluted		63,914			63,641			63,361
Net loss per share:
Class A and B—basic and diluted	$	(0.04	)	$	(1.07	)	$	(1.62	)

16. Related Party Transactions

Since 2004, the Company has been a majority-owned subsidiary of Mollusk Holdings, LLC, an entity controlled by Lawrence J. Ellison, the Chief Executive Officer of Oracle Corporation. In 2009 and 2008, the Company purchased software products and support services totaling $856 and $1,095, respectively, from Oracle Corporation on terms the Company believes are comparable to those it would obtain in an arm’s-length agreement. As of December 31, 2009, Mr. Ellison may be deemed to have or share the power to direct the voting and disposition, and therefore to have beneficial ownership, of approximately 16.2 million shares of our Class B common stock, which represents approximately 52.4% of the combined voting power of our Class A common stock and Class B common stock. For a more complete discussion of Mr. Ellison’s beneficial ownership of our common stock, see “Security Ownership of Certain Beneficial Owners and Management.”

In 2009 and 2008, the Company paid Pillar Data Systems, Inc. a total of $368 and $261, respectively, in arm’s-length transactions for equipment fees. Lawrence J. Ellison is the majority stockholder of Pillar Data Systems, Inc.

The Company was previously involved in a dispute with Mounte LLC arising out of a 2002 tax sharing agreement between the Company and Knowledge Universe, Inc., the predecessor in interest of Mounte LLC. Following discussions between the parties, the Company and Mounte entered into a written agreement effective July 9, 2009, settling the dispute. Pursuant to the agreement, Mounte paid LeapFrog $295 in settlement of all claims by either party under the agreement, including Mounte’s counter-claim for $1,479.

17. Concentrations of Credit Risk and Certain Other Risks

Financial instruments that subject the Company to concentrations of credit risk include cash equivalents, foreign exchange transactions, long-term investments and trade receivables. Cash and cash equivalents consist principally of cash and money market funds. Long-term investments consist of auction rate securities, which are generally illiquid and have experienced significant impairment losses since the fourth quarter of 2007 due to the

74

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

adverse credit and financial markets conditions which have prevailed since then. The carrying value of the Company’s investment in auction rate securities has declined 69% from its original book value, or par, as of December 31, 2009. The adverse economic conditions are expected to continue into 2009 and further impairment losses may be incurred. Foreign exchange transactions consist primarily of short-term foreign currency transactions with highly rated financial institutions.

LeapFrog manufactures and sells its products primarily to national and regional mass-market retailers in the United States. Credit is extended based on an evaluation of the customers’ financial condition; generally, collateral is not required. Allowances for credit losses are provided for in the consolidated financial statements at the time of sale. Three major retailers account for 61% and 66% of total accounts receivable at December 31, 2009 and 2008, respectively. Should any of the three retailers experience difficulties paying their debts to LeapFrog, this could have a significant negative impact on the Company’s statement of operations and cash flows.

Seasonality of Sales

Sales of LeapFrog’s products have historically been highly seasonal with a significant majority of the sales occurring during the third and fourth quarters. Failure to accurately predict and respond to consumer demand may cause LeapFrog to produce excess inventory, which could adversely affect operating results and financial condition. Conversely, if a product achieves greater success than anticipated, the Company may not have sufficient inventory to meet retail demand, which could adversely impact LeapFrog’s relations with its customers.

Manufacturing Vendor Concentration

LeapFrog’s manufacturing and operations strategy is designed to maximize the use of outsourced services, particularly with respect to the actual production and physical distribution of its products. The Company believes that its outsourcing strategy enhances the scalability of the manufacturing process. Since the Company does not have its own manufacturing facilities, it is dependent on close working relationships with its contract manufacturers for the supply and quality of its products and the computer chips contained in these products. LeapFrog uses contract manufacturers located in Asia, primarily in China, to build its finished products. Given the highly seasonal nature of its business, any unusual delays or quality control problems could have a material adverse effect on LeapFrog’s operating results and financial condition. LeapFrog’s top three vendors supplied a total of 64%, 49% and 52% of LeapFrog’s products in 2009, 2008 and 2007, respectively. In 2009, our largest individual vendor, WKK Technology Limited, located in China, supplied 26% of LeapFrog’s products. In 2008, Askey Computer Corporation, located in China, supplied 20%, and in 2007 Jetta Company Limited, located in China, supplied 24% of LeapFrog’s products. The Company expects to continue to use a limited number of contract manufacturers and fabricators.

75

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

Customer Concentration

A limited number of customers historically have accounted for a substantial portion of our gross sales. For the last three fiscal years, the Company’s top three customers have been Target, Toys “R” Us and Wal-Mart. The relative percentage of gross sales to the top three customers to total Company sales were as follows for the three years shown below:

	Years Ended December 31,
	2009		2008		2007
Gross sales:
Wal-Mart	22	%	25	%	21	%
Toys “R” Us	19	%	18	%	20	%
Target	16	%	17	%	13	%
Total	57	%	60	%	54	%

Wal-Mart, Target and Toys “R” Us accounted for 28%, 14% and 19% of total gross accounts receivable at December 31, 2009, respectively, as compared to 36%, 12% and 17%, respectively at December 31, 2008.

18. Commitments and Contingencies

Leases and Royalties

The Company is obligated to pay certain minimum royalties in connection with license agreements to which it is a party. Royalty expense was $15,711, $19,315 and $21,768 in 2009, 2008 and 2007, respectively.

LeapFrog leases a portion of its capital equipment and certain of its facilities under operating leases that expire at various dates through 2016. Rent expense was $2,497, $5,827 and $4,591 in 2009, 2008 and 2007, respectively.

Minimum rent commitments under all non-cancelable leases with an initial term in excess of one year and minimum royalty commitments are set forth in the following table:

Years Ended December 31,	Leases		Royalties		Total
2010		7,915		7,201		15,116
2011		4,620		10,691		15,311
2012		4,116		669		4,785
2013		3,810		477		4,287
2014		3,869		—		3,869
Thereafter		5,028		—		5,028
Total	$	29,358	$	19,038	$	48,396

LeapFrog accounts for total rent expense under the leases on a straight-line basis over the lease terms. At December 31, 2009 and 2008, the Company had a deferred rent liability of $1,908 and $2,092, respectively, relating to rent escalation costs net of tenant incentives for its Emeryville, California headquarters. Deferred rent is included in long-term liabilities.

76

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

Legal Proceedings

From time to time, in the normal course of business, the Company is party to various pending claims and lawsuits. Currently, the Company is party to a claim regarding our use of various trademarks and logos in connection with its Tag reading systems. In October 2009, TAG Toys, Inc. filed a complaint against the Company in the United States District Court for the Central District of California, alleging that the Company’s use of various logos and marks relating to the our Tag Reading Systems infringes trademark rights held by TAG Toys, constitutes a false designation of origin for its products, and constitutes unfair competition under federal and California laws. TAG Toys is seeking unspecified monetary damages, costs and attorneys’ fees, and injunctive relief. In December 2009, the Company filed our answer to TAG Toys’ complaint, denying the material allegations and asserting affirmative defenses. The Company has not accrued a liability for potential damages as it is unable to estimate the possible loss.

19. Segment Reporting

The Company’s business is organized, operated and assessed in two geographic segments; United States and International.

Historically, LeapFrog organized, operated and assessed its business in three segments, U.S. Consumer, International and School. The School segment sold products tailored for the educational market directly to schools, teacher supply stores and through catalogs and websites aimed at educators, all in the United States. During 2008, we ceased marketing directly to the educational channel, reduced headcount and direct facilities expenses accordingly, and transferred responsibility for this sales channel to the former U.S. Consumer operating segment. Accordingly, in 2009, we have consolidated and reclassified the results of the former U.S. Consumer and School segments into the United States segment for the fiscal years ended December 31, 2009, 2008 and 2007.

We charge all of our indirect operating expenses and general corporate overhead to the United States segment and do not allocate any of these expenses to the International segment.

The accounting policies of the segments are the same as those described in Note 2 of these Notes to these Consolidated Financial Statements.

The primary business of the two operating segments is as follows:

• The United States segment is responsible for the development, design and marketing of electronic educational hardware products and related software, sold primarily through retail channels and through the Company’s website in the United States.

• The International segment is responsible for the localization and marketing of electronic educational hardware products and related software originally developed for the United States, sold primarily in retail channels outside of the United States.

77

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

The table below shows certain information by segment for the years ended December 31, 2009, 2008 and 2007.

	Years Ended December 31,
	2009			2008			2007
Net sales:
United States	$	306,472		$	363,396		$	338,856
International		73,362			95,663			103,415
Totals	$	379,834		$	459,059		$	442,271
Income (Loss) from operations:
United States	$	(18,506	)	$	(55,854	)	$	(100,922	)
International		10,093			(4,350	)		(1,409	)
Totals	$	(8,413	)	$	(60,204	)	$	(102,331	)
Total assets:
United States	$	251,221		$	245,885		$	309,547
International		54,774			60,188			60,259
Totals	$	305,995		$	306,073		$	369,806

In 2009, 2008 and 2007, no countries other than the United States accounted for 10% or more of LeapFrog’s consolidated net sales. LeapFrog attributes sales to non-United States countries on the basis of sales billed by each of its foreign subsidiaries to its customers. For example, the Company attributes sales to the United Kingdom based on the sales billed by its United Kingdom-based foreign subsidiary, LeapFrog Toys (UK) Limited, to its customers. Additionally, the Company attributes sales to non-United States countries if the product is shipped from Asia or one of its leased warehouses in the United States to a distributor in a foreign country.

The table below shows the sales of products that constituted 10% or more of total net sales by segment for the years ended December 31, 2009, 2008 and 2007.

	2009				2008				2007
	$		% of Net Sales		$		% of Net Sales		$		% of Net Sales
	(Dollars in millions)
SEGMENTS
United States:
Tag	$	47.7	16	%	$	51.7	14	%	$	—	n/a
Leapster *		121.7	40	%		151.6	42	%		133.2	39	%
All other		137.1	44	%		160.1	44	%		205.7	61	%
Total	$	306.5	100	%	$	363.4	100	%	$	338.9	100	%
International:
Tag	$	9.1	12	%	$	16.7	17	%	$	—	n/a
Leapster *		16.4	22	%		27.4	29	%		26.4	26	%
All other		47.8	66	%		51.6	54	%		77.0	74	%
Total	$	73.3	100	%	$	95.7	100	%	$	103.4	100	%
CONSOLIDATED LEAPFROG
Tag	$	56.8	15	%	$	68.4	15	%	$	—	n/a
Leapster *		138.1	36	%		179.0	39	%		159.6	36	%
All other		184.9	49	%		211.7	46	%		282.7	64	%
Total net sales	$	379.8	100	%	$	459.1	100	%	$	442.3	100	%

* Includes classic Leapster and Leapster 2 platforms, content and accessories and all Leapster TV and Leapster L-MAX product sales

78

LEAPFROG ENTERPRISES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

20. Selected Quarterly Financial Information—Unaudited

Unaudited selected financial information by quarter for the years ended December 31, 2009 and 2008 is presented below.

	For 2009 Quarters Ended											Full Year 2009
	March 31			June 30			September 30		December 31
	(All quarterly data unaudited)
Net sales	$	29,879		$	49,412		$	111,906	$	188,637		$	379,834
Gross profit		8,086			18,741			47,787		83,393			158,007
Total operating expenses		34,978			36,969			38,717		55,756			166,420
Income (loss) from operations		(26,892	)		(18,228	)		9,070		27,637			(8,413	)
Net income (loss)	$	(27,121	)	$	(12,217	)	$	7,218	$	29,432		$	(2,688	)
Net income (loss) per common share:
Basic and Diluted	$	(0.43	)	$	(0.19	)	$	0.11	$	0.47		$	(0.04	)
Market price range common stock:
High	$	3.69		$	3.33		$	4.77	$	4.45		$	4.77
Low	$	0.84		$	1.28		$	1.91	$	2.88		$	0.84
	For 2008 Quarters Ended											Full Year 2008 (1)
	March 31 (1)			June 30 (1)			September 30 (1)		December 31 (1)
Net sales	$	58,274		$	68,341		$	194,626	$	137,818		$	459,059
Gross profit		21,131			26,887			85,326		48,141			181,485
Total operating expenses		49,749			49,243			56,009		86,688			241,689
Income (loss) from operations		(28,618	)		(22,356	)		29,317		(38,547	)		(60,204	)
Net income (loss)	$	(27,431	)	$	(20,764	)	$	23,976	$	(44,135	)	$	(68,354	)
Net income (loss) per common share:
Basic	$	(0.43	)	$	(0.32	)	$	0.38	$	(0.70	)	$	(1.07	)
Diluted	$	(0.43	)	$	(0.32	)	$	0.38	$	(0.70	)	$	(1.07	)
Market price range common stock:
High	$	7.75		$	9.38		$	10.63	$	10.47		$	10.63
Low	$	4.95		$	7.09		$	7.51	$	3.14		$	3.14

(1) Certain amounts have been revised for insignificant errors. Refer to Note 1, “Summary of Significant Accounting Policies” for additional information.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Attached as exhibits to this Form 10-K are certifications of our Chief Executive Officer and the Chief Financial Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934 or the Rule 13a-14(a) Certifications. This Controls and Procedures section of the annual report on Form 10-K includes the information concerning the controls evaluation referred to in Rule 13a-14(a) Certifications.

Evaluation of Disclosure Controls and Procedures

We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, or disclosure controls, as of the end of the period covered by this annual report on Form 10-K. This controls evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO. Disclosure controls are controls and procedures designed to reasonably assure that information required to be disclosed or submitted in our reports filed under the Exchange Act, such as this Form 10-K, are recorded, processed, summarized and reported within the time periods specified in the United States Securities and Exchange Commission’s rules and forms. Disclosure controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

The evaluation of our disclosure controls included a review of the controls’ objectives and design, our implementation of the controls and the effect of the controls on the information generated for use in our reports. In the course of the controls evaluation, we reviewed and identified data errors and control problems and sought to confirm that appropriate corrective actions, including process improvements, were undertaken. This type of evaluation is performed on a quarterly basis so that the conclusions of management, including our CEO and CFO, concerning the effectiveness of the disclosure controls can be reported in our periodic reports filed with the Securities and Exchange Commission on Forms 10-Q, 10-K, and others as may be required from time to time.

Based upon the controls evaluation, our CEO and CFO have concluded that our disclosure controls were effective as of December 31, 2009.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, our CEO and CFO, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of our company.

• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors.

80

• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

Management assessed our internal control over financial reporting as of December 31, 2009, the end of our fiscal year. Management based its assessment on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies and our overall control environment.

Based on management’s assessment of our internal control over financial reporting, management concluded that, as of December 31, 2009, our internal control over financial reporting was effective. Ernst & Young LLP, the independent registered public accounting firm that audited our financial statements included in this Annual Report on Form 10-K, has audited our internal control over financial reporting as of December 31, 2009, as stated in its attestation report appearing herein.

Inherent Limitations on Effectiveness of Controls

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure system are met.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the quarter ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

Not applicable.

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PART III

Certain information required by Part III is omitted from this Report on Form 10-K and is incorporated herein by reference from our definitive proxy statement relating to our 2010 annual meeting of stockholders, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, also referred to in this Form 10-K as our 2010 Proxy Statement, which we expect to file with the SEC no later than April 30, 2010.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information appearing in our 2010 Proxy Statement under the following headings is incorporated herein by reference:

• “Proposal One: Election of Directors,”

• “Board of Directors and Corporate Governance—Committees of the Board”

• “Section 16(a) Beneficial Ownership Reporting Compliance”

The information under the heading “Executive Officers of the Registrant” in Item 1 of this Form 10-K is also incorporated by reference in this section.

In April 2005, our Board of Directors adopted the LeapFrog Code of Business Conduct and Ethics, which applies to all of our employees and directors, including our Chief Executive Officer, Chief Financial Officer, who is our principal financial officer, and our Vice President, Corporate Controller, who is our principal accounting officer. In August 2006, our Board adopted a number of versions of our Code of Business Conduct and Ethics that are specifically tailored to the various international locations in which we have operations. The United States and international versions of our Code of Business Conduct and Ethics are posted in the corporate governance section of our website located at www.leapfroginvestor.com. To date, there have been no waivers under our Code of Business Conduct and Ethics. We will disclose any reportable waivers, if and when granted, of our Code of Business Conduct and Ethics in the corporate governance section of our website located at www.leapfroginvestor.com.

ITEM 11. EXECUTIVE COMPENSATION

The information appearing in our 2010 Proxy Statement under the following headings is incorporated herein by reference:

• “Board of Directors and Corporate Governance—Compensation of Directors”

• “Board of Directors and Corporate Governance—Committees of the Board—Compensation Committee—Compensation Committee Interlocks and Insider Participation” and “—Report of the Compensation Committee,” which report shall be deemed to be “furnished,” not “filed” with the SEC.

• “Executive Compensation”

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information appearing in our 2010 Proxy Statement under the following headings is incorporated herein by reference:

• “Security Ownership of Certain Beneficial Owners and Management”

82

Equity Compensation Plan Information

The following table shows certain information concerning our Class A common stock reserved for issuance in connection with our 2002 Equity Incentive Plan and our 2002 Non-Employee Directors’ Stock Award Plan as of December 31, 2009:

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	8,527,166	$	3.97	4,692,414	(1)
Equity compensation plans not approved by security holders	—		—	—
TOTAL	8,527,166	$	3.97	4,692,414

(1) Includes 1,403,488 shares reserved for issuance under our 2002 Employee Stock Purchase Plan, 4,125,384 shares reserved for issuance under our 2002 Equity Incentive Plan, and 566,030 shares reserved for issuance under our 2002 Non-Employee Directors’ Stock Award Plan.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information appearing in our 2010 Proxy Statement under the following headings is incorporated herein by reference:

• “Transactions with Related Persons”

• “Board of Directors and Corporate Governance—Independence of the Board of Directors”

• “Board of Directors and Corporate Governance—Committees of the Board”

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information appearing in our 2010 Proxy Statement under the heading “Proposal Two: Ratification of Selection of Independent Registered Public Accounting Firm—Independent Registered Public Accounting Firm Fee Information” and “Pre-Approval Procedures of Audit and Non-Audit Services by the Independent Registered Accounting Firm” is incorporated herein by reference.

83

PART IV

ITEM 15. EXHIBITS AND FINANCIAL SCHEDULES

(1) Financial Statements: The following are filed as a part of Item 8 of this Annual Report on Form 10-K:

	Page
Reports of Independent Registered Public Accounting Firm	43
Consolidated Balance Sheets	45
Consolidated Statements of Operations	46
Consolidated Statements of Stockholders’ Equity	47
Consolidated Statements of Cash Flows	48
Notes to the Consolidated Financial Statements	49

(2) Financial Statement Schedules: The following financial statement schedule is included as Appendix A of this Form 10-K:

Valuation and Qualifying Accounts and Allowances

(3) The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Annual Report.

84

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

LEAPFROG ENTERPRISES, INC
By:	/s/    William B. Chiasson
	William B. Chiasson Chief Financial Officer and Principal Financial Officer
Date:	February 22, 2010

85

POWER OF ATTORNEY

Each individual whose signature appears below constitutes and appoints Jeffrey G. Katz and William B. Chiasson, and each of them, his or her true and lawful attorneys-in-fact and agents with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this report on Form 10-K, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his, her or their substitute or substitutes, may lawfully do or cause to be done or by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signatures	Title	Date
/s/    JEFFREY G. KATZ         Jeffrey G. Katz	Chairman of the Board, Chief Executive Officer (Principal Executive Officer), and President	February 22, 2010
/s/    WILLIAM B. CHIASSON         William B. Chiasson	Chief Financial Officer (Principal Financial Officer)	February 22, 2010
/s/    MARK A. ETNYRE         Mark A. Etnyre	Vice President and Corporate Controller (Principal Accounting Officer)	February 22, 2010
/s/    THOMAS J. KALINSKE         Thomas Kalinske	Vice Chairman and Director	February 22, 2010
/s/    PHILIP B. SIMON         Philip B. Simon	Presiding Director	February 22, 2010
/s/    PAUL T. MARINELLI         Paul T. Marinelli	Director	February 22, 2010
/s/    STANLEY E. MARON         Stanley E. Maron	Director	February 22, 2010
/s/    E. STANTON MCKEE, JR.         E. Stanton McKee, Jr.	Director	February 22, 2010
/s/    DAVID C. NAGEL         David C. Nagel	Director	February 22, 2010
/s/    CADEN WANG         Caden Wang	Director	February 22, 2010

86

EXHIBIT INDEX

		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File No.	Original Exhibit Number	Filing Date	Filed Herewith
3.01	Amended and Restated Certificate of Incorporation	S-1	333-86898	3.03	7/22/2002
3.02	Amended and Restated Bylaws	8-K	001-31396	3.04	11/2/2007
4.01	Form of Specimen Class A Common Stock Certificate	10-K	001-31396	4.01	3/7/2006
4.02	Fourth Amended and Restated Stockholders Agreement, dated May 30, 2003, among LeapFrog and the investors named therein	10-Q	001-31396	4.02	8/12/2003
10.01	Form of Indemnification Agreement entered into by LeapFrog with certain of its directors and executive officers	10-Q	001-31396	10.01	5/4/2007
10.02	Net Lease, dated November 14, 2000, between Hollis Street Investors, LLC and LeapFrog, as amended	S-1	333-86898	10.02	4/24/2002
10.03	Sixth Amendment, dated March 22, 2006, to Net Lease, dated November 14, 2000, between Hollis Street Investors, LLC and LeapFrog	10-Q	001-31396	10.42	5/9/2006
10.04	Industrial Lease by and between SP Kaiser Gateway I, LLC and LeapFrog dated March 31, 2004	10-Q	001-31396	10.29	5/10/2004
10.05	Tax Sharing Agreement dated as of July 3, 2002, between Knowledge Universe, Inc. and LeapFrog	S-1	333-86898	10.2	7/5/2002
10.06	Credit Agreement between the financial institutions named therein, Banc of America Securities LLC, Bank of America, N.A. and LeapFrog Enterprises, Inc. as the Borrower dated as of November 8, 2005	10-Q	001-31396	10.38	11/9/2005
10.07*	Amended and Restated Employee Equity Participation Plan	S-1	333-86898	10.05	4/24/2002
10.08*	Amended and Restated 2002 Equity Incentive Plan	8-K	001-31396	10.1	8/31/2009
10.09*	Form of Stock Option Agreement under the 2002 Equity Incentive Plan	10-Q	001-31396	10.01	11/9/2007
10.10*	Form of Stock Bonus Agreement under the 2002 Equity Incentive Plan	10-Q	001-31396	10.32	11/9/2004
10.11*	Form of Restricted Stock Unit Award Agreement under the 2002 Equity Incentive Plan	10-Q	001-31396	10.02	11/9/2007

87

		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File No.	Original Exhibit Number	Filing Date	Filed Herewith
10.12*	Form of Performance Share Award Agreement under the 2002 Equity Incentive Plan	10-K	001-31396	10.4	3/7/2006
10.13*	Amended and Restated 2002 Non-Employee Directors Stock Award Plan	10-Q	001-31396	10.1	8/4/2009
10.14*	Form of Nonstatutory Stock Option Agreement under the 2002 Non-Employee Directors’ Stock Award Plan	S-1	333-86898	10.09	7/5/2002
10.15*	Compensation Arrangements between LeapFrog and its Board of Directors†					†
10.16*	Employment Agreement, dated July 3, 2006, between Thomas J. Kalinske and LeapFrog	8-K	001-31396	10.3	7/10/2006
10.17*	Amendment to Employment Agreement, dated December 31, 2006, between Thomas J. Kalinske and LeapFrog	8-K	001-31396	10.1	1/8/2007
10.18*	Executive Management Severance and Change in Control Benefit Plan	10-Q	001-31396	10.03	11/9/2007
10.19*	Certain Compensation Arrangements with Named Executive Officers††					††
10.20*	Employment Agreement, effective as of July 3, 2006, between Jeffrey G. Katz and LeapFrog	8-K	001-31396	10.1	7/10/2006
10.21*	Employment Agreement, effective as of November 11, 2004, between William B. Chiasson and LeapFrog	10-K	001-31396	10.33	3/29/2005
10.22*	Offer Letter, dated January 23, 2007, between Nancy G. MacIntyre and LeapFrog	10-K	001-31396	10.29	3/13/2008
10.23	Amendment No. 1 to the Credit Agreement dated as of May 15, 2008 among LeapFrog, the banks, financial institutions and other institutional lenders named therein and Bank of America, N.A.	8-K	001-31396	10.1	5/21/2008
10.24*	Stock Option Agreement between LeapFrog Enterprises, Inc. and Jeffrey G. Katz on June 9, 2008	8-K	001-31396	10.01	6/11/2008
10.25*	Release Agreement, dated December 12, 2008 between Martin A. Pidel and LeapFrog	10-K	001-31396	10.27	3/11/2009

88

		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File No.	Original Exhibit Number	Filing Date	Filed Herewith
10.26	Amended and Restated Loan and Security Agreement dated August 13, 2009 by and among LeapFrog, certain financial institutions (“Lenders”) and Bank of America, N.A., as agent for the Lenders.	10-Q	001-31396	10.02	11/3/2009
10.27	Technology License Agreement between LeapFrog and Anoto A.B., among other parties, dated January 25, 2004 ***					X
10.28	Amendment No. 1 to Technology License Agreement between LeapFrog and Anoto A.B., among other parties, dated December 7, 2004					X
10.29	Amendment No. 2 to Technology License Agreement between LeapFrog and Anoto A.B., among other parties, dated March 25, 2005 ***					X
10.30	Amendment No. 3 to Technology License Agreement between LeapFrog and Anoto A.B., among other parties, dated June 29, 2005 ***					X
10.31	Amendment No. 4 to Technology License Agreement between LeapFrog and Anoto A.B., among other parties, dated August 19, 2005 ***					X
10.32	Amendment No. 5 to Technology License Agreement between LeapFrog and Anoto A.B., among other parties, dated July 27, 2006 ***					X
21.01	List of Subsidiaries					X
23.01	Consent of Independent Registered Public Accounting Firm					X
24.01	Power of Attorney (see signature page to this Form 10-K)					X
31.01	Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					X
31.02	Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.					X
32.01**	Certification of the Chief Executive Officer and the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.					X

89

* Indicates management contract or compensatory plan or arrangement.

** These certifications accompany LeapFrog’s Annual Report on Form 10-K; they are not deemed “filed” with the Securities and Exchange Commission and are not to be incorporated by reference in any filing of LeapFrog under the Securities Act of 1933, or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

*** Confidential treatment is being sought with respect to certain portions of this agreement. Such portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission.

† Description contained under the heading “Compensation of Directors” in LeapFrog’s definitive proxy materials filed with the Securities and Exchange Commission on June 15, 2009 and in LeapFrog’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 19, 2009 incorporated herein by reference.

†† Descriptions contained in LeapFrog’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 4, 2009 incorporated herein by reference.

90

APPENDIX A

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS AND ALLOWANCES.

(In thousands)

	Years Ending December 31,
	2009			2008			2007
Allowance for doubtful accounts receivable, beginning of year	$	3,872		$	97		$	785
Additions (reductions) charged (credited) to operations		(1,176	)		5,045			(286	)
Net deductions		(1,577	)		(1,270	)		(402	)
Allowance for doubtful accounts receivable, end of year	$	1,119		$	3,872		$	97
Allowance for promotional markdowns, beginning of year	$	16,215		$	9,904		$	17,459
Additions charged to operations		16,043			20,027			8,092
Net deductions		(22,795	)		(13,716	)		(15,647	)
Allowance for promotional markdowns, end of year	$	9,463		$	16,215		$	9,904
Allowance for cooperative advertising, beginning of year	$	6,455		$	12,175		$	13,917
Additions charged to operations		9,413			5,490			6,258
Net deductions		(10,337	)		(11,210	)		(8,000	)
Allowance for cooperative advertising, end of year	$	5,531		$	6,455		$	12,175
Allowance for defective products, beginning of year	$	10,768		$	8,583		$	7,169
Additions charged to operations		5,256			10,825			11,534
Net deductions		(12,674	)		(8,640	)		(10,120	)
Allowance for defective products, end of year	$	3,350		$	10,768		$	8,583
Allowance for sales returns, beginning of year	$	15,166		$	7,030		$	12,802
Additions charged to operations		7,608			15,798			5,824
Net deductions		(17,999	)		(7,662	)		(11,596	)
Allowance for sales returns, end of year	$	4,775		$	15,166		$	7,030
Allowance for chargebacks and price changes, beginning of year	$	2,813		$	2,166		$	1,419
Additions charged to operations		989			3,450			2,946
Net deductions		(2,230	)		(2,803	)		(2,199	)
Allowance for chargebacks and price changes, end of year	$	1,572		$	2,813		$	2,166
Valuation allowance for deferred tax assets, beginning of year	$	126,101		$	101,491		$	60,433
Additions charged to operations		7,691			25,188			47,310
Net deductions		(1,774	)		(578	)		(6,252	)
Valuation allowance for deferred tax assets, end of year	$	132,018		$	126,101		$	101,491

A-1

EX-10.27

Exhibit 10.27

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

TECHNOLOGY LICENSE AGREEMENT

BETWEEN

LEAPFROG ENTERPRISES, INC. AND LEAPFROG INTERNATIONAL

RESEARCH COMPANY LTD., ON ONE HAND, AND

ANOTO A.B. AND ANOTO GROUP A.B., ON THE OTHER HAND

JANUARY 25, 2004

Table of Contents

			Page
1.	DEFINITIONS		1
	1.1	“Advance Royalty”	1
	1.2	“Anoto Authorized Source”	1
	1.3	“Anoto Compulsory Components”	2
	1.4	“Anoto Content”	2
	1.5	“Anoto Core Applications”	2
	1.6	“Anoto Dot Pattern”	2
	1.7	“Anoto Functionality”	2
	1.8	“Anoto Indemnified Elements”	2
	1.9	“Anoto Infrastructure Software”	2
	1.10	“Anoto Key Components”	3
	1.11	“Anoto Other New Technology”	3
	1.12	“Anoto Updates”	3
	1.13	“Anoto Upgrades”	3
	1.14	“Anoto XY Module”	3
	1.15	“Confidential Information”	3
	1.16	“Controlled”	3
	1.17	“Dot Codes”	3
	1.18	“Exclusive Field”	3
	1.19	“Exclusive Markets”	3
	1.20	“Exclusive Term”	3
	1.21	“Firmware”	3
	1.22	“Group Company”	4
	1.23	“Improvement”	4
	1.24	“Intellectual Property Rights”	4
	1.25	“Joint Platform”	4
	1.26	“Joint Platform Customer”	4
	1.27	“LeapFrog SDK”	4
	1.28	“LeapFrog ASIC”	4
	1.29	“LeapFrog Content”	5

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[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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Page

1.30	“LeapFrog Indemnified Elements”	5
1.31	“LeapFrog Other New Technology”	5
1.32	“LeapFrog Product”	5
1.33	“LeapFrog Updates”	5
1.34	“LeapFrog Upgrades”	5
1.35	“LeapFrog XY Module”	5
1.36	“Learning Application”	5
1.37	“Licensed Anoto Dot Pattern”	6
1.38	“Licensed Anoto IP”	6
1.39	“Licensed Anoto Technology”	6
1.40	“Licensed LeapFrog IP”	7
1.41	“Licensed LeapFrog Technology”	7
1.42	“Licensed Product”	7
1.43	“Licensed Technology”	8
1.44	“Major Country”	8
1.45	“Newly Developed Technology”	8
1.46	“Net Sales Value”	8
1.47	“Net Sublicense Royalty Value”	8
1.48	“Other New Technology”	8
1.49	“Permitted Anoto Fields”	9
1.50	“Permitted Field”	9
1.51	“Platform OS”	9
1.52	“Pre-existing Technology”	9
1.53	“Qualified LeapFrog Foundry”	9
1.54	“Relationship Managers”	9
1.55	“Statement of Work”	10
1.56	“Stand Alone (Self-Contained) Device”	10
1.57	“Technology”	10
1.58	“Term” has the meaning set forth in Section 16.1	10
1.59	“Test Equipment and Specifications”	11

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[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

Table of Contents

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	1.60	“Update”	11
	1.61	“Upgrade”	11
	1.62	“Work Product”	11
	1.63	“XY Module”	11
2.	DELIVERY AND LICENSE OF LICENSED ANOTO TECHNOLOGY		11
	2.1	License to LFIRC	11
	2.2	License to the Anoto Dot Pattern	12
	2.3	Sublicensing	13
	2.4	Purchase Procedures	15
	2.5	Exclusions	15
	2.6	LeapTrack System	15
	2.7	Delivery of Licensed Anoto Technology	15
	2.8	No Reverse Engineering	15
	2.9	Upgrades and Updates	16
	2.10	LeapFrog Products	16
	2.11	Licensed Field Limitation	16
	2.12	Exclusive Field Recognition	16
	2.13	Permitted Field Rights	17
	2.14	Dot Pattern Variations	17
3.	DELIVERY AND LICENSE OF LICENSED LEAPFROG TECHNOLOGY		17
	3.1	License to Anoto	17
	3.2	Sublicensing	19
	3.3	Purchasing Procedure	21
	3.4	Exclusions	21
	3.5	Third Party Technology	21
	3.6	License Grant by LF Enterprises to LFIRC	21
	3.7	Delivery of LeapFrog Technology	22
	3.8	No Reverse Engineering	22
	3.9	Upgrades and Updates	22
	3.10	Field Recognition	22

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[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

Table of Contents

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4.	LIMITED EXCLUSIVITY		22
	4.1	Exclusive Term	22
	4.2	Market Exception Requests	23
	4.3	Permitted Field Exception	24
5.	DEVELOPMENT, DELIVERABLES AND CORRECTIVE ACTION PROCEDURES		25
	5.1	Engineering Milestone Schedule	25
	5.2	Statements of Work	25
	5.3	Acceptance of Deliverables	25
	5.4	Development Changes	27
	5.5	Development Compensation	28
	5.6	Corrective Action Procedures	28
	5.7	Remedies for Major Delays	31
	5.8	Additional Definitions	37
	5.9	[No Heading]	38
6.	ALLOCATION OF INTELLECTUAL PROPERTY RIGHTS		38
	6.1	Pre-existing Technology	38
	6.2	Improvements	39
	6.3	Newly Developed Technology	39
	6.4	Other New Technology	42
	6.5	Assignment and Cooperation	42
	6.6	Realization of Intellectual Property Rights	42
	6.7	Employees and Contractors	43
	6.8	License to Technology Updates, Upgrades and Other New Technology	43
	6.9	Non-Assertion	43
	6.10	Future Acquisitions of IP	44
	6.11	Claims	44
7.	PROTECTION OF INTELLECTUAL PROPERTY RIGHTS		44
	7.1	General Protection Rights	44
	7.2	Filings of Jointly-Owned IPR	44

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[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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	7.3	Enforcement	45
	7.4	Abandonment	46
	7.5	Markings	47
8.	CONSIDERATION		47
	8.1	Royalties	47
	8.2	Royalty Payment	47
	8.3	Sale Date	47
	8.4	Audit and Prescription Period	47
	8.5	Currency	48
	8.6	Taxes	48
	8.7	Late Payment	48
9.	COMPULSORY AND KEY COMPONENTS		49
	9.1	LeapFrog Obligations With Respect to Anoto Compulsory and Key Components	49
	9.2	Anoto Obligations With Respect to Anoto Compulsory and Key Components	49
	9.3	LeapFrog Obligations with Respect to the LeapFrog ASIC	50
10.	SUBCONTRACTORS AND GROUP COMPANIES		50
	10.1	Subcontractors	50
	10.2	Group Companies	50
	10.3	Sublicensees	51
	10.4	Letter of Credit	51
11.	GENERAL UNDERTAKINGS		52
	11.1	Responsibility for the XY Module	52
	11.2	Product Liability for Licensed Product	52
	11.3	Maintenance and Support	52
	11.4	Protection of the Parties’ Rights in Event of Bankruptcy	53
	11.5	Covenant Not to Compete	55
12.	LIMITED WARRANTY AND DISCLAIMER		56
	12.1	Anoto Warranty	56

-v-

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

Table of Contents

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	12.2	LeapFrog Warranty	56
	12.3	Warranty Remedies	57
	12.4	Disclaimer	57
13.	WARRANTIES AND INTELLECTUAL PROPERTY RIGHTS INDEMNIFICATION		57
	13.1	Anoto Representations and Warranties	57
	13.2	LeapFrog Representations and Warranties	59
	13.3	Corporate Authority	60
	13.4	No Conflicting Licenses	60
	13.5	Indemnification by Anoto	61
	13.6	Indemnification by LeapFrog	61
	13.7	Additional Indemnification Remedy	61
	13.8	Indemnification Procedures	62
	13.9	Limitation and Exclusions	62
14.	LIMITATION OF LIABILITY		63
	14.1	[No Heading]	63
	14.2	Limitation of Liability	63
	14.3	Prospective Royalties	64
15.	CONFIDENTIALITY		65
	15.1	Confidential Information	65
	15.2	Non-Disclosure Obligation	65
	15.3	Legal Obligation to Disclose	66
	15.4	Injunctive Relief	66
	15.5	Scope of Obligations	66
	15.6	Publicity	66
16.	TERM AND TERMINATION		67
	16.1	Term; Good Faith Re-Negotiation	67
	16.2	Termination for Cause	67
	16.3	Effect of Termination	68
	16.4	Survival	69

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[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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17.	CHOICE OF LAW AND ARBITRATION		70
	17.1	Choice of New York Law	70
	17.2	Binding Arbitration	70
	17.3	Injunctive Relief	70
	17.4	Fees and Costs	70
18.	MISCELLANEOUS		71
	18.1	Compliance	71
	18.2	Reimbursement of Legal Fees	71
	18.3	Notices, Modifications, Amendments	71
	18.4	Attribution	71
	18.5	No Waiver	71
	18.6	No Assignment or Delegation	72
	18.7	Patent Assignment	72
	18.8	Relationship Between the Parties	72
	18.9	Construction	72
	18.10	Force Majeure	73
	18.11	Severability	73
	18.12	Entire Agreement; Interpretation	74
	18.13	Counterparts	74

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[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

[EXECUTION COPY]

TECHNOLOGY LICENSE AGREEMENT

This Technology License Agreement (the “Agreement”) is entered into as of January 25, 2004 (“Effective Date”) by and between ANOTO AB, a company incorporated under the laws of Sweden (“Anoto”), ANOTO GROUP AB, a company incorporated under the laws of Sweden (“Anoto Group”), LEAPFROG ENTERPRISES, INC., a company incorporated under the laws of Delaware (“LF Enterprises”) and LEAPFROG INTERNATIONAL RESEARCH COMPANY LTD., a wholly-owned Group Company of LF Enterprises incorporated under the laws of the Cayman Islands (“LFIRC”), and together with LF Enterprises, referred to as (“LeapFrog”). Each of Anoto, Anoto Group, LF Enterprises and LFIRC are referred to as a “Party”, and collectively as the “Parties”.

BACKGROUND

A. LF Enterprises designs, develops, markets and distributes interactive technology-based learning/education products worldwide.

B. LFIRC develops and licenses intellectual property pursuant to this Agreement.

C. Anoto develops and licenses a digital pen and paper technology and infrastructure based on a specific printed pattern. Such Anoto technology enables solutions for paper based digital communication through transmission of handwritten information from paper printed with the Anoto Dot Pattern into digital data.

D. LF Enterprises, LFIRC and Anoto wish to: (a) develop and customize their respective technologies to be combined in the Joint Platform and LeapFrog Products; (b) have LeapFrog manufacture and distribute LeapFrog Products and LeapFrog Content, and license others to manufacture and distribute LeapFrog Content in accordance with this Agreement; and (c) have Anoto license to third parties the Joint Platform and incorporate such Joint Platform in products in accordance with this Agreement.

Based on the foregoing, and in consideration of the mutual promises and covenants set forth below and other good and valuable consideration the receipt and adequacy of which is hereby acknowledged, the Parties agree as follows:

1. DEFINITIONS.

Capitalized terms not otherwise defined herein will have the meaning set forth below:

1.1 “Advance Royalty” has the meaning as defined in Schedule G.

1.2 “Anoto Authorized Source” means Anoto or any of the authorized suppliers for Anoto Compulsory Components and Anoto Key Components as listed in Schedule E.

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1.3 “Anoto Compulsory Components” means the hardware and software components of the LeapFrog XY Module as specified in Schedule D and, subject to the terms of Sections 6.8 and 11.3, any Updates or Upgrades thereto.

1.4 “Anoto Content” means material printed with the Anoto Dot Pattern but not the Licensed Anoto Dot Pattern to support interactivity with the Joint Platform or other device using the Anoto XY Module, and any accompanying software for audio, video, data, executable code, storage or other functionality.

1.5 “Anoto Core Applications” means applications for personal or business uses that employ Anoto Functionality for, e.g., notetaking, messaging, forms processing, device entry, Internet or Intranet information services or E-commerce services.

1.6 “Anoto Dot Pattern” means an absolute positioning and electronically detectable background pattern to be printed on paper or other media that is read by a digital pen and that incorporates Technology and Intellectual Property Rights Controlled by Anoto. For the avoidance of doubt, Dot Codes, as defined below, do not form part of the Anoto Dot Pattern.

1.7 “Anoto Functionality” means personal and business paper-based digital processes comprising interaction between an Anoto Digital Pen and Anoto Dot Pattern to (i) perform Internet or Intranet services by accessing Anoto Infrastructure Software, e.g., the GPLS or the EPLS, through a mobile phone, PC or any other applicable access node, or (ii) connect and interact directly with an electronic device, e.g., a PC, mobile phone, PDA or any other relevant electronic device, for enabling applications or services on such electronic device.

1.8 “Anoto Indemnified Elements” means the Licensed Anoto Dot Pattern and the LeapFrog XY Module, in each case excluding third party hardware and software to the extent identified in Schedule B. Notwithstanding the foregoing and for clarity, the following items are excluded from Anoto Indemnified Elements: (i) the Dot Codes as such, (ii) the Firmware included in the XY Module to the extent that it is used for decoding of Dot Codes (referred to as Dot Code Software in Schedule A), and (iii) the Dot Code generation module (as further described in Schedule A).

1.9 “Anoto Infrastructure Software” means the software products developed by or for Anoto that provide the paper look up service (i.e., the directory service of linking Anoto Dot Patterns with one or more of a plurality of service providers or applications) which, as of the Effective Date, includes: (a) GPLS (global paper look-up service) which is a system operated centrally by Anoto; (b) EPLS (enterprise paper look-up service) which is an Intranet system operated by a service provider; and (c) LPLS (local paper look-up service), which is a software component residing on a personal computer.

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[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

1.10 “Anoto Key Components” means the hardware and software components and specifications of the LeapFrog XY Module as specified in Schedule D and, subject to the terms of Sections 6.8 and 11.3, any Updates or Upgrades thereto.

1.11 “Anoto Other New Technology” means Other New Technology developed or acquired by Anoto or any Anoto Group Company during the Exclusive Term that has application in the Exclusive Field.

1.12 “Anoto Updates” means Updates made by Anoto to Licensed Anoto Technology, including the LeapFrog XY Module and subcomponents thereof, and the PAPS, GAPAT, OPRS and PPS production test software and test limits.

1.13 “Anoto Upgrades” means Upgrades made by Anoto to Licensed Anoto Technology.

1.14 “Anoto XY Module” means an implementation of the XY Module that is capable of interaction with any portion of the Anoto Dot Pattern except for the Licensed Anoto Dot Pattern.

1.15 “Confidential Information” has the meaning assigned to it in Section 15.1.

1.16 “Controlled” and cognates thereof means, with respect to Technology or Intellectual Property Rights, lawfully possessing the ability to grant rights of the scope contemplated by this Agreement to another without accounting to a third party.

1.17 “Dot Codes” means a dot pattern proprietary to Anoto which encodes information (other than position information) in graphical objects on a surface with the graphical objects placed at positions aligned with an imagined or explicitly marked raster. The implementation of Dot Codes includes (i) Firmware of the XY Module (referred to as Dot Code Software in Schedule A) which decodes the Dot Codes, (ii) the Dot Codes as such, and (iii) the Dot Code Generation module (described in Schedule A).

1.18 “Exclusive Field” means the manufacture, use, sale, promotion or distribution of interactive products that are: (a) Stand Alone (Self-Contained) Devices having either [*]. Except as may be mutually agreed, the Exclusive Field expressly excludes [*].

1.19 “Exclusive Markets” means [*] in the Exclusive Field.

1.20 “Exclusive Term” means the period as defined in Section 4.1.

1.21 “Firmware” means embedded software in object code form.

1.22 “Group Company” means, with respect to a Party, any parent, subsidiary, affiliate or other person that directly or indirectly controls, is controlled by or is under common control with that Party, where “control” means beneficial control

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of more than fifty percent (50%) of the voting securities or other ownership interests. For clarity, LF Enterprises and LFIRC are Group Companies with respect to each other, and similarly, Anoto and its parent, Anoto Group AB, are Group Companies with respect to each other.

1.23 “Improvement” means any beneficial or useful modification to Technology that enhances the efficiency of, reduces the cost of, improves the reliability of, improves the competitiveness or marketability of or improves usability of such Technology.

1.24 “Intellectual Property Rights” means any and all worldwide rights (including license rights), title, ownership and interest, in existence at the Effective Date or obtained thereafter, in and to copyrights, mask works, industrial designs, trademarks, service marks, trade names, trade secrets, know-how, patents (and all claims, applications, registrations, reissues, divisions, substitutions, renewals, extensions, provisionals, continuations, continuations-in-part and reexaminations thereof) and any other rights to Technology, recognized in any jurisdiction or country of the world, whether or not perfected.

1.25 “Joint Platform” means the platform jointly-developed under this Agreement in accordance with the Statement of Work, including the XY Module, the LeapFrog ASIC and the Platform OS, as further described in joint platform specifications to be agreed upon by the Parties, and any Updates or Upgrades thereto supplied by either Party pursuant to Section 6.8. Anoto’s implementation of the Joint Platform will include the Anoto XY Module, the LeapFrog ASIC, and the Platform OS and may include the LeapFrog SDK for Anoto Content development. LeapFrog’s implementation of the Joint Platform will include the LeapFrog XY Module, the LeapFrog ASIC, and the Platform OS and may include the LeapFrog SDK for LeapFrog Content development.

1.26 “Joint Platform Customer” has the meaning assigned to it in Section 3.1.

1.27 “LeapFrog SDK” means the software development kit to be provided by LFIRC as further described on Schedule C, and, subject to the terms of Sections 6.8 and 11.3, any Updates and Upgrades thereto. The LeapFrog SDK contains third party Technology which Anoto must separately license at the prices and terms offered by such third party and which LeapFrog has made a good faith effort to identify in Schedule C.

1.28 “LeapFrog ASIC” means the application specific integrated circuits (ASICs) to be provided by LFIRC to support audio functionality in Licensed Products as further described in Schedule C, and, subject to the terms of Sections 6.8 and 11.3, any Updates or Upgrades thereto. The LeapFrog ASIC contains third party Technology which Anoto must separately license at the prices and terms offered by such third party and which LeapFrog has made a good faith effort to identify in Schedule C.

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1.29 “LeapFrog Content” means material printed with the Licensed Anoto Dot Pattern to support interactivity with a LeapFrog Product, and any accompanying software for audio, video, data, executable code, storage or other functionality.

1.30 “LeapFrog Indemnified Elements” means the LeapFrog ASIC, the Platform OS and the LeapFrog SDK, in each case excluding any third party hardware or software contained therein to the extent identified on Schedule C.

1.31 “LeapFrog Other New Technology” means Other New Technology developed or acquired by LeapFrog or any LeapFrog Group Company during the Term that has application in the Permitted Anoto Fields.

1.32 “LeapFrog Product” means a Licensed Product that includes a LeapFrog XY Module and that reads the Licensed Anoto Dot Pattern and may read the Dot Codes.

1.33 “LeapFrog Updates” means Updates made by LeapFrog to Licensed LeapFrog Technology, including the LeapFrog ASIC, LeapFrog SDK and Platform OS.

1.34 “LeapFrog Upgrades” means Upgrades made by LeapFrog to Licensed LeapFrog Technology.

1.35 “LeapFrog XY Module” means the implementation of the XY Module to be assembled by LeapFrog pursuant to specifications (including the PAPS) supplied by Anoto as set forth in the Statement of Work, as amended and agreed to by the Parties, from (a) Anoto Compulsory Components acquired from Anoto Authorized Sources, (b) Anoto Key Components acquired from Anoto Authorized Sources or otherwise meeting agreed-upon specifications, (c) licensed third party technologies, and (d) other hardware and Firmware proprietary to Anoto or Anoto Authorized Sources; and (e) any Anoto Update or Anoto Upgrade (subject to purchase in accordance with Section 6.8) to the foregoing provided. For clarity, the LeapFrog XY Module will include a sensor, illumination optics, imaging optics, imaging and position decoding software, and a light-emitting device, and the LeapFrog XY Module will be capable of reading the Licensed Anoto Dot Pattern and, if implemented, the Dot Codes. Schedule B identifies elements of the LeapFrog XY Module that Anoto in good faith believes are proprietary to third parties.

1.36 “Learning Application” means any product or application that (a) involves: (i) the act, process or experience of [*] (b) is promoted, positioned or sold as [*] By way of example:

[*]

1.37 “Licensed Anoto Dot Pattern” means: (a) the parts of the Anoto Dot Pattern licensed to LFIRC by Anoto pursuant to Section 2; and (b) Updates or Upgrades to the foregoing provided under Section 6.8 or Section 11.3.

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[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

1.38 “Licensed Anoto IP” means Intellectual Property Rights owned or Controlled by Anoto or an Anoto Group Company at any time during the Term that are reasonably necessary to allow LFIRC to use or exploit all applications of the Licensed Anoto Technology or Newly Developed Technology owned by LFIRC in the Permitted Field in accordance with the terms of this Agreement. Schedule I includes all Anoto’s and its Group Companies’ patents and patent applications as ‘of Effective Date. Licensed Anoto IP is included in Schedule I but not all of Schedule I is necessarily Licensed Anoto IP.

1.39 “Licensed Anoto Technology” means the following Technology owned or Controlled by Anoto or an Anoto Group Company:

(a) the LeapFrog XY Module including its Firmware;

(b) any deliverable made by Anoto pursuant to the Statement of Work as part of the Joint Platform, except to the extent the deliverable incorporates or embodies the Firmware of the Anoto XY Module, any LeapFrog Pre-Existing Technology or Newly Developed Technology solely owned by LeapFrog pursuant to Section 6;

(c) Test Specifications;

(d) Licensed Anoto Dot Pattern, Dot Codes, Offset Printing Requirement Specification (OPRS), Generic Anoto Paper Application Tool (GAPAT) and Printing Anoto Pattern Specification (PAPS);

(e) Updates and Upgrades to any of the foregoing to the extent provided under and subject to the terms (including additional payments if any) of Section 6.8 or Section 11.3; and

(f) Newly Developed Technology to the extent solely or jointly owned by Anoto pursuant to Section 6.3.

Licensed Anoto Technology in clauses (a), (c) and (d) as of the Effective Date is identified on Schedule B. Anoto has made a good faith effort to identify on Schedule B any third party software or hardware not Controlled by Anoto that is included in the foregoing clauses (a), (c) and (d), and such identified third party software and hardware is excluded from Licensed Anoto Technology.

1.40 “Licensed LeapFrog IP” means Intellectual Property Rights owned or Controlled by LeapFrog or any Group Company of LeapFrog at any time during the Term that are reasonably necessary to allow Anoto to use or exploit the Joint Platform in the Permitted Anoto Field in accordance with the license granted in Section 3.1 and to practice Newly Developed Technology owned by Anoto pursuant to the terms of this Agreement. Licensed LeapFrog IP includes, but is not limited to, the patents and patent applications identified in Schedule J.

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1.41 “Licensed LeapFrog Technology” means the following Technology owned or Controlled by LeapFrog or a LeapFrog Group:

(a) the Technology specifically identified on Schedule C, consisting of the LeapFrog ASIC, the Platform OS and the LeapFrog SDK;

(b) any deliverable made by LFIRC pursuant to the Statement of Work as part of the Joint Platform, except to the extent the deliverable incorporates or embodies any Anoto Pre-existing Technology or Newly Developed Technology solely owned by Anoto pursuant to Section 6;

(c) Updates and Upgrades to any of the foregoing to the extent provided under and subject to the terms (including additional payments if any) of Section 6.8 or Section 11.3; and

(d) Newly Developed Technology solely or jointly owned by LFIRC pursuant to Section 6.3.

LeapFrog has made a good faith effort to identify on Schedule C any third party software or hardware not Controlled by LeapFrog that is included in the foregoing clause (a), and such identified third party software and hardware is excluded from LeapFrog Licensed Technology. Notwithstanding the definition of “Technology”, Licensed LeapFrog Technology will include certain specified source code of software components in accordance with Schedule C.

1.42 “Licensed Product” means an interactive pen, wand, stylus, writing instrument, game or toy that interacts with the Anoto Dot Pattern, and that (a) includes, uses or is made using some part of Licensed Anoto Technology, or (b) but for the licenses granted in Section 2, the manufacture, use, sale, offer for sale or import of which would infringe Licensed Anoto IP.

1.43 “Licensed Technology” means the Licensed Anoto Technology, the Licensed LeapFrog Technology or both, as applicable.

1.44 “Major Country” means Australia, Canada, China, Japan, Korea, the United States and the countries of the European Union as constituted on the Effective Date, Switzerland, Iceland, Norway and Liechtenstein.

1.45 “Newly Developed Technology” has the meaning set forth in Section 6.3.

1.46 “Net Sales Value” means the actual gross selling price specified on the invoice for the sale or other disposition by or for LeapFrog or a LeapFrog Group Company of a Licensed Product or LeapFrog Content in an arm’s length transaction to a third party customer of LeapFrog (not to a LeapFrog Group Company) less customary trade discounts and reasonable and customary allowances for returns and defects, collectively not to exceed [*] of the gross

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selling price, and less taxes, duties and shipping charges to the extent separately stated on the invoice.

1.47 “Net Sublicense Royalty Value” means the actual royalty and license fees received by Anoto and its Group Companies for sublicenses granted pursuant to Section 3.2 and related licenses in arm’s length agreements with third parties (not Anoto Group Companies) for the Joint Platform and associated Anoto Content, including licenses to use hardware, software and related Intellectual Property Rights in the Joint Platform, and to produce Anoto Content for use with the Joint Platform, or actual royalty and license fees received by LFIRC and its Group Companies for sublicenses granted pursuant to Section 2.3 in arm’s length agreements with third parties (not LFIRC Group Companies) for LeapFrog Content. For example, if the Joint Platform were licensed by Anoto through one or more of its Group Companies to an ultimate non-affiliated sublicensee, then the Net Sublicense Royalty Value would be the license fees paid by the non-affiliated sublicensee to the Group Companies, but would not include inter-company payments between Group Companies. For the avoidance of doubt, separately priced service-related revenues and non-recurring engineering fees are excluded from the Net Sublicense Royalty Value and royalty and license fees are counted only once for determining Net Sublicense Royalty Value; provided, however, that prices for such service-related revenues and engineering fees are set in good faith in accordance with regular business practice and not to unreasonably divert revenues from royalties or license fees.

1.48 “Other New Technology” means Technology and Intellectual Property Rights developed or acquired by a Party after the Effective Date, including that Party’s Improvements to its own Technology to the extent such Improvements are not Updates or Upgrades, but excluding Newly Developed Technology, that Party’s Pre-existing Technology or that Party’s Improvement to the other Party’s Technology.

1.49 “Permitted Anoto Fields” means any activities or applications outside of the Exclusive Field.

1.50 “Permitted Field” means the manufacture, use, sale, importation, promotion or distribution of a pen, wand, stylus, writing instrument, toy or game that (a) has one or more of [*] that may be either [*] (b) interacts with any part of the [*] and (c) interacts with the user [*] and (d) may have the [*] (Such a [*] will still be in the Permitted Field if it contains [*]). The Permitted Field encompasses the Exclusive Field, but it expressly excludes the manufacture, use, sale, promotion or distribution of products, devices, processes or services that constitute or practice [*] or that compete with or have similar functionality or features as [*] Notwithstanding the foregoing, downloading of [*] does not by itself remove the device from the Permitted Field.

1.51 “Platform OS” means the software operating system and application program interfaces (APIs) for use on the Joint Platform to be provided by LFIRC as further

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described on Schedule C and, subject to the terms of Sections 6.8 and 11.3, Updates and Upgrades thereto. The Platform OS contains third party Technology which Anoto must separately license at the prices and terms offered by such third party and which LFIRC has made a good faith effort to identify in Schedule C.

1.52 “Pre-existing Technology” has the meaning set forth in Section 6.1.

1.53 “Qualified LeapFrog Foundry” means a foundry identified on Schedule F.

1.54 “Relationship Managers” means the individuals identified by each Party in the Statement of Work to be that Party’s contact for day-to-day communications and coordination development activities under the Statement of Work; provided, however, that each Party may from time to time replace its Relationship Manager upon written notice to the other Party in accordance with this Agreement.

1.55 “Statement of Work” means the program of activities set forth on Schedule A for the development of Joint Platform and the LeapFrog Products, as such schedule may be updated or added to by way of new, subsequent statements of work as mutually agreed upon in writing from time to time in accordance with Section 5.2.

1.56 “Stand Alone (Self-Contained) Device” means a device that [*] that may be either [*].

The term “Stand Alone (Self-Contained) Device,” as used in this Agreement, does not include:

(a) a device in which the audio output is provided solely by either

(i) a [*], or

(ii) [*] (as generally defined in November 2003), or

(iii) [*] (as generally defined in November 2003); or

(b) a device that incorporates Anoto Functionality, does not include a [*] and such device or content for such device is not [*].; or

(c) a device that incorporates Anoto Functionality and [*] that is used to complement the Anoto Functionality and such device or content for such device is [*]

1.57 “Technology” means any computer program or routines (in object code or embedded format, regardless of the medium on which it resides), know-how, hardware and/or software configurations, inventions, documentation, translations, text and other works of authorship, data, databases, information, designs, symbols, names, procedures, processes, technical improvements, prototypes, samples, copies and other materialized forms of any intangibles within the

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foregoing. Technology does not include trademarks, service marks, logos, insignias, trade dress and other proprietary trade designations protected by law. Technology does not include software source code except as otherwise expressly provided elsewhere in this Agreement.

1.58 “Term” has the meaning set forth in Section 16.1.

1.59 “Test Equipment and Specifications” means the PPS production test software and test limits and the Anoto PPS production tester for the XY Module, as further defined in Schedule B and specifications therefor, all as defined in Schedule A.

1.60 “Update” means, with respect to specified Licensed Technology, any bug fix, revision and modification made to the specified Licensed Technology by the Party who owns that Licensed Technology. Updates do not include Upgrades.

1.61 “Upgrade” means, with respect to a specified Licensed Technology, a modification (other than Newly Developed Technology) by the owner of that Licensed Technology that adds functions, enhances performance, lowers costs or reduces the size of the Licensed Technology or its components, resulting in a new version of the Licensed Technology. Notwithstanding any provision in this Agreement to the contrary, including any term defined in this Section 1, Upgrades will be made available and licensed only upon mutual agreement in accordance with Section 6.8.

1.62 “Work Product” means any Technology or other tangible or intangible results of the development activities performed under the Statement of Work by or for Anoto or LFIRC or both.

1.63 “XY Module” means the hardware and software detection module that is capable of interaction with the Anoto Dot Pattern, and that is to be developed by Anoto pursuant to the Statement of Work. The XY Module will contain a CMOS sensor, illumination optics, imaging optics, and imaging and position decoding Firmware

2. DELIVERY AND LICENSE OF LICENSED ANOTO TECHNOLOGY.

2.1 License to LFIRC. Subject to the terms and conditions of this Agreement, Anoto hereby grants to LFIRC the following license rights:

(a) A worldwide, exclusive license under Licensed Anoto Technology and Licensed Anoto IP (i) to acquire Anoto Compulsory Components from an Anoto Authorized Source, (ii) to import Anoto Compulsory Components acquired from an Anoto Authorized Source and (iii) to use, sell, and offer for sale such Anoto Compulsory Components acquired from an Anoto Authorized Source solely as part of Licensed Products in the Exclusive Field for the Exclusive Term.

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(b) A worldwide, exclusive license under Licensed Anoto Technology and Licensed Anoto IP (i) to acquire Anoto Key Components from an Anoto Authorized Source, and (ii) to make and have made Anoto Key Components as authorized pursuant to Section 9 and (iii) to use, sell, offer for sale and import such Anoto Key Components or Anoto Key Components acquired from an Anoto Authorized Source solely as part of Licensed Products in the Exclusive Field for the Exclusive Term.

(c) A worldwide, exclusive license under Licensed Anoto Technology and Licensed Anoto IP to make and have made Licensed Products (except for Compulsory Components) and to use, sell, offer for sale and import Licensed Products in the Exclusive Field for the Exclusive Term.

(d) A worldwide, non-exclusive license under Licensed Anoto Technology and Licensed Anoto IP (i) to acquire Anoto Compulsory Components from an Anoto Authorized Source, (ii) to import Anoto Compulsory Components acquired from an Anoto Authorized Source, and (iii) to use, sell, and offer for sale such Anoto Compulsory Components acquired from an Anoto Authorized Source solely as part of Licensed Products in the Permitted Field for the Term.

(e) A worldwide, non-exclusive license under Licensed Anoto Technology and Licensed Anoto IP (i) to acquire Anoto Key Components from an Anoto Authorized Source, and (ii) to make and have made Anoto Key Components as authorized pursuant to Section 9, and (iii) to use, sell, offer for sale and import such Anoto Key Components or Anoto Key Components acquired from an Anoto Authorized Source solely as part of Licensed Products in the Permitted Field for the Term.

(f) A worldwide, non-exclusive license under Licensed Anoto Technology and Licensed Anoto IP to make and have made Licensed Products (except for Compulsory Components) and to use, sell, offer for sale and import such Licensed Products in the Permitted Field for the Term.

(g) A worldwide, non-exclusive license under Licensed Anoto Technology and Licensed Anoto IP to use Test Specifications solely to design, test, manufacture and maintain LeapFrog Content, Licensed Products and components to Licensed Products in the Permitted Field for the Term.

(h) Subject to the provisions of Section 15, a worldwide, non-exclusive license under Licensed Anoto Technology and Licensed Anoto IP to use, reproduce, make derivative works of, and distribute (for its own internal use or internal use by its suppliers or permitted sublicensees) a reasonable number of copies of the Firmware (in object code only), data, technical documentation, production test software and development tools (in object code only, unless otherwise agreed) included in Licensed Anoto

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Technology (solely to design, test, manufacture and maintain Licensed Products and their components in the Permitted Field for the Term.

2.2 License to the Anoto Dot Pattern. By submitting orders to Anoto, (LFIRC may request a license for parts of the Anoto Dot Pattern. Upon Anoto’s acceptance of the respective order(s) and identification of a specific part of the Anoto Dot Pattern, such specific part will be deemed the “Licensed Anoto Dot Pattern”. Notwithstanding the foregoing, together with the license grant in this Section 2.2, Anoto will allocate to LFIRC a unique and contiguous portion of the Anoto Dot Pattern equal to [*] and the price for such allocated Anoto Dot Pattern will be included in the Initial License Fee stated in Section 5 of Schedule G. In the event that LFIRC wishes to license additional unique areas of the Anoto Dot Pattern, a license fee equal to [*] per unique area equivalent to [*] will be charged. Subject to the terms and conditions of this Agreement, Anoto hereby grants to LFIRC the following license rights:

(a) A worldwide, exclusive license under Licensed Anoto Technology and Licensed Anoto IP to use, print and copy the Licensed Anoto Dot Pattern solely to create, make, have made, use, sell, offer for sale, import, reproduce, publicly display, publicly perform, transmit and distribute (through multiple levels of distribution) LeapFrog Content for the Term.

(b) A worldwide, non-exclusive license under Licensed Anoto Technology and Licensed Anoto IP to use [*] solely to create, make, have made, use, sell, offer for sale, import, reproduce, publicly display, publicly perform, transmit and distribute (through multiple levels of distribution) LeapFrog Content in the Permitted Field for the Term.

2.3 Sublicensing.

(a) Except as provided in this Section 2.3, LFIRC may not grant any sublicense (either directly or through a Group Company) of the license rights granted in this Section 2.

(b) LFIRC may only grant sublicenses under the rights granted in Section 2.1 with Anoto’s prior written consent, which will not be unreasonably withheld or delayed, except that LFIRC may grant sublicenses under the rights granted in Section 2.1 to LFIRC Group Companies without prior consent of Anoto, provided, however, that each such Group Company granted a sublicense signs a sublicense agreement that includes (i) agreement by the Group Company to be bound by the terms of this Agreement, (ii) automatic termination in the event the Group Company ceases for any reason to be a Group Company as defined herein, and (iii) automatic termination in the event this Agreement is terminated.

(c) LFIRC may grant sublicenses (with right to grant further sublicense) under the rights granted under Section 2.2 with respect to the Licensed Anoto

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Dot Pattern only, without Anoto’s prior consent; provided, however, that Anoto will have the right to charge LFIRC for Anoto’s reasonable cost, if any, of administrating the distribution of such sublicensed Licensed Anoto Dot Pattern. LFIRC will provide written notice to Anoto of each sublicense under this Section 2.3(c) within a reasonable time after it becomes effective unless Anoto has already expressly consented to the sublicense.

(d) LFIRC will enter into written agreements with each permitted sublicensee, if any, on terms consistent with this Agreement. Such permitted sublicensee must specifically agree to the applicable terms of this Agreement, and, in particular agree that the sublicensee will not be allowed to (i) modify, create derivatives work of, reverse engineer or decompile the Licensed Anoto Dot Pattern or any other part of the Licensed Anoto Technology that LFIRC may be permitted to sublicense in accordance with this Agreement, (ii) remove any patent, copyright, trade secret or other proprietary rights ownership notices, or (iii) assign or transfer its sublicensed right to the Licensed Anoto Dot Pattern or Licensed Anoto Technology without prior written approval from Anoto.

(e) Sublicenses granted by LFIRC pursuant to Section 2.3(c) to make, have made, offer for sale, sell, and import, reproduce, publicly display, publicly perform, transmit and distribute (through multiple levels of distribution) LeapFrog Content based on the Licensed Anoto Dot Pattern will have a maximum term of [*] and will continue until expiration or termination of that [*] despite the termination or expiration of this Agreement or of the license granted to LFIRC in Section 2.2. LFIRC will provide Anoto with a true copy of each such sublicense within thirty (30) days after its execution. To the extent any such sublicense continues for its remaining term after termination or expiration of this Agreement or of the license granted to LFIRC in Section 2.2, (i) LFIRC will retain rights under this Agreement for the remaining term of such sublicense solely to the extent necessary to support such sublicensee as provided by the terms of such sublicense, (ii) LFIRC will continue to enforce such sublicense and will comply with all provisions of this Agreement applicable such sublicense, including the payment to Anoto of amounts due for such sublicense pursuant to Section 8 and Schedule G, as if this Agreement or of the license granted to LFIRC in Section 2.2 had not expired or been terminated, (iii) except for the grant of license rights under Licensed Anoto Technology and Licensed Anoto IP as necessary to permit continuation of the sublicense for its remaining term, Anoto will have no obligation or liability to LFIRC or any other party to such sublicense under any term of this Agreement, including Section 13, for any actions by LFIRC or such other party to such sublicense occurring after the date of termination or expiration of this Agreement or of the license granted to LFIRC in Section 2.2, and (iv) LFIRC may not grant any new sublicenses

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(or expand the scope of then existing sublicenses) after expiration or termination of this Agreement or the license granted to LFIRC in Section 2.3.

(f) LFIRC will, within thirty (30) days after execution of any sublicense, provide Anoto with the identity of the sublicense, and, to the extent not subject to confidentiality obligations, a summary of the product and market scope of the license rights granted under Licensed Anoto IP and Licensed Anoto Technology and a reasonable description of the sublicensee’s intended use if known by LFIRC. In the event of an audit by Anoto pursuant to Section 8.4, LFIRC will make the entirety of each sublicense agreement available for review, in confidence, by qualified, independent legal counsel and the CPA for purposes of determining not only the accuracy of Royalties paid with respect to such sublicenses, but also that the scope of such sublicenses are consistent with the terms of this Agreement.

2.4 Purchase Procedures. LFIRC agrees to require any manufacturer for LFIRC of LeapFrog Products to comply with the purchasing authorization procedures established by Anoto with any Anoto Authorized Source, which procedures will be provided to LFIRC by Anoto.

2.5 Exclusions. No rights are granted by Anoto under this Section 2 to: (i) any source code of any of the Licensed Anoto Technology (including the LeapFrog XY Module), except as specifically provided in Sections 5 and 11.4; (ii) modify the Leapfrog XY Module, including the Anoto Compulsory Components, without Anoto’s prior written approval; (iii) use the Anoto Infrastructure Software or use the Licensed Anoto Technology to develop software having similar functions as the Anoto Infrastructure Software without written approval from Anoto; or (iv) remove any patent, copyright, trade secret or other proprietary rights ownership notices from Licensed Anoto Technology. Clause (iii) in the foregoing sentence is not intended to prohibit LF Enterprises or LFIRC from independently developing content, content publishing and/or pattern management tools for use by LF Enterprises, LFIRC and their sublicensees with LeapFrog Products or LeapFrog Content, provided in both cases they do not use Licensed Anoto Technology or Licensed Anoto IP in a manner that is contrary to the terms of this Agreement.

2.6 LeapTrack System. Because the LeapTrack system may include functionality falling outside the Permitted Field as performing Anoto Core Applications or as competitive with Anoto Functionality, the Parties agree not later than June 30, 2004, to negotiate in good faith an extension of the license granted in Sections 2.1(d), (e) and (f) to the extent necessary to permit use of Licensed Anoto Technology in the LeapTrack system as it exists as of the Effective Date. In such negotiations, the Parties will consider how LeapFrog could address the market for the LeapTrack system without interfering with the Anoto Functionality and Anoto’s business model related thereto. Any license extension will be on commercially reasonable terms.

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2.7 Delivery of Licensed Anoto Technology. Anoto will provide LFIRC with the Licensed Anoto Technology in accordance with the Statement of Work or on dates otherwise agreed upon.

2.8 No Reverse Engineering. Each of LF Enterprises and LFIRC, for themselves and their Group Companies, undertakes that it will not dissemble, reverse engineer or decompile any technology of the LeapFrog XY Module hardware or software, production software, or other Licensed Anoto Technology except: (a) if Anoto has given its prior written consent; or (b) to the extent permitted according to compulsory applicable law notwithstanding the foregoing prohibition. LF Enterprises and LFIRC will give Anoto prior written notice with detailed explanation prior to exercising any right under sub-section (b) above.

2.9 Upgrades and Updates. LFIRC’s rights to Anoto Upgrades and Anoto Updates are subject to the procedures and conditions set forth in Section 6.8.

2.10 LeapFrog Products. Notwithstanding any other provision of this Agreement, LeapFrog, for itself and its Group Companies, agrees that all Licensed Products made, use, sold, offered for sale or imported by or for LeapFrog, any LeapFrog Group Company or any permitted agent, sublicensee or distributor thereof (a) will include the LeapFrog XY Module, made by or for LeapFrog or a LeapFrog Group Company or permitted sublicensee, using and acquiring Anoto Components (as defined in Section 9) in accordance with the terms of Section 9, and (b) will read solely the Licensed Anoto Dot Pattern and, if so implemented by LFIRC, the Dot Codes: LeapFrog acknowledges and agrees that any breach of the obligations of this Section 2.10 will be a material breach of this Agreement justifying termination by Anoto in accordance with Section 16.2.

2.11 Licensed Field Limitation. LeapFrog expressly agrees for itself and its Group Companies not to use or practice Licensed Anoto Technology or Licensed Anoto IP outside the Permitted Field, not to use or practice Licensed Anoto Technology or Licensed Anoto IP to make, use, sell, offer for sale or import products other than LeapFrog Products, and not to assist or permit any third party to use or practice Licensed Anoto Technology or Licensed Anoto IP except as expressly permitted by this Agreement.

2.12 Exclusive Field Recognition.

(a) It is the intent of the parties that LFIRC, pursuant and subject to the terms of this Agreement, possesses all substantial rights under Licensed Anoto Technology and Licensed Anoto IP in the Exclusive Field, and, accordingly, Anoto expressly agrees for itself and its Group Companies not to use or practice Licensed Anoto Technology or Licensed Anoto IP in the Exclusive Field and not to assist or permit any third party to use or practice Licensed Anoto Technology or Licensed Anoto IP in the Exclusive Field.

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(b) It is also the intent of the Parties that LFIRC, pursuant and subject to the terms of this Agreement, possesses exclusive rights to use of the Licensed Anoto Dot Pattern, and, therefore, Anoto expressly agrees for itself and its Group Companies not to use or permit others to use the Licensed Anoto Dot Pattern for any application.

(c) Anoto will act reasonably and in good faith, and further will not: (i) circumvent LFIRC’s rights to the Exclusive Field by granting a license to a licensee whose purpose with such license, to the extent known by Anoto, would be to enter into direct competition with LFIRC and its sublicensees in the Exclusive Field, or (ii) in the case of Anoto digital pens with audio output, or content for such digital pens, enter into direct competition (which means offering, or allowing its licensees to offer, a product with a similar function as a LeapFrog Product or LeapFrog Content and similar positioning through the same channel) with LFIRC and its sublicensees in Learning Applications.

(d) Anoto will not grant any licensee of a Stand-Alone (Self-Contained) Device that does not include Anoto Functionality and any licensee of Anoto Content for Learning Applications the rights to use the same portion of the Anoto Dot Pattern.

2.13 Permitted Field Rights. Because LFIRC’s rights in the Permitted Field are nonexclusive, Anoto may grant licenses, that may be exclusive except for LFIRC’s rights or nonexclusive, under Licensed Anoto Technology or Licensed Anoto IP to third parties in the Permitted Field, but outside the Exclusive Field during the Exclusive Term. In addition, Anoto may grant licenses in the Exclusive Field in accordance with Section 4.2 and exclusive licenses (even as to LFIRC and its Group Companies) in the Permitted Field in accordance with Section 4.3.

2.14 Dot Pattern Variations. So long as the Licensed Anoto Dot Pattern remains the same as licensed herein, LFIRC may deviate from Anoto specifications for printing the Licensed Anoto Dot Pattern (PAPS or OPRS) as necessary to print on media having surfaces, shapes or sizes not contemplated by such specifications. Anoto will have no responsibility for the functionality of any material printed with the Licensed Anoto Dot Pattern that does not conform to the Anoto specifications, and Anoto hereby disclaims any representation or warranty, including those in Section 12, that may apply to any such material. Material printed with variations of the Licensed Anoto Dot Pattern as contemplated by this Section 2.14, for purposes of the terms of Section 2, will be licensed despite the deviations from the specifications.

3. DELIVERY AND LICENSE OF LICENSED LEAPFROG TECHNOLOGY.

3.1 License to Anoto. Subject to the terms and conditions of this Agreement, LFIRC hereby grants to Anoto the following license rights (the “LeapFrog License”) for the stated purposes, including enabling third party licensees of Anoto (other than

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Anoto Group Companies) (“Joint Platform Customers”) to use Licensed LeapFrog Technology in the Joint Platform:

(a) Subject to the terms and conditions of this Agreement, LFIRC hereby grants to Anoto a worldwide, nonexclusive license under Licensed LeapFrog Technology and Licensed LeapFrog IP solely in the Permitted Anoto Fields during the Exclusive Term and in any field after expiration of the Exclusive Term to:

(i) design and develop the Joint Platform;

(ii) subject to Section 3.2(b), grant royalty-bearing sublicenses to Joint Platform Customers to: (A) purchase the LeapFrog ASIC from a Qualified LeapFrog Foundry solely for use with the Joint Platform; and (B) make, have made, use, sell, offer for sale, import and otherwise commercially distribute products that implement the Joint Platform;

(iii) subject to the provisions of Section 15, use, reproduce, make derivative works of, and distribute (for its own internal use or internal use by its permitted sublicensees) a reasonable number of copies of technical documentation included in Licensed LeapFrog Technology solely as necessary to design, test, manufacture and maintain the Joint Platform and its components.

(b) Subject to the terms and conditions of this Agreement, LFIRC hereby grants to Anoto a worldwide, nonexclusive license under Licensed LeapFrog Technology and Licensed LeapFrog IP solely in the Permitted Anoto Fields prior to December 31, 2009 Term and in any field after December 31, 2009 to:

(i) modify and compile the ASIC system starter/hello world module, in source code format, to create customized versions thereof in object code format;

(ii) install and execute the Platform OS and the LeapFrog SDK, in object code format, on one or more of its own computers solely for developing applications to run on the Joint Platform and solely in accordance with the form end user license agreements that accompany the LeapFrog SDK;

(iii) reproduce copies of the Platform OS and LeapFrog SDK, in object code format only (except the ASIC system starter/hello world module and customized versions of same, which may be distributed in source code format), and to distribute such copies by way of sublicense solely to Joint Platform Customers solely for use with the Joint Platform; and

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(iv) subject to Section 3.2(b), grant sublicenses to Joint Platform Customers, solely in the Permitted Anoto Fields, to: (A) exercise the rights granted under Sections 3.1(a) through 3.1(b); (B) reproduce copies of the Platform OS in object code format only, and to distribute such copies, solely as incorporated into the Joint Platform; and (C) reproduce exact copies of device drivers and other portions of the LeapFrog SDK designated by LFIRC in Schedule C as “redistributable” components and distribute the same solely as incorporated into applications developed using the LeapFrog SDK that are deployed on the Joint Platform.

3.2 Sublicensing.

(a) Except as provided in this Section 3.2, Anoto may not sublicense (either directly or through a Group Company), the license rights granted in Section 3.1.

(b) Anoto may not grant the sublicenses described in Sections 3.1(a)(ii) and 3.1(b)(iv) prior to six (6) months after LeapFrog begins production of Licensed Products using the Interim DotPos or Complete DotPos (as defined in Section 5) without LFIRC’s prior written approval which will not be unreasonably withheld or delayed. Anoto may grant the sublicenses described in Sections 3.1(a)(ii) and 3.1(b)(iv) without LFIRC’s approval at any time after six (6) months after LeapFrog begins production of Licensed Product using the Interim DotPos or Complete DotPos.

(c) Anoto may grant sublicenses under Sections 3.1(b)(i) through (iii) without LFIRC’s prior approval to Anoto’s Group Companies; provided, however, that each such Group Company signs a sublicense agreement that includes: (i) agreement by the Group Company to be bound by the terms of this Agreement, (ii) automatic termination in the event the Group Company ceases for any reason to be a Group Company as defined herein, and (iii) automatic termination in the event this Agreement is terminated. Anoto will provide LFIRC with a true copy of all such sublicense agreements promptly after their execution.

(d) In all cases, Anoto will, within thirty (30) days after its execution, provide LFIRC with the identity of the sublicense, and, to the extent not subject to confidentiality obligations, a summary of the product and market scope of the license rights granted under Licensed LeapFrog IP and Licensed LeapFrog Technology and a reasonable description of the sublicensee’s intended use if known by Anoto. In the event of an audit by LFIRC pursuant to Section 8.4, Anoto will make the entirety of each sublicense agreement available for review, in confidence, by qualified, independent legal counsel and the CPA for purposes of determining not only the accuracy of Royalties paid with respect to such sublicenses, but also that

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the scope of such sublicenses are consistent with the terms of this Agreement.

(e) Anoto will enter into written agreements with each permitted sublicensee, if any, on terms consistent with this Agreement. Such permitted sublicensee must specifically agree to the applicable terms of this Agreement, and, in particular, agree that the sublicensee will not be allowed to (i) modify, create derivatives work of, reverse engineer or decompile the Platform OS, LeapFrog SDK, or any other part of the Licensed LeapFrog Technology that Anoto may be permitted to sublicense in accordance with this Agreement (other than the ASIC system starter/hello world module); (ii) reproduce or distribute the LeapFrog SDK or Platform OS except as expressly permitted under Section 3.1; or (iii) remove any patent, copyright, trade secret or other proprietary rights ownership notices.

(f) If, after expiration or termination of the Exclusive Term, Anoto grants a sublicense under Licensed LeapFrog Technology and Licensed LeapFrog IP to a Joint Platform Customer to make, have made, use, sell, offer for sale, import and otherwise commercially distribute products (including any Anoto Content) that implement the Joint Platform in the Exclusive Field at royalty rates that are less than the Licensed Product Royalty or Licensed Content Royalty, as applicable, then payable by LFIRC pursuant to paragraphs 1 or 2 of Schedule G, Anoto will promptly so advise LFIRC and, upon written request of LFIRC, will amend the royalty rates in paragraphs 1 and 2 of Schedule G, as applicable, so that such rates are as low as the royalty rates payable by such Joint Platform Customer for sales of such products in the Exclusive Field. In the event, after expiration of this Agreement, LeapFrog desires a new license under Licensed Anoto Technology or Licensed Anoto IP, LeapFrog will be entitled to the benefits of this provision with respect to any sublicense that (i) continues after expiration of this Agreement pursuant to Section 3.2(g) and (ii) constitutes potential competition to LeapFrog activities subject to the new license. The benefits of this provision will apply to any such new license only so long as such sublicense(s) continues after expiration of this Agreement.

(g) Sublicenses granted by Anoto pursuant to Section 3.2(b) have a maximum term of [*] and will continue until expiration or termination of that [*] term despite the termination or expiration of this Agreement or of the license granted to Anoto in Section 3.1, subject to the following: (i) Anoto will retain rights under this Agreement for the remaining term of such sublicense solely to the extent necessary to support such sublicensee as provided by the terms of such sublicense, (ii) Anoto will continue to enforce such sublicense and will comply with all provisions of this Agreement applicable such sublicense, including the payment to LFIRC of amounts due for such sublicense pursuant to Section 8 and Schedule G, as

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if this Agreement or of the license granted to Anoto in Section 3.1 had not expired or been terminated, (iii) except for the grant of license rights under Licensed LeapFrog Technology and Licensed LeapFrog IP as necessary to permit continuation of the sublicense for its remaining term, LeapFrog will have no obligation or liability to Anoto or any other party to such sublicense under any term of this Agreement, including Sections 11.3 and 13, for any actions by Anoto or such other party to such sublicense occurring after the date of termination or expiration of this Agreement or of the license granted to Anoto in Section 3.1, (iv) Anoto may not grant any new licenses (or expand the scope of then existing licenses) after expiration or termination of this Agreement or the license granted to Anoto in Section 3.1.

3.3 Purchasing Procedure. Anoto agrees to require any Anoto Joint Platform Customer to comply with the purchasing authorization procedures established by LeapFrog with any Qualified LeapFrog Vendors, which procedures will be provided to Anoto by LeapFrog. An Anoto Joint Platform Customer may not assign or transfer its right to purchase the LeapFrog ASIC from a Qualified LeapFrog Foundry without prior written approval from LFIRC.

3.4 Exclusions. No rights are granted by LFIRC under this Section 3 to: (i) source code of any of the Licensed LeapFrog Technology (including the Platform OS and LeapFrog SDK), except for the system starter/hello world module and pursuant to Sections 5 and 11.4; (ii) modify the Licensed LeapFrog Technology, without LeapFrog’s prior written approval, except for the ASIC system starter/hello world module; (iii) remove any patent, copyright, trade secret or other proprietary rights ownership notices from Licensed LeapFrog Technology; or (iv) any trademark, service mark, logo or other proprietary trade designation, including LEAPFROG or LEAP PAD. LFIRC will have the right to revoke, restrict or limit any portion of the LeapFrog License to prevent the sale of Joint Platforms for use in the Exclusive Field for the Exclusive Term in violation of LeapFrog’s rights under this Agreement.

3.5 Third Party Technology. Anoto and any Joint Platform Customers will need to independently license from third parties the third party Technology referenced on Schedule C. No rights are granted by LFIRC under this Section 3 to any third party software included in the Licensed LeapFrog Technology that is not Controlled by LeapFrog. If LFIRC uses customized third party Technology in the Licensed LeapFrog Technology or to the extent that the LeapFrog ASIC contains third party Technology and such Technology is not Controlled by LeapFrog, then LFIRC will use its commercially reasonable efforts to make arrangements with such third party Technology providers to directly sublicense from LFIRC to Anoto the right to use such customized third party Technology on such terms and conditions to be agreed upon by Anoto, LeapFrog and the applicable third party, which sublicense would require a license fee to such third party software licensors to be paid by Anoto or Joint Platform Customers as agreed by the Parties. The

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Parties will discuss a mutually satisfactory arrangement for such third party Technology.

3.6 License Grant by LF Enterprises to LFIRC. LF Enterprises grants to LFIRC a non-exclusive, non-assignable, non-transferable, royalty-bearing, worldwide right and license to the Pre-existing LeapFrog Technology (as defined in Section 6.1), including Updates and Upgrades (if any) as defined in Section 6.8, with full right to sublicense, to be used in the development of the LeapFrog Licensed Technology and the Joint Platform. The amount of royalty to be paid by LFIRC under this license grant will be determined by LF Enterprises and LFIRC at an appropriate time in the future.

3.7 Delivery of LeapFrog Technology. LFIRC will provide Anoto with the Licensed LeapFrog Technology in accordance with the Statement of Work or on dates as otherwise agreed upon between the Parties.

3.8 No Reverse Engineering. Each of Anoto and Anoto Group Companies undertakes that it will not dissemble, reverse engineer or decompile any Technology, software or other property provided by LFIRC hereunder except: (a) if LFIRC has given its prior written consent; or (b) to the extent permitted according to compulsory applicable law notwithstanding the foregoing prohibition. Anoto will give LFIRC prior written notice with detailed explanation prior to exercising any right under sub-section (b) above.

3.9 Upgrades and Updates. Anoto’s rights to LeapFrog Upgrades and LeapFrog Updates are subject to the procedures and conditions set forth set forth in Section 6.8.

3.10 Field Recognition. Anoto expressly agrees for itself and its Group Companies not to use or practice Licensed LeapFrog Technology or Licensed LeapFrog IP, and not to assist or permit any third party to use or practice Licensed LeapFrog Technology or Licensed LeapFrog IP, except as expressly permitted by this Agreement.

4. LIMITED EXCLUSIVITY.

4.1 Exclusive Term. The Exclusive Term will commence on the Effective Date and continue through [*]. Notwithstanding the foregoing, and except as provided below, Anoto, by written notice to LFIRC, may convert LFIRC’s exclusive rights under Section 2 in the Exclusive Field to nonexclusive rights if LFIRC, directly or through its Group Companies, does not commercially introduce and market prior to [*], one or more LeapFrog Products that, individually or collectively, include all of the following features: (1) pre-loaded content or physically exchangeable content cartridges, and (2) supporting the capability to download content via physical attachment; and (3) wireless connection to a content source; unless the primary cause for such failure to launch such LeapFrog Products is a material delay or failure by Anoto to perform its a material obligation under this

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Agreement or a material failure of a material Anoto deliverable. Notwithstanding the foregoing:

(a) Anoto will not be entitled to exercise such rights if (i) LFIRC gives Anoto written notice in response to Anoto’s notice of proposed termination that it will launch the Licensed Product on or before [*]; and (ii) the Licensed Product is actually launched on or before [*]

(b) If (i) LeapFrog has commercially introduced one or more LeapFrog Products as per the dates defined in Section 4.1 above as required under clauses (1) and (2) above but has not by that time introduced a LeapFrog Product that includes a [*] as required by clause (3) above; and (ii) the Parties have not agreed on an extension of LFIRC’s license in accordance with Section 2.5; then LFIRC’s exclusive rights under Section 2 will remain in effect (notwithstanding the provisions in this Section to the contrary), but clause (iii) of the definition of Exclusive Field will, after [*], be deemed amended by deleting [*] therefrom and thereafter Anoto may license others to distribute for Learning Applications sound-enabled Stand-Alone (Self-Contained) Devices that [*].

4.2 Market Exception Requests. Notwithstanding the grants of exclusive rights to LFIRC in Section 2, Anoto may practice within the Exclusive Field under circumstances specified below:

(a) LFIRC will notify Anoto on or before [*] of the individual markets identified on Schedule L (the “Individual Markets”) within the Exclusive Markets in which it will cause to be launched a LeapFrog Product during the following year (the “Launch Year” for such Individual Markets) as follows: (i) the United States and one (1) additional Individual Market for Launch Year [*]; (ii) two (2) Individual Markets for Launch Year [*]; and (iii) three (3) Individual Markets for Launch Year [*]. If LFIRC does not notify Anoto of the requisite number of Individual Markets by the applicable notification date, then the Individual Markets for the next Launch Year will be the first Individual Markets not previously selected by LFIRC, based on the order in which they appear on Schedule L.

(b) If LF Enterprises or LFIRC directly, or indirectly through its distributors, fails to launch a LeapFrog Product within an Individual Market before the end of the applicable Launch Year, then that Individual Market will no longer constitute part of the Exclusive Markets for purposes of this Section 4 if: (i) Anoto has a bona-fide partner opportunity to commercialize a product within the Exclusive Field (that may, at Anoto’s discretion, incorporate the Joint Platform) within such Individual Market, and Anoto notifies LFIRC thereof in writing by the end of the applicable Launch Year; and (ii) the Parties have discussed in good faith the risk and likely commercialization of such opportunity (provided, however, that the decision to pursue such opportunity will remain in Anoto’s discretion).

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Notwithstanding the foregoing, (x) the United States is not subject to removal from the Exclusive Markets, and (y) LeapFrog will not lose exclusivity as a result of any failure to launch a LeapFrog Product with an Individual Market if such failure was due to the failure of a deliverable or performance of Anoto. Subject to Section 2.13 and 4.3, notwithstanding the removal of an Individual Market from the Exclusive Markets, LeapFrog may continue to exercise its license rights under this Agreement on non-exclusive basis in such Individual Market.

(c) From time to time during the Exclusive Term, if Anoto has a bona-fide partner opportunity to commercialize a product within the Exclusive Field in one or more Individual Markets (that may, at Anoto’s discretion incorporate the Joint Platform), Anoto will submit a written request (including all relevant details with respect to such opportunity that Anoto is permitted to disclose consistent with its confidentiality obligations to such partner) to LFIRC for approval to pursue such opportunity. LFIRC will approve or reject such request within fourteen (14) days after its receipt of such request; provided, however, that LFIRC may reject such request in its good-faith discretion if: (i) LFIRC and/or LF Enterprises is otherwise in compliance with the launch requirements described in Section 4.2(a) above with respect to the market identified in Anoto’s opportunity request; and (ii) the Parties have discussed in good faith the risk and likelihood of commercialization of such opportunity. If LFIRC approves such request in writing, the Exclusive Field will not apply solely within the applicable Individual Market and only to the extent of the ‘partner opportunity approved by LFIRC. Further, the Parties acknowledge that when deciding whether or not to approve an Anoto request the following considerations will be taken into account: (x) the objective of the Parties to cooperate to create a broad de facto standard for the Licensed Anoto Technology and Licensed LeapFrog Technology via the Joint Platform, and (y) the risk of forcing a competing platform; and (z) the risk of reduced overall business for LFIRC and its Group Companies.

4.3 Permitted Field Exception. If, at any time after [*], Anoto proposes to grant to a third party an exclusive license (even as to LFIRC) under Licensed Anoto Technology and/or Licensed Anoto IP in the Permitted Field, but outside the Exclusive Field during the Exclusive Term, Anoto shall first provide LFIRC with a written notice of such proposal which identifies the specific target market for which Anoto proposes to grant an exclusive license. Unless, within ninety (90) days after receipt Anoto’s written notice, LFIRC discloses to Anoto specific plans LFIRC has to exploit that target market and commits in writing to commercialize products in that target market within [*] months after receipt of Anoto’s notice, Anoto may grant the proposed exclusive license (even as to LFIRC and its Group Companies) to the third party for the target market for a period not to exceed three (3) years. Anoto may provide such third party with the option to extend the

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exclusive license period for additional three-year periods, each such extension being subject to LFIRC’s approval pursuant to the terms of this Section 4.3.

5. DEVELOPMENT, DELIVERABLES AND CORRECTIVE ACTION PROCEDURES.

5.1 Engineering Milestone Schedule. The initial engineering milestone schedule is set forth in the Statement of Work and identified as the “Engineering Milestone Schedule”. Each of the Parties will use best commercial efforts to produce the deliverables that it is required to provide under the Statement of Work in accordance with the Engineering Milestone Schedule and agreed upon specifications and criteria contained in the Statement of Work. The Parties each acknowledge that time is of the essence and strict adherence to the Engineering Milestone Schedule is necessary to meet the production start date identified in the Engineering Milestone Schedule (“Production Start Date”), which is the date of commencement of full-scale commercial production and manufacturing of the Licensed Products for the United States Fall/Holiday retail shipping season for 2005.

5.2 Statements of Work. Additional and more detailed specifications and terms with respect to development of the Licensed Product (i.e., division of roles and responsibilities, project schedule, time plan, deliverables, milestones and cost allocation) are set forth in the Statement of Work, which will be deemed part of, and governed by the terms of this Agreement. Each Party will use best commercial efforts to perform its obligations under the Statement of Work to achieve each defined milestone and to deliver specified deliverables that satisfy the applicable specifications and schedules set forth in the Statement of Work. The Parties may agree to modify or supplement the Statement of Work, and any such modification or supplement will be in writing, executed by both parties and attached to this Agreement as an addendum to the Statement of Work.

5.3 Acceptance of Deliverables.

(a) As soon as a Party that is obligated to provide a deliverable under this Agreement, including under the Statement of Work, (an “Obligated Party”) believes it has completed a deliverable for which it is responsible under the Statement of Work (and that such deliverable meets all applicable agreed-upon specifications and acceptance criteria), the Obligated Party will provide such deliverable to the other Party (a “Recipient Party”) for acceptance testing and evaluation, together with a qualification report, if appropriate, documenting that the deliverable meets the agreed upon specifications and acceptance criteria. The Recipient Party will then, within seven (7) days after receipt of such deliverable and the corresponding qualification report (the “Acceptance Period”) test, evaluate and determine whether the deliverable and qualification results meet the agreed-upon specifications and acceptance criteria set forth in the Statement of Work.

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(b) With respect to any deliverable provided hereunder, a Recipient Party will: (i) issue a written notice of acceptance (an “Acceptance Notice”); (ii) issue a written notice of rejection that includes a detailed description of the non-conformance, acceptance criteria not fulfilled and/or other reasons why the deliverable is not reasonably acceptable to such Recipient Party (a “Rejection Notice”); or (iii) issue a written notice that additional time is needed for evaluation in which case the Acceptance Period will be prolonged accordingly (an “Extension Notice”). An Extension Notice may not seek a period of extension for rejection or acceptance greater than ten (10) days past the original Acceptance Period, unless agreed to in writing by the Obligated Party. If the Recipient Party issues an Extension Notice or fails to respond by the end of the Acceptance Period, the schedule for any other deliverables that are dependent upon the timely acceptance of the first deliverable will be delayed, on a day-by-day basis, to reflect the actual delay in acceptance for the first deliverable.

(c) No deliverable will be deemed accepted by a Recipient Party unless and until it issues an Acceptance Notice, except as set forth in this Section 5.3(c). If a Recipient Party has not issued an Acceptance Notice prior to the expiration of the Acceptance Period, the applicable deliverable will be deemed rejected; provided that if the Obligated Party has not received an Acceptance Notice, Rejection Notice or Extension Notice on or before the date of expiration of the Acceptance Period, then the Obligated Party may deliver to the Recipient Party a notice of default acceptance (a “Default Acceptance Notice”) which will result in such deliverable being accepted by default five (5) days after receipt of the Default Acceptance Notice by the Recipient Party (the “Default Acceptance Date”), unless the Recipient Party delivers to the Obligated Party a Rejection Notice or Acceptance Notice or an Extension Notice on or before the Default Acceptance Date. Upon acceptance of a deliverable, whether by default pursuant to this Section 5.3(c) or by an Acceptance Notice pursuant to Section 5.3(b), any applicable payments for completion of such deliverable will be due and payable by the Recipient Party; provided, however, that LeapFrog may elect to take delivery of an Interim DotPos ASIC in accordance with Section 5.7(a)(ii) without being deemed to have accepted the DotPos ASIC or relieving Anoto of its obligations to correct the Interim DotPos ASIC under Section 5.3(d). If no Rejection Notice has been provided, the Recipient Party will not be entitled to invoke a Level One or a Level Two Event, as defined below.

(d) If a Recipient Party issues a Rejection Notice for or, pursuant to Section 5.3, is deemed to have rejected, any deliverable due to non-conformance of the agreed upon specification and acceptance criteria, the Obligated Party will, at no additional charge, use best commercial efforts to implement all necessary corrective actions with respect to the applicable deliverable(s) as soon as practicable (so as not to materially impact the

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overall Engineering Milestone Schedule, and more specifically, the Production Start Date) to deliver promptly a schedule for resubmission, and to resubmit such deliverable for acceptance testing in accordance with this Section 5. If the Obligated Party (i) does not resubmit to the Recipient Party the deliverable that meets the agreed-upon specifications and acceptance criteria within seventeen (17) days from receipt of an Rejection Notice, or (ii) submits a revised schedule for correction of the rejected deliverable that projects an overall delay of the Engineering Milestone Schedule or the Production Start Date of greater than seventeen (17) days, or (iii) fails to submit a revised schedule for correction of the rejected deliverable at all, then the Recipient Party may, at its option, invoke a Level One Event (as defined in Section 5.6(a)), unless the reason for the Obligated Party’s non-conformance is the Recipient Party’s material failure to perform an obligation expressly defined in the Statement of Work the performance of which was necessary for the Obligated Party’s completion of the deliverable.

(e) If the Obligated Party (i) does not resubmit to the Recipient Party the deliverable that meets the agreed-upon specifications and acceptance criteria within forty-five (45) days from receipt of an Rejection Notice, or (ii) submits a revised schedule for correction of the rejected deliverable that projects an overall delay of the Engineering Milestone Schedule or the Production Start Date of greater than forty-five (45) days, or (iii) fails to submit a revised schedule for correction of the rejected deliverable at all, then the Recipient Party may, at its option, invoke a Level Two Event (as defined in Section 5.6(c), unless the reason for the Obligated Party’s non-conformance is the Recipient Party’s material failure to perform an obligation expressly defined in the Statement of Work the performance of which was necessary for the Obligated Party’s completion of the deliverable.

(f) In addition to the terms of Section 18.3, any notice permitted or required by Section 5.3 may be sent by e-mail to e-mail addresses designated in writing by the Party receiving such notices.

5.4 Development Changes.

(a) If a Party wishes to change a Statement of Work (or any of the specifications set forth therein), such Party will provide the other Party notice of such desired change (a “Change Request”) and the Parties will discuss in good faith the ramifications of such Change Request on the overall development schedule and any resulting adjustment in NRE Fees to be charged as a result of such Change Request. No Change Request will be made to the Engineering Milestone Schedule or otherwise to the Statement of Work unless mutually agreed upon by each of the Parties. The Parties will use best commercial efforts to respond to a Change Request as soon as commercially practicable, but not later than ten (10)

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days after receipt of the Change Request. Notwithstanding the submission of any Change Request, unless otherwise specifically directed by the Recipient Party, the Obligated Party will continue its activities in accordance with the then-current Statement of Work unless and until each Party agrees to the Change Request.

(b) In the event of a delay of any task as defined in a Statement of Work, an Obligated Party will, within seven (7) calendar days after the Obligated Party knows or reasonably anticipates such delay, or within two (2) days of missing a delivery or milestone date, notify the Relationship Manager of the Recipient Party, in writing, and provide the following information: (i) a description of the delay, including the impacted deliverables and actual or anticipated duration of the delay; (ii) an analysis of the impact and consequences of the delay on each Party’s deliverables, based on the current project schedule as maintained by the Parties; (iii) the root cause of the delay (or indication of the root cause); and (iv) a schedule recovery plan, including the impact, if any, on the Production Start Date.

5.5 Development Compensation. In consideration of Anoto’s performance of its obligations under the Statement of Work, LFIRC will pay Anoto the NRE Fee of [*] in installments in accordance with Section 5.2 of Schedule G. Any further development work performed by a Party for the other beyond that which is specified in the Statement of Work will be subject to an additional non-recurring engineering fee (“Additional NRE Fee”) calculated at a rate of USD [*] per person-hour, or such other flat fee or other arrangement upon which the Parties may mutually agree; provided that work authorization has been approved in writing by the Recipient Party. Such Additional NRE Fee will be invoiced monthly in arrears and each such invoice will be submitted together with a detailed written record and supporting documents of the work performed approved and countersigned by the Relationship Manager for the Party to whom such invoice is submitted.

5.6 Corrective Action Procedures.

(a) Level One Event. A Recipient Party will, at no additional cost to such Recipient Party, be entitled to exercise Level One Remedies set forth below if: (i) an Obligated Party fails to perform one of its milestone or development obligations (and the reason for such failure is not the Recipient Party’s material failure to perform an obligation expressly defined in the Statement of Work the performance of which was necessary for the Obligated Party’s completion of its milestone or development obligation) in accordance with the Engineering Milestone Schedule, which failure remains uncured for seventeen (17) days; (ii) an Obligated Party’s deliverables are not accepted by the Recipient Party due to nonconformance to the agreed-upon specifications and acceptance criteria and the Obligated Party is unable to correct or otherwise modify the unaccepted deliverable within seventeen (17) days from receipt by the

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Obligated Party of the Rejection Notice (and the reason for such failure is not the Recipient Party’s material failure to perform an obligation expressly defined in the Statement of Work the performance of which was necessary for the Obligated Party’s completion of the pertinent deliverable); (iii) the Recipient Party can reasonably demonstrate that the Production Start Date will be delayed by seventeen (17) or more days as a result of the failure to provide a deliverable (and the reason for such failure is not the Recipient Party’s material failure to perform an obligation expressly defined in the Statement of Work the performance of which was necessary for the Obligated Party’s completion of the pertinent deliverable); or (iv) as otherwise specified above in Section 5.3(c) (each, a “Level One Event”). In addition, the Parties agree to communicate in good faith with respect to interim progress made toward a pending deliverable milestone, and to exercise immediate Level One Remedies as mutually agreed upon in order to meet the Production Start Date.

(b) Level One Remedies. For purposes of this Agreement, “Level One Remedies” means that the Recipient Party will have the right, but not obligation, to have access to and use Technology Controlled by the Obligated Party that is reasonably necessary to support recovery, for the sole purpose of assisting the Obligated Party to fulfill its obligations under this Agreement. Such access and use will be limited to access and use of Technology or Intellectual Property Rights Controlled by the Obligated Party that the Recipient Party would reasonably need to remedy the Level One Event which is the basis for invoking the Level One Remedy and the Obligated Party’s relevant proprietary tools, facilities and equipment (collectively, the “Enabling IP”). Enabling IP provided under a Level One Remedy need not include core technology or source code owned or Controlled by the Obligated Party. All Level One Remedies will be delivered or made available either at the Obligated Party’s offices or such other reasonable location designated by the Obligated Party where such Technology could be used effectively for the purposes set forth in this Section 5.6. The Recipient Party will send to the Obligated Party’s offices (or other designated location) employees or consultants of the Recipient Party that have appropriate expertise to address the causes of the delay or failure of the acceptance of the deliverable or other matter related to the Level One Event. Any reasonable, pre-approved in writing travel costs of the employees or consultants of the Recipient Party to access and use the Technology under the Level One Remedies will be paid by the Obligated Party. In furtherance of the foregoing, the Obligated Party will grant to the Recipient Party a temporary, restricted license (a “Level One Event License”) to use the Enabling IP for the sole purpose of remedying the Level One Event which formed the basis for invoking the Level One Remedy. A Level One Event License will be strictly limited and the Recipient Party will have access to and use of the Obligated Party’s Enabling IP only: (1) to the extent and scope as is absolutely necessary to

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enable the Recipient Party to remedy the Level One Event, as appropriate; (2) for so long as is needed to remedy the Level One Event, as appropriate; and (3) with respect to such number of employees or consultants of the Recipient Party as is needed to enable the proper and timely remedy of the Level One Event, as appropriate. The Recipient Party will provide to the Obligated Party the names, titles and locations of such persons who access or use the Enabling IP (and each such person will sign an individual confidentiality agreement with terms consistent with this Section 5.6(b) and Section 15). Upon completing the remedy for the Level One Event, the Recipient Party will return to the Obligated Party, or, at the Obligated Party’s election, will destroy immediately, all materials relating to the Enabling IP other than the deliverables required under the Statement of Work that are prepared using the Enabling IP, and such Level One Event License will immediately terminate. Each employee or consultant identified by the Recipient Party as having had access to or used such Enabling IP will provide promptly to the Obligated Party a written certification of return or destruction of all such Enabling IP received under the Level One Event License. Enabling IP will, at all times, be deemed Confidential Information of the Obligated Party.

(c) Level Two Events. A Recipient Party will, at no additional cost to such Recipient Party, be entitled to Level Two Remedies set forth below if: (i) the Obligated Party fails to perform one of its milestone or development obligations, and such failure remains uncured for forty-five (45) days (and the reason for such failure is not the Recipient Party’s material failure to perform an obligation expressly defined in the Statement of Work the performance of which was necessary for the Obligated Party’s completion of the pertinent milestone or development obligation); (ii) the Obligated Party has ceased to provide the Recipient Party the maintenance and support as defined in Schedule H contemplated by this Agreement after a written notice of failure to do so by the Recipient Party and such failure is not cured for forty-five (45) days; or (iii) the Production Start Date is delayed by more than forty-five (45) days and the reason for such delay is not the Recipient Party’s material failure to perform an obligation expressly defined in the Statement of Work the performance of which was necessary for the Obligated Party’s completion of the pertinent deliverable or; (iv) as otherwise specified above in Section 5.3(e) (each, a “Level Event”). Notwithstanding the foregoing, the Parties agree that the Level Two Event shall be used as a last resort to meet the Production Start Date, and the Parties shall, without undue delay and not more than ten (10) days after discovery thereof discuss the feasibility of a recovery plan which would resolve the delay in the overall time schedule or the non-conformance without resorting to Level Two Remedies.

(d) Level Two Remedies. For purposes of this Agreement, “Level Two Remedies” means that an Obligated Party will provide to a Recipient

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Party a copy of all of the Obligated Party’s Enabling IP, and will grant to the Recipient Party a temporary, restricted license (a “Level Two Event License”) to use the Enabling IP for the sole purpose of remedying the Level Two Event which is the basis for invoking the Level Two Remedy. A Level Two Event License will be strictly limited and the Recipient Party will have access to and use of the Obligating Party’s Enabling IP, including source code, core technology and documentation owned or Controlled by the Obligated Party, only: (1) to the extent and scope as is absolutely necessary to enable the Recipient Party to remedy the Level Two Event which is the basis for invoking the Level Two Remedy; (2) for so long as is needed to enable the remedy of such Level Two Event; and (3) with respect to such number of employees or consultants of the Recipient Party as is needed to enable the timely remedy of such Level Two Event. The Recipient Party will provide to the Obligated Party the names, titles and locations of such persons who access or use the Enabling IP (and each such person will sign an individual confidentiality agreement with terms consistent with this Section 5.6(d) and Section 15). Upon completion of the remedy of such Level Two Event, the Recipient Party will return, or, at the Obligated Party’s election, will destroy immediately, all materials relating to the Enabling IP other than the deliverables required under the Statement of Work that are prepared using the Enabling IP, and such Level Two Event License will immediately terminate. Each employee or consultant identified by the recipient Party as having had access to or used such Enabling IP will provide promptly to the Obligated Party a written certification of return or destruction of all such Enabling IP received under the Level Two Event License. The Enabling IP will, at all times, be deemed Confidential Information of the Obligated Party.

5.7 Remedies for Major Delays. The following additional remedies will apply to the Statement of Work.

(a) RTP Dates. The “Latest RTP Date” means February 1, 2005 and the “Remedy Date” means March 1, 2005.

(b) Specified Anoto Events. The Parties will work together to monitor the progress of the activities set forth in the Statement of Work regarding the Complete DotPos, and, no later than September 15, 2004, LeapFrog may elect in its discretion to direct the Parties to proceed with preparations for the implementation of the BSU. If a Specified Anoto Event does occur, then the remedies set forth in this Section 5.7(b) will become effective. Notwithstanding anything to the contrary in this Agreement, the provision of any one or more of the following remedies does not (1) operate to cure the Specified Anoto Event or satisfy any milestone set forth in the Engineering Milestone Schedule; (2) relieve Anoto of its obligation to complete and deliver a Complete DotPos to LFIRC as soon as possible; (3) create any obligation for LeapFrog to make any NRE Fee or Additional NRE Fee payments for any incomplete milestone. The

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remedies of this Section 5.7 are in addition to and not in lieu of the Level One and Level Two remedies.

(i) BSU Substitution. If LFIRC has requested Anoto to proceed with the BSU in accordance with Section 5.7(b) above, then Anoto will (1) achieve a RTP Date for the BSU on or before January 15, 2005; and (2) provide reasonable technical assistance to LFIRC in implementing the BSU as an interim solution for the DotPos ASIC in the LeapFrog Product. For clarity, provision of the BSU will not in any way limit or fulfill Anoto’s obligation to deliver the Complete DotPos. In addition:

(A) For each unit of LeapFrog Product containing the BSU rather than the Complete DotPos or Interim DotPos that LFIRC orders from the Anoto Authorized Source between the Remedy Date and the actual RTP Date of the Complete DotPos or Interim DotPos, the applicable Licensed Product Royalty set forth in Schedule G shall be reduced by fifty percent (50%).

(B) (1) The discount provided in paragraph 6 of Schedule G will not apply to LeapFrog Products that are subject to the discount of Section 5.7(b)(i)(A) and that contain a BSU that LFIRC orders between the Remedy Date and [*], resulting in a net royalty reduction of [*] for such Products.

(2) The discount provided in paragraph 6 of Schedule G will apply to LeapFrog Products that are subject to the discount of Section 5.7(b)(i)(A) and that contain a BSU that LFIRC orders after [*], resulting in a net royalty reduction of [*].

(C) Any unit of LeapFrog Product containing the BSU rather than the Complete DotPos or Interim DotPos that LFIRC orders before the Remedy Date will be subject to the Licensed Product Royalty set forth in Schedule G and the discount provided in paragraph 6 of Schedule G, but will not be subject to the discount of Section 5.7(b)(i)(A).

(D) LFIRC will, in ordering units of the BSU to support its manufacturing plans, minimize the quantity of units of the BSU that it orders so that the financial impact of purchasing the BSU as compared to the Complete DotPos is also minimized; provided that the Parties acknowledge that the timing and amounts of LFIRC’s orders will be made with the goal of maximizing sales of LFIRC’s Licensed Products and Content.

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(ii) Interim DotPos ASIC. On an ongoing basis, the Parties will discuss the current technical status of the Complete DotPos. If a Specified Anoto Event occurs, LFIRC may elect in its sole discretion to use in a LeapFrog XY Module the partially completed DotPos ASIC described in Section III of the Statement of Work (the “Interim DotPos”) in LeapFrog Products rather than the BSU. On the RTP Date for the Interim DotPos, remedies set forth in Section 5.7(b)(i) will no longer apply.

(A) The Licensed Product Royalty for each unit of LeapFrog Product containing the Interim DotPos ordered by LFIRC between the RTP Date for the Interim DotPos and the actual RTP Date for the Complete DotPos shall be equal to the applicable Licensed Product Royalty set forth in Schedule G, after deducting the discount set forth in Paragraph 6 of Schedule G.

(B) For each unit of LeapFrog Product containing the Interim DotPos ordered by LFIRC between the RTP Date for the Interim DotPos and the actual RTP Date for the Complete DotPos, LFIRC will be entitled to a credit equal to [*] of the actual per-unit costs incurred by LeapFrog to acquire additional hardware necessary to implement the DotPos ASIC in the Interim DotPos with functionality equivalent to that of the Complete DotPos, excluding any parts or modifications that relate to the LeapFrog specified functions, which are identified in Section III of the Statement of Work (“Unit Credit Amount”).

(C) Beginning with the first unit of LeapFrog Product sold by LeapFrog after the total of all discounts provided for in paragraph 6 of Schedule G have been taken, LFIRC will deduct a Unit Credit Amount from the Licensed Product Royalty payable pursuant to paragraph 1 of Schedule G for each unit of LeapFrog Product until all Unit Credit Amounts accumulated pursuant to Section 5.7(b)(ii)(B) have been exhausted.

(D) For clarity, “Interim DotPos” also includes LeapFrog XY Modules including a DotPos ASIC that have certain deviations from full specifications for an agreed upon period of time, which deviations will be agreed upon by the Parties in writing.

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(iii) Security for Delay.

(A) If Anoto fails to provide an RTP Date for either the Interim DotPos or Complete DotPos by [*], LFIRC will pay the Advance Royalty amount due that day as specified in paragraph 5.5(b) of Schedule G, but [*] of that Advance Royalty payment will be deposited into a Client Account maintained by Anoto on behalf of LFIRC until an RTP Date has been achieved for either the Interim DotPos or Complete DotPos that has been accepted by LFIRC in writing in accordance with this Agreement and the Statement of Work.

(B) If Anoto fails to provide an RTP Date for either the Interim DotPos or Complete DotPos by [*], LFIRC will pay the Advance Royalty amount due that day as specified in paragraph 5.5(c) of Schedule G, but [*] of that Advance Royalty payment will be deposited into the Client Account maintained by Anoto on behalf of LFIRC until an RTP Date as been achieved for either the Interim DotPos or Complete DotPos that has been accepted by LFIRC in writing in accordance with this Agreement and the Statement of Work.

(C) If Anoto fails to provide an RTP Date for either the Interim DotPos or Complete DotPos by [*], LFIRC will pay the Advance Royalty amount due that day as specified in paragraph 5.5(d) of Schedule G, but [*] of that Advance Royalty payment will be deposited into the Client Account maintained by Anoto on behalf of LFIRC until an RTP Date as been achieved for either the Interim DotPos or Complete DotPos that has been accepted by LFIRC in writing in accordance with this Agreement and the Statement of Work.

(D) If Anoto fails to provide an RTP Date for either the Interim DotPos or Complete DotPos by [*], then:

(1) LFIRC may withdraw and keep all funds then on deposit in the Client Account;

(2) LFIRC will have no further obligation to pay any Advance Royalties under this Agreement;

(3) LFIRC will thereafter have no obligation to pay any Royalties under this Agreement on Net Sales Value of LeapFrog Products that accrues prior to the RTP Date for either the Interim DotPos or Complete DotPos;

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(4) LFIRC’s obligation thereafter to pay Royalties under this Agreement on Net Sales Value of LeapFrog Content that accrues prior to the RTP Date for either the Interim DotPos or Complete DotPos will be reduced [*] prior to taking any discount pursuant to paragraph 6 of Schedule G, resulting in a net royalty reduction of [*];

(5) The remedies specified in Section 5.7(b)(iv)(B)(1) through (4) will apply.

(iv) Failure to Provide a Remedy.

(A) First-Level Delay. If a Specified Anoto Event occurs and Anoto fails to provide an RTP Date for either the BSU, the Interim DotPos, the Complete DotPos or another solution acceptable to LFIRC (in its sole discretion) in accordance with Section 5.7(b)(i) or Section 5.7(b)(ii), as applicable (or cures the Specified Anoto Event by providing a RTP Date for the Complete DotPos), on or before [*], then the Advance Royalty payment scheduled for payment pursuant to paragraph 5.5(a) of Schedule G on [*], shall be delayed until Anoto provides an RTP Date for either the BSU, the Interim DotPos, the complete DotPos or another solution acceptable to LFIRC. For the avoidance of doubt, such delay in the Advance Royalty payment shall be in addition to any other remedies available under this Section 5, including those set forth in Section 5.7(b)(i) or Section 5.7(b)(ii) above.

(B) Second-Level Delay. If a Specified Anoto Event occurs and Anoto fails to provide a RTP Date for either the BSU, the Interim DotPos, the Complete DotPos or another solution acceptable to LFIRC (in its sole discretion) in accordance with Section 5.7(b)(i) or Section 5.7(b)(ii), as applicable (or cures the Specified Anoto Event by providing a RTP Date for the Complete DotPos), on or before [*], then the remedies listed below shall apply. For the avoidance of doubt, all of the following remedies shall be in addition to any other remedies available under this Section 5, including those set forth in Section 5.7(b)(i) or Section 5.7(b)(ii) above.

(1) The Exclusive Term will be extended by one (1) year, such that it expires on [*]; and

(2) The Set Term will be extended by one (1) year, such that it expires on [*]; and

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(3) The product launch deadline as set forth in Section 4.1 shall be extended by one (1) year, such that it falls on [*] (rather than [*]); and

(4) Each of the launch year deadlines specified in Section 4.2(a) shall be extended by one (1) year; and

(5) LFIRC shall be permanently relieved of any obligation to make any payments of Advance Royalty pursuant to paragraph 5.5 of Schedule G.

(C) Third Level Delay. In the event that a Specified Anoto Event occurs and Anoto fails to provide a RTP Date for the BSU, the Interim DotPos, the Complete DotPos, or another solution acceptable to LFIRC (in its sole discretion) on or before [*], then LFIRC may, in its sole discretion, elect to terminate this Agreement for cause in accordance with Section 16.2, and, if LFIRC elects to terminate, LeapFrog’s sole remedy is to receive from Anoto an amount equal to [*] plus all Advance Royalties previously paid to Anoto.

(c) Delay in Licensed Product Launch Caused by LeapFrog.

(i) Accelerated Vesting. For purposes of this section, a “Next Year Delay” means a delay of the commercial launch of the first LeapFrog Product by LeapFrog from one calendar year (the “Planned Year”) into the immediately following calendar year (“Delayed Year”), where the first Planned Year is [*]. If a Next Year Delay is either (A) imposed by LeapFrog for its own convenience despite the delivery of all Anoto deliverables in accordance with the Statement of Work reasonably required to start production of LeapFrog Products by LeapFrog (including the provision by Anoto of a RTP Date for a BSU, Interim DotPos or Complete DotPos no later than (1) for [*] the Latest RTP Date, or (2) for any subsequent Planned Year, [*] of the concerned year); or (B) for any Planned Year other than [*] primarily caused by LeapFrog, then such Next Year Delay will be deemed to be a “LeapFrog-Caused Next Year Delay”, and a specified portion (a “Vested Amount”) of the amounts paid to Anoto as Advance Royalties shall become “Vested” in accordance with the table below.

LeapFrog-Caused Next Year Delay	Vested Amount
First LeapFrog-Caused Next Year Delay	[*]
Second LeapFrog-Caused Next Year Delay	[*]

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Third LeapFrog-Caused Next Year Delay	[*]
Fourth LeapFrog-Caused Next Year Delay	[*]

Notwithstanding the foregoing, if a Next Year Delay for the [*] Planned Year is primarily caused by LeapFrog’s material failure to fulfill its express obligations under the Statement of Work, then the table above will be amended so that the Vested Amount during the First LeapFrog-Caused Next Year Delay will be zero, and the Vested Amount for the Third LeapFrog-Caused Next Year Delay will be [*].

For purposes of this Section 5.7(c)(i), “Vested” means that for the LeapFrog-Caused Next Year Delay, effective as of the end of the last day of the Planned Year, the Vested Amount shall be deemed to have been earned and paid to Anoto as a royalty by LFIRC in accordance with Section 5.5 of Schedule G, and consequently shall be deemed nonrefundable and deducted from the total Advance Royalty prepayment credits available to LFIRC for use in offsetting future accrued royalties.

(d) The Parties acknowledge that Change Requests that are accepted by the Parties may, in accordance with their express terms, result in changes to the schedules set forth in the Statement of Work, which in turn may also result in changes to the dates and deadlines set forth in this Section 5.7.

5.8 Additional Definitions.

(a) “DotPos ASIC” means the Anoto mixed-signal ASIC designated as the “DotPos” deliverable in the Statement of Work, which will be designed for use both by LFIRC in its LeapPen product and by Anoto in other licensees’ products.

(b) “Complete DotPos” means a DotPos ASIC-based LeapFrog XY Module that fully conforms to the specifications set forth in the Statement of Work (Milestone M) and additional specifications as agreed to in writing by the Parties in accordance with an update to the Statement of Work, and has been released for non-risk production, including the completion of all appropriate qualification and manufacturing test vectors, which vectors may be adjusted as needed through the production process.

(c) “BSU” means the base system unit for the LeapFrog XY Module as described in the Statement of Work. The BSU is designed to be implemented as a temporary solution in the event of a Specified Anoto Failure.

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(d) “RTP Date” means the date on which the XY Module Components (as defined in the Statement of Work) and an ASIC solution (i.e. the BSU, Interim DotPos or Complete DotPos) has been released for non-risk production, as set forth in the Statement of Work (Milestone M for the Interim DotPos or Complete DotPos or Milestone K for the BSU).

(e) “Specified Anoto Event” means the failure of Anoto to complete and achieve an RTP Date for a Complete DotPos in accordance with the Statement of Work on or before the Latest RTP Date; provided, however, that such failure shall not be deemed a “Specified Anoto Event” to the extent the reason for the delay was LFIRC’s material failure to perform a material obligation expressly defined in the Statement of Work the performance of which was necessary for Anoto’s completion of the DotPos ASIC, or if the failure was caused by Leapfrog specified functions as defined in the Statement Of Work, Section III.

(f) “Client Account” means a separate cash account (i) maintained by Anoto in an established bank in Sweden, (ii) designated by Anoto and LFIRC under applicable Swedish accounting and banking laws and regulations as a segregated account ([*]) containing conditional advance payments by LFIRC to Anoto, and (iii) under applicable Swedish law and this Agreement, allows Anoto to assume title to and withdraw amounts from the account only on the condition that Anoto provides an actual RTP Date for either the Interim DotPos or Complete DotPos in accordance with Section 5.7(b)(iii) and LFIRC agrees in writing to Anoto that such actual RTP Date has been met. The Client Account shall have all characteristics necessary under Swedish bankruptcy law to preserve for LFIRC the balance in the account at the time of any Anoto Bankruptcy Event.

5.9 The remedies set forth in this Section 5 are the exclusive remedies for the events specified in this Section 5 and the occurrence of any such event will not constitute a breach of this Agreement.

6. ALLOCATION OF INTELLECTUAL PROPERTY RIGHTS.

6.1 Pre-existing Technology. The Parties’ Intellectual Property Rights with respect to the Pre-existing Anoto Technology (defined below) and Pre-existing LeapFrog Technology (defined below) will be as follows:

(a) Anoto and Anoto Group Companies retain all Intellectual Property Rights and Technology that any of them owns or Controls prior to the Effective Date of this Agreement, including, but not limited to, Licensed Anoto Technology and Licensed Anoto IP that was owned or Controlled by Anoto or any of its Group Companies prior to the Effective Date (“Pre-existing Anoto Technology”). The Anoto Dot Pattern is Pre-existing Anoto Technology.

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(b) LFIRC and LFIRC Group Companies retain all Intellectual Property Rights and Technology that any of them owns or Controls prior to the Effective Date of this Agreement, including, but not limited to, Licensed LeapFrog Technology and Licensed LeapFrog IP that was owned or Controlled by LFIRC or any of its Group Companies prior to the Effective Date (“Pre-existing LeapFrog Technology”).

(c) Pre-existing Anoto Technology and Pre-existing LeapFrog Technology also referred to generically and collectively as “Pre-existing Technology”.

6.2 Improvements. Notwithstanding any provisions herein to the contrary, the following provisions will apply to patented Improvements (other than LeapFrog Content or Anoto Content) not subject to Section 6.3 or 6.4:

(a) Anoto hereby grants to LeapFrog a worldwide, nonexclusive, royalty-free, irrevocable license under any patented Improvement made by Anoto or its Group Companies during the Term to Pre-existing LeapFrog Technology that is part of Licensed LeapFrog Technology.

(b) LFIRC hereby grants to Anoto a worldwide, nonexclusive, royalty-free, irrevocable license under any Improvement made by LFIRC or its Group Companies during the Term to the LeapFrog XY Module, the Anoto Dot Pattern, the Dot Codes or Test Specifications. LeapFrog will have no obligation to grant licenses to Anoto pursuant to this Section 6.2(b) for Improvements constituting user interfaces or Platform OS or similar system software.

(c) Each Party will disclose to the other Party each Improvement licensed by it under this Section 6.2 promptly after its first publication as a patent or patent application in any country.

(d) The license to Improvements includes a license under Intellectual Property Rights in such Improvements.

(e) The license to Improvements includes the right to grant sublicenses.

6.3 Newly Developed Technology. The Parties’ Intellectual Property Rights with respect to Work Product developed under the Statement of Work (“Newly Developed Technology”) will be allocated as set forth in this Section 6.3, unless otherwise specifically agreed to by the Parties in the Statement of Work attached to this Agreement as Schedule A, or pursuant to a subsequent statement of work agreed to and signed by the Parties. If not otherwise set forth in such Statement of Work then, subject to Section 6.1, upon creation of any Newly Developed Technology under this Agreement, the Intellectual Property Rights to such new Newly Developed Technology will be allocated as follows:

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(a) Improvement to Anoto or LeapFrog Pre-existing Technology. Regardless of whether the Newly Developed Technology is created by LFIRC, Anoto, or jointly by both Parties: (i) Anoto will own all Intellectual Property Rights to any Newly Developed Technology that is an Improvement to any Pre-existing Anoto Technology and is not an Improvement to Pre-existing LeapFrog Technology; and (ii) LFIRC will own all Intellectual Property Rights to any Newly Developed Technology that is an Improvement to any Pre-existing LeapFrog Technology and is not an Improvement to Pre-existing Anoto Technology. Newly Developed Technology that is an Improvement to Pre-existing Anoto Technology and is created solely by LFIRC or jointly by LFIRC and Anoto will become part of the Licensed Anoto Technology, and Newly Developed Technology that is an Improvement to Pre-existing Anoto Technology and is created solely by Anoto will be governed by Section 6.3(g). Newly Developed Technology that is an Improvement to Pre-existing LeapFrog Technology and is created solely by Anoto or jointly by LFIRC and Anoto will become part of the Licensed LeapFrog Technology, and Newly Developed Technology that is an Improvement to Pre-existing LeapFrog Technology and is created solely by LFIRC will be governed by Section 6.3(g).

(b) Improvement of Neither Party’s Technology. If Newly Developed Technology constitutes neither an Improvement of Pre-existing LeapFrog Technology nor an Improvement of Pre-existing Anoto Technology, then all Intellectual Property Rights to such Newly Developed Technology will be (i) solely owned by the Party solely creating such Newly Developed Technology and will be governed by Section 6.3(g), or (ii) jointly-owned by both Parties if such Newly Developed Technology is (x) jointly developed by both Parties, or (y) developed by one Party for and at the expense of the other Party pursuant to the terms of this Agreement.

(c) Improvement to Both Party’s Pre-existing Technology. If Newly Developed Technology constitutes an Improvement of both the Pre-existing LeapFrog Technology and the Pre-existing Anoto Technology, then all Intellectual Property Rights to such Newly Developed Technology will be owned by the Party who solely developed such Newly Developed Technology, and the other Party will receive a worldwide, nonexclusive, royalty-free, irrevocable license (with the right to grant sublicenses) to such Newly Developed Technology; provided, however, that if such Newly Developed Technology was developed by both Parties, then such Newly Developed Technology will be jointly owned by both LFIRC and Anoto without a right to accounting, revenue sharing or prior approval for commercialization or enforcement.

(d) Jointly-Owned Intellectual Property. Intellectual Property Rights in Newly Developed Technology that are jointly-owned by the Parties pursuant to the terms of this Section 6.3 will be subject to the following terms:

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(i) Except as provided in Section 4.2, Anoto will not license or otherwise exercise its rights in jointly-owned Intellectual Property Rights in the Exclusive Field, during the Exclusive Term.

(ii) Except as provided in sub-section (i) immediately above and as provided in Sections 7.2 and 7.3(a), each Party will have an unrestricted right to exploit its interest in such jointly-owned Intellectual Property Rights without accounting to, revenue sharing with, or prior approval for commercialization or enforcement by the other Party.

(e) Deemed Ownership. For the purposes of clarity only, as between LeapFrog and its Group Companies and Anoto and its Group Companies (as defined below), and solely for purposes of this Agreement, any Newly Developed Technology that would, in accordance with Sections 6.3(a)-(b) above, be deemed owned by a LeapFrog Group Company, will be owned in the name of LFIRC, and any Newly Developed Technology that would, in accordance with Sections 6.3(a)-(b) above, be deemed owned jointly, would be owned jointly in the name of LFIRC and Anoto.

(f) No Grant to Pre-existing Technology. For the avoidance of doubt, no assignment or license contemplated by this Section 6.3 shall require either Party to assign or license to the other Party any Intellectual Property Rights in its Pre-existing Technology, even if such Pre-existing Technology is utilized in Newly Developed Technology. License rights in Pre-existing Technology must be separately procured on mutually agreeable prices and terms if such license rights are required to practice the Newly Developed Technology, except to the extent such Pre-existing Technology is included in Licensed Anoto Technology or Licensed LeapFrog Technology, is licensed pursuant to Section 2 or 3, or is subject to the non-assertion provisions of Section 6.9.

(g) Included in License. Any Intellectual Property Rights in Newly Developed Technology (a) if owned only by Anoto or any of its Group Companies, will be included in Anoto Licensed IP and licensed to LFIRC subject to all terms and conditions contained in Section 2; and (b) if owned only by LFIRC or any of its Group Companies, will be included in Licensed LeapFrog IP and licensed to Anoto subject to all terms and conditions contained in Section 3.

6.4 Other New Technology. Each Party will own its respective Other New Technology.

6.5 Assignment and Cooperation.

(a) Agreement to Convey Title. If under applicable mandatory law the allocation of Intellectual Property Rights set forth in Section 6.1, 6.3 or

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6.4, does not automatically vest in the Party entitled to own such rights as set forth in such sections (the “Entitled Party”), each Party (the “Assigning Party”) hereby irrevocably transfers, conveys and assigns (and covenants to irrevocably transfer, convey and assign) to the Entitled Party such of its right title and interest in the Entitled Party’s Intellectual Property Rights as necessary to achieve the foregoing allocation. The Assigning Party will execute such documents and render such assistance and take such other actions as the other Party may reasonably request (at the requesting Party’s expense), to apply for, register, perfect, maintain and protect the other Party’s rights in and to the assigned Technology.

(b) Power of Attorney. If the Assigning Party fails to comply with the foregoing for any reason, the Assigning Party hereby appoints the Entitled Party as its attorney-in-fact with respect to such assignment (and the Assigning Party hereby acknowledges that such appointment is irrevocable and a power coupled with an interest), to act for and in the Assigning Party’s behalf and stead to assign such technology and Intellectual Property Rights therein to the Entitled Party and to execute and file such applications and to do all other lawfully permitted acts (with the same legal force and effect as if executed by the Assigning Party) to further the application for, registration, perfection, maintenance and protection of the other Party’s rights in and to the assigned Technology.

(c) Fallback License. To the extent that under mandatory law, Intellectual Property Rights may not be assigned, the Parties hereby agree to grant an exclusive, perpetual, irrevocable, and unconditional license under such Intellectual Property Rights to the Entitled Party (subject to applicable licenses in this Section 6). To the extent such license grant is invalid or not fully enforceable under mandatory law, the Parties irrevocably agree to grant and hereby grant such right to the Entitled Party as the Entitled Party reasonably requests in order to acquire a legal position as close as possible to the legal position described in Section 6.1, 6.3 and 6.4.

6.6 Realization of Intellectual Property Rights. In order to ensure that each Party will be able to retain, acquire, and use its respective Technology and Intellectual Property Rights as outlined in Section 6.3, each Party will: (a) transfer possession, ownership and title to media, models and other tangible objects containing Technology to the other Party if that other Party is entitled to the Intellectual Property Rights to such Technology under this Agreement; (b) share copies of media, models and other tangible objects containing Technology of both Parties if it is not feasible or commercially reasonable to physically separate the Technology of each Party; and (c) provide the other Party with reasonable support and information for registering or otherwise securing, defending and enforcing such other Party’s Intellectual Property Rights against third parties. Notwithstanding the provisions of this Section 6.6 to the contrary, neither party shall be required to disclose its confidential or proprietary information

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constituting its Pre-existing Technology except to the extent required to provide a deliverable that it is obligated to provide under the applicable Statement of Work.

6.7 Employees and Contractors. In order to ensure that both Parties acquire all Intellectual Property Rights as outlined in Section 6.3, both Parties will exercise commercially reasonable efforts to have all their respective employees, consultants and agents assign or otherwise transfer (as provided in Section 6.5) to the Party that acts as their employer, customer or principal, all Intellectual Property Rights arising out of any work such employees, consultants or agents perform in connection with this Agreement.

6.8 License to Technology Updates, Upgrades and Other New Technology.

(a) Anoto will notify LFIRC of any Anoto Updates of the Licensed Anoto Technology and will provide such Anoto Updates to LFIRC free of charge if and when such Updates become available. Anoto Updates will be deemed to be Licensed Anoto Technology and included in the licenses granted by Anoto under this Agreement. LFIRC will notify Anoto of any LeapFrog Updates of the Licensed LeapFrog Technology and will provide such LeapFrog Updates to Anoto free of charge if and when such LeapFrog Updates become available. LeapFrog Updates will be deemed to be Licensed LeapFrog Technology and included in the licenses granted under this Agreement by LFIRC. It is the objective of the Parties’ cooperation to create a broad de facto standard for the Joint Platform, and LeapFrog Updates and Anoto Updates will be provided in furtherance of the continued update of the Joint Platform.

(b) Upgrades of the Licensed Technology, when and if available, will be delivered and licensed to the other Party, subject to agreed upon upfront license fees and/or royalties.

(c) Anoto will advise LFIRC of the existence of Anoto Other New Technology having application in the Permitted Field, and LFIRC will advise Anoto of the existence of LeapFrog Other New Technology having application in the Permitted Anoto Field.

6.9 Non-Assertion. Anoto agrees that, during the Term, it will not assert, nor permit any of its Group Companies to assert, Licensed Anoto IP against LF Enterprises, LFIRC or their Group Companies or authorized sublicensees based solely upon the exercise of the license rights granted in Section 2, so long as LF Enterprises, LFIRC or their authorized sublicensees, as appropriate, complies with the terms and conditions of this Agreement. LF Enterprises and LFIRC each agrees that, during the Term, it will not assert, nor permit any of its Group Companies to assert, Licensed LeapFrog IP against Anoto, Anoto Group Companies or their authorized licensees, based solely upon the exercise of the license rights granted in Section 3 so long as Anoto, its Group Companies and licensees, as appropriate, complies with the terms and conditions of this Agreement.

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6.10 Future Acquisitions of IP. Any Intellectual Property Right that a Party acquires ownership or Control of during the Term shall be included in the license grant to the other Party as set forth in this Agreement if such Intellectual Property Right is necessary for the other Party to exercise of its rights under such grant. Each Party shall use reasonable commercial efforts (short of having to pay additional license fees or royalties) to gain Control over any Intellectual Property Right that it licenses from a third party if such Intellectual Property Right would be reasonably necessary to allow the other Party to this Agreement to exercise its license rights under Section 2 or 3 (as the case may be) of this Agreement.

6.11 Claims. LFIRC will inform Anoto if LFIRC or any Group Company of LFIRC becomes party to a suit or other proceeding, or is expressly threatened in writing with a suit or other proceeding, based on an allegation that LeapFrog Licensed Technology infringes an issued patent(s) of a third party. Anoto will inform LFIRC if Anoto or any Group Company of LFIRC becomes party to a suit or other proceeding, or is expressly threatened in writing with a suit or other proceeding, based on an allegation that Anoto Licensed Technology infringes an issued patent(s) of a third party. Each Party will have a reasonable time to investigate the relevance of any such threat before informing the other Party, provided that a Party will not be under an obligation to inform the other Party if the threat is, to the best of such Party’s knowledge, not a bona fide claim.

7. PROTECTION OF INTELLECTUAL PROPERTY RIGHTS.

7.1 General Protection Rights. Other than with respect to jointly-owned Intellectual Property Rights, the Party that solely owns Intellectual Property Rights as described in Section 6 will have the sole and exclusive right, but not the obligation to seek, obtain and maintain registrations for and other protection of such Intellectual Property Rights, at its own expense, in such countries as that Party considers appropriate.

7.2 Filings of Jointly-Owned IPR. The Parties will inform each other in writing when a jointly-owned invention has been made. The parties will agree which of them will assume responsibility for and control of preparation and prosecution of a patent application on each jointly-owned invention (“Joint Filing”), in what jurisdictions the application will be filed (including the jurisdiction where the application is to be initially filed), and whether the application will be filed under the Patent Cooperation Treaty. The non-drafting party will have the right to approve the application prior to its initial filing. All Joint Filings and any Intellectual Property Rights issuing thereon will be filed and held in the names of LFIRC and Anoto jointly. The Parties will cooperate in applying for, prosecuting and maintaining any Intellectual Property Rights arising out of such Joint Filings and will equally divide the expenses thereof In the event that one Party elects not to file for or maintain protection of jointly-owned Intellectual Property Rights in any country or jurisdiction, it will give notice thereof to the other Party, which will have the right but not the obligation to file for or maintain such protection jointly in the names of LFIRC and Anoto. Notwithstanding the foregoing, either

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Party may elect within thirty (30) days of being notified of a proposed or actual Joint Filing not to share the expenses of making and maintaining such Joint Filings in any or all countries (with failure to positively indicate agreement to a Joint Filing within the aforesaid thirty (30) days being taken as an election not to share in such expenses), in which case the other Party may file, prosecute and/or maintain such Joint Filings at its own expense and will have sole control of the prosecution of such Joint Filing, even though title will remain joint as aforesaid.

7.3 Enforcement.

(a) Of Jointly-Owned Intellectual Property. Each Party will give prompt notice to the other Party of any suspected infringement of any jointly-owned Intellectual Property Rights by third parties. Upon agreement of the Parties, one Party in the name of both Parties will institute and conduct such legal action against third party infringers or unauthorized users of the jointly-owned Intellectual Property Rights, or may enter into settlement agreements, as are deemed appropriate, subject to agreement of the other Party. Costs of any action will be shared by the Parties. In the event either Party does not agree, within ninety (90) days of receiving written notice from the other Party, that an action should be commenced or a settlement sought against a suspected infringer, then such other Party will have the right to initiate and pursue such action, at its expense. Notwithstanding the foregoing, the Party bringing the action may not settle or otherwise resolve the action in any manner that adversely effects or prevents the other Party from continuing its business as provided for under this Agreement. All awards, damages and settlement amounts received in such actions will be shared equally after first reimbursing the actual and reasonable attorney’s fees and other out-of-pocket expenses incurred by the Party or Parties bringing the action. To the extent applicable laws requires cooperation of joint owners in enforcement of any jointly owned Intellectual Property Right, a party that does not agree with an action will join the action in the name only and at the other Party’s expense. Nothing in this Section 7.3(a) shall limit either Party’s right to grant a license under the jointly-held Intellectual Property Right to an alleged infringer on any terms (including royalty-free terms), provided, however, that a Party may not grant a license to an alleged infringer after the other Party initiates an legal action against the alleged infringer.

(b) Of LFIRC’s Exclusive Rights. Each Party will promptly notify the other Party of any suspected infringement by a third party of Licensed Anoto IP in the Exclusive Field during the Exclusive Term. Anoto, in its own name or jointly with LFIRC if required by law, will have the first option, at its own expense, to bring and diligently prosecute actions for infringement against such third party. LFIRC will, if so requested, join in with such action at Anoto’s expense and will otherwise reasonably cooperate with Anoto in maintaining such actions. If Anoto does not bring an action against such third party within [*] days after a written request by LFIRC

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to do so, then LFIRC may, at its election and expense, bring such action in its own name and in the name of Anoto. If LFIRC brings an action, then Anoto will, if so requested, join in such action at LFIRC’s expense and will otherwise reasonably cooperate with LFIRC in maintaining such actions. If for any reason Anoto refuses to join in an action legitimately brought by LFIRC pursuant to this section and such refusal prevents or unreasonably delays such action, LFIRC may suspend payment of Royalties pursuant to Section 8 until Anoto joins in the action. Notwithstanding the other Party’s joinder or participation in such legal action, the Party bringing suit will have sole control over such legal action and will be empowered to seek an injunction against infringement, collect damages and awards of whatever nature are recoverable for such infringement and settle any claim of infringement. Notwithstanding the foregoing, Anoto may not settle any such action by granting a license that would conflict with LFIRC’s exclusive rights hereunder, without the prior written consent of LFIRC; and LFIRC may not settle any action by granting a sublicense under this Agreement without the prior written consent of Anoto if required in accordance with the terms of this Agreement. All awards, damages and settlement amounts received in such actions will be shared in accordance with the following allocation after first reimbursing the actual and reasonable attorney’s fees and other out-of-pocket expenses incurred by the Party bringing the action: in actions brought by Anoto [*] to Anoto, [*] to LFIRC; in actions brought by LFIRC, [*] to Anoto, [*] to LFIRC.

(c) Other Licensed IP. Each Party will have the exclusive right, but not the obligation, to enforce Intellectual Property Rights owned or Controlled by it that are not subject to exclusive licenses granted pursuant to this Agreement.

7.4 Abandonment. Each Party that is responsible for maintenance or prosecution of a Joint Filing in any or all countries will give notice to the other Party about its intention to abandon such Joint Filing in any or all countries, in which case the other Party, may, by written notice to the responsible Party, assume prosecution or maintenance, at its own expense, of such Joint Filing and will have sole control of the prosecution or maintenance of such Joint Filing, even though title will remain joint as aforesaid. If Anoto elects to abandon any Licensed Anoto IP that is exclusively licensed to LFIRC, Anoto shall give LFIRC sufficient advance written notice thereof to permit LFIRC to elect to assume the control and cost of prosecution and maintenance of such Licensed Anoto IP, but such assumption of control will not change ownership or Control of the Licensed Anoto IP. If either party elects to abandon any Licensed Anoto or LFIRC IP, as applicable, relating to Improvements under section 6.2, the other Party shall have the right but not the obligation to assume the control and cost of prosecution and maintenance of such filing, but such assumption of control will not change ownership or Control of the Licensed Anoto or LeapFrog IP.

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7.5 Markings. LFIRC will use and print, and cause its permitted sublicensees and Group Companies to use and print, a statement(s) on the LeapFrog Content regarding a common identifier supplied by Anoto and agreed to by LFIRC. Such statement will be agreed upon by the Parties as soon as practical after execution of the Agreement, taking into account what is suitable from a marketing and end-user point of view. In addition, LFIRC will mark and cause its Group Companies to mark the LeapFrog Products with appropriate patent numbers, as provided by Anoto; and Anoto will mark the Joint Platforms with appropriate patent numbers, as provided by LFIRC.

8. CONSIDERATION.

8.1 Royalties. In consideration of the rights and licenses granted herein, each Party agrees to pay to the other Party royalties (“Royalties”) and other fees as set forth on Schedule G.

8.2 Royalty Payment. Within [*] days after the end of each calendar quarter, each Party (the “Reporting Party”) will submit to the other Party: (a) a written report detailing the quantity of LeapFrog Products and LeapFrog Content, and Joint Platforms and Anoto Content, sold, the number returned and the applicable Net Sales Value or Net Sublicense Royalty Value, as appropriate, by the Reporting Party during such quarter and on which Royalties are payable as set forth in Schedule G (“Royalty Report”); together with (b) payment of the Royalties due based on the Net Sales Value or Net Sublicense Royalty Value, as appropriate, set forth in such report. No Royalties will be due from LFIRC pursuant to Section 8.2(b) until all Advance Royalties previously paid to Anoto by LFIRC have been exhausted pursuant to the terms of Schedule G. Each Party will maintain books and records of account, in accordance with generally accepted accounting principles, generally sufficient to confirm the accuracy of all reports furnished by the Reporting Party under this Section 8.2.

8.3 Sale Date. LeapFrog Products will be considered sold on the date of invoice or the date of shipment, whichever is earlier, and, if not sold but otherwise disposed of by lease, give-away, placement on consignment or otherwise on the date of shipment.

8.4 Audit and Prescription Period. No more than [*] each calendar year and upon no less than [*] business days prior written notice, each Party (the “Auditing Party”) may have a certified public accountant (“CPA”), reasonably acceptable to the other Party (the “Audited Party”), audit such books and records of account of the Audited Party, to confirm the accuracy and completeness of all the Royalty Reports, and Royalties paid hereunder. The Auditing Party acknowledges and agrees that: (a) such audit may be conducted by the Auditing Party no more than one (1) time in any calendar year during the Audited Party’s normal business hours and in a manner that does not disrupt the Audited Party’s normal business operations; (b) the CPA may inspect and audit the previously unaudited books and records for the [*] month period preceding such audit; (c) the Auditing Party may

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require that the CPA execute the Audited Party’s non-disclosure agreement and not report to the Auditing Party any information other than whether and to what extent the reports and payments hereunder by the Audited Party are accurate. The Auditing Party will bear all costs and expenses incurred in connection with any audit under this Section 8.4.

8.5 Currency. All payments shall be made in U.S. dollars. To the extent that any portion of Royalties payable by either party are based on sales of LeapFrog Products or LeapFrog Content or licensing of Joint Platform or Anoto Content made in a currency other than U.S. dollars, Net Sales Value or Net Sublicense Royalty Value will be calculated by converting such non-U.S. proceeds into U.S. dollars at the rate published in The Wall Street Journal on the business day next following the end of the quarter for which such Royalties are reported by the Party owing the Royalties, as the case may be.

8.6 Taxes. All amounts payable (including up-front license fees, Royalties and NRE Fees) under this Agreement are exclusive of any sales tax, excise tax, value-added tax, duty, levy, custom fee or similar charge (collectively “Taxes”). Any Taxes will be on the account of the Party paying the amount other than income taxes imposed on the Party receiving the amount or any of its Group Companies. Any withholding tax which a Party is required to withhold or deduct from payments of Royalty to the other, if any, will be grossed up and thus the amount required to be withheld will be paid over to the appropriate government authority by the Party paying the royalty without reducing the amount paid to the other Party. The preceding sentence with respect to withholding taxes is based on an understanding by the Parties that payments pursuant to this Agreement by LeapFrog or LFIRC to Anoto from the United States or the Cayman Islands are not subject to withholding taxes, and the Parties agree to amend this provision to equitably distribute the burden of withholding taxes if that understanding is or at any time during the Term becomes incorrect.

8.7 Late Payment. If a Party is overdue with any undisputed payment due under this Agreement then such Party will pay interest on the overdue amount at a rate equal to [*] per month or the maximum rate permitted under applicable law, whichever is less, which interest will accrue on a daily basis from the date the payment becomes overdue until the other Party has received payment of the overdue amount together with any interest that has accrued.

9. COMPULSORY AND KEY COMPONENTS.

9.1 LeapFrog Obligations With Respect to Anoto Compulsory and Key Components.

(a) In order to secure a technically satisfactory quality of LeapFrog Products, LeapFrog must use the Anoto Compulsory Components and, unless otherwise agreed, the Key Components (together “Anoto Components”).

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(b) LeapFrog will use Anoto Components for the sole purpose of implementation in LeapFrog Products.

(c) For all Anoto Compulsory Components and Anoto Key Components used in the LeapFrog Products, LeapFrog will bear the responsibility to have a relationship with the Anoto Authorized Source either (i) through agreements to be entered into between the Anoto Authorized Source and LeapFrog or (ii) for placing orders, using a process agreed between LeapFrog and the Anoto Authorized Source, as an authorized purchaser under the agreement entered into between Anoto and the Anoto Authorized Source. Anoto’s obligations to maintain agreements with Anoto Authorized Sources are regulated below in Section 9.2.

9.2 Anoto Obligations With Respect to Anoto Compulsory and Key Components.

(a) Anoto will use best commercial efforts to facilitate and ensure that LeapFrog is able to enter into agreements with Anoto Authorized Sources for the supply of all Anoto Compulsory Components and agreed upon Anoto Key Components on substantially the same prices, terms and conditions as those at which such vendors have agreed to supply Anoto Components to Anoto.

(b) Anoto will use best commercial efforts to maintain or enter into new supply agreements with Anoto Authorized Sources that give LeapFrog the right to purchase Anoto Components under such agreements on substantially the same terms as Anoto.

(c) Anoto will use best commercial efforts to (a) cooperate in good faith with LeapFrog to identify agreed-upon target prices for the Anoto Components, and (b) encourage Anoto Authorized Sources to meet the target prices agreed-upon by the Parties for the Anoto Components.

(d) Upon written request from LeapFrog identifying an Anoto Key Component and potential vendor who LeapFrog desires to have manufacture such Anoto Key Component, Anoto, as Confidential Information subject to Section 15, will provide specifications of the identified Anoto Key Component to LeapFrog to allow LeapFrog to qualify and appoint the identified new vendor as an Anoto Authorized Source. Anoto may refuse to provide the specifications if it has a good faith reason for objecting to the identified vendor, which objection will be conveyed to LeapFrog promptly after receipt of the written request. Unless otherwise agreed by the Parties, the specifications for such Anoto Key Components will be comparable to the specifications for such Key Components in existence as of the Effective Date.

9.3 LeapFrog Obligations with Respect to the LeapFrog ASIC. LeapFrog will use best commercial efforts to facilitate and ensure that Joint Platform Customers are

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able to enter agreements with Qualified LeapFrog Foundries for the supply of LeapFrog ASIC on substantially the same prices, terms and conditions as those at which such vendors have agreed to supply such components to LeapFrog. LeapFrog will use best commercial efforts to (a) cooperate in good faith with Anoto to identify agreed-upon target prices for the LeapFrog ASIC, and (b) encourage Qualified LeapFrog Foundries to meet the target prices agreed upon by the Parties for the LeapFrog ASIC.

10. SUBCONTRACTORS AND GROUP COMPANIES.

10.1 Subcontractors. Each Party may use subcontractors when exercising the rights granted to it or performing the obligations imposed on it herein (including the performance under the Statement of Work or the manufacturing of the LeapFrog Products or the Joint Platform); provided, however, that any such subcontractor (other than the case when Anoto or LFIRC are acting as subcontractors to the other Party) will be required to enter into an agreement with LeapFrog or Anoto (as applicable) that contains terms that are no less restrictive than the terms contained herein, including but not limited to terms relating to use of the Licensed Anoto or LeapFrog Technology, Licensed Anoto or LeapFrog IP, and Anoto or LeapFrog Confidential Information and that restricts such subcontractors to activities that are solely for the benefit of Anoto or LFIRC. For the avoidance of doubt, subcontractors will not be sublicensed under Licensed Anoto IP or Licensed LeapFrog IP. With respect to manufacturing subcontractors, prior written notice of the identity of each such subcontractor will be given to Anoto or LeapFrog (as applicable). In the event that a Party (the “Responsible Party”) reasonably believes that any of its subcontractors (the “Violating Subcontractor”) is violating the terms of this Agreement, the Responsible Party will notify the Violating Subcontractor thereof in writing. In such case, the Responsible Party will effectively enforce the relevant provisions of this Agreement against such Violating Subcontractor of the Responsible Party or terminate the relevant rights granted to such Subcontractor of the Responsible Party as the Responsible Party deems appropriate. Notwithstanding the foregoing, any act or omission of such Violating Subcontractor will be deemed an act or omission of Responsible Party. Consequently, all obligations of Anoto will run only to LFIRC and all obligations of LFIRC will run only to Anoto. Nothing herein will prevent Anoto or LeapFrog, as applicable, from enforcing its respective Intellectual Property Rights against any Violating Subcontractor.

10.2 Group Companies. In the event that a Party (the “Responsible Party”) reasonably believes that a Group Company of either Party (the “Violating Group Company”) is violating the terms of this Agreement, the Responsible Party will notify the Violating Group Company and the other Party thereof in writing. The Parties will cooperate to effectively enforce the relevant provisions of this Agreement against such Violating Group Company or to terminate the relevant rights granted to such Violating Group Company where appropriate. For the avoidance of doubt, any non-compliance with the provisions of this Agreement by

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any Group Company of a Party will be deemed a breach of this Agreement by that Party.

10.3 Sublicensees. In the event that a Party (the “Responsible Party”) reasonably believes that any of its permitted sublicensees is violating the terms of the sublicense agreement (“Violating Sublicensee”), such Party will notify the Violating Sublicensee thereof in writing. In such case, the Responsible Party will effectively enforce the relevant provisions of this Agreement and the sublicense agreement against such Violating Sublicensee or terminate the relevant rights granted to such Violating Sublicensee as the Responsible Party deems appropriate. For the avoidance of doubt, any non-compliance with the provisions of this Agreement or the sublicense agreement by any Violating Sublicensee of a Party (other than by one of its Group Companies) in and of itself will not be deemed a breach of this Agreement by the Responsible Party, but nothing herein will prevent Anoto or LeapFrog, as applicable, from enforcing its respective Intellectual Property Rights against any Violating Sublicensee of the other Party.

10.4 Letter of Credit. To guarantee its performance under this Agreement, within sixty (60) days after the Effective Date, LFIRC will obtain, maintain and provide to Anoto an irrevocable standby letter of credit with an institution reasonably acceptable to Anoto in an amount of the greater of [*] or the amount of NRE Fees, Interim License Fees or Advanced Royalties payable during the next six months, and after exhaustion of Advance Royalties, Royalties payable for the coming six months based on forecast provided by LeapFrog. Thus, for example, (a) on the date within sixty (60) days after the Effective Date, the letter of credit amount will be [*], which is intended to cover all amounts specified in Schedule G as payable in [*], (b) on [*], the letter of credit amount will be [*], which is intended to cover all amounts specified in Schedule G as payable through [*], (c) on [*] the letter of credit amount will be increased to [*], which is intended to cover all amounts specified in Schedule G as payable from July 1, 2005 through [*], and (d) on [*], the letter of credit amount may be reduced to [*], which is intended to cover all amounts specified in Schedule G as payable from [*] through [*]. The letter of credit will be structured to allow payment upon default, upon either the joint instruction of the parties, or an order or award of an arbitrator under Section 17.2, or a court of competent jurisdiction, that payment is due by LFIRC to Anoto (including but not limited to payment under the terms of Schedule G as payable from [*] through [*], damages, liabilities, lawyers fees, arbitration or court costs awarded by such arbitrator or court).

11. GENERAL UNDERTAKINGS.

11.1 Responsibility for the XY Module. Anoto will be responsible for the development of the LeapFrog XY Module. Accordingly, Anoto, in accordance with the Statement of Work, will bear the overall responsibility for the development and the specification of the LeapFrog XY Module. Other than with respect to the LeapFrog XY Module and except as provided in Section 5 and the Statement of Work, LFIRC will be responsible for the development of the LeapFrog Product.

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Accordingly, except as provided in Section 5 and the Statement of Work LFIRC will bear the responsibility for assembly from Anoto Components of the LeapFrog XY Module, for the LeapFrog Product specification, for development, industrialization, testing and production of the LeapFrog Product and its components, and for the final product as such.

11.2 Product Liability for Licensed Product. The Party selling a LeapFrog Product or licensing the Joint Platform to third parties (“Selling Party”) will defend and indemnify the other Party (“Licensing Party”) from and against any claims that a product sold by the Selling Party (or the Selling Party’s licensees, as the case may be) caused damage to persons or tangible property. The obligation herein on the Selling Party will not apply if the claim of damage is based on (i) a product not supplied or controlled by the Selling Party (or its Joint Platform licensees), or (ii) a combination of a product supplied or controlled by the Selling Party (or its Joint Platform licensees) and other components not supplied or controlled by the Selling Party, or (iii) use of a product supplied or controlled by the Selling Party (or its Joint Platform licensees) in an unintended manner. A Party’s obligation under this Section 11.2 to defend and indemnify the other Party against a claim will be conditioned on: (a) it receiving prompt notice of the claim; (b) it having sole control of the defense and any related settlement negotiations; provided, however, that the indemnified party shall have the right to approve any settlement agreement purporting to bind it; and (c) the indemnified party cooperating in the defense. An indemnified party under this Section 11.2 will have the right, at its own expense, to participate in the defense with counsel of its choosing. Each Selling Party Agrees that it will not, without the Licensing Party’s written consent, exercise (or sublicense others to exercise) its license rights under Section 2 or 3 (as applicable) to produce or sell products or content used in the following activities: the design, construction, operation or maintenance of any life-support system, aircraft, weapons system or nuclear facility; aircraft navigation or control; medical diagnosis or the prescription or dispensation of drugs to humans; or any other activity in which the failure of the device could reasonably be expected to result in loss of human life, personal injury or property damage.

11.3 Maintenance and Support. Anoto and LFIRC will provide maintenance and support services to each other with respect to the Licensed Anoto Technology and Licensed LeapFrog Technology, respectively, in accordance with the Maintenance and Support Terms set forth on Schedule H. The Parties acknowledge and agree that: (a) each party will provide its respective maintenance and support services at no additional charge, unless otherwise agreed to in Schedule H; and (b) neither LFIRC nor Anoto will be obligated to provide support to any third party unless expressly agreed upon by LFIRC or Anoto, as applicable, on a case-by-case basis.

11.4 Protection of the Parties’ Rights in Event of Bankruptcy.

(a) To preserve the confidentiality of this Agreement, the Parties, within sixty (60) days after the execution of this Agreement, will draft an agreed-upon

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short-form version of the licenses contained herein (“Agreement Summary”) suitable for recordation in copyright and patent registers. Each party hereby authorizes (“Authorizing Party”) the other party to register (“Registering Party”), at its own expense, the Agreement Summary with the copyright and patent registers in all jurisdictions where the Authorizing Party has registered a patent covered by the license grant herein. The Authorizing Party agrees to provide assistance in obtaining such registration. Each Party will, at the request and expense of the other Party, register (and cause its Group Companies to register) its (or their) copyrights to the Licensed Technology that it has delivered to the other Party.

(b) All rights and licenses granted under this Agreement are and will otherwise be deemed to be, for purposes of Section 365(n) of the United States Bankruptcy Code, 11 United States Code, Section 101, et seq. (“Bankruptcy Code”), licenses of rights to “intellectual property” as defined under Section 101(35A) of the Bankruptcy Code. The assignment restrictions of Section 18.6 will not operate to prevent a trustee or debtor-in-possession from assuming this Agreement if a Party enters into bankruptcy proceedings under Chapter 11 of the Bankruptcy Code; provided, however, that this provision will not operate to permit such trustee or debtor-in-possession from transferring this Agreement to a third party in contravention of Section 18.6. Nothing in this Section 11.4(b) is intended to conflict with or modify the laws of any other country.

(c) “Bankruptcy Event” means, with respect to a Party, a declaration by a court or other government agency having jurisdiction that the Party is (i) bankrupt or (ii) the Party is in liquidation.

(d) In the event Anoto suffers a Bankruptcy Event, the Parties stipulate that any Advance Royalty previously paid by LFIRC to Anoto pursuant to Schedule G that, as of the Bankruptcy Event, has not been credited against Royalties accruing pursuant to Section 8 and Schedule G or otherwise have become a Vested Amount pursuant to Section 5.7(c)(i) shall be offset against LFIRC’s Royalty obligation under the doctrine of recoupment in bankruptcy.

(e) “Deposit Material” will have the meaning agreed to by the Parties and included in the escrow agreement executed pursuant to Section 11.4(f). The Parties acknowledge that Deposit Material as that term is to be agreed-upon in the Escrow Agreement must include documentation, source code owned or Controlled by Anoto or its Group Companies, ASIC design files and other materials as are reasonably necessary for LFIRC to develop, enhance and support the Licensed Anoto Technology upon release from the escrow.

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(f) The Parties will enter into and negotiate in good faith an escrow agreement with DSI Technology Escrow Services, an escrow agent located in the United States, which will hold in escrow the Deposit Material for the benefit of LFIRC, pursuant to an escrow agreement to be entered into within sixty (60) days after execution of this Agreement, unless otherwise agreed. LFIRC will bear the cost of all the fees of DSI Technology Escrow Services. Anoto will deposit the initial Deposit Material and, at a reasonable frequency to be agreed upon by the Parties in the escrow agreement, any future Updates and Upgrades used in LeapFrog Products (subject to mutual agreement on royalties and license fees in accordance with Section 6.8(b)), with DSI Technology Escrow Services in accordance with the escrow agreement. The parties will in the Escrow Agreement agree on the procedure and frequency for deposit of Updates. LFIRC will be entitled to verify and audit Anoto’s compliance with the foregoing deposit and updating requirement once per year. The escrow agreement will specify that the escrow agent owns the physical copy (but not the Intellectual Property Rights therein) of the Deposit Materials that are in its custody, and it will specify that Anoto will have no right of objection if Anoto suffers a Bankruptcy Event.

(g) The escrow agreement negotiated pursuant to Section 11.4(f) will provide that LFIRC will be entitled to a release of the Deposit Material in the event of an Anoto Bankruptcy Event.

(h) LFIRC is hereby granted a worldwide, non-exclusive license to the Deposit Material, under the terms of Section 2.1 and this Section 11.4(h), and subject to the other terms of this Agreement, including consideration pursuant to Section 8, for the sole purpose of enabling LFIRC to carry out the rights and obligations set forth in this Agreement. LFIRC has no right under this Section 11.4(h) to possession of particular Deposit Material until such Deposit Material has been released from escrow in accordance with the escrow agreement. For the avoidance of doubt, the license grant to the Deposit Material does not give LFIRC any rights in addition to those granted herein, except that LFIRC, and its suppliers to the extent of acting solely for LFIRC, have the right to reproduce, internally distribute, create derivative works, compile and otherwise modify the Deposit Materials to develop, enhance and support Licensed Products so long as the Deposit Materials are treated as Confidential Information of Anoto. LFIRC hereby assigns to Anoto all derivative works based on and Improvements to Deposit Materials made by or for LFIRC or any of its Group Companies during exercise of rights granted pursuant to this Section 11.4(h), provided, however, that all such derivative works will become part of Licensed Anoto Technology and Licensed Anoto IP and will be licensed to LFIRC in accordance with the terms of Section 2.

(i) Upon request from Anoto, the Parties will enter into and negotiate in good faith a source code escrow agreement with an internationally reputable

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escrow agent located in Sweden that will hold in escrow the source code to the software contained in LeapFrog Licensed Technology provided to Anoto pursuant to the terms of this Agreement (including LeapFrog Updates to same which are requested to be deposited by Anoto) for the benefit of Anoto. Anoto will bear the cost of all the fees for the agreed escrow agent. Anoto will be entitled to verify and audit LFIRC’s compliance with the foregoing deposit and updating requirement once per year. The provisions of Section 11.4(h) will apply pari passu to the escrow arrangement established to hold LeapFrog Licensed Technology.

11.5 Covenant Not to Compete. LeapFrog agrees that promoting or selling in the Exclusive Field products that employ Technology that [*] (a “Replacement Technology”) would be inconsistent with the purposes of this Agreement, and, accordingly, LFIRC agrees, during the Exclusive Term, that it and its Group Companies will not manufacture, sell, distribute or market within the Exclusive Field any Replacement Technology. Further LeapFrog agrees to notify Anoto (i) [*] months prior to any intended launch of a product that incorporates any Replacement Technology or (ii) upon a decision by LFIRC or its Group Companies to initiate development of Replacement Technology with an intent to launch a product, which ever date is the earliest. Upon such notice by LFIRC or any Group Company, Anoto may terminate the Exclusive Term by giving LFIRC notice of termination describing the alleged breach in reasonably specific detail. LFIRC will have a grace period of [*] days, beginning on the date that LFIRC receives such notice, to permanently cease the breach described in the notice. If LFIRC terminates or causes termination of the breaching activity within the [*] day grace period, then the Exclusive Term will remain in effect; otherwise the Exclusive Term will terminate at the conclusion of the [*] day grace period. Termination of the Exclusive Term will be the sole remedy for any breach by LFIRC or its Group Companies of this Section 11.5.

Notwithstanding the foregoing, this Section 11.5 will not apply if Anoto is in material breach of this Agreement or if there has been a failure of a deliverable or performance of Anoto that results in a material delay or reduction in LFIRC’s ability to properly commercialize the Licensed Anoto Technology.

Further, and without limitation to the foregoing, if Anoto has not achieved an RTP Date for either an Interim DotPos or Complete DotPos by [*], LFIRC or its Group Companies, have the right to initiate development of Replacement Technology with intent to launch a product that incorporates such Replacement Technology, without notifying Anoto as set forth in this Section 11.5. If Anoto, after such event, achieves an RTP date of the Complete DotPos or Interim DotPos on or before [*], then LFIRC and its Group Companies shall immediately notify Anoto of such development and of its intent to either cease or proceed with such development. If LFIRC or its Group Companies proceeds with development with intent to launch a product that incorporates Replacement Technology, Anoto may terminate the Exclusive Term according to the procedure, terms and conditions set forth above.

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12. LIMITED WARRANTY AND DISCLAIMER.

12.1 Anoto Warranty. Anoto warrants to LeapFrog that:

(a) for [*] months after delivery, the LeapFrog XY Module and Test Specifications delivered to LFIRC will substantially conform to the applicable final specifications therefore as set forth in the Statement of Work as mutually agreed to by the Parties, excluding any errors or non-conformities caused by LeapFrog’s implementation or by its improper handling, assembly or production of the LeapFrog XY Module or Test Specification; and

(b) the specifications for the Licensed Anoto Technology, provided by Anoto to Anoto Authorized Sources and/or LeapFrog in connection with the development or manufacture of any LeapFrog Product will be free from defects in design and will correctly specify the requirements necessary for obtaining the agreed upon functionality to be incorporated in or supported by the LeapFrog XY Module incorporated in the LeapFrog Product (as set forth in the Statement of Work).

12.2 LeapFrog Warranty. LFIRC and LF Enterprises each warrant to Anoto that:

(a) for [*] months after delivery to Anoto, the LeapFrog ASIC, Platform OS and LeapFrog SDK being sublicensed by Anoto to Anoto customers will substantially conform to the applicable final specifications therefore as set forth in the Statement of Work as mutually agreed to by the Parties, excluding any errors or non-conformities caused by Anoto’s implementation or its licensees’ improper handling, assembly or production of Joint Platform; and

(b) the specifications for the Licensed LeapFrog Technology, provided to in connection with the development or manufacture of any Joint Platform will be free from defects in design and will correctly specify the requirements necessary for obtaining the agreed upon functionality to be incorporated in or supported by the Joint Platform (as set forth in the Statement of Work).

12.3 Warranty Remedies. In the event of a breach of warranty of either Party as specified in Section 12.1 or 12.2, the non-breaching Party’s exclusive remedy and the breaching Party’s sole obligation (except for the remedies of Section 5, if applicable) will be to notify the breaching Party no later than [*] months after the final delivery of the nonconforming item subject to warranty, whereupon the breaching Party will, at its own cost, work with the relevant vendors to correct any nonconformities between the specification and the item by changing the specification (subject to consent by the non-breaching Party, which consent will not be unreasonably withheld) or modifying the item and, if required, provide an Update to the item subject to warranty as necessary to remedy the breach of

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warranty as soon as possible but not later than within [*] days after the receipt of notice of such breach. For the avoidance of doubt, the breaching party will have no liability with respect to cost related to scrap, re-work, re-call, repair or similar of products or components caused by such non-conformity.

12.4 Disclaimer. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, EACH PARTY PROVIDES ITS LICENSED TECHNOLOGY AND LICENSED IP WITHOUT WARRANTY OF ANY KIND. EACH PARTY HEREBY DISCLAIMS ALL OTHER WARRANTIES EXPRESS, IMPLIED OR STATUTORY, INCLUDING, WITHOUT LIMITATION, ALL IMPLIED WARRANTIES OF MERCHANTABILITY, NON-INFRINGEMENT AND FITNESS FOR A PARTICULAR PURPOSE.

13. WARRANTIES AND INTELLECTUAL PROPERTY RIGHTS INDEMNIFICATION.

13.1 Anoto Representations and Warranties. Anoto represents and warrants, to and for the sole benefit of LFIRC, as follows:

(a) Anoto has reviewed its patent files as of [*], and identifies in Schedule K those issued patents of third parties that Anoto believes are the most relevant to Anoto’s Technology and that it is aware of no other issued patents that it believes are more pertinent to Licensed Anoto Technology than those identified in Schedule K.

(b) Anoto or its Group Company owns all right, title and interest in and to the Anoto Licensed IP and, as of the Effective Date, the patents and patent applications listed in Schedule I free and clear of any liens and security interests (other than nonexclusive licenses granted outside of the Exclusive Field and exclusive licenses granted outside of the Permitted Field).

(c) The manufacture, use, sale or distribution of Anoto Indemnified Elements as permitted under this Agreement will not infringe or misappropriate or otherwise violate any third party’s copyright, trade secret, mask work or trademark throughout the world.

(d) Anoto has made a good faith effort to specify in the Statement of Work or other schedule to this Agreement all hardware and software provided by or proprietary to a third party included in the Licensed Anoto Technology delivered by Anoto under the Statement or Work.

(e) Anoto has the right and power to grant the licenses under its respective Licensed IP as granted in Section 2 of this Agreement.

(f) Anoto has the right and power to place software source code that is owned or Controlled by Anoto or its Group Companies into escrow and to grant contingent rights thereto as provided in Section 11.4.

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(g) Anoto and its Group Companies have no actual knowledge as of the Effective Date of any third party infringement of Licensed Anoto IP in the Exclusive Field.

(h) Anoto and its Group Companies have exercised commercially reasonable efforts to insure all officers, employees and contractors are contractually obligated to assign to Anoto or one of its Group Companies rights in Technology made for Anoto or one of its Group Companies and are contractually obligated to hold in confidence Confidential Information of Anoto and its Group Companies.

(i) To the best of Anoto’s and its Group Companies’ knowledge upon reasonable inquiry, no funding, facilities or personnel of any government body were used to develop or create, in whole or in part, any Licensed Anoto Technology.

(j) As of the Effective Date, Anoto and its Group Companies have not participated in standard setting activities of a standard setting body with respect to the Licensed Anoto Technology.

(k) As of the Effective Date, to the best of Anoto’s and its Group Companies’ knowledge upon reasonable inquiry, Anoto or any Group Company is not engaged in any lawsuit, arbitration or other legal proceeding to which Anoto or any of its Group Companies (or any person who is entitled to indemnification in such proceeding by Anoto or any of its Group Companies) is a party, involving: (i) an allegation that the Licensed Anoto Technology as licensed as of the Effective Date of Agreement (or its use by Anoto licensees) infringes a granted patent of another party; or (ii) that any Licensed Anoto IP is invalid, not infringed or unenforceable, other than [*] filed in the [*].

13.2 LeapFrog Representations and Warranties. LFIRC represents and warrants, to and for the sole benefit of Anoto, as follows:

(a) LeapFrog has reviewed its patent files as of [*], and identifies in Schedule K those issued patents of third parties that LeapFrog believes are the most relevant to the Licensed LeapFrog Technology and that it is aware of no other issued patents that it believes are more pertinent to Licensed LeapFrog Technology than those identified in Schedule K.

(b) LFIRC or its Group Company owns all right, title and interest in cash to the LeapFrog Licensed IP free and clear of any liens and security interests (other than nonexclusive licenses).

(c) LFIRC has made a good faith effort to specify in the Statement of Work or other schedule to this Agreement all hardware and software provided by or

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proprietary to a third party included in the Licensed LeapFrog Technology delivered by LFIRC under the Statement of Work.

(d) The manufacture, use, sale or distribution of LeapFrog Indemnified Elements as permitted under this Agreement will not infringe or misappropriate or otherwise violate any third party’s copyright, trade secret, mask work or trademark throughout the world.

(e) LFIRC has the right and power to grant the licenses under its respective Licensed IP as granted in Section 3 of this Agreement.

(f) LFIRC has the right and power to place software source code that it owns or Controls into escrow and to grant contingent rights thereto as provided in Section 11.4(i).

(g) LFIRC and its Group Companies have no actual knowledge as of the Effective Date of any third party infringement of Licensed LeapFrog IP in the Exclusive Field.

(h) LFIRC and its Group Companies have has exercised commercially reasonable efforts to insure all officers, employees and contractors are contractually obligated to assign to LFIRC or one of its Group Companies rights in Technology made for LFIRC or its Group Companies and are contractually obligated to hold in confidence Confidential Information of LFIRC and its Group Companies.

(i) To the best of LFIRC’s and its Group Companies’ knowledge upon reasonable inquiry, no funding, facilities or personnel of any government body were used, directly or indirectly, to develop or create, in whole or in part, any of the Licensed LeapFrog Technology or Licensed LeapFrog IP.

(j) As of the Effective Date, LFIRC and its Group Companies have not participated in standard setting activities of a standard setting body with respect to the Licensed LeapFrog Technology.

(k) The single patent application listed in Schedule J is the only Intellectual Property Rights owned or Controlled by LFIRC and its Group Companies as of the Effective Date that would be necessary for Anoto to exercise the rights granted to it under this Agreement.

(l) To the best of LFIRC’s and its Group Companies’ knowledge upon reasonable inquiry, there is no lawsuit, arbitration or other legal proceeding that is pending to LFIRC or a Group Company to which LFIRC or any of its Group Companies (or any person who is entitled to indemnification in such proceeding by LFIRC or any of its Group Companies) is a party, involving: (a) an allegation that LeapFrog’s Technology (or its use by LeapFrog licensees) or LeapFrog’s products

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infringes a granted patent of another party; or (b) that any Licensed LeapFrog IP is invalid, not infringed or unenforceable other than: [*] and [*].

(m) LFIRC undertakes starting on [*], and at all times thereafter until the termination or expiration of this Agreement, to maintain funds of a minimum amount of [*] and that after such expiration or termination to maintain funds of sufficient amounts to pay any Royalties due under any sublicense agreement granted under Section 2.3(e).

13.3 Corporate Authority. Each Party represents and warrants, solely to and for the benefit of the other, that: (a) it is a corporation duly organized and in good standing under the laws of its respective jurisdiction of incorporation indicated in the preamble to this Agreement; (b) it has the full corporate right, power and authority to enter into this Agreement, grant the rights set forth herein and perform its obligations hereunder; (c) its performance of this Agreement, and the other Party’s exercise of such other Party’s rights under this Agreement, shall not conflict with or result in a breach or violation of any of the terms or provisions or constitute a default under any other agreement by which it is bound or to which its assets are subject; (d) when executed and delivered, this Agreement shall constitute a legal, valid and binding obligation enforceable against it in accordance with its terms; and (e) it shall comply with all applicable laws, regulations and orders of any governmental authority of competent jurisdiction in its performance of this Agreement.

13.4 No Conflicting Licenses. Anoto and Anoto Group Companies each hereby represents and warrants that, as of the Effective Date, neither Anoto nor any Anoto Group Company has entered into any arrangement, agreement or license that grants a third party any right to manufacture, sell, distribute or market products practicing Anoto Licensed IP or Licensed Anoto Technology in the Exclusive Field.

13.5 Indemnification by Anoto. Conditioned upon LFIRC’s compliance with Section 13.8, Anoto will defend and settle any suit brought against LFIRC or its Group Companies by a third party based on alleged infringement by Anoto Indemnified Elements of patents owned by such third party that are issued in a Major Country or any breach by Anoto of its representations or warranties under Section 13.1. Subject to Section 14, Anoto will indemnify LFIRC or its Group Companies for any damages, court costs and the third party’s attorney’s fees awarded (“Award Amount”) in such suit by a final judgment not subject to further appeal or any payments made by LFIRC in a settlement of such suit negotiated and concluded by Anoto. Notwithstanding the foregoing, Anoto shall have no obligation under this Section 13.5 with respect to any claim to the extent based upon (a) a combination of any Anoto Indemnified Element with other Technology not supplied by Anoto or Anoto Authorized Sources if such Anoto Indemnified Element by itself would not result in direct or indirect infringement; or (b) use of the Anoto Indemnified Elements other than as permitted under this Agreement; or

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(c) modification of any of the Anoto Indemnified Elements as provided by Anoto if the infringement would not have occurred but for the modification.

13.6 Indemnification by LeapFrog. Conditioned upon Anoto’s compliance with Section 13.8, LeapFrog will defend and settle any suit brought against Anoto or its Group Companies by a third party based on alleged infringement by LeapFrog Indemnified Elements of patents owned by such third party that are issued in a Major Country or any breach by LFIRC of its representations or warranties under Section 13.2. Subject to Section 14, LeapFrog will indemnify Anoto, its Group Companies or its licensees for any Award Amount awarded in such suit by a final judgment not subject to further appeal or any payments made by Anoto to a settlement of such suit negotiated and concluded by LeapFrog. Notwithstanding the foregoing, LeapFrog shall have no obligation under this Section 13.6 with respect to any claim to the extent based upon (a) a combination of any LeapFrog Indemnified Elements with other Technology not supplied by LeapFrog or Qualified LeapFrog Foundries if such LeapFrog Indemnified Elements by itself would not result in direct or indirect infringement; or (b) use of the LeapFrog Indemnified Elements other than as permitted under this Agreement; or (c) modification of any of the LeapFrog Indemnified Elements as provided by LeapFrog if the infringement would not have occurred but for the modification.

13.7 Additional Indemnification Remedy. The Party obligated to defend and indemnify pursuant to Section 13.5 or 13.6 (“Indemnitor”) will further, at its own option and expense, use best commercial efforts to either: (i) procure for the Party being Indemnified (“Indemnitee”) the right to continue to use the Indemnified Element accused of infringement; or (ii) replace such Indemnified Element with non-infringing products or materials without materially detracting from function and performance; or (iii) modify such Indemnified Element so that it becomes non-infringing without materially detracting from function and performance. If, despite the exercise of best commercial efforts, the Indemnitor cannot achieve through commercially reasonable expenditure of financial resources or effort any of the measures set forth in this Section 13.7, and the consequence is that the Indemnitee is precluded from using such Indemnified Element or its functional equivalent, the Indemnitor shall promptly notify the Indemnitee thereof and either Party may terminate this Agreement without any further liability except for accrued indemnification obligations as provided in this Section 13 and, if Anoto is the Indemnitor, it will refund to LFIRC: (i) Advance Royalties paid prior to termination that as of termination have not vested under Section 5.7 or been applied pursuant to Schedule G; (ii) an amount equal to the value of the Initial License Fee, amortized in equal monthly increments over ten (10) years, as of termination; and (iii) the Interim License Fee; less (iv) the total aggregate life-to-date discounts taken by LFIRC under Section 5 of Schedule G as of termination.

13.8 Indemnification Procedures. The undertaking set forth in Sections 13.5 and 13.6 are conditioned upon the following:

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(a) Indemnitee, without undue delay, will notify Indemnitor in writing of any claim, suit or proceeding and will give full authority, information and assistance to handle the claim or the defense of any suit, proceeding or settlement; provided that the failure to provide such notice will not relieve the Indemnitor of its obligation to indemnify hereunder unless such failure or delay in notice causes the Indemnifying Party material prejudice.

(b) The Indemnitor will assume the defense of the claim at its own expense, and will have full control over the defense and settlement of the claim; provided that the Indemnitee may, at its own expense, retain its own legal counsel to consult with Indemnitor in the defense or settlement of any such claim and that the Indemnitee will have the right to approve any settlement agreement purporting to bind it or which otherwise affects any Intellectual Property Rights owned or Controlled by the Indemnitee; further provided, however, that such approval shall not be unreasonably withheld or delayed.

(c) Indemnitee cooperates in the defense and settlement and refrains from all steps in any legal action that may prejudice the Indemnitor.

13.9 Limitation and Exclusions. The maximum liability of an Indemnitor under this Section 13 will be subject to the provisions of Section 14. Sections 13 and 14 constitute entire liability of Anoto and its Group Companies and of LFIRC and its Group Companies and the entire remedy of Anoto and its Group Companies and of LFIRC and its Group Companies with respect to breach of representations and warranties in this Section 13 and to infringement of a third party’s Intellectual Property Rights; provided, however, that a material breach of representation or warranty in this Section 13 will be a basis for termination of this Agreement by the non-breaching Party in accordance with Section 16.2.

14. LIMITATION OF LIABILITY.

14.1 IN NO EVENT WILL ANY PARTY BE LIABLE FOR ANY SPECIAL, CONSEQUENTIAL, EXEMPLARY, INDIRECT OR INCIDENTAL DAMAGES (INCLUDING, BUT NOT LIMITED TO LOSS OF BUSINESS, LOSS OF OPPORTUNITY, LOSS OF DATA OR INFORMATION, LOSS OF REVENUE OR PROFIT) WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, ARISING IN ANY WAY OUT OF THIS AGREEMENT OR THE TECHNOLOGY OR PRODUCTS LICENSED OR OTHERWISE PROVIDED PURSUANT TO THIS AGREEMENT.

14.2 Limitation of Liability.

(a) Notwithstanding anything to the contrary, the total cumulative liability of Anoto and its Group Companies (“Anoto Group”) and the total cumulative liability LFIRC and its Group Companies (“LFIRC Group”)

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with respect to all Claims arising under this Agreement will be limited to [*]

(b) The total cumulative liability of each of the Anoto Group and the LFIRC Group with respect to all Claims for indemnity and, except as provided in Section 14.1(e), for any damages, court costs and attorney’s fees awarded based on material breach of Agreement by that Group arising in calendar year [*] is [*].

(c) The total cumulative liability of each of the Anoto Group and the LFIRC Group with respect to all Claims for indemnity and, except as provided in Section 14.1(e), for any damages, court costs and attorney’s fees awarded based on material breach of Agreement by that Group arising in calendar year [*] is [*].

(d) For Claims for indemnity and, except as provided in Section 14.1(e), for damages based on material breach of the Agreement by a Party arising in calendar year [*] and for each calendar year thereafter, the total liability of each of the Anoto Group and the LFIRC Group for any single Claim will be limited to [*]. In the event multiple Claims arise in any one calendar year, each party’s total liability for such multiple Claims will be limited to [*]. If a Claim arises after the termination of this Agreement, [*].

(e) For Claims by one of the Anoto Group or the LFIRC Group for damages arising in [*] from a material breach of the Agreement by the other of the Anoto Group and the LFIRC Group that, because of the nature of the breach, effectively deprives the damaged Group of essentially all of the consideration contemplated by the Agreement, the total cumulative liability of the one Group with respect to all such Claims is [*].

(f) The limitations of this Section 14.1 will not apply to or in any way limit a Party’s recovery in regard to: (i) the remedies available under Section 5 or 13.7; (ii) refund of Advance Royalty not Vested or applied pursuant to Schedule G as of the date of termination, in the event that LFIRC terminates the Agreement for cause or in accordance with Sections 5.7; (iii) claims for indemnification based on misrepresentation or fraud by the Indemnitor; (iv) any claims based on willful misconduct or gross negligence; and (v) claims for personal injury or physical property damage.

(g) For purposes of this Section 14.1, a Claim “arises” when it is asserted by the other Party or, in the case of a third party claim for which indemnification is sought, an indemnity, when the final judgment is awarded on the claim or settlement of the claim is made. A “Claim” means any liability, charge or claim for damages whatsoever arising in any way out of this Agreement or the Licensed Technology or the products or

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services otherwise provided pursuant to this Agreement, including claims for indemnification under Section 13.

(h) To the extent the costs and attorney’s fees of one of the Anoto Group or the LFIRC Group are imposed on the other of the Anoto Group or the LFIRC Group pursuant to Section 17.4, they will count toward the liability cap of the other Anoto Group or the LFIRC Group.

14.3 Prospective Royalties. In the event, in settlement of an action subject to Section 13.5, 13.6 or 13.7, the Indemnitor or the Indemnitee is required to pay royalties to a third party for rights under the third party’s Intellectual Property Rights that will permit the Indemnitee to prospectively exercise the rights granted to it under this Agreement, the Anoto Group and the LFIRC Group will share the future royalty payments with [*]. In no event will the total amount payable by Indemnitee to third parties under this Section 14.3 and to Indemnitor under Section 8 be greater than [*]. In the event royalties payable to any such third parties would reduce the Indemnitor’s revenue pursuant to this Agreement after deducting the Indemnitor’s share of the amount paid to the third parties to an effective rate that is [*], Indemnitee agrees to negotiate in good faith with Indemnitor to amend consideration terms of this Agreement. Notwithstanding this Section 14.3, Anoto shall [*] for prospective rights in any settlement arising out of the action entitled [*] filed in the [*] or any related action.

15. CONFIDENTIALITY.

15.1 Confidential Information. “Confidential Information” means (i) Work Product, Licensed Technology and any other information relating to a Party’s technology, customers, business plans, marketing activities, finances and other business affairs, and (ii) third party information that a Party is under an obligation to keep confidential; in each case as notified in writing by a Party, that is marked or otherwise expressly identified as confidential in writing or that should have been reasonably understood as such due to its nature, regardless of whether in tangible, electronic, verbal, graphic, visual or other form, that one Party (“Owner”) discloses to another Party (“Recipient”). Confidential Information does not include material or information that: (a) is generally known by third parties other than as a result of an act or omission of the Recipient; (b) subsequent to disclosure hereunder, was lawfully received without restriction on disclosure from a third party having the right to disseminate the information; (c) was already known by the Recipient prior to receiving it from the Owner and was not received from a third party in breach of that third party’s obligations of confidentiality; or (d) was independently developed by the Recipient without use of the Confidential Information of the Owner, as documented by written records.

15.2 Non-Disclosure Obligation. Subject to Sections 15.2 and 15.6 below, Recipient will protect the secrecy of Owner’s Confidential Information with the same degree of care as it uses to protect its own Confidential Information, but not less than due care. Recipient will: (a) not disclose Owner’s Confidential Information

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to any third party, except to its suppliers, permitted sublicensees and persons in Recipient’s own organization who, in each case, have a need to know in order to fulfill Recipient’s obligations and exercise its rights under this Agreement, and who, in each case, are bound by non-disclosure obligations requesting them to treat the Confidential Information as confidential; and (b) not use Owner’s Confidential Information except as necessary for the performance of Recipient’s obligations or the exercise of Recipient’s express rights under this Agreement. Recipient may not make any copies of Owner’s Confidential Information without the prior written consent of Owner except as permitted herein; and (c) notify the Owner immediately upon discovery of any unauthorized use or disclosure of Confidential Information and of any other breach of the confidentiality provisions of this Agreement. Upon termination of this Agreement, Recipient must promptly destroy or return all Confidential Information and any copies thereof upon Owner’s written request. Recipient agrees to provide written certification of compliance with this Section 15.2 within thirty (30) days after the receipt of the request.

15.3 Legal Obligation to Disclose. Notwithstanding anything contained herein to the contrary, Recipient may disclose Confidential Information pursuant to an order of a court of competent jurisdiction or as otherwise required by applicable law. Under such circumstances, Recipient shall, if reasonably possible under the circumstance of such disclosure, provide the other Party with reasonable advance notice of such disclosure in order to afford the other Party an opportunity to take legal action to prevent or limit the scope of such disclosure, and shall reasonably cooperate with the other Party in connection therewith.

15.4 Injunctive Relief. The Recipient hereby acknowledges that unauthorized disclosure or use of Confidential Information could cause irreparable harm and significant injury to the Owner, for which monetary damages may be an inadequate remedy. Accordingly, the Recipient agrees that the Owner will have the right to seek and obtain immediate injunctive relief to enforce obligations under this Agreement in addition to any other rights and remedies the Owner may have.

15.5 Scope of Obligations. This Agreement covers Confidential Information disclosed by the Owner both prior and subsequent to the Effective Date hereof To the extent that information disclosed prior to the Effective Date hereof is subject to a separate prior non-disclosure agreement, such information shall be subject to both the terms of the prior agreement and of this Section 15 and in the event of conflict or inconsistency between the prior agreement and this Section 15, the provision that is more restrictive in regard to the use or disclosure of Confidential Information shall control.

15.6 Publicity. The terms of this Agreement are confidential, and no Party may issue press releases or engage in other types of publicity of any nature or otherwise disclose the terms of this Agreement without the other Parties’ prior written approval, which approval may not be unreasonably withheld, except that

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disclosure of the terms and conditions of this Agreement may be made to such Party’s attorneys, accountants and other professional advisors under a duty of confidentiality or to the extent such disclosure is required to comply with governmental laws, rules or regulations or stock market rules or regulations; provided that Recipient seeks to obtain confidential treatment of as many of the terms of this Agreement as the applicable agency allows. The terms of this Agreement may be disclosed by a Party to prospective investors, lenders or purchasers in connection with a proposed merger, financing or sale of such Party’s business; provided that any third party to whom the terms of this Agreement are to be disclosed signs a confidentiality agreement reasonably consistent with the confidentiality obligations set forth in this Section 15. Notwithstanding anything herein to the contrary, any Party to this Agreement (and any employee, representative or other agent of any Party to this Agreement) may disclose the U.S. federal income tax treatment and tax structure (and all materials related to the tax treatment and tax structure) of the transactions contemplated by this Agreement, in the manner and to the extent contemplated by Treasury Regulation § 1. 6011 -4(b)(3)(iii).

16. TERM AND TERMINATION.

16.1 Term; Good Faith Re-Negotiation. The term of this Agreement will commence on the Effective Date and will continue until [*] (“Set Term”), and thereafter will automatically continue for subsequent [*] extension terms unless a Party, by written notice to the other Party not less than [*] days prior to expiration of the Set Term or any extension term, elects not to extend the Agreement (the “Term”). The Parties agree that they will meet on or immediately prior to [*] (the “Good Faith Re-Negotiation”) to discuss and negotiate in good faith the potential extension of the Set Term, the Exclusive Term, or any other terms that the Parties may choose to discuss; provided that the Parties will not be obligated to change, extend or otherwise modify this Agreement in connection with the Good Faith Re-Negotiation unless a modification is made in accordance with Section 18.3 below.

16.2 Termination for Cause.

(a) In the event that one of Anoto and its Group Companies or one of LFIRC and its Group Companies (the “Breaching Party”) commits any material breach or default of its obligations under this Agreement, the other of Anoto and its Group Companies and LFIRC and its Group Companies (the “Non-Breaching Party”) may give the Breaching Party written notice thereof and demand that such breach or default be cured immediately.

(b) If the Breaching Party

(i) fails to cure such breach or default within [*] calendar days after the receipt of the Non-Breaching Party’s written notice hereunder, or

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(ii) where a cure cannot reasonably be effected within ninety (90) calendar days, fails to initiate good faith efforts to cure such breach or default within [*] calendar days after the receipt of the Non-Breaching Party’s written notice hereunder, or

(iii) where the specific breach or default cannot be cured by any action of Breaching Party and such specific breach or default does not deprive the Non-Breaching Party of substantially all of its consideration under this Agreement, and the Breaching Party fails to exercise its best efforts to prevent a recurrence of the same type of breach or default,

the Non-Breaching Party may terminate this Agreement immediately upon giving written notice of termination thereof to the Breaching Party. Termination of this Agreement pursuant to this Section 16.2 for material breach or default by the Breaching Party will not terminate the license rights and related and obligations of the Non-Breaching Party under this Agreement unless the Non-Breaching Party so elects in its written notice of termination. For example, under the preceding sentence, the Non-Breaching Party could retain its in-license under Section 2 or 3 (as the case may be), subject to its obligations (and the Breaching Party’s rights) in relation to such in-license. The provisions of Sections 16.2(b)(ii) and 16.2(b)(iii) will not apply to a breach or default arising from a failure or delay in the payment of money or a breach or default of Section 2.10 or 2.10 or a material breach where the breaching party acted willfully or was grossly negligent.

16.3 Effect of Termination. Except where the Non-Breaching Party’s rights and obligations continue as provided in Section 16.2, upon the expiration or other termination of this Agreement for any reason (including where the Non-Breaching Party elects termination of its rights and obligations pursuant to Section 16.2), all rights and obligations hereunder will cease and the following will apply:

(a) The licenses granted under Section 2 and Section 3 will terminate.

(b) Except for sublicenses subject to Section 2.3(e) and 3.2(g), Anoto with respect to sublicenses granted by LFIRC pursuant to Section 2.3 and LFIRC with respect to sublicenses granted by Anoto pursuant to Section 3.2 will have the right and option to assume (subject to approval by the sublicensee) or reject such sublicenses by written notice to the sublicensees. Assumed sublicenses will be assigned to LFIRC or Anoto as appropriate. Sublicenses that are rejected or otherwise not assumed will be terminated effective on the date of termination of this Agreement. Each Party will include a term in its sublicense agreements effectuating this provision. This provision will not apply when this Agreement expires pursuant to Section 16.1.

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(c) Each Party shall promptly report and pay, in accordance with Section 8, all Royalties and other fees accruing prior to the date of expiration or other termination.

(d) The expiration or other termination of this Agreement shall not relieve either Party of any obligation or liability accrued under this Agreement prior to termination or rescind any payment made by either Party or anything done by either Party prior to termination.

(e) If this Agreement is terminated by Anoto for cause pursuant to Section 16.2, then the Advance Royalties paid prior to termination will be deemed non-refundable and will remain with Anoto.

(f) If this Agreement is terminated by LFIRC for cause pursuant to Section 16.2 and LFIRC elects pursuant to Section 16.2 to terminate its rights and obligations, then Anoto will, within thirty (30) days after termination, refund to LFIRC the Advance Royalties paid prior to termination that as of termination have not vested under Section 5.7 or otherwise been applied to LFIRC’s Royalty obligations.

(g) Unless LFIRC as the Non-Breaching Party retains its rights and obligations pursuant to Section 16.2, upon expiration or termination of this Agreement for any reason, LFIRC will have no further obligation to pay any installment of Interim License Fee (as defined in Schedule G) or Advance Royalties, other than unpaid installments that were, in accordance with Schedule G, due before the date of termination.

(h) Notwithstanding the provisions of this Section 16.3 to the contrary, each Party (and its sublicensees that are terminated) may continue to exercise the license rights, on a non-exclusive basis, granted to it under this Agreement for up to two (2) years after expiration or other termination of this Agreement solely to dispose of previously made or partially made LeapFrog Products or LeapFrog Content (in the case of LFIRC and its sublicensee) or Joint Platform products (in the case of Anoto’s sublicensees); provided that the post-termination exercise of those rights shall be subject to the applicable terms of this Agreement, including but not limited to the confidentiality obligations, rendering of reports and payment of Royalties required under this Agreement.

(i) Each party shall promptly return to the other Party all Confidential Information of the other Party, including all source code and notes, files computer programs and Deposit Material in its possession embodying such Confidential Information; provided, however that each party may retain a confidential file copy of this Agreement.

(j) At Anoto’s request, LIFRC shall turn over to Anoto control over any enforcement action initiated prior to termination of this Agreement in

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accordance with Section 7.3(b) and Anoto will thereafter share with LIFRC any recovery in such action as provided under Section 7.3(b) with respect to infringement that occurred prior to the date of termination; if LFIRC maintains control over any enforcement action after termination of this Agreement, then LFIRC will share with Anoto any recovery in such action as provided under Section 7.3(b).

16.4 Survival. Notwithstanding the expiration or termination of this Agreement for any reason, all purchasers of LeapFrog Products, LeapFrog Content, Joint Platform or Anoto Content prior to the date of termination or expiration will retain all rights acquired by such purchases: Further any provisions that by nature should survive expiration or termination will so survive, including but not limited to Sections 1, 2.3(e), 2.8, 3.2 (f) and (g), 3.8, 6.2 (but only with respect to Improvements made prior to expiration or other termination of this Agreement), 6.3(c), 6.4, 6.5, 7, 8, 10, 11.2, 13.5 to 13.9, 14, 15, 16, 17 and 18 will survive to effect the purposes thereof.

17. CHOICE OF LAW AND ARBITRATION.

17.1 Choice of New York Law. This Agreement and any dispute arising out of or relating to this Agreement (“Disputes”) will be governed by the laws of New York, USA, excluding its conflict of laws principles and excluding the rules of the U.N. Convention on the International Sale of Goods (“New York Law”).

17.2 Binding Arbitration. Except as provided in Section 17.3, all Disputes arising out of or in connection with this Agreement will be finally settled by binding arbitration under the Rules of Arbitration of the International Chamber of Commerce before three (3) arbitrators, selected pursuant to said Rules, who will, at either Party’s request, give a written opinion stating the factual basis and legal reasoning for the decision. The Parties, their representatives and any other participants will hold the existence, content and result of arbitration in confidence. The arbitration proceedings will be conducted in English and take place in: (a) Stockholm, Sweden, if LFIRC or LF Enterprises initiates the proceedings, or (b) London, England, if Anoto or Anoto Group initiates the proceedings. The arbitrators will apply New York Law. Depositions may be taken and full discovery may be obtained in any arbitration commenced under this provision. The provisions of this Section 17.2 may be enforced by any court of competent jurisdiction.

17.3 Injunctive Relief. Either party may, at its sole discretion, seek preliminary judicial relief (including, but not limited to, preliminary injunctive relief) in any court of competent jurisdiction to restrain, until an arbitration proceeding can be completed to determine a final resolution of the dispute, any infringement by the other party of its Intellectual Property Rights, including but not limited to infringement by exceeding the scope or otherwise breaching the terms of the license granted to such other party under this Agreement. Without limiting any remedies available to either party, each party acknowledges that money damages

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may not be an adequate remedy for breach of this Agreement and agrees that the other party shall be entitled to specific performance or injunctive relief (without showing irreparable harm) to enforce or prevent any violation of those provisions of this Agreement. Unless expressly set forth to the contrary, all express remedies set forth herein are cumulative, and do not operate to limit any other remedies that may be available at law or in equity.

17.4 Fees and Costs. The Arbitrators are authorized to allocate costs and attorney’s fees among the Parties in a fair and equitable manner.

18. MISCELLANEOUS.

18.1 Compliance. Each Party will comply with all applicable laws, including, but not limited to, the export control laws of the United States. Neither Party may export or re-export, or allow its licensees to export or re-export, any Work Product or Technology without the appropriate United States and other government licenses. The Parties will cooperate and inform each other of necessary approvals and applicable restrictions.

18.2 Reimbursement of Legal Fees. Each Party bears its own expenses with regard to the negotiation and execution of this Agreement, except that LFIRC will reimburse Anoto for up to [*] for its reasonable, documented attorney’s fees for the purpose of reviewing the draft of this Agreement.

18.3 Notices, Modifications, Amendments. Any notices hereunder and any modifications of, or amendments to, this Agreement will be invalid, unless: (a) the notices are in writing and sent by (i) fax, (ii) registered or certified mail (postage prepaid) or (iii) overnight delivery by an internationally recognized delivery service; in each case to the address set forth on the signature page of this Agreement or such other address designated in writing by a Party; and (b) the modifications or amendments of this Agreement are in writing and signed by duly authorized officers of each of the Parties. Notice will be deemed effective upon the earlier of actual receipt or [*] days after deposit as registered or certified mail, postage pre-paid, properly addressed to the receiving Party, with the postal authority of the receiving Party’s country.

18.4 Attribution. Each Party may disclose on its website, in press releases and marketing materials that the other Party uses its Technology in statements approved by the other Party, such approval not to be unreasonably withheld, and at the request of either Party, the other Party may publish such statements on its website. Otherwise, neither Party may delete or relocate any patent or copyright notice or similar Intellectual Property Rights marking appearing on the other Party’s deliverables or Technology items provided hereunder; provided, however, that either may delete, and will not be obligated to otherwise use or reproduce, any trade names, trademarks, service marks, logos or slogans on or in connection with any products it markets hereunder, including, but not limited to, the Licensed Product and any Content unless otherwise mutually agreed. In addition, the

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Parties agree to include such other patent notices on their respective products (or on product packaging or manuals, as applicable), in the manner required by 35 United States Code § 287 or any foreign counterpart thereto.

18.5 No Waiver. The failure of either Party to enforce any provision of this Agreement or to exercise any right under this Agreement or the delay in doing so does not constitute a waiver of such provision or right and will in no way affect that Party’s right to later enforce or exercise it. The waiver by either Party of one breach or default under this Agreement will not constitute the waiver of any subsequent breach or default regarding the same or any other provision of this Agreement. Any waiver of the provisions of this Agreement or of rights under this Agreement will be without effect, unless made in writing and signed by a duly authorized representative of the Parties hereto.

18.6 No Assignment or Delegation. None of the Parties may assign or otherwise transfer any of its respective rights or licenses, nor delegate or otherwise transfer its respective obligations or duties under this Agreement, to any third party without the other Party’s prior written consent, which consent may not be unreasonably withheld or delayed. Notwithstanding the foregoing, a Party may assign this Agreement without the prior permission of the other Party (a) to another entity (“Successor”) in connection with a merger, transfer, sale of substantially all assets associated with performance under this Agreement, or change of control of such Party, or (b) to its Group Company as Successor; provided, however, in each case that such Successor has assumed in writing, or by operation of law, all rights and obligations of the assigning Party set forth herein. Any attempted or purported assignment or delegation by either Party in violation of this Section 18.6 will be null and void. Subject to the foregoing, this Agreement will be binding upon, and will inure to the benefit of, the Parties and their respective successors and permitted assigns.

18.7 Patent Assignment. If Anoto or one of its Group Companies desires to assign or otherwise transfer ownership to any third party of any one or more of its patents included in Licensed Anoto IP, it will (a) give written notice of the assignment or transfer (including the identity of the assignee or transferee) to LFIRC at least [*] days prior to such assignment or transfer, and (b) ensure that the assignee or transferee agrees in writing that the assignment or transfer is made subject to this Agreement and LFIRC’s rights hereunder.

18.8 Relationship Between the Parties. The Parties are acting hereunder as independent contractors and each will conduct its business hereunder solely as a principal for its own account. Nothing in this Agreement will be deemed to create an agency, employment, partnership, fiduciary or joint venture relationship between the Parties. Neither Party has, and nor will it represent to any third party that it has, the power or authority as agent, employee or in any other capacity to represent, act for, bind or otherwise create or assume any obligation on behalf of the other Party for any purpose whatsoever. There are no third party beneficiaries to this agreement.

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18.9 Construction. The following rules shall govern construction of this Agreement:

(a) section headings are for convenience only and are not to be used in interpreting this Agreement;

(b) as used in this Agreement both (i) the word “including” and (ii) the phrase “including without limitation” and similar phrases mean “including but not limited to”;

(c) in constructing the terms of this Agreement, no presumption shall operate in favor of or against any party as a result of its counsel’s role in drafting the terms and provisions hereof;

(d) all references to Sections, Schedules and Exhibits refer to the Sections, Schedules and Exhibits, respectively, of this Agreement unless otherwise indicated;

(e) any capitalized terms used in any Exhibit or Schedule but not otherwise defined therein shall have the meaning as defined in this Agreement;

(f) all capitalized terms defined herein apply equally to both the singular and plural forms of such terms;

(g) all monetary amounts refer to U.S. dollars unless otherwise indicated; and

(h) in the event of a conflict between the main body of this Agreement and its Schedules or Exhibits other than Schedule G and Schedule J, the language of the main body of this Agreement controls.

18.10 Force Majeure. Any delay in performance by either Party under this Agreement will not be considered a breach of this Agreement and will be excused to the extent caused by any occurrence that is beyond the control of such Party despite its reasonable efforts to prevent, avoid or mitigate such occurrence, if such occurrence directly impairs such Party’s ability to perform and is in the nature of earthquakes, famines, epidemics and other natural disasters or acts of God, war, terrorism, riots or civil unrest, failures in electric power and telecommunications services, labor strikes, government regulation or court injunction; provided, however, that a Party unable to perform because of such events gives prompt notice to the other Party and uses its best efforts to mitigate the effects of such causes and further provided that a Party’s delay caused by such event does not exceed a cumulative total of [*] days. In the event LFIRC is excused from performance of its obligations under Section 5 pursuant to this provision for [*]) consecutive days, Anoto, by written notice to LFIRC, may terminate the Exclusive Term, and, if so terminated, must return to LFIRC any un-credited Advance Royalties and LFIRC will have no obligation to make future payments of Advance Royalties. Notwithstanding the foregoing, neither Party’s financial

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condition or inability to pay will be a basis for excusing performance of any of that Party’s obligations pursuant to this Agreement.

18.11 Severability. If and to the extent any provision of this Agreement is held illegal, invalid or unenforceable in whole or in part under applicable law, such provision or such portion thereof will be ineffective as to the jurisdiction in which it is illegal, invalid or unenforceable to the extent of its illegality, invalidity or unenforceability and will be deemed modified to the extent necessary to conform to applicable law so as to give the maximum effect to the intent of the Parties and the Agreement will be otherwise deemed modified to the extent necessary to ensure that (notwithstanding the modification or severance of the illegal, invalid or unenforceable provision) each of the Parties receive the benefit of their respective bargains under this Agreement. Subject to the foregoing, the illegality, invalidity or unenforceability of such provision in that jurisdiction will not in any way affect the legality, validity or enforceability of any other provision of this Agreement in any other jurisdiction.

18.12 Entire Agreement; Interpretation. This Agreement, together with any Exhibits and Schedules hereto, constitutes the entire agreement of the Parties with respect to the subject matter hereof and supersedes all previous and contemporaneous agreements, contracts, communications, representations and understanding, either oral or written, between the Parties relating to the subject matter hereof except as provided in Section 15.5.

18.13 Counterparts. This Agreement may be executed in two or more counterparts in the English language, and each such counterpart will be deemed an original hereof In case of any conflict between the English version and any translated version of this Agreement, the English version will govern.

[Intentionally Blank]

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IN WITNESS WHEREOF, the authorized representatives of each of the Parties have executed and delivered this Agreement as of the Effective Date.

LEAPFROG ENTERPRISES, INC.		ANOTO AB
By:	/s/ Michael C. Wood	By:	/s/ Örjan Johansson
	Michael C. Wood, President and CEO		Örjan Johansson, President and CEO
By:	/s/ James P. Curley	By:	/s/ Peter Liss
	James P. Curley, Chief Financial Officer		Peter Liss, Chief Financial Officer
Address for Notices:		Address for Notices:
6401 Hollis Street, Suite 100 Emeryville, CA 94608 USA		Scheelevägen 19 C 223 70 Lund, SWEDEN
Fax: (510) 420-5011		Fax: +46 46 540 12 02
Attention: Corporate Counsel		Attention: Chief Executive Officer
LEAPFROG INTERNATIONAL RESEARCH COMPANY LTD.		ANOTO GROUP AB
By:	/s/ L. James Marggraff	By:	/s/ Christer Fåhraeus
	L. James Marggraff, Director		Christer Fåhraeus, Chairman
Address for Notices:		Address for Notices:
c/o M&C Corporate Services Limited P.O. Box 309GT Ugland House South Church Street George Town Grand Cayman, Cayman Islands Fax: (345) 949 8080		Scheelevägen 19 C 223 70 Lund, SWEDEN Fax: +46 46 540 12 02 Attention: Chairman
With a copy to:
LeapFrog International Research Company Ltd. c/o 6401 Hollis Street, Suite 175 Emeryville, CA 94608 USA
Fax: (510) 420-5011
Attention: Corporate Secretary

[SIGNATURE PAGE TO TECHNOLOGY LICENSE AGREEMENT]

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TECHNOLOGY LICENSE AGREEMENT

TABLE OF SCHEDULES:

Schedule A:	Statement of Work
Schedule B:	Licensed Anoto Technology, including appropriate specifications
Schedule C:	Licensed LeapFrog Technology, including appropriate specifications
Schedule D:	Anoto Components
Schedule E:	Anoto Authorized Source
Schedule F:	Qualified LeapFrog Foundry
Schedule G:	Royalty and Payment Schedule
Schedule H:	Maintenance and Support Terms
Schedule I:	Licensed Anoto IP
Schedule J:	Licensed LeapFrog IP
Schedule K:	Relevant Patents Relating to LeapFrog Technology and Relevant Patents Relating to Anoto Technology
Schedule L:	Individual Markets

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TECHNOLOGY LICENSE AGREEMENT

SCHEDULE A: STATEMENT OF WORK

This Statement of Work is entered into pursuant to the Technology License Agreement dated as of January 14, 2004 between Anoto, Anoto Group, LFIRC and LF Enterprises (“Agreement”) Capitalized terms not defined in this Statement of Work are defined in the Agreement. All software delivered by Anoto or Anoto Group to LFIRC pursuant to the Agreement and this Statement of Work will be delivered electronically via a secure FTP site designated by LFIRC.

Definitions:

• Kailas project: XY Module for LFIRC with tools and production environment. The XY Module will include the ability to embed and extract data, and are further described in this Statement of Work.

• BSU (Baseline System): LeapFrog Product in which DotPos and associated camera system is replaced with [*], and which further performs the same software functionality as defined for the LeapFrog Product.

• PPS System: means the specifications for [*] and the [*]. It includes the [*] and the relevant associated specifications, including but not limited to the [*] and the [*].

I. RELATIONSHIP MANAGERS.

Anoto – [*]

LFIRC – Mark Flowers

II. DELIVERABLES AND RESPONSIBILITIES.

A. Objectives. The objectives of this Statement of Work are as follows:

1. Development of a joint platform (as defined in the Agreement, “Joint Platform”), which integrates the XY Module, the LeapFrog ASIC, LeapFrog Platform OS and LeapFrog SDK in accordance with the Agreement, this Statement of Work and mutually agreed upon specifications by the Parties.

2. Delivery by Anoto of Licensed Anoto Technology to LFIRC for use in LeapFrog Products.

3. Delivery by LFIRC of Licensed LeapFrog Technology to Anoto for use in the Joint Platform.

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4. Development and Commercialization of LeapFrog Products

B. Phases. These deliverables will be provided in the following three phases, which may occur in overlapping time periods:

1. Upfront Deliverables by Anoto to LFIRC. The upfront deliverables reflect past development that Anoto has done and are being delivered in consideration for the Initial License Fee and Interim License Fee set forth in Section 5.1 of Schedule G.

2. Additional Deliverables by Anoto to LFIRC. The additional deliverables provided by Anoto will be developed pursuant to this Statement of Work and are subject to a NRE Fee of [*], as defined in Section 5.1(a) of Schedule G in accordance with the payment schedule set forth in Section 5.2 of Schedule G.

3. Deliverables by LFIRC to Anoto. The deliverables provided by LFIRC will be developed pursuant to this Statement of Work.

4. Additional Support. Outside of the main technology deliverables part of phases 1 and 2 above, Anoto will provide LFIRC with additional technical support for development of LeapFrog Products on a time and materials basis, pursuant to a separate addendum to this Statement of Work. LFIRC will provide such addenda to Anoto at least three (3) months in advance of the desired commencement date. If three (3) months advance notice is not possible, then Anoto will accommodate LFIRC requests on a best commercial effort basis.

The deliverables to be provided in the foregoing four phases are described in more detail as follows.

C. Upfront Deliverables And Responsibilities From Anoto To LFIRC. These deliverables are to be delivered by Anoto to LFIRC within two (2) weeks from the signing date of the Agreement:

[*]

D. Development Deliverables by Anoto to LFIRC. Anoto will provide the following additional deliverables to LFIRC within the timeframe established in Section IV of this Statement of Work. In preparing these deliverables, Anoto will invest [*] of Anoto’s own funds in nonrecurring engineering expenses which will be sufficient to develop the DotPos. LFIRC, at its sole discretion, may choose to invest an additional [*] NRE to reduce the CMOS chip price exclusively for LFIRC for a period of time or initial production quantity to be mutually agreed to.

[*]

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Acceptance criteria include that each deliverable meet its applicable specifications set forth in the agreed upon specifications delivered in Milestone B of the Engineering Milestone Schedule in Section IV of this Statement of Work.

These deliverables, and the respective responsibilities of Anoto and LFIRC, are described in more detail as follows and in the Engineering Milestone Schedule in Section IV of this Statement of Work:

• The [*] (preliminary specs will be provided by Milestone B, below)

• A fully functional [*] for mounting on a LeapFrog [*] running the [*] software.

• The [*] will be programmed to read the Licensed Anoto Dot Pattern, provided, however, that it will be readily [*] supplied by Anoto (on terms subject to mutual agreement of the Parties), to enable the [*] to read [*] both with respect to existing and future units.

• [*] functionality to include [*] including [*] that estimates the [*].

• System specifications that fully define system performance and production test methods (to be defined in detail during the project).

• Anoto Key Component specifications and reference sources.

• [*]:

• [*] electrical and mechanical specification.

• Specification [*].

• [*] brought to production ready status including [*] (in vendor’s possession, not to be delivered to LFIRC) at qualified vendor.

• Qualified vendor must be capable of producing up [*] units per year if needed (in accordance with vendor standard requirements for forecasting and lead times).

• [*]

• [*] production ready, including [*] at qualified vendor.

• Mechanical drawings, including CAD files if available, and other information needed to tool and manufacture the [*].

• Specification of [*].

• Process documentation known to Anoto, which would facilitate LFIRC to [*] at the first production vendor, including all [*] including updates developed during the path leading to and including production release.

• [*]

• [*] (object code).

• API specification of the SW IP.

• Support for [*] (object code) as defined in [*]

Production Test Equipment Specifications and Support

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• PPS Production test changes for [*] (excluding LeapFrog specific fixturing).

• All documentation and design files needed to [*] to enable LFIRC to [*].

• Right to buy [*].

• Production test guidelines available for current system [*] and test limits, and updates thereof for [*].

Development Tools

• Development test environment changes [*] (excluding LFIRC specific fixturing) The test environment will be brought to the same level (test cover and documentation) as in the [*] today.

• [*]

• [*] pens and other project specific tools that can assist LFIRC development.

• Tools to generate the [*], including:

• GAPAT ([*]) or similar.

• Initially existing tools ([*]) will be used, with LFIRC enabled to [*].

• A [*] will be delivered by Anoto by [*]. An engineering method to [*] shall be made available by [*]. This engineering method is to be included as part of [*]. The goal is to enable LFIRC to [*] tool.

• LFIRC will need to [*] use in the LeapFrog Content flow.

• It is preferred that LFIRC be able to [*], methodology to be reviewed.

• LFIRC will pay additional NRE for any LFIRC customization that Anoto performs.

• [*]

Other Deliverables and Responsibilities

• LFIRC may make further investments to lower [*], in which case, unless otherwise is agreed between the parties, the [*] for a period of time or initial production quantity to be mutually agreed to.

• Other than for [*], additional LFIRC investment is [*] for LeapFrog product specific needs.

• Examples include tester modification for LeapFrog product specific needs (which means LeapFrog specific, [*]).

• Other than as provided in Section 6 of the Agreement, LeapFrog Product specific elements will be for exclusive LFIRC use unless otherwise agreed in writing. [*]

• LFIRC will [*] high volume LeapFrog production tooling and testers.

A-4

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• Anoto will use reasonable commercial efforts to make available reasonable additional resources (for additional NRE) for R&D on next generation technologies.

• Anoto will be responsible for providing [*], including:

• [*] in compliance with specifications.

• [*] with the same results.

• LFIRC is responsible for the [*] parts.

• LFIRC will pay [*] of first [*] if LFIRC has access [*] of volume capacity.

• *For Clarity, “vendor qualified” means:

• Vendor has know-how, equipment and track record to meet Anoto specifications.

• Vendor has resources needed to meet high volume (in accordance with vendor standard requirements for forecasting and lead times).

Production Launch Support, including:

• In addition to the responsibilities stated in the Agreement and this Statement of Work, Anoto has responsibility for:

• Design (for manufacturing, approved by LFIRC prior to tool order) of the [*].

• First [*] (producing parts according to [*]).

• Production test equipment specifications (according to “[*]”) and test limits.

• Anoto will provide reasonable and customary (non product specific) support to take a complex technology into production, with respect to [*]

• Answer [*] questions regarding the deployment of the [*] in volume production.

• Address and resolve [*] LeapFrog [*] relative to Anoto specs.

• In addition to the responsibilities stated in the Agreement and this Statement of Work, LFIRC has responsibility for:

• [*] process and assembly.

• [*]

• Moving production to another facility.

• Anoto remains responsible for performance of Anoto technology in accordance with Anoto specs, and for its suitability to high volume production, in accordance with the Maintenance and Support Terms in Schedule H.

• Anoto will provide all necessary documentation but does not plan to engage tech writers to create publication quality formatting.

A-5

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E. Deliverables by LFIRC to Anoto. LFIRC will provide the following deliverables to Anoto at LFIRC’s expense within the timeframe established in Section IV of this Statement of Work:

• [*] per agreed to specifications.

• Production [*] (which will run near or at full capacity for LFIRC) For LFIRC internal use.

• [*] as needed for production (for LFIRC internal use).

• Qualification of LFIRC specific printing vendors (LFIRC responsibility and not a deliverable).

• System ASIC brought to production ready, including production masks and test vectors at qualified vendor.

• Achievement of System ASIC cost efficiency consistent with present LeapFrog 0.18uM ASICs. [*]

• Qualified vendor must be capable of producing up [*] units per year if needed (in accordance with vendor standard requirements for forecasting and lead times).

• Reference schematic and system PCB for third party developers (will not be LFIRC production PCB).

• FPGA development platforms, prototype product and/or development PCBs, and EP, FEP, and PP pilot production PCBs.

• LFIRC develops third party development platform with optical module interface.

• LFIRC delivers third party specification of the system ASIC and low level drivers.

• LFIRC delivers Platform OS software as defined by OS and SDK specifications.

• LFIRC delivers SDK for third party development including documentation.

• LFIRC will deliver reasonable quantities of EP, FEP, PP pilot production unit samples at EP, FEP, PP completion.

• LFIRC will deliver reasonable quantities of production pens and LeapFrog Content at the time of first product launch.

• LFIRC will provide all necessary documentation, but does not plan to engage tech writers to create publication quality formatting.

F. Additional Support. Anoto and LFIRC will undertake activities that are not covered by the initial [*] NRE. Some of these activities have already been identified and others will be amended from time to time.

As forecasted by LFIRC and Anoto, these activities are to be charged separately (in accordance with rates specified in Section 5.5 of the Agreement), and include:

• LeapFrog Product related tooling investments for high volume test/production jigs and/or fixturing.

• Further development of the PPS production tester for higher volume capacity production.

A-6

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• Mechanical design support.

• Electrical design support.

• Specification support of [*].

• LFIRC specific [*].

• Any production support beyond that described in the production launch support section above, as set forth in Schedule H.

• Any additional PPS study outside the main PPS deliverables, including:

• New [*].

• Any PPS deliverable that is not included in the technology PPS deliverable (i.e. support of a DotPos PPS system) [*].

• Any firmware related investigation (ICR etc.).

• LeapFrog PPS product verification, including:

• PPS performance of the LeapFrog Product ([*] PPS in the product etc.).

• However, Anoto will conduct full [*] on [*] chosen by Anoto as part of the initial [*] NRE.

• Project Management for LFIRC support (as defined within this section).

III. DOTPOS BACKUP PLAN.

Subject to Section 5.7 of the Agreement, the DotPos ASIC including the image subsystem and other analog functionality can be used in products even though it is not fully functioning. The primary backup plan to a Complete DotPos is to use the DotPos ASIC with external circuitry to compensate for the functionality of the ASIC that is not functioning (Interim DotPos). An Interim DotPos may be accepted as a backup solution to the Complete DotPos in LFIRC’s sole discretion, and acceptance of any such Interim DotPos solution will not alleviate Anoto of the responsibility of completing an acceptable Complete DotPos.

Additionally, if any of the following blocks are not working they can be built externally with discrete components which are considered LeapFrog specified functions in the Anoto sensor ASIC:

[*]

LFIRC is responsible for building the external components to compensate for this functionality identified in the foregoing sentence. Anoto is responsible to get the DotPos sub-image system to work as apart of the PPS System, and to provide hooks so that the above functions can be implemented externally.

The secondary backup plan is the BSU. This consists of the [*]. This can be used with the LeapFrog System ASIC.

IV. ENGINEERING MILESTONE SCHEDULE.

A-7

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Date	Milestone	Anoto deliverables (with additional acceptance criteria in parentheses)	LFIRC deliverables (with additional acceptance criteria in parentheses)
	SIGNING: contract signing	(1) Documentation transfer as listed in the section Upfront Deliverables. (2) Training available.
[*]	A. First [*] based proto with XY functioning	(1) [*] with [*] pen. Dependencies: (i)     Anoto develops [*] by late November. (ii)    LFIRC develops [*] by late November.	(1) [*] platform with DotPos interface. (2) Support and changes as needed to Anoto.
[*]	B. Design specifications signoff	Joint Platform design specifications, including: (1) [*] Frozen “design to” Specification ([*]) including: (i)     [*]. (ii)    [*]. (iii)  Anoto development tools ([*]). (iv)   [*] mechanical drawings. (review early, milestone is met by a LFIRC signoff) The Parties recognize that the specifications at this stage are preliminary and that the specifications may be changed upon mutual agreement.	(1) LeapFrog Design Requirements Specification (LeapFrog DRS) including: (i)     LeapFrog system ASIC. (ii)    LeapFrog Platform OS. (iii)  LeapFrog SDK (review early, milestone is met by an Anoto signoff).
[*]	C. Design Review	Design review relating to “suitability for volume production.” Anoto to provide sufficient data for such review.	Participation in the design review and preliminary approval of the design with respect to “suitability for volume production.” Final approval after vendor discussion and prototype review.
[*]	Dl. First full APR function	(1) First full implementation (all functions) according to Kailas DRS running on existing hardware, with optimized APR functionality.

A-8

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Date	Milestone	Anoto deliverables (with additional acceptance criteria in parentheses)	LFIRC deliverables (with additional acceptance criteria in parentheses)
[*]	D2. First LeapFrog software and SDK.		(1) First version of LeapFrog software (Platform OS) and SDK (not yet all functions).
	D3. Demonstrated production mirror optics	(1) Low volume production tooled optics [*] functioning (which means an image of pattern through optics taken with Panoptes sent to LFIRC) with sensor [*] concept to meet performance specifications (which means LFIRC confidence that adjustments can be made to meet specifications).
[*]	E. Tape-out	First DotPos silicon tape-out.
[*]	F. DotPos Silicon out samples	DotPos (silicon out) samples available from vendor.	Wire bonded DotPos on test PCB and complete tethered pen verification platform (specification to be agreed upon in [*] ten (10) days after receipt of DotPos.
[*]	G. Production XY Module	(1) Integrated optics and DotPos functioning (which means decoding). (2) Production (soft tool) optics. (3) Tool ready optical component drawings and specifications (fine tuning depending on production variances will still remain). (4) DotPos tested, delivered to LFIRC (first pass silicon with possible modifications).
[*]	H. BSU decision date	Anoto to prepare for design review by [*.] This shall include risk analysis and detailed information on DotPos status.	Decision to proceed (or not) with BSU project based on Anoto status. Will advise Anoto no later than [*].

A-9

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Date	Milestone	Anoto deliverables (with additional acceptance criteria in parentheses)	LFIRC deliverables (with additional acceptance criteria in parentheses)
[*]	II. LeapFrog System ASIC delivery		(1) LeapFrog System ASIC tested, functioning, delivered to Anoto (first pass silicon with possible minor modifications). (2) Functioning product PCBs.
	12. Final software	(1) APR.	(1) LeapFrog software (Platform OS) and SDK
	13. Commit date (90% confidence that specifications and schedule will be kept)	(1) Only minor low risk silicon changes remaining. (2) Production optics from low volume production tools. (3) Confidence on all Anoto compulsory components including: (i) designs will meet specifications (this is more a review than a delivery date, fine tuning remains). (ii) suitable to high volume production. (iii) written quotation from qualified source which meets cost, volume and schedule targets.	(1) Only minor low risk silicon changes remaining. (2) Integrated PCB in proto mechanics. (3) Confidence in LeapFrog ASIC including: (i) designs will meet specifications. (ii) suitable to high volume production. (iii) written quotation from qualified source which meets cost, volume and schedule targets.
	14. Engineering and production testers	(1) Modified design test and production test equipment functioning and documented.

A-10

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Date	Milestone	Anoto deliverables (with additional acceptance criteria in parentheses)	LFIRC deliverables (with additional acceptance criteria in parentheses)
	J. Integrated system	(1) XY Module parts available as risk production. Release candidate to meet specification. May require limited tool adjustments. Subject to final verification together with final DotPos ASIC. (2) All other Anoto deliverables complete and in full compliance with spec. (3) DotPos available from risk production (not approved, ordered at tapeout).	(1) Integrate system working (2) Preliminary reliability, agency tests, (3) Final silicon fully verified and released for limited production orders.
[*]	K. Delivery date for BSU	Fully verified with limited production, compliant with BSU specifications, BSU fully verified, released for non risk production orders.
[*]	L. Engineering Prototypes		EP, FEP, PP and PS units as available.
[*]	M. Release to Production Date (RTP)	(1) XY Module components available for non-risk production orders. (2) DotPos ASIC released for non-risk production orders – including production test at a minimum of [*] complete and verified. (3) System verification complete, all elements of the [*] and other Anoto deliveries complete, fully verified and compliant to specifications. (4) Support of manufacturing transfer complete •   Production test limits “Suitable for [*] runs”. •   [*] performed at lower quantities.	(1) LeapFrog ASIC released for non-risk production orders.

A-11

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Date	Milestone	Anoto deliverables (with additional acceptance criteria in parentheses)	LFIRC deliverables (with additional acceptance criteria in parentheses)
[*]	N. Test Vectors Complete	DotPos first production test vectors 100% complete, suitable coverage, verified on corner lots and simulation and signed off by Anoto and the ASIC foundry.	LeapFrog ASIC first production test vectors 100% complete, suitable coverage, verified on corner lots and simulation, and signed off by LeapFrog and the ASIC foundry.
[*]	0. Production Start Date
[*]

The Remedy start date ([*]) will be included in Section 5.7 of the Agreement.

A-12

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TECHNOLOGY LICENSE AGREEMENT

SCHEDULE B: LICENSED ANOTO TECHNOLOGY,

including appropriate specifications

1. Licensed Anoto Dot Pattern (as defined in the Agreement):

2. Dot Codes (as defined in the Agreement):

3. Specifications related to printing the Anoto Dot Pattern and the design of products printed with the Anoto Dot Pattern:

(A) OFFSET PRINTING REQUIREMENT SPECIFICATION ([*])

• Including the [*]

• Specification of how to produce printed matters compatible with the Pen Positioning System and the specification thereof (including papers, inks and equipment).

(B) PRINTING INTERFACE GUIDELINES

4. The XY Module consisting of:

(A) XY MODULE FUNCTIONALITY AND PERFORMANCE

• According to “Positioning System functionality and performance” specifications.

(B) CMOS SENSOR

• Including Imaging Hardware preprocessing.

(C) IMAGING AND ILLUMINATION COMPONENTS

• For example (depending on design) [*]

(D) IMAGING AND DECODING SOFTWARE

• Generating xy-coordinates from acquired images and;

• Image processing for product and production verification.

• Running anywhere in the system (in the pen or on an outside computer or device).

5. PPS Production Test for the XY Module:

(A) PPS PRODUCTION TEST SOFTWARE AND TEST LIMITS

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• Test software, test cases and test limits for testing of positioning functionality in running production.

(B) PEN & OPTICS TESTER

• The Pen & Optics Tester is used as the final test in the production line to test the PPS performance of the assembled product.

(C) ANOTO PATTERN ANALYSER, APA

• The Anoto Pattern Analyser, APA , is used to test and verify the printed pattern on a specific paper against the PAPS specification. The tool is connected to a PC for analysis of the pattern and feedback on printed pattern characteristics are given on the computer screen. The APA can be used for print shops as outgoing inspection, for the pen assembly factory as incoming inspection and as a development tools for the paper in the design phase. The APA is sold by a third party (Techon Gmbh) to licensees of Anoto under Techon’s standard terms and conditions for sale.

6 [*] development Tools:

(A) [*]

• The [*] is a development tool to verify the performance of the [*]. Feedback on [*] can be presented directly on the [*] where feedback is given on system performance. This tool is useful when developing [*].

(B) GAPAT ([*])

• Module for [*].

• Possible for use in [*].

7. Up front deliverables (these deliverables will not be updated during the project):

• Mechanical 3D files of [*] as they are today.

• [*] of mechanics/optomechanics from [*].

• [*] specifications ([*]).

• Specification of [*]).

• [*]: the [*] specification contains information regarding the [*] for the [*] to meet its specification. Parameters such as [*] of the [*] are described.

• PCB layout of the [*] for [*].

• [*] of [*] for [*].

B-2

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TECHNOLOGY LICENSE AGREEMENT

SCHEDULE C: LICENSED LEAPFROG TECHNOLOGY,

including appropriate specifications

1. The LeapFrog ASIC:

• [*] ASIC including [*] core, cache, RAM, system functions and analog circuits. Designed to interface with DotPos ASIC, run Anoto XY Module software, perform system functions and run product applications developed and available in both die form for die bonding and packaged form for PCB solder. The LeapFrog ASIC includes third party hardware components, such as the [*] which will have license fees due. Either LFIRC must collect royalties from Anoto for the third party components in the ASIC, or Anoto must separately license at the prices and terms offered by such third party. Third party component license fees due may be collected as part of a foundry arrangement as further defined in Section 3.5 and Section 9.3 of the Agreement.

• The LeapFrog ASIC may contain third party software that Anoto must separately license, at the prices and terms offered by such third party, depending on product design.

2. LeapFrog Software has two components:

• LeapFrog Platform Software and Object Code (“Platform OS”):

• Commercially available third party [*] operating system that must be licensed from [*] or other comparable provider selected by LFIRC.

• LeapFrog binary code (includes application program interfaces (APIs), application libraries, hardware drivers, and interface routines to commercially available [*] operating system, which Anoto must separately license at the prices and terms offered by such third party) and includes the following components:

• Audio sub-system.

• Speech decompression functions.

• Music functions.

• Timers.

• Memory allocation.

• Cache control.

• Interrupts.

• Boot code.

• Events.

• Messaging.

C-1

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• Standard C/C++ library routines (this is third party technology that Anoto must separately license at the prices and terms offered by such third party).

• Semaphores.

• Note: LeapFrog binary code includes software licensed to LFIRC which LFIRC will sublicense. LFIRC has an obligation to collect royalties on behalf of its third party licensors and must collect royalties on those products. Such royalties charged to Anoto shall be without mark-up.

• LeapFrog source code to run on the System ASIC:

• The ASIC system starter/hello world module is the only source code to be provided.

• Software supported audio codec that Anoto must separately license at the prices and terms offered by such third party.

• Note: All of the foregoing Platform OS components are redistributable except for the source code version of the ASIC system starter/hello world module. This means that an Anoto sublicensee can receive LFIRC’ s source for the ASIC system start/hello world module, but cannot distribute the source (only can distribute binary derivatives).

• LeapFrog SDK Tools and Documentation (“LeapFrog SDK”):

• [*] (this is third party software that Anoto must separately license at the prices and terms offered by such third party).

• Build environment, including [*] and [*], which are third party open-source tools that Anoto must separately license at the prices and terms offered by such third party.

• LeapFrog Content tools, including:

• Audio compression

• MIDI conversion.

• Binary packers.

• Shape definition and packing tool.

• SDK documentation.

• Additional software components may also require Anoto to separately license the software component at the prices and terms offered by such third party.

• Note: LeapFrog Content tools may include software licensed to LFIRC which LFIRC will sublicense.

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TECHNOLOGY LICENSE AGREEMENT

SCHEDULE D: ANOTO COMPONENTS

1. Anoto Compulsory Components:

CMOS SENSOR

a. Including [*].

IMAGING AND DECODING SOFTWARE

b. Generating [*], and;

c. [*] for product and production verification.

d. This Anoto Compulsory Component can be running anywhere in the system (e.g., in [*]).

2. Anoto Key Components:

IMAGING AND ILLUMINATION COMPONENTS

• For example (and depending on design), these Anoto Key Components would include: [*]

3. Anoto Specifications and Processes:

PPS PRODUCTION TEST SOFTWARE AND TEST LIMITS

• Test software, test cases and test limits for testing of positioning functionality in running production.

OFFSET PRINTING REQUIREMENT SPECIFICATION ([*])

• Including the [*]).

• Specification of how to produce printed matters compatible with the Pen Positioning System (“PPS”) and the specification thereof (including papers, inks and equipment).

INK REFILL SPECIFICATION

• The ink refill specification contains information regarding the ink cartridge for the PPS system to meet its specification. Parameters such as type of ink and mechanical dimensions of the ink refill are described.

PEN & OPTICS TESTER SPECIFICATIONS AND TEST PROCESS

• Specifications and process for the Pen & Optics Tester.

D-1

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TECHNOLOGY LICENSE AGREEMENT

SCHEDULE E: ANOTO AUTHORIZED SOURCE

[*]

Other vendors used by Anoto or as mutually agreed upon by the Parties.

****

E-1

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TECHNOLOGY LICENSE AGREEMENT

SCHEDULE F: QUALIFIED LEAPFROG FOUNDRIES

None as of the Effective Date. The Parties will mutually agree upon Qualified LeapFrog Foundries.

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TECHNOLOGY LICENSE AGREEMENT

SCHEDULE G: ROYALTY AND PAYMENT SCHEDULE

1. Licensed Product Royalty. Subject to the Section 6 of this Schedule G, for each unit of LeapFrog Product sold by LFIRC or its Group Companies under this Agreement, LFIRC will pay to Anoto a Royalty (the “Licensed Product Royalty”) equal to:

(a) First [*] Units – For the first [*] units of LeapFrog Products sold by LFIRC or its Group Company, [*] of the Net Sales Value of LeapFrog Product.

(b) After [*] Units – For all units of LeapFrog Products in excess of [*] sold by LFIRC or its Group Company, [*] of the Net Sales Value of LeapFrog Products.

Such Royalties under this Section 1 of Schedule G will be deducted against the Advance Royalties paid under Section 5 of this Schedule G. Licensed Product Royalty will not apply to inter-company transactions between LFIRC Group Companies but rather will be based on the first sale by LFIRC or its Group Company to an unrelated customer.

In addition to the above definition of Licensed Product Royalty, the following shall apply until [*] after which date it will be renegotiated in good faith by the Parties.

A Maximum and Minimum royalty shall be applied for each LeapFrog Product sold in the Exclusive Field. The Maximum Royalty per LeapFrog Product within the Exclusive Field per unit will be [*]. The Minimum Royalty per LeapFrog Product within the Exclusive Field per unit will be [*].

For the avoidance of doubt, these Maximum and Minimum levels will only be applicable for LeapFrog Products sold or otherwise distributed within the Exclusive Field Furthermore, this applies only to units sold separately (i.e., these levels are not applicable for multiple units bundled into one product package), e.g., a starter kit with one pen and one piece of Content.

The above Maximum and Minimum levels are applied to determine the Licensed Product Royalty before taking into account any discount permitted under the Agreement or this Schedule G. For example, if a unit of Licensed Product sold for [*], then the Licensed Product Royalty at [*] would be [*]; however, the Licensed Product Royalty would, under the preceding paragraph, be deemed no less than the Minimum Level of [*]. Any permitted discounts permitted this Schedule G or Section 5.7 would then be applied to reduce the net Licensed Product Royalty, even if below the Minimum Level (in the case of a [*] discount for example, to [*]).

2. Content Royalty.

(a) Where LFIRC or its Group Company sells or licenses LeapFrog Content on a stand-alone basis, LFIRC will pay a royalty (the “LeapFrog Content Royalty”) per sold LeapFrog Content item equal to:

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(i) [*] of the Net Sales Value, if no royalty is paid by LFIRC or a Group Company to a third party licensor in connection with the LeapFrog Content; or

(ii) [*] of the Net Sales Value, if LFIRC or a Group Company pays royalties to a third party licensor in connection with the LeapFrog Content

(b) Where LFIRC or its Group Company sells or licenses LeapFrog Content other than on a stand-alone basis, LFIRC will pay Anoto: (i) where the LeapFrog Content is bundled with a LeapFrog Product, a Royalty equal to the Licensed Product Royalty will apply with respect to the Net Sales Value of the bundle; and (ii) where the LeapFrog Content is bundled with any product or item other than a LeapFrog Product, a reasonable Royalty based on the value of the Content in proportion to the value of the overall product will be paid to Anoto; provided, however, that Anoto has given its written approval to such Royalty level, such approval not to be unreasonably withheld.

(c) Where content is developed, created and sold by an unrelated sublicensee of LFIRC or a Group Company, the Royalty rate is [*] of the sublicensees Net Sales Value of such content, subject to the following, notwithstanding the provisions of Section 2(a) or 2(b) above to the contrary :

(i) LFIRC or its Group Companies will have the right to license [*] to a sublicensee, the right to print Licensed Anoto Dot Pattern in books, magazines and other publications that (a) are sold by the sublicensee separately from the digital software and content used with the LeapFrog Product (“SW Content”), (b) were not originally published in digitally enabled form for use with the Licensed Anoto Dot Pattern, and (c) with the exception of adding the Licensed Anoto Dot Pattern and additional codes or features that interact with LeapFrog Products to provide additional functionality, no material changes have been made to the original book, magazine, or publication other than the inclusion of such additional codes or features and of notice to readers that the Licensed Anoto Dot Pattern is used. In such case, [*] Royalty shall be paid to Anoto for such sublicense, except for the Anoto Dot Pattern License Fee set forth in Section 3 below as applicable, and LFIRC and its Group Companies [*]. This Section 2(c)(i) will not apply if LFIRC or any LFIRC Group Company charges the sublicensee [*] for the right to use Licensed Anoto Dot Pattern with such digitally-enabled books, magazines or other publications.

(ii) For books, magazines and other publications that were originally published in digitally enabled form for use with the Licensed Anoto Dot Pattern, the Royalty payable to Anoto is [*] of the sublicensee’s Net Sales Value of such products. Such Royalty will also apply when such book, magazine or publication, is bundled and sold together with the

G-2

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corresponding digital SW Content, or when the digital SW Content is sold, in tangible form (cartridge or similar).

(iii) If the digital SW Content is sold separately by means of downloading the SW from an internet service, the Royalty payable to Anoto is [*] of the sales value received from the customer that is downloading and paying for such digital content, excluding sales tax and administrative costs that are stated separately (e.g. handling and invoice fee’s and similar charges).

(d) Such Royalties under this Section 2 will be deducted against the Advance Royalties paid under Section 5 of this Schedule G. LeapFrog Content Royalty will not apply to inter-company transfers between LFIRC Group Companies but rather will be based on the first sale by LFIRC or a Group Company to an unrelated customer.

(e) The Parties agree to discuss in good faith the possibility of pre-printing the Licensed Anoto Dot Pattern in LeapFrog Content or other Content prior to initial launch of LeapFrog Products.

3. Anoto Dot Pattern License Fee. With respect to any license by LFIRC for additional unique areas of the Anoto Dot Pattern (following the initial allocation of the equivalent of [*] pursuant to Section 2.2 of the Agreement), after Anoto has completed and confirmed processing of LFIRC’s order for the Licensed Anoto Dot Pattern, and has allocated the applicable portion of the Anoto Dot Pattern to LFIRC, LFIRC will pay Anoto the applicable license fee therefore as set forth in Section 2.2 of the Agreement.

4. Royalties on Sublicensing Revenues.

(a) If Anoto grants a sublicense of its rights under Section 3 of the Licensed LeapFrog Technology to third parties, then Anoto will pay LFIRC a Royalty equal to a portion, specified as follows, of the Net Sublicense Royalty Value received by Anoto:

(i) [*] of any Net Sublicense Royalty Value received by Anoto or its Group Companies until first [*] royalty-bearing units implementing the Joint Platform (“Royalty Bearing Units”) have been sold;

(ii) [*] of any Net Sublicense Royalty Value received by Anoto or its Group Companies once sales of Royalty-Bearing Units are in excess of [*].

(b) If LFIRC grants a sublicense of its rights under Section 2 of the Licensed Anoto Technology to third parties, then LFIRC will pay Anoto a Royalty based on sales by such third parties as if such sales were made by LeapFrog.

G-3

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(c) In addition to its obligation to pay NRE under Section 5 of the Agreement, LFIRC may elect to pay, in whole or in part, additional non-recurring expenses of Anoto associated with the development of the Anoto ASIC to lower the per-unit amortization charge assessed by Anoto’s third-party ASIC supplier. In such case, LFIRC, Anoto and the relevant third-party supplier will enter into an agreement whereby prices charged to LFIRC by the third-party supplier for the Anoto ASIC will be reduced (relative to those charged by the supplier or Anoto to other customers) for a volume of units sufficient to allow LFIRC to recover such additional non-recurring expense.

5. Payments and Payment Terms.

5.1 Total Payments. In partial consideration of the licenses granted and services performed by Anoto, LFIRC will pay to Anoto the following payments in accordance with Sections 5.2 through 5.4 below:

(a) [*] as a non-recurring charge for engineering services provided by Anoto under the Statement of Work (“NRE Fee”);

(b) [*] as a nonrefundable initial license fee (“Initial License Fee”);

(c) [*] as a nonrefundable interim license fee that will not be credited against future Royalty obligations (“Interim License Fee”); and

(d) [*] as an advance to be credited against Royalty obligations incurred by LFIRC under this Agreement (“Advance Royalties”).

5.2 NRE Fee. LFIRC will pay the NRE Fee to Anoto in five (5) equal installments of [*]. The installments will be payable upon attainment by Anoto of each specified milestone (as described in the Statement of Work) in accordance with the following schedule:

(a) [*]: First full APR functionality (Milestone D1);

(b) [*]: DotPos (silicon out) samples available from vendor (Milestone F);

(c) [*]: Attainment of all milestones specified (Milestones II through I4);

(d) [*]: XY Module release to production (Milestone M);

(e) [*]: Production Start Date (Milestone 0).

5.3 Initial License Fee. LFIRC will pay the Initial License fee to Anoto within ten (10) days after the date that this Agreement is executed by all of the Parties.

G-4

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

5.4 Interim License Fee. LFIRC will pay the Interim License Fee to Anoto in four (4) equal installments as follows:

(a) [*] to be paid by [*];

(b) [*] to be paid by [*];

(c) [*] to be paid by [*]; and

(d) [*] to be paid by [*].

5.5 Advance Royalties. LFIRC will pay the Royalty Advance in four (4) installments as follows:

(a) [*] to be paid by [*];

(b) [*] to be paid by [*];

(c) [*] to be paid by [*]; and

(d) [*] to be paid by [*].

The Advance Royalties will be credited against Royalty amounts owed by LFIRC under this Agreement until the Advance Royalties are exhausted. LFIRC will not be entitled to a refund of Advance Royalties except as expressly provided under this Agreement. In accordance with Section 5.7 under the Agreement, portions of the Advance Royalties may “vest” if LFIRC does not fulfill its obligations under the Statement of Work. Portions of the Advance Royalties that have vested will not subsequently be credited to LFIRC’s Royalty obligations.

6. Discount. Subject to the terms of this Section 6, LFIRC may take a [*] discount against Royalties payable by LFIRC under Sections 1 and 2 of this Schedule G until such aggregate life-to-date discounts taken by LFIRC under this Section 6 (not Section 5.7) equals [*]. Under this Section 6, LFIRC may take such discount against Royalty payments that are already discounted in accordance with Section 5.7 of the Agreement, unless expressly stated to the contrary in Section 5.7. For example, if LFIRC’s first Licensed Product were introduced in the first quarter of [*], and if Net Sales Value generated in that quarter were [*], then the resulting Royalty obligation (at [*] Royalty rate) would be [*]; in that case, LFIRC would first discount this gross Royalty obligation as permitted under Section 5.7 to arrive at a net Royalty obligation; LFIRC would then take a [*] discount under this Section 6 against such net Royalty obligation. Assuming in the foregoing example that there were no discount available under Section 5.7, then LFIRC would remit (or deduct against any Advanced Royalties paid and not previously deducted, as applicable) [*] to Anoto in full satisfaction of LFIRC’s Royalty obligation for that quarter. Having taken that discount, LFIRC’s aggregate life-to-date discount for purposes of this Section 6 would equal [*] and thereafter LFIRC would not be entitled to take additional discounts under this Section 6. Assuming instead in the foregoing example that a discount were available under Section 5.7, then LFIRC would take the Section 5.7 discount and then apply the

G-5

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

[*] discount under this section to the net result. Only the amount of the incremental [*] discount taken under this Section 6 would be included in LFIRC’s aggregate life-to-date discount for purposes of determining when the LFIRC has reached [*] aggregate life-to-date discount cap.

G-6

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

TECHNOLOGY LICENSE AGREEMENT

SCHEDULE H: MAINTENANCE AND SUPPORT TERMS

To be negotiated in good faith by the Parties before December 31, 2004, unless otherwise agreed.

****

H-1

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

TECHNOLOGY LICENSE AGREEMENT

SCHEDULE I: LICENSED ANOTO IP

Includes the list of Patents and Patent Applications Owned by Anoto AB and its Group Companies, as of the Effective Date.

I-1

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

TECHNOLOGY LICENSE AGREEMENT

SCHEDULE J: LICENSED LEAPFROG IP

U.S. Pat. Application Ser. No. 60/456,053 filed March 18, 2003, entitled “Scanning Apparatus and Method for Scanning Print Elements” naming inventors James Marggraff, Michael C. Wood, and Mark Flowers.

No other patents or patent applications of LFIRC or LeapFrog existing as of the Effective Date are included in Licensed LeapFrog IP, notwithstanding anything to the contrary in the Agreement.

****

J-1

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

TECHNOLOGY LICENSE AGREEMENT

SCHEDULE K: RELEVANT PATENTS RELATING TO LEAPFROG TECHNOLOGY

AND RELEVANT PATENTS RELATING TO ANOTO TECHNOLOGY

1. Relevant Patents Relating to LeapFrog Technology

[*]

2. Relevant Patents Relating to Anoto Technology

Please note that the list does not include complete families, but only one exemplary family member of each family.

[*]

****

K-1

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

TECHNOLOGY LICENSE AGREEMENT

SCHEDULE L: INDIVIDUAL MARKETS

[*]

****

L-1

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

EX-10.28

Exhibit 10.28

AMENDMENT NO. 1 TO

TECHNOLOGY LICENSE AGREEMENT

This Amendment No. 1 (“Amendment No. 1”) dated as of December 7,2004 (the “Effective Date”) to that certain Technology License Agreement dated January 25, 2004 (the “Original Agreement”) by and between ANOTO AB, a company incorporated under the laws of Sweden (“Anoto”), ANOTO GROUP AB, a company incorporated under the laws of Sweden (“Anoto Group”), LEAPFROG ENTERPRISES, INC., a company incorporated under the laws of Delaware (“LF Enterprises”) and LEAPFROG INTERNATIONAL RESEARCH COMPANY LTD., a wholly-owned Group Company of LF Enterprises incorporated under the laws of the Cayman Islands (“LFIRC”). Each of Anoto, Anoto Group, LF Enterprises and LFIRC are referred to as a “Party”, and collectively as the “Parties”. Capitalized terms not defined in this Amendment No. 1 will have the meaning ascribed to them in the Original Agreement.

BACKGROUND

A. The Parties entered into the Original Agreement as of January 25, 2004.

B. On June 23,2004, the Parties entered into a letter agreement (the “June 2004 Letter”) whereby the Parties agreed to amend Section 2.6 of the Original Agreement to extend the deadline to negotiate mutually agreeable terms with respect to use of the Licensed Anoto Technology with LeapFrog’s LeapTrack system.

C. LF Enterprises now intends to dissolve and wind down LFIRC, its wholly owned subsidiary.

D. LFIRC now desires to assign all of its rights and obligations under the Original Agreement (as amended by the June 2004 Letter) to LF Enterprises, LF Enterprises now desires to assume all of the rights and obligations of LFIRC under the Original Agreement (as amended by the June 2004 Letter), Anoto and Anoto Group agree to consent to the assignment by LFIRC and the assumption by LF Enterprises of such rights and obligations, and the Parties also desire to make such other amendments to the Original Agreements as specifically set forth in this Amendment No. 1.

Based on the foregoing, and in consideration of the mutual promises and covenants set forth below and other good and valuable consideration the receipt and adequacy of which is hereby acknowledged, the Parties agree as follows:

1. ASSIGNMENT AND ASSUMPTION.

As of the Effective Date of this Amendment No. 1, LF Enterprises and LFIRC agree as follows:

1.1 LFIRC hereby conveys, transfers and assigns to LF Enterprises all of LFIRC’s right, title and interest under the Original Agreement and the June 2004 Letter; and

1

1.2 LF Enterprises hereby assumes all of LFIRC’s right, title, interest and obligations under the Original Agreement and the June 2004 Letter.

2. AMENDMENTS TO PRIOR AGREEMENTS.

2.1 References to “LFIRC” and “LeapFrog”. The Parties agree that any references in the Original Agreement or in the June 2004 Letter to “LFIRC” or to “LeapFrog” will, as of the Effective Date of this Amendment No. 1, refer exclusively to LF Enterprises.

2.2 Deletion of Sections to the Original Agreement. The Parties agree to amend the Original Agreement as follows:

(a) Section 10.4 of the Original Agreement is hereby deleted in its entirety and replaced with the following:

“10.4 [RESERVED]”

(b) Section 13.2(m) of the Original Agreement is hereby deleted in its entirety and replaced with the following:

“13.2 (m) [RESERVED]”

3. MISCELLANEOUS.

3.1 Effect of Amendment No. 1. Except as specifically set forth in Sections 1 and 2 of this Amendment No. 1, the terms and conditions of the Original Agreement and the June 2004 Letter will remain in full force and effect.

3.2 Entire Agreement; :Interpretation. This Amendment No. 1, together with the Original Agreement, the June 2004 Letter, and any notices made pursuant any of the foregoing, collectively constitute the entire agreement of the Parties with respect to the subject matter hereof and supersedes all previous and contemporaneous agreements, contracts, communications, representations and understanding, either oral or written, between the Parties relating to the subject matter hereof.

3.3 Counterparts. This Agreement may be executed in two or more counterparts in the English language, and each such counterpart will be deemed an original hereof. In case of any conflict between the English version and any translated version of this Agreement, the English version will govern.

[Intentionally Blank]

2

IN WITNESS WHEREOF, the authorized representatives of each of the Parties have executed and delivered this Amendment No. 1 as of the Effective Date.

LEAPFROG ENTERPRISES, INC.		ANOTO AB
By:	/s/ Tom Kalinske	By:	/s/ Anders Tormod
	Tom Kalinske, CEO		Anders Tormod, CEO
By:	/s/ Bill Chiasson	By:	/s/ Peter Liss
	Bill Chiasson, Chief Financial Officer		Peter Liss, Chief Financial Officer
Address for Notices:		Address for Notices:
6401 Hollis Street, Suite 100		Scheelevågen 19 C
Emeryville, CA 94608 USA		223 70 Lund, SWEDEN
Fax: (510) 420-5011		Fax: +46 46 540 12 02
Attention: VP, Legal Affairs		Attention: Chief Executive Officer
LEAPFROG INTERNATIONAL RESEARCH COMPANY LTD.		ANOTO GROUP AB
By:	/s/ L. James Marggraff	By:	/s/ Christer Fåhraeus
	L. James Marggraff, Director		Christer Fåhraeus, Chairman
Address for Notices:		Address for Notices:
c/o M&C Corporate Services Limited		Scheelevågen 19
P.O. Box 309GT		223 70 Lund, SWEDEN
Ugland House		Fax: +46 46 540 12 02
South Church Street		Attention: Chairman
George Town
Grand Cayman, Cayman Islands
Fax: (345) 949 8080
With a copy to:
LeapFrog International Research Company Ltd.
c/o 6401 Hollis Street, Suite 175 Emeryville, CA 94608 USA
Fax: (510) 420-5011
Attention: Corporate Secretary

1.

EX-10.29

Exhibit 10.29

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

AMENDMENT NO. 2 TO

TECHNOLOGY LICENSE AGREEMENT

This Amendment No. 2 (“Amendment No. 2”) dated as of March 25, 2005 (the “Amendment No. 2 Effective Date”) to that certain Technology License Agreement dated January 25, 2004 (the “Original Agreement”) by and between ANOTO AB, a company incorporated under the laws of Sweden (“Anoto”), ANOTO GROUP AB, a company incorporated under the laws of Sweden (“ANOTO GROUP”), and LEAPFROG ENTERPRISES, INC., a company incorporated under the laws of Delaware (“LeapFrog”). Each of Anoto, Anoto Group, LeapFrog are referred to as a “Party”, and collectively as the “Parties”. Capitalized terms not defined in this Amendment No. 2 will have the meaning ascribed to them in the Original Agreement.

BACKGROUND

The Parties entered into the Original Agreement as of January 25, 2004.

The Parties desire to amend certain portions of the payment schedule set forth in Schedule G (Royalty and Payment Schedule) of the Original Agreement and to clarify certain delivery obligations as set forth herein.

Based on the foregoing, and in consideration of the mutual promises and covenants set forth below and other good and valuable consideration the receipt and adequacy of which is hereby acknowledged, the Parties hereby agree as follows:

AGREEMENT

1. Amendments to Payment Schedule.

1.1 Milestone I NRE. Section 5.2(c) of Schedule G of the Original Agreement is hereby replaced in its entirety with the following: “Upon execution of Amendment No. 2.”

1.2 Milestone M NRE. Section 5.2(d) of Schedule G of the Original Agreement is hereby replaced in its entirety with the following: “Upon final acceptance by LeapFrog of Milestone M (Release to Production Date (RTP)).

1.3 First Advance Royalty Payment. Section 5.5(a) of Schedule G of the Original Agreement is hereby replaced in its entirety with the following:

[*] shall be paid upon execution of Amendment No. 2.

1.4 Second Advance Royalty Payment. Section 5.5(b) of Schedule G of the Original Agreement is hereby replaced in its entirety with the following:

[*] shall be paid upon the latter of June 30, 2005 or final acceptance of Milestone M (Release to Production Date (RTP)).

1.5 Other Invoiced Amounts.

Invoice #1002820 in the amount of [*] shall be paid on or before execution of Amendment No. 2.

Invoice #1002821 in the amount of [*] shall be paid on or before execution of Amendment No. 2.

Invoice #1003710 in the amount of [*] shall be paid upon execution of Amendment No. 2.

Invoice #1003709 in the amount of [*] shall be paid upon final acceptance of [*].

Invoice #1003708 in the amount of [*] shall be paid upon final acceptance of [*].

2. Effect of Work Performed under SSoWs. Anoto acknowledges and agrees that the deliverables to be provided by Anoto to LeapFrog under Schedule A of the Technology License Agreement apply to the XY Module as modified by the work performed under SSoW#1 and SSoW#2.

3. Clarification of RTP Milestone M (RTP) deliverables. The Parties acknowledge that the Milestone M (Release to Production Date (RTP)) deliverable under Schedule A of the Original Agreement includes all items identified in Section 4 below, Exhibit A attached hereto, Attachement1 050321.xls, and Attachment2 050321.doc, excluding DP18, PPS12 and PPS13 of Attachement1 050321.xls. The Parties acknowledge that the specifications for these items are not precise at this time. The Parties agree to use good faith and commercially reasonable best effort to define and deliver these items in accordance with the guidelines set forth in Exhibit A attached hereto.

1.

4. Amendments to Delivery Schedule. Anoto will use commercially reasonable best efforts to meet the following schedule:

FLY PPS Design Specifications – [*] (prerelease with TBDs will be done along the road)

FLY PPS Design description – Done

FLY PPS measured data – [*] after receiving pens and working [*] environment

FLY PPS Product Specification – [*] after FLY PSS measured data

Other priority 1 items in Attachement1 050321.xls and in Attachment2 050321.doc – [*]

Priority 2 items in Attachement1 050321.xls and in Attachment2 050321.doc – [*]

5. Payments. Milestone M deliveries will be delivered at no additional charge (beyond the original contracted amount plus amounts due under SSOW #1 and SSOW #2) unless additional charges are expressly identified in this Amendment No. 2 or otherwise agreed to in writing by the parties.

6. Effective of this Amendment. Except as expressly set forth herein, the Original Agreement shall remain in full force and effect in accordance with its terms.

7. Miscellaneous. This Amendment No. 2, the Original Agreement and all other duly executed, written amendments to the Original Agreement represent the entire agreement between the Parties with respect to the subject matter hereof and supersedes all prior agreements and understandings with respect to the subject matter hereof.

In witness whereof, the Parties hereto have executed this Amendment No. 2 as of the Amendment No. 2 Effective Date.

LEAPFROG ENTERPRISES, INC.		ANOTO AB
By:	/s/ Mark Flowers	By:	/s/ Anders Tormod
	Mark Flowers, CTO		Anders Tormod
		By:	/s/ Mats Blom
			Mats Blom, Chief Financial Officer
Address for Notices 6401 Hollis Street, Suite 100 Emeryville, CA 94608 USA Fax: (510) 420-5011 Attention: VP, Legal Affairs		Address for Notices: Scheelevägen 19 C 223 70 Lund, SWEDEN Fax: +46 46 540 12 02 Attention: Chief Executive Officer
		ANOTO GROUP AB
		By:	/s/ Christer Fåhraeus
			Christer Fåhraeus, Chairman
		Address for Notices: Scheelevägen 19 C 223 70 Lund, SWEDEN Fax: +46 46 540 12 02 Attention: Chairman

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

EXHIBIT A

Clarification of Certain

Milestone M (Release to Production Date (RTP)) Deliverables

FLY PPS specification process

Anoto will develop FLY PPS specifications in a three step process. First, Anoto will deliver a [*]. Second, Anoto will characterize [*] and produce a [*]. Third, Anoto will correlate [*] with [*] and produce a [*] Anoto will be responsible for a design that performs consistent with the Design Specifications Provided that pens are assembled correctly with in tolerance components. The Product Specifications may vary slightly from the Design Specification provided that such variations do not have a material adverse effect on product performance.

FLY PPS Design Specification

The goal of the Design Specification is to provide a well characterized theoretical performance specification over conditions which somewhat exceed the normal specified use conditions. The scope and format will be developed in accordance with the example set forth in Attachement3 Fly_PPS_Design_specification.doc. Four additional [*] may be added to address additional information requested by LeapFrog. Information on performance reduction due to [*] will be provided based on [*] data. [*] will be of similar accuracy and confidence as those in the [*] (reference) [*]. Anoto intends to achieve this accuracy by performing [*] analysis on the results of [*]. Design Specifications will reference the possibility of up to a [*] based on possible deviations between [*] performance. [*] will be of sufficient accuracy to have a [*] confidence that there will not be a [*] of performance.

FLY PPS [*] report

The [*] verification step will be conducted on FLY pens in lieu of the originally envisioned [*] reference verification. Quantities and details of the verification procedure will be discussed and established by mutual agreement. Goals of the verification process include establishing confidence in the theoretical performance data across the range of allowed manufacturing tolerances. LeapFrog will be responsible for providing components with mechanical dimensions well characterized. Parties will consider how to best verify performance at manufacturing tolerances. LeapFrog may request the testing of additional pens for the purpose of qualifying its manufacturing process. Testing charges will apply for the testing of pens beyond that which is reasonably appropriate to properly qualify the design performance.

Additional information

Anoto will provide additional [*] information to enable LeapFrog to set up a manufacturing test process. For example, LeapFrog may need to understand the nature of the system behavior when certain critical components are [*] or [*]. Analysis of LeapFrog manufacturing problems, if needed, will be provided to LeapFrog [*].

Design adjustment

Anoto will provide some guidance to help LeapFrog to become effective at making minor performance adjustments as may be reasonably useful to optimize for component spec variations or [*]. Examples may include [*]. The goal will be to give LeapFrog enough guidance to become productive at testing and collecting data on possible adjustments. It is understood that any adjustments must be simulated by Anoto before implementation otherwise performance results cannot be guaranteed. Additional charges would apply for the simulation of LeapFrog requested adjustments.

DotCode performance

DotCode performance will be improved with a target of [*]. Present goals are to achieve [*] performance. [*] information will be provided. Variations in performance from [*] will be documented.

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

Minimum dot size

Fly will target [*] dot size to be consistent with Anoto ecosystem. Performance specifications will be provided at [*] and above [*] so that LeapFrog can make decisions regarding content and system design margin. Expectations are that FLY DotPos at [*] will not be [*] than [*] reference at [*] (except for known FLY limits beyond [*])

ImageViewer

Anoto will provide Image Viewer in [*] format with certain additional features as have been discussed. Final determination of Anoto provided feature set will be determined by mutual agreement. The goal is to provide sufficient functionality up front so that [*] does not have to be upgraded to a [*] interface.

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

Attachment 1

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

Milestone M

Milestone M. [Illegible]

SSow

[Illegible]

1 [Illegible] for RTP

2 Scheduled later than critical items

Pen Positioning System (PPS)

Category	#	Name	Category	Description from Leapfrog	Comments and action	Delivery date
1	P=PS1	PPS [*] (Mark’s)	Milestone M	Describe to Leapfrog the design, simulation and verification process that results of the [*] and [*] (i.e. including SSOWs 1 and 2) having a sufficient level of [*], and [*] (including [Illegible] and characterization data to simulation) to support [*]	Need for review. Update [*] “The Leapfrog role in the PPS chain” will be followed – simulations and individual design tests in the [Illegible] system can not be described.	[*]
1	PPS2	PPS [*] (PeterM’s)	Milestone M	[*]pdf • what pens were tested? [*] pens with [*]? [Illegible] end pens? • What was the maximum [*] tested? [*] conditions? • How many systems [Illegible] with [*]? What [*] conditions? How well did the units perform, acceptable or target? (according to [*])	as above	[*]
1	PPS3	[*] PPS specs	Milestone M	Should mention or reference the performance with [*] – is it the same?	Technical usage description in [*] and [*] have agreed that Leapfrog will create Leapfrog user specifications for [*].
1	PPS4	[*] specs	SSoW1 (FlyPPS)	[*].pdf (Section [Illegible]/24 It includes a brief discussion on performance at [*], but needs to be greatly expanded. It only states that [*] performance at these [*] is okay. It needs to define the [*] better, the expected [*] and [*] that this causes. Differentiating [*] through this region [*] in this [*] might help too.	[*] date in [*] will not be expanded as no [*] has asked for it and we have the same type of [*] in previous specs. A [*] test with high resolution will be done on Fly pen and delivered as a test report Anoto needs [*] and [*] from Leapfrog to perform the task.	[*]
2	PPS5	Suggested [*] Improvements	SSoW1 (FlyPPS)	Reducing [*] in the [*] and in (illegible) the [*]. Are these related to [*] case [*] and –ve [Illegible] [*] ( as well as associated [*]) Leapfrog does not have [*] of the system to make [*] and [*] on these issues and needs more information in this area.	Update [*]	[*]
1	PPS7	FlyPPS [*]	SSoW1 (FlyPPS)	Identify [*] or [*] tasks that are [*] or done [*] on the [*] (vs. the reference [*]) and discuss why these differences are appropriate given the nature of the Leapfrog [*]. Was the [*] tested in [*] and [*] modes?	The complete verification is quoted by Anoto [*] due to issued [*] an [*] Product Specification will be done based on Knowledge from [*] and [*]. This process will be explained in a separate document	[*]
1	PPS8	FlyPPS [*]	SSoW1 (FlyPPS)	Provide [*], clearly [*] in which the [*] production [*] performance differs from the [*], including performance on [*]	Does “[*]” mean [*] or [*] [*]?	[*]
2	PPS9	FlyPPS [*]	SSoW1 (FlyPPS)	The [*] to [*] may be solved by [*] the [*] of the [*] – what is the predicted improvement in [*] with this changes (or [*] where did the [*] performance in [*]) again [*] does	This is a [*] to solve & [*] side step from the [*], and will only put fly back on the [*] (Fly PPS [*]). No [*] will be provided as it is [*] in accordance with the document. “The Leapfrog role in the PPS chain”	[*]

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

				not have a basis [*] the [*] is performance from this change (and perhaps [Illegible] related issues of stray light). A [*] would help with these issues.
1	PPS10	FlyPPS [*] [Illegible]	SSoW1 (FlyPPS)	What is the [*] of the system and what is the [*]? The [*] has quoted [*] and [*] under all conditions [*]. Does the [*]? Does it include the [*] in [*] modes?	[*] bias for Fly will be part of Fly PPS PS. A more extended explanation is included in [[*] documentation. The [*] mode for [*] bias is calculated from the date set with Leapfrog in [*].	[*]
1	PPS11	[*] size	SSoW1 (FlyPPS)	LeapFrog has no documented information on [*] on the [*] and performance or [*] and performance.	Performance	[*]
2 or 3	PPS12	(illegible)	Other	(illegible)		[Illegible]
2 or 3	PPS13	(illegible)	Other	(illegible)	(illegible)	(illegible)
	DotPos
	#	Name	Category	Description from LeapFrog	Planned action	Delivery date
1	DP1	DotPos [*]	Milestone M	[*] to hold a [*] with [*] and [*] to review [*] discuss [*], [*], [*], and review othernew [*] requirements	Needs feedback from [*] on agenda and meeting time to be able to set up a meeting with the right people request sent on e-mail [*] and again [*] with [*]
1	DP2	DotPos [*]	Milestone M	[*] that was contained in DotPos design requirements documents, including [*] levels, [*] regulation and limit and [*], Request delivery of [*] requirements doc including [*] referenced in test reports, or merge of this info into [*]	[*] have been updated. Available on the [*]. All versions of the [*] have been put on the [*].	[*]
1 Plan 2 done	DP3	DotPos Life [*]	Milestone M, DBSS March	Approved [*] with pre production phase complete	[*] responsible. Draft for time schedule is first readout [*] and final readout [*]. If you like to this could be discussed during a design review as above.
	DotPos (illegible) BB Verification summary rev003
1	DP4		Milestone M	Missing much of the [*] and [*] (how many parts, what [*] ranges, etc)	More info are available in [*] verification summary”	[*]
1	DP5		Milestone M	like to see [*] and [*] represented in the front of the report	[1],[2],[6],[7],[8],[9] and [14] are available on the sftp. [3], [4], [5], [10] are confidential. Non-confidential parts of [11], [12], [13] have been summarized in the document.	—
1	DP6		Milestone M	like to understand [*] what [*] used for [*]	What tests are retired to 7 [Illegible] more info will be available in row [Illegible] of [*] summary.	done?
1	DP7		Milestone M	like better description of [*]	Confidential in accordance with the documents. “The Leapfrog role in PPS chain”	—
1	DP8		Milestone M	which [*] are tested, which are not, in use production test ([*]. ..)	Confidential in accordance with the document. “The Leapfrog role in the PPS chain”	—
1	DP9		Milestone M	how is the [*] not [*] for [*]?	Confidential in accordance with the document. “The Leapfrog role in the PPS chain”	—
1	DP10		Milestone M	what is [*]?	See Section [*] in [*] verification summary”	—
1	DP11		Milestone M	would like better understanding of [*]and [*], and implications [*]	[Illegible] – The [*] with be as [*] is only used for testing. and have no implications. Image part - Confidential in accordance with the document. “The Leapfrog role in the PPS chain”	—
1	DP12		Milestone M	need a spec on [*]	Will be added (should not be article since Leapfrog are using a FSR switch)	18 Mar 05
1	DP13		Milestone M	missing [*]	The [*] is now [*] finished, and [*] are currently being received.	18 Mar 05

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1 plan 2 done	DP14		Milestone M, pass March	missing [*] testing	[*] have only been [*] [Illegible], Do you require the [*] test have to be done by [*]. II required , we should let [*] as soon as possible.	?
1	DP15		Milestone M	Missing [Illegible] tests	[*] verification summary”	done
		[Illegible] production release at [*]
1	DP16		Milestone M	Need written approval of [*] by both Anoto and [*]	Final review of will take place this week	18/Mar/05
1	DP17		Milestone M	Need written confirmation from [*] that [*] is ready to [*] consistent with the [*]		18/Mar/05
1 plan 2 dellv.	DP18	[*]	other	Deliver [*] samples to LeapFrog	[Illegible]	[Illegible]
	APR
	#	Name	Category	Description from Leapfrog	Planned action	Delivery date
		Dot Codes
1	APR1			No [*] found covering [*]	Addressed in [*]
1	APR2	Writing [*] [*]		No specification found covering [*].	All [*] supported, See [*]
1	APR3	Writing [*] [*] (UK)		[*] does not match [*]	Dotcodes are more sensitive
1	APR4	Printing DotCodes		No specification or specification reference found for [*].	No difference to [*]– according to [*]
1	APR4,5	ECC count		[*]– there should be a value that indicates [*]. This can help LF understand quality of dotcode [*].		New
		Pen Tip Correction
	APR6	Pen Tip Correction	[Illegible]	[Illegible]	[Illegible]	[Illegible]
		APR
2	APR7	[*] and laser printer support		[*] • how is performance specified? what performance should LeapFrog get? • how can LeapFrog test and [*]	Added comments [*]. This functionality [*] techniques. The functionality for [*] will be implemented at Anoto and be available to leapfrog in the future.	done
2	APR 6,7,13	Perspective [*]		The [*], [*] and [*] of the [*] and [*] specified. The [*] feature described in the original contract is not specified and LeapFrog cannot verify this functionality. How can Leapfrog test and accept the technology as delivered today in [*]? How much do the [*] cost or improve [*]? How much do they improve [*]? How much do they increase [*]? How do these two parameters interact and what side-effects are there in their use?	Added comments to [*]. Information if a [*] was returned due to [*]. Anoto can release a new version of [*] where this information is returned. [*] allows for the pen updates mode to be used, see the [*] when part of the pattern is [*], …) The two do not interact. See sections 4 of the [*]	done
1	APR8			Specification does not state that [*] in the [*] are accepted and processed	Leapfrog can use the entire [*] for open functionality (Anoto functionality may however not be supported by Leapfrog pens as of today)	—
1	APR9			No indication of which [*] versions are supported.	Added to [*] Software Spec. section 1	done
1	APR10			Contract and [*] discussed [*] Current LF release is [*]. Is our APR module based off of the Second generation of the APR?	Yes, see section 1 of [*]	done
2	APR11			Measured [*] from Anoto specified in [*] match those measured by LF. Discussions are underway to understand the differences.	Being investigated. Anoto use same way of [*] same as LF. Email send to Mike regarding this on [*]	[Illegible] to come back

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2	APR12	[*] module is not [*]. It does not confirm to Industry standard [*] or the [*] in other [*] production [*].	No known [*] tested. No further actions planned.	—
1	APR14	Section 4 describes the [*], but there are no details into what causes these [*]. For example with [*]- what are the [*] for this condition?	Added to [*]	done
1	APR15	Section 4 does not describe the [*] [Illegible] formal referred to by [*]_ [Illegible] [*] function.	These are Anoto [Illegible] and will not be described further.	—
1	APR16	Section 6 should refer to [*] and performance specifications as [*] of the version of [*]. Some items are shown as actuals as measured with [*] of the code. Values need to be described as [*] or [*] with an additional [*] value.	Addressed in [*]	done
1	APR17	Section 6 shows current [*] for a specific version of [*]. [*] and does not appear to include [*]. These [*] should be specified as [*]. SOW#2 indicated a total size of [*] maximum.	Addressed in [*]	done
1	APR18	Section 6 shows actual [*] usage for [*] and not [*] values. It does not include [*] usage by DPCom and [*]. SOW#2 state a target of [*] and a maximum of [*], including [*] usage by [*] and [*] overhead.	Addressed in [*]	done
	APR19	Section 6 states target execution times that are [*] then SOW#2 which describes target performance [*] acceptable times.	These are Anoto targets, not a product specification	—
1	APR20	Section 7 describes actual measured [*] for [*]. These should be stated as targets. In addition, there is no indication on how these performance targets are effected by pen angle, [*], number of dots, etc.	See appendix B1 of [*]. Execution time is only dependent on [*]. The [*] the [*] is however dependent on [*] and [*]	done
1	APR21	Section 8 describes various [*] that [*] must follow in order to work within the Fly system. As described they are referring to a particular version of code and not the rules that any release must follow. The specification should reflect the rules established in SOW#2	Addressed in [*]	done
1	APR22	[*] and [*] modules do not have specifications [*]. No [*] targets have been set for these modules.	Module description is found in [*] targets adressed in [*]	done
1	APR23	Specification describing [*]	[*] module from SOW#2 mods must go through [*]. Need written spec describing [*] and notice that it has gone through those specifications.	new
	GAPAT

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	#	Name	Category	Description from Leapfrog	Planned Action	Delivery date
2	G1	[*] files	Milestone M	[*] (e.g. how does GAPAT deal with [*]; more than one?; date based?)	There are two different kind of [*]. Anoto [*]) which is not related to LF at all and needs not to be considered. [*]. There is [*] which is valid for [*] purchased for [*]. AndyC/ Stefan/Johan phone conference [*]; Will be described briefly. [*] from LF to 3rd parties will be discussed off the Milestone deliveries.	15/Mar/05
1	G2	Dot Generation	Milestone M	[*] (e.g. how is this manifested in an [*]	[*] method is confidential. Andy C/Stephan/Johan phone conference [*]; [*] will be documented briefly with the purpose of [*] to this format in future releases. Branching [*] version to Leapfrog was also discussed but rejected as this would mean that Leapfrog would not benefit from future updates on other [*]	15/Mar/05
1	G3	[*] Merging	Milestone M	[*] Merging (e.g. how is this happening, how can we [*] the [*] we have been experiencing)	This is changed in [*] which will include the [*] file. The process will be and has [*] by Leapfrog to ensure quality and stability of the new solution.	done
2	G4	Lib Support	Milestone M	Lib support (e.g. is this a standard C library? What [*] is it targeted for? Is it available on other [*]? Is this the only [*]?)	It is a standard [*]. It is currently not available for [*] but the code is [*] and it should be possible to move.	—
2	G5	Runtime details	Milestone M	Runtime details (e.g. how much [*] what [*] on)	[*] depends on [*]. On a general case [GAPAT] consumes between [*] (which is too [*] to be a relevant figure in a specification) AndyC/Stefan/Johan phone conference [*]; Andy to give detailed request list by 11 March.	example
1	G6	Supported [*]	Milestone M	Need written confirmation from Anoto that the following [*] are supported; [*]	[*] is the agreed solution to [*]. (However need for [*] when run in [*])	—
2	G7	Supported additional [*]	Milestone M	What additional [*] are supported?	see above	—
2	G8	Available input and output formats	Milestone M	What is full range of input and output formats?	The specified input and output for the current LF and [*] implementation and process is [*] in and [*] out. A lot more is supported [*]	—
		GAPAT functional Issues, see the GAPAT Issue1.xls spreadsheet			All issues in this list is either targeted by GAPAT 1.50 release
		Tom M comments	2/18/2005	Anoto 3/21/2005	LeapFrog (TomM) 3/21/2005

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Agreed need to create specification [*] the map out these requirements for both per our conversation with (Peter M).	See [*]	Improvement to spec made. [*] and [*] still is not accurate - (Peter M) has additional comments.
Need to document [*]	See [*] In addition, Anoto will provide additional performance indications for [*]	Spec changes acceptable with exception of [*]
See above	See above	Discussion around acceptance of +/- degrees
This fact needs to be documented	See [*]	Spec charges okay.
Is [*] solution a [*] solution or does it impact [*]? If its [*] it requires a solution before product release. Mark Flowers need to clarify with Anoto an understanding of how this [*] relates to the discussions of this feature during contract negotiations.		Comments regarding Mark F’s and Anoto’s discussions about laser support and [*] covered under item [*]. Combining [*] around [*] issued.
Anoto states that it is [*] or [*] how this works. Would be valuable to get returned information about [*] being activated so we can see how often it is used to ensure its [*] due to other possible system issues.		[*] should return when [*] was used. This will help understand system performance and errors. [*] helps with incomplete [*]. Spec describes the causes of [*], but no specification for extent of (Illegible) that can be recovered from with and without [*]. Spec says with [*] success drops if [*]. If this occurs what happens? Does the system need to adjust or does the [*]
This needs to be stated in writing. Second issue regarding Anoto (Illegible) is a separate issue that does not have to do with what dots will the [*].	See [*]	Spec change okay.
Current test refers to [*] and previous versions needs as refer to current [*] version and [*] versions.	See [*]	Spec change only states [*]. Should state from [*] version [*] through all [*]
Okay
Mike F sent code to Anoto, They have done it and (Illegible) are still different. We have a copy of their code. (Illegible) needs to (Illegible) in more detail [*] to see if that explains it. If [*] in this more than it will be much more extensive investigation.	Anoto is waiting for feedback.	As of [*] measured [*] at [*] (Illegible) mode on [*] (Illegible) [*].
Anoto states this is [*], but has been used for a long time.	[*] should be treated as [*]	LF will probably be making same (Illegible) in this [*]
[*] is now specified, but there are still no details on [*]. What information does LF need to correctly interpret these [*] and determine what is happening in the system to have caused them?	See [*].[pg8].	[*] are [*]. If these are returned we have no information indicating what are (Illegible) causes of these [*] and what can be done to [*] them.
I am not concerned with the (Illegible) of the table contents, but only as it [*] needs to be [*] or [*] in the [*]. Is it simply a [*] or are there any [*] that should be described so [*] correctly?	See [*][pg14].	Spec changes describes [*] (Illegible) format that must be [*] to [*]. This is okay. Should specify a [*] so in future versions it doesn’t grew significantly.
(Illegible) now refer to targets and are independent of the [*]. Need to have [*]. Currently cannot calculate this would without knowing the [*] that could be [*] and [*] are acceptable. These values have been verified with the latest (Illegible) of [*]. There is a TODO for the [*] previous version of Spec there was a value for this.	[*]. Max. number of [*]. This equals the limit specified by the [*]
[*] images are [*] All values except [*] range have been verified.	ok	ok
[*] are acceptable. All values, except [*] range have been verified.	ok	ok

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Should add in section 6 notes about perf only depending on # of [*] and not [*], [*], etc. Should add in description of a not to extend or [*] on the [*] of [*] that could possibly be seen. What is there is correct, but there are several missing constraints, [*]:- [*] and [*]are assigned by [*] services.   •   If [*] is required, in avoid [*] to other [*] users and ensure [*] corresponding [*] should be provided to us to ensure compatibility.   •   Source code for generic functions such as (but not limited to) [*] that have [*] contains should be provided in LeapFrog. In case of a [*] that has proprietary [*], Anoto can provide us the [*] with [*].   •   Register usage should be provided for each [*] to ensure proper [*]. See [*] resources are allocated outside of the [*] Section 8 specifies the [*] for all future releases. Each release specifies the actual resources required in the release notes.

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Attachment 2

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

Fly Manufacturing Issues For Anoto

FLY test & manufacturing issues.

Priority 1 are production critical.

Priority 2 are important to have soon.

[*]

• 2 - We have a documentation package but do not have an easy way to determine [*]. Would like to use [*] as the test case and go over the documentation with [*] when he is at [*]. We can have [*] use the documentation for setup, calibration and [*] for the third machine. Suggest [*] arrival in [*].

• 1 - Need the pass/fail criteria for [*] on [*] and fully understand the [*] of [*] for [*].

• We need the details of the limits set in the [*] tests of the [*] modules. What was the recent ([*]) change in Limits?

• What is the cause of failure if the [*]? What is likely corrective action to take?

• What is the cause of failure if the [*]? [*]? What is likely corrective action to take?

• 2 - Would like a full [*] for the [*] month

• 1 - Release [*] of the software was intended to [*]. There are still problems being addressed with a new s/w version. This needs to be tested and validated.

• We are about to enter high volume manufacturing and the [*] test fixture is a vital part of the process, we need to have ‘final’ validated software for the [*].

[*]:

• 2 - Would like [*] month. (See also above though)

• 1 - Need to define [*] limits so LeapFrog can test with DOTPOS [*] samples.

• We do not have enough knowledge to set useful [*] limits on the units to even pick samples that will [*].

[*]:

• 1 - Need to define [*] limits so leapfrog can run [*] testing.

• What makes a good or a bad [*]? We have [*] specification only. (Is the system insensitive to the [*] performance of the [*])

• Is there a sensible [*] on the [*] we can set?

Fly Manufacturing Issues For Anoto

[*]:

• 1 - Still confusion as to the ability of [*] to screen parts

• With the recent [*], I would like to see a clear document on the [*], associated [*] measurements on [*] and [*] parts, so we don’t do this again.

• Can we tell on an assembled pen if it has [*]?

• 2 - Need [*].

• The vendor will no doubt have [*] on the [*], this will be mixed with [*] on the [*] module. LeapFrog doesn’t have a good way of determining the root cause of the [*] problems yet.

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[*]:

• 1 - Current s/w does not accept [*] or [*] as acceptable. [*] needs to handle all conditions which can be created by GAPAT

• The printing vendors will be required to test sheets of LeapFrog printed paper, we need the ability to test the entire sheet at the printer.

• 2 - Current s/w does not return [*] information

• This lets us validate that the printed sheet reflects the content design.

Are these [*] issues?

• The appears to be [*] in the s/w such that the time for [*] will increase as more and more [*] are made when the [*] is [*].

• The [*] software locks up after several [*]. It has to be disconnected from the [*] and reconnected.

[*]:

• 1 - Need [*] to understand the results of [*]

• We can measure static ‘typical case’ [*] now. We need the knowledge to either predict the [*] performance from these ‘static’ typical [*], or we need more information on the [*] so we can select more rigorous testing to do.

• When there are failures in a [*], we do not have a way to suggest a root cause today.

Fly Manufacturing Issues For Anoto

• What are the key variables?

• [*], what does this cause? How do we measure (view [*] and measure [*]?)

• Short/long [*]? What problems do these cause? Can we see with [*] dot paper on [*]? [*] dot paper?

• Mechanical tolerance [*], leading to [*]? What does this cause?

• Mechanical tolerance [*], pointing errors on [*]? What problems do these cause and how do we detect (large [*] offset?)

• [*]?

• System [*] (as measured by [*]?)

• Excess [*] (as measured by [*]?)

• 1 - Need to define [*] limits so leapfrog can do corner testing on [*]

• 1 - In general we need to know how to debug assembled pen systems from [*] with... [*].

Pen [*]:

• 1 - Need clear definition of acceptance limits for [*]

• There are [*] limits: the limit based on the [*] design and where the [*] system starts to fail.

1 – [*]. Need this in time for [*].

There will be a [*] for [*], I view this as one of the [*] in the production. We have started with [*] here. The two options are [*] and [*]

• Currently [*] does no analysis and doesn’t do [*] setup.

• Need a [*] to perform [*]

• UI and .ini to initialize DOTPOS – probably with [*] for some [*]. What other variable(s) should we change?

• [*]

• Measure and display [*]

• Test for [*] and [*]

• Test [*], via [*] on dot paper at [*] angles

• Test [*].

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• Test [*]?

[*] strategy has become unclear and needs clear direction.

Fly Manufacturing Issues For Anoto

[*] Testing:

• 1/2 - Want [*] Month.

• 1/2 - Need to know list of [*] and their affect on system performance. Once the parameters are adjusted for best LeapFrog Fly performance could we make adjustments in production to [*] on an [*]? [ *]– we may need to change system code to adjust.

• 1/2 - What are the best choices for [*] a complete [*] using [*]? [*], etc. Would like [*] for all parameters.

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Attachment 3

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

[*]

Document ID	Revision	Title		Page (Pages)
DS –	UA1	Fly PPS Design Specification		1 (11)
Author		Checked by and date	Approved by and date	Date
[*]

Fly PPS Design Specification,

Product No

The information and data contained in this document is preliminary and subject to change without prior approval. Any implementation of the concerned technology shall be tested and verified by the receiver prior to inclusion into a final product.

Summary

This Document defines the [*] of Fly PPS. Fly PPS includes a [*], a [*] with an [*] and a [*] and also [*] and [*].

Revision history

Date	Revision	Description	Author
[*]			OS

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

[*]

Document ID	Revision	Title		Page (Pages)
DS –	UA1	Fly PPS Design Specification		2 (11)
Author		Checked by and date	Approved by and date	Date
[*]

Contents

	Summary			1
	Revision history			1
1	INTRODUCTION			3
	1.1	Purpose		3
	1.2	Acronyms and abbreviations		3
	1.3	Definitions		3
	1.4	Device Description		4
2	FUNCTIONALITY			5
3	DEFINITION OF PEN CONDITIONS			7
4	DEFINITION OF USAGE CONDITIONS			8
5	SENSITIVITY ANALYSIS			9
	5.1	[*]		9
	5.2	[*]		10
	5.3	[*]		10
	5.4	[*]		10
	5.5	[*]		10
	5.6	[*]		10
	5.7	[*]		10
	5.8	[*]		10
		5.8.1	[*]	10
		5.8.2	[*]	10
6	REFERENCES			10
Appendix A: Pen Orientation Relative to the Paper				11

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

[*]

Document ID	Revision	Title		Page (Pages)
DS –	UA1	Fly PPS Design Specification		3 (11)
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1 Introduction

1.1 Purpose

This document defines the performance of the Fly PPS design.

1.2 Acronyms and abbreviations

Term	Definition
Fly PPS	Pen Posting System developed for Fly pen
PPS 3.0	Pen Posting System 3.0
LED	Light Emitting Diode
NIR	Near-infrared
N/A	Not applicable
[*]	[*]
1.3    Definitions
Term	Definition
[*] system	System consisting of the [*], [*], and [*] and [*] that delivers [*].
[*] system	System consisting of [*] (including [*]), [*] and [*]
[*]	Module consisting of [*].
[*] ink	[*] representation of [*] ink. The [*] ink is the ink [*].
[*] Pen	A pen that has been used as a platform to verify [*].
[*]	A software [*] is made in production to [*] for [*] due to [*].

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[*]

Document ID	Revision	Title		Page (Pages)
DS	UA1	Fly PPS Design Specification		4 (11)
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1.4 Device Description

The Anoto pen positioning system determines absolute positions of the Anoto pen tip by reading and decoding information encoded in a proprietary pattern printed on the paper surface.

The Pen Positioning System (FLY PPS) consists of the following modules:

• The [*].

• A [*], which consists of

• An [*]

• A [*]

• A [*]

• [*] software

• [*] software for Anoto [*].

[*]

Figure 1.1. The Anoto digital pen positioning system.

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[*]

Document ID	Revision	Title		Page (Pages)
DS	UA1	Fly PPS Design Specification		5 (11)
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2 Functionality

In this section, the functionality of the Positioning System is defined. The functionality is defined for different usage conditions according to section 4.

Table 2-1. Functionality

Name	Value	Definition	Comment
1. Pen positioning for a [*] pen under [*] conditions	[*]	The percentage [*] in a series of [*] must be [*] in the [*] region.	The pen positioning [*] in combination with the [*] determines how well pen [*] are reproduced in the [*].
2. Pen positioning for [*] pens under [*] conditions	[*]	The maximum number of [*] that [*] must be (Illegible). The system should be [*] in a [*] position.	[*] indicates a region where the [*] from the [*] the images [*] (see [*] Definitions) [*] and/or [*] printed paper will have a [*] and [*] functionality. Papers printed according to the OPR has no [*]. As [*] has been performed, an uncertainty of [*] applies to the limits of the [*] regions.
3.[*] time	[*] when used in [*] and a maximum of [*] between pen [*]	Time from [*] to capture of first [*] image.	This requirement is [*] to avoid [*] at the beginning of a [*]

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[*]

Document ID	Revision	Title		Page (Pages)
DS	UA1	Fly PPS Design Specification		6 (11)
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[*]

Name	Value	Definition	Comment
4. [*]	[*]	The [*] positioning [*]	[*] is a measure of the [*] between the [*] ink and the [*] ink. The requirement is [*] for [*] and [*] graphics.
	[*]	The [*] positioning [*] after [*].	[*]
5. [*]	[*]	The quantity is defined as [*] times the standard deviation of the [*] from a pen [*]	The [*] expresses the deviation of the [*] ink from a [*], for a pen held at [*] that is [*] relative to the paper. The [*] relates to the [*] of the camera [*].
6. [*] margin	[*] over all supported [*]	Closest distance to the [*] of the Anoto pattern that coordinates can be [*], regardless of [*].	If the [*] is placed too close to the [*] of the pattern, the [*] may not [*] a large enough [*] to be able to [*].
7. [*] speed [*] of	[*]	The [*] speed of the pen relative to the [*]	The [*] should handle a [*] of the pen and/or the pattern target

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

[*]

Document ID	Revision	Title		Page (Pages)
DS	UA1	Fly PPS Design Specification		7 (11)
Author		Checked by and date	Approved by and date	Date
[*]

Name	Value	Definition	Comment
target			While writing. The requirement [*] writing and a [*]. Verification is done by [*].
8. [*] speed – [*]	[*] for [*] and all [*]	The [*] around the [*] while the [*] is fixed in the [*]	The [*] should handle a [*] of the pen [*] while writing. The requirement is an [*] writing and a [*]. Verification is done by [*].
3       Definition of pen conditions
Name	Definition	Comment
1. [*] pens	Pens based on [*] design yield.	By assuming [*] standard deviations for the [*] specified on the [*], the yield of the design, for the [*], becomes [*] for [*]. This simulation has [*] in Fly PPS. The production yield will of course depend on many other factors, such as [*] and [*].
2. [*] pen	All [*] included in the [*] are [*]	This is a pen where all components are [*]. Examples are [*]…

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

[*]

Document ID	Revision	Title		Page (Pages)
DS	UA1	Fly PPS Design Specification		8 (11)
Author		Checked by and date	Approved by and date	Date
[*]

4 Definition of usage conditions

These set of conditions define in what external usage conditions the positioning system should be used.

Those following conditions that are usage dependent refer to these sets. All conditions refer to Min and Max and typical off course refer to Typical.

Table 4-1. Usage conditions requirements

Name	Min	Max	Typical	Definition	Comment
1. [*] speed	[*]	[*]	[*]	—	The [*] speed is based on [*]of a group of [*], see [5]
2. [*] on paper	[*]	[*]	[*]	The requirement applies for light with the spectral profile of solar radiation on Earth at sea level.	In normal room [*] conditions, the [*] is approximately [*] Test setup is described in [4]. [*] improves the functionality and is [*]
3. [*] in use	[*]	[*]	[*]	IEC 60068-2-2, test Bd and IEC 60068-2-1, test Ad	Elevated [*] increases the [*]. No environmental tests have been performed to verify [*] in use for [*].
4. Printed Anoto pattern	Defined in [*] [2] but with [*].	Defined in [*] [2] but with [*]	Printing guidelines	See printing guidelines in Printing Requirement where applicable	[*] requirements are the same as for regular Anoto pattern – print specification according to the [*] but with [*]
5. [*] compatibility	[*] designed according to [1].	[*] designed according to [1].	[*] designed according to [1].	—	For [*] according to [*] or in other ways approved by Anoto see ref. [3]

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

[*]

Document ID	Revision	Title		Page (Pages)
DS	UA1	Fly PPS Design Specification		9 (11)
Author		Checked by and date	Approved by and date	Date
[*]

5 Sensitivity analysis

Sensitivity analysis shows how sensitive the system is to changes in different variables. These could be both pen variables and usage conditions.

The sensitivity is presented as [*] as function of [*]. The performance at [*] can be estimated from this data.

The diagrams will [*] but will indicated how [*] a certain variable [*] the system. [*] used in the analysis are agreed upon with Leapfrog. The method for determining [*] are described in the [*]

5.1 [*]

[*] is the [*] in relation to its nominal position. Components affecting [*] are such are [*] and other components affecting dimensions [*]. The impact on performance is similar compared to [*].

Two different [*] are defined.

• [*] estimation: Based on [*] calculations.

• [*] tolerances at [*]

[*]

Fig 4.1. [*]. The horizontal axis shows [*]and the vertical axis shows [*]. The yellow line describes the [*] estimation of [*] variation and the white dotted line describes the [*] for [*] angles

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

[*]

Document ID	Revision	Title		Page (Pages)
DS	UA1	Fly PPS Design Specification		10 (11)
Author		Checked by and date	Approved by and date	Date
[*]

5.2 [*]

5.3 [*]

5.4 [*]

5.5 [*]

5.6 [*]

5.7 [*]

5.8 [*]

5.8.1 [*]

5.8.2 [*]

6 Reference

[1] [*]

[2] [*]

[3] [*]

[4] [*]

[5] [*]

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

[*]

Document ID	Revision	Title		Page (Pages)
DS	UA1	Fly PPS Design Specification		11 (11)
Author		Checked by and date	Approved by and date	Date
[*]

APPENDIX A: PEN ORIENTATION RELATIVE TO THE PAPER

The following parameters, as illustrated in 0, uniquely define the orientation of the [*] relative to the paper:

• [*] is the angle between the [*] of the paper and the [*].

• [*] is [*] around the [*]. [*] where the pen [*] is [*] to the paper.

• [*] is [*] around its [*]. [*] where the [*] onto the paper [*] is aligned with [*]

A negative [*] with [*] corresponds to a positive [*] with [*]

[*]

Figure B-1. Parameters used to define the orientation of the pen relative to the paper.

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

EX-10.30

Exhibit 10.30

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

AMENDMENT NO. 3 TO

TECHNOLOGY LICENSE AGREEMENT

This Amendment No. 3 (“Amendment No. 3”) dated as of June 29, 2005 (the “Amendment No. 3 Effective Date”) to that certain Technology License Agreement dated January 25, 2004 (the “Original Agreement”) by and between ANOTO AB, a company incorporated under the laws of Sweden (“Anoto”), ANOTO GROUP AB, a company incorporated under the laws of Sweden (“Anoto Group”) and LEAPFROG ENTERPRISES, INC., a company incorporated under the laws of Delaware (“LeapFrog”). Each of Anoto, Anoto Group, LeapFrog are referred to as a “Party”, and collectively as the “Parties”. Capitalized terms not defined in this Amendment No. 3 will have the meaning ascribed to them in the Original Agreement.

BACKGROUND

The Parties entered into the Original Agreement as of January 25, 2004.

The Parties desire to amend certain portions of the payment schedule set forth in Schedule G (Royalty and Payment Schedule) of the Original Agreement as set forth herein.

Based on the foregoing, and in consideration of the mutual promises and covenants set forth below and other good and valuable consideration the receipt and adequacy of which is hereby acknowledged, the Parties hereby agree as follows:

AGREEMENT

1. Amendments to Payment Schedule.

1.1 Second Advance Royalty Payment. Section 5.5(b) of Schedule G of the Original Agreement (as amended by Amendment No. 2) is hereby replaced in its entirety with the following:

[*] shall be paid upon the execution of Amendment No. 3.

1.2 Third Advance Royalty Payment. Section 5.5(c) of Schedule G of the Original Agreement is hereby replaced in its entirety with the following:

[*] shall be paid upon the latter of [*] or final acceptance of [*]).

2. Effective of this Amendment. Except as expressly set forth herein, the Original Agreement shall remain in full force and effect in accordance with its terms.

3. Miscellaneous. This Amendment No. 3, the Original Agreement and all other duly executed, written amendments to the Original Agreement represent the entire agreement between the Parties with respect to the subject matter hereof and supersedes all prior agreements and understandings with respect to the subject matter hereof.

In witness whereof, the Parties hereto have executed this Amendment No. 3 as of the Amendment No. 3 Effective Date.

LEAPFROG ENTERPRISES, INC.		ANOTO AB
By:	/s/ Mark Flowers	By:	/s/ Anders Tormod
Mark Flowers, CTO		Anders Tormod, CEO
		By:	/s/ Mats Blom
		Mats Blom, Chief Financial Officer
Address for Notices: 6401 Hollis Street, Suite 100 Emeryville, CA 94608 USA Fax: (510) 420-5011 Attention: VP, Legal Affairs		Address for Notices: Scheelevägen 19 C 223 70 Lund, SWEDEN Fax: +46 46 540 12 02 Attention: Chief Executive Officer
		ANOTO GROUP AB
		By:	/s/ Christer Fåhraeus
		Christer Fåhraeus, Chairman Address for Notices: Scheelevägen 19 C 223 70 Lund, SWEDEN Fax: +46 46 540 12 02 Attention: Chairman

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

EX-10.31

Exhibit 10.31

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

AMENDMENT NO. 4 TO

TECHNOLOGY LICENSE AGREEMENT

(PROJECT PHOENIX)

This Amendment No. 4 (“Amendment No. 4”) dated as of August 19, 2005 (the “Amendment No. 4 Effective Date”) to that certain Technology License Agreement dated January 25, 2004 (the “Original Agreement”) by and between ANOTO AB, a company incorporated under the laws of Sweden (“Anoto”), ANOTO GROUP AB, a company incorporated under the laws of Sweden (“Anoto Group”) and LEAPFROG ENTERPRISES, INC., a company incorporated under the laws of Delaware (“LeapFrog”). Each of Anoto, Anoto Group, LeapFrog are referred to as a “Party”, and collectively as the “Parties”. Capitalized terms not defined in this Amendment No. 4 will have the meaning ascribed to them in the Original Agreement.

BACKGROUND

The Parties entered into the Original Agreement as of January 25, 2004.

The Parties desire to amend the Original Agreement in order to (1) enable LeapFrog to use Licensed Anoto Technology in a Licensed Product which has limited functionality and a lower royalty rate and (2) allow LeapFrog appropriate access to certain Anoto Technology in view of the increased integration of Licensed Anoto Technology into LeapFrog products.

Based on the foregoing, and in consideration of the mutual promises and covenants set forth below and other good and valuable consideration the receipt and adequacy of which is hereby acknowledged, the Parties hereby agree as follows:

1. Definitions. The following additional definitions are hereby added to the Original Agreement:

“Level 1 Licensed Products” means the following two categories of Licensed Products: (1) a Licensed Product that has the ability to [*] but does not have the ability to [*] and (2) a Licensed Product that has the ability to [*] but does not have the ability to [*].

“Level 2 Licensed Product” means a Licensed Product that has the ability to [*] but does not have [*] functionality beyond the foregoing.

2. Amendment to Schedule G of the Original Agreement. A new Section 7 is hereby added to Schedule G of the Original Agreement as follows:

7. Royalties for Level 1 Licensed Products and Level 2 Licensed Products. The provisions of Sections 1, 2 and 4 of Schedule G shall not apply to Level 1 Licensed Products and Level 2 Licensed Products. LeapFrog shall pay an IPR Royalty of [*] for each Level 1 Licensed Product sold by LeapFrog. LeapFrog shall pay an IPR Royalty of [*] for each Level 2 Licensed Product sold by LeapFrog. LeapFrog may offer to end users an add-on device which converts a Level 1 Licensed Product to a Level 2 Licensed Product (a “Converter”). LeapFrog shall pay an IPR

Royalty of [*] for each Converter sold by LeapFrog. The foregoing royalty obligations shall not apply to [*] In particular, there shall be no royalty obligations with respect to [*] Content sold for use with Licensed Products having capabilities [*] is subject to the LeapFrog Content Royalty according to the Original agreement. The IPR Royalties under this Section 7 of Schedule G will be deducted against the Advance Royalties paid under Section 5 of this Schedule G.

3. Escrow Considerations. The parties acknowledge that Anoto and LeapFrog have been negotiating a technology escrow agreement pursuant to the provisions of Section 11.4 of the Original Agreement. The parties agree that the escrow agreement will provide that, in addition to a release of the Deposit Materials in the event of an Anoto Bankruptcy Event, LeapFrog will be entitled to a release of the Deposit Materials upon the occurrence of the following event: Anoto or Anoto Group materially breaches the executed version of the Agreement for Mutual Maintenance and Support under the Technology License Agreement and fails to cure such material breach within thirty (30) days of written notice thereof. For the avoidance of doubt, the license rights under Section 11.4(h) shall apply equally to Licensed Products, Level 1 Licensed Products and Level 2 Licensed Products.

4. Anoto will under an SSOW according to the Master Agreement For Subsequent Statements Of Work Under The Technology License Agreement develop and optimize the [*] in Level 1 and 2 Licensed Products including the portions of [*] to meet the specifications set out in Exhibit A, “Limited Camera System Specifications”. To make performance enhancements, RAM/ROM memory use modifications, API modifications and other modifications as may be useful in system integration Anoto will invite Leapfrog expertise to provide assistance as required. In case Anoto cannot make the limited camera system for Level 1 and 2 Licensed Products meet the Limited Camera System Specifications, Anoto and Leapfrog shall in good faith negotiate if and how Leapfrog shall have limited access to limited parts of the APR source code to make necessary modifications to meet said specifications.

In addition, the parties agree to work in good faith toward allowing LeapFrog access to selected [*] and selected [*] which LeapFrog identifies as [*]. (The [*] and [*] are referred to herein as the “Highly Sensitive Information.”) The following provisions shall apply with respect to any Highly Sensitive Information shared with LeapFrog: (i) LeapFrog shall maintain a log of all persons accessing or using the Highly Sensitive Information and shall make such log available to Anoto upon written request; (ii) the Highly Sensitive Information shall not be accessed by any third parties or consultants; (iii) the Highly Sensitive Information shall be installed only on a non-networked computer system which is password protected, and all files will be password protected; (iv) LeapFrog shall prevent telephone or other remote access to the Highly Sensitive Information from other locations; (v) all hardcopy produced from the Highly Sensitive Information must be labeled “Highly Confidential” and must be shredded after use; and (vi) the building in which LeapFrog uses the Highly Sensitive Information shall have restricted access twenty-four (24) hours a day. All backup copies made of the Highly Sensitive Information must be labeled “Highly Confidential” and must be stored in a locked, secure locations.

Leapfrog will at a defined time approve or reject the performance and manufacturability of the system according the specifications and schedule in Exhibit A.

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

[*] shall not apply to Level 1 Licensed Products and/or Level 2 Licensed Products. For the avoidance of doubt, the Anoto Licensed Technology contained in Level 1 Licensed Products and Level 2 Licensed Products shall be covered under the terms of the Agreement for Mutual Maintenance and Support under the Technology License Agreement.

5. Limitation of Liability for Level 1 Licensed Products and/or Level 2 Licensed Products. A new Subsection (h) is hereby added to Section 14.2 of the Original Agreement as follows:

(h) For Claims for indemnity with respect to Level 1 Licensed Products and Level 2 Licensed Products, the total liability of Anoto Group for any single Claim will be limited to [*]. In the event multiple Claims arise in any one calendar year, Anoto Group’s total liability for such multiple Claims will be limited to [*] If a Claim arises after the termination of this Agreement, then [*] [*] shall not be counted as royalties received by Anoto Group for purposes of calculating the liability cap of Section 14.2(d). Likewise, amounts paid under Claims for [*] shall not count toward the liability cap of Section 14.2(d).

6. Future Engineering Support. Anoto will provide engineering support for the following modifications to the Licensed Anoto Technology, at LeapFrog’s request: (a) [*], (b) [*], (c) [*] and (d) [*] and (e) adjustments to optimize production (f) other modifications or enhancements that LeapFrog may request. All such work shall be set forth in a mutually agreed upon statement of work setting forth the deliverables timeframe for deliver, timeframe for acceptance and mutually agreed upon rates, which shall be reasonable.

7. Joint Platform. Any and all modifications or improvements to the Joint Platform created pursuant to the work performed under the statement of work set forth in Exhibit A shall be deemed a part of the Joint Platform. Any and all other Updates and Upgrades to the Joint Platform are addressed in Section 6.8 of the Original Agreement.

8. Future Discussions. Leapfrog acknowledges that use of Licensed Anoto Technology beyond the scope of the license grant in the Original Agreement will require additional license rights and that Anoto is willing to negotiate such a license.

9. Effective of this Amendment. Except as expressly set forth herein, the Original Agreement shall remain in full force and effect in accordance with its terms.

10. Miscellaneous. This Amendment No. 4, the Original Agreement and all other duly executed, written amendments to the Original Agreement represent the entire agreement between the Parties with respect to the subject matter hereof and supersedes all prior agreements and understandings with respect to the subject matter hereof.

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

IN WITNESS WHEREOF, the authorized representatives of each of the parties have executed and delivered this Amendment No 4 as of the Effective Date.

LEAPFROG ENTERPRISES, INC.		ANOTO AB
By:	/s/ Jim Marggraff	By:
	Jim Marggraff, EVP Worldwide Content		Christer Fåhraeus, Chairman
By:	/s/ Mike Houlahan	By:	/s/ Örjan Johansson
	Mike Houlahan, VP of Business		Örjan Johansson, EVP Business
	Development Development
Address for Notices:		Address for Notices:
	6401 Hollis Street, Suite 100 Emeryville, CA 94608 USA Fax: (510) 420-5011 Attention: Corporate Counsel		Scheelevägen 19 C 223 70 Lund, SWEDEN Fax: +46 46 540 12 02 Attention: Chief Executive Officer
		ANOTO GROUP AB
		By:
			Christer Fåhraeus, Chairman
		Address for Notices:
			Scheelevägen 19 C 223 70 Lund, SWEDEN Fax: +46 46 540 12 02 Attention: Chairman

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

EXHIBIT A

Schedule and Specifications of the camera system

To be developed and mutually agreed upon by the parties.

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

EX-10.32

Exhibit 10.32

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

AMENDMENT NO. 5 TO TECHNOLOGY LICENSE AGREEMENT

This Amendment No. 5 (“Amendment No. 5”) entered into as of July 27, 2006 (the “Amendment No. 5 Effective Date”) between LeapFrog Enterprises, Inc. and LeapFrog Group Companies (collectively, “LeapFrog”) on the one hand, and Anoto AB and Anoto Group AB, on the other hand, (collectively “Anoto”) amends the Technology License Agreement between the Parties dated January 25, 2004 (as amended by Amendment No. 1, Amendment No. 2, Amendment No. 3 and Amendment No. 4) (the “TLA”) as set forth herein. Capitalized terms not defined herein shall have their respective meanings set forth in the TLA.

I. DEFINITIONS

1. The definition of “Exclusive Field” under Section 1 of the TLA is hereby replaced in its entirety with the following: “Exclusive Field” means the manufacture, use, sale, promotion or distribution of interactive products to the Consumer Market and the School Market that are: (1) AF Devices and/or Stand Alone (Self- Contained) Devices (a) having either [*].

2. The definition of “Exclusive Markets” under Section 1 of the TLA is hereby replaced in its entirety with the following: “Exclusive Markets” means the following markets in the Exclusive Field: [*].

3. The definition of the “Exclusive Term” under Section 1 of the TLA is hereby replaced in its entirety with the following: The “Exclusive Term” will commence on the Effective Date and continue through [*] with respect to [*] and through [*] with respect to [*], subject to the provisions of Section 11.5, 11.7 and 11.8 of this Amendment No. 5.

4. “School Market” means sales to K-12 public and private schools and school districts in the United States and Canada. The School Market includes formative and summative test taking and assessment for grades K-12 in public and private schools and school districts, except the actual administration, test taking and assessment of national aptitude or entrance examinations for entry into educational programs such as the SAT, AP, ACT, PSAT, and TOEFL for Youth, but excludes business forms and Business Transactions. For the avoidance of doubt, Learning Applications for the School Market shall not be considered business forms.

5. “Consumer Market” means online, direct or retail sales, including via distributors, to (i) Youth or the functional equivalent of such grades in foreign countries (not to exceed 18 years of age) and (ii) to governmental agencies, non-profits and businesses for use by Youth (such as a sale to Kaplan for use by Youth for SAT prep at Kaplan centers) and not for business forms or Business Transactions use by such agencies, non-profits or business, provided that the Consumer Market does not include sales to public and private schools. The Consumer Market exclusivity includes all types of test taking and assessment and test preparation except the actual administration, test taking and assessment of national aptitude or entrance examinations for entry into educational programs such as the SAT, AP, ACT, PSAT, and TOEFL for Youth, provided that the Consumer Market does not include sales to public and private schools or business forms

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or Business Transactions. For the avoidance of doubt, Learning Applications for the Consumer Market shall not be considered business forms.

6. “Youth” means (i) grades 12 and below for Stand-Alone (Self-Contained) Devices and (ii) grades K-12 for AF Devices.

7. “FLY 1.0 Pens” means the Fly pentop computer commercially launched in the United States on October 16, 2005 and iterative improvements thereto that do not include Anoto Functionality.

8. “FLY 2.0 Pens” means audio-enabled Licensed Products that are iterative improvements of FLY 1.0 that utilize Anoto Functionality. FLY 2.0 Pens are not STP Pens or FLY 1.0 Pens, but are AF Devices. Prior to [*], commercially released FLY 2.0 Pens shall not include (i) [*] (other than a [*] as is commonly understood as of the Amendment No. 5 Effective Date), (ii) a [*] (an [*] is permitted), (iii) [*] (e.g. [*] are permitted) or (iv) [*] (as “[*]” are commonly understood as of Amendment No. 5 Effective Date).

9. “STP Pen” means a “standard technology platform” for pentop computers that is a Licensed Product and AF Device that interacts with the Anoto Dot Pattern and is based on Anoto technology and Intellectual Property Rights and that meets mutually agreed upon specifications (including an [*], [*], user interface, operating system, SDK and tools) and product requirements documents (collectively, the “STP” or “STP Pen”). For the avoidance of doubt, as set forth in Section 11.1, Anoto has no obligations or responsibilities for delivering and supporting the STP Pen.

10. “Launch” means the sale by LeapFrog of at least [*] of FLY 1.0 Pens, FLY 2.0 Pens or STP Pens, as applicable, by the end of the calendar year of the Launch date in Exclusive Markets outside [*] and the following cumulative number of units of Stand Alone (Self-Contained) Devices and/or AF Devices in [*] from sales occurring on or after [*]:

(a) [*] by December 31, [*];

(b) [*] by December 31, [*]; and

(c) [*] by December 31, [*].

11. The definition of “Net Sales Value” under the TLA is hereby replaced in its entirety with the following: “Net Sales Value” means the actual gross selling price specified on the invoice for the sale or other disposition by or for LeapFrog or a LeapFrog Group Company of a Licensed Product or LeapFrog Content in an arm’s length transaction to a third party customer of LeapFrog (not to a LeapFrog Group Company) less (i) trade discounts and credits granted to retailers for the sole purpose of promoting sales of a Licensed Product or LeapFrog Content, where such discounts and credits are capped at 20% of Net Sales Value, (ii) rebates given to consumers for the sole purpose of promoting sales of Licensed Product or LeapFrog Content that consumers actually redeem, (iii) reasonable and customary allowances, including allowances for defects, where such allowances are capped [*] of Net Sales Value for LeapFrog Content and [*] of Net Sales Value for Licensed Products, and (iv) taxes, duties and shipping charges to the extent separately stated on the invoice.

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[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

12. “Note Pad” means a collection of sheets of Open Paper, in which each sheet may have pre-printed graphical materials on no more than [*] of its surface area (e.g., tool bars), excluding ruled lines and grids, which may appear on all or any part of the surface area. The note pads for the current FLY 1.0 Pen that have no more than [*] graphical materials are an example of a “Note Pad.”

13. “Open Paper” means a surface, or a portion of surface, printed with the Anoto Dot Pattern on which no pre-printed materials other than ruled lines or grids appear.

14. The following new subsections are hereby added to the definition of “Licensed Anoto Technology” under Section 1.39 of the TLA:

(g) Any deliverable made by Anoto pursuant to the PRD Reference Design.

(h) All Technology for Anoto Functionality for use in AF Devices in the Exclusive Field and Permitted Field.

(i) The source code identified in Section 11.3 of this Amendment No. 5.

(j) Improvements delivered by Anoto pursuant to Section II of this Amendment No.5.

(k) Licenses granted by Anoto to LeapFrog under Section III of this Amendment No.5.

15. The following new subsections are hereby added to the definition of “Licensed LeapFrog Technology” under Section 1.39 of the TLA:

(e) Licenses granted by LeapFrog to Anoto under Section III of this Amendment No.5.

16. Subject to Section II.1, the definition of “Anoto Indemnified Elements” under section 1.8 of the TLA is hereby replaced in its entirety with the following: “Anoto Indemnified Elements” means (i) the Licensed Anoto Dot Pattern and the LeapFrog XY Module, in each case excluding third party hardware and software to the extent identified in Schedule B, and (ii) the STP Pen and the software developer kit for the STP Pen, in each case excluding third party intellectual property, except to the extent that Anoto is able to secure full indemnification for its sublicensees. In case Anoto develops STP Pen, third party intellectual property shall be identified.

17. The following definition is hereby added to Section 1 of the TLA: “AF Device” means a device that (a) supports Anoto Functionality, (b) has an optical/reading device part on board the pen, (c) has [*] part on board the pen and/or a dedicated [*], and (d) has a [*] part and/or a [*] part. The dedicated [*] part may be either implemented in [*], or [*] to the AF Device. AF Devices specifically excludes the XY Pen and Stand Alone (Self-Contained) Devices. The STP Pen and FLY 2.0 Pens are AF Devices. FLY 1.0 Pens and Stand Alone (Self-Contained) Devices are not AF Devices.

18. The definition of the “Permitted Field” under Section 1.50 of the TLA is hereby replaced in its entirety with the following: “Permitted Field” means the manufacture, use, sale, importation, promotion or distribution of a pen, wand, stylus, writing

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instrument, toy or game that (a) has one or more of [*] (b) interacts with any part of the [*] and (c) interacts with the [*] and (d) may [*]. The Permitted Field also includes the manufacture, use, sale, promotion and distribution of [*]. Other than as set forth in the previous sentence, the Permitted Field expressly excludes the manufacture, use, sale, promotion or distribution of products, devices, processes or services that constitute or practice [*] and expressly excludes the manufacture, use, sale, promotion or distribution of [*].

19. Section 4.3 of the TLA entitled “Permitted Field Exception” is hereby replaced in its entirety with the following:

(a) If Anoto desires to grant to a third party an exclusive license under Licensed Anoto Technology and/or Licensed Anoto IP in the Permitted Field, but outside the Exclusive Field during the Exclusive Term, Anoto shall first provide LeapFrog with a written notice of such proposal which identifies the specific target market for which Anoto proposes to grant an exclusive license. Unless, within [*] days after receipt of Anoto’s written notice, LeapFrog discloses to Anoto specific plans it has to exploit that target market itself or with a partner other than the partner contemplated by Anoto and commits in writing to sell [*] AF Devices or Stand Alone (Self-Contained) Devices in that target market with a partner other than the partner contemplated by Anoto within [*] after receipt of Anoto’s notice, Anoto may grant the proposed exclusive license (even as to LeapFrog and its Group Companies) to the third party for the target market for a period not to exceed [*]. Anoto may provide such third party with the option to extend the exclusive license period for additional [*] periods, each such extension being subject to LeapFrog’s approval pursuant to the terms of this Section 4.3. For the sake of clarity, Anoto has granted [*] rights [*] to exclusively use Licensed Anoto Technology for [*] for AF Devices that provide [*] of the AF Devices’ [*] to another device and develop and license tools for development of such applications; all the foregoing with an obligation for [*] to license systems and tools to Anoto partners, including LeapFrog, on fair, reasonable and non-discriminatory terms.

(b) If LeapFrog desires to grant to a third party an exclusive license under Licensed Anoto Technology and/or Licensed Anoto IP in the School Market in territories outside of the United States and Canada, LeapFrog shall first provide Anoto with a written notice of such proposal which identifies the specific target market for which LeapFrog proposes to grant an exclusive license. Unless, within [*] days after receipt of LeapFrog’s written notice, Anoto discloses to LeapFrog specific plans it has to exploit that target market with a partner other than the partner contemplated by LeapFrog and commits in writing to sell [*] AF Devices or Stand Alone (Self-Contained) Devices in that target market with a partner other than the partner contemplated by LeapFrog within [*] after receipt of LeapFrog’s notice, LeapFrog may grant the proposed exclusive license (even as to Anoto and its Group Companies) to the third party for the target market for a period not to exceed [*]. LeapFrog may provide such third party with the option to extend the

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exclusive license period for additional [*] periods, each such extension being subject to Anoto’s approval pursuant to the terms of this Section 4.3.

20. The definition of the “Anoto Core Applications” under Section 1.5 of the TLA is hereby replaced in its entirety with the following: “Anoto Core Applications” mean business forms and Business Transactions.

21. “XY Pen” means a digital pen, wand, stylus, writing instrument, toy or game that: (i) interacts with the Anoto Dot Pattern, (ii) streams XY coordinates to a processor on another electronic device for processing, (iii) does not provide any [*] other than the [*], (iv) does not have [*] on the pen and (v) does not have [*] on the pen.

22. “STP Reference Design” means a reference design for the development and high-volume manufacture of a STP Pen, including all schematics, hardware, pen and client software and software drivers. For the avoidance of doubt, as set forth in Section 11.1 Anoto has no obligations or responsibilities for delivering and supporting the STP Reference Design.

23. “College Market” means persons aged 18 and over who are attending college, community college, junior college or universities.

24. “Business Transactions” means use of a digital signature image for verification of a business transaction.

II. EXCLUSIVITY AND PLATFORMS

1. Delivery of STP Pen and STP Reference Design. Anoto shall have no obligations or responsibilities for delivering or supporting the STP Pen or STP Reference Design. In the event that Anoto develops an STP Pen and/or STP Reference Design and LeapFrog elects to launch an STP Pen based on the STP Reference Design, LeapFrog and Anoto will negotiate in good faith mutually agreeable delivery milestones and payment schedule for the STP Pen and STP Reference Design that meet LeapFrog’s target launch date. The Parties agree that the royalty rates set forth in this Amendment No. 5 and a [*] license fee will apply to STP Pens and that neither Party will attempt to renegotiate such rates or license fee or other terms of this Amendment No. 5 or the TLA. NRE fees for the development of the STP Pen and /or STP Reference design will be determined based on respective Party’s responsibility for the development and the work to be carried out.

2. Improvements to STP; SDK and Right to Sublicense to Developers.

Subsections (a) through (d) and (f) and (g) are subject to Section II. 1 above.

(a) LeapFrog’s licenses under this Amendment No. 5 and the TLA with respect to the STP Pen will include, without additional payment, any Improvements to the STP Reference Design (such as Improvements to the SDK for STP Pen applications, Improvements to the operating system (with the exception of creating an industry standard OS), Improvements to Anoto pattern recognition,

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mechanical Improvements to the optical module (excluding the DotPos chip), Improvements to high volume offset printing and Improvements to the microphone technology and to the industrialization of the display) (collectively “Reference Design Improvements”). Reference Design Improvements do not include (i) any Intellectual Property Rights or source code licensed to Anoto from a third party that bears a per unit royalty or flat fee, (ii) any advancements to printing other than high volume offset printing, (iii) the creation of an industry standard OS, and (iv) Reference Design Improvements that are integrated into a new version of the Core Chips at the silicon level (each new version of the Core Chips is referred to as a “Core Chip Improvement”). LeapFrog will have the right to receive a license to a Core Chip Improvement for fees to be separately determined, but no greater than that paid by any other Anoto customer. “Core Chips” means the DotPos chip, digital system chip and separate analog signal chip that form the core processing engine of the STP Pen. Anoto will permit its chip suppliers (currently [*] in the case of the DotPos chip) to supply LeapFrog any version of the Core Chips that is used in a pen that LeapFrog is shipping, even if such version of the Core Chips is not being used in STP Pens or other Anoto pens, provided that LeapFrog acknowledges that Anoto cannot require its suppliers to continue to manufacture such chips if the supplier will not accept orders from LeapFrog in the volumes requested.

(b) For third party technology that is incorporated into the STP Reference Design that bears a per unit royalty, Anoto’s contracts with such third parties shall, if possible using reasonable and customary business efforts, provide that LeapFrog will have the right to distribute such third party technology in STP Pens at the same per unit royalty rate that Anoto pays for such third party technology. However, LeapFrog reserves the right to negotiate its own royalty rate with such third parties.

(c) Anoto may from time to time add new features to the STP that are not Reference Design Improvements or Core Chip Improvements, such as [*] (each, a “New Module”). LeapFrog will have the right to receive a license to a New Module for fees no greater than that paid by any other Anoto customer. LeapFrog is not required to purchase a New Module even if the New Module is integrated into Core Chips that are used in LeapFrog’s implementation of the STP Pen, in which case LeapFrog will not make use of such New Modules in the Core Chips.

(d) Anoto will make all Reference Design Improvements, Core Chip Improvements and New Modules available to LeapFrog at the beta phase and again upon commercial release, but in no event later than when Anoto provides such functionality to any other company or its internal content developers.

(e) The pre-existing provisions of the TLA with respect to Improvements, Updates and Upgrades shall continue to apply to FLY 1.0 Pens and FLY 2.0 Pens, provided, however that LeapFrog shall have right to include Improvements to Anoto pattern recognition, mechanical Improvements to the optical module (excluding the DotPos chip) and Improvements to high volume offset printing in Stand Alone (Self-Contained) Devices and AF Devices without additional fees.

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LeapFrog will also have the right to include new versions of DotPos chip for use in Stand Alone (Self-Contained) Devices and AF Devices at a price to be determined, but no greater than that paid by any other Anoto customer. LeapFrog will not be required to pay more than once for each new version of the DotPos chip (e.g., if LeapFrog pays to include a new version of the DotPos chip in an STP Pen, then LeapFrog does not have to pay an additional fee to include the same version of the DotPos chip in a FLY 1.0 Pen).

(f) Should LeapFrog OEM an STP Pen from Anoto, the technology delivered by Anoto for the STP Pen, including all functionality within the PRD, will include all third party royalties (such as royalties for handwriting recognition) and LeapFrog shall not be responsible for paying any third party royalties.

(g) Subject to Section 1.19 (a) and 11.6, Anoto grants LeapFrog a non-exclusive license under Anoto’s Intellectual Property Rights to (i) use the STP Pen software development kit (SDK) to create LeapFrog Content and (ii) distribute LeapFrog Content within the Permitted Field during the term of the TLA. LeapFrog may sublicense the object code version of the SDK to its contractors and third party publishers for purpose of creating LeapFrog Content within the Permitted Field during the term of the TLA.

3. Support. Subject to Section II.1, LeapFrog will have support from Anoto and the right to create specific features for its implementation of the STP, provided that LeapFrog does not break compatibility with the STP (i.e., LeapFrog’s STP Pen will support a base set of pen functionality as defined in the STP compatibility specification that the parties will mutually agree upon). Independent of Section II.1, all source code for Anoto Functionality for use with FLY 2.0 Pens as described in Section 1.8 of this Amendment No. 5 including SDK, operating system and any other source code that LeapFrog requires to add specific features to meet LeapFrog’s product requirements, excluding any and all source code for Anoto’s dot pattern recognition software, will be delivered to LeapFrog upon LeapFrog’s request, subject to the terms of the Mutual Non-Disclosure Agreement dated December 1, 2005 between the Parties. Such Mutual NDA must be in effect or renewed for Anoto to provide source code and each party agrees to renew such Mutual NDA, without modification of any terms or conditions, at the request of the other party. LeapFrog does not have the right to sublicense or provide any Anoto source code to any third party and may only sublicense object code as expressly provided under the TLA or this Amendment No. 5.

4. In Section 2.1(a)(b) and (c) and Section 2.2(a) of the TLA, the phrase “A worldwide, exclusive license” is deleted and replaced with the phrase “An exclusive license in the Exclusive Markets.”

5. Earned Exclusivity.

a. Consumer Market for Stand Alone (Self-Contained) Devices. Exclusive Markets within the Consumer Market will be lost on a country by country basis,

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except for [*], for Stand Alone (Self-Contained) Devices in those Exclusive Markets where LeapFrog does not Launch a FLY 1.0 or FLY 2.0 Pen by [*].

b. Consumer Market for AF Devices. Exclusive Markets within the Consumer Market will be lost on a country by country basis for AF Devices, excluding Stand Alone (Self-Contained) Devices, (i) in those Exclusive Markets other than [*] where LeapFrog does not Launch a Fly 2.0 Pen or STP Pen by [*] and (ii) in [*] if LeapFrog does not meet its Launch requirements in Section I.10 of this Amendment No. 5. For example, should LeapFrog fail to Launch a FLY 1.0 Pen or FLY 2.0 Pen in [*] by [*] it loses exclusivity as to Stand Alone (Self-Contained) Devices in [*] but may regain exclusivity for AF Devices in [*] if it Launches a FLY 2.0 or STP Pen in [*] by [*] Similarly, if LeapFrog Launches a FLY 1.0 Pen in [*] by [*] but fails to launch a FLY 2.0 or STP Pen in [*] by [*], LeapFrog would lose exclusivity for AF Devices but would retain exclusivity for Stand Alone (Self-Contained) Devices in [*].

c. School Market. Exclusivity for AF Devices in the School Market will be lost if LeapFrog does not launch an STP Pen, FLY 2.0 Pen or FLY 1.0 Pen in the U.S. School Market by [*]. Launch in the case of the School Market means the commercial availability of an STP Pen, FLY 2.0 Pen or FLY 1.0 Pen to the U.S. School Market by [*] and the sale by LeapFrog of the following cumulative units of AF Devices and Stand Alone (Self- Contained) Devices: [*] by [*], [*] by [*], and [*] by [*]. For the avoidance of doubt, the sale of AF Devices or Stand Alone (Self-Contained) Devices by LeapFrog to a distributor or publisher that sells to the School Market (such as [*]) will be considered a sale to the School Market.

6. [*] The parties agree that [*] shall be the channel in [*] for Anoto Dot Pattern, the internet portal and tools for AF Devices that provide real time transmission of the AF Device’s detected position on a dot enabled surface to another device, provided that [*] will make its internet portal and tools available in a timely manner and on fair, reasonable and nondiscriminatory terms.

7. Earned Extension of Exclusivity Through [*]. The Exclusive Term for the Exclusive Markets for AF Devices and Stand Alone (Self-Contained) Devices shall be extended until [*] if revenue paid (including royalties that are deducted against Royalty Advances) to Anoto from the Amendment No. 5 Effective Date through [*] is greater than [*]. In the event that there is a revenue shortfall of less than [*], LeapFrog may make a payment to Anoto in the amount of the shortfall and retain exclusivity through [*].

8. Earned Extension of Exclusivity Through [*]. The Exclusive Term for the Exclusive Markets for the AF Devices and Stand Alone (Self-Contained) Devices shall be extended until [*] if revenue paid (including royalties that are deducted against Royalty Advances) to Anoto from the Amendment No. 5 Effective Date through [*] is greater than [*]. In the event that there is a revenue shortfall of less than [*], LeapFrog may make a payment to Anoto in the amount of the shortfall and retain exclusivity through [*].

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9. Royalties for Pens. The Royalties for Stand Alone (Self-Contained) Devices and AF Devices are set forth in Exhibit A.

10. Establishing STP as Standard Platform.

a. Anoto shall have no obligations or responsibilities for delivering or supporting the STP Pen or STP Reference Design.

b. Anoto recognizes that LeapFrog is an important partner and that the Parties in collaboration can drive the market for STP as a Standard Platform. In the event that Anoto develops a pentop computing platform for the consumer or school markets, the Parties shall in good faith discuss how to establish a Standard Platform, taking both Parties’ and their respective partners’ and customers’ reasonable interest into consideration.

11. STP APIs. In the event that Anoto develops STP, Anoto and LeapFrog will work together to achieve a reasonable portability of content from FLY 1.0 to STP Pens, taking both Parties’ and their respective partners’ and customers’ reasonable interest into consideration.

12. OEM Pen. Subject to Section II.1, LeapFrog may, at its option, OEM an STP Pen from Anoto at rates no less favorable than those given to any other Anoto customer or partner.

13. College Market Restriction. Through [*], LeapFrog agrees that its marketing materials, such as print, online and television advertising, for AF Devices and Stand Alone (Self-Contained) Devices will not specifically target the College Market in the United States and that LeapFrog will not make institutional sales of such devices to colleges, community colleges, junior colleges or universities (provided that LeapFrog may sell or provide such devices to such institutions for research purposes). For the avoidance of doubt, LeapFrog may (i) market such devices to any age group in Youth, (ii) market any LeapFrog Content to the College Market, and (iii) market such devices to any age provided that it does not specifically target the College Market. This section does not apply if Anoto Inc. is not marketing an STP Pen to the College Market by [*].

III. IP LICENSE

1. User Interface and Operating System Patent Cross License.

a. Anoto hereby grants LeapFrog and LeapFrog hereby grants Anoto a perpetual, non-exclusive, sub-licensable license, under the Included Patents, to use, manufacture, have manufactured, distribute, sell, offer for sale and import User Interfaces and/or Operating Systems that are sold in the form of AF Devices, Stand Alone (Self-Contained) Devices and/or content for such devices.

b. Anoto and LeapFrog acknowledge that each party may create User Interfaces and/or Operating Systems, whereby such User Interfaces and/or Operating Systems may be similar to the other party’s User Interface and/or Operating

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System, provided that the foregoing shall not be deemed to be a license to any copyright, trademark, service mark, trade dress or similar right of a Party or its Group Companies.

c. On a monthly basis, each party will disclose to the other Party all Included Patents which have been filed in any given country. Each party may use the information contained in the Included Patents for any business purpose related to digital pen based computing utilizing the Anoto Dot Pattern, provided that the foregoing shall not be deemed to expand the scope of the licenses granted in Section HU (a) of this Amendment No. 5 and that neither party will disclose the contents of such Included Patents to any third party other than such party’s contractors and manufacturers that are subject to confidentiality restrictions.

d. Notwithstanding anything to the contrary in Section 18.6 of the TLA, neither party may assign or transfer the licenses granted under Section III.1(a) of this Amendment No. 5 to any person or entity in connection with any bankruptcy or liquidation proceeding.

e. “Included Patents” means any patents and/or patent applications that claim inventions conceived or reduced to practice by Anoto or LeapFrog prior to [*] that are (i) User Interfaces and/or Operating Systems and/or (ii) improvements to User Interfaces and/or Operating Systems.

f. “User Interface” means the system level commands and mechanisms that can be seen, heard or otherwise perceived by the user when using a Stand Alone (Self-Contained) Device and/or AF Device with dot enabled paper and that are used to control the operation of such devices excluding any commands or mechanisms that are unique to an application or content but are not broadly used across applications and content. For the avoidance of doubt, patents covering Paper ROM are included in the definition of User Interface.

g. “Operating System” means system level software contained on a Stand Alone (Self-Contained) Device and/or AF Device that manages such devices’ internal functions and provides a means to control such devices’ operations and file system.

2. Enabling Technology Cross License.

a. Anoto hereby grants LeapFrog and LeapFrog hereby grants Anoto a perpetual, non-exclusive, non-sub-licensable license, under the Enabling Technology Patents, to use, manufacture, have manufactured, distribute, sell, offer for sale and import AF Devices, Stand Alone (Self- Contained) Devices and/or content for such devices.

b. On a monthly basis, each party will disclose to the other Party all Enabling Technology Patents which have been filed in any given country. Each party may use the information contained in the Enabling Technology Patents for any

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business purpose related to digital pen based computing utilizing the Anoto Dot Pattern, provided that the foregoing shall not be deemed to expand the scope of the licenses granted in Section III.2(a) of this Amendment No. 5 and that neither party will disclose the contents of such Enabling Technology Patents to any third party other than such party’s contractors and manufacturers that are subject to confidentiality restrictions.

c. Notwithstanding anything to the contrary in Section 18.6 of the TLA, neither party may assign or transfer the licenses granted under Section III.2(a) of this Amendment No. 5 to any person or entity in connection with any bankruptcy or liquidation proceeding.

d. “Enabling Technology Patents” means any patents and/or patent applications that claim inventions conceived or reduced to practice by Anoto or LeapFrog prior to [*] that relate to e-commerce, “paper replay” or note-taking for AF Devices and Stand Alone (Self- Contained) Devices.

3. Source Code License. LeapFrog grants Anoto a perpetual license to use, develop and sublicense the source code that LeapFrog has developed for its current FLY platform as of [*] (the commercial release date of [*]), solely for use on AF Devices that are based on a standard Anoto reference platform and interact with the Anoto Dot Pattern. The foregoing perpetual license to any Intellectual Property Rights on the operating system shall be exclusively licensed to Anoto during the term of the TLA, provided that LeapFrog shall not be prevented from using and exploiting the operating system or portions thereof in its and its Group Company’s products (such as FLY 1.0) and the products of their third party publishers. The only deliverables that LeapFrog will provide in connection with the foregoing license is the source code and associated documentation for LeapFrog’s software developer’s kit for its current FLY platform as it exists as of [*]. Notwithstanding the first sentence of this Section, Anoto does not have the right to sublicense the source code to LeapFrog’s software developer’s kit for the current FLY platform or provide such source code to any third party, provided that Anoto may sublicense the object code version of such software developer’s kit to third parties when it is combined with the object code for Anoto’s software developer’s kit for the STP (e.g., Anoto may not sublicense the Fly software developer’s kit on a stand alone basis). Section 3 of the TLA is hereby deleted in its entirety and LeapFrog is no longer required to provide any deliverables under Section 3, Schedule A or Schedule C of the TLA and the Parties agree that, for purposes of the TLA, LeapFrog has not provided any deliverables or other Work Product to Anoto under Schedule A or Schedule C of the TLA.

4. No warranties. All patents, patent applications and source code provided under this Section III of this Amendment No. 5 are provided on an as-is basis, with no warranties of any kind, whether express or implied. LeapFrog agrees to provide a reasonable amount of consulting services to Anoto with respect to LeapFrog’s software developer’s kit pursuant to a mutually agreed upon SSOW under the Master Agreement for Subsequent Statements of Work Under the Technology License Agreement dated June 1, 2004.

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5. Revenue Share. In consideration of the source code and patent licenses granted by LeapFrog above, Anoto shall pay to LeapFrog within [*] days of the end of each calendar quarter, (i) [*] of the royalty revenue received by Anoto Inc. and its wholly-owned subsidiaries for AF Devices and content for such devices and (ii) [*] of the Net Sales Value of AF Devices and content for such devices sold or distributed by Anoto Inc. or its wholly-owned subsidiaries. LeapFrog shall have the same right to audit Anoto Inc. as Anoto has to audit LeapFrog under the TLA.

IV. MISCELLANEOUS

1. Sections 4.1 and 4.2(a) and (b) of the TLA are hereby deleted in their entirety.

2. Replacement for Section 4.2(c) of the TLA: Section 4.2(c) of the TLA is hereby replaced in its entirety with the following: From time to time during the Exclusive Term, if Anoto has a bona-fide partner opportunity to commercialize a product within the Exclusive Field in one or more Exclusive Markets (that may, at Anoto’s discretion incorporate the STP Pen), Anoto will submit a written request (including all relevant details with respect to such opportunity that Anoto is permitted to disclose consistent with its confidentiality obligations to such partner) to LeapFrog for approval to pursue such opportunity. LeapFrog will approve or reject such request within [*] days after its receipt of such request; provided, however, that LeapFrog may reject such request in its good-faith discretion if: (i) LeapFrog is otherwise in compliance with its Launch requirements with respect to the Exclusive Market identified in Anoto’s opportunity request; and (ii) the Parties have discussed in good faith the risk and likelihood of commercialization of such opportunity. If LeapFrog approves such request in writing, the Exclusive Field will not apply solely within the applicable Exclusive Market and only to the extent of the partner opportunity approved by LeapFrog. Further, the Parties acknowledge that when deciding whether or not to approve an Anoto request the following considerations will be taken into account: (x) the objective of the Parties to cooperate to create a broad de facto standard for the Licensed Anoto Technology, and (y) the risk of forcing a competing platform; and (z) the risk of reduced overall business for LeapFrog and its Group Companies.

3. Non-Interference. The Parties agree that during the term of this Agreement, neither Party will, directly or indirectly through others, solicit, attempt to solicit, or hire any employee of the other Party to become an employee or independent contractor (“Restricted Workers”). The restriction in the preceding sentence shall not, however, apply to (i) independent contractors, (ii) an employee who has been terminated or laid off by a Party or has given written notice of termination of employment, or (iii) without prior solicitation by the other Party, an employee who responds to any general employment advertisement placed by the other Party in connection with an open position. In the event that a Party hires a Restricted Worker in violation of this clause, such Party shall pay to the other Party immediately upon hiring or engagement of such Restricted Worker, as compensation and not as a penalty, a lump sum amount equal to the Restricted Worker’s gross wages earned by the worker during [*] month period ending on the worker’s last day of employment with the Party.

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4. [*]. LeapFrog shall have the right, without payment of a royalty to Anoto, to license the [*], solely in object code format and in conjunction with LeapFrog’s software development kit, to LeapFrog’s developers and third party publishers for use in the creation of LeapFrog Content provided that the LeapFrog licensee agrees to be bound by terms consistent with the terms of this Agreement. LeapFrog agrees to enforce such agreements with licensees in the event that a licensee breaches such agreement, and LF agrees to indemnify and hold Anoto harmless for such breaches.

5. Anoto will accept orders by LeapFrog for additional parts of the Anoto Dot Pattern per Section 2.2 of the TLA.

6. LeapFrog may, upon written notice to Anoto, extend the non-exclusive “Set Term” of the Agreement under Section 16.1 of the TLA by [*] to [*].

7. This Amendment No. 5 and the TLA represent the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings with respect to the subject matter hereof. Except as set forth herein, the TLA shall remain in effect in accordance with its terms.

8. Prior to LeapFrog entering into an agreement with a [*] company in the School Market for Summative Test Taking or Assessment, LeapFrog and Anoto will in good faith negotiate and agree upon (provided that neither party will unreasonably withhold agreement) the scope of Anoto’s revenue share of the amount [*] pays to LeapFrog for the rights to Summative Test Taking or Assessment. Such revenue sharing will apply through [*]. For the avoidance of doubt, LeapFrog will not enter into an agreement with a [*] company in the School Market for Summative Test Taking or Assessment using Anoto Technology without Anoto’s approval, not to be unreasonably withheld. “Summative Test Taking or Assessment” means state or nationally administered tests given to students, such as the STAR, Iowa Test of Basic Skills, TAKS (Texas Assessment of Knowledge and Skills) and FCAT (Florida Comprehensive Achievement Test). Summative Test Taking or Assessment excludes test taking or formative assessment given in conjunction with classroom instruction and excludes national aptitude or admissions tests such as the SAT. The provisions of this Section only apply during the Exclusive Term.

9. No Assignment or Delegation. Subsection (b) of Section 18.6 of the TLA is hereby replaced in its entirety with the following:

(b) to its Group Company as Successor; provided, however, in each case that the assigning Party will continue to honor all obligations, and the rights and licenses granted to the other Party, under the TLA and this Amendment No. 5 except that Anoto AB and Anoto Group AB shall have no obligations or responsibilities with respect to STP Pens and the STP Reference Design except as expressly set forth in Section II.1 above.

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Agreed to and accepted by:
LEAP FROG ENTERPRISES, INC.		ANOTO AB & ANOTO GROUP AB
By:	/s/ Jeffrey G. Katz	By:	/s/ Mats Blom	/s/ Christer Fáhraeus
Name: Jeffrey G. Katz, Pres. and CEO		Name: Mats Blom, CEO		Christer Fáhraeus, Board member

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[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

EXHIBIT A

ROYALTIES

A1. FLY 1.0 Royalties. The Royalty for FLY 1.0 Pens and Stand Alone (Self-Contained) Devices that do not contain Anoto Functionality and LeapFrog Content for such devices shall be as set forth in the TLA except that: (i) the [*] per pen cap shall apply for the term of the TLA, (ii) the bundling provisions of Section A7 below shall apply to FLY 1.0 Pens and Stand Alone (Self-Contained) Devices and LeapFrog Content for such devices and (iii) the Royalty for “point and click” and/or slow-drag (no utilization of stroke information) content and for Note Pads shall be [*] of Net Sales Value beginning on [*]. The foregoing shall not be construed to limit or amend the provisions of Amendment No. 4 to the TLA (the Phoenix Amendment).

A2. Hardware Royalty for AF Devices.

The Hardware Royalty for AF Devices, including FLY 2.0 Pens and STP Pens, shall be the following percentage of Net Sales Value, provided that in no event will the Hardware Royalty be greater than [*] per pen:

Pen Units (Million)	Hardware Royalty Rate
[*]	[*]
[*]	[*]
[*]	[*]

Note: Units refer to cumulative lifetime volume of AF Devices during the term of the TLA.

The foregoing hardware royalties apply in lieu of the provisions of Section 1 of Exhibit G of the TLA with respect to AF Devices.

A3. Royalty for Content Downloaded from a LeapFrog or Third Party Website for AF Devices.

The Royalty for LeapFrog Content for AF Devices that is made available in a download model where the sale of the content occurs on a LeapFrog controlled website or third party website (excluding content sold as a CD or other media in a box at retail where the CD or other media contains a link to such website(s) from which the content purchased by the consumer is downloaded or where the CD contains the content) shall be the following percentage of the cumulative LeapFrog Net Sales Value of downloaded LeapFrog Content less the cumulative marketing spend on AF Devices and LeapFrog Content for such devices (“the Pricing Model”):

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[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

Cumulative LeapFrog Net Sales Value of Downloaded Content Less Cumulative Marketing Spend on AF Devices	Content Royalty*
[*]	[*]
[*]	[*]
[*]	[*]

Notes:

* The royalty rate for the first [*] in Net Sales Value from a download shall be [*] regardless of the value of the Pricing Model.

** With respect to an item of LeapFrog Content, each of the royalty rates in this Section A3 shall be reduced by [*] percentage points (e.g., from [*] if LeapFrog pays a third party licensor a royalty of [*] or more of LeapFrog’s Net Sales Value for such LeapFrog Content.

For third party content sold via download the Royalty paid to Anoto shall be the applicable percentage, per the above table, of the Net Sales Value received by LeapFrog from the third party.

A4. Royalty for Content Downloaded from Pens from an Anoto Website for STP Pens.

Anoto will make available to LeapFrog the Anoto website(s) for downloads and related services (e.g., customer registration) at rates no less favorable than those made available to any other customer. In no event will the royalty for LeapFrog content downloaded on an Anoto website exceed [*] of the sales price of the download, excluding taxes.

For the avoidance of doubt, LeapFrog shall not be required to use or purchase any services or products offered by Anoto in order to deliver to customers AF Devices or content therefore or for customers to use such pens and content.

A5. Royalties for all other Content for AF Devices.

The Royalty provisions of the TLA shall apply to all content and content delivery models for AF Devices other than those set forth in Sections A3 and A4 above. Notwithstanding the foregoing, (i) the Royalty for “point and click” and/or slow-drag (no utilization of stroke information) content (except content utilizing Paper ROM) and for Note Pads for AF Devices shall be [*] of Net Sales Value and (ii) the royalty for content utilizing Paper ROM shall be [*] of Net Sales Value. The phrase “content utilizing Paper ROM” means content containing Dot Codes that enable a digital pen to read data from the Dot Codes that is not an XY coordinate or position information.

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[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

A6. Applications Licensed From Anoto. Subject to Section II.1, LeapFrog will have the right to obtain a license to Anoto’s content and applications for STP Pens, including content or applications included on the base ROM of the STP Pen, at rates no less favorable than those made available to any other customer.

A7. Bundles. For all Licensed Products and LeapFrog Content, if a Licensed Product (such as a pen) is bundled with LeapFrog Content on initial sell in, the hardware and content royalties will be calculated based upon the pro-rata amount of the sales price of the bundle that is attributed to the Licensed Product and the LeapFrog Content, respectively, both of which are derived from their stand alone sales price. The hardware royalty rate and cap will be applied to the pro-rata amount attributed to the Licensed Product (i.e., the pen). The content royalty rate will be applied to the pro-rata amount attributed to the LeapFrog Content. For example if the sales price of a STP Pen and LeapFrog Content bundle is [*] and the historical sale prices of the components of the bundle are [*] for the STP Pen and [*] for the LeapFrog Content, the pro-rata sales price attributable to the STP Pen will be [*], which equals [*]. The hardware royalty rate and cap, if applicable, will then be applied to [*]. The pro-rata sales price attributable to the LeapFrog Content will be [*], which equals [*]. The applicable royalty rate for the LeapFrog Content will then be applied to [*]. If LeapFrog does not have historical data to determine an average sales price of the content or other product, then LeapFrog may allocate a reasonable amount of the sales price to such content or other product based on (i) its list price or, if no list price exists, (ii) the sale price of comparable software, to be agreed upon by the parties, which agreement will not be unreasonably withheld. The foregoing bundling model shall also apply to Licensed Products or LeapFrog Content bundled with respective accessories that do not include Anoto technology. For example, if a FLY 2.0 Pen is bundled with a carrying case, the hardware royalty will be calculated based upon the pro-rata amount of the sales price of the bundle that is attributed to the pen, which is derived from the stand alone sales price of the pen and carrying case. This Section A7 replaces the provisions regarding bundling in the TLA for all pens and content, including Stand Alone (Self-Contained) Devices, FLY 2.0 Pens and STP Pens and content therefor.

A8. All Advance Royalties paid by LeapFrog under the TLA, including the Advance Royalties paid under Section 5.5 of Exhibit G of the TLA, shall be credited against all royalties due under this Amendment No. 5.

The provisions of Sections 2(c) (as modified below), 2(d), 2(e), 3, and 6 of Exhibit G of the TLA shall continue to apply to the royalties on LeapFrog Products and LeapFrog Content, including Stand Alone (Self-Contained) Devices such as FLY 1.0 Pens, FLY 2.0 Pens and AF Devices such as STP Pens, and content therefor. Section 2(c) of Schedule G of the TLA is hereby replaced in its entirety with the following new Section 2(c) of Schedule G:

2(c) Where content is developed, created and sold by an unrelated sublicensee of LeapFrog or a LeapFrog Group Company, other than downloadable content for an AF Device, the Royalty rate is [*] of the sublicensees’ Net Sales Value of such content, subject to the following, notwithstanding the provisions of Section 2(a) or 2(b) above to the contrary:

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[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

(i) If LeapFrog licenses a third party the right to print the Licensed Anoto Dot Pattern or Dot Codes on books, magazines and other surfaces (“Third Party Dot Enabled Content”) [*], then there will be [*] due to Anoto for the printing or distribution of the Third Party Dot Enabled Content by the sublicensee. For example, LeapFrog may grant a [*] license to a textbook publisher to print the Licensed Anoto Dot Pattern on a textbook and distribute the resulting textbook. In this case, there shall be [*] due to Anoto on the license of the Licensed Anoto Dot Pattern to the publisher or sale of the textbook by the publisher. In the event that LeapFrog charges [*], then LeapFrog will pay Anoto [*] of the Net Sales Value that LeapFrog receives from the sublicensee for the printing or distribution of the Licensed Anoto Dot Pattern. The foregoing shall not modify or amend the royalty due to Anoto for the sale of pens or software content that interact with such Third Party Dot Enabled Content. In the event that LeapFrog acquires a publisher or enters the publishing business, then the foregoing shall apply to books, magazines and other surfaces printed with the Licensed Anoto Dot Pattern or Dot Codes sold by LeapFrog or its Affiliates as a publisher, provided, however, that, in such case, (1) if LeapFrog charges customers [*] then LeapFrog will pay [*] and (2) if LeapFrog sells [*] then LeapFrog will pay [*].

A9. Revenue Share in [*]. If LeapFrog Launches a FLY 2.0 Pen or STP Pen in [*], Anoto shall then pay to LeapFrog within [*] days of the end of each calendar quarter, [*] of Anoto’s Net Sales Value from Learning Applications for STP pens sold in [*] in the Consumer Market through [*]. LeapFrog shall have the same right to audit Anoto as Anoto has to audit LeapFrog under the TLA.

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[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

EX-21.01

Exhibit 21.01

Subsidiaries of the Registrant

Subsidiary	Jurisdiction of Incorporation or Organization
LeapFrog Canada, Inc.	Canada
LeapFrog (H.K.) Limited	Hong Kong
LeapFrog Toys (UK) Limited	England and Wales
LF France, SAS	France
LeapFrog Mexico S.A. de C.V.	Mexico
LFC Ventures, LLC	Delaware
LeapFrog Digital Technology (Shenzhen) Co. Ltd.	China

EX-23.01

Exhibit 23.01

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-97061, No. 333-117798, No. 333-136328, No. 333-145125 and No. 333-152956) pertaining to the 2002 Equity Incentive Plan, 2002 Employee Stock Purchase Plan and 2002 Non-Employee Directors’ Stock Option Plan and 2002 Equity Incentive Plan of LeapFrog Enterprises, Inc., of our reports dated February 22, 2010, with respect to the consolidated financial statements and schedule of LeapFrog Enterprises, Inc., and the effectiveness of internal control over financial reporting of LeapFrog Enterprises, Inc., included in the Annual Report (Form 10-K) for year ended December 31, 2009.

/s/ Ernst & Young LLP

San Francisco, California

February 22, 2010

EX-31.01

Exhibit 31.01

CERTIFICATION

I, Jeffrey G. Katz, certify that:

1. I have reviewed this annual report on Form 10-K of LeapFrog Enterprises, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 22, 2010	/s/ Jeffrey G. Katz
	Jeffrey G. Katz
	Chairman and Chief Executive Officer

EX-31.02

Exhibit 31.02

CERTIFICATION

I, William B. Chiasson, certify that:

1. I have reviewed this annual report on Form 10-K of LeapFrog Enterprises, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 22, 2010	/s/ William B. Chiasson
	William B. Chiasson
	Chief Financial Officer

EX-32.01

Exhibit 32.01

CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

Pursuant to 18 U.S.C. Section 1350

Pursuant to the requirements set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Jeffrey G. Katz, the Chief Executive Officer of LeapFrog Enterprises, Inc. (the “Company”), and William B. Chiasson, the Chief Financial Officer of the Company, each hereby certifies that, to the best of his knowledge:

1. The Company’s Annual Report on Form 10-K for the year ended December 31, 2009, to which this Certification is attached as Exhibit 32.01 (the “Annual Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act; and

2. The information contained in the Annual Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by the Annual Report and results of operations of the Company for the periods covered in the financial statements in the Annual Report.

Dated: February 22, 2010

/s/ Jeffrey G. Katz	/s/ William B. Chiasson
Jeffrey G. Katz	William B. Chiasson
Chairman and Chief Executive Officer	Chief Financial Officer

Note: This certification accompanies the Annual Report pursuant to 18 U.S.C. Section 1350 and shall not be deemed “filed” by the Company for purposes of Section 18 of the Exchange Act or incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing.