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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2003

or

For the Transition Period from              to             

Commission file number 001-31396

LEAPFROG ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)

6401 Hollis Street, Suite 150

Emeryville, CA 94608

(Address of principal executive offices)

(510) 420-5000

(Registrant’s telephone number, including area code)

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

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

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.    x  Yes    ¨  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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 an accelerated filer (as defined in Rule 12b-2 of the Act).    x  Yes    ¨  No

The aggregate market value of the common equity held by non-affiliates of the registrant calculated using the market price as of the close of business on June 30, 2003 was approximately $719,166,000. The registrant does not have non-voting common stock outstanding.

The number of shares of Class A common stock and Class B common stock, outstanding as of March 1, 2004, was 31,517,258 and 27,882,817, 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 Annual Meeting of Stockholders, to be filed by April 29, 2004.

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SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

This report on Form 10-K, including the sections entitled “Item 1. Business,” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Result of Operations,” contains forward-looking statements. 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 or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include those listed under “Risk Factors That May Affect Our Results and Stock Price” in Item 7 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 or achievements. 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.

TRADEMARKS AND SERVICE MARKS

“LeapFrog,” the Leapfrog Logo, “LeapPad,” “Above & Beyond,” “Alphabet Pal,” “Hug & Learn,” “Imagination Desk,” “iQuest,” “Leap,” the Leaping Frog Design, “LeapTrack,” “Learning Something New Everyday,” “Learning Friend,” “Mind Station,” “NearTouch,” “Odyssey,” “Phonics Desk,” “Quantum Pad” and “Turbo Twist” are our registered trademarks or our service marks. “Baby Tad,” “Fridge Phonics,” “Great Reader,” “Language First!,” the LeapFrog SchoolHouse design, “Leap’s Pond,” “LeapStart,” “Fun-Damental,” “Ready, Set, Leap!,” the green GO circle, and the Bouncing Frog Logo are some of our trademarks or our 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 property of their respective owners.

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INDEX

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PART I

Item 1. Business

Overview

LeapFrog is a leading designer, developer and marketer of innovative, technology-based educational products and related proprietary content, dedicated to making learning effective and engaging. We currently design our products to help infants and toddlers through high school students learn age- and skill-appropriate subject matter, including phonics, reading, writing, math, spelling, science, geography, history and music. We base our products on sound educational pedagogy under the guidance of our in-house educational experts and our Education Advisory Board. We then use our proprietary technologies and content to make these products interactive and engaging. Our product line includes: (1) learning platforms, which are portable, affordable hardware devices, (2) educational software-based content, such as interactive books and cartridges, specifically designed for use with our learning platforms and (3) stand-alone educational products. Our products are sold throughout the United States primarily by national and regional mass-market and specialty retailers, and to a lesser extent into international markets and to U.S. schools.

As of December 31, 2003, we have sold more than 23 million platform products since 1999. These platforms provide us with a large and growing installed base on which to build continued software content sales. In 2003 we introduced three new platforms, the LittleTouch LeapPad learning system designed for ages 6 months to 3 years, the LeapPad Plus Writing learning system designed for ages 4 to 8 years and the Leapster multimedia learning system designed for ages 4 to 8 years.

Our product line also includes a significant library of proprietary content, most of which has been developed internally, for use with our platforms. For our LittleTouch LeapPad, My First LeapPad, LeapPad, LeapPad Plus Writing and Quantum Pad platforms, which together constitutes our LeapPad family of platforms, each set of content related to those platforms consists of an audio cartridge as well as a corresponding interactive books and activity cards. For our Turbo Twist, iQuest and Leapster handhelds, our content comes in memory cartridges that slot easily into the platforms. We currently offer over 100 interactive books for our LeapPad family of platforms at U.S. retail stores. We also currently offer eight Leapster cartridges with math, phonics and writing, nine Turbo Twist cartridges with math, spelling and social studies questions, as well as seven cartridges for our iQuest platform covering material from over 250 major textbooks used in 5th through 8th grade classrooms in U.S. schools and for PSAT, SAT and ACT preparation materials for high school students.

By using a specially designed stylus that incorporates our proprietary NearTouch technology, children touch words and images on our interactive books placed in our LeapPad family of platforms. Depending on the book, they can hear information regarding various academic subjects, read engaging stories or play interactive, educational games. Our LeapPad family of platforms evolves with a child as his or her interests and abilities change, since switching the content is as easy as changing the book and related audio cartridge. Many of our LeapPad family-related interactive books feature our internally developed, branded LeapFrog characters, such as Leap, Lily, Tad and Professor Quigley, while others feature popular licensed characters such as Thomas the Tank Engine, Dora the Explorer, Bob the Builder, Winnie-the-Pooh, Disney Princesses, Scooby-Doo, Dr. Seuss’ The Cat in the Hat and characters from the movies like Monsters, Inc., The Lion King, Toy Story 2 and Finding Nemo.

Our product line also includes over 35 stand-alone educational products. These stand-alone products combine our proprietary technologies with a fixed set of content and include our interactive plush toys, our LeapStart learning table and our Fridge Phonics magnetic set products for infants and toddlers and our Explorer interactive globes for older children.

Since the inception of our business in 1995, we have focused primarily on the U.S. consumer market. This market represented the substantial majority of our sales and operating profit in 2003 and will continue to be our primary focus in the near future. However, we are increasing our focus on international markets and have customized or are planning to customize many of our products for use in foreign countries. To pursue our international strategy, we have established sales offices in the United Kingdom, Canada, Mexico and France. We also have relationships with distributors in Spain, Germany, Korea, Australia and several other countries. Further, we intend to leverage relationships with strategic partners in various countries, such as our existing relationships with Benesse Corporation and Sega Toys in Japan. For additional discussion of our three business segments, including our international segment, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Consolidated Financial Statements — Note 23. Segment Reporting.”

In addition to our international expansion, we established our Education and Training group in 1999. Within this group, our SchoolHouse division focuses on developing supplemental curriculum and assessment programs for pre-kindergarten to 8th grade classrooms and on the sale of new products incorporating our core technologies and specially modified versions of our products to schools, teacher supply stores and educational products catalogs in the United States. LeapFrog SchoolHouse product areas currently include assessment, early literacy, early childhood, reading, language arts, math, English Language Development, and special education. Our SchoolHouse products are research-based products that are tied to state standards, and have been adopted or listed in 13 cities, states and regions, including California, Illinois, New York City and Texas. Through

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our SchoolHouse division, we currently offer exclusively for the school market, more than 200 LeapPad and Quantum Pad books, as well as over 450 interactive skill cards, which represent over 6,000 pages of interactive content. Our LeapTrack assessment and instruction system is designed to meet the increasing demands for accountability in schools. The LeapTrack system provides teachers with the ability to instantly assess their students, personalize student instruction and continuously monitor student progress relative to state standards. Our Literacy Center program has been adopted and listed as a supplemental early reading curriculum by seven states and one major metropolitan city. Our comprehensive, research-based pre-kindergarten curriculum, the Ready, Set, Leap! program, meets Head Start standards and was adopted by the Texas State Board of Education. We have also developed and introduced our nine-theme, 36-interactive book English language development program, Language First!, which is designed to build oral language skills for students for whom English is a second language. In addition to these core programs, our SchoolHouse division offers a library of interactive books to be used with our LeapPad and Quantum Pad learning platforms, and which are designed to address challenging issues in classroom instruction

We have grown significantly and consistently by introducing innovative new platforms and other products, expanding our content offerings and increasing our distribution. From 2001 to 2003, our total net sales increased from $314.2 million to $680.0 million and our total net income increased from $9.7 million to $72.7 million.

The Educational Foundation of Our Products

We believe that sound educational principles are at the core of the value of our brands and products. All LeapFrog content and curriculum is based on a proprietary method of learning, created by our in-house educational experts with the assistance of our Education Advisory Board, that identifies what children learn and when and how they learn it. Our grade-based content is aligned with state and national education standards, often mirroring what is learned in the classroom.

The following four educational principles are at the core of our products:

Children Learn Best When Actively Engaged

Our products encourage active participation by asking children questions and requiring them to direct their own play before continuing with an activity. For example, children using our LeapPad interactive books can control the information they receive by deciding what to touch with the NearTouch stylus. Even our Learning Drum, designed for infants, engages them by only continuing with the activity or game after receiving a response from the child.

Positive Reinforcement and Immediate Feedback Encourage Continued Effort

Our educational products are designed to help develop self-confidence through immediate and supportive feedback. Many of our products offer clues that are designed to help lead a child to the correct answer, while at the same time providing information on incorrect responses. For example, if a child is asked to locate Spain on our Explorer interactive globe and touches France, the globe will respond, “You found France!” and then provide a clue as to how the child can locate Spain. We believe this combination of presenting new information and offering positive reinforcement encourages the child to continue learning.

Ability-Appropriate Tasks Motivate Learners

We believe that learning is most effective when a task matches the learner’s ability. For instance, a task that is too easy may quickly become boring while a task that is too difficult may be discouraging and demoralizing. To address this issue, we offer a variety of age-appropriate platforms and a library of content for each of these platforms to address the specific needs of children as their skills develop and interests mature. Through our Learning Center shelf displays and our LeapFrog newsletter, we provide guidance to parents on how to select the appropriate product and content for each child’s age and ability. We have also developed products that adapt to the user’s abilities. For example, we have designed our Turbo Twist handhelds to deliver easier or more difficult questions based on a child’s performance. We believe this technology enables the child to spend more time within his or her optimal learning zone.

Supplemental Materials Should Complement and Enhance What Children Learn at School

We design our products and content to be consistent with the curricula used in schools across the U.S. For example, we offer a library of content cartridges compatible with our iQuest handheld of test questions corresponding to over 250 major textbooks currently used in U.S. middle schools. With the guidance of the educational experts in our SchoolHouse division, we also design our products in accordance with state and federal standards regarding the scope and sequence of learning.

We believe these educational principles are fundamental building blocks on which our company is built. We implement these principles by leveraging our team of in-house educational experts and our outside Education Advisory Board, which consists of distinguished educators. The members of our Education Advisory Board actively participate in the design and development of our products by meeting with our creative design team several times each year. Our Education Advisory Board also is an external source of feedback for our creative design team with respect to new products that are in the development stage. We believe that both our in-house experts and outside advisors are critical in the creation of our learning products.

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Our Education Advisory Board

The members of our Education Advisory Board are involved deeply in the research of both education and reading development. As of March 1, 2004, the members of our Education Advisory Board were:

Robert Calfee, Ph.D. Dr. Calfee has chaired our Education Advisory Board since our business started in 1995. He has been a prolific researcher and author in the area of reading and reading development for the past 30 years. Dr. Calfee is presently Distinguished Professor and Dean Emeritus at the School of Education at the University of California, Riverside. He is professor emeritus at Stanford University’s School of Education, as well as a member of the board of the Society for Scientific Study of Reading. Dr. Calfee is editor emeritus for Education Assessment and the Journal of Educational Psychology. Dr. Calfee has published eight books and over 150 articles in journals such as Educational Psychologist, the Journal of Reading, Issues in Education and Assessment in Education.

Anne Cunningham, Ph.D. Dr. Cunningham is an associate professor of cognition and development at the University of California, Berkeley and the Director of the Joint Doctoral Program in Special Education. She is a past member of the board of the Society for Scientific Study of Reading and the board of directors for American Educational Research Association, Division C. Dr. Cunningham has published over 35 articles in journals such as Development Psychology, Journal of Educational Psychology, Reading and Writing, and The American Educator. Dr. Cunningham is a former classroom teacher and reading resource specialist, having taught pre-school and kindergarten through third grade for 10 years. She serves on numerous state and national committees surrounding literacy development and instruction such as the U.S. Department of Education Reading First expert panel.

Alma Flor Ada, Ph.D. Dr. Ada is the director of the Center for Multicultural Literature for Children and Young Adults at the University of San Francisco, where she has been a professor since 1976. She is an expert on bilingual education and was the founder and first editor-in-chief of the Journal of the National Association for Bilingual Education, where she has served on the advisory board for over 25 years. Dr. Ada is the author of numerous award-winning English and Spanish children’s books and English and Spanish reading programs. Additionally, she has shared her expertise on issues of transformative education, multicultural and multilingual education, home school interaction and early childhood education in Central and South America, the Caribbean, Europe, New Zealand, Micronesia and in the United States and Canada.

Karen Fuson, Ph.D. Dr. Fuson is a Professor Emeritus at the School of Education and Social Policy at Northwestern University. She is a mathematics educator and cognitive scientist whose work focuses on children’s mathematical understanding and the classroom conditions that can facilitate such understanding. Her past work has contributed to the understanding of children’s counting and understanding of whole number, fraction, and decimal computation. Dr. Fuson is currently a contributing editor of the Journal of Mathematical Behavior and has served as an editorial board member of Mathematical Cognition, Mathematical Thinking and Learning, and the Journal for Research in Mathematics Education. She has reviewed proposals for the National Science Foundation since 1978. Dr. Fuson served on the recent Mathematics Learning Committee of the National Research Council. She has published over 100 articles in books, handbooks, encyclopedias, and journals such as Cognition and Instruction, Journal of Educational Psychology, Journal for Research in Mathematics Education, Elementary School Journal, Cognitive Psycholog, and Child Development.

Ruth Nathan, Ph.D. Since June 2003, LeapFrog has employed Dr. Nathan as its Executive Educational Advisor. In addition, Dr. Nathan is a lead instructor at the University of California, Berkeley Extension Reading Certificate Program. Dr. Nathan has co-authored many books on literacy, including: Beginnings of Writing; Classroom Strategies That Work; Writers in the Classroom; The Great Source Reading Daybooks and Reading Source Books for third through fifth grades; and three writing handbooks, Writers Express, Write On Track, and Write Away. Additionally, she has published more than ten articles in journals such as Reading Research Quarterly, Child Development and Language Arts. Dr. Nathan has taught in the public school system over a thirty year period, alternating her full-time, classroom experience with university professorships and district consulting.

Scott G. Paris, Ph.D. Dr. Paris is a professor in the School of Education and professor and Chair of the Graduate Program in the Department of Psychology at the University of Michigan. He was a founding member of the Center for the Improvement of Early Reading Achievement and served on the board of directors of the National Reading Conference. He is on the editorial boards of the Educational Psychologist, Cognition and Instruction and Reading Research Quarterly, and he has previously served on the editorial boards of 11 other journals. Dr. Paris is a frequent contributor to scholarly publications in the field of education and developmental psychology. He has published 11 books, 50 chapters, and more than 75 articles in journals such as the Journal of Educational Psychology, Developmental Psychology, Child Development, Reading Research Quarterly and Educational Psychologist.

P. David Pearson, Ph.D. Dr. Pearson is the Dean of the Graduate School of Education at the University of California,

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Berkeley and was previously the John A. Hannah Distinguished Professor of Education in the College of Education and the Co-Director of the Center for the Improvement of Early Reading Achievement at Michigan State University, and was Dean of the College of Education and the Co-Director of the Center for the Study of Reading at the University of Illinois, Urbana-Champaign. He has been the President of the National Reading Conference and the National Conference on Research in English and has served on the board of directors of the American Association of Colleges for Teacher Education. Dr. Pearson currently serves on the editorial advisory boards of Cognition and Instruction, Educational Assessment, Reading Research Quarterly, Research in the Teaching of English and Reading On-Line. He is a frequent speaker and publisher in the field of reading and education. Dr. Pearson has had published 12 books and over 100 articles in journals such as Reading Research Quarterly, The Journal of Literacy Research, Language Arts and The Reading Teacher.

Jeni Leta Riley, Ph.D. Dr. Riley is the head of the School of Early Childhood and Primary Education for the Institute of Education, University of London. Dr. Riley received her conferment of title of Reader in Literacy in Primary Education in 2000 and has been active in early childhood literacy development as a teacher, lecturer, examiner and researcher for nearly 30 years. Among her research projects was a study of literacy development in the first year of school and is currently involved with a funded project called Storytalk, investigating how to support spoken language development most effectively in multicultural early years classrooms. Dr. Riley has served on many educational committees, including four years as the Deputy Chair of the National Association of Primary Teacher Education Conference (NaPTEC), and as a member of the Committee of the Heads of School, University of London, Institute of Education. Most recent publications include an edited book Learning in the Early Years: A guide for teachers of children 3-7 and research journal articles entitled The National Literacy Strategy: Success with literacy for all? and Developing young children’s thinking through learning to write argument.

Liliane Sprenger-Charolles, Ph.D. Dr. Sprenger-Charolles is a Senior Research Scientist and leads the Literacy Department of a laboratory that belongs both to the French National Center for Scientific Research (CNRS, Department of Humanities and Social Sciences) and to the University René Descartes, Paris. She is an expert in the field of literacy with extensive research on the role of phonological skills in reading acquisition and developmental dyslexia. Dr. Sprenger-Charolles has been widely published in dozens of international journals and textbooks including recent research findings featured in the Handbook of Children’s Literacy and in the Journal of Experimental Child Psychology. Additionally, she has shared her expertise in literacy research as a speaker in prestigious academic conferences and workshops across Europe and in the United States and Canada.

Keith E. Stanovich, Ph.D. Dr. Stanovich is a professor at the University of Toronto, Department of Human Development and Applied Psychology where he holds the Canada Research Chair in Applied Cognitive Science. Dr. Stanovich has been recognized for his research in reading including being awarded the Distinguished Scientific Contributions Award from the Society for the Scientific Study of Reading, July 2000, and the International Reading Association’s Albert J. Harris Award in 1988 and 1992, the only two-time winner. He was elected to the Reading Hall of Fame in 1995 by the members of that society. He has published over 125 articles in journals such as Journal of Educational Psychology, American Educator and Scientific Studies of Reading. Dr. Stanovich served four years on the board of directors for the Society of Scientific Study of Reading and is an editorial board member for several academic journals.

Our Products

We have developed a variety of learning platforms, a significant library of related content and more than 35 stand-alone products. Our platforms are hardware devices that work with multiple content sets. Our content comes in the form of memory cartridges and, where applicable, related interactive books, magazines and activity cards designed for use with specific platforms. Our stand-alone products combine our proprietary technology with a fixed set of content.

Hardware Platforms and Related Content

LeapPad Family of Platforms

The LittleTouch library of content includes interactive books and activity cards made of tear resistant material that feature activities that introduce ABCs, letter sounds, numbers, colors, shapes and reading readiness. The LittleTouch content is designed to match the rapid growth and development that occurs during the infant and toddler years. Each interactive book contains three learning experiences that are designed to stimulate learning at various developmental levels. One setting features music, rhythms and sounds to help infants recognize key, pitch and tempo. Another setting focuses on word play in order to introduce word-object association and early language concepts. A third setting features early learning concepts to help build preschool readiness by introducing abstract concepts like colors, shapes and numbers, as well as word production and early grammar skills.

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Currently we have six LittleTouch LeapPad interactive books available at retail.

Sales of our My First LeapPad platforms and related interactive books accounted for approximately 4% of our total net sales in 2001, approximately 9% of our total net sales in 2002 and approximately 12% of our total net sales in 2003.

Currently we have twelve My First LeapPad interactive books available at retail.

The LeapPad platform is available in English, French, Korean, Japanese and Spanish, and is sold in U.S. schools.

The retail LeapPad library was developed with guidance from our educational experts and is designed to help children build skills they need to excel in reading, math, vocabulary, science, music, logic and more. The library is divided into grade-based categories so children can learn appropriate skills at appropriate intervals, and include:

Our retail library includes titles featuring our Leap family of characters as well as popular characters like Scooby-Doo, Winnie-the-Pooh and SpongeBob SquarePants, as well as characters from movies like Toy Story 2, The Lion King, Monsters, Inc. and Finding Nemo.

Our SchoolHouse version of the LeapPad learning system is reinforced for classroom use and comes with an AC adapter and headphones. The SchoolHouse division offers over 450 activity cards and over 200 books for use in schools, which represent over 6,000 pages of interactive content. For more details regarding the LeapPad platform products offered by our SchoolHouse division, see “Item 1. Business. —SchoolHouse.”

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Aggregate sales of our LeapPad, LeapPad Plus Writing and Quantum Pad platforms, each of which are based on our NearTouch technology and can work together with a significant majority of the same interactive books, together with aggregate sales of the interactive books compatible with these three platforms, accounted for approximately 53% of our total net sales in 2001, approximately 56% of our total net sales in 2002 and approximately 47% of our total net sales in 2003.

Currently we have over 100 interactive books available at retail, the significant majority of which are compatible with each of the LeapPad, LeapPad Plus Writing and Quantum Pad platforms.

Leapster Multimedia Learning System (ages 4 to 8)

The Leapster multimedia learning system, launched in November 2003, is designed to teach kids in the manner in which they like to play. Similar to handheld video game devices, the Leapster handheld allows children to play action-packed learning games with backlit color animation using a multi-directional control pad and a touch-screen enabled by a built-in stylus. In addition, the Leapster content also allows “players” to read electronic books, create works of art and watch interactive videos. Currently we have eight interactive Leapster titles available at retail, including educational games featuring Dora the Explorer and SpongeBob SquarePants, a digital art title, an educational book on phonics and our interactive The Letter Factory video.

Turbo Twist Handhelds: Spelling, Math, and Vocabulator Versions and BrainQuest Edition (1^st through 6^th grades)

Our Turbo Twist handhelds let children twist, pound and press the handheld device while they learn spelling, math, social studies and vocabulary. Using our proprietary technology, each Turbo Twist platform self-adjusts as the child answers questions to deliver content appropriate for his or her individual skill level. Each handheld was developed to reinforce the skills and information children learn in school. Each comes preloaded with spelling, math, social studies or vocabulary questions. Content cartridges for math, spelling and social studies for 1st through 6th grades are available at retail. The Turbo Twist BrainQuest edition covers our social studies curricula, and features BrainQuest licensed content. In 2004, we expect to introduce a new version of the Turbo Twist handheld that is compatible with grade-specific cartridges containing multiple learning categories.

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iQuest Interactive Handheld (5th grade through high school)

Our iQuest interactive handheld was initially created specially to assist children in studying for tests at the middle school level. We have created outlines, review games and tips for over 250 major textbooks used in 5th through 8th grade social studies, science and math classes. Each iQuest handheld comes pre-loaded with a 75,000 word pocket version of the Merriam-Webster dictionary and a cartridge with over 1,000 basic fact questions created in conjunction with The Princeton Review, as well as a program that lets children input addresses and phone numbers. Additional content cartridges are available with test questions from over 250 textbooks used in schools across the United States. Our test preparatory materials licensed from Kaplan, Inc., allow students to use their iQuest handheld to study for the PSAT, SAT and ACT standardized tests and include a workbook and corresponding content cartridge.

Stand-Alone Products

Our more than 35 stand-alone educational products are designed for children who are too young to use our platforms effectively. These stand-alone products help develop fine motor skills and color, sound and letter recognition. These products are generally affordable and simpler to localize for foreign markets than our platform and content suites. Some of our more popular stand-alone products include:

SchoolHouse

Our SchoolHouse division, part of our Education and Training group, offers supplemental pre-kindergarten through 8th grade school curriculum programs that incorporate our proprietary technology platforms and research-based instructional principles. Our SchoolHouse division curriculum provides over 200 interactive book titles and over 450 interactive assessment cards, for a total of over 6,000 pages of interactive content. The interactive content includes instruction and assessment for subject areas such as early literacy, early childhood, reading, language arts, math, science, English language development and special education. Our multi-sensory classroom programs include:

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International

Our international strategy includes the creation of LeapFrog products in foreign languages as well as marketing English-language products as tools for learning English as a foreign language. As of December 31, 2003, our products had been marketed and sold in five languages and more than 20 countries, including the United Kingdom, Canada, France, Spain, Mexico, Japan, Australia and Korea. We currently sell our My First LeapPad and LeapPad platforms in countries where we have created content for our platforms in the local language. We have created British English content for the U.K. market and have developed a variety of our content in other languages, including French, Japanese, Korean and Spanish. We sell our LeapPad platform to the consumer market in Japan under the CoCoPad brand name through our relationship with Sega Toys. In addition, Benesse Corporation, a supplemental educational materials company, is currently distributing a co-branded CoCoPad version of our LeapPad platform to preschool to third grade level subscribers of its educational program. We market and sell local language versions of some of our stand-alone products, including French and Spanish versions of the Discovery Ball, Learning Drum and Learning Table. These stand-alone products, with their limited set of content, are typically easier to localize than our platform and content suites. Finally, we sell our English language content internationally through consumer retail and educational channels and believe that significant opportunities exist to market our products as tools to learn English as a foreign language.

Advertising and Marketing

Our advertising and marketing strategy is designed to establish LeapFrog as the leading provider of engaging, effective and affordable learning solutions for the infant through high school audience and as a brand that parents and educators will seek to supplement a child’s educational needs. We use a variety of advertising and marketing tools to implement our strategy, including network and national cable television advertisements and national print advertisements that feature our LeapFrog brand and our “Learn Something New Every Day” campaign that highlights the educational nature and extended life of our products. We are able to feature our products through cooperative print advertisements in local newspapers with key retail chains. These advertisements, run by our retail partners such as Toys “R” Us, Wal-Mart, Kmart and Target, highlight the availability of particular LeapFrog products at these retail outlets.

In key retail stores, we feature our products via our Learning Center shelf displays, which are designed to highlight our LeapFrog brand as the “one stop” solution for technology-based educational products. We have received additional brand exposure through television appearances by senior management and other television spots showcasing our products, often during the key holiday season.

Sales and Distribution

U.S. Consumer

We market and sell our products primarily through national and regional mass-market retail stores as well as specialty toy stores. In 2003, sales of our products to Toys “R” Us, Wal-Mart (including Sam’s Club) and Target accounted for over 79% of net sales in our U.S. Consumer segment. Our remaining U.S. Consumer retail sales came from sales of our products to specialty toy stores and, to a lesser extent, to book, electronics and office supply stores and other retailers.

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

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Education and Training

Our Education and Training group’s primary customers represent U.S. pre-kindergarten through 8th grade classrooms as well as teacher supply stores and catalogs through our SchoolHouse division. As of December 31, 2003, using our in-house sales team as well as independent sales representatives, we estimate that we have sold our Literacy Centers, LeapTrack systems and Ready, Set, Leap! programs, as well as other products into an estimated 25,000 classrooms. We plan to grow our sales team significantly over the next few years to provide a more focused sales effort and increase our penetration of the school market.

International

In 2000, we established our U.K. office, located outside London, England, which sells our products directly to Woolworth’s, Early Learning Centres, Toys “R” Us, Argos and other leading U.K. retailers. Our emerging success in penetrating the U.K. market is exemplified by the British Association of Toy Retailers choosing our LeapPad platform as the top preschool toy for each of 2001, 2002 and 2003. Our U.K. office also coordinates distribution of our U.K.-localized British English products into Australia and New Zealand. We also have satellite offices in Hong Kong and Macau that help us oversee global manufacturing of our products. In 2002, we began selling directly to retailers in Canada and in France and in 2003 we began selling directly to retailers in Mexico.

Prior to the establishment of overseas offices or subsidiaries, we utilize simple distribution arrangements to sell our products in other non-English speaking countries, using separate distributors for the consumer and school markets as appropriate. In markets where we do not establish direct sales, we plan on continuing to use these distribution arrangements. Paralleling our segmentation of the U.S. market between consumer and school markets, we believe that overseas markets represent similar dual opportunities. Although we plan to develop most key consumer markets directly, we expect to seek a strategic education partner in key overseas markets given the costs and challenges associated with developing country-by-country curricula.

We currently have distribution arrangements with distributors in countries such as Spain, Korea, Australia and New Zealand. In March 2002, Sega Toys began distributing the CoCoPad system, a co-branded, modified version of our LeapPad platform, and Sega Toys has developed original Japanese-language content for interactive books used with the CoCoPad system, including books by Berlitz International that help teach English. Benesse Corporation is assisting us in developing the Japanese supplemental educational materials market by distributing the CoCoPad system to its preschool through third grade level subscribers. Additionally, Benesse Corporation has developed original educational content in Japanese and English for interactive books to be used with the CoCoPad system.

Financial Information about Geographic Areas

Our International segment represented 14% of our total consolidated net sales in 2003. For the year ended December 31, 2003, 2002 and 2001, net sales in dollars and as a percentage of our International segment net sales were as follows:

No individual country within our International segment exceeded 10% of consolidated net sales during 2003.

Our long-lived assets are primarily comprised of net fixed assets and net intangibles. In 2003, approximately 3% of our long-lived assets were located outside of the United States. For the year ended December 31, 2003, 2002 and 2001, long-lived assets in dollars and as a percentage of total long-lived assets were as follows: