UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

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

Exchange Act of 1934 (Amendment No.     )

Filed by the Registrant x                             Filed by a Party other than the Registrant ¨

Check the appropriate box:

LEAPFROG ENTERPRISES, INC.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)

Payment of Filing Fee (Check the appropriate box)

LEAPFROG ENTERPRISES, INC.

6401 Hollis Street

Emeryville, California 94608

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

To Be Held On Wednesday, August 26, 2009

Dear Stockholder:

You are cordially invited to attend a special meeting of the stockholders of LeapFrog Enterprises, Inc., a Delaware corporation. The meeting will be held on Wednesday, August 26, 2009 at 9:00 a.m. local time at our headquarters located at 6401 Hollis Street, Emeryville, California.

The meeting has been called for the following purposes:

These items of business are more fully described in the proxy statement accompanying this notice. The record date for the special meeting is July 10, 2009. Only stockholders of record at the close of business on that date may vote at the meeting or any postponement or adjournment thereof.

We are using the Securities and Exchange Commission’s “Notice and Access” delivery model allowing companies to provide their stockholders with access to the proxy materials over the Internet. This permits us to conserve natural resources and reduces our printing costs, while giving our stockholders a convenient and efficient way to access our proxy materials and vote their shares. On or about July 15, 2009, we intend to mail a Notice of Internet Availability of Proxy Materials to our stockholders, informing them that our notice of special meeting and proxy statement and voting instructions are available on the Internet. As described in more detail in that notice, stockholders may choose to access our materials through the Internet or may request to receive paper copies of the proxy materials.

Emeryville, California

July 15, 2009

LEAPFROG ENTERPRISES, INC.

PROXY STATEMENT

FOR SPECIAL MEETING OF STOCKHOLDERS

QUESTIONS AND ANSWERS ABOUT THESE PROXY MATERIALS AND VOTING

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

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

We intend to mail the Notice and, where required, any other printed proxy materials, on or about July 15, 2009 to all stockholders of record entitled to vote at the special meeting.

Why are these proxy materials being made available?

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

How do I attend the special meeting?

The special meeting will be held on Wednesday, August 26, 2009 at 9:00 a.m. local time at our headquarters located at 6401 Hollis Street in Emeryville, California. Directions to the special meeting may be found at www.leapfrog.com under About Us—Contact Us.

Who can vote at the special meeting?

Only stockholders of record at the close of business on July 10, 2009 will be entitled to vote at the special meeting. On the record date, there were 36,783,936 shares of Class A common stock and 27,140,794 shares of Class B common stock outstanding and entitled to vote.

Stockholder of Record: Shares Registered in Your Name

If, on July 10, 2009, your shares of Class A common stock were registered directly with Continental Stock Transfer and Trust Company, our transfer agent for our Class A common stock, or your shares of Class B common stock were registered directly with LeapFrog, then you are a stockholder of record. As a stockholder of record, you may vote in person at the meeting or vote by proxy. Whether or not you plan to attend the meeting, we urge you to submit your proxy on the matters to be considered as promptly as possible in order to ensure your representation at the meeting. You may submit your proxy via the Internet or by requesting a printed copy of the proxy materials and returning the enclosed proxy card.

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

If, on July 10, 2009, your shares were held in an account at a brokerage firm, bank, dealer, or other similar organization, then you are the beneficial owner of shares held in “street name” and the Notice and any other proxy materials are being forwarded to you by that organization. The organization holding your account is considered the stockholder of record for purposes of voting at the meeting. As a beneficial owner, you have the right to direct your broker or other agent on how to vote the shares in your account. You are also invited to attend the meeting. However, since you are not the stockholder of record, you may not vote your shares in person at the meeting unless you request and obtain a valid proxy from your broker or other agent.

What am I voting on?

There are two matters scheduled for a vote at the meeting and for which we are soliciting your proxy:

How do I vote?

You may vote “For” or “Against” each of the proposals or abstain from voting. The procedures for voting are as follows:

Voting via the Internet

Voting by Mail

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

If you return a signed and dated proxy card or otherwise complete a ballot or voting instructions without marking your selections, your shares will be voted “For” the stock option exchange program and “For” the amendment to our 2002 Equity Incentive Plan.

Who is paying for this proxy solicitation?

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

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

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

Can I change my vote after submitting my proxy?

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

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

How are votes counted?

Votes will be counted by the inspector of election appointed for the meeting, who will separately count “For” and “Against” votes, abstentions and broker non-votes. Abstentions will be counted towards the vote total for the proposals, and will have the same effect as “Against” votes. Broker non-votes have no effect and will not be counted towards the vote total for any of the proposals.

What are broker non-votes?

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

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

What vote is needed to approve each proposal?

Under the listing rules of the NYSE, the proposals to approve the stock option exchange program and the amendment to the 2002 Equity Incentive Plan must receive a “For” vote from the holders of shares representing a majority of the votes cast on the relevant proposal at the special meeting and the total votes cast on each proposal

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must represent more than 50% of the votes of holders entitled to vote at the meeting. If you “Abstain” from voting on either proposal, it will have the same effect as an “Against” vote. Broker non-votes will have no effect.

What is the quorum requirement?

A quorum of stockholders is necessary to hold a valid meeting. A quorum will be present if at the meeting there is present in person or represented by proxy the holders of outstanding shares of Class A and Class B common stock entitled to cast a majority of the votes that could be cast by all outstanding shares of Class A and Class B common stock voting together as a class. On the record date, there were 36,783,936 shares of Class A common stock outstanding and 27,140,794 shares of Class B common stock outstanding, all of which are entitled to vote and represent a total of 308,191,876 votes. Thus, holders of shares representing at least 154,095,939 votes must be present in person or represented by proxy at the meeting to have a quorum.

Your votes will be counted towards the quorum only if you submit a valid proxy or vote at the meeting. Abstentions and broker non-votes will be counted towards the quorum requirement. If there is no quorum, a majority of the votes present at the meeting may adjourn the meeting to another date.

How many votes do I have?

For holders of our Class A common stock, you have one vote for each share of Class A common stock you owned as of July 10, 2009, and for holders of our Class B common stock, you have ten votes for each share of Class B common stock you owned as of July 10, 2009.

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

Preliminary voting results will be announced at the special meeting. Final voting results will be published in our quarterly report on Form 10-Q for the third quarter of 2009.

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SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

This proxy statement, including the section entitled “Executive Compensation—Compensation Discussion and Analysis,” contains forward-looking statements, including statements regarding the anticipated effects of a stock option exchange program on our equity compensation plans and programs and regarding the anticipated benefits of our executive and director compensation programs generally. These statements relate to future events 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” in Item 1A of our 2008 annual report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 11, 2009 and in our quarterly reports on Form 10-Q and other reports filed with the SEC. 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.

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PROPOSAL ONE

APPROVAL OF OPTION EXCHANGE PROGRAM

Introduction

We are seeking stockholder approval of an Option Exchange Program (defined below) that would allow us to cancel out-of-the-money stock options currently held by some of our employees and directors in exchange for the issuance of stock options to purchase fewer shares at lower exercise prices. We are proposing this program primarily to replenish the pool of shares available for issuance under our 2002 Equity Incentive Plan and to reduce the number of shares subject to outstanding stock options that may not have significant performance or retention value in light of the current market prices for our Class A common stock. In addition, we believe that replenishing our plan pool using the Option Exchange Program has the added benefit of replacing “underwater” options (meaning options for which the exercise price is more than the market price for our stock) with new options that, while covering fewer shares, have a lower exercise price and may therefore have greater performance or retention value to our employees. This program is designed to result in no significant adverse impact on our reported operating results. In this proxy statement, we refer to the numbers of shares available for future issuance under our equity incentive plans as the Plan “pools.”

Overview

In June 2009, our board authorized a stock option exchange program (the “Option Exchange Program”) subject to stockholder approval. Under the proposed Option Exchange Program, eligible employees, including executive officers and members of our board of directors, would be able to elect to exchange outstanding eligible options to purchase shares of our Class A common stock for new stock options with a lower exercise price but covering fewer shares (the “New Options”). Stock options will be eligible for the program (“Eligible Options”) if they have exercise prices per share greater than or equal to the higher of (a) $4.00 or (b) the closing price of our Class A common stock as reported on the New York Stock Exchange (the “NYSE”) for the business day prior to the date on which we close the exchange offer (the “Market Price” and the higher of $4.00 and the Market Price, the “Participation Price”). If the Market Price is equal to or greater than $8.00 per share, the proposed Option Exchange Program would automatically, without further action by the company or the board of directors, terminate and no options would be eligible or accepted for exchange.

The opportunity to participate in the option exchange will be offered to all of our domestic employees and certain of our non-U.S. employees and to members of our board of directors (collectively referred to as the “Eligible Participants”) who hold Eligible Options that were granted under either our 2002 Equity Incentive Plan (the “Equity Incentive Plan”) or 2002 Non-Employee Director Stock Award Plan (the “NEDSAP” and, together with Equity Incentive Plan, the “Plans”) or under two non-plan grants held by our Chief Executive Officer. Generally, Eligible Options surrendered for cancellation in the Option Exchange Program under the Equity Incentive Plan or the NEDSAP will, upon the closing of the exchange offer, be exchanged for New Options granted pursuant to the Equity Incentive Plan or NEDSAP, respectively. However, any Eligible Options that were issued under the Equity Incentive Plan to non-employee directors will instead be exchanged for New Options granted pursuant to the NEDSAP. The Equity Incentive Plan awards previously granted to non-employee directors were granted in a stock option exchange program that we completed in June 2008 because our NEDSAP did not expressly permit the board of directors to grant options on a discretionary basis; however in April 2009, we amended the NEDSAP to permit discretionary awards to non-employee directors. Any non-plan grants surrendered for cancellation in the Option Exchange Program will be exchanged for New Options granted pursuant to the Equity Incentive Plan.

Under the proposed Option Exchange Program, each New Option will have (1) an exercise price per share equal to the Market Price or, for our CEO and any members of the board of directors who participate, the greater of $6.25 or the Market Price, (2) the same expiration date as the tendered Eligible Option and (3) the same vesting schedule as the tendered Eligible Option, as described in more detail below under “Description of the Option Exchange Program—Vesting of New Options.”

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We plan to structure the program so that it does not have any significant adverse impact on our reported operating results. Accordingly, the program provides that, except as set forth below, the ratio of the number of shares underlying exchanged options to the number of shares underlying New Options will vary based on the relative market values of the exchanged options and the New Options. Accordingly, we expect that the New Options will have fair values generally equal to the fair values of the Eligible Options surrendered based on valuation assumptions made as of the close of the Option Exchange Program, which we believe should result in no significant adverse impact on our reported operating results. In the case of any New Options issued to our CEO and any non-employee directors, while the exercise price of such New Options will be the greater of $6.25 per share or the Market Price, the exchange ratio will be determined using the Market Price to value the New Options, even if the Market Price is significantly lower than $6.25. More information about the exchange ratios for the Option Exchange Program is provided below under “Description of the Option Exchange—Exchange Ratios.”

We believe that, if approved by the stockholders, the Option Exchange Program will permit us to:

Under the listing rules of the NYSE, stockholder approval is required in order for us to implement the Option Exchange Program. If our stockholders approve this proposal, our board of directors intends to close the exchange offer promptly following the special meeting. If we do not obtain stockholder approval of this proposal, we will not be able to implement the Option Exchange Program. Under NYSE rules, this proposal must receive a “FOR” vote from the holders of a majority of votes cast either in person or by proxy on the proposal and the total votes cast on the proposal must represent more than 50% of the votes of holders entitled to vote at the meeting. If you “ABSTAIN” from voting, it will have the same effect as an “AGAINST” vote. Broker non-votes will have no effect.

Our board of directors unanimously recommends a vote “FOR” this proposal.

Reasons for the Option Exchange Program

We believe that an effective and competitive employee incentive program is imperative for the future growth and success of our business. We rely on highly skilled and educated technical and managerial employees to implement our strategic initiatives, expand and develop our business, and satisfy customer needs. Competition for these types of employees, particularly in the San Francisco Bay Area, is intense, and many companies use stock options as a means of attracting, motivating and retaining their best employees. At LeapFrog, stock options constitute a key part of our incentive and retention programs because our board of directors believes that equity compensation encourages employees to act like owners of the business, motivating them to work toward our success and rewarding their contributions by allowing them to benefit from increases in the value of our shares. We believe we need to maintain an adequate pool of shares available for stock awards under our Plans so that we can maintain competitive compensation packages sufficient to motivate, retain and recruit employees in the future, and to help us compete for the types of employees we want to hire in the future.

Accordingly, the primary reasons for the Option Exchange Program are to replenish the pool of shares available for issuance under our Equity Incentive Plan and to reduce the number of shares subject to outstanding stock options that may not have significant retention value in light of the current market prices for our Class A common stock. Under the proposed Option Exchange Program, participants will receive stock options covering fewer shares than the options surrendered. As a result, the number of shares subject to all outstanding equity awards will be reduced and the Equity Incentive Plan pool will be increased. As of June 17, 2009, approximately

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9.2 million and 420,000 shares were subject to stock options outstanding under our Equity Incentive Plan and NEDSAP, respectively, and approximately 2.1 million shares and 810,000 shares were available for future stock awards under our Equity Incentive Plan and NEDSAP, respectively. Based on our projections of the number of shares needed for new hire and annual grants under the Equity Incentive Plan and input from our outside compensation consultant, we believe the number of shares remaining in that pool is likely to be sufficient for approximately one more year, and the number of shares remaining in the NEDSAP pool is likely to be sufficient for approximately four to five more years. In light of our current estimates, absent the Option Exchange Program, we estimate that we would seek to amend the Equity Incentive Plan in 2010 to provide us with an increased number of shares in the Equity Incentive Plan pool that would be sufficient to continue our equity incentive programs through 2011 and beyond.

Among the factors affecting our assessment of the appropriate size for the Equity Incentive Plan pool, we considered the fact that our executive officers and other senior management employees have severance arrangements that may delay or prevent the return of shares to the pool in the event of management turnover. For example, under the severance arrangements with our CEO, we could be obligated to retain him as a consultant for two years after his termination as an employee and, during that time, his options would remain outstanding and exercisable. Please see the discussion below under “Compensation Matters—Executive Compensation—Compensation Discussion and Analysis—Potential Payments Upon Termination or Change in Control” for more information. As part of this analysis, we also considered that the loss of any executive might require us to offer large equity awards to prospective replacements.

While we project the NEDSAP pool to be sufficient for a longer period than the Equity Incentive Plan pool, many of our directors hold options to purchase significant numbers of shares that were granted to them in our 2008 option exchange program under the Equity Incentive Plan. If the directors participate in the exchange, these shares would return to the Equity Incentive Plan pool and the new grants would come from the NEDSAP pool, further replenishing the Equity Incentive Plan pool. Please see the footnotes to “Interests of our Directors and Executive Officers in the Option Exchange Program” for details about the number of shares subject to options currently held by directors that could be returned to the Equity Incentive Plan pool if they participate in the exchange.

Given recent historic lows in the trading prices of our Class A common stock, conducting an Option Exchange Program in 2009 may be an unusual opportunity to significantly reduce the number of shares subject to outstanding options and to significantly replenish the Equity Incentive Plan pool without adding shares to the maximum permitted to be issued under the Equity Incentive Plan. As discussed below, however, the actual reduction in the number of shares subject to outstanding options that could result from the Option Exchange Program could vary significantly and is dependent upon a number of factors. For example, if the Market Price is ultimately substantially higher than current trading prices Option Exchange Program, the reduction in the number of shares subject to outstanding options and the increase in the Equity Incentive Plan pool could be much smaller than anticipated.

In the Option Exchange Program, Eligible Options would be exchanged for New Options, with lower exercise prices covering fewer shares. If the Option Exchange Program had been closed on June 17, 2009, for example, and if all Eligible Options were exchanged using exchange ratios calculated as previously described, options to purchase approximately 6.1 million shares would have been surrendered and cancelled with the shares returning to the Equity Incentive Plan, while New Options covering approximately 2.8 million shares would have been issued under the Equity Incentive Plan. This would result in a net increase to the number of shares available for issuance under the Equity Incentive Plan of approximately 3.3 million shares, a 157% increase in the Equity Incentive Plan pool based on the pool size as of June 17, 2009. Based on the number of shares subject to outstanding awards as of June 17, 2009 and the assumptions above, the number of shares available for future issuances of stock awards under the Equity Incentive Plan and NEDSAP after completion of the Option Exchange Program would be approximately 5.4 million shares and 680,000 shares, respectively. The actual number of shares available for future issuances of stock awards under the Plans after completion of the Option

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Exchange Program could vary significantly and is dependent upon a number of factors, including the actual level of participation in the Option Exchange Program and the Market Price.

We continue to believe that stock options are an important component of our employees’ total compensation. Given the current market price of our common stock, many of our employees may view their existing underwater options as having little or no incentive value. Of the shares subject to outstanding awards under the Equity Incentive Plan and NEDSAP, approximately 8.5 million shares and 320,000 shares, respectively, were subject to stock options held by Eligible Participants that have exercise prices higher than $2.72 (the closing price of our Class A common stock on June 16, 2009) per share. Below is a breakdown by exercise price of the numbers of shares subject to options outstanding under the Plans:

As of June 17, 2009, approximately 95% of the shares subject to outstanding stock options held by Eligible Participants under our Equity Incentive Plan had exercise prices higher than $2.72 per share, the closing price of our Class A common stock on June 16, 2009, and approximately 68% had exercise prices above $4.00. Consequently, as of June 17, 2009, approximately 8.5 million shares subject to outstanding stock options held by Eligible Participants issued under our Equity Incentive Plan were underwater. As a result, we believe that these underwater options may no longer have significant performance or retention value and that completion of the Option Exchange Program would give us greater flexibility to make strategic grants under our plans in the future to current and prospective employees and to reestablish the value of equity incentives currently held by our existing employees.

The Option Exchange Program is also designed to benefit our stockholders by reducing the number of shares from future stock option exercises that could potentially dilute the ownership interests of existing stockholders. The actual reduction in the number of shares subject to outstanding options that could result from the Option Exchange Program could vary significantly and is dependent upon a number of factors, including the actual level of participation in the Option Exchange Program. We currently estimate a reduction of shares subject to outstanding stock options of approximately 3.7 million shares, assuming full participation in the Option Exchange Program by all Eligible Participants with Eligible Options (including those who would receive New Options with exercise prices equal to the greater of $6.25 or the Market Price), a Participation Price of $4.00 and a Market Price of $2.72 per share (the closing price of our Class A common stock on June 16, 2009), and using exchange ratios that result in the fair value of the New Options being equal to the fair value of the Eligible Options surrendered (using, for purposes of this calculation, an exercise price for all New Options equal to the Market Price) based on valuation assumptions made as of the close of the Option Exchange Program.

In addition to replenishing our Equity Incentive Plan pool and reducing the number of outstanding options, we believe that the Option Exchange Program would have the added benefit of replacing “underwater” options with new options that, while covering fewer shares, would have a lower exercise price and may therefore have greater performance or retention value to our employees. The attractiveness of the New Options to Eligible Participants is important to the success of the replenishment and other goals of the Option Exchange Program, and we believe that the potentially significantly lower prices of the New Options will be seen as beneficial by our employees, even though the New Options will cover fewer shares than the surrendered Eligible Options.

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Our CEO and non-employee directors will receive New Options with exercise prices that may be higher than the Market Price, which could make the Option Exchange Program less attractive to them. Though we expect that our CEO and non-employee directors will participate with all or a portion of their Eligible Options, we cannot guarantee that they will ultimately do so, nor can we guarantee how many of their Eligible Options they will tender. If any of our non-employee directors or, in particular, our CEO, does not participate with all or a significant percentage of his Eligible Options, it could significantly reduce the effectiveness of the Option Exchange Program in replenishing the Equity Incentive Plan pools.

Consideration of Alternatives

When considering how best to maintain our performance, retention and recruiting incentives and our competitiveness as an employer, as our Equity Incentive Plan pool diminishes over the coming year, we considered several alternatives:

Increase cash compensation.    To replace equity incentives and the need to increase the pool in the near term, we considered that we could substantially increase base and target bonus compensation. However, significant increases in cash compensation would substantially increase our compensation expenses and reduce our cash flow from operations, which would adversely affect our business and operating results.

Increase Option Pool.    We considered asking our stockholders to approve an increase in the overall pool of shares available for stock awards under the Equity Incentive Plan at our annual meeting of stockholders in 2010. However, this alternative would increase potential dilution of ownership of existing stockholders and, as of June 17, 2009, leave outstanding underwater options to purchase approximately 8.5 million shares under the Equity Incentive Plan based on our June 16, 2009 closing price of $2.72 per share.

Implement Option Exchange Program.    Finally, we considered implementing an option exchange program. We determined that a program under which employees could exchange stock options with an exercise price equal to or greater than the Participation Price for stock options covering fewer shares with an exercise price per share equal to the Market Price (and for our CEO and any members of our board of directors who participate, the greater of $6.25 or the Market Price) was most attractive for a number of reasons, including the following:

The simultaneous increase in the Equity Incentive Plan pool and significant reduction of outstanding underwater options that is expected to occur if the Option Exchange Program is approved and

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completed will give us greater flexibility in re-establishing strong equity incentives for our existing employees and in offering competitive equity compensation to prospective employees. With a larger option pool under the Equity Incentive Plan, we believe we would be able to provide appropriate ongoing retention grants to our top employees into 2011 and beyond, and, over time, would be able to reset overall equity interests held by such individuals to competitive industry levels without having to take into account the large number of shares subject to existing underwater options held by them. In addition, we believe a larger pool would permit us to offer competitive equity compensation to prospects, particularly if we need to recruit at the executive level.

If all Eligible Options were exchanged, based on the assumed Participation Price, Market Price and exchange ratios described above, options to purchase approximately 6.7 million shares would have been surrendered and cancelled, while New Options covering approximately 3.0 million shares would have been issued. This would have resulted in a net reduction in the number of shares subject to outstanding stock options by approximately 3.7 million shares, or approximately 10% of the number of shares of our Class A common stock outstanding as of June 17, 2009. The actual reduction in the number of shares subject to outstanding options that could result from the Option Exchange Program could vary significantly and is dependent upon a number of factors, including the actual level of participation in the Option Exchange Program. All Eligible Options that are not exchanged will remain outstanding and in effect in accordance with their existing terms.

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We considered whether to permit directors and executive officers to participate in the Option Exchange Program and determined that permitting them to participate in the program would be important to accomplishing the primary purposes of the exchange because our executive officers and directors hold options covering, as of June 17, 2009, approximately 60% of the total shares subject to all options outstanding under the Equity Incentive Plan.

We also considered that we completed an option exchange program in June 2008. The primary reason for completing the 2008 option exchange program was to re-establish equity incentives by replacing underwater options with lower-priced options to serve as better incentives for existing employees. While we considered that this was also a potential benefit for the proposed Option Exchange Program, we determined that the primary reasons for the Option Exchange Program (replenishment of our Equity Incentive Plan pool and the reduction in the number of shares subject to underwater outstanding options) were different. Further, the 2008 option exchange resulted in the issuance of new options to purchase approximately 3.7 million shares of Class A common stock with strike prices of $9.14 and greater in exchange for options to purchase approximately 4.9 million shares, which did not achieve the purpose of establishing better incentives for our employees and returned less than 1.3 million shares, combined, to the pool of shares available for issuance of future awards under the Equity Incentive Plan and NEDSAP.

Based on all these factors, we believe the Option Exchange Program provides greater value to the company, employees and other participants in our equity programs and our stockholders than would simply amending the Equity Incentive Plan in 2010 to increase the pool. The Option Exchange Program is designed to replenish the pool of shares available for future stock awards under the Equity Incentive Plan, providing flexibility to grant stock awards under the Plans in the future. However, unlike an amendment to increase the overall pool of shares available for awards under the Equity Incentive Plan, the exchange would not increase the maximum potential dilution of the ownership interests of existing stockholders from stock awards under the Plans and would reduce the number of shares subject to outstanding stock options.

Description of the Option Exchange Program

Implementing the Option Exchange Program.    If the Option Exchange Program is approved by the stockholders, it is the board of directors’ intent that Eligible Participants who were offered the opportunity to participate in the program under a tender offer (an “Offer to Exchange”) filed with the Securities and Exchange Commission (the “SEC”) will be able to complete their exchange promptly following the special meeting. From the time the Offer to Exchange commences, the Eligible Participants will be given at least 20 business days to make an election to surrender for cancellation all or a portion of their Eligible Options on a grant-by-grant basis in exchange for New Options. In our discretion, Eligible Participants who hold single grants of options to purchase 250,000 shares or more may, under the final Offer to Exchange, be permitted to exchange partial grants. The New Options will be issued promptly following the closing of the Offer to Exchange, which we expect will be on or about August 27, 2009. Even if the Option Exchange Program is approved by our stockholders, our board will retain the authority, in its sole discretion, to terminate or postpone the program, at any time prior to the closing of the Offer to Exchange, or to exclude certain Eligible Options or Eligible Participants from participating in the Option Exchange Program due to tax, regulatory or accounting reasons or because participation would be inadvisable or impractical. Stockholder approval of the Option Exchange Program applies only to this exchange program. If we were to implement a stock option exchange program in the future, we would once again need to seek stockholder approval.

Outstanding Options Eligible for the Option Exchange Program.    To be eligible for exchange under the Option Exchange Program, an option must have an exercise price equal to the Participation Price (an exercise price per share greater than or equal to the higher of (a) $4.00 or (b) the closing price of our Class A common

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stock as reported on the NYSE for the business day prior to the date on which we close the exchange offer). As of June 17, 2009, options to purchase approximately 10.1 million shares of our Class A common stock were outstanding, of which options to purchase approximately 6.7 million shares, would be eligible for exchange under the Option Exchange Program, assuming for this purpose a $4.00 per share Participation Price.

Eligibility.    The Option Exchange Program will be open to all of our domestic employees, including our executive officers, certain of our foreign employees and members of our board of directors who hold Eligible Options. We may exclude employees in certain non-U.S. jurisdictions from the Option Exchange Program if, for any reason, we believe that their participation would be inadvisable or impractical. To be eligible, an employee must be employed by us and a director must be serving on our board of directors at the time the Offer to Exchange commences. Additionally, in order to receive the New Options, an Eligible Participant who surrenders his or her Eligible Options for exchange must be an employee or serving on our board of directors on the date the New Options are granted. As of June 17, 2009, approximately 337 employees and five non-employee directors held Eligible Options.

Exercise Price of New Options.    All New Options will be granted with an exercise price per share equal to the Market Price or, for our CEO and any members of the board of directors who participate, the greater of $6.25 or the Market Price.

Exchange Ratios.    Exchange ratios will generally be designed to result in a fair value, for accounting purposes, of the New Options that will be equal to the fair value of the Eligible Options surrendered based on valuation assumptions made as of the close of the Option Exchange Program. These ratios will be designed to make the grant of New Options accounting expense neutral. In the proposed exchange offer, Eligible Participants would be offered an opportunity to exchange their Eligible Options for New Options covering fewer shares. The actual number of shares subject to New Options will be determined in accordance with exchange ratios calculated by our external compensation consultant using a Monte Carlo option valuation model and the Market Price.

The following table shows (a) the number of shares underlying outstanding Eligible Options in each exercise price range as of June 17, 2009 and (b) the hypothetical average of the exchange ratios that could be applied to calculate the number of shares subject to New Options to be granted in exchange for surrendered Eligible Options. The exchange ratios set forth in the table were calculated based on the assumption that the Participation Price is $4.00 per share and the Market Price is $2.72 per share (the closing price of our Class A common stock on June 16, 2009), and using exchange ratios that result in the fair value of the New Options being equal to the fair value of the Eligible Options surrendered (using, for purposes of this calculation, an exercise price for all New Options equal to the Market Price) based on valuation assumptions made as of the close of the Option Exchange Program. If the Option Exchange Program is approved, the actual exchange ratios used should result in (1) the issuance of fewer shares subject to the New Options than were subject to the cancelled Eligible Options tendered in the exchange offer and (2) no significant incremental accounting expense to us for the value of the New Options.

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The actual exchange ratios will be set based on the specific exchange price determined at the close of the NYSE on the day prior to the close of the exchange offer and the specific exercise price for each Eligible Option, by grant, tendered for exchange. We currently expect to close the exchange offer on or about August 27, 2009, assuming the Option Exchange Program is approved by our stockholders. New Options granted in accordance with the actual exchange ratios will be rounded down to the nearest whole share on a grant-by-grant basis. Adjustments to any of the assumptions used to calculate the information in the above table will result in a change to the number of shares underlying New Options that may be granted under the Option Exchange Program.

In the case of any New Options issued to our CEO and any non-employee directors, while the exercise price of such New Options will be the greater of $6.25 per share or the Market Price, the exchange ratio will be determined using the Market Price to value the New Options, even if the Market Price is significantly lower than $6.25. While this arrangement may not result in a fair value, for accounting purposes, of the New Options that will be equal to the fair value of the Eligible Options surrendered, we do not believe the potential reduction in value of such New Options will change the accounting expense neutrality of the Option Exchange Program.

Election to Participate.    Participation in the Option Exchange Program will be voluntary. Eligible Participants will be permitted to exchange all or none of their Eligible Options for New Options on a grant-by-grant basis. In our discretion, Eligible Participants who hold single grants of options to purchase 250,000 shares or more may, under the final Offer to Exchange, be permitted to exchange partial grants.

Vesting of New Options.    The New Options will have the same vesting schedule as the surrendered options. If an Eligible Participant exchanges an Eligible Option that is already partially vested as of the close of the Option Exchange Program, the same proportion of the shares subject to the New Option will be vested on the grant date, and the unvested portion will vest on the same schedule and in the same proportions of the shares subject to the option as the Eligible Option. If an Eligible Participant exchanges an Eligible Option that is fully vested, the New Option would also be fully vested.

Term of the New Options.    The New Options will have the same expiration date as the Eligible Options they replace.

Other Terms and Conditions of the New Options.    The other terms and conditions of the New Options will be set forth in an option agreement to be entered into as of the New Option grant date and will be comparable to those of the corresponding Eligible Options surrendered. All New Options will be nonstatutory stock options granted under our Plans, regardless of the tax status of the Eligible Options tendered for exchange. The offer and sale of the shares of Class A common stock for which the New Options may be exercised are currently registered on a registration statement filed with the SEC.

Return of Eligible Options Surrendered.    Consistent with the terms of the Plans, the pool of shares available for the grant of future awards under our Plans will be increased by that number of shares equal to the difference between (a) the number of shares underlying surrendered and cancelled Eligible Options issued under the Plans and (b) the number of shares underlying New Options issued under the Plans. The shares subject to non-Plan options held by our CEO will not be returned to the pool of shares available for grant under either of the Plans.

Automatic Termination.    If the Market Price is equal to or greater than $8.00 per share, the proposed Option Exchange Program would automatically, without further action by the company or the board of directors, terminate and no options would be eligible or accepted for exchange.

Accounting Treatment.    We have adopted the provisions of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (Revised), or SFAS 123(R), regarding accounting for share-based payments. Under SFAS 123(R), we will recognize the incremental compensation cost of the stock options granted in the Option Exchange Program. The incremental compensation cost will be measured as the

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excess, if any, of the fair value of each New Option granted to employees in exchange for surrendered Eligible Options, measured as of the date the New Options are granted, over the fair value of the Eligible Options surrendered in exchange for the New Options, measured immediately prior to the cancellation. This incremental compensation cost will be recognized ratably over the vesting period of the New Options. However, because the exchange ratios will be calculated to result in the fair value of Eligible Options surrendered being equal to the fair value of the New Options replacing them (except, as described above, in the case of any New Options issued to members of our board of directors and CEO, where the fair value of the New Options may be lower than the value of the corresponding Eligible Options surrendered in the Option Exchange Program), we do not expect to recognize any significant incremental compensation expense for financial reporting purposes as a result of the Option Exchange Program. As would be the case with Eligible Options, in the event that any of the New Options are forfeited prior to their vesting due to termination of service, the compensation cost for the forfeited New Options will not be recognized.

U.S. Federal Income Tax Consequences.    The following is a summary of the anticipated material U.S. federal income tax consequences of participating in the Option Exchange Program. A more detailed summary of the applicable tax considerations to participants will be provided in the Offer to Exchange; however the tax consequences of the Option Exchange Program are not entirely certain and the Internal Revenue Service is not precluded from adopting a contrary position, and the law and regulations themselves are subject to change. We believe the exchange of Eligible Options for New Options pursuant to the Option Exchange Program should be treated as a non-taxable exchange, and no income should be recognized for U.S. federal income tax purposes by us or our employees upon the grant of the New Options. As all New Options issued under the Option Exchange Program will be nonstatutory stock options, upon exercise of a New Option the Eligible Participant will recognize ordinary income equal to the excess, if any, of the fair market value of the purchased shares on the exercise date over the exercise price paid for those shares. Upon disposition of the stock, the Eligible Participant will recognize a capital gain or loss (which will be long- or short-term depending upon whether the stock was held for more than one year) equal to the difference between the selling price and the sum of the amount paid for the stock plus any amount recognized as ordinary income upon acquisition (or vesting) of the stock. The tax consequences for participating non-U.S. employees may differ from the U.S. federal income tax consequences. All holders of Eligible Options are urged to consult their own tax advisors regarding the tax treatment of participating in the Option Exchange Program under all applicable laws prior to participating in the Option Exchange Program.

Potential Modifications to Terms to Comply with Governmental Requirements.    The terms of the Option Exchange Program will be described in an Offer to Exchange that we will file with the SEC. Although we do not anticipate that the SEC will require us to modify the terms significantly, it is possible we will need to alter the terms of the Option Exchange Program to comply with comments from the SEC. Changes in the terms of the Option Exchange Program may also be required for tax purposes for participants in the United States as the tax treatment of the Option Exchange Program is not entirely certain. In addition, we intend to make the Option Exchange Program available to certain of our employees located outside of the United States, where permitted by local law and where we determine it is feasible and practicable to do so. It is possible that we may need to make modifications to the terms offered to employees in countries outside the United States to comply with local requirements, or for tax or accounting reasons. We reserve the right not to conduct the Option Exchange Program in countries in which we deem it inadvisable to do so for any reason.

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Interests of Our Directors and Executive Officers in the Option Exchange Program

Our directors and executive officers will be permitted to participate in the Option Exchange Program. The following table shows the number of shares subject to Eligible Options held by our directors and executive officers as of June 17, 2009 and the number of shares subject to New Options that they may receive assuming, for purposes of illustration only, that: (1) each director and executive officer decides to exchange all of his or her Eligible Options, (2) the Participation Price is $4.00, and (3) the Market Price is $2.72 per share, the closing price of our Class A common stock on June 16, 2009.

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Effect on Stockholders

We are not able to predict the precise impact the Option Exchange Program will have on your interests as a stockholder, as we are unable to predict how many participants will exchange their Eligible Options or what the future market price of our Class A common stock will be on the date that the New Options are granted. If the Option Exchange Program is approved, the exchange ratios should result in (1) the issuance of fewer shares subject to the New Options than were subject to the cancelled Eligible Options tendered in the exchange offer and (2) the fair value of Eligible Options surrendered generally being equal to the fair value of the New Options replacing them.

As a result we expect the Option Exchange Program to reduce the number of shares subject to outstanding options, to replenish our Equity Incentive Plan pool so that we have continued flexibility to use stock awards for recruiting, retention and performance incentives, and to be accounting expense neutral as discussed in more detail above. While we cannot predict how many shares subject to Eligible Options will be exchanged, based on an assumed Participation Price of $4.00 per share, an assumed Market Price of $2.72 per share (the closing price of our Class A common stock on June 16, 2009) and estimated exchange ratios calculated as described above, we currently estimate a reduction in the number of shares subject to outstanding stock options of approximately 3.7 million shares assuming full participation in the Option Exchange Program by all Eligible Participants with Eligible Options. The actual reduction in the number of shares subject to outstanding stock options that could result from the Option Exchange Program could vary significantly and is dependent upon a number of factors, including the actual level of participation in the Option Exchange Program.

The Board of Directors recommends a vote FOR this proposal.

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PROPOSAL TWO

APPROVAL OF AMENDMENT TO 2002 EQUITY INCENTIVE PLAN

Our Equity Incentive Plan was initially adopted by our board of directors on May 24, 2002 and approved by our stockholders on July 19, 2002. The Equity Incentive Plan was subsequently amended and restated by our board in March 2006 to increase the aggregate number of shares of Class A common stock authorized for issuance under the plan by 2,000,000 shares and to expand the types of awards available for grant under the plan. The Equity Incentive Plan, as amended and restated, was approved by our stockholders in June 2006. In February 2007, the board amended the Equity Incentive Plan, subject to stockholder approval, to increase the aggregate number of shares of Class A common stock authorized for issuance under the plan by 3,000,000 shares, from a total of 21,000,000 shares to 24,000,000 shares. The Equity Incentive Plan, as amended and restated, was approved by our stockholders in May 2007.

On June 4, 2009, the board approved an amendment to the Equity Incentive Plan, subject to stockholder approval, to increase from 2,000,000 to 3,500,000 the limitation on the maximum number of shares subject to awards that may be granted to an individual under the plan in any one year. The board approved this amendment to provide greater flexibility in granting awards to our executive officers in light of the proposed Option Exchange Program as explained in more detail below. In the event that this proposal is not approved by the stockholders at the special meeting of stockholders, the proposed amendment to the Equity Incentive Plan will not be effected, and the Equity Incentive Plan will remain in full force and effect with the limitation on the maximum number of shares subject to awards that may be granted under the plan in any one year to an individual remaining at 2,000,000 shares. A copy of the restated Equity Incentive Plan, as amended to give effect to this proposal, is attached to this proxy statement as Appendix A.

The Equity Incentive Plan limit on the maximum number of shares subject to awards that may be granted to an individual under the plan in a single year, or the “162(m) limit,” is designed to satisfy the requirements under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). Generally, Section 162(m) of the Code limits the amount of annual compensation that may be deducted by a public company for its CEO and the three other most highly paid executive officers (other than the principal financial officer) to $1.0 million per calendar year. However, performance -based compensation, within the meaning of Treasury Regulations, is not subject to the limitation. Compensation attributable to stock options and stock appreciation rights will generally satisfy the exception for performance-based compensation if these awards are granted with an exercise price that is at least equal to the grant date fair-market value and by outside directors pursuant to a stockholder-approved plan that contains a limit on the maximum number of shares subject to options or stock appreciation rights that may be granted under the plan to any covered employee in a specified time period. The Equity Incentive Plan currently contains the provisions necessary to qualify compensation attributable to stock options and stock appreciation rights as performance-based compensation.

We believe that increasing the 162(m) limit will permit greater flexibility to use our Equity Incentive Plan to retain our top executives and, if needed, recruit new top executives in light of the significant challenges we face in the coming year and beyond in managing our business through the economic downturn and preserving equity incentives through a simultaneous significant decline in the trading price of our Class A common stock. In the past, the current 162(m) limit in the Equity Incentive Plan caused us to grant options outside of our Equity Incentive Plan to recruit a new CEO, which increased the total potential number of shares issuable as equity compensation because these non-plan options did not reduce the number of shares available for issuance under the Equity Incentive Plan. In addition, for 2009, we believe the current 162(m) limit in the Equity Incentive Plan could prevent us from granting additional options to certain of our executives if necessary or appropriate for retention purposes later in the year, particularly if they exchange Eligible Options covering a large number of shares in the Option Exchange Program. All of our continuing named executive officers, as well as other senior management and key contributors, received an interim grant of additional stock options to improve their equity incentive compensation packages in light of the decreases in the trading prices of our Class A common stock on the NYSE between September 2008 and May 2009 relative to the exercise prices of existing options held by such

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individuals. More information about these grants is provided below under “Compensation Matters—Executive Compensation—Compensation Discussion and Analysis—Summary Compensation Information—Notes Regarding Summary Compensation Table and Grants of Plan-Based Awards Table.” For our CEO, who received an option to purchase 929,400 shares in May 2009, the Section 162(m) limit could restrict his ability to exchange all of his Eligible Options under our proposed Option Exchange Program, particularly if the Market Price ends up being higher than we currently anticipate. If the Market Price were $7.99 (and otherwise based on the assumptions set forth in the discussion of the Option Exchange Program above), our CEO could tender for cancellation Eligible Options to purchase approximately 2.4 million shares (from his existing outstanding options covering 3.5 million shares) that would result in New Options covering approximately 2.2 million shares being issued to him in the Option Exchange Program.

As discussed above under “Proposal One—Approval of Option Exchange Program,” we believe it is very important for us to maintain competitive employee compensation and incentive programs, including among our top executives. We believe that raising the 162(m) limit in our Equity Incentive Plan is necessary to provide us with the flexibility needed to provide equity compensation at attractive levels to retain and motivate our CEO and other top executives and, if necessary in the future, recruit and retain additional top executives. We believe that preserving a sufficient equity stake in the company for our executives is crucial to our success. In addition, raising the 162(m) limit could permit greater participation by our CEO in the Option Exchange Program, which would improve the program’s effectiveness in replenishing our Equity Incentive Plan pool and reducing the number of shares subject to outstanding “underwater” stock options (as discussed above under “Proposal One—Approval of Option Exchange Program”).

Under the listing rules of the NYSE, the affirmative vote of the holders of shares representing a majority of the votes present in person or represented by proxy and entitled to vote on the proposal at the meeting will be required to approve this proposal and the total votes cast on the proposal must represent more than 50% of the votes of holders entitled to vote at the meeting. Abstentions will be counted toward the tabulation of votes cast on proposal and will have the same effect as negative votes. Broker non-votes are counted towards a quorum, but are not counted for any purpose in determining whether this matter has been approved.

Features of Equity Incentive Plan

Purpose

The purpose of the Equity Incentive Plan is to enable LeapFrog to attract and retain talented employees, key consultants and directors by providing incentives to such individuals through equity participation in LeapFrog, and by rewarding employees, key consultants and directors who contribute to the achievement of LeapFrog’s long-term economic objectives.

Term

The Equity Incentive Plan automatically will terminate ten years after its adoption, unless it is terminated earlier by the board of directors.

Eligibility

The Equity Incentive Plan provides for the following types of stock awards to the following persons:

As of June 17, 2009, we had approximately 560 employees, seven outside directors and a number of consultants who were eligible to receive awards under the Equity Incentive Plan. The board of directors selects any employees, directors and consultants who are actually granted awards under the Equity Incentive Plan.

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Administration

Pursuant to the terms of the Equity Incentive Plan, the board of directors has delegated administration of the Equity Incentive Plan to its compensation committee. In the discretion of the board of directors, in the case of stock awards intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of the Code, or that are made to persons who are subject to Section 16 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the compensation committee may consist, respectively, solely of two or more “outside directors” within the meaning of Section 162(m) of the Code and solely of two or more “non-employee directors” within the meaning of Section 16 of the Exchange Act. Subject to the terms of the Equity Incentive Plan, the compensation committee determines recipients, the numbers of shares subject to and types of stock awards to be granted and the terms and conditions of the stock awards, including the period of their exercisability and vesting. Subject to the limitations set forth below, the compensation committee will also determine the exercise, purchase or strike price of each stock award. In granting a performance-based stock award, the compensation committee will set a period of time (a Performance Period), which will generally be three years long, over which the attainment of one or more goals (Performance Goals) will be measured for the purpose of determining whether the award recipient has a vested right in or to such stock award. Within the time period prescribed by Section 162(m) of the Code (typically before the 90th day of a Performance Period), the compensation committee will establish the Performance Goals, based upon one or more pre-established criteria (Performance Criteria) enumerated in the Equity Incentive Plan. As soon as administratively practicable following the end of the Performance Period, the compensation committee will certify (in writing) whether the established Performance Goals have been satisfied. As used herein with respect to the Equity Incentive Plan, the “board of directors” refers to any committee to which the board of directors delegates administration of the Equity Incentive Plan (and, if applicable, such a subcommittee) as well as to the board of directors itself.

Stock Subject to the Equity Incentive Plan

The maximum number of shares of Class A common stock available for issuance under the Equity Incentive Plan is 24,000,000, except as described below under “Adjustment Upon Changes in Stock,” and the maximum number of shares of Class A common stock that may be awarded pursuant to incentive stock options is 24,000,000. The number of shares available for issuance under the Equity Incentive Plan is reduced by (i) one share for each share of Class A common stock issued pursuant to an option or a stock appreciation right, and (ii) two shares for each share of Class A common stock issued pursuant to a stock bonus award, restricted stock award or restricted stock unit award.

Subject to this proposal, no person may be granted awards under the Equity Incentive Plan covering more than 3,500,000 shares of Class A common stock in any calendar year. Shares may be issued in connection with a merger or acquisition as permitted by the rules of the applicable national securities exchange, and such issuance will not reduce the number of shares available for issuance under the Equity Incentive Plan. If an award granted under the Equity Incentive Plan expires or otherwise terminates without having been exercised, or vested in the case of restricted stock and RSU awards, in full, the shares of Class A common stock subject to such awards will again become available for issuance under the Equity Incentive Plan. If any shares issued pursuant to a stock award under the Equity Incentive Plan are forfeited back to or repurchased by us, the forfeited or reacquired stock will again become available for reissuance under the Equity Incentive Plan. Awards that are terminated, forfeited or repurchased shall result in an increase in the share reserve of the Equity Incentive Plan corresponding to the reduction originally made in respect of the award. If stock awards granted under the Equity Incentive Plan are not delivered to a participant because (i) the stock award is exercised through a reduction in the number of shares subject to the stock award (a “net exercise”), (ii) the appreciation distribution upon exercise of a stock appreciation right is paid in shares of Class A common stock, or (iii) shares are withheld in satisfaction of applicable withholding taxes, the number of shares not delivered will become again available for subsequent issuance under the Equity Incentive Plan. Finally, if the exercise price is satisfied by tendering shares of Class A common stock previously held by a participant, the number of shares so tendered will become again available for subsequent issuance under the Equity Incentive Plan. Shares issued under the Equity Incentive Plan may be previously unissued shares or reacquired shares bought on the market or otherwise.

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Stock Options

Stock options are granted pursuant to stock option agreements. The exercise price of incentive stock options must be at least 100% of the fair market value of the Class A common stock on the date of the grant and, in some cases, at least 110% of such fair market value, as described below. The exercise price of nonstatutory stock options must be at least 50% of the fair market value of the Class A common stock on the grant date. However, the exercise price for any option intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of the Code cannot be less than 100% of the fair market value of the Class A common stock on the date of grant. As of June 17, 2009, the closing price of the Company’s Class A common stock as reported on the NYSE was $2.59 per share.

Options granted under the Equity Incentive Plan vest at the rate and under the terms and conditions specified in the option agreement. A stock option may provide for an early exercise feature pursuant to which the option may be exercised prior to full vesting, resulting in unvested shares of Class A common stock being subject to repurchase by us in the event of the optionee’s cessation of service prior to the vesting of the shares.

In general, stock options granted under the Equity Incentive Plan may not be exercised after the expiration of ten years from the date of grant. If an optionee’s relationship with us, or any affiliate of ours, terminates for any reason other than disability or death, the optionee may exercise his or her option (to the extent that such option was vested at the time of termination), but only within the period of time ending on the earlier of (i) three months following such termination (or such longer or shorter period as specified in the option agreement) or (ii) the expiration of the term of the option as set forth in the option agreement. If an optionee’s relationship with us, or any affiliate of ours, terminates due to disability, the optionee may exercise his or her option (to the extent that such option was vested at the time of termination), but only within the period ending on the earlier of (i) six months following such termination (or such longer or shorter period as specified in the option agreement) or (ii) the expiration of the term of such option as set forth in the option agreement. If an optionee’s relationship with us, or any affiliate of ours, terminates as a result of the optionee’s death or the optionee dies within a specified period after termination of service, the optionee’s estate, heirs or beneficiaries may exercise the option (to the extent that such option was vested at the time of death), but only within the period ending on the earlier of (i) six months following the optionee’s death (or such longer or shorter period as specified in the option agreement) or (ii) the expiration of the term of the option as set forth in the option agreement. If an option is not exercised within the time specified in the option agreement, such option terminates.

Class A common stock issued pursuant to stock options granted under the Equity Incentive Plan may, at the discretion of the board of directors, be paid for (i) in cash, check, bank draft or money order, (ii) pursuant to a broker-assisted cashless exercise, (iii) by delivery of other Class A common stock of LeapFrog, (iv) according to a deferred payment or similar arrangement, (iv) pursuant to a net exercise arrangement, or (vi) in any other form of legal consideration acceptable to the board.

Generally, an optionee may not transfer a stock option other than by will or the laws of descent and distribution unless the optionee holds a nonstatutory stock option and the terms of the stock option agreement provide otherwise. However, an optionee may designate a beneficiary who may exercise the option following the optionee’s death.

Tax Limitations on Incentive Stock Option Grants.    Incentive stock options may be granted only to our employees. The aggregate fair market value, determined at the time of grant, of shares of our Class A common stock with respect to incentive stock options that are exercisable for the first time by an optionee during any calendar year under all of our stock plans may not exceed $100,000. No incentive stock option may be granted to any person who, at the time of the grant, owns or is deemed to own stock possessing more than 10% of the total combined voting power of LeapFrog or any affiliate unless the following conditions are satisfied:

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Stock Awards

Stock Bonus Awards.    Stock bonus awards are granted pursuant to stock bonus agreements. Shares awarded under a stock bonus award may be subject to repurchase by us in accordance with a vesting schedule to be determined by the board of directors. The grant or vesting of stock bonus awards may also be based upon service conditions or may be subject to Performance Goals to be determined by the compensation committee, based on one or more of the following Performance Criteria: (i) earnings per share; (ii) earnings before interest, taxes and depreciation; (iii) earnings before interest, taxes, depreciation and amortization (EBITDA); (iv) net earnings; (v) total stockholder return; (vi) return on equity; (vii) return on assets; (viii) return on investment; (ix) return on capital employed; (x) operating margin (xi) gross margin; (xii) operating income; (xiii) net income; (xiv) net operating income; (xv) net operating income after tax; (xvi) pre- and after-tax income; (xvii) pre-tax profit; (xviii) operating cash flow; (xix) revenue; (xx) revenue growth; (xxi) expenses; (xxii) improvement in or attainment of expense levels; (xxiii) improvement in or attainment of working capital levels; (xxiv) economic value added; (xxv) market share; (xxvi) cash flow; (xxvii) cash flow per share; (xxviii) economic value added (or an equivalent metric); (xxix) share price performance; (xxx) debt reduction; and (xxxi) other measures of performance selected by the compensation committee.

If a stock bonus award recipient’s relationship with us, or any affiliate of ours, terminates, we may reacquire any of the shares subject to the award that are unvested as of the date of such termination. A stock bonus award may be awarded in consideration of past services rendered to us or any affiliate of ours. Rights to acquire shares under a stock bonus award may be transferable only to the extent provided in a stock bonus agreement.

Restricted Stock Awards.    Restricted stock awards are granted pursuant to restricted stock agreements. The purchase price of a restricted stock award cannot be less than 50% of the fair market value of the Class A common stock on the date of grant or at the time the purchase is made.

Shares awarded under a restricted stock award may be subject to repurchase by us in accordance with a vesting schedule to be determined by the board of directors. If a restricted stock award recipient’s relationship with us, or any affiliate of ours, terminates, we may repurchase or reacquire any of the shares subject to the award that are unvested as of the date of such termination. Class A common stock acquired pursuant to a restricted stock award may be paid for in cash or, if provided in the restricted stock agreement at the discretion of the board of directors, pursuant to a deferred payment arrangement or in other legal consideration approved by the board of directors. Rights to acquire shares under a restricted stock award may be transferable only to the extent provided in a restricted stock award agreement.

Restricted Stock Unit Awards.    Restricted stock unit awards are granted pursuant to restricted stock unit award agreements. The purchase price, if any, for restricted stock unit awards is determined by the board of directors at the time of grant and may be paid in any form of legal consideration acceptable to the board of directors. A restricted stock unit award is an award of rights to receive shares of our Class A common stock, rather than an award of restricted stock.

Restricted stock unit awards vest at the rate specified in the restricted stock unit award agreement as determined by the board of directors. However, at the time of grant, the board of directors may impose additional restrictions or conditions that delay the delivery of stock or cash subject to the restricted stock unit award to a time after vesting. A restricted stock unit award may be settled by the delivery of shares of our Class A common stock, cash, any combination of the two or in any other form of consideration, as determined by the board of directors. Dividend equivalent rights may be credited with respect to shares covered by a restricted stock unit award as determined by the board of directors and contained in the restricted stock unit award agreement. However, we do not anticipate paying cash dividends on our Class A common stock for the foreseeable future. If a restricted stock unit award recipient’s relationship with us, or any affiliate of ours, terminates, restricted stock units that have not vested will be forfeited on the date of such termination, except as otherwise may be provided in the restricted stock unit award agreement.

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Stock Appreciation Rights.    Stock appreciation rights are granted pursuant to stock appreciation rights agreements. The maximum term of stock appreciation rights granted under the Equity Incentive Plan is ten years.

Each stock appreciation right is denominated in shares of Class A common stock equivalents. The strike price of stock appreciation rights may not be less than 100% of the fair market value of the Class A common stock equivalents subject to the stock appreciation rights on the date of grant. Upon exercise of a stock appreciation right, we will pay the recipient an amount equal to the excess of (i) the aggregate fair market value on the date of exercise of a number of Class A common stock equivalents with respect to which the recipient is exercising the stock appreciation right, over (ii) the strike price determined by the board of directors on the date of grant. The appreciation distribution upon exercise of a stock appreciation right may be paid in cash, shares of our Class A common stock, any combination of the two or in any other form of consideration determined by the board of directors.

Stock appreciation rights vest and become exercisable at the rate specified in the stock appreciation right agreement as determined by the board of directors. If a stock appreciation rights recipient’s relationship with us, or any affiliate of ours, terminates, the recipient generally may exercise any vested stock appreciation right for three months (or such longer or shorter period specified in the stock appreciation rights agreement) after the date the service relationship ends. In no event may a stock appreciation right be exercised beyond the expiration of its term.

Acceleration of Awards

The board of directors has the power to accelerate the vesting of a stock award notwithstanding the vesting schedule or terms relating to the exercisability contained in the stock award agreement.

Adjustments upon Changes in Stock

If any change is made in the Class A common stock subject to the Equity Incentive Plan or subject to any stock award without receipt of consideration by us (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or otherwise), the class(es) and maximum number of shares subject to the Equity Incentive Plan, the maximum annual award limit applicable under the Equity Incentive Plan and the class(es) and number of shares and price per share of stock subject to outstanding stock awards will be appropriately adjusted.

Corporate Transactions

In the event of a Corporate Transaction (as defined in the Equity Incentive Plan), any surviving or acquiring corporation may assume or continue any stock awards outstanding under the Equity Incentive Plan or may substitute similar awards for those outstanding under the Equity Incentive Plan. A surviving corporation or acquiring corporation (or its parent) may choose to assume or continue only a portion of a stock award or substitute a similar stock award for only a portion of a stock award. If a surviving or acquiring corporation does not assume or continue such stock awards or substitute similar awards, then, unless otherwise provided by the board of directors, any outstanding stock awards that have not been assumed or substituted may be exercised (to the extent vested) prior to the effective time of the corporate transaction, and any such stock awards will terminate if not exercised prior to the effective time of the corporate transaction.

Changes in Control

In the event of a Change in Control (as defined in the Equity Incentive Plan), an outstanding stock award held by a recipient whose relationship with us, or any affiliate of ours, that has not terminated may be subject to additional acceleration of vesting and exercisability upon or after the Change in Control to the extent provided in a stock award agreement or any other written agreement between the recipient and us or an affiliate. In the absence of such provision, however, this acceleration will not occur.

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Amendments to the Equity Incentive Plan

The board of directors has the authority to amend the Equity Incentive Plan, so long as the action does not impair any stock award previously granted under the Equity Incentive Plan, unless consented to in writing by the holder of the award. In addition, no amendment will be effective unless approved by our stockholders where the amendment requires stockholder approval under applicable law or stock exchange requirements. The board of directors may, in its sole discretion, submit any other amendment to the Equity Incentive Plan for stockholder approval.

Termination or Suspension of the Equity Incentive Plan

The board of directors may suspend or terminate the Equity Incentive Plan at any time. No stock awards may be granted under the Equity Incentive Plan while the Equity Incentive Plan is suspended or after it is terminated.

Federal Income Tax Consequences of the Equity Incentive Plan

The following is a summary of the principal United States federal income tax consequences to participants and LeapFrog with respect to participation in the Equity Incentive Plan. This summary is not intended to be exhaustive, and does not discuss the income tax laws of any city, state or foreign jurisdiction in which a participant may reside.

Options

There are no federal income tax consequences to the optionee or us by reason of the grant of a nonstatutory stock option. Upon exercise of a nonstatutory stock option, the optionee normally will recognize taxable ordinary income equal to the excess of the fair market value of our Class A common stock on the date of exercise over the option exercise price. With respect to employees, we are generally required to withhold an amount based on the ordinary income recognized. Generally, we will be entitled to a business expense deduction equal to the taxable ordinary income realized by the optionee. Upon disposition of the stock, the optionee will recognize a capital gain or loss equal to the difference between the selling price and the sum of the amount paid for such stock plus any amount recognized as ordinary income upon exercise of the option. Such gain or loss will be long-term or short-term depending on whether the stock was held for more than one year. Slightly different rules may apply to optionees who are subject to Section 16(b) of the Exchange Act.

Incentive stock options granted under the Equity Incentive Plan are intended to qualify for favorable tax treatment under Section 422 of the Code. There generally are no federal income tax consequences to the optionee or us by reason of the grant or exercise of an incentive stock option. However, the exercise of an incentive stock option may increase the optionee’s alternative minimum tax liability, if any. If an optionee holds stock acquired through exercise of an incentive stock option for more than two years from the option grant date and more than one year from the date on which the shares are transferred to the optionee upon exercise of the option, any gain or loss on a disposition of such stock will be a long-term capital gain or loss. Generally, if the optionee disposes of the stock before the expiration of either of these holding periods (a “disqualifying disposition”), then at the time of disposition the optionee will realize taxable ordinary income equal to the lesser of (i) the excess of the stock’s fair market value on the exercise date over the exercise price, or (ii) the optionee’s actual gain, if any, on the purchase and sale. The optionee’s additional gain or any loss upon the disqualifying disposition will be a capital gain or loss, which will be long-term or short-term depending on whether the stock was held for more than one year. To the extent the optionee recognizes ordinary income by reason of a disqualifying disposition, we generally will be entitled (subject to the requirement of reasonableness, the provisions of Section 162(m) of the Code and the satisfaction of a tax reporting obligation) to a corresponding business expense deduction in the tax year in which the disqualifying disposition occurs.

Stock Bonus and Restricted Stock Awards.    There are no tax consequences to the recipient or us by reason of the grant of a stock bonus or restricted stock award. Upon receipt of the stock pursuant to such award, the

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recipient normally will recognize taxable ordinary income equal to the excess of the stock’s fair market value over the purchase price, if any. However, to the extent the stock is subject to certain types of vesting restrictions, the taxable event will be delayed until the restrictions lapse, unless the recipient elects to be taxed on receipt of the stock by filing a Section 83(b) election. With respect to employees, we generally are required to withhold an amount based on the ordinary income recognized. Generally, we will be entitled (subject to the requirement of reasonableness, the provisions of Section 162(m) of the Code and the satisfaction of a tax reporting obligation) to a business expense deduction equal to the taxable ordinary income realized by the recipient. Upon disposition of the stock, the recipient will recognize a capital gain or loss equal to the difference between the selling price and the sum of the amount paid for such stock plus any amount recognized as ordinary income upon acquisition (or vesting) of the stock. Such gain or loss will be long-term or short-term depending on whether the stock was held for more than one year. Certain different rules may apply to recipients who are subject to Section 16(b) of the Exchange Act.

Restricted Stock Unit Awards

No taxable income is recognized upon receipt of a restricted stock unit award. The recipient generally will recognize ordinary income in the year in which the shares subject to that unit are actually vested and issued to the recipient in an amount equal to the fair market value of the shares on the date of issuance. The recipient and LeapFrog will be required to satisfy certain tax withholding requirements applicable to such income. Generally, we will be entitled (subject to the requirement of reasonableness, the provisions of Section 162(m) of the Code and the satisfaction of a tax reporting obligation) to an income tax deduction equal to the amount of ordinary income recognized by the recipient at the time the shares are issued. In general, the deduction will be allowed for the taxable year in which such ordinary income is recognized by the recipient.

Stock Appreciation Rights

No taxable income is realized upon the receipt of a stock appreciation right. Upon exercise of the stock appreciation right, the fair market value of the shares (or cash in lieu of shares) received is recognized as ordinary income to the recipient in the year of such exercise. Generally, with respect to employees, we are required to withhold from the payment made on exercise of the stock appreciation right or from regular wages or supplemental wage payments an amount based on the ordinary income recognized. Generally, LeapFrog will be entitled (subject to the requirement of reasonableness, the provisions of Section 162(m) of the Code, and the satisfaction of a tax reporting obligation) to an income tax deduction in the year in which such ordinary income is recognized by the recipient.

Potential Limitation on Company Deductions

Section 162(m) of the Code denies a deduction to any publicly held corporation for compensation paid to certain covered employees in a taxable year to the extent that compensation exceeds $1.0 million for a covered employee. It is possible that compensation attributable to stock awards granted in the future under the Equity Incentive Plan, when combined with all other types of compensation received by a covered employee from us, may cause this limitation to be exceeded in any particular year.

Certain kinds of compensation, including qualified “performance-based compensation,” are disregarded for purposes of the deduction limitation. In accordance with Treasury Regulations issued under Section 162(m) of the Code, compensation attributable to stock options and stock appreciation rights will qualify as performance-based compensation if such awards are granted by a compensation committee comprised solely of “outside directors” and the plan contains a per-employee limitation on the number of shares for which such awards may be granted during a specified period, the per-employee limitation is approved by the stockholders, and the exercise or strike price of the award is no less than the fair market value of the stock on the date of grant.

Compensation attributable to stock options or stock appreciation rights with exercise or strike prices less than fair market value on the date of grant, stock bonus awards, restricted stock awards and restricted stock unit

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awards will qualify as performance-based compensation under the Treasury Regulations issued under Section 162(m) only if (i) the award is granted by a committee comprised solely of outside directors, (ii) the award is granted or becomes vested (or exercisable) only upon the achievement of an objective performance goal established in writing by the committee while the outcome is substantially uncertain, (iii) the committee certifies in writing prior to the granting or vesting (or exercisability) of the award that the performance goal has been satisfied and (iv) prior to the granting or vesting (or exercisability) of the award, stockholders have approved the material terms of the award (including the class of employees eligible for such award, the business criteria on which the performance goal is based, and the maximum amount, or formula used to calculate the amount, payable upon attainment of the performance goal).

Interests of Our Directors and Executive Officers in the Amendment to the Equity Incentive Plan

Executive officers and directors are among the eligible participants under our Equity Incentive Plan. The proposed amendment would increase the limitation on total annual grants to an individual from 2,000,000 to 3,500,000 shares. Depending on the exchange ratios in the option exchange and the size of future retention grants to our executive officers, this increase may benefit our CEO and our other executive officers by permitting the board to grant them stock awards covering larger numbers of shares in 2009 (and in future years).

The following table provides information as of June 17, 2009 regarding the options received under the Equity Incentive Plan by each of our executive officers named in the Summary Compensation Table under “Compensation Matters—Executive Compensation—Compensation Discussion and Analysis,” all current executive officers as a group, all current non-employee directors as a group, and all current non-executive employees as a group.

The Board of Directors recommends a vote FOR this proposal.

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EQUITY COMPENSATION PLAN INFORMATION

The following table shows certain information concerning our Class A common stock authorized for issuance as of December 31, 2008 in connection with our 2002 Equity Incentive Plan, our 2002 Non-Employee Directors’ Stock Award Plan , and non-plan grants made to our Chief Executive Officer and approved by our stockholders in connection with our 2008 option exchange program. Information regarding our 2002 Employee Stock Purchase Plan is included only in column (c).

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Controlling Stockholder

As of June 17, 2009, Lawrence J. Ellison, through entities controlled by him, held a majority of the voting power of our outstanding stock. As a result, Mr. Ellison controls the election of all members of our board of directors and all other matters submitted to a vote of our stockholders as to which the vote required is a majority of the outstanding voting power. Mr. Ellison is Chief Executive Officer of Oracle Corporation.

Beneficial Ownership of Our Common Stock

The following table sets forth certain information regarding the ownership of LeapFrog’s common stock as of June 17, 2009 by: (i) each director; (ii) each of the executive officers named in the Summary Compensation Table below; (iii) all executive officers and directors of LeapFrog as a group; and (iv) all those known by LeapFrog to be beneficial owners of more than five percent of our common stock. Information with respect to beneficial ownership has been furnished by each director, executive officer or beneficial owner of more than five percent of the shares of our common stock, as the case may be, and Schedules 13D and 13G filings with the SEC.

Beneficial ownership is determined in accordance with SEC rules, which generally attribute beneficial ownership of securities to each person who possesses, either solely or shared with others, the power to vote or dispose of those securities. These rules also treat as outstanding all shares of capital stock that a person would receive upon exercise of stock options held by that person that are immediately exercisable or exercisable within 60 days of June 17, 2009. These shares are deemed to be outstanding and to be beneficially owned by the person holding those options for the purpose of computing the number of shares beneficially owned and the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated and to the extent known, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to applicable community property laws.

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Beneficial Ownership of Our Common Stock (continued)

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

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

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COMPENSATION MATTERS

COMPENSATION OF DIRECTORS

During the fiscal year ended December 31, 2008, our non-employee directors received the following compensation for their service on our board of directors:

Director Compensation for Fiscal Year 2008

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The above incremental grant date fair values for these grants reflect the total incremental fair value of options granted to the relevant individual in the 2008 option exchange program (net of options canceled in the exchange) rounded to the nearest dollar. The aggregate incremental grant date fair value for all non-employee directors was less than $21.

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Discussion of Director Compensation

Each of our non-employee directors receives a cash meeting fee of $1,500 for each board of directors and committee meeting attended, even if the meetings occurred on the same day. In addition to this meeting fee, each non-employee director received the following annual retainer fees:

In the fiscal year ended December 31, 2008, the total cash compensation paid to non-employee directors was $474,750. The members of our board of directors are also eligible for reimbursement of their expenses incurred in attending board meetings. In April 2009, the board of directors approved an annual retainer payment of $10,000 to be paid to the member of the board holding the position of “presiding director.” As of July 2009, Mr. Simon served as the “presiding director” with the role of presiding over regularly-scheduled executive sessions of the board.

The 2002 Non-Employee Directors’ Stock Option Plan provided for automatic stock option grants to our non-employee directors. In March 2006, the board adopted an amendment and restatement of the directors’ plan (and renamed it the 2002 Non-Employee Directors’ Stock Award Plan, or NEDSAP), which was approved by our stockholders at the 2006 annual meeting of stockholders. In April 2009, the board adopted an amendment and restatement of our directors’ plan to permit discretionary grants of awards under the NEDSAP.

The NEDSAP, as amended and restated, provides for an initial stock award upon being elected to the board and annual stock awards on July 1 of each year (or the next business day if that date is a legal holiday or falls on a weekend day). The board or a committee of the board has the discretion to provide that initial and annual grants under the NEDSAP will be made in the form of stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights or performance stock awards. If equity grants are made in the form of stock options, the NEDSAP provides that the initial grant is an option to purchase 30,000 shares of our Class A common stock and the annual grant is an option to purchase 15,000 shares of our Class A common stock; provided, however, that a non-employee director who holds the position of Chairman of our board of directors at the time of the annual grant will receive an annual grant of 25,000 shares in lieu of an annual grant of 15,000 shares. In the event that initial and annual grants are made in the form of stock awards other than options, the board or a committee of the board has the authority to determine the number of shares subject to such stock awards. Also, with the amendment of the NEDSAP in April 2009, the board may, in its discretion, grant additional stock awards at any time under the NEDSAP.

With respect to stock option awards, the exercise price of options granted under the NEDSAP is 100% of the fair market value of the common stock subject to the option on the date of the option grant. Options granted under the NEDSAP vest in equal monthly installments over a three-year period in accordance with its terms. The

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

In February 2007, the board unanimously approved a grant of 20,000 restricted stock units, or RSUs, to directors that had not been employed by LeapFrog in the past three years, except that our former board Chairman, Mr. Fink, received a grant of 30,000 RSUs and the Chairman of our audit committee, Mr. McKee, received a grant of 25,000 RSUs. The grants were recommended by our nominating and governance committee based primarily on a competitive compensation review that showed LeapFrog’s director compensation fell short of the board’s target of maintaining total director compensation at approximately the 75^th percentile of similar companies. These RSUs vest monthly over a three-year period, and, regardless of the vesting terms, the shares of Class A common stock underlying the RSUs would not be delivered to a director until three months following the expiration or termination of the director’s term on the board. The vesting of these RSUs would fully accelerate in the event of a “change in control,” as defined in the NEDSAP. In 2008, the board did not approve any further awards of RSUs or other equity awards other than the standard annual option grants described above.

In May 2009, all of our continuing non-employee directors, as well as our new directors, Paul T. Marinelli and Philip B. Simon, who joined us in March 2009, received interim grants of additional stock options under the NEDSAP to improve their equity incentive compensation packages in light of the decreases in the trading prices of our Class A common stock on the NYSE between September 2008 and May 2009. Each of Messrs. Kalinske, Marinelli, Maron, McKee, Nagel, Simon and Wang received an option to purchase 35,000 shares of our Class A common stock with an exercise price of $2.75 per share. In each case, no portion of the option will vest until the average closing price of our Class A common stock on the NYSE across all trading days during a consecutive 90-day period that occurs after the grant date and during the term of the option equals or exceeds $4.00 per share (such condition of vesting, the “Price Condition”). In addition, subject to the Price Condition, the option will vest over three years in equal monthly installments. Any option shares that would, but for the Price Condition, have vested according to the vesting schedule above will vest when the Price Condition is met. All vesting is subject to standard terms set forth in the NEDSAP and associated form stock option agreement, including Continuous Service as defined under the NEDSAP.

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EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

Overview

The Compensation Discussion and Analysis provides information about the overall objectives of our executive compensation program and each element of compensation that we provide to our named executive officers. For purposes of this proxy statement, our “named executive officers” are our President and Chief Executive Officer (CEO), our Chief Financial Officer (CFO), our three other most highly compensated executive officers during 2008, and two individuals who would have been among the three other most highly compensated executive officers during 2008 but for the fact that these individuals were not serving as executive officers at the end of fiscal 2008, as reflected in the Summary Compensation Table below. The compensation philosophy discussed here is applicable to all of our named executive officers.

Executive Compensation Program Philosophy

Our compensation philosophy is to provide total compensation packages that reasonably, equitably and responsibly meet the following objectives:

Our compensation philosophy is implemented through the following key principles:

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Compensation Methodology

The compensation committee of our board of directors is responsible for the design, implementation and oversight of the executive compensation programs for our executive officers and reports to the full board of directors its discussions and actions. Typically, our CEO makes recommendations to the compensation committee regarding short- and long-term compensation for our named executive officers as well as our other executive officers based on company results, an individual executive’s contribution toward these results, performance toward goal achievement, market surveys and input from our Human Resources department and our independent compensation consultant. The compensation committee also recommends to the full board for approval all compensation matters related to our CEO. The compensation committee’s recommendations to the full board regarding CEO compensation are based on the compensation committee’s assessment of company and CEO performance, input from our outside compensation consultant, and other factors such as prevailing industry trends.

The compensation committee has engaged and uses the services of an outside compensation consultant to provide it with advice and guidance on design of our compensation programs and policies and relevant information regarding executive compensation at similarly situated companies, as well as relevant information about other market practices and trends. In July 2008, the compensation committee replaced our former compensation consultant, Towers Perrin, with a new compensation consultant, Compensia, Inc. Prior to the replacement, Towers Perrin had served as advisor to our compensation committee for approximately five years, and the committee believed it would be appropriate to engage a new firm as a matter of good corporate governance. Compensia is retained directly by the compensation committee and works under the direction of the compensation committee. We have not engaged Compensia for any other services, though it is possible that Compensia could be retained by the nominating and corporate governance committee to provide advisory services relating to board compensation. Compensia provides comment and guidance to the compensation committee and management in advance of compensation committee meetings on compensation proposals, including changes to compensation levels for any executive officers, the design of equity programs, and the design of compensation programs, such as severance and change-in-control policies, perquisites and other executive benefit programs. In addition, Compensia, reviews compensation materials prepared by management in advance of compensation committee meetings.

Annually, under the direction of the compensation committee, our compensation consultants have conducted reviews of the effectiveness and competitiveness of our total executive compensation packages, which includes reviewing base salaries, short- and long-term incentives, including cash bonuses and equity awards, and other executive benefits, by conducting benchmarking studies of our compensation peer group described below and analyzing the results of these studies, as well as data from third-party compensation surveys. The information provided is used to determine if the total compensation packages of our executive officers are competitive and if each element of those compensation packages is aligned with reasonable and responsible practices in our industry and geographic marketplace.

In early 2008, Towers Perrin and the compensation committee established a compensation peer group to determine competitive compensation levels for our executive officers. Previously, in 2007, Towers Perrin reviewed a cross section of competitors and related industries with a focus on toy, gaming and educational products and identified 18 companies from the toy, education, consumer goods, and prepackaged software industries as our “compensation peer group.” Based on a subsequent review of the 2007 peer group, Towers Perrin determined that the 2007 peer group should remain unchanged. The compensation committee reviewed

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and approved the 18 companies recommended by Towers Perrin at its February 28, 2008 meeting. The compensation peer group was composed of the following companies:

After its engagement, Compensia assisted our compensation committee in an effort to refine and update the peer group composition, establishing a list of “direct peers” and a separate list of “industry reference peers.” The direct peer group is intended to include companies whose market position and size more closely match ours. These companies are the primary companies we use to benchmark our executive officer and board compensation. These direct peer companies must meet at least three of the following six criteria:

The compensation committee reviewed and approved the following 13 companies recommended by Compensia for inclusion in our direct peer group:

An industry reference peer group was established as a secondary reference point for executive and Board pay program design and trends and best compensation practices. The industry peer group is composed of companies that provide toys, educational products, consumer packaged goods for children or games (handheld or electronic, hardware or software). The compensation committee reviewed and approved the following six companies recommended by Compensia for inclusion in our industry reference peer group: Activision, Electronic Arts, Hasbro, Mattel, Scholastic Corporation and The McGraw-Hill Companies.

The compensation committee approved these two peer groups after reviewing Compensia’s report and analyzing and comparing the various peer groups proposed by the two compensation consultants. The committee determined to eliminate from the peer groups five companies included in the previous peer group (Take Two Interactive Software, The Gymboree Corporation, Educate, Inc., McAfee, Inc., and John Wiley and Sons, Inc.) that the committee believed to be less relevant to LeapFrog because of their sizes and business focus. CNET Networks, Inc. was acquired during 2008 and therefore was removed from the peer groups. The seven new companies included in the current direct peer group (BlackBoard, Build-A-Bear Workshop, CyberSource, iRobot, K12, Openwave Systems, and Real Networks) were more similar to LeapFrog in size based on revenues, market capitalization and number of employees. The compensation committee determined that the remaining companies in the previous peer group were more appropriately included in the industry peer group than in the direct peer group because, while they operated in a very similar business or industry, they did not meet two or more of the other criteria established for the direct peer group. The new peer groups were approved by the compensation committee at their October 30, 2008 meeting. We believe the companies in our compensation peer

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groups represent a good cross-section of the companies against which we compete for talent or that are similar to us in size and business focus.

In addition to benchmarking studies of the compensation peer group, the compensation committee employs the collective experience and judgment of its members and advisors in determining the total compensation and the various components of the packages paid to our executive officers. The compensation committee has also historically taken into account input from other sources, including other independent members of the board, publicly available data relating to the compensation practices and policies of other companies within and outside of our industry, and the input of our CEO and Human Resources department. While the compensation committee does not believe that compensation peer group benchmarking is appropriate as a stand-alone tool for setting compensation due to the aspects of our business and objectives that may be unique to us, the compensation committee finds that evaluating this information is an important part of its decision-making process and exercises its discretion in determining the nature and extent of its use.

In light of the current economic climate, the compensation committee considered in February 2009 the incentives provided by our executive compensation programs and whether they encouraged excessive risk taking or other behaviors that could have a negative impact on our long-term prospects. While the committee believed that our various compensation elements provided an appropriate balance of incentives that did not encourage our management to take unreasonable risks, they determined that the variable component of compensation (in particular our 2009 bonus program) should be modified for 2009 to reflect new business realities as we weather the recession. The adjustments to the bonus plan to emphasize cash management and achieving an operating profit are discussed in more detail in “Elements of Executive Compensation” below under “Performance-Based Annual Bonus Awards.”

Elements of Executive Compensation

The compensation committee has determined that a mix of cash and equity, along with severance, health and other benefits, be used in order to provide total compensation packages for our executive officers and others that meet our objectives as outlined above. The elements of our executive compensation are:

The overall composition of an executive’s total compensation package is determined initially based on competitive market benchmarks provided by Compensia for the position and the skills and experience of the individual. Each year, the total compensation of executives is evaluated with respect to company performance, individual performance, changes in scope of responsibility and competitive market changes for each position. There is no pre-established policy or target for the allocation between either cash and non-cash or short-term and long-term incentive compensation. Rather, the compensation committee reviews information provided by Compensia to determine the appropriate level and mix of incentive compensation for the year. While the determination of base salary and equity components are generally independent of the decisions regarding other elements of compensation, target bonus is expressed as a percentage of base salary and, therefore, dependent upon the determination of base salary. As a general matter, the level of compensation “at risk” increases with the executive’s level of responsibility.

Towers Perrin conducted for the compensation committee a comprehensive study of executive compensation in 2006, and that data was updated for 2008. The studies determined that LeapFrog’s executive

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compensation was approximately at the median competitive level for all elements of overall compensation for our executive officers.

For 2009, Compensia conducted for the compensation committee a study of the compensation of our executive officers for 2009 using the refined direct peer group and industry reference peer group, supplemented by data from a third-party compensation survey. The study indicated that our target direct total compensation for our executive officers (target total cash plus the value of ongoing equity awards) aligns with the market 40^th percentile. The market data consisted of published survey data and direct peer data from proxy statements. The decline in value of stock awards granted in 2008 contributed to the decrease in the market percentile from the 2008 survey.

The specific compensation elements are described below with discussion of compensation decisions for each element with respect to the named executive officers.

Base Salary

The compensation committee reviews and determines the base salaries of our executive officers, including our CEO, on an annual basis, and it makes these determinations on a case-by-case basis upon the hiring of any new executive officers. In determining the total compensation package for a new executive officer, the compensation committee reviews market data for the position, the experience and skills of the candidate, total compensation at the candidate’s former employer, including any compensation that will be forfeited upon departure from the candidate’s former employer. For its annual review of compensation, with respect to determining base salaries, the compensation committee considers individual and company performance, potential of the executive officer to contribute to the long-term success of the company, scope of responsibilities and experience, and competitive salary practices. The study conducted by Compensia for 2009 indicated that our executive base salaries align with the market 55^th percentile overall, although there was significant variation by individual.

Based on the overall performance of the company in 2007 and the comparative position of our executives’ salaries relative to the external market, the compensation committee determined in February 2008 that no base salary increases for our named executive officers were warranted with the exception of a 9.1% increase for Ms. MacIntyre, our Executive Vice President, Product, Innovation and Marketing, who joined us in January 2007. This increase was approved by the compensation committee in February 2008 and brought Ms. MacIntyre’s base salary to $300,000 from $275,000 annually. This salary change was recommended based on competitive data from our compensation peer group (the Towers Perrin list) as well as to address internal equity issues.

Due to business conditions, including the global economic crisis and the pervasive uncertainty surrounding 2009 revenue expectations, and based on the overall performance of the company in 2008, the compensation committee determined in February 2009 that no base salary increases for named executive officers were warranted for 2009.

Performance-Based Annual Bonus Awards

Annual performance bonuses are intended to motivate executives to achieve LeapFrog’s short-term goals and are designed to reward company performance and individual performance. The compensation committee approved executive goals for 2008 performance-based bonuses at its February 2008 meeting and determined executive bonus awards for 2008 performance at its February 2009 meeting. To determine bonus awards, the compensation committee first calculated the extent of the funding of the bonus pool. The potential size of the bonus pool is generally based upon the aggregate of the target bonuses (typically expressed as a percentage of salary) for which each employee is eligible. Funding is calculated by assessing company performance against the pre-determined financial measures described below to determine the amount of the company component of the

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bonus pool, which is then added to a pre-set individual portion of the bonus pool. After the bonus pool is calculated, the overall pool is generally allocated among employees, including executive officers, based on individual performance, using a multiplier percentage against their allocated portion of the bonus pool. However, for 2008, as discussed below, the committee determined that no bonuses would be paid to any of our executive officers from the bonus pool, either from the individual component or from the company performance component. For 2009, Compensia reviewed the bonus targets of our executive officers and determined that target bonus percentages were generally between the market 25^th and 50^th percentiles overall.

Under the 2008 bonus plan approved by the compensation committee in February 2008, our CEO, Mr. Katz, had an overall bonus target of 100% of his 2008 base compensation and our other named executive officers had overall bonus targets of 50% of their 2008 base compensation. For all our named executive officers, their individual portions of the bonus pool were funded with an amount equal to 20% of their target bonuses. The overall target bonuses are typically initially set in employees’ offer letters or employment terms and are based on competitive market data for their positions. The individual versus company portion allocation is determined by using competitive market practices and by our assessment of the amount of pay that should be at risk for our named executive officers. Percentages may be modified from year to year based on competitive market data or on changes to an employee’s position within the company.

The funding of the company performance portion of the bonus pool for 2008 performance was based on four company financial measures: (1) total 2008 net sales, (2) overall gross margin, (3) overall operating income and (4) achievement of a “momentum index,” which is a measure of projected 2009 operating income. The momentum index measure was implemented to provide incentives in 2007 during the “reload” phase of our turnaround strategy, which entailed the development of a strong new product line for 2008 to position us for sales growth, and was measured based on the 2007 projection for net sales of new products in 2008. In 2008, as we launched the product lines developed in 2007, the momentum index was modified to focus on projected operating income for 2009 to reflect the focus on profitability for 2009 and beyond, and the weighting of this measure was reduced from 40% to 10% of the overall company-performance portion of the bonus pool. Giving financial performance metrics more weight reflected our renewed focus on achieving our projected financial results in 2008, compared to a primary focus on product development for 2007. With each measure, there is minimum performance level required to trigger any funding of the company-performance portion of the bonus pool in any of the categories. If the minimum performance for any measure is achieved, 80% of the amount allocated to that measure is funded. If the target performance for any measure is achieved, 100% of the amount allocated to that measure is funded. If performance exceeds the target performance for any measure, up to 200% of the amount allocated to that measure is funded. In addition, as part of our 2008 bonus program, the compensation committee required that our actual 2008 net sales of new products achieve the level projected by the 2007 momentum index before the 2008 bonus pool could be funded for the 2008 net sales component.

The weighting of each measure and range of potential payout resulting from the achievement of each measure were approved by the compensation committee in February 2008 and were as follows:

In 2008, our net sales were $459.1 million, we had an overall gross margin of 40%, and we had an operating loss of ($60.1 million). None of these met the minimum target amounts required by our 2008 bonus plan. Further, in February 2009, we projected 2009 operating income to be below the minimum performance level for our momentum index measure, resulting in no bonus payout on that company performance measure either. As a result, no company-performance bonuses were paid. This result is consistent with our philosophy that a sufficient portion of executive target bonuses be funded based solely on quantitative overall company performance

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measures. We believe this aligns the interests of our executives with those of our stockholders in achieving company operating goals.

While funding for the bonus pool as a whole was based on the calculations described above, the actual bonus payout for each of the named executive officers (other than the CEO) was to be determined under the 2008 bonus plan on the basis of the CEO’s evaluation of the individual performance of the named executive officer, in part with respect to overall achievement of his or her goals for the year, and in part with respect to the contributions and impact that his or her area of responsibility made to the achievement of key corporate accomplishments. In the case of the CEO’s bonus award, the compensation committee evaluates CEO performance and makes a recommendation to the full board. The amount of the bonus awards actually paid to our named executive officers can be less than or exceed the funded amount per person, as determined through performance reviews and subject to approval by the compensation committee.

While under the terms of the 2008 bonus plan, the individual component of the bonuses would have been funded with respect to 20% of the target bonus of each executive officer, the compensation committee determined at its February 2009 meeting that no bonuses would be paid to the CEO or any of the named executive officers. (Messrs. Moon and Pidel were not eligible for bonuses under the 2008 bonus plan because of their departure from the company in December 2008.) This determination was based primarily on our financial results, uncertainty about our performance in 2009 in light of the current recession, and our focus on cash management and achieving our goals in reducing our operating loss in 2009.

2009 Bonus Plan

In February 2009, the compensation committee approved a 2009 bonus plan with modifications from prior years. Taking into account the expected global economic environment through at least 2009, the committee determined that the 2009 bonus plan should be adjusted to reflect our priorities for a difficult environment over the coming year.

While retaining the same target bonuses and funding the individual component of the target bonuses in the same manner as in 2008, the 2009 bonus plan has a new structure for funding and paying out the company performance portion of target bonuses. The goal of the new company performance component of the 2009 bonus plan (which again represents 80% of any bonus funding for our executives as described in more detail below) represents a significant change from the bonus plans of recent years in that it focuses on managing cash flow and achieving an improved operating income rather than on achieving top-line product sales growth. As noted in “Compensation Methodology” above, while the committee felt that our various compensation elements provided an appropriate balance of incentives that did not encourage our management to take unreasonable risks relating to our business, they determined the variable component could be modified for 2009 to reflect new business realities as we weather the recession.

As in prior years, the extent of the actual funding of the bonus pool is determined by the compensation committee in its discretion. The target bonus pool again includes two components: (1) a company performance component (for executive officers, 80% of their respective target bonuses), which is calculated by assessing company performance against pre-determined financial measures as described below, and (2) an individual component (for executive officers, 20% of their respective target bonuses), which will be funded only if the threshold end-of-year 2009 operating income financial goal for the company performance component is achieved. After calculating the extent of the funding of the bonus pool, the pool is allocated among employees, including our executive officers, based on a review of individual performance, using a multiplier percentage against their allocated portion of the relevant component of the overall bonus pool.

For 2009, funding of the company component of the bonus pool will be based upon the following company performance goals: a quarterly cash balance goal and a year-end measure of operating profit or loss.

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Quarterly Cash Balance Goals During Fiscal 2009.    With respect to the company performance component of the target bonus pool, 30% of that pool will depend upon achievement of specified quarterly cash balance goals. For each of the first three fiscal quarters of 2009, a cash balance goal has been set by the compensation committee based upon our operating plan for 2009. In any of the quarters, 80% to 100% of the cash balance element of the company performance amount allocated to that quarter can be funded. Accordingly, for achieving the 80% threshold or 100% target first quarter cash balance goal, 4% or 5%, respectively, of the total company performance component of the target bonus pool would be funded. For achieving the threshold or target second quarter cash balance goal, 8% or 10%, respectively, of the total company performance component would be funded. For achieving the threshold or the target third quarter cash balance goal, 12% or 15%, respectively, of the total company performance component would be funded. For achieving a cash balance between the threshold and target, the cash balance element for that quarter would be funded ratably.

However, if the cash balance goal were not fully achieved in any of the first three quarters, there would be an opportunity to “catch up” in the following quarters. For example, if the target cash balance goal were not fully achieved in the first quarter, but were fully achieved in the second quarter, the company performance component would be funded at the level of 15% minus the percentage funded in the first quarter. Similarly, if the target cash balance goal were fully achieved in the third quarter, the company component would be funded at the level of 30% minus the cumulative percentages funded in the first and second quarters. As an illustration, if only 4% of the company performance component is funded in the first quarter, up to 11% of the company performance component could be funded in the second quarter. If 0% is funded in the first quarter, up to 15% could be funded in the second quarter. If only 4% and 8% are funded in the first and second quarters, respectively, the amount funded in the third quarter could be up to 18% of the company performance component. Any actual bonuses resulting from this funding would be paid on a quarterly basis.

Operating Income or Loss Goal at Fiscal Year End.    With respect to the remaining 70% of the company performance component of the target bonus pool, funding will depend upon achievement, as of the end of the fiscal year, of an operating income or loss goal set by the compensation committee. Threshold, target and “stretch” goals (as explained in more detail below) for operating income or loss are to be set in July 2009 based on our operating plan for 2009 and data regarding our financial results and business expectations as of that time, with any actual bonuses resulting from this funding to be paid in early 2010.

The element of the company performance component of the target bonus pool related to the achievement of the operating income or loss goal would be funded at an 80% level if the threshold goal were achieved, at 0% if the threshold goal were not achieved, and at 100% if the target goal were fully achieved. For achieving operating income or loss between the threshold and target, the operating income or loss component would be funded ratably. In addition, if we achieve more than the target goal, this element would be funded ratably up to a maximum level of 120% based on the difference between the target goal and the stretch goal. For example, achieving an operating income midway between the target goal and the stretch goal set by the bonus plan for the year would result in funding of 110% of the operating income or loss element and 77% of the company performance component of the target bonus pool. The 120% top end of the potential bonus that could be funded for the operating income or loss element is set lower than our traditional 200% maximum in recognition of the fact that the operating income or loss goals will not be finally set until the July 2009 board and committee meetings.

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The following table illustrates different possible scenarios for funding of the company component of the bonus pool relative to achievement of the operating income or loss goal:

Operating Income (Loss) Element Funding Illustration

(Full Year) (70% of Company Performance Component)

The compensation committee has considered and will consider the likelihood of achievement when recommending and approving, respectively, the company performance goals and the bonus plan structures in 2008 and 2009, but it did not undertake a detailed statistical analysis of the difficulty of achievement of each separate measure. When it set operating profit as the dominant goal in the 2009 bonus plan, the committee believed that the goal was appropriate because operating profit will be one of our most significant measures of performance and sustainability. As noted above, the committee has not yet established the specific target for operating profit under the plan’s company component. The committee strives to establish targets so that 80% funding is achievable and 100% would be challenging. Any amounts in excess of 100% of the target are thought to be stretch goals that will be difficult to achieve and will require exceptional skill and effort. We believe this held true for the targets in both our 2008 plan when it was established, and for the 2009 plan. For fiscal 2009, the committee noted that the performance required for achieving the company performance goals at target level is likely to be particularly challenging because of extremely difficult economic conditions, but designed the bonus plan to reward exceeding expectations while ensuring that the bulk of any company performance component is funded only if there is sufficient profit to do so.

Equity Incentive Awards

We believe that granting equity incentive awards to our key employees is a critical way to meet the objectives of our compensation philosophy of attracting and retaining talented executives, motivating and rewarding outstanding company and individual performance, and aligning the interests of our executive officers with those of our stockholders. LeapFrog employees are granted equity incentive awards on the basis of performance against short- and long-term goals, the employee’s then-current equity holdings and our assessment of the potential of the employee to provide long-term value to the company. For 2009, Compensia reviewed the equity awards granted to our executive officers and determined that equity award levels were generally competitive with approximately the market 65^th percentile after adjusting the reference market data downward by 50% to approximate the general decline in stock prices among peer group issuers (30^th percentile before the adjustment).

We grant a combination of equity awards to our executives and other key employees, including time-vested restricted stock units, or RSUs, and time-vested stock options, and we refer to them collectively as “stock awards.” In general, we make grants of stock awards to our executive officers as part of their initial compensation packages, and we make subsequent grants of stock awards on an annual basis. Historically, these annual grants of stock awards have not been made at a set time of the year. In early 2007, the compensation committee decided to grant these annual stock awards in the fall of each year. In August 2008, the compensation committee approved grants to our executive officers, including our named executive officers. Consistent with our stock granting policy (described below), the grants of those stock awards became effective and were priced in mid-September 2008 in accordance with our existing stock award granting policy described below.

Guidelines for the size of equity awards granted to each level of employee are reviewed annually and benchmarked against peer compensation group companies by our outside executive compensation consulting

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firm. This review and analysis serves to evaluate the competitiveness of the prospective value of grants awarded by us to our employees and to monitor our equity usage levels relative to peer compensation group companies and in relation to the published guidelines of proxy-voting advisory firms such as RiskMetrics Group’s ISS Governance Services. Towers Perrin, our outside consulting firm until July 2008, prepared proposed 2008 equity grant guidelines, which were reviewed and approved by the compensation committee in February 2008.

Like our 2007 equity grant guidelines, our 2008 equity grant guidelines resulted in grant levels below median competitive grant levels in order to manage overall share usage through 2009. In 2008, the guideline grant levels were approximately 30% below median competitive grant levels determined by Towers Perrin, compared to 20% in 2007. Also in line with past guidelines, the 2008 guidelines provide that the annual stock award grant value is to be split so that 50% of the grant value is provided through stock options and 50% is provided through RSUs. Consistent with option valuations and past practice, we generally grant stock options and RSUs to our employees at a ratio of approximately two option shares for every one RSU. This ratio reflects the relative expense to the company for financial statement purposes of a stock option compared to a full value share award like an RSU. Similarly, in accordance with the terms of our equity incentive plan, we deduct from the pool of shares available for issuance under the plan two shares for each RSU granted and one share for each option share granted. Under our equity grant guidelines, grants for new hires are made entirely in the form of stock options, except in special cases.

Stock Award Granting Policy.    Our general policy for stock award grants is that we will not seek to time or select the grant dates of stock options or other stock awards in coordination with the release by us of material non-public information, nor will we have any program, plan or practice to do so. We also have a specific policy regarding the grant dates of stock options and other stock awards, including stock awards made to our executive officers. That policy provides that the grant date of all awards is to be the 15th day of the month subsequent to the month in which the award is approved by the board (or the next succeeding business day that the NYSE is open). Accordingly, we have 12 preset grant dates during a calendar year (i.e., the 15^th of each month, except as adjusted due to weekends and holidays). The exercise price of each award equals the closing price of our common stock on the trading day immediately preceding the grant date, in accordance with the terms of our equity plan.

Stock Options.    The compensation committee believes that stock options provide management with a strong link to long-term corporate performance and the creation of stockholder value. Appreciation of our stock price will benefit both stockholders and employees that are option holders. Option grants made to our executive officers typically have a four-year vesting period and a strike price equal to 100% of the fair market value of the underlying Class A common stock, as defined under our equity plan. Employees, including our executive officers, are generally eligible for “new hire” grants upon initial hire, and then annually thereafter, based on factors including individual performance and total equity position, anticipated future contribution to our success, and alignment among similarly situated employees.

In August 2008, the compensation committee approved the grant of stock options to our named executive officers as part of our annual equity grant process. Mr. Katz was awarded an option to purchase 178,500 shares, Mr. Chiasson was awarded an option to purchase 51,000 shares, Mr. Dodd was awarded an option to purchase 53,250 shares, Ms. MacIntyre was awarded an option to purchase 70,000 shares, Mr. Campbell was awarded an option to purchase 21,200 shares, Mr. Moon was awarded an option to purchase 15,900 shares, and Mr. Pidel was awarded an option to purchase 21,000 shares. All stock option awards for these named executive officers had an exercise price of $9.33 per share and were granted effective September 15, 2008 in accordance with our stock award granting policy. These options vest in 48 equal monthly installments from September 15, 2008.

These awards were primarily based on the 2008 equity guidelines developed by Towers Perrin and approved by the compensation committee in February 2008. However, the compensation committee decided not to grant RSUs to our executive officers, including the named executive officers, in light of the fact that our option exchange program conducted in 2008 discussed below had already provided a potentially significant benefit to

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our executives. The number of RSUs that our named executive officers would otherwise have been granted were replaced by options to purchase the same number of shares. Stock option awards for each of the named executive officers (other than the CEO) were recommended by the CEO upon consideration of a number of factors, including the executive’s overall performance in 2007 and the first portion of 2008, strategic impact on the company, and current equity holdings compared to similar positions within our peer compensation peer group. The compensation committee approved the stock option award to Mr. Katz by reviewing his overall performance in achieving corporate and individual goals in 2007 and the first portion of 2008 and his total direct compensation compared to CEOs in our compensation peer group.

Restricted Stock Units (RSUs).    Restricted stock units, or RSUs, represent full-value shares of Class A common stock. Because RSUs are full value, our practice is to grant fewer shares under RSUs as compared to options since RSUs have a greater fair value per share than options. Granting RSUs allows us to deliver competitive compensation value to our key employees and strengthen the retention power of the equity grant program while, at the same time, reducing the amount of potential dilution for all stockholders. RSUs are primarily a retention vehicle, as the stock continues to have value even when the stock price declines. In addition, RSUs can serve as a valuable recruitment tool by offering immediate equity value in our common stock, which can help us attract talented executives who might forfeit valuable equity stakes at their current employers in order to join us. Shares of our common stock are not issued when an RSU is granted. Instead, once an RSU vests, one share of our common stock is issued for each share of RSU vested. RSUs vest at the rate of 25% on each of the four anniversaries of the vesting commencement date. However, as discussed above, the compensation committee did not grant RSUs to our named executive officers in the 2008 annual grant process.

Stock Option Exchange Program Conducted in 2008.    In early 2008, the compensation committee reviewed our use of equity incentives and noted that a large number of issued stock options were no longer serving as effective incentive or retention tools, yet were being recorded as compensation expense by us and contributing to our potential employee equity overhang. In February 2008, the compensation committee recommended to the full board, and the board subsequently approved, a stock option exchange program, under which our directors and employees would be offered the opportunity to exchange eligible out-of-the-money stock options for new options having an exercise price per share equal to the higher of (a) $7.50 per share or (b) $0.25 above the closing price of our Class A common stock as reported on the NYSE for the business day prior to the date the new options were granted (the “Exchange Price”). Under the program, outstanding stock options with an exercise price greater than the Exchange Price were eligible to participate. The new options issued in the 2008 exchange program covered fewer shares at a lower exercise price than the options surrendered for cancellation. The exchange ratio was set to result in the same fair value for the new options as for the options surrendered for cancellation so the exchange had only a very minor impact on our income statement.

The compensation committee concluded that our executive officers should be eligible to participate in the 2008 option exchange program to provide them with improved incentives to increase stockholder value, increase the retention value of outstanding options and reduce the total number of potential shares directed towards employee incentive programs—all at virtually no expected additional compensation expense to the company for accounting purposes. Many of our senior executives, including all of our named executive officers, were previously granted “tiered” options to purchase shares of our stock at then fair market value as well as at strike prices that were approximately 133% and 166% of then fair market value. Those who elected to surrender tiered options in the program received in exchange option grants with a similar tier structure with the result that the new options would include the same proportions of out-of-the-money strike prices as the surrendered options.

The 2008 option exchange program was approved by stockholders on June 5, 2008 and the exercise price of the replacement options was set at $9.14, $0.25 above the closing price of our Class A common stock as reported on the NYSE for the business day prior to the date the new options were granted on June 9, 2008.

A total of 103 employees participated in the 2008 option exchange program, including three of our named executive officers: Messrs. Katz and Chiasson and Ms. MacIntyre. Mr. Katz exchanged options to purchase

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2,681,250 shares with exercise prices ranging from $10.30—$16.67 for options to purchase 2,237,312 shares with exercise prices ranging from $9.14—$14.79. Mr. Chiasson exchanged options to purchase 382,000 shares with exercise prices ranging from $9.33—$15.49 for options to purchase 288,264 shares with exercise prices ranging from $9.14—$15.17. Ms. MacIntyre exchanged options to purchase 100,000 shares with exercise prices ranging from $10.39—$17.25 for options to purchase 84,780 shares with exercise prices ranging from $9.14—$15.17.

Severance Benefits

In 2007, the compensation committee approved our Executive Management Severance and Change-in-Control Plan, or Severance Plan. All of our named executive officers may receive benefits under the Severance Plan, with the exceptions of Mr. Katz, who is not eligible to participate in these plans and instead is eligible to receive benefits under the severance and change-in-control provisions that are part of his employment agreement.

Prior to the approval of these plans, our executive officers frequently had individually negotiated severance agreements. The plans were developed to achieve three objectives: (1) to minimize distraction and risk of departure of executives and senior management in the event of a potential change-in-control transaction involving LeapFrog; (2) to provide consistency in benefits among our executive officers and senior management; and (3) to align our severance benefits for executives and senior management with competitive practice. In addition, the compensation committee took into account the multi-year nature of our turnaround plan and the historic and anticipated continued volatility of our stock price and operating results. In 2007, the compensation committee engaged Towers Perrin to review the severance plans and to benchmark the benefits against compensation peer group practices and overall market practices. The plans were intended to replace previously negotiated severance benefits set forth in employment offer letters or to provide benefits for those executive officers and senior management who had no benefits in place. In order to determine an appropriate level of severance and change-in-control benefits, Towers Perrin reviewed data from three general industry surveys and conducted a review of the severance practices employed by our compensation peer group companies.

Under the terms of the Executive Management Severance Plan, the named executive officers other than Mr. Katz are eligible to receive the benefits described in the Severance Plan if the executive is terminated “without cause” or resigns for “good reason.” Our Severance Plan excludes performance-based terminations from severance protection. For more discussion regarding the definition of “without cause” and “good reason” under the Severance Plan, please see the section in this proxy statement entitled “Potential Payments Upon Termination or Change in Control” below.

In general, if any of the named executive officers is terminated without cause or voluntarily terminates for good reason, the Severance Plan provides for the payment of 12 months of base salary paid in semi-monthly installments and 12 months of COBRA benefits. If the termination occurs during the period beginning three months before and ending 12 months after a change in control of LeapFrog, the Severance Plan provides for 24 months of base salary paid in a lump sum, payment of 200% of the named executive officer’s target bonus, 24 months of COBRA benefits and acceleration of vesting of all stock awards held by the named executive officer. Additional information regarding the severance benefits for which our named executive officers are eligible is provided below under the heading “Potential Payments Upon Termination or Change in Control.” None of the executive officers is entitled to any tax gross-up benefits under the Severance Plan.

Mr. Katz is eligible to receive severance benefits under his employment agreement, the terms of which were reviewed and approved by our board upon the hiring of Mr. Katz as our CEO and President in July 2006. The terms of Mr. Katz’s severance benefits are described below under the heading “Potential Payments Upon Termination or Change in Control.”

As part of our November 2008 reduction in force, Messrs. Moon and Pidel left the company in December 2008. Both Messrs. Moon and Pidel were eligible to receive severance benefits under the Severance Plan. In

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addition, given the significant remaining term for Mr. Pidel’s mortgage assistance if he remained with LeapFrog, the compensation committee approved a payment of $45,000 to Mr. Pidel representing an extension of his mortgage interest assistance payments under his offer letter with us. More information concerning the severance benefits paid to Messrs. Moon and Pidel is provided below under the heading “Potential Payments Upon Termination or Change in Control.”

Other Benefits and Perquisites

While the compensation committee seeks to offer benefits that are competitive with companies with which we compete for talent, it also seeks to limit, in a reasonable and responsible manner, the level of perquisites offered. The compensation committee reviews and approves any benefits we provide to our executive officers. Employee benefits include healthcare coverage and opportunity to participate in our 401(k) plan and our employee stock purchase plan. These benefits are generally available to all full-time employees, with no additional elements for our executive officers other than an additional week of vacation. We do not offer guaranteed retirement or pension plan benefits.

In addition, in light of the high cost of housing in the San Francisco Bay Area relative to other parts of the country, we have offered relocation reimbursements and mortgage interest differential payments for newly hired executives who need to relocate to the area from lower cost locations. The amount and duration of the payment is typically negotiated and set in the offer letter or employment agreement for the relevant executive, and has typically been for approximately three years of monthly payments. For our named executive officers, the value of these benefits is described in the Summary Compensation Table and the related footnotes.

Under his employment offer letter, Mr. Moon received mortgage interest assistance through March 2008 depending on his continued employment and we paid him $5,982 in 2008 under this arrangement. Mr. Pidel also received reimbursements for his relocation expenses as part of his employment package. In 2008, we paid Mr. Pidel an aggregate of $78,000 in relocation expense reimbursements, including mortgage interest assistance payments of $3,000 per month for the eleven months of his 2008 tenure with us, plus a $45,000 lump sum payment representing a continuation of his mortgage interest subsidy.

Compliance with Internal Revenue Code Section 162(m)

Section 162(m) of the Internal Revenue Code of 1986, as amended, generally disallows a tax deduction to publicly held companies for compensation exceeding $1.0 million paid to certain of a company’s executive officers. The limitation applies only to compensation that is not considered to be performance-based. Our 2002 Equity Incentive Plan includes certain provisions intended to allow us to qualify the compensation attributable to performance share grants as “performance-based” compensation under Section 162(m), although, in February 2007, we discontinued our performance share program. In addition, grants of stock options under our 2002 Equity Incentive Plan are also designed to qualify as “performance-based,” provided the grants have exercise prices of no less than 100% of fair market value on the date of grant and do not exceed a calendar year total grant limit for each optionee that is set forth in the 2002 Equity Incentive Plan. We generally intend to grant stock options to our executives in a manner that satisfies the requirements for qualified performance-based compensation to avoid any disallowance of deductions under Section 162(m).

The compensation committee believes it is appropriate for us to retain the flexibility to pay compensation above $1.0 million if warranted based upon exceptional company and individual performance, and thus, from time to time, we may pay compensation to executives that is not deductible, including grants of equity and cash bonuses.

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SUMMARY COMPENSATION INFORMATION

The following table shows compensation awarded, paid to or earned by, our “named executive officers.” The named executive officers for 2008 are our CEO, our CFO, our other three most highly compensated executive officers in 2008, and two individuals who would have been among the three most highly compensated executive officers but for the fact that such individuals were not serving as an executive officer at the end of fiscal 2008. The table shows compensation for 2008 and, where the individual was a named executive officer in the relevant prior year, 2007 and 2006.

Summary Compensation Table

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Grants of Plan-Based Awards

The following table shows for the fiscal year ended December 31, 2008, certain information regarding grants of plan-based awards to the named executive officers:

Grants of Plan-based Awards in Fiscal 2008