LeapFrog 2005 Annual Report Download - page 27

• the willingness of teachers, administrators, parents and students to use products in a classroom setting
from a company that may be perceived as a toy manufacturer;
• the effectiveness of our sales force;
• our ability to generate recurring revenue from existing customers through various marketing channels;
and
• the availability of state and federal government funding to defray, subsidize or pay for the costs of our
products which may be severely limited due to budget shortfalls and other factors.
If we cannot continue to increase market acceptance of our SchoolHouse division’s supplemental
educational products, the division may not be able to sustain its recent operating profits and our future sales
could suffer.
Our intellectual property rights may not prevent our competitors from using our technologies or similar
technologies to develop competing products, which could weaken our competitive position and harm our
operating results.
Our success depends in large part on our proprietary technologies that are used in our learning platforms and
related software. We rely, and plan to continue to rely, on a combination of patents, copyrights, trademarks, trade
secrets, confidentiality provisions and licensing arrangements to establish and protect our proprietary rights. The
contractual arrangements and the other steps we have taken to protect our intellectual property may not prevent
misappropriation of our intellectual property or deter independent third-party development of similar
technologies. The steps we have taken may not prevent unauthorized use of our intellectual property, particularly
in foreign countries where we do not hold patents or trademarks or where the laws may not protect our
intellectual property as fully as in the United States. Some of our products and product features have limited
intellectual property protection, and, as a consequence, we may not have the legal right to prevent others from
reverse engineering or otherwise copying and using these features in competitive products. In addition,
monitoring the unauthorized use of our intellectual property is costly, and any dispute or other litigation,
regardless of outcome, may be costly and time-consuming and may divert our management and key personnel
from our business operations. However, if we fail to protect or to enforce our intellectual property rights
successfully, our rights could be diminished and our competitive position could suffer, which could harm our
operating results. For additional discussion of litigation related to the protection of our intellectual property, see
“Item 3—Legal Proceedings.—LeapFrog Enterprises, Inc. v. Fisher-Price, Inc. and Mattel, Inc.”
Third parties have claimed, and may claim in the future, that we are infringing their intellectual property
rights, which may cause us to incur significant litigation or licensing expenses or to stop selling some of our
products or using some of our trademarks.
In the course of our business, we periodically receive claims of infringement or otherwise become aware of
potentially relevant patents, copyrights, trademarks or other intellectual property rights held by other parties.
Responding to any infringement claim, regardless of its validity, may be costly and time-consuming, and may
divert our management and key personnel from our business operations. If we, our distributors or our
manufacturers are adjudged to be infringing the intellectual property rights of any third-party, we or they may be
required to obtain a license to use those rights, which may not be obtainable on reasonable terms, if at all. We
also may be subject to significant damages or injunctions against the development and sale of some of our
products or against the use of a trademark or copyright in the sale of some of our products. Our insurance may
not cover potential claims of this type or may not be adequate to indemnify us for all the liability that could be
imposed. For more information regarding this see “Item 3—Legal Proceedings—Tinkers & Chance v. LeapFrog
Enterprises, Inc.”
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