The firm posted a third-quarter net loss of $49.7 million, compared with profit of $32.8 million a year earlier.
The company cited a 24 per cent sales decline and said it recorded more than $20 million of inventory reserves partly as a result. It also cited a non-cash valuation allowance of $43 million against deferred tax assets.
Sales fell to $184.7 million from $242.8 million a year earlier. Sales in its US consumer division fell 28 percent, while international revenue was off 4.8 percent.
The firm said it would introduce a line of successor products to LeapPad, update its Leapster educational games and change the design of products to cut costs to turn around results.
Slower sellers will also be deleted from its lineup, and it will expand its age segment with the new FLY Fusion line in 2007. Test marketing has begun in China, and a full launch will take place next year.