UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1

(Mark One)

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

For the Fiscal Year Ended December 31, 2004

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

Commission File No. 000-50570

ALPHASMART INC.

(Exact name of Registrant as specified in its charter)

Delaware	77-0298384
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

973 University Avenue

Los Gatos, CA 95032

(408) 355-1000

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

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

None

Securities registered pursuant to section 12(g) of the Act:

Common Stock, par value $.0001 per share

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  þ    No  ¨

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

Yes  þ    No  ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  þ

Based on the closing sale price of the Common Stock on the NASDAQ National Market System on June 30, 2004, the aggregate market value of the voting Common Stock held by non-affiliates of the Registrant was approximately $15,260,000. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares outstanding of the Registrant’s Common Stock, $.0001 par value, was 14,897,549 on February 22, 2005.

ALPHASMART, INC.

ANNUAL REPORT ON FORM 10-K/A

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

TABLE OF CONTENTS

		Page
PART IV
Explanatory Note		1
ITEM 15:	Exhibits and Financial Statement Schedules	2
Signatures		30

EXPLANATORY NOTE

AlphaSmart, Inc. (“AlphaSmart”) is filing this Amendment No. 1 to its Annual Report on Form 10-K for the fiscal year ended December 31, 2004, which was filed with the Securities and Exchange Commission on March 3, 2005 (File No. 000-50570) (the “2004 Form 10-K”). The “Report of Independent Registered Public Accounting Firm,” which appear on pages 48 through 72 of the 2004 Form 10-K, (the “Audit Report”) has been amended to add an “Unaudited Subsequent Event” to Note 15 of the Audit Report. This amendment describes the settlement of that certain lawsuit filed by Wolf Electronix, Inc. against AlphaSmart in the United States District Court for the District of Utah (the “Wolf Lawsuit”). The Wolf Lawsuit was settled on April 11, 2005, and as such was not included in the 2004 Form 10-K. In addition, a cross reference to the update in Note 15 has been added to Note 6, which describes the Wolf Lawsuit.

Except for the amendments described above, this Form 10-K/A does not modify or update any other disclosures in the 2004 Form 10-K.

1

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) Financial Statements

The following consolidated financial statements are included in this Annual Report on Form 10-K:

	Page
Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm	5
Consolidated Financial Statements:
Consolidated Balance Sheets	6
Consolidated Statements of Operations	7
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)	8
Consolidated Statements of Cash Flows	10
Notes to Consolidated Financial Statements	11

Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto.

(a)(2) Financial Statement Schedules

Schedule II — See Note 4 to the notes of the financial statements for the disclosure of Valuation and Qualifying Accounts

(a)(3) Exhibits

2.1	Agreement and Plan of Merger and Reorganization by and among Renaissance Learning, Inc., RLI Acquisition Corp., Inc., RLI Acquisition Sub, LLC and AlphaSmart, Inc. dated as of January 24, 2005. (Previously filed as an exhibit to AlphaSmart’s Current Report on Form 8-K on January 25, 2005, and incorporated herein by reference.)
3.1	Amended and restated certificate of incorporation. (Previously filed as Exhibit 3.4 to AlphaSmart’s Registration Statement on Form S-1 (No. 333-109267), and incorporated herein by reference.)
3.2	Amended and restated bylaws. (Previously filed as Exhibit 3.5 to AlphaSmart’s Registration Statement on Form S-1 (No. 333-109267), and incorporated herein by reference.)
4.1	Form of registrant’s specimen common stock certificate. (Previously filed as Exhibit 4.1 to AlphaSmart’s Registration Statement on Form S-1 (No. 333-109267), and incorporated herein by reference.)
10.1	1998 stock option plan. (Previously filed as Exhibit 10.1 to AlphaSmart’s Registration Statement on Form S-1 (No. 333-109267), and incorporated herein by reference.)
10.2	2003 stock plan. (Previously filed as Exhibit 10.3 to AlphaSmart’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, and incorporated herein by reference.)
10.3	2003 employee stock purchase plan. (Previously filed as Exhibit 10.3 to AlphaSmart’s Registration Statement on Form S-1 (No. 333-109267), and incorporated herein by reference.)
10.4	Form of directors’ and officers’ indemnification agreement. (Previously filed as Exhibit 10.4 to AlphaSmart’s Registration Statement on Form S-1 (No 333-109267), and incorporated herein by reference.)

2

10.5	Indemnification agreement by and between the registrant and Walter G. Kortschak. (Previously filed as Exhibit 10.5 to AlphaSmart’s Registration Statement on Form S-1 (No. 333-10927), and incorporated herein by reference.)
10.6	Loan agreement dated May 30, 2003 by and between the registrant and Union Bank of California, N.A. (Previously filed as Exhibit 10.6 to AlphaSmart’s Registration Statement on Form S-1 (no. 333-109267), and incorporated herein by reference.
10.7	First Amendment to Loan Agreement by and between Union Bank of California, N.A. and the registrant dated June 30, 2004. (Previously filed as Exhibit 10.7 to AlphaSmart’s Annual Report on Form 10-K (No. 000-50570), and incorporated herein by reference.)
10.8	Security agreement dated May 30, 2003 by and between the registrant and Union Bank of California, N.A., as agent and a lender. (Previously filed as Exhibit 10.7 to AlphaSmart’s Registration Statement on Form S-1 (No. 333-109267), and incorporated herein by reference.)
10.9	Real estate lease agreement by and between registrant and Milpitas Industrial Properties, Inc. dated February 10, 2003. (Previously filed as Exhibit 10.8 to AlphaSmart’s Registration Statement on Form S-1 (No. 333-109267), and incorporated herein by reference.)
10.10	Real estate lease agreement by and between registrant and AlphaVista Properties LLC dated February 11, 2001. (Previously filed as Exhibit 10.9 to AlphaSmart’s Registration Statement on Form S-1 (No. 333-109267), and incorporated herein by reference.)
10.11	Real estate sublease agreement by and between registrant and PumaTech Inc. dated February 4, 2002. (Previously filed as Exhibit 10.12 to AlphaSmart’s Registration Statement on Form S-1 (No. 333-109267), and incorporated herein by reference.)
10.12*	License agreement by and between the registrant and PalmSource, Inc. dated June 29, 2001. (Previously filed as Exhibit 10.13 to AlphaSmart’s Registration Statement on Form S-1 (No. 333-109267), and incorporated herein by reference.)
10.13*	Amendment no. 1 to the software license agreement for Palm OS Software by and among PalmSource, Inc., Palm Platform Overseas Limited and the registrant. (Previously filed as Exhibit 10.14 to AlphaSmart’s Registration Statement on Form S-1 (No. 333-109267) , and incorporated herein by reference.)
10.14*	Amendment no. 3 to the software license agreement for Palm OS Software by and among PalmSource, Inc., Palm Platform Overseas Limited and the registrant. (Previously filed as Exhibit 10.20 to AlphaSmart’s Quarterly Report on the Form 10-Q for the quarter ended March 31, 2004, and incorporated herein by reference.)
10.15*	License agreement settlement and mutual release by and between the registrant and Douglas J. Kelly dated April 1, 2002. (Previously filed as Exhibit 10.15 to AlphaSmart’s Registration Statement on Form S-1 (No. 333-109267), and incorporated herein by reference.)
10.16	Investors’ rights agreement dated June 4, 1999 by and among the registrant, Ketan D. Kothari, Manish D. Kothari, Joseph Barrus and the investors set forth on the signature pages thereto. (Previously filed as Exhibit 10.16 to AlphaSmart’s Registration Statement on Form S-1 (No. 333-109267), and incorporated herein by reference.)
10.17	Form of stock option agreement by and between the registrant and James M. Walker. (Previously filed as Exhibit 10.17 to AlphaSmart’s Registration Statement on Form S-1 (No. 333-109267), and incorporated herein by reference.)
10.18	Form of stock option agreement by and between the registrant and David M. Gallatin. (Previously filed as Exhibit 10.18 to AlphaSmart’s Registration Statement on Form S-1 (No. 333-109267), and incorporated herein by reference.)

3

23.1	Consent of PricewaterhouseCoopers LLP regarding the audited financial statements of AlphaSmart, Inc.
31.1	Certificate of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.
31.2	Certificate of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.
32.1	Certificate of the Chief Executive Officer furnished pursuant to Rule 13a-14(b) of the Exchange Act and Section 1340 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).
32.2	Certificate of the Chief Financial Officer furnished pursuant to Rule 13a-14(b) of the Exchange Act and Section 1340 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).

* Certain portions of this exhibit have been omitted from the copy filed and are subject to an order granting confidential treatment with respect thereto.

4

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of AlphaSmart, Inc:

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of AlphaSmart, Inc. and its subsidiary at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

San Jose, CA

February 21, 2005

5

ALPHASMART, INC.

CONSOLIDATED BALANCE SHEETS

	December 31,
	2004			2003
	(In thousands, except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	4,070		$	2,285
Accounts receivable, net		4,052			4,405
Inventory		4,087			2,818
Deferred tax assets		498			572
Other current assets		3,225			898
Total current assets		15,932			10,978
Property and equipment, net		572			709
Deferred tax assets, net of current portion		285			361
Other assets		2,193			1,644
Total assets	$	18,982		$	13,692
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	750		$	1,892
Accrued liabilities		2,171			3,957
Income taxes payable		642			625
Borrowings under loan facility, current portion		—			2,680
Capital lease obligations, current portion		92			76
Total current liabilities		3,655			9,230
Borrowings against line of credit		—			873
Borrowings under loan facility, net of current portion		—			1,340
Capital lease obligations, net of current portion		24			106
Other long-term liabilities		18			60
Mandatorily redeemable preferred stock (Redemption value of $10,335)		—			9,747
Total liabilities		3,697			21,356
Redeemable convertible preferred stock, par value $0.0001:
Authorized: 0 and 5,038,000 shares at December 31, 2004 and 2003, respectively
Issued and outstanding: 0 and 5,037,744 at December 31, 2004 and 2003, respectively		—			13,468
Contingencies and commitments (Note 6)
Stockholders’ equity (deficit):
Convertible preferred stock, par value $0.0001:
Authorized: 5,000,000 and 0 shares at December 31, 2004 and 2003, respectively
Issued and outstanding: no shares at December 31, 2004 and 2003		—			—
Common stock, par value $0.0001:
Authorized: 30,000,000 and 20,000,000 shares at December 31, 2004 and 2003, respectively
Issued and outstanding: 14,851,641 and 5,599,563 at December 31, 2004 and 2003, respectively		2			1
Additional paid-in capital		35,697			1,509
Unearned stock-based compensation		(137	)		(191	)
Retained earnings		15,721			13,509
Accumulated other comprehensive income		1			39
Distributions in excess of net book value		(35,999	)		(35,999	)
Total stockholders’ equity (deficit)		15,285			(21,132	)
Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit)	$	18,982		$	13,692

The accompanying notes are an integral part of these consolidated financial statements.

6

ALPHASMART, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	Years Ended December 31,
	2004			2003			2002
	(In thousands, except per share data)
Net revenue	$	35,461		$	38,864		$	35,631
Cost of revenue		17,149			18,803			16,951
Gross margin		18,312			20,061			18,680
Operating expenses:
Research and development		2,410			3,177			2,931
Sales and marketing		7,084			5,971			5,312
General and administrative		4,613			4,163			4,403
Total operating expenses		14,107			13,311			12,646
Income from operations		4,205			6,750			6,034
Other income (expense):
Interest income		31			9			20
Interest expense		(631	)		(1,010	)		(1,013	)
Other income (expense), net		20			(42	)		(25	)
Income before provision for income taxes		3,625			5,707			5,016
Provision for income taxes		(1,413	)		(2,283	)		(2,024	)
Net income	$	2,212		$	3,424		$	2,992
Net income per share:
Basic	$	0.16		$	0.62		$	0.55
Diluted	$	0.15		$	0.31		$	0.28
Shares used in computing per share amounts:
Basic		13,803			5,550			5,481
Diluted		14,727			10,955			10,808

The accompanying notes are an integral part of these consolidated financial statements.

7

ALPHASMART, INC.

CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK

AND STOCKHOLDERS’ EQUITY (DEFICIT)

	Redeemable Convertible Preferred Stock			Common Stock			Additional Paid-In Capital		Unearned Stock-Based Compensation			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Distributions in Excess of Net Book Value			Total Stockholders’ Equity (Deficit)
	Shares	Amount		Shares	Amount
	(In thousands, except share data)
Balance at January 1, 2002	5,037,744	$	13,468	5,469,139	$	1	$	1,026	$	—		$	7,093	$	(7	)	$	(35,999	)	$	(27,886	)
Issuance of common stock upon exercise of stock options	—		—	57,079		—		52		—			—		—			—			52
Issuance of common stock options to employees	—		—	—		—		8		(8	)		—		—			—			—
Issuance of common stock options to non-employees	—		—	—		—		98		(40	)		—		—			—			58
Amortization of unearned stock-based compensation	—		—	—		—		—		48			—		—			—			48
Comprehensive income:
Net income	—		—	—		—		—		—			2,992		—			—
Foreign currency translation loss	—		—	—		—		—		—			—		(4	)		—
Total comprehensive income																					2,988
Balance at December 31, 2002	5,037,744		13,468	5,526,218		1		1,184		—			10,085		(11	)		(35,999	)		(24,740	)
Issuance of common stock upon exercise of stock options	—		—	73,345		—		114		—			—		—			—			114
Issuance of common stock options to employees	—		—	—		—		175		(175	)		—		—			—			—
Issuance of common stock options to non-employees	—		—	—		—		36		(36	)		—		—			—			—
Amortization of unearned stock-based compensation	—		—	—		—		—		20			—		—			—			20
Comprehensive income:
Net income	—		—	—		—		—		—			3,424		—			—
Foreign currency translation gain	—		—	—		—		—		—			—		50			—
Total comprehensive income																					3,474
Balance at December 31, 2003	5,037,744	$	13,468	5,599,563	$	1	$	1,509	$	(191	)	$	13,509	$	39		$	(35,999	)	$	(21,132	)

8

ALPHASMART, INC.

CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK

AND STOCKHOLDERS’ EQUITY (DEFICIT) — (Continued)

	Redeemable Convertible Preferred Stock					Common Stock				Additional Paid-In Capital			Unearned Stock-Based Compensation			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Distributions in Excess of Net Book Value			Total Stockholders’ Equity (Deficit)
	Shares		Amount			Shares		Amount
	(In thousands, except share data)
Balance at January 1, 2004	5,037,744		$	13,468		5,599,563		$	1	$	1,509		$	(191	)	$	13,509	$	39		$	(35,999	)	$	(21,132	)
Issuance of common stock upon exercise of stock options	—			—		187,039			—		269			—			—		—			—			269
Shares repurchased	—			—		(584	)		—		(2	)		—			—		—			—			(2	)
Issuance of common stock under employee stock purchase plan	—			—		27,879			—		95			—			—		—			—			95
Conversion of redeemable convertible preferred stock	(5,037,744	)		(13,468	)	5,037,744			1		13,467			—			—		—			—			13,468
Net proceeds from initial public offering	—			—		4,000,000			—		20,351			—			—		—			—			20,351
Reversal of unearned stock-based compensation due to terminations	—			—		—			—		(9	)		9			—		—			—			—
Amortization of unearned stock-based compensation	—			—		—			—		—			45			—		—			—			45
Income tax benefit from exercise of stock options	—			—		—			—		17			—			—		—			—			17
Comprehensive income:
Net income	—			—		—			—		—			—			2,212		—			—
Foreign currency translation loss	—			—		—			—		—			—			—		(38	)		—
Total comprehensive income																									2,174
Balance at December 31, 2004	—		$	—		14,851,641		$	2	$	35,697		$	(137	)	$	15,721	$	1		$	(35,999	)	$	15,285

The accompanying notes are an integral part of these consolidated financial statements.

9

ALPHASMART, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2004			2003			2002
	(In thousands)
Cash flows from operating activities:
Net income	$	2,212		$	3,424		$	2,992
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Allowances for doubtful accounts and sales returns		190			230			(159	)
Depreciation and amortization		426			430			346
Deferred tax assets		150			(240	)		141
Amortization of unearned stock-based compensation		45			20			48
Tax benefit from exercise of stock options		17			—			—
Amortization of deferred financing fees		—			89			62
Accretion of interest on mandatorily redeemable preferred stock		73			728			675
Premium on mandatorily redeemable preferred stock		515			—			—
Change in operating assets and liabilities:
Accounts receivable		163			(428	)		(113	)
Inventory		(1,269	)		(1,440	)		95
Other current assets		(2,327	)		78			(757	)
Other assets		(198	)		(1,524	)		(72	)
Accounts payable		(1,142	)		575			(43	)
Accrued liabilities		(1,786	)		1,394			576
Income taxes payable		17			532			(652	)
Other long-term liabilities		(42	)		(66	)		126
Net cash (used in) provided by operating activities		(2,956	)		3,802			3,265
Cash flows from investing activities:
Purchases of property and equipment		(265	)		(210	)		(464	)
Purchases of capitalized software		(351	)		—			—
Net cash used in investing activities		(616	)		(210	)		(464	)
Cash flows from financing activities:
Proceeds from line of credit		—			873			—
Proceeds from loan facility		—			6,030			—
Repayment of line of credit		(873	)		(1,000	)		—
Repayment of loan facility		(4,020	)		(8,715	)		(3,380	)
Payments under capital lease obligations		(90	)		(62	)		(63	)
Proceeds from the issuance of common stock under stock option plans		269			114			52
Proceeds from the issuance of common stock under purchase plan		95			—			—
Repurchases of common stock		(2	)		—			—
Redemption of mandatorily redeemable preferred stock		(10,335	)		—			—
Net proceeds from sale of common stock in initial public offering		20,351			—			—
Net cash provided by (used in) financing activities		5,395			(2,760	)		(3,391	)
Effect of foreign currency translation		(38	)		50			(4	)
Net increase (decrease) in cash and cash equivalents		1,785			882			(594	)
Cash and cash equivalents at beginning of period		2,285			1,403			1,997
Cash and cash equivalents at end of period	$	4,070		$	2,285		$	1,403
Supplemental disclosure of cash flow information — See Note 13

The accompanying notes are an integral part of these consolidated financial statements.

10

ALPHASMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — FORMATION AND BUSINESS OF THE COMPANY:

AlphaSmart, Inc. (the “Company”) develops, markets and supports technology platforms that are focused on the K-12 education market and are based on low-cost, durable and easy-to-use technology. Designed for the specific needs of the education market, the products improve students’ fundamental academic and computing skills and provide educators with integrated tools to easily manage the classroom’s word processing, outlining, keyboarding, test taking and technology skill building needs. The products are distributed in the United States of America and other markets throughout the world.

The Company was incorporated in California in January 1992, as Intelligent Peripheral Devices, Inc. In November 1999, the Company was renamed AlphaSmart, Inc. From January 1, 1999 until June 4, 1999, the Company elected to be taxed as an “S” Corporation under the Internal Revenue Code. Thereafter, the Company has been taxed as a “C” Corporation under the Internal Revenue Code. In January 2004, the Company was reincorporated in Delaware.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of consolidation and basis of presentation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary AlphaSmart Europe Limited, which was incorporated in the United Kingdom. All significant intercompany transactions and account balances between AlphaSmart, Inc. and AlphaSmart Europe Limited have been eliminated.

Certain reclassifications have been made to the prior year’s financial statements to confirm to the current year’s presentation. These reclassifications had no effect on the prior years total assets, stockholders’ deficit or results of operations.

Foreign currency translation

The functional currency of the Company’s subsidiary is the British Pound. Assets and liabilities are translated using the exchange rate in effect at the balance sheet date and revenue and expense accounts are translated at the average exchange rate during the period. Resulting translation adjustments are recorded directly to accumulated other comprehensive income (loss).

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Stock split

In January 2004, the Company effected a 2 for 3 reverse split of its common stock and redeemable convertible preferred stock. All common stock and redeemable convertible preferred stock, Series A data and common stock option plan information has been restated to reflect the reverse split.

Cash and cash equivalents

Cash and cash equivalents consists of highly liquid investment securities with an original or remaining maturity of three months or less at the purchase date.

11

ALPHASMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Fair value of financial instruments

The reported amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximate fair value due to their short maturities. Based on borrowing rates available to the Company for loans with similar terms, the carrying value of borrowings under the line of credit and loan facility approximates fair value.

Inventory

Inventory, which includes raw materials and finished goods, is stated at the lower of cost or market with cost being determined using the first in, first out (“FIFO”) method. The Company provides an inventory allowance based upon excess and obsolete inventory determined primarily by future demand forecasts.

Property and equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of three to five years. Amortization of leasehold improvements is computed on a straight-line basis over the shorter of the facility lease term or the estimated useful lives of the improvements. The Company capitalizes tooling costs to the extent they relate to costs of tools and molds used to manufacture products that the Company markets. Capitalized tooling and molds are amortized over their estimated useful life of three years. Major additions and improvements to assets are capitalized, while replacements, maintenance and repairs that do not improve or extend the life of the assets are charged to operations. In the period assets are retired or otherwise disposed of, the costs and related accumulated depreciation and amortization are removed from the accounts, and any gain or loss on disposal is included in the results of operations.

Long-lived assets

The Company accounts for impairment of long-lived assets in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (or “SFAS No. 144”), which the Company adopted in 2002. SFAS No. 144 establishes a uniform accounting model for long-lived assets to be disposed of. SFAS No. 144 also requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to estimated undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Warranty accrual

The Company’s products carry a limited warranty ranging from one to three years that includes repair services or replacement parts as needed. The Company accrues estimated expenses for warranty obligations at the time that products are shipped based on historical experience and the Company’s estimate of the level of future costs. The factors that affect the Company’s warranty liability include the number of units sold, historical rates of warranty claims and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Warranty costs are reflected in the income statement as a cost of revenue.

12

ALPHASMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Changes in the Company’s estimated product warranty liability during the years ended December 31, 2004 and 2003 were as follows (in thousands):

	Year Ended December 31,
	2004			2003
Warranty accrual at beginning of period	$	300		$	294
Additions charged to cost of revenue during the period		144			245
Settlements made during the period		(187	)		(239	)
Warranty accrual at end of period	$	257		$	300

Certain risks and concentrations

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of money market funds. The Company places its temporary cash investments primarily with one financial institution which management believes to be creditworthy. Deposits with financial institutions may exceed the amount of insurance provided on such deposits.

The Company’s accounts receivable are derived from revenue earned from customers located primarily in the United States of America. The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers. The Company maintains an allowance for doubtful accounts receivable based upon management’s experience and estimate of collectibility of each account. To date losses from bad debt have not been material.

For the years ended December 31, 2004, 2003 and 2002, no single customer represented 10% or more of total revenue. At December 31, 2004, one customer accounted for 12% of total accounts receivable. At December 31, 2003, no single customer accounted for more than 10% of total accounts receivable.

The Company participates in a dynamic high technology industry and believes that changes in any of the following areas could have a material adverse effect on the Company’s future financial position or results of operations: delays in new product announcements and product introduction by the Company or its competitors, competitive pricing pressures, changes in the mix or markets in which products are sold, availability and costs of raw materials, reliance on subcontractors, lack of management continuity, political and economic conditions in various geographic areas, and costs associated with other events, such as intellectual property disputes and litigation among other factors.

Revenue recognition

Revenue is recognized when it is earned in accordance with applicable accounting standards, including Statement of Position No. 97-2, “Software Revenue Recognition,” as amended. The Company recognizes revenue from the sale of its devices and software upon shipment to the customer, provided at the time of shipment there is persuasive evidence of an arrangement with the customer, the fee is fixed or determinable, collection of the receivable is reasonably assured, and there are no remaining unfulfilled obligations.

Revenue recognized is net of an estimated amount for the return of devices and software. The Company measures estimated future returns related to the current period by analyzing historical returns, current economic trends and changes in customer demand and acceptance of their devices and software.

13

ALPHASMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company does not provide free updates to its devices or software, however it does provide limited customer support, which includes email and phone support as well as software bug fixes which can be downloaded from the Company’s website. The Company accrues for the costs associated with providing such customer support as a cost of revenue at the time the revenue is recognized.

Shipping and handling fees and costs

The Company classifies amounts billed to customers for shipping and handling as revenue. Costs incurred by the Company for shipping and handling have been classified as cost of revenue.

Software development costs

Software development costs have been accounted for in accordance with Statement of Financial Accounting Standards, or “SFAS”, No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed.” Costs incurred in the research and development of new products and enhancements to existing products are charged to expense as incurred until technological feasibility of the product or enhancement has been established through the inclusion of a detailed program design. Capitalized development costs are amortized to cost of revenue over the estimated useful life of the product. The Company had $351,000 of capitalized software development costs included in other assets as of December 31, 2004 and recorded $7,000 as amortization expense during the year ended December 31, 2004. There were no capitalized software development costs as of December 31, 2003.

Advertising costs

The cost of advertising is expensed as incurred. For the years ended December 31, 2004, 2003 and 2002, the Company incurred $203,000, $216,000 and $196,000 in advertising expenses, respectively.

Income taxes

The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires the use of the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. The provision for income tax expense is composed of taxes payable for the current year, plus the net change in deferred tax amounts during the year.

Segment reporting

The Financial Accounting Standards Board or “FASB” issued SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information,” which establishes annual and interim reporting standards for an enterprise’s business segments and related disclosures about its products, services, geographical areas and major customers. The method of determining what information to report is based on the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance.

The Company’s chief operating decision-maker is considered to be the Chief Executive Officer (“CEO”). The CEO reviews financial information for purposes of making operational decisions and assessing financial performance. This financial information is consistent with the information presented in the accompanying statements of operations. The Company operates in one reportable segment, the education market.

14

ALPHASMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

All long-lived assets are maintained in the United States of America. International sales were 13%, 11% and less than 10% of net revenue for the years ended December 31, 2004, 2003 and 2002, respectively.

Stock-based compensation

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation —Transition and Disclosure — an amendment of FASB Statement No. 123” (or “SFAS No. 148”), which amends FASB Statement No. 123, “Accounting for Stock-Based Compensation” (or “SFAS No. 123”), to provide alternative methods of transition for voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition and annual disclosure requirements of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The interim disclosure requirements are effective for interim periods ending after December 15, 2002. The Company uses the intrinsic value method of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” in accounting for its employee stock options, and presents disclosure of pro forma information required under SFAS No. 123, “Accounting for Stock-Based Compensation.”

Had compensation cost for the Company’s stock option grants to employees been determined based on the fair values of the stock option at the date of grant consistent with the provisions of SFAS No. 123, the Company’s net income would have changed to the pro forma amounts as follows (in thousands, except per share data):

	Years Ended December 31,
	2004			2003			2002
Net income as reported	$	2,212		$	3,424		$	2,992
Add: Stock-based employee compensation expense included in reported net income, net of related taxes		39			9			8
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related taxes		(115	)		(32	)		(43	)
Pro forma net income	$	2,136		$	3,401		$	2,957
Net income per share:
Basic:
As reported	$	0.16		$	0.62		$	0.55
Pro forma	$	0.15		$	0.61		$	0.54
Diluted:
As reported	$	0.15		$	0.31		$	0.28
Pro forma	$	0.15		$	0.31		$	0.27

15

ALPHASMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Fair value disclosures

For all option grants issued after September 30, 2003, the fair value of each option grant has been estimated using the Black-Scholes option pricing model with the following assumptions:

	Year Ended December 31, 2004			Three Months Ended December 31, 2003
Stock options
Weighted average risk-free interest rate		3.1	%		2.8	%
Expected life (in years)		4			4
Dividend yield		0	%		0	%
Volatility		55	%		65	%
Weighted average fair value	$	1.60		$	0.85
Employee Stock Purchase Plan
Weighted average risk-free interest rate		2.6	%		—
Expected life (in years)		0.5			—
Dividend yield		0	%		—
Volatility		55	%		—
Weighted average fair value	$	1.51			—

For all option grants issued prior to September 30, 2003, the fair value of each option grant has been estimated on the date of grant using the minimum value method with the following assumptions:

	Nine Months Ended September 30, 2003			Year Ended December 31, 2002
Stock options
Weighted average risk-free interest rate		2.6	%		4.1	%
Expected life (in years)		4			4
Dividend yield		0	%		0	%
Weighted average fair value	$	1.17		$	0.73

The Company accounts for stock-based compensation issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force (“EITF”) No. 96-18, “Accounting for Equity Investments That Are Issued to Non-Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” Stock-based compensation to non-employees is based on the fair value of the option estimated using the Black-Scholes model on the date of grant and revalued until vested. The assumptions used in the calculation for non-employee grants were: dividend yield of 0%; expected volatility of 65%; expected term of 10 years; risk free interest rate ranging from 1.21% to 4.66%.

Recent accounting pronouncements

In April, 2004, the EITF reached final consensus on EITF 03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128,” which requires companies that have participating securities to calculate earnings per share using the two-class method. This method requires the allocation of undistributed earnings to the common shares and participating securities based on the proportion of undistributed earnings that each would have been entitled to had all the period’s earnings been distributed. EITF 03-6 is effective for fiscal periods beginning

16

ALPHASMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

after March 31, 2004 and earnings per share reported in prior periods presented must be retroactively adjusted in order to comply with EITF 03-6. The Company adopted EITF 03-6 on April 1, 2004. The adoption of EITF Issue 03-6 did not have a material impact on the Company’s financial position or results of operations.

In November 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 151, “Inventory Costs — an amendment of ARB No. 43” (“FAS 151”), which is the result of its efforts to converge U.S. accounting standards for inventories with International Accounting Standards. FAS No. 151 requires idle facility expenses, freight, handling costs, and wasted material (spoilage) costs to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. FAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not believe that adoption of this standard will have a material impact on its consolidated financial statements.

In December 2004, FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment,” which requires companies to expense the fair value of employee stock options and other forms of share-based compensation. Accordingly, SFAS 123R eliminates the use of the intrinsic value method to account for share-based compensation transactions as provided under APB Opinion No. 25. Under SFAS 123R, the Company is required to determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The Company currently uses the Black-Scholes option-pricing model to value options for financial statement disclosure purposes. The use of a different model to value options may result in a different fair value than the use of the Black-Scholes option-pricing model. The Company is required to adopt SFAS 123R in the third quarter of fiscal 2005. The Company is evaluating the requirements of SFAS 123R and expects its impact on the Company’s results of operations will not be materially different from the amount as calculated under FAS 123, depending on the plan and its terms, the valuation model used, and other factors.

In December 2004, the FASB issued FASB Staff Position No. FAS 109-1 (“FAS 109-1”), “Application of FASB Statement No. 109, “Accounting for Income Taxes,” to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 (the “AJCA”).” The AJCA introduces a special 9% tax deduction on qualified production activities. FAS 109-1 clarifies that this tax deduction should be accounted for as a special tax deduction in accordance with Statement 109. The Company is evaluating its impact on its consolidated financial statements.

In December 2004, the FASB issued FASB Staff Position No. FAS 109-2 (“FAS 109-2”), “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creations Act of 2004.” The AJCA introduces a limited time 85% dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are met. FAS109-2 provides accounting and disclosure guidance for the repatriation provision. The Company does not expect the adoption of this new tax provision to have a material impact on its consolidated financial statements.

In December 2004, the FASB issued SFAS Statement No. 153, “Exchanges of Non-monetary Assets.” The Statement is an amendment of APB Opinion No. 29 to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges on non-monetary assets that do not have commercial substance. The effective date if for exchanges occurring in fiscal periods beginning after June 15, 2005. The Company believes that the adoption of this standard will have no material impact on its consolidated financial statements.

17

ALPHASMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 3 — NET INCOME PER SHARE:

Net income per share, which is also referred to as earnings per share (“EPS”) is computed in accordance with SFAS No. 128, “Earnings per Share.” Basic net income per share is computed by dividing net income by the weighted-average number of vested common shares outstanding for the period. Diluted net income per share is computed giving effect to all potentially dilutive securities, including stock options, common stock subject to repurchase and redeemable convertible preferred stock. Potentially dilutive securities are excluded from the computation of diluted net income per share if their effect would be antidilutive.

A reconciliation of the numerator and denominator used in the calculation of basic and diluted net income per share is as follows (in thousands):

	Years Ended December 31,
	2004			2003		2002
Numerator:
Net income	$	2,212		$	3,424	$	2,992
Denominator:
Weighted-average common stock outstanding		13,820			5,550		5,499
Less: Weighted-average shares subject to repurchase		(17	)		—		(18	)
Weighted-average shares used in computing basic net income per share		13,803			5,550		5,481
Effects of potentially dilutive securities:
Common stock options and shares subject to repurchase		428			367		289
Convertible preferred stock		496			5,038		5,038
Total weighted-average number of shares used in computing diluted net income per share		14,727			10,955		10,808

For the years ended December 31, 2004, 2003, and 2002 there were approximately 251,000, 53,000 and 24,000 anti-dilutive weighted shares, respectively, which were excluded from the calculation of diluted weighted average shares outstanding. The exercise prices of these options were greater than the average market price of the common shares for the period.

NOTE 4 — BALANCE SHEET COMPONENTS:

Accounts receivable consisted of the following (in thousands):

	December 31,
	2004			2003
Accounts Receivable, trade	$	4,176		$	4,529
Less: Allowance for doubtful accounts and returns		(124	)		(124	)
	$	4,052		$	4,405

The following summarizes the activity related to the allowance for doubtful accounts and product returns (in thousands):

	Balance at Beginning of Year		Charge (Credit)			Utilization			Balance at End of Year
Year ended December 31, 2004	$	124	$	190		$	(190	)	$	124
Year ended December 31, 2003		181		230			(287	)		124
Year ended December 31, 2002		340		(159	)		—			181

18

ALPHASMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Inventory consisted of the following (in thousands):

	December 31,
	2004		2003
Finished goods	$	3,637	$	2,533
Raw materials		450		285
	$	4,087	$	2,818

Other current assets consisted of the following (in thousands):

	December 31,
	2004		2003
Prepaid royalties and license fees	$	1,544	$	381
Non-trade receivables		1,405		193
Prepaid insurance		160		76
Other		116		248
	$	3,225	$	898

Property and equipment consisted of the following (in thousands):

	December 31,
	2004			2003
Fixtures and equipment	$	1,127		$	985
Leasehold improvements		411			374
Tooling and molds		788			670
		2,326			2,029
Less: Accumulated depreciation and amortization		(1,754	)		(1,320	)
	$	572		$	709

Leasehold improvements include $382,000 and $355,000 of assets acquired under capital leases at December 31, 2004 and 2003, respectively, with accumulated amortization of $280,000 and $179,000 at December 31, 2004 and 2003, respectively. Depreciation and amortization expense for the years ended December 31, 2004, 2003 and 2002 was $426,000, $430,000 and $346,000, respectively.

Other assets consisted of the following (in thousands):

	December 31,
	2004		2003
Prepaid royalties and license fees	$	1,677	$	—
Capitalized software		351		—
Long-term deposits		111		132
Deferred IPO costs		—		1,492
Other		54		20
	$	2,193	$	1,644

19

ALPHASMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Accrued liabilities consisted of the following (in thousands):

	December 31,
	2004		2003
Payroll and personnel related accruals	$	613	$	1,094
Sales and other taxes payable		541		685
Professional services		488		1,210
Warranty		257		300
Sales commissions		106		120
Royalties		28		269
Lease restructuring		—		112
Other		138		167
	$	2,171	$	3,957

NOTE 5 — BORROWINGS:

Loan facility

In June 1999, the Company entered into a $20,000,000 term loan facility with a bank with a maturity date of June 2004. Interest was calculated and paid monthly. The loan was collateralized by substantially all of the assets of the Company. In May 2003, the Company fully repaid the remaining principal of $5,860,000 and interest of $29,000 related to the $20,000,000 term loan facility.

In May 2003, the Company entered into a $6,030,000 term loan with a bank. The loan bore interest at a bank rate that was 4% per annum through February 2004. Interest and principal were due and payable quarterly. The loan was collateralized by substantially all of the assets of the Company. The loan would have matured in May 2005. Under the terms of the term loan facility, the Company was required to maintain certain financial covenants regarding its net worth, profitability, fixed charges to EBITDA, and total indebtedness to EBITDA.

In February 2004, the Company completed an initial public offering and used a portion of the proceeds to repay the remaining principal of $4,020,000 and interest of $30,000 related to the $6,030,000 term loan facility.

Line of credit

In June 1999, the Company entered into a revolving line of credit agreement with a bank for borrowings of up to $5,000,000. Interest accrued monthly at the bank’s prime rate. Amounts borrowed under this agreement were collateralized by substantially all of the assets of the Company. The line of credit agreement would have expired in June 2004. In May 2003, the Company fully repaid the remaining principal of $1,000,000 and interest of $8,000 related to the $5,000,000 line of credit.

In May 2003, the Company entered into a revolving line of credit agreement with a bank for borrowings up to $3,000,000. Interest accrues monthly at the banks reference rate (5.25% at December 31, 2004), or 1.5% above the banks LIBOR rate (4.06% at December 31, 2004), whichever the Company selects. Amounts borrowed under this agreement are collateralized by substantially all of the assets of the Company. Interest expense is due monthly on the first day of each month. The line of credit agreement expires in May 2005. Under the terms of the agreement, the Company is required to maintain certain financial covenants regarding its net worth, profitability, and selected financial ratios. At December 31, 2004, the Company had no outstanding balance under this line of credit.

20

ALPHASMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 6 — CONTINGENCIES AND COMMITMENTS:

Claims and litigation settlement

In April 2002, the Company reached a final settlement with a third party in an intellectual property dispute. The Company agreed to pay $1,000,000 over the period April 1, 2002 through January 1, 2009 and issued 13,334 common stock options at exercise price of $0.02 per share, vesting immediately. The costs of this settlement are to be expensed from April 1, 2002 through January 1, 2009 and have been included in the minimum royalty payment commitment table below.

On November 20, 2003, one of the Company’s contract manufacturers, Wolf Electronix, Inc. (“Wolf”), filed a lawsuit against the Company in United States District Court for the District of Utah, alleging that the Company breached its contract with Wolf and violated a U.S. federal anti-discrimination statute by no longer using Wolf for volume order manufacturing. Wolf is seeking an injunction and unspecified damages in connection with its complaint. On December 17, 2003, the Company answered the complaint and denied Wolf’s allegations. Discovery is in progress. Trial is currently scheduled for May 2005. The Company believes Wolf’s claims lack merit and that it has meritorious defenses to each claim. Accordingly, management does not believe it is probable that a material loss will arise from this claim. Note 15 contains an update to this matter.

From time to time the Company is involved in litigation arising out of claims in the normal course of business. Based on the information presently available, including discussion with outside legal counsel, management believes that there are no claims or actions pending or threatened against the Company, the ultimate resolution of which will have a material adverse effect on the Company’s financial position, liquidity or results of operations.

Capital leases

The Company acquired leasehold improvements under capital leases expiring through 2008. Future minimum lease payments under the capital leases as of December 31, 2004, are as follows (in thousands):

Years Ending December 31,
2005	$	100
2006		20
2007		4
2008		1
Total minimum lease payments		125
Less amount representing interest		(9	)
Present value of minimum lease payments		116
Less current portion of capital lease obligations		(92	)
Capital lease obligations, net of current portion	$	24

Commitments

The Company has entered into operating leases for its facilities with original terms ranging from one to five years. The Company has also entered into royalty agreements with rights to license software and technology used in its products with future minimum royalty payments. In February 2004, the Company extended the term of its licensing agreement with PalmSource, Inc. to December 2008. At December 31, 2004, the future minimum lease

21

ALPHASMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

payments under all noncancelable leases and sub-leases and minimum royalty payments having initial terms longer than one year are as follows (in thousands):

Years Ending December 31,	Minimum Lease Payments		Minimum Royalty Payments
2005	$	557	$	3,282
2006		217		1,508
2007		198		100
2008		39		25
2009		—		—
	$	1,011	$	4,915

Rent expense for the years ended December 31, 2004, 2003 and 2002 was $729,000, $541,000 and $691,000 respectively. The minimum royalty payments included above include royalty payments to PalmSource, Inc. and Douglas J. Kelly in respect of certain technology used in the Company’s products. The PalmSource, Inc. contractual commitment expires in December 2008 and thereafter is renewable if both parties agree. The Kelly patent contractual commitment expires in March 2008.

NOTE 7 — LIABILITIES: MANDATORILY REDEEMABLE PREFERRED STOCK:

During 1999, the Company authorized and issued 100,000 shares of mandatorily redeemable preferred stock at a price of $69.46 per share. In accordance with the terms of the Company’s then existing articles of incorporation, the Company, within 10 days of the closing of an initial public offering of the Company’s common stock, was obligated to redeem the outstanding shares for the redemption proceeds of $69.46 per share plus all accrued and unpaid dividends and such additional amount as was necessary to increase the aggregate redemption proceeds to $103.35 per share. Within 10 days of the closing of the Company’s initial public offering on February 11, 2004, all 100,000 shares of mandatorily redeemable preferred stock were redeemed for an aggregate amount of $10,335,000. Before this redemption, the rights, preferences and privileges of the mandatorily redeemable preferred stockholders were as follows:

Dividends

The holders of mandatorily redeemable preferred stock were entitled to receive cumulative dividends accrued on a daily basis at the rate of 7.52% per annum of the liquidation value from date of issuance of mandatorily redeemable preferred stock, to the first to occur of liquidation of the Company, redemption of the mandatorily redeemable preferred stock, or the date such shares are otherwise acquired by the Company. Accordingly, for the years ending December 31, 2004, 2003 and 2002, $588,000, $728,000 and $675,000 in dividends were accrued for, respectively, and reflected in the financial statements as interest expense as the mandatorily redeemable preferred stock had the characteristics of a debt instrument and was classified appropriately as a liability in the balance sheet as follows (in thousands):

Balance at January 31, 2002	$	8,344
Accretion of interest		675
Balance at December 31, 2002		9,019
Accretion of interest		728
Balance at December 31, 2003		9,747
Accretion of interest		588
Redemption of mandatorily redeemable preferred stock		(10,335	)
Balance at December 31, 2004	$	—

22

ALPHASMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Liquidation

In the event of any liquidation, dissolution, or winding up of the Company, each holder of mandatorily redeemable preferred stock was entitled to receive liquidation proceeds equal to $69.46 per share plus all accrued and unpaid dividends and such additional amount as may be necessary to increase the aggregate liquidation proceeds to $103.35 per share prior to and in preference to distributions to the holders of common stock and holders of redeemable convertible preferred stock.

Redemption

On the first day of June each year, commencing 2005 and ending in 2006, the Company was obligated to redeem the lesser of: (a) 51,263 shares on June 1, 2005 and 48,737 shares on June 1, 2006, or (b) the number of shares of mandatorily redeemable preferred stock then outstanding for redemption proceeds of $69.46 per share, plus all accrued and unpaid dividends and such additional amount as may be necessary to increase the aggregate redemption proceeds to $103.35 per share. In the event of: (i) a change in ownership of the Company whereby any person or group of persons, other than the holders of common stock and mandatorily redeemable convertible preferred stock, acquired capital stock of the Company possessing the voting power to elect a majority of the Company’s Board of Directors, or (ii) any sale or transfer of a majority of the assets of the Company, or (iii) any merger or consolidation in which the Company is not the surviving Company, the Company was obligated to redeem the outstanding mandatorily redeemable preferred stock for redemption proceeds of $69.46 per share, plus all accrued and unpaid dividends and such additional amount as may be necessary to increase the aggregate redemption proceeds to $103.35 per share. Upon an initial public offering of the Company’s common stock, the Company was obligated to redeem any then outstanding shares of mandatorily redeemable preferred stock for redemption proceeds of $69.46 per share, plus all accrued and unpaid dividends and such additional amount as may be necessary to increase the aggregate redemption proceeds to $103.35 per share. The Company could, at any time after the first anniversary of the date of issuance of the mandatorily redeemable preferred stock, have redeemed all or any portion of the shares of mandatorily redeemable preferred stock then outstanding. Within 10 days of the closing of the Company’s initial public offering on February 11, 2004, all 100,000 shares of mandatorily redeemable preferred stock were redeemed for an aggregate amount of $10,335,000.

Voting

Shares of mandatorily redeemable preferred stock had no voting rights, however they had certain rights of veto. As long as any mandatorily redeemable preferred stock remained outstanding, the Company was obligated to obtain approval from a majority of the holders of mandatorily redeemable preferred stock in order to: (i) sell, lease or otherwise dispose of, a majority of the consolidated assets of the Company, (ii) effect a merger or consolidation, (iii) liquidate, dissolve or effect a recapitalization or reorganization, (iv) change the number of authorized shares of any class or series of stock, or any notes or debt securities containing equity features having any preference to or parity with any such preference of the mandatorily redeemable preferred stock, or (v) amend the articles of incorporation as related to mandatorily redeemable preferred stock.

NOTE 8 — REDEEMABLE CONVERTIBLE PREFERRED STOCK:

Redeemable convertible preferred stock, at December 31, 2003 consisted of the following (in thousands, except share data):

	Number of Shares		Liquidation Amount		Proceeds Net of Issuance Costs
	Authorized	Outstanding
2003	5,038,000	5,037,744	$	10,335	$	13,468

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ALPHASMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In January 2004, the Company was reincorporated in Delaware. The Company’s certificate of incorporation in Delaware authorized the Company to issue 5,138,000 shares of $0.0001 par value preferred stock. Immediately prior to the closing of the Company’s initial public offering on February 11, 2004, all 5,037,744 shares of redeemable convertible preferred stock were converted to 5,037,744 shares of common stock pursuant to an automatic conversion election of holders of a majority of the then outstanding redeemable convertible preferred stock.

The rights, preferences and privileges of the redeemable convertible preferred stockholders were as follows:

Dividends

The holders of redeemable convertible preferred stock were not entitled to receive any dividends. As long as any redeemable convertible preferred stock was outstanding, without prior written consent of a majority of the holders of redeemable convertible preferred stock, the Company could not redeem, purchase or otherwise acquire directly or indirectly any common stock, nor could the Company directly or indirectly pay or declare any dividend or make any distribution upon any common stock.

Liquidation

In the event of any liquidation, dissolution, or winding up of the Company, after payment to the holders of mandatorily redeemable convertible preferred stock, and prior to any distribution to the holders of common stock, the holders of redeemable convertible preferred stock were entitled to receive the greater of: (i) an amount equal to $2.05 per share, as adjusted for stock dividends, splits, combinations or recapitalizations, or (ii) the maximum consideration payable with respect to each share of common stock in such liquidation, dissolution or winding up of the Company multiplied by the number of shares of common stock issuable upon conversion of each share of redeemable convertible preferred stock. For purposes of holders of redeemable convertible preferred stock, a liquidation, dissolution or winding up of the Company would have included the sale of a majority of the Company’s assets or the merger or consolidation of the Company whereby, immediately subsequent to such event, previous shareholders of the Company hold a minority voting interest in the surviving corporation.

Voting

Each share of redeemable convertible preferred stock had voting rights equal to the number of shares of common stock into which it was convertible and voted together as one class with the common stock.

As long as at least 1,000,000 shares of redeemable convertible preferred stock remained outstanding, the Company was obligated to obtain approval of a majority of the holders of redeemable convertible preferred stock in order to: (i) sell, lease or otherwise dispose of, a majority of the consolidated assets of the Company, (ii) effect a merger or consolidation, (iii) liquidate, dissolve or effect a recapitalization or reorganization, (iv) change the number of authorized shares of redeemable convertible preferred stock, (v) authorize, create or issue any shares of any class or series of stock, or any notes or debt securities containing equity features having any preference to or parity with any such preference of the redeemable convertible preferred stock, or (vi) amend the certificate of incorporation as related to redeemable convertible preferred stock.

Conversion

Each share of redeemable convertible preferred stock was convertible, at the option of the holder, into shares of common stock, at an initial conversion price of $2.73 per share as adjusted for dividends and distributions, reclassifications, reorganization, splits, exchange or substitution, issuance of additional dilutive

24

ALPHASMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

securities, or sale of shares below the series conversion price. Redeemable convertible preferred stock would have automatically converted to common stock at a rate of one-to-one at the effective conversion price upon the earlier of (i) the closing of a firm commitment underwritten public offering in which the aggregate gross proceeds to the Company were at least $20,000,000 or (ii) the consent of holders of more than 50% of the then outstanding shares of redeemable convertible preferred stock.

At December 31, 2004 and 2003, the Company reserved 0 and 5,037,744 shares of common stock, respectively, for the conversion of redeemable convertible preferred stock.

In February 2004, the Company’s certificate of incorporation was amended to authorize the Company to issue 5,000,000 of $0.0001 par value convertible preferred stock. At December 31, 2004, there were no shares of convertible preferred stock outstanding. The Board of Directors has the authority to issue the undesignated preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof.

NOTE 9 — COMMON STOCK:

In January 2004, the Company was reincorporated in Delaware. The Company’s certificate of incorporation authorized the Company to issue 20,000,000 shares of $0.0001 par value common stock. Each share of common stock has the right to one vote. In February 2004, the Company’s certificate of incorporation was amended to authorize the Company to issue 30,000,000 shares of $0.0001 par value common stock. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the Board of Directors, subject to the prior rights of holders of mandatorily redeemable preferred stock, and redeemable convertible preferred stock, outstanding at the time.

Stock Purchase Plan

In September 2003, the Board of Directors adopted the 2003 Employee Stock Purchase Plan (the “Purchase Plan”), which was established concurrent with our initial public offering in February 2004. A total of 166,675 shares of our common stock were initially reserved for issuance under the Purchase Plan. In addition, the Purchase Plan provides for annual increases in the number of shares available for issuance under the Purchase Plan on the first day of each fiscal year, beginning with January 1, 2005, equal to the lesser of 2% of the outstanding shares of common stock on the first day of the fiscal year, 533,360 shares of common stock, or such other amount as the board of directors may determine. The offering periods are for six months and generally start on the first trading day on or after February 1 and August 1 of each year, except for the first such offering period, which commenced on February 6, 2004. The purchase price is 85% of the lower of the fair market value of the common stock at the beginning of an offering period or at the end of the same period. The purchase plan permits participants to purchase common stock through payroll deductions of up to 15% of their eligible compensation, subject to limitations, including a maximum purchase of 1,667 shares during any offering period. Unless previously terminated by the administrator, the 2003 Purchase Plan will terminate on the 20th anniversary of its original approval by the board of directors.

During the year ended December 31, 2004, the Company issued 27,879 shares of our common stock under the Purchase Plan at a weighted average price of $3.40 per share. At December 31, 2004, approximately 138,796 shares of common stock were reserved for future issuance under the Purchase Plan.

Stock Option Plans

In August 1998, the Company adopted the 1998 stock option plan and in September 2003, the Company adopted the 2003 stock option plan, together known as (the “Plans”). Under the Plans, eligible employees,

25

ALPHASMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

directors, and consultants can receive options to purchase shares of the Company’s common stock at a price not less than 100% of the fair value on the date of grant, in the case of incentive stock options and nonqualified stock options granted under the 1998 stock option plan, and the price established by the administration of the 2003 stock option plan, in the case of nonqualified stock options granted under the 2003 stock option plan. The options granted under the Plans are exercisable over a maximum of ten years from the date of grant and generally vest in various installments over a two to five year period.

At December 31, 2004 and 2003, the Company had reserved an aggregate of 1,945,569 shares of common stock for issuance under the Plans.

A summary of the stock option activity is set forth below (in thousands, except share and per share data):

	Shares Available for Grant		Outstanding
			Number of Shares		Exercise Price		Aggregate Price			Weighted Average Exercise Price
Balances at January 1, 2002	225,482		801,527		$	0.30-$1.50	$	1,111		$	1.39
Exercised	—		(57,079	)	$	0.30-$4.50		(52	)	$	0.91
Granted	(64,657	)	64,657		$	0.02-$4.50		232		$	3.59
Cancelled	16,665		(16,665	)	$	1.50		(25	)	$	1.50
Granted outside of the 1998 plan	—		13,334		$	0.02		1		$	0.02
Balances at December 31, 2002	177,490		805,774		$	0.02-$4.50		1,267		$	1.57
Additional shares authorized	378,824		—
Exercised	—		(73,345	)	$	0.30-$4.50		(114	)	$	1.55
Granted	(291,982	)	291,982		$	4.50-$8.00		1,586		$	5.43
Cancelled	66,092		(66,092	)	$	0.30-$4.50		(132	)	$	2.00
Balances at December 31, 2003	330,424		958,319		$	0.02-$8.00	$	2,607		$	2.72
Exercised	—		(187,039	)	$	0.30-$6.00		(269	)	$	1.44
Granted	(187,214	)	187,214		$	2.96-$8.00		1,074		$	5.74
Cancelled	30,085		(30,085	)	$	0.30-$8.00		(142	)	$	4.72
Balances at December 31, 2004	173,295		928,409		$	0.02-$8.00	$	3,270		$	3.53

The following table summarizes information with respect to stock options outstanding at December 31, 2004:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Average Contractual Life (Years)	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$0.02-$0.30	34,332	5.24	$	0.19	34,332	$	0.19
$1.50-$1.50	409,060	6.24	$	1.50	409,060	$	1.50
$2.96-$4.27	91,333	9.42	$	3.95	5,999	$	3.00
$4.50-$4.50	140,073	8.02	$	4.50	136,656	$	4.50
$5.58-$5.64	33,950	9.27	$	5.58	—	$	0.00
$6.00-$6.00	144,333	8.71	$	6.00	121,973	$	6.00
$8.00-$8.00	75,328	9.84	$	8.00	75,328	$	8.00
	928,409				783,348

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ALPHASMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

At December 31, 2003, approximately 466,000 options to purchase common stock of the Company were exercisable at a weighted average exercise price of $1.50.

NOTE 10 — LEASE RESTRUCTURING CHARGE:

On April 8, 2002, the Company vacated its office facility in Cupertino, California and shifted its operations to the new office facility in Los Gatos, California. The Company sub-let the office facility in Cupertino, California to a third-party for the remaining term of the lease which expired in August 2004. In 2002, the Company recognized a charge of $305,000, which is included in general and administrative expenses, on the restructuring of the lease that was comprised of $290,000 of net rental costs for the remaining lease term and $15,000 of furniture and fixtures written off. Net rental costs of $290,000 include $106,000 for 2002, $117,000 for 2003 and $67,000 in 2004.

NOTE 11 — INCOME TAXES:

The U.S. and non-U.S. components of income before income taxes are (in thousands):

	Years Ended December 31,
	2004		2003		2002
U.S. operations	$	3,538	$	5,547	$	4,925
Non-U.S. operations		87		160		91
	$	3,625	$	5,707	$	5,016

The income tax provision comprises (in thousands):

	Years Ended December 31,
	2004		2003			2002
Current tax expense:
Federal	$	1,146	$	2,111		$	1,629
State		89		363			226
Foreign		27		50			28
		1,262		2,524			1,883
Deferred tax expense:
Federal		134		(215	)		105
State		17		(26	)		36
		151		(241	)		141
	$	1,413	$	2,283		$	2,024

The difference between the actual tax rate and the statutory rates is as follows:

	Years Ended December 31,
	2004		2003		2002
Tax at federal statutory rate	34.0	%	34.0	%	34.0	%
State, net of federal benefit	2.1		3.7		3.2
Research credit	(3.0	)	(3.4	)	(2.3	)
Nondeductible interest	5.5		4.3		3.0
Other	0.4		1.4		2.3
Provision for taxes	39.0	%	40.0	%	40.2	%

27

ALPHASMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The components of the net deferred tax asset are as follows (in thousands):

	December 31,
	2004			2003
Deferred tax assets:
Depreciation and amortization	$	285		$	361
Reserves and accruals		498			572
		783			933
Current deferred tax assets		(498	)		(572	)
Long term deferred tax assets	$	285		$	361

As of December 31, 2004, the Company has not provided U.S. income taxes on $339,000 of non-U.S. subsidiary income because such income is intended to be re-invested indefinitely.

NOTE 12 — RELATED PARTY TRANSACTIONS:

Capital lease

The Company acquired leasehold improvements which are recognized as a capital lease for one of its facilities, which is leased under an operating lease from certain shareholders and employees of the Company. The future minimum lease payments have been included in Note 6.

Operating lease

The Company leases one of its facilities under an operating lease from certain shareholders and employees of the Company. In 2004, 2003 and 2002, the Company incurred $84,000, $81,000 and $65,000, respectively, of rent expense in connection with this operating lease. The lease expires in 2006 and the future minimum lease payments under this lease at December 31, 2004 are as follows (in thousands):

Years Ending December 31,
2005	$	85
2006		21
	$	106

Reseller agreement

The Company entered into a reseller agreement with an entity controlled by the spouse of one of the employees of the Company to distribute its products. The terms of the agreement are substantially the same as those with the Company’s other third party resellers. For the years ended December 31, 2004, 2003 and 2002, the Company recorded revenue of $0, $0, and $478,000, respectively, from this related party reseller at gross margins of between 11% and 90%. At December 31, 2004 and 2003, there were no amounts included in accounts receivable owing from this related party reseller. On July 22, 2003, the Company settled the outstanding balance of $66,000 in exchange for certain technology assets received from the related party.

28

ALPHASMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 13 — SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

	Years Ended December 31,
	2004			2003		2002
Supplemental disclosures (in thousands):
Interest paid	$	3,432		$	303	$	532
Taxes paid	$	1,389		$	2,278	$	2,535
Capital and equipment acquired under capital leases	$	24		$	—	$	—
Unearned stock based compensation	$	(9	)	$	211	$	48
Disposition of fully depreciated property and equipment	$	—		$	57	$	3

NOTE 14 — RETIREMENT PLAN:

The Company maintains a savings plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). Under the 401(k) Plan, participating employees may defer a portion of their pretax earnings up to the Internal Revenue Service annual contribution limit. The Company’s contributions to the 401(k) Plan are discretionary. In the years ended December 31, 2004, 2003 and 2002, the Company contributed $222,000, $152,000 and $198,000 to the 401(k) Plan, respectively.

NOTE 15 — SUBSEQUENT EVENTS:

The Company entered into an Agreement and Plan of Merger with Renaissance Learning, Inc., RLI Acquisition Corp, Inc. and RLI Acquisition Sub, LLC on January 24, 2005. Under the agreement, unanimously approved by the boards of directors of both companies, each Company stockholder will receive $3.75 per share, in a transaction that is valued at approximately $57 million. The Company stockholders will have the option to be paid in cash, stock or some combination of the two, subject to redesignation procedures set forth in the merger agreement. The mergers, subject to approval of the Company’s stockholders, are expected to be completed in the second quarter of 2005.

In February 2005, the Company suspended its Purchase Plan.

On April 11, 2005, the Company agreed in principle to settle the litigation with Wolf Electronix, Inc. (“Wolf”). Under the terms of the settlement, the Company expects to incur an additional charge and net payment of $355,000, after recovery from insurers, in full and final settlement of the lawsuit. The Company has recorded the net charge of $355,000 as an expense in its financial statements for the three months ended March 31, 2005.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Act of 1934, the Registrant, AlphaSmart, Inc., a Delaware corporation, has duly caused this Annual Report on Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Gatos, State of California, on April 15, 2005.

ALPHASMART, INC.
By:	/s/    KETAN D. KOTHARI
	Ketan D. Kothari
	Chief Executive Officer and Chairman

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