Ventajas de los juegos en la educación

Public Sale of Common Stock

We completed our IPO of 3.3 million shares of our common stock in December 2004 for net proceeds of $41.7 million. Offering costs of $4.6 million were offset against the proceeds. Upon completion of the IPO, all of the then outstanding shares of Series A and Series B automatically converted to a total of 2,346,486 shares of our common stock, and the common stock put agreement with one of our founders expired.

Accordingly, the remaining $547,000 related to the put agreement was reclassified to common stock. In addition, our authorized common stock increased from 12 million shares to 100 million shares.

Registration Rights

Upon completion of our IPO, certain holders of shares of common stock have registration rights, including the right to require us to register the sale of their shares and the right to include their shares in public offerings we undertake in the future. We registered all shares of common stock that are issuable under our stock option plans and employee stock purchase plan, and they may be freely sold in the public market, subject to certain lock-up restrictions.

Repurchase Option

We or our designee had the option to repurchase all shares held by any shareholder that such shareholder proposed to sell, assign, pledge, encumber, transfer, or otherwise dispose of for value to a competitor. Such repurchases were at the same terms and conditions specified in a bona fide third party offer for any or all of such securities. The repurchase option lapsed upon our IPO. We repurchased the following shares pursuant to this repurchase option during the periods indicated (including shares repurchased pursuant to the Stock Put Agreement described below):

Stock Put Agreement

We had a common stock put agreement with one of our original founders. As part of the agreement, at the founder’s annual option on or before July 1, we were required to purchase common shares valued at up to $150,000 based on our last annual valuation. Additional common shares could be purchased at our discretion if so agreed to by the founder. In 2004, we purchased 15,790 shares at $9.50 per share. In 2003, we repurchased 30,000 shares at $5.00 per share and in 2002, we purchased 21,428 shares at $7.00 per share. This agreement terminated upon our IPO in December 2004.

Common Stock Warrant

In 1998, we issued a warrant for the purchase of 15,000 shares of our common stock at $3.80 per share. The warrant entitled the holder to additional shares upon the satisfaction of certain conditions, as defined in the agreement. During 1999, one such condition was satisfied, increasing the number of shares eligible for purchase under the warrant to 25,000. In December 2003, we issued 18,091 shares of our common stock upon the exercise of a portion of the warrants in exchange for $57,000 of cash and the surrender of the remaining warrants to purchase 6,909 shares of our common stock. The fair value of the initial 15,000 shares and the additional 10,000 shares under the warrant was determined using the Black-Scholes valuation model with the following assumptions: no dividend yield; risk-free interest rates of 4.45% and 6.19%, respectively; expected volatility of 81%; and contractual lives of 5.0 and 4.5 years, respectively. The fair value of these warrants is not material to the financial statements.

F-19

Year Ended December 31, 2004 2003 2002

Number of shares repurchased 23,562 61,776 56,940

Notes Receivable for Common Stock

We have sold shares of common stock for notes receivable. The notes were due and payable at various dates and bore interest at various rates. The notes were full recourse notes and were partially secured by the shares of common stock issued thereunder. During 2002, the notes were paid in full.

Stock Option Plans

Our stock incentive plans include our 1993 Stock Incentive Plan (the “1993 Plan”) and our 2000 Stock Incentive Plan (the “2000 Plan”) (together, the “Plans”) and provide for the granting to employees of either incentive stock options or nonqualified stock options. Incentive stock options must be granted at an exercise price not less than 100% of the fair market value per share at the grant date. Nonqualified stock options granted or shares sold under the Plans cannot be granted or sold at a price less than 85% of the fair market value per share at the date of grant or sale. The terms of options granted under the Plans is 10 years, and the right to exercise options granted generally vests 20% each year, with varying initial holding periods. The 1993 Plan expired during 2003 and any remaining unissued options were canceled. The 2000 Plan expires October 15, 2010. In addition, options currently outstanding under the 1993 Plan will not be available for reissuance upon cancellation. We have authorized a total of 1.8 million shares of common stock for issuance under the 2000 Plan.

At December 31, 2004, 611,417 shares were available for future grants, and we had 2,549,505 shares of our common stock reserved for future issuance under the Plans. Stock option activity for each of the years in the three-year period ended December 31, 2004 is as follows:

During 2003, we issued options to purchase 380,450 shares of common stock to our employees and non-employee directors. Due to the difference between the exercise price and the estimated fair value of common stock, approximately $1.0 million of compensation expense is to be amortized over the vesting period of five years. During 2004, we granted options to purchase 496,250 shares of common stock to employees and non-employee directors at fair market value and, therefore, did not record any compensation expense related to these grants.

F-20 Options Outstanding Weighted Average Exercise Price Outstanding at December 31, 2001 1,857,097 $ 3.94 Granted 227,200 5.55 Exercised (33,367 ) (0.92 ) Forfeited (225,265 ) (5.63 ) Outstanding at December 31, 2002 1,825,665 3.98 Granted 380,450 5.26 Exercised (130,397 ) (0.81 ) Forfeited (302,223 ) (3.82 ) Outstanding at December 31, 2003 1,773,495 4.52 Granted 496,250 11.71 Exercised (145,668 ) (1.38 ) Forfeited (185,989 ) (3.82 ) Outstanding at December 31, 2004 1,938,088 $ 6.65

Stock options granted by quarter were as follows:

The fair market value for options granted during 2003 was determined retrospectively based primarily on a negotiated transaction in

December 2003. The fair market value for options granted during 2004 was determined contemporaneously by our Board of Directors utilizing an analysis that considers factors such as recent arms-length transactions, our financial condition and recent operating results, our competitive position and future prospects, the value of comparable public companies, the lack of an active public market for our common stock and the likelihood of an initial public offering.

The following information relates to options outstanding and exercisable under the Plans at December 31, 2004:

At December 31, 2003 and 2002, 1,028,825 and 1,170,814 options, respectively, were exercisable at weighted average exercise prices of $3.65 per share and $2.87 per share, respectively.

Deferred Stock-Based Compensation

During 2003, we issued 380,450 options to employees and non-employee directors. Due to the difference between the exercise price and the estimated fair value of common stock, approximately $1.0 million of compensation expense is to be amortized over the vesting period of five years. We recognized compensation expense of $326,000 in 2004 and $139,000 in 2003 related to these options. Additionally, in 2003, we recognized the remaining $38,000 in deferred stock-based compensation related to options issued to employees and non-employee directors prior to our attempted public offering in 2000.

Previously recognized compensation expense related to unvested options that are forfeited is reversed in the quarter that the options are forfeited and no future amortization related to the forfeited options is recognized. Reversals of compensation expense totaled $117,000, $32,000 and $88,000 in 2004, 2003 and 2002, respectively.

F-21

Grants made during quarter ended (unaudited)

Number of options granted Exercise price per share Fair market value per share Intrinsic value per share March 31, 2003 — $ — $ — $ — June 30, 2003 — — — — September 30, 2003 181,000 5.00 8.00 3.00 December 31, 2003 199,450 5.50 8.00 2.50 March 31, 2004 11,500 9.50 9.50 — June 30, 2004 38,500 9.50 9.50 — September 30, 2004 173,000 9.50 9.50 — December 31, 2004 273,250 13.52 13.52 — Options Outstanding Weighted Options Exercisable

Range of exercise price Number of options average remaining contractual life (years) Weighted average exercise price Number of options Weighted average exercise price $ 1.80 – 2.50 101,500 0.62 $ 2.18 101,500 $ 2.18 3.10 305,580 2.33 3.10 305,580 3.10 3.80 160,513 4.32 3.80 160,513 3.80 5.00 – 7.00 874,245 7.41 6.07 485,959 6.20 9.50 223,000 9.55 9.50 — — 13.52 273,250 8.64 13.52 60,010 13.52 $ 1.50 – 13.52 1,938,088 6.42 $ 6.65 1,113,562 $ 5.03

Employee Stock Purchase Plan

In February 2004, our board of directors approved the 2004 Employee Share Purchase Plan (the “2004 ESPP”) and the reservation of 400,000 shares of our common stock thereunder. The 2004 ESPP consists of consecutive, overlapping offering periods with a new offering period commencing on the first trading day on or after February 1 and August 1 each year (the “Enrollment Date”). Based on the effective date of our IPO, the first offering period will commence with the first trading day on or after February 1, 2005. Any eligible employee may participate in the 2004 ESPP by completing a subscription agreement which will allow participants to purchase up to 5,000 shares, per offering period, at a purchase price of 85% of the fair market value of a share, of Common Stock on the enrollment date or on the exercise date, whichever is lower. The exercise date is the last trading day of each offering period.