##### Table of Contents









UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-K







|  |                                                                                                                                          
|- | -----------------------------------------------------------------------------------------------------------------------------------------
|þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934: For the fiscal year ended
    December 31, 2004

OR




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

Commission File No. 0-22187


RENAISSANCE LEARNING, INC.




|                                                                                                              |  |                                         
|------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------
|Wisconsin                                                                                                     |  | 39-1559474                              
|(State or other jurisdiction of
    incorporation or organization)                                            |  | (I.R.S. Employer
    Identification No.)
|                                                                                                             
|2911 Peach Street
     P.O. Box 8036
     Wisconsin Rapids, Wisconsin(Address of principal executive offices) |  | 54495-8036(Zip Code)                    



| |                                                                       
| | ----------------------------------------------------------------------
| | Registrants telephone number, including area code:
    (715) 424-3636
|
| | Securities registered pursuant to Section 12(b) of the Act:
    None  
|
| | Securities registered pursuant to Section 12(g) of the Act:           

Common Stock, $.01 par value




þ o


þ


þ o




DOCUMENTS INCORPORATED BY REFERENCE












---










INDEX


|                                                         |  |                                                                                                    |  |      |    | 
|-------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                         |  |                                                                                                    |  | Page
|                                                         |  |                                                                                                    |  |     
|PART I                                                  
|Item 1.                                                  |  | Business                                                                                           |  |      |    | 
|                                                         |  | Overview                                                                                           |  |      | 2  | 
|                                                         |  | Software and Other Products                                                                        |  |      | 3  | 
|                                                         |  | Product Development                                                                                |  |      | 7  | 
|                                                         |  | Selling and Marketing                                                                              |  |      | 7  | 
|                                                         |  | Production                                                                                         |  |      | 8  | 
|                                                         |  | Competition                                                                                        |  |      | 8  | 
|                                                         |  | Intellectual Property                                                                              |  |      | 8  | 
|                                                         |  | Employees                                                                                          |  |      | 9  | 
|                                                         |  | Backlog                                                                                            |  |      | 9  | 
|                                                         |  | Forward-Looking Statements; Risk Factors                                                           |  |      | 9  | 
|Item 2.                                                  |  | Properties                                                                                         |  |      | 13 | 
|Item 3.                                                  |  | Legal Proceedings                                                                                  |  |      | 14 | 
|Item 4.                                                  |  | Submission of Matters to a Vote of
    Security Holders                                            |  |      | 14 | 
|                                                        
|PART II                                                 
|Item 5.                                                  |  | Market for Registrants Common
    Equity and Related Stockholder Matters                          |  |      | 16 | 
|Item 6.                                                  |  | Selected Financial Data                                                                            |  |      | 17 | 
|Item 7.                                                  |  | Managements Discussion and
    Analysis of Financial Condition and Results of Operations          |  |      | 18 | 
|Item 7A.                                                 |  | Quantitative and Qualitative Disclosures
    About Market Risk                                     |  |      | 26 | 
|Item 8.                                                  |  | Financial Statements and Supplementary
    Data                                                    |  |      | 27 | 
|Item 9.                                                  |  | Changes In and Disagreements With
    Accountants on Accounting and Financial Disclosure           |  |      | 45 | 
|Item 9A.                                                 |  | Controls and Procedures                                                                            |  |      | 45 | 
|Item 9B.                                                 |  | Other Information                                                                                  |  |      | 48 | 
|                                                        
|PART III                                                
|Item 10.                                                 |  | Directors and Executive Officers of the
    Registrant                                             |  |      | 49 | 
|Item 11.                                                 |  | Executive Compensation                                                                             |  |      | 49 | 
|Item 12.                                                 |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters |  |      | 49 | 
|Item 13.                                                 |  | Certain Relationships and Related
    Transactions                                                 |  |      | 50 | 
|Item 14.                                                 |  | Principal Accountant Fees and
    Services                                                         |  |      | 50 | 
|                                                        
|PART IV                                                 
|Item 15.                                                 |  | Exhibits and Financial Statement
    Schedules                                                     |  |      | 51 | 
|Non-Employee Director Compensation Summary              
|Executive Officer Compensation Summary                  
|Subsidiaries of the Registrant                          
|Consent of Independent Registered Public Accounting Firm
|Directors' Powers of Attorney                           
|302 Certification of Chief Executive Officer            
|302 Certification of Chief Financial Officer            
|906 Certification of Chief Executive Officer            
|906 Certification of Chief Financial Officer            
|Schedule II - Valuation and Qualifying Accounts         



1



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##### Table of Contents






PART I







|        |         
|------- | --------
|Item 1. | Business




Overview






Renaissance Place Renaissance Place Renaissance Place Renaissance Place STAR Reading STAR Math Accelerated Reading Accelerated Math Renaissance Place Renaissance Place Renaissance Place


Accelerated Reader, Accelerated Reader






---



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | AR, AccelScan, AccelTest, Accelerated Grammar and Spelling,
    Accelerated Math, Accelerated Reader, Accelerated Vocabulary,
    Accelerated Writer, Fluent Reader, Generation21, Math Facts in a
    Flash, Math Renaissance, Read Now, Reading Renaissance,
    Renaissance, Renaissance Learning, Renaissance Place, School
    Renaissance, STAR Early Literacy, STAR Reading, STAR Math,
    StandardsMaster, TestCheck and Writing Renaissance are
    trademarks of Renaissance Learning, Inc. registered or pending
    registration in the United States and other countries.

2



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English in a
Flash English in a Flash




Generation21


http://www.renlearn.com





Software and Other Products


Renaissance Place Renaissance Place Accelerated Reader, STAR
Reading, STAR Early Literacy, Fluent Reader, Accelerated Math,
STAR Math, StandardsMaster English in a Flash.


Accelerated Reader Accelerated Reader Accelerated Reader


3



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##### Table of Contents



Accelerated Reader Accelerated Reader Literacy Skills


STAR Reading STAR Reading


STAR Early Literacy


Fluent Reader Fluent Reader


Accelerated Vocabulary Accelerated
Vocabulary


Read Now Read Now Fluent Reader Accelerated Vocabulary


Math Renaissance/ Accelerated Math. Math Renaissance Accelerated Math STAR
Math Math Renaissance Math Renaissance Accelerated Math Accelerated Math AccelScan Accelerated Math


4



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##### Table of Contents



STAR Math STAR Reading. STAR
Math STAR Math


MathFacts in a Flash


Accelerated Writer


Accelerated Grammar and Spelling


StandardsMaster StandardsMaster


English in a Flash


AccelScan


Customized Assessment Products.


5



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##### Table of Contents



Educator Resource Products.


Professional Services




Support Plans.


Professional Development. Accelerated Reader Accelerated Math


National School Renaissance Conference National
School Renaissance Conference


Web-based Training. Introduction to Reading Renaissance Math
Renaissance Renaissance Practicum. Renaissance Practicum


Renaissance Consulting Renaissance Renaissance Renaissance Renaissance


Renaissance Evaluation Service Renaissance


6



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Renaissance Mentor Coaching Renaissance


Renaissance Technical Services. Renaissance Renaissance Place





Product Development









Selling and Marketing


National School Renaissance Conference.








7



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Accelerated Reader Accelerated
Math





Production


Accelerated Reader Accelerated Math AccelScan





Competition









Intellectual Property




8



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Employees







Backlog


National School
Renaissance Conference.





Forward-Looking Statements; Risk Factors




Reliance on Single Product Line. Accelerated
Reader Accelerated Reader Accelerated Reader


Dependence on Continued Product Development.


Reliance on statistical studies to demonstrate effectiveness
of our products and services.


9



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Management of Growth.


Selling and Marketing Strategy and Product Acceptance. Renaissance Place


Risks of International Expansion.


Educational Philosophies.


Dependence on Educational Institutions and Government
Funding.


10



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Geographic Concentration of Sales.


Highly Competitive Industry.




Dependence on Key Personnel.


Ability to Attract and Retain Qualified Personnel.


Fluctuations in Quarterly Performance.




| |   |                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------
| |  | delays in the development and/or shipment of new products;                                                    
|
| |  | the closing of large contract sales, such as those to school
    districts;                                   
|
| |  | the shipment of new products for which orders have been building
    for some period of time; and             
|
| |  | seasonal variations due to, among other things, the budget and
    school year cycles of our school customers.

11



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| |   |                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | charges related to acquisitions and divestitures, including
    related expenses, the write-off of in-process research and
    development, the amortization of intangible assets, asset
    impairments and similar items;
|
| |  | charges related to obsolete or impaired assets;                                                                                                                                                                            
|
| |  | supply-chain issues such as manufacturing problems, delivery
    delays, or quality issues;                                                                                                                                
|
| |  | expenses related to product development and marketing
    initiatives; and                                                                                                                                                 
|
| |  | expenses for product support costs.                                                                                                                                                                                        

National School Renaissance Conference,


Share Price Volatility.


Limited Protection of Intellectual Property and Proprietary
Rights.


War, Acts of War and Terrorism.


Concentration of Share Ownership; Control by Principal
Shareholders/ Management.


Shares Eligible for Future Sale.


12



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Cash Dividends.


Possible Antitakeover Effects of Certain Articles and By-Law
Provisions and Provisions of Wisconsin Law.


Acquisitions.


Divestitures.







|        |           
|------- | ----------
|Item 2. | Properties



13



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|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings








|        |                                                    
|------- | ---------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security Holders



14



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EXECUTIVE OFFICERS OF THE REGISTRANT


|                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------------------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name and Age of Officer  |  | Office                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Judith Ames Paul Age 58  |  | Ms. Paul is the co-founder of the company and has been
    co-chairman of the board of directors with Mr. Paul since
    July 2003. From 1986 until July 2001, and again from August 2002
    until July 2003, Ms. Paul served as chairman of the board,
    and from July 2001 until August 2002, Ms. Paul served as
    co-chairman with Mr. Paul. Ms. Paul has been a
    director since 1986. Ms. Paul acts as our spokesperson and
    is a leading teacher advocate. Ms. Paul holds a
    bachelors degree in elementary education from the
    University of Illinois. Judith Paul is Terrance Pauls wife.                                                                                                                                                                                                                                                                                        
|Terrance D. Paul Age 58  |  | Mr. Paul is the co-founder of the company and has been
    co-chairman of the board of directors with Ms. Paul since
    July 2003. From August 2002 until July 2003, Mr. Paul
    served as our chief executive officer. From July 1996 until July
    2001, Mr. Paul served as vice chairman of the board and
    from July 2001 until August 2002, Mr. Paul served as
    co-chairman with Ms. Paul. Mr. Paul has been a
    director since 1986. Mr. Paul holds a law degree from the
    University of Illinois and an MBA from Bradley University.
    Terrance Paul is Judith Pauls husband.                                                                                                                                                                                                                                                                                                       
|John R. Hickey Age 49    |  | Mr. Hickey has been our chief executive officer and
    president since July 2003. Mr. Hickey served as our
    president and chief operating officer from July 1996 until July
    2003 and has served as a director since October 1996.
    Mr. Hickey holds a bachelors degree in international
    business and history from the University of Wisconsin.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Steven A. Schmidt Age 50 |  | Mr. Schmidt has been our executive vice president since
    July 2003. From August 1999 until November 2004,
    Mr. Schmidt served as our chief financial officer and
    secretary, and from August 1999 until July 2003, he also served
    as a vice president. From January 1998 until December 1998, he
    served as corporate controller for Wausau-Mosinee Paper
    Corporation, a specialty paper manufacturer. From June 1993
    until December 1997, Mr. Schmidt was vice president
    finance, secretary and treasurer for Wausau Paper Mills Company,
    a publicly traded specialty paper manufacturer headquartered in
    Wausau, Wisconsin. Mr. Schmidt holds a bachelors
    degree in accountancy from the University of Wisconsin-LaCrosse,
    and is a Certified Public Accountant.                                                                                            
|Mary T. Minch Age 38     |  | Ms. Minch has been our chief financial officer and
    secretary since November 2004 and has served as vice-president,
    finance since December 2003. From February 2003 to December
    2003, Ms. Minch held the position of North American
    division controller for Stora Enso North American, Corp., a
    forest product company whose parent company acquired
    Consolidated Papers, Inc. From October 2000 to February 2003,
    she served as controller-magazine papers at Stora Enso North
    American, Corp. From April 1999 to October 2000, she was
    assistant controller at Consolidated Papers, Inc., a paper
    processing company. Ms. Minch holds bachelors degrees
    in managerial accounting and finance from the University of
    Wisconsin-Stevens Point and a masters degree from the
    University of Wisconsin-Oshkosh, and is a Certified Public
    Accountant.





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PART II







|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity and Related
    Stockholder Matters

Market Information




Holders




Historical Dividends




Recent Sales of Unregistered Securities




Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities






|         |       |              |         |            |  |                  |       |                     |  |  |         |         |  |  |         |  | 
|-------- | ----- | ------------ | ------- | ---------- |  | ---------------- | ----- | ------------------- |  |  | ------- | ------- |  |  | ------- |  | 
|         |       |              |         |            |  | Total Number of  |       |                    
|         |       |              |         |            |  | Shares Purchased |       | Maximum Number of  
|         |       |              |         |            |  | as Part of       |       | Shares that May yet
|         |       | Total Number |         | Average    |  | Publicly         |       | be Purchased Under 
|         |       | of Shares    |         | Price Paid |  | Announced Plans  |       | the Plans or       
|Period   |       | Purchased    |         | per Share  |  | or Programs      |       | Programs(1)        
|         |       |              |         |            |  |                  |       |                    
|October  |       |              | 14,100  |            |  | $                | 19.33 |                     |  |  | 14,100  |         |  |  | 963,658 | 
|November |       |              | 215,500 |            |  |                  | 19.04 |                     |  |  | 215,500 |         |  |  | 748,158 | 
|December |       |              | 60,400  |            |  |                  | 19.27 |                     |  |  | 60,400  |         |  |  | 687,758 | 
|         |       |              |         |            |  |                  |       |                     |  |  |         |         |  |  |         | 
|         | Total |              |         | 290,000    |  |                  | $     | 19.10               |  |  |         | 290,000 |  |  |         |  | 
|         |       |              |         |            |  |                  |       |                     |  |  |         |         |  |  |         | 






|    |                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------
|(1) | On February 9, 2005, our Board of Directors authorized an
    additional 3,000,000 shares under the stock repurchase
    program.

16



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|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA


(In thousands, except per share amounts)


|                                   |                            |                          |         |        |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        |         | 
|---------------------------------- | -------------------------- | ------------------------ | ------- | ------ | ------- | ---- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------ | ------- | 
|                                   |                            | Year Ended December 31, 
|                                   |                            |                         
|                                   |                            | 2004                     |         | 2003   |         | 2002 |         | 2001    |         | 2000
|                                   |                            |                          |         |        |         |      |         |         |         |     
|Consolidated Income Statement Data |                            |                          |         |        |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |       
|Net sales:                         |                            |                          |         |        |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |       
|                                   | Products                   |                          | $       | 92,326 |         |      | $       | 107,863 |         |      | $       | 109,503 |         |   | $       | 110,702 |         |   | $       | 87,004 |        
|                                   | Services                   |                          |         | 21,722 |         |      |         | 22,681  |         |      |         | 21,729  |         |   |         | 21,652  |         |   |         | 19,987 |        
|                                   |                            |                          |         |        |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |       
|                                   |                            | Total net sales          |         |        | 114,048 |      |         |         | 130,544 |      |         |         | 131,232 |   |         |         | 132,354 |   |         |        | 106,991 | 
|                                   |                            |                          |         |        |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |       
|Cost of sales:                     |                            |                          |         |        |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |       
|                                   | Products                   |                          |         | 6,419  |         |      |         | 10,826  |         |      |         | 11,930  |         |   |         | 14,857  |         |   |         | 11,621 |        
|                                   | Services                   |                          |         | 10,322 |         |      |         | 10,256  |         |      |         | 9,741   |         |   |         | 9,936   |         |   |         | 10,300 |        
|                                   |                            |                          |         |        |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |       
|                                   |                            | Total cost of sales      |         |        | 16,741  |      |         |         | 21,082  |      |         |         | 21,671  |   |         |         | 24,793  |   |         |        | 21,921  | 
|                                   |                            |                          |         |        |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |       
|                                   |                            | Gross profit             |         |        | 97,307  |      |         |         | 109,462 |      |         |         | 109,561 |   |         |         | 107,561 |   |         |        | 85,070  | 
|Operating expenses:                |                            |                          |         |        |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |       
|                                   | Product development        |                          |         | 16,803 |         |      |         | 17,000  |         |      |         | 17,266  |         |   |         | 17,800  |         |   |         | 14,922 |        
|                                   | Selling and marketing      |                          |         | 33,022 |         |      |         | 30,623  |         |      |         | 30,974  |         |   |         | 29,731  |         |   |         | 24,166 |        
|                                   | General and administrative |                          |         | 13,086 |         |      |         | 13,593  |         |      |         | 13,830  |         |   |         | 14,322  |         |   |         | 11,833 |        
|                                   |                            |                          |         |        |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |       
|                                   |                            | Total operating expenses |         |        | 62,911  |      |         |         | 61,216  |      |         |         | 62,070  |   |         |         | 61,853  |   |         |        | 50,921  | 
|                                   |                            |                          |         |        |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |       
|                                   |                            | Operating income         |         |        | 34,396  |      |         |         | 48,246  |      |         |         | 47,491  |   |         |         | 45,708  |   |         |        | 34,149  | 
|                                   | Other, net                 |                          |         | 1,639  |         |      |         | 2,266   |         |      |         | 3,760   |         |   |         | 4,187   |         |   |         | 3,385  |        
|                                   |                            |                          |         |        |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |       
|                                   | Income before taxes        |                          |         | 36,035 |         |      |         | 50,512  |         |      |         | 51,251  |         |   |         | 49,895  |         |   |         | 37,534 |        
|                                   | Income tax provision       |                          |         | 13,333 |         |      |         | 17,971  |         |      |         | 19,813  |         |   |         | 19,226  |         |   |         | 14,601 |        
|                                   |                            |                          |         |        |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |       
|                                   | Net income                 |                          | $       | 22,702 |         |      | $       | 32,541  |         |      | $       | 31,438  |         |   | $       | 30,669  |         |   | $       | 22,933 |        
|                                   |                            |                          |         |        |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |       
|Basic earnings per share           |                            | $                        | 0.73    |        |         | $    | 1.05    |         |         | $    | 0.93    |         |         | $ | 0.89    |         |         | $ | 0.67    |       
|Diluted earnings per share         |                            |                          | 0.73    |        |         |      | 1.04    |         |         |      | 0.92    |         |         |   | 0.88    |         |         |   | 0.67    |       
|Cash dividends declared per share  |                            | $                        | 2.31    | *      |         | $    |        |         |         | $    |        |         |         | $ |        |         |         | $ |        |       
|Consolidated Balance Sheet Data    |                            |                          |         |        |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |       
|Working capital                    |                            | $                        | 41,237  |        |         | $    | 102,703 |         |         | $    | 74,496  |         |         | $ | 83,383  |         |         | $ | 59,897  |       
|Total assets                       |                            |                          | 114,724 |        |         |      | 159,601 |         |         |      | 147,611 |         |         |   | 159,961 |         |         |   | 118,221 |       
|Shareholders equity               |                            |                          | 84,417  |        |         |      | 133,330 |         |         |      | 121,236 |         |         |   | 136,531 |         |         |   | 99,670  |       






|  |                                                
|- | -----------------------------------------------
|* | Includes a special dividend of $2.15 per share.

17



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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

Overview














18



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English in a Flash


Recent Developments








Results of Operations










19



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|                     |                            |                     |      |      |       |      |      |      |       |   |      |      |       |  
|-------------------- | -------------------------- | ------------------- | ---- | ---- | ----- | ---- | ---- | ---- | ----- | - | ---- | ---- | ----- | -
|                     |                            | For the Years Ended
|                     |                            | December 31,       
|                     |                            |                    
|                     |                            | 2004                |      | 2003 |       | 2002
|                     |                            |                     |      |      |       |     
|Net Sales:           |                            |                     |      |      |       |      |      |      |       |   |      |     
|                     | Products                   |                     |      | 81.0 | %     |      |      | 82.6 | %     |   |      | 83.4 | %    
|                     | Services                   |                     |      | 19.0 |       |      |      | 17.4 |       |   |      | 16.6 |      
|                     |                            |                     |      |      |       |      |      |      |       |   |      |     
|                     |                            | Total net sales     |      |      | 100.0 | %    |      |      | 100.0 | % |      |      | 100.0 | %
|                     |                            |                     |      |      |       |      |      |      |       |   |      |     
|Cost of sales:       |                            |                     |      |      |       |      |      |      |       |   |      |     
|                     | Products                   |                     |      | 7.0  | %     |      |      | 10.0 | %     |   |      | 10.9 | %    
|                     | Services                   |                     |      | 47.5 |       |      |      | 45.2 |       |   |      | 44.8 |      
|                     |                            |                     |      |      |       |      |      |      |       |   |      |     
|                     |                            | Total cost of sales |      |      | 14.7  |      |      |      | 16.1  |   |      |      | 16.5  |  
|                     |                            |                     |      |      |       |      |      |      |       |   |      |     
|Gross profit:        |                            |                     |      |      |       |      |      |      |       |   |      |     
|                     | Products                   |                     |      | 93.0 |       |      |      | 90.0 |       |   |      | 89.1 |      
|                     | Services                   |                     |      | 52.5 |       |      |      | 54.8 |       |   |      | 55.2 |      
|                     |                            |                     |      |      |       |      |      |      |       |   |      |     
|                     |                            | Total gross profit  |      |      | 85.3  |      |      |      | 83.9  |   |      |      | 83.5  |  
|                     |                            |                     |      |      |       |      |      |      |       |   |      |     
|Operating expenses:  |                            |                     |      |      |       |      |      |      |       |   |      |     
|                     | Product development        |                     |      | 14.7 |       |      |      | 13.0 |       |   |      | 13.2 |      
|                     | Selling and marketing      |                     |      | 29.0 |       |      |      | 23.5 |       |   |      | 23.6 |      
|                     | General and administrative |                     |      | 11.5 |       |      |      | 10.4 |       |   |      | 10.5 |      
|                     |                            |                     |      |      |       |      |      |      |       |   |      |     
|Operating income     |                            |                     | 30.2 |      |       |      | 37.0 |      |       |   | 36.2 |     
|Other, net           |                            |                     | 1.4  |      |       |      | 1.7  |      |       |   | 2.9  |     
|                     |                            |                     |      |      |       |      |      |      |       |   |      |     
|Income before taxes  |                            |                     | 31.6 |      |       |      | 38.7 |      |       |   | 39.1 |     
|Income tax provision |                            |                     | 11.7 |      |       |      | 13.8 |      |       |   | 15.1 |     
|                     |                            |                     |      |      |       |      |      |      |       |   |      |     
|Net income           |                            |                     | 19.9 | %    |       |      | 24.9 | %    |       |   | 24.0 | %   
|                     |                            |                     |      |      |       |      |      |      |       |   |      |     

Years Ended December 31, 2004 and 2003


Net Sales. Renaissance Place Renaissance Place Accelerated Reader Accelerated Math Renaissance
Place,


National School
Renaissance Conference National
School Renaissance Conference.


20



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##### Table of Contents





English in a Flash.


Cost of Sales.


National School Renaissance
Conference.




Product Development.


Selling and Marketing.


General and Administrative.


Operating Income.


Income Taxes.


21



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Years Ended December 31, 2003 and 2002


Net Sales. Accelerated Grammar and Spelling Read Now, Renaissance Place,




Cost of Sales.






Product Development.


Selling and Marketing.


General and Administrative.


Operating Income.


Income Taxes.


Liquidity and Capital Resources




22



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Off-Balance Sheet Arrangements and Aggregate Contractual
Obligations




Operating Leases.


23



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|           |  |                |       | 
|---------- |  | -------------- | ----- | 
|           |  | (In Thousands)
|2005       |  | $              | 1,073 | 
|2006       |  |                | 672   | 
|2007       |  |                | 349   | 
|2008       |  |                | 180   | 
|After 2008 |  |                | 257   | 
|           |  |                |       | 
|           |  | $              | 2,531 | 
|           |  |                |       | 

Retirement Plan.




Other Obligations.


Critical Accounting Policies and Estimates




Revenue Recognition.




24



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Impairment of Long-Lived Assets.




Software Support Obligations.


Software Development Costs.


Taxes.




Recent Accounting Pronouncement






25



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##### Table of Contents










|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
    Risk

Interest Rate Risk.


Market Risk.






Foreign Currency Exchange Rate Risk.


26



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|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholders of


Renaissance Learning, Inc. and Subsidiaries:












| |                          
| | -------------------------
| | DELOITTE & TOUCHE
    LLP





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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


As of December 31, 2004 and 2003


|                                     |                                                                                                                     |                                                                                                             |                                            |        |         |         |        |        |         |         | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------- | ------- | ------ | ------ | ------- | ------- | 
|                                     |                                                                                                                     | 2004                                                                                                        |                                            | 2003  
|                                     |                                                                                                                     |                                                                                                             |                                            |       
|                                     |                                                                                                                     | (In Thousands, Except                                                                                      
|                                     |                                                                                                                     | Share and                                                                                                  
|                                     |                                                                                                                     | Per Share Amounts)                                                                                         
|ASSETS                              
|Current assets:                      |                                                                                                                     |                                                                                                             |                                            |        |         |         |        |       
|                                     | Cash and cash equivalents                                                                                           |                                                                                                             | $                                          | 27,460 |         |         | $      | 62,524 |        
|                                     | Investment securities                                                                                               |                                                                                                             |                                            | 25,103 |         |         |        | 42,825 |        
|                                     | Accounts receivable, less allowance of $1,433 and $1,459,
    respectively                                          |                                                                                                             |                                            | 8,969  |         |         |        | 13,352 |        
|                                     | Inventories                                                                                                         |                                                                                                             |                                            | 2,375  |         |         |        | 2,354  |        
|                                     | Prepaid expenses                                                                                                    |                                                                                                             |                                            | 1,227  |         |         |        | 1,352  |        
|                                     | Deferred tax asset                                                                                                  |                                                                                                             |                                            | 3,800  |         |         |        | 3,743  |        
|                                     | Other current assets                                                                                                |                                                                                                             |                                            | 452    |         |         |        | 889    |        
|                                     |                                                                                                                     |                                                                                                             |                                            |        |         |         |        |       
|                                     |                                                                                                                     |                                                                                                             | Total current assets                       |        |         | 69,386  |        |        |         | 127,039 | 
|Investment securities                |                                                                                                                     |                                                                                                             | 21,003                                     |        |         |         | 6,485  |       
|Property, plant and equipment, net   |                                                                                                                     |                                                                                                             | 19,130                                     |        |         |         | 20,536 |       
|Deferred tax asset                   |                                                                                                                     |                                                                                                             | 1,620                                      |        |         |         | 1,795  |       
|Goodwill                             |                                                                                                                     |                                                                                                             | 2,757                                      |        |         |         | 2,642  |       
|Other intangibles, net               |                                                                                                                     |                                                                                                             | 192                                        |        |         |         | 478    |       
|Capitalized software, net            |                                                                                                                     |                                                                                                             | 636                                        |        |         |         | 626    |       
|                                     |                                                                                                                     |                                                                                                             |                                            |        |         |         |        |       
|                                     |                                                                                                                     |                                                                                                             | Total assets                               |        | $       | 114,724 |        |        | $       | 159,601 | 
|                                     |                                                                                                                     |                                                                                                             |                                            |        |         |         |        |       
|                                    
|LIABILITIES AND SHAREHOLDERS EQUITY
|Current liabilities:                 |                                                                                                                     |                                                                                                             |                                            |        |         |         |        |       
|                                     | Accounts payable                                                                                                    |                                                                                                             | $                                          | 2,667  |         |         | $      | 3,144  |        
|                                     | Deferred revenue                                                                                                    |                                                                                                             |                                            | 17,554 |         |         |        | 10,875 |        
|                                     | Payroll and employee benefits                                                                                       |                                                                                                             |                                            | 3,069  |         |         |        | 3,153  |        
|                                     | Income taxes payable                                                                                                |                                                                                                             |                                            | 925    |         |         |        | 2,295  |        
|                                     | Other current liabilities                                                                                           |                                                                                                             |                                            | 3,934  |         |         |        | 4,869  |        
|                                     |                                                                                                                     |                                                                                                             |                                            |        |         |         |        |       
|                                     |                                                                                                                     |                                                                                                             | Total current liabilities                  |        |         | 28,149  |        |        |         | 24,336  | 
|Deferred revenue                     |                                                                                                                     |                                                                                                             | 620                                        |        |         |         | 800    |       
|Deferred compensation                |                                                                                                                     |                                                                                                             | 1,354                                      |        |         |         | 958    |       
|                                     |                                                                                                                     |                                                                                                             |                                            |        |         |         |        |       
|                                     |                                                                                                                     |                                                                                                             | Total liabilities                          |        |         | 30,123  |        |        |         | 26,094  | 
|Minority interest                    |                                                                                                                     |                                                                                                             | 184                                        |        |         |         | 177    |       
|Shareholders equity:                |                                                                                                                     |                                                                                                             |                                            |        |         |         |        |       
|                                     | Common stock, $.01 par; shares authorized: 150,000,000; issued:
    34,736,647 shares at December 31, 2004 and 2003 |                                                                                                             |                                            | 347    |         |         |        | 347    |        
|                                     |                                                                                                                     | Additional paid-in capital                                                                                  |                                            |        | 54,490  |         |        |        | 54,167  |        
|                                     |                                                                                                                     | Retained earnings                                                                                           |                                            |        | 99,689  |         |        |        | 148,596 |        
|                                     |                                                                                                                     | Treasury stock, at cost 3,865,280 shares at
    December 31, 2004 3,860,802 shares at
    December 31, 2003 |                                            |        | (70,213 | )       |        |        | (69,838 | )      
|                                     |                                                                                                                     | Accumulated other comprehensive income                                                                      |                                            |        | 104     |         |        |        | 58      |        
|                                     |                                                                                                                     |                                                                                                             |                                            |        |         |         |        |       
|                                     |                                                                                                                     |                                                                                                             | Total shareholders equity                 |        |         | 84,417  |        |        |         | 133,330 | 
|                                     |                                                                                                                     |                                                                                                             |                                            |        |         |         |        |       
|                                     |                                                                                                                     |                                                                                                             | Total liabilities and shareholders equity |        | $       | 114,724 |        |        | $       | 159,601 | 
|                                     |                                                                                                                     |                                                                                                             |                                            |        |         |         |        |       



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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF INCOME


For the Years Ended December 31, 2004, 2003 and 2002


|                     |                            |                                 |                          |        |      |         |        |         |      |         |        |         |      |         | 
|-------------------- | -------------------------- | ------------------------------- | ------------------------ | ------ | ---- | ------- | ------ | ------- | ---- | ------- | ------ | ------- | ---- | ------- | 
|                     |                            | 2004                            |                          | 2003   |      | 2002   
|                     |                            |                                 |                          |        |      |        
|                     |                            | (In Thousands, Except Per Share
|                     |                            | Amounts)                       
|Net Sales:           |                            |                                 |                          |        |      |         |        |         |      |         |        |        
|                     | Products                   |                                 | $                        | 92,326 |      |         | $      | 107,863 |      |         | $      | 109,503 |     
|                     | Services                   |                                 |                          | 21,722 |      |         |        | 22,681  |      |         |        | 21,729  |     
|                     |                            |                                 |                          |        |      |         |        |         |      |         |        |        
|                     |                            |                                 | Total net sales          |        |      | 114,048 |        |         |      | 130,544 |        |         |      | 131,232 | 
|                     |                            |                                 |                          |        |      |         |        |         |      |         |        |        
|Cost of sales:       |                            |                                 |                          |        |      |         |        |         |      |         |        |        
|                     | Products                   |                                 |                          | 6,419  |      |         |        | 10,826  |      |         |        | 11,930  |     
|                     | Services                   |                                 |                          | 10,322 |      |         |        | 10,256  |      |         |        | 9,741   |     
|                     |                            |                                 |                          |        |      |         |        |         |      |         |        |        
|                     |                            |                                 | Total cost of sales      |        |      | 16,741  |        |         |      | 21,082  |        |         |      | 21,671  | 
|                     |                            |                                 |                          |        |      |         |        |         |      |         |        |        
|                     |                            |                                 | Gross profit             |        |      | 97,307  |        |         |      | 109,462 |        |         |      | 109,561 | 
|Operating expenses:  |                            |                                 |                          |        |      |         |        |         |      |         |        |        
|                     | Product development        |                                 |                          | 16,803 |      |         |        | 17,000  |      |         |        | 17,266  |     
|                     | Selling and marketing      |                                 |                          | 33,022 |      |         |        | 30,623  |      |         |        | 30,974  |     
|                     | General and administrative |                                 |                          | 13,086 |      |         |        | 13,593  |      |         |        | 13,830  |     
|                     |                            |                                 |                          |        |      |         |        |         |      |         |        |        
|                     |                            |                                 | Total operating expenses |        |      | 62,911  |        |         |      | 61,216  |        |         |      | 62,070  | 
|                     |                            |                                 |                          |        |      |         |        |         |      |         |        |        
|                     |                            |                                 | Operating income         |        |      | 34,396  |        |         |      | 48,246  |        |         |      | 47,491  | 
|Other income:        |                            |                                 |                          |        |      |         |        |         |      |         |        |        
|                     | Interest income            |                                 |                          | 1,072  |      |         |        | 1,927   |      |         |        | 3,207   |     
|                     | Other, net                 |                                 |                          | 567    |      |         |        | 339     |      |         |        | 553     |     
|                     |                            |                                 |                          |        |      |         |        |         |      |         |        |        
|Income before taxes  |                            |                                 | 36,035                   |        |      |         | 50,512 |         |      |         | 51,251 |        
|Income tax provision |                            |                                 | 13,333                   |        |      |         | 17,971 |         |      |         | 19,813 |        
|                     |                            |                                 |                          |        |      |         |        |         |      |         |        |        
|Net income           |                            | $                               | 22,702                   |        |      | $       | 32,541 |         |      | $       | 31,438 |        
|                     |                            |                                 |                          |        |      |         |        |         |      |         |        |        
|Earnings per share:  |                            |                                 |                          |        |      |         |        |         |      |         |        |        
|                     |                            | Basic                           |                          | $      | 0.73 |         |        | $       | 1.05 |         |        | $       | 0.93 |        
|                     |                            | Diluted                         |                          | $      | 0.73 |         |        | $       | 1.04 |         |        | $       | 0.92 |        



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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY


For the Years Ended December 31, 2004, 2003 and 2002


|                           |                                      |                      |     |            |   |          |        |          |   |               |         |               |   |   |         |         |   |   |      |      |   |   |         |         |        | 
|-------------------------- | ------------------------------------ | -------------------- | --- | ---------- | - | -------- | ------ | -------- | - | ------------- | ------- | ------------- | - | - | ------- | ------- | - | - | ---- | ---- | - | - | ------- | ------- | ------ | 
|                           |                                      |                      |     |            |   |          |        |          |   | Other         |         | Accumulated  
|                           |                                      | Common               |     | Additional |   |          |        |          |   | Comprehensive |         | Total        
|                           |                                      | Stock                |     | Paid-in    |   | Retained |        | Treasury |   | Income        |         | Shareholders
|                           |                                      | Amount               |     | Capital    |   | Earnings |        | Stock    |   | (Loss)        |         | Equity       
|                           |                                      |                      |     |            |   |          |        |          |   |               |         |              
|                           |                                      | (In Thousands)      
|Balance, December 31, 2001 |                                      | $                    | 346 |            |   | $        | 51,703 |          |   | $             | 84,617  |               |   | $ | (325    | )       |   | $ | 190  |      |   | $ | 136,531 |        
|                           | Net income                           |                      |     |           |   |          |        |         |   |               |         | 31,438        |   |   |         |        |   |   |      |     |   |   |         | 31,438  |       
|                           | Foreign currency translation         |                      |     |           |   |          |        |         |   |               |         |              |   |   |         |        |   |   |      | (58  | ) |   |         | (58     | )     
|                           | Unrealized loss on securities        |                      |     |           |   |          |        |         |   |               |         |              |   |   |         |        |   |   |      | (241 | ) |   |         | (241    | )     
|                           |                                      |                      |     |            |   |          |        |          |   |               |         |               |   |   |         |         |   |   |      |      |   |   |         |        
|                           |                                      | Comprehensive income |     |            |  |          |        |          |  |               |         |               |  |   |         |         |  |   |      |      |  |   |         |         | 31,139 | 
|                           | Stock repurchased for treasury       |                      |     |           |   |          |        |         |   |               |         |              |   |   |         | (49,155 | ) |   |      |     |   |   |         | (49,155 | )     
|                           | Employee stock purchase plan         |                      |     |           |   |          |        | 1,066    |   |               |         |              |   |   |         |        |   |   |      |     |   |   |         | 1,066   |       
|                           | Exercise of stock options            |                      |     | 1          |   |          |        | 1,219    |   |               |         |              |   |   |         |        |   |   |      |     |   |   |         | 1,220   |       
|                           | Tax benefit on stock options         |                      |     |           |   |          |        | 378      |   |               |         |              |   |   |         |        |   |   |      |     |   |   |         | 378     |       
|                           | Stock option grants to non-employees |                      |     |           |   |          |        | 57       |   |               |         |              |   |   |         |        |   |   |      |     |   |   |         | 57      |       
|                           |                                      |                      |     |            |   |          |        |          |   |               |         |               |   |   |         |         |   |   |      |      |   |   |         |        
|Balance, December 31, 2002 |                                      |                      | 347 |            |   |          | 54,423 |          |   |               | 116,055 |               |   |   | (49,480 | )       |   |   | (109 | )    |   |   | 121,236 |        
|                           | Net income                           |                      |     |           |   |          |        |         |   |               |         | 32,541        |   |   |         |        |   |   |      |     |   |   |         | 32,541  |       
|                           | Foreign currency translation         |                      |     |           |   |          |        |         |   |               |         |              |   |   |         |        |   |   |      | 167  |   |   |         | 167     |       
|                           |                                      |                      |     |            |   |          |        |          |   |               |         |               |   |   |         |         |   |   |      |      |   |   |         |        
|                           |                                      | Comprehensive income |     |            |  |          |        |          |  |               |         |               |  |   |         |         |  |   |      |      |  |   |         |         | 32,708 | 
|                           | Stock repurchased for treasury       |                      |     |           |   |          |        |         |   |               |         |              |   |   |         | (23,727 | ) |   |      |     |   |   |         | (23,727 | )     
|                           | Employee stock purchase plan         |                      |     |           |   |          |        | (131     | ) |               |         |              |   |   |         | 1,177   |   |   |      |     |   |   |         | 1,046   |       
|                           | Exercise of stock options            |                      |     |           |   |          |        | (561     | ) |               |         |              |   |   |         | 2,192   |   |   |      |     |   |   |         | 1,631   |       
|                           | Tax benefit on stock options         |                      |     |           |   |          |        | 393      |   |               |         |              |   |   |         |        |   |   |      |     |   |   |         | 393     |       
|                           | Stock option grants to non-employees |                      |     |           |   |          |        | 43       |   |               |         |              |   |   |         |        |   |   |      |     |   |   |         | 43      |       
|                           |                                      |                      |     |            |   |          |        |          |   |               |         |               |   |   |         |         |   |   |      |      |   |   |         |        
|Balance, December 31, 2003 |                                      |                      | 347 |            |   |          | 54,167 |          |   |               | 148,596 |               |   |   | (69,838 | )       |   |   | 58   |      |   |   | 133,330 |        
|                           | Net income                           |                      |     |           |   |          |        |         |   |               |         | 22,702        |   |   |         |        |   |   |      |     |   |   |         | 22,702  |       
|                           | Foreign currency translation         |                      |     |           |   |          |        |         |   |               |         |              |   |   |         |        |   |   |      | 46   |   |   |         | 46      |       
|                           |                                      |                      |     |            |   |          |        |          |   |               |         |               |   |   |         |         |   |   |      |      |   |   |         |        
|                           |                                      | Comprehensive income |     |            |  |          |        |          |  |               |         |               |  |   |         |         |  |   |      |      |  |   |         |         | 22,748 | 
|                           | Dividends ($2.31 per share)          |                      |     |           |   |          |        |         |   |               |         | (71,609       | ) |   |         |        |   |   |      |     |   |   |         | (71,609 | )     
|                           | Stock repurchased for treasury       |                      |     |           |   |          |        |         |   |               |         |              |   |   |         | (5,539  | ) |   |      |     |   |   |         | (5,539  | )     
|                           | Exercise of stock options            |                      |     |           |   |          |        | (833     | ) |               |         |              |   |   |         | 5,164   |   |   |      |     |   |   |         | 4,331   |       
|                           | Tax benefit on stock options         |                      |     |           |   |          |        | 1,156    |   |               |         |              |   |   |         |        |   |   |      |     |   |   |         | 1,156   |       
|                           |                                      |                      |     |            |   |          |        |          |   |               |         |               |   |   |         |         |   |   |      |      |   |   |         |        
|Balance, December 31, 2004 |                                      | $                    | 347 |            |   | $        | 54,490 |          |   | $             | 99,689  |               |   | $ | (70,213 | )       |   | $ | 104  |      |   | $ | 84,417  |        
|                           |                                      |                      |     |            |   |          |        |          |   |               |         |               |   |   |         |         |   |   |      |      |   |   |         |        






|    |                                                                  
|--- | -----------------------------------------------------------------
|(1) | Common Stock, $0.01 par value, 150,000,000 shares
    authorized.



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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


For the Years Ended December 31, 2004, 2003 and 2002


|                                                                               |                                                    |                                                       |                                                  |         |        |         |        |         |       |         |         |         |       |         |  
|------------------------------------------------------------------------------ | -------------------------------------------------- | ----------------------------------------------------- | ------------------------------------------------ | ------- | ------ | ------- | ------ | ------- | ----- | ------- | ------- | ------- | ----- | ------- | -
|                                                                               |                                                    | 2004                                                  |                                                  | 2003    |        | 2002   
|                                                                               |                                                    |                                                       |                                                  |         |        |        
|                                                                               |                                                    | (In Thousands)                                       
|Reconciliation of net income to net cash provided by operating
    activities: |                                                    |                                                       |                                                  |         |        |         |        |         |       |         |         |        
|                                                                               | Net income                                         |                                                       | $                                                | 22,702  |        |         | $      | 32,541  |       |         | $       | 31,438  |      
|                                                                               | Noncash (income) expenses included in net income  |                                                       |                                                  |         |        |         |        |         |       |         |         |         |      
|                                                                               |                                                    | Depreciation and amortization                         |                                                  |         | 3,638  |         |        |         | 3,923 |         |         |         | 4,633 |        
|                                                                               |                                                    | Amortization of investment discounts/premiums         |                                                  |         | 696    |         |        |         | 1,618 |         |         |         | 2,146 |        
|                                                                               |                                                    | Deferred income taxes                                 |                                                  |         | 118    |         |        |         | 114   |         |         |         | 323   |        
|                                                                               | Change in assets and liabilities                  |                                                       |                                                  |         |        |         |        |         |       |         |         |         |      
|                                                                               |                                                    | Accounts receivable                                   |                                                  |         | 4,383  |         |        |         | (733  | )       |         |         | (221  | )      
|                                                                               |                                                    | Inventories                                           |                                                  |         | (21    | )       |        |         | (630  | )       |         |         | (76   | )      
|                                                                               |                                                    | Prepaid expenses                                      |                                                  |         | 125    |         |        |         | 59    |         |         |         | (348  | )      
|                                                                               |                                                    | Accounts payable and other liabilities                |                                                  |         | (2,471 | )       |        |         | (463  | )       |         |         | (200  | )      
|                                                                               |                                                    | Deferred revenue                                      |                                                  |         | 6,499  |         |        |         | 348   |         |         |         | 3,047 |        
|                                                                               |                                                    | Income tax benefit from the exercise of stock options |                                                  |         | 1,156  |         |        |         | 393   |         |         |         | 378   |        
|                                                                               |                                                    | Other current assets                                  |                                                  |         | 437    |         |        |         | 442   |         |         |         | (19   | )      
|                                                                               |                                                    | Other                                                 |                                                  |         | (22    | )       |        |         | 416   |         |         |         | 439   |        
|                                                                               |                                                    |                                                       |                                                  |         |        |         |        |         |       |         |         |        
|                                                                               |                                                    |                                                       | Net cash provided by operating activities        |         |        | 37,240  |        |         |       | 38,028  |         |         |       | 41,540  |  
|                                                                               |                                                    |                                                       |                                                  |         |        |         |        |         |       |         |         |        
|Cash flows from investing activities:                                          |                                                    |                                                       |                                                  |         |        |         |        |         |       |         |         |        
|                                                                               | Purchase of property, plant and equipment          |                                                       |                                                  | (1,411  | )      |         |        | (2,436  | )     |         |         | (1,572  | )    
|                                                                               | Purchase of investment securities                  |                                                       |                                                  | (46,408 | )      |         |        | (42,357 | )     |         |         | (60,816 | )    
|                                                                               | Maturities/sales of investment securities          |                                                       |                                                  | 48,949  |        |         |        | 73,045  |       |         |         | 50,575  |      
|                                                                               | Capitalized software development costs             |                                                       |                                                  | (563    | )      |         |        | (448    | )     |         |         | (729    | )    
|                                                                               | Acquisitions                                       |                                                       |                                                  |        |        |         |        | (521    | )     |         |         |        |      
|                                                                               |                                                    |                                                       |                                                  |         |        |         |        |         |       |         |         |        
|                                                                               |                                                    |                                                       | Net cash provided (used) by investing activities |         |        | 567     |        |         |       | 27,283  |         |         |       | (12,542 | )
|                                                                               |                                                    |                                                       |                                                  |         |        |         |        |         |       |         |         |        
|Cash flows from financing activities:                                          |                                                    |                                                       |                                                  |         |        |         |        |         |       |         |         |        
|                                                                               | Return of capital to minority interest             |                                                       |                                                  | (54     | )      |         |        |        |       |         |         |        |      
|                                                                               | Proceeds from issuance of stock                    |                                                       |                                                  |        |        |         |        | 1,046   |       |         |         | 1,066   |      
|                                                                               | Proceeds from exercise of stock options            |                                                       |                                                  | 4,331   |        |         |        | 1,674   |       |         |         | 1,277   |      
|                                                                               | Dividends paid                                     |                                                       |                                                  | (71,609 | )      |         |        |        |       |         |         |        |      
|                                                                               | Purchase of treasury stock                         |                                                       |                                                  | (5,539  | )      |         |        | (23,727 | )     |         |         | (49,025 | )    
|                                                                               |                                                    |                                                       |                                                  |         |        |         |        |         |       |         |         |        
|                                                                               |                                                    |                                                       | Net cash used by financing activities            |         |        | (72,871 | )      |         |       | (21,007 | )       |         |       | (46,682 | )
|                                                                               |                                                    |                                                       |                                                  |         |        |         |        |         |       |         |         |        
|Net (decrease) increase in cash                                                |                                                    |                                                       | (35,064                                          | )       |        |         | 44,304 |         |       |         | (17,684 | )      
|Cash and cash equivalents, beginning of period                                 |                                                    |                                                       | 62,524                                           |         |        |         | 18,220 |         |       |         | 35,904  |        
|                                                                               |                                                    |                                                       |                                                  |         |        |         |        |         |       |         |         |        
|Cash and cash equivalents, end of period                                       |                                                    | $                                                     | 27,460                                           |         |        | $       | 62,524 |         |       | $       | 18,220  |        
|                                                                               |                                                    |                                                       |                                                  |         |        |         |        |         |       |         |         |        
|Supplemental cash flow information                                             |                                                    |                                                       |                                                  |         |        |         |        |         |       |         |         |        
|Cash paid during the year for                                                 |                                                    |                                                       |                                                  |         |        |         |        |         |       |         |         |        
|                                                                               | Interest                                           |                                                       | $                                                |        |        |         | $      |        |       |         | $       |        |      
|                                                                               | Income taxes (net of refunds)                      |                                                       | $                                                | 13,054  |        |         | $      | 17,172  |       |         | $       | 20,845  |      



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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|    |              
|--- | -------------
|(1) | Consolidation





|    |                     
|--- | --------------------
|(2) | Nature of operations



Accelerated
Reader, STAR Reading, STAR Early
Literacy, Fluent Reader, Accelerated Vocabulary, Read Now,
Reading Renaissance, Accelerated Math, STAR Math, MathFacts in a
Flash, Math Renaissance, Accelerated Grammar and Spelling,
StandardsMaster English in a Flash.


Generation21




|    |            
|--- | -----------
|(3) | Acquisition



32



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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                
|--- | -------------------------------
|(4) | Significant accounting policies



|    |                 
|--- | ----------------
|(a) | Use of estimates





|    |                    
|--- | -------------------
|(b) | Revenue recognition









33



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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                          
|--- | -------------------------
|(c) | Cash and cash equivalents



|                       |  |                |        |      |  |   |        | 
|---------------------- |  | -------------- | ------ | ---- |  | - | ------ | 
|                       |  | 2004           |        | 2003
|                       |  |                |        |     
|                       |  | (In Thousands)
|Cash and time deposits |  | $              | 11,060 |      |  | $ | 9,924  | 
|Municipal obligations  |  |                | 16,400 |      |  |   | 32,300 | 
|Corporate obligations  |  |                |       |      |  |   | 20,300 | 
|                       |  |                |        |      |  |   |        | 
|                       |  | $              | 27,460 |      |  | $ | 62,524 | 
|                       |  |                |        |      |  |   |        | 



|    |                      
|--- | ---------------------
|(d) | Investment securities









|                                         |                         |                                   |        |        |        |          |        |        |        |   |        |        |        |   |        |        |        | 
|---------------------------------------- | ----------------------- | --------------------------------- | ------ | ------ | ------ | -------- | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                         |                         | 2004                              |        | 2003  
|                                         |                         |                                   |        |       
|                                         |                         | Carrying                          |        | Fair   |        | Carrying |        | Fair  
|                                         |                         | Value                             |        | Value  |        | Value    |        | Value 
|                                         |                         |                                   |        |        |        |          |        |       
|                                         |                         | (In Thousands)                   
|Debt securities due in less than 1 year: |                         |                                   |        |        |        |          |        |        |        |   |        |        |        |   |        |       
|                                         | Commercial paper        |                                   | $      | 1,496  |        |          | $      | 1,500  |        |   | $      |       |        |   | $      |       |       
|                                         | Corporate bonds         |                                   |        | 3,762  |        |          |        | 3,748  |        |   |        | 18,224 |        |   |        | 18,304 |       
|                                         | Municipal bonds         |                                   |        | 19,845 |        |          |        | 19,790 |        |   |        | 24,601 |        |   |        | 24,628 |       
|                                         |                         |                                   |        |        |        |          |        |        |        |   |        |        |        |   |        |       
|                                         |                         | Current investment securities     |        |        | 25,103 |          |        |        | 25,038 |   |        |        | 42,825 |   |        |        | 42,932 | 
|                                         |                         |                                   |        |        |        |          |        |        |        |   |        |        |        |   |        |       
|Debt securities due in 1 to 2 years:     |                         |                                   |        |        |        |          |        |        |        |   |        |        |        |   |        |       
|                                         | Corporate bonds         |                                   |        | 3,000  |        |          |        | 2,968  |        |   |        | 3,902  |        |   |        | 3,904  |       
|                                         | Municipal bonds         |                                   |        | 16,649 |        |          |        | 16,593 |        |   |        | 2,583  |        |   |        | 2,582  |       
|Equity securities:                       |                         |                                   |        |        |        |          |        |        |        |   |        |        |        |   |        |       
|                                         | Mutual fund investments |                                   |        | 1,354  |        |          |        | 1,354  |        |   |        |       |        |   |        |       |       
|                                         |                         |                                   |        |        |        |          |        |        |        |   |        |        |        |   |        |       
|                                         |                         | Non-current investment securities |        |        | 21,003 |          |        |        | 20,915 |   |        |        | 6,485  |   |        |        | 6,486  | 
|                                         |                         |                                   |        |        |        |          |        |        |        |   |        |        |        |   |        |       
|Total investment securities              |                         | $                                 | 46,106 |        |        | $        | 45,953 |        |        | $ | 49,310 |        |        | $ | 49,418 |       
|                                         |                         |                                   |        |        |        |          |        |        |        |   |        |        |        |   |        |       

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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |            
|--- | -----------
|(e) | Inventories





|    |                  
|--- | -----------------
|(f) | Advertising costs



(g) Property, plant and equipment








|                                                 |                                     |                |        |        |  |   |        |        | 
|------------------------------------------------ | ----------------------------------- | -------------- | ------ | ------ |  | - | ------ | ------ | 
|                                                 |                                     | 2004           |        | 2003  
|                                                 |                                     |                |        |       
|                                                 |                                     | (In Thousands)
|Land and improvements                            |                                     | $              | 3,646  |        |  | $ | 3,642  |       
|Buildings                                        |                                     |                | 16,043 |        |  |   | 16,004 |       
|Furniture, fixtures and office equipment         |                                     |                | 5,896  |        |  |   | 5,986  |       
|Computer and production equipment                |                                     |                | 10,549 |        |  |   | 10,443 |       
|Other                                            |                                     |                | 1,704  |        |  |   | 1,545  |       
|                                                 |                                     |                |        |        |  |   |        |       
|                                                 | Total property, plant and equipment |                |        | 37,838 |  |   |        | 37,620 | 
|Less  accumulated depreciation and amortization |                                     |                | 18,708 |        |  |   | 17,084 |       
|                                                 |                                     |                |        |        |  |   |        |       
|Property, plant and equipment, net               |                                     | $              | 19,130 |        |  | $ | 20,536 |       
|                                                 |                                     |                |        |        |  |   |        |       



|    |                           
|--- | --------------------------
|(h) | Software development costs



35



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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                        
|--- | ---------------------------------------
|(i) | Sales and concentration of credit risks





|    |                         
|--- | ------------------------
|(j) | Stock-based compensation





|                                                                                                                       |          |                           |        |      |      |      |        |   |      |   |        |   |      | 
|---------------------------------------------------------------------------------------------------------------------- | -------- | ------------------------- | ------ | ---- | ---- | ---- | ------ | - | ---- | - | ------ | - | ---- | 
|                                                                                                                       |          | 2004                      |        | 2003 |      | 2002
|                                                                                                                       |          |                           |        |      |      |     
|                                                                                                                       |          | (In Thousands,           
|                                                                                                                       |          | Except Per Share Amounts)
|Net Income, as reported                                                                                                |          | $                         | 22,702 |      |      | $    | 32,541 |   |      | $ | 31,438 |  
|Deduct: total stock-based compensation expense determined under
    fair-value based method for all awards, net of tax |          |                           | 1,681  |      |      |      | 3,767  |   |      |   | 4,429  |  
|Pro forma net income                                                                                                   |          | $                         | 21,021 |      |      | $    | 28,774 |   |      | $ | 27,009 |  
|Earnings per share:                                                                                                    |          |                           |        |      |      |      |        |   |      |   |        |  
|                                                                                                                       | Basic:   |                           |        |      |      |      |        |   |      |   |        |   |     
|                                                                                                                       |          | As reported               |        | $    | 0.73 |      |        | $ | 1.05 |   |        | $ | 0.93 | 
|                                                                                                                       |          | Pro forma                 |        |      | 0.68 |      |        |   | 0.92 |   |        |   | 0.80 | 
|                                                                                                                       | Diluted: |                           |        |      |      |      |        |   |      |   |        |   |     
|                                                                                                                       |          | As reported               |        | $    | 0.73 |      |        | $ | 1.04 |   |        | $ | 0.92 | 
|                                                                                                                       |          | Pro forma                 |        |      | 0.67 |      |        |   | 0.92 |   |        |   | 0.80 | 
|The per share weighted average fair value of options granted
    under the plan during the year is:                    |          | $                         | 14.08  |      |      | $    | 12.30  |   |      | $ | 16.01  |  



|                         |  |      |       |      |  |      |       |   |  |  |       |  
|------------------------ |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                         |  | 2004 |       | 2003 |  | 2002
|                         |  |      |       |      |  |     
|Dividend yield           |  |      | 0.64  | %    |  |      | 0     | % |  |  | 0     | %
|Expected volatility      |  |      | 62.48 | %    |  |      | 75.20 | % |  |  | 80.27 | %
|Risk-free interest rate  |  |      | 3.39  | %    |  |      | 3.09  | % |  |  | 3.91  | %
|Expected life (in years) |  |      | 6     |      |  |      | 6     |   |  |  | 6     |  

36



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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                          
|--- | -------------------------
|(k) | Earnings per common share









|                                             |  |      |            |      |  |      |            |  |  |  |            | 
|-------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  |  | ---------- | 
|                                             |  | 2004 |            | 2003 |  | 2002
|                                             |  |      |            |      |  |     
|Basic weighted average shares outstanding    |  |      | 31,046,200 |      |  |      | 31,110,578 |  |  |  | 33,858,579 | 
|Dilutive effect of outstanding stock options |  |      | 153,611    |      |  |      | 194,853    |  |  |  | 209,137    | 
|                                             |  |      |            |      |  |      |            |  |  |  |            | 
|Diluted weighted average shares outstanding  |  |      | 31,199,811 |      |  |      | 31,305,431 |  |  |  | 34,067,716 | 
|                                             |  |      |            |      |  |      |            |  |  |  |            | 



|    |             
|--- | ------------
|(l) | Income taxes





|    |                            
|--- | ---------------------------
|(m) | Comprehensive income (loss)





|    |                                         
|--- | ----------------------------------------
|(n) | Shipping and handling revenues and costs



37



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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                  
|--- | -----------------
|(o) | Reclassifications





|    |                                     
|--- | ------------------------------------
|(5) | Goodwill and other intangible assets









|                             |  |                   |       |                   |  |     |       |        |  |              |     |     |  |   |       |  |  |   |       |  |  |   |     | 
|---------------------------- |  | ----------------- | ----- | ----------------- |  | --- | ----- | ------ |  | ------------ | --- | --- |  | - | ----- |  |  | - | ----- |  |  | - | --- | 
|                             |  | December 31, 2004 |       | December 31, 2003
|                             |  |                   |       |                  
|                             |  | Gross             |       | Accumulated       |  |     |       | Gross  |  | Accumulated  |     |    
|                             |  | Amount            |       | Amortization      |  | Net |       | Amount |  | Amortization |     | Net
|                             |  |                   |       |                   |  |     |       |        |  |              |     |    
|                             |  | (In Thousands)   
|Algorithms and software code |  | $                 | 2,124 |                   |  | $   | 2,124 |        |  | $            |    |     |  | $ | 2,124 |  |  | $ | 2,058 |  |  | $ | 66  | 
|Non-compete agreement        |  |                   | 1,100 |                   |  |     | 908   |        |  |              | 192 |     |  |   | 1,100 |  |  |   | 688   |  |  |   | 412 | 
|                             |  |                   |       |                   |  |     |       |        |  |              |     |     |  |   |       |  |  |   |       |  |  |   |     | 
|Other intangibles            |  | $                 | 3,224 |                   |  | $   | 3,032 |        |  | $            | 192 |     |  | $ | 3,224 |  |  | $ | 2,746 |  |  | $ | 478 | 
|                             |  |                   |       |                   |  |     |       |        |  |              |     |     |  |   |       |  |  |   |       |  |  |   |     | 



|    |             
|--- | ------------
|(6) | Income taxes



|                             |                 |                |        |        |  |      |        |        |  |   |        |        | 
|---------------------------- | --------------- | -------------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                             |                 | 2004           |        | 2003   |  | 2002
|                             |                 |                |        |        |  |     
|                             |                 | (In Thousands)
|Current tax provision:       |                 |                |        |        |  |      |        |        |  |   |        |       
|                             | U.S. federal    |                | $      | 10,752 |  |      | $      | 14,831 |  |   | $      | 16,538 | 
|                             | State and local |                |        | 2,407  |  |      |        | 2,721  |  |   |        | 2,952  | 
|                             | Foreign         |                |        | 56     |  |      |        | 305    |  |   |        |       | 
|                             |                 |                |        |        |  |      |        |        |  |   |        |       
|Total current tax provision  |                 |                | 13,215 |        |  |      | 17,857 |        |  |   | 19,490 |       
|                             |                 |                |        |        |  |      |        |        |  |   |        |       
|Deferred tax provision:      |                 |                |        |        |  |      |        |        |  |   |        |       
|                             | U.S. federal    |                |        | 113    |  |      |        | 105    |  |   |        | 313    | 
|                             | State and local |                |        | 5      |  |      |        | 9      |  |   |        | 10     | 
|                             |                 |                |        |        |  |      |        |        |  |   |        |       
|Total deferred tax provision |                 |                | 118    |        |  |      | 114    |        |  |   | 323    |       
|                             |                 |                |        |        |  |      |        |        |  |   |        |       
|Provision for income taxes   |                 | $              | 13,333 |        |  | $    | 17,971 |        |  | $ | 19,813 |       
|                             |                 |                |        |        |  |      |        |        |  |   |        |       

38



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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                  |  |                |        |      |  |      |      |    |  |   |        |   |  |  |      |    |  |   |        |   |  |  |      |   
|------------------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ---- | -- |  | - | ------ | - |  |  | ---- | -- |  | - | ------ | - |  |  | ---- | --
|                                                  |  | 2004           |        | 2003 |  | 2002
|                                                  |  |                |        |      |  |     
|                                                  |  | (In Thousands)
|Income tax provision at statutory tax rate        |  | $              | 12,612 |      |  |      | 35.0 | %  |  | $ | 17,679 |   |  |  | 35.0 | %  |  | $ | 17,937 |   |  |  | 35.0 | % 
|State and local taxes, net of federal tax benefit |  |                | 1,550  |      |  |      | 4.3  | %  |  |   | 1,775  |   |  |  | 3.5  | %  |  |   | 1,925  |   |  |  | 3.8  | % 
|Federal research credit                           |  |                | (262   | )    |  |      | (0.7 | %) |  |   | (1,051 | ) |  |  | (2.1 | %) |  |   | (250   | ) |  |  | (0.5 | %)
|Other                                             |  |                | (567   | )    |  |      | (1.6 | %) |  |   | (432   | ) |  |  | (0.8 | %) |  |   | 201    |   |  |  | 0.4  | % 
|                                                  |  |                |        |      |  |      |      |    |  |   |        |   |  |  |      |    |  |   |        |   |  |  |      |   
|Provision for income taxes                        |  | $              | 13,333 |      |  |      | 37.0 | %  |  | $ | 17,971 |   |  |  | 35.6 | %  |  | $ | 19,813 |   |  |  | 38.7 | % 
|                                                  |  |                |        |      |  |      |      |    |  |   |        |   |  |  |      |    |  |   |        |   |  |  |      |   



|                                   |                                   |                |       |       |  |   |       |       | 
|---------------------------------- | --------------------------------- | -------------- | ----- | ----- |  | - | ----- | ----- | 
|                                   |                                   | 2004           |       | 2003 
|                                   |                                   |                |       |      
|                                   |                                   | (In Thousands)
|Current deferred tax assets:       |                                   |                |       |       |  |   |       |      
|                                   | Deferred revenue                  |                | $     | 1,228 |  |   | $     | 1,063 | 
|                                   | Expenses not currently deductible |                |       | 2,572 |  |   |       | 2,680 | 
|                                   |                                   |                |       |       |  |   |       |      
|Net current deferred tax assets    |                                   |                | 3,800 |       |  |   | 3,743 |      
|                                   |                                   |                |       |       |  |   |       |      
|Noncurrent deferred tax assets:    |                                   |                |       |       |  |   |       |      
|                                   | Deferred revenue                  |                |       | 77    |  |   |       | 78    | 
|                                   | Depreciation and amortization     |                |       | 173   |  |   |       | 190   | 
|                                   | Intangibles                       |                |       | 1,370 |  |   |       | 1,527 | 
|                                   |                                   |                |       |       |  |   |       |      
|Net noncurrent deferred tax assets |                                   |                | 1,620 |       |  |   | 1,795 |      
|                                   |                                   |                |       |       |  |   |       |      
|Total deferred tax assets          |                                   | $              | 5,420 |       |  | $ | 5,538 |      
|                                   |                                   |                |       |       |  |   |       |      



|    |                
|--- | ---------------
|(7) | Lines of credit





|    |                  
|--- | -----------------
|(8) | Lease commitments



39



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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|           |  |                |       | 
|---------- |  | -------------- | ----- | 
|           |  | (In Thousands)
|2005       |  | $              | 1,073 | 
|2006       |  |                | 672   | 
|2007       |  |                | 349   | 
|2008       |  |                | 180   | 
|After 2008 |  |                | 257   | 
|           |  |                |       | 
|           |  | $              | 2,531 | 
|           |  |                |       | 



|    |           
|--- | ----------
|(9) | Litigation





|     |                 
|---- | ----------------
|(10) | Retirement plans











40



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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                  |       |                |       |       |  |      |       |       |  |   |       |       | 
|------------------------------------------------- | ----- | -------------- | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- | 
|                                                  |       | 2004           |       | 2003  |  | 2002
|                                                  |       |                |       |       |  |     
|                                                  |       | (In Thousands)
|Employer matching contribution  401(k) Plan      |       | $              | 1,241 |       |  | $    | 1,268 |       |  | $ | 1,071 |      
|Employer matching contribution  SERP             |       |                | 24    |       |  |      | 24    |       |  |   | 19    |      
|(Gain) or loss related to unfunded SERP liability |       |                | 16    |       |  |      | 118   |       |  |   | (43   | )    
|                                                  |       |                |       |       |  |      |       |       |  |   |       |      
|                                                  | Total |                | $     | 1,281 |  |      | $     | 1,410 |  |   | $     | 1,047 | 
|                                                  |       |                |       |       |  |      |       |       |  |   |       |      



|     |                  
|---- | -----------------
|(11) | Stock option plan





|                                   |  |        |           |          |  |        |       |          |  |        |           |          |  |   |       |  |  |  |           |   |  |   |       | 
|---------------------------------- |  | ------ | --------- | -------- |  | ------ | ----- | -------- |  | ------ | --------- | -------- |  | - | ----- |  |  |  | --------- | - |  | - | ----- | 
|                                   |  | 2004   |           | 2003     |  | 2002  
|                                   |  |        |           |          |  |       
|                                   |  |        |           | Weighted |  |        |       | Weighted |  |        |           | Weighted
|                                   |  |        |           | Average  |  |        |       | Average  |  |        |           | Average 
|                                   |  |        |           | Exercise |  |        |       | Exercise |  |        |           | Exercise
|                                   |  | Shares |           | Price    |  | Shares |       | Price    |  | Shares |           | Price   
|                                   |  |        |           |          |  |        |       |          |  |        |           |         
|Outstanding at beginning of year   |  |        | 1,989,383 |          |  | $      | 21.82 |          |  |        | 1,818,257 |          |  | $ | 22.16 |  |  |  | 1,421,911 |   |  | $ | 22.06 | 
|Granted                            |  |        | 122,067   |          |  |        | 24.73 |          |  |        | 386,720   |          |  |   | 18.33 |  |  |  | 578,857   |   |  |   | 22.40 | 
|Exercised                          |  |        | (285,522  | )        |  |        | 15.17 |          |  |        | (121,394  | )        |  |   | 13.44 |  |  |  | (75,557   | ) |  |   | 16.15 | 
|Cancelled                          |  |        | (200,890  | )        |  |        | 24.68 |          |  |        | (94,200   | )        |  |   | 24.78 |  |  |  | (106,954  | ) |  |   | 26.45 | 
|                                   |  |        |           |          |  |        |       |          |  |        |           |          |  |   |       |  |  |  |           |   |  |   |       | 
|Outstanding at end of year         |  |        | 1,625,038 |          |  |        | 22.85 |          |  |        | 1,989,383 |          |  |   | 21.82 |  |  |  | 1,818,257 |   |  |   | 22.16 | 
|                                   |  |        |           |          |  |        |       |          |  |        |           |          |  |   |       |  |  |  |           |   |  |   |       | 
|Options exercisable at end of year |  |        | 1,074,182 |          |  | $      | 23.12 |          |  |        | 1,079,932 |          |  | $ | 21.43 |  |  |  | 839,512   |   |  | $ | 19.06 | 
|                                   |  |        |           |          |  |        |       |          |  |        |           |          |  |   |       |  |  |  |           |   |  |   |       | 



|                 |  |                     |           |                     |  |                  |      |             |  |                     |       |  |  |  |           |  |  |   |       | 
|---------------- |  | ------------------- | --------- | ------------------- |  | ---------------- | ---- | ----------- |  | ------------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                 |  | Outstanding Options |           | Exercisable Options
|                 |  |                     |           |                    
|                 |  |                     |           | Weighted Average    |  |                  |      |             |  | Weighted Average   
|Range of         |  | Options             |           | Remaining           |  | Weighted Average |      | Options     |  | Exercise Price of  
|Exercise price   |  | Outstanding         |           | Contractual Life    |  | Exercise Price   |      | Exercisable |  | Exercisable Options
|                 |  |                     |           |                     |  |                  |      |             |  |                    
|$8.00 to $16.00  |  |                     | 229,563   |                     |  |                  | 3.73 |             |  | $                   | 11.38 |  |  |  | 229,563   |  |  | $ | 11.38 | 
|$16.01 to $22.00 |  |                     | 627,359   |                     |  |                  | 7.03 |             |  |                     | 17.81 |  |  |  | 334,546   |  |  |   | 18.53 | 
|$22.01 to $28.00 |  |                     | 194,436   |                     |  |                  | 8.98 |             |  |                     | 24.71 |  |  |  | 64,673    |  |  |   | 24.75 | 
|$28.01 to $34.00 |  |                     | 376,379   |                     |  |                  | 6.39 |             |  |                     | 30.65 |  |  |  | 278,720   |  |  |   | 30.40 | 
|$34.01 to $40.00 |  |                     | 196,300   |                     |  |                  | 5.91 |             |  |                     | 35.46 |  |  |  | 165,930   |  |  |   | 35.65 | 
|$40.01 to $52.00 |  |                     | 1,001     |                     |  |                  | 6.56 |             |  |                     | 51.47 |  |  |  | 750       |  |  |   | 51.47 | 
|                 |  |                     |           |                     |  |                  |      |             |  |                     |       |  |  |  |           |  |  |   |       | 
|$8.00 to $51.58  |  |                     | 1,625,038 |                     |  |                  | 6.51 |             |  | $                   | 22.85 |  |  |  | 1,074,182 |  |  | $ | 23.12 | 
|                 |  |                     |           |                     |  |                  |      |             |  |                     |       |  |  |  |           |  |  |   |       | 

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|     |                             
|---- | ----------------------------
|(12) | Employee stock purchase plan





|     |                     
|---- | --------------------
|(13) | Shareholders equity







|     |                  
|---- | -----------------
|(14) | Segment reporting



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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|     |                                            
|---- | -------------------------------------------
|(15) | Quarterly results of operations (unaudited)



|     |                                      |                                          |   |         |       |              |   |             |       |  |   |        |       |  |   |        |       | 
|---- | ------------------------------------ | ---------------------------------------- | - | ------- | ----- | ------------ | - | ----------- | ----- |  | - | ------ | ----- |  | - | ------ | ----- | 
|     |                                      | Quarter Ended                           
|     |                                      |                                         
|     |                                      | March 31                                 |   | June 30 |       | September 30 |   | December 31
|     |                                      |                                          |   |         |       |              |   |            
|     |                                      | (In Thousands, Except Per Share Amounts)
|2004 |                                      |                                          |   |         |       |              |   |             |       |  |   |        |       |  |   |       
|     | Net sales                            |                                          | $ | 31,533  |       |              | $ | 31,181      |       |  | $ | 25,542 |       |  | $ | 25,792 |      
|     | Gross profit                         |                                          |   | 25,997  |       |              |   | 27,192      |       |  |   | 21,787 |       |  |   | 22,331 |      
|     | Operating income                     |                                          |   | 9,046   |       |              |   | 11,912      |       |  |   | 5,618  |       |  |   | 7,820  |      
|     | Income tax provision                 |                                          |   | 3,490   |       |              |   | 4,514       |       |  |   | 2,272  |       |  |   | 3,057  |      
|     | Net income                           |                                          |   | 5,942   |       |              |   | 7,685       |       |  |   | 3,868  |       |  |   | 5,207  |      
|     | Basic and diluted earnings per share |                                          |   | 0.19    |       |              |   | 0.25        |       |  |   | 0.12   |       |  |   | 0.17   |      
|     | Common stock price per share:        |                                          |   |         |       |              |   |             |       |  |   |        |       |  |   |        |      
|     |                                      | High                                     |   |         | 31.00 |              |   |             | 26.54 |  |   |        | 24.50 |  |   |        | 20.41 | 
|     |                                      | Low                                      |   |         | 23.97 |              |   |             | 20.91 |  |   |        | 20.35 |  |   |        | 18.46 | 
|2003 |                                      |                                          |   |         |       |              |   |             |       |  |   |        |       |  |   |       
|     | Net sales                            |                                          | $ | 34,226  |       |              | $ | 33,616      |       |  | $ | 31,315 |       |  | $ | 31,387 |      
|     | Gross profit                         |                                          |   | 27,702  |       |              |   | 28,716      |       |  |   | 26,224 |       |  |   | 26,821 |      
|     | Operating income                     |                                          |   | 11,674  |       |              |   | 13,825      |       |  |   | 10,924 |       |  |   | 11,825 |      
|     | Income tax provision                 |                                          |   | 4,744   |       |              |   | 5,560       |       |  |   | 3,188  |       |  |   | 4,479  |      
|     | Net income                           |                                          |   | 7,661   |       |              |   | 8,976       |       |  |   | 8,277  |       |  |   | 7,627  |      
|     | Basic and diluted earnings per share |                                          |   | 0.24    |       |              |   | 0.29        |       |  |   | 0.27   |       |  |   | 0.25   |      
|     | Common stock price per share:        |                                          |   |         |       |              |   |             |       |  |   |        |       |  |   |        |      
|     |                                      | High                                     |   |         | 19.91 |              |   |             | 24.09 |  |   |        | 26.90 |  |   |        | 26.82 | 
|     |                                      | Low                                      |   |         | 15.90 |              |   |             | 16.20 |  |   |        | 21.10 |  |   |        | 22.22 | 





|     |                                 
|---- | --------------------------------
|(16) | Recent accounting pronouncements







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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|     |                  
|---- | -----------------
|(17) | Subsequent Events





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##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls
and Procedures






Managements Report on Internal Control Over Financial
Reporting


Internal Control 
Integrated Framework Internal
Control  Integrated Framework,




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholders of


Renaissance Learning, Inc. and Subsidiaries:


Managements Report on Internal Control
Over Financial Reporting,










46



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##### Table of Contents







| |                      
| | ---------------------
| | DELOITTE & TOUCHE LLP





47



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##### Table of Contents








|         |                  
|-------- | -----------------
|Item 9B. | Other Information

Entry into a Material Definitive Agreement








| |   |                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Committee approved 5% increases in the base salaries of
    Mr. John Hickey and Mr. Steve Schmidt, our Chief
    Executive Officer and our Executive Vice President,
    respectively. At the same time, the Committee decreased the base
    salary of Mr. Terrance Paul, our Co-Chairman, by 23%. No
    adjustment was made to the base salary of Ms. Judith Paul,
    our Co-Chairman.
|
| |  | The Committee approved a cash bonus for Mr. Schmidt under
    our Incentive Bonus Plan of up to 100% of his base salary. No
    cash bonuses were approved for Mr. Hickey, Mr. Paul or
    Ms. Paul.                                                                                                                                                                                          
|
| |  | The Committee approved 5% increases in the current dollar value
    of stock option grants to Mr. Hickey and Mr. Schmidt
    under our 1997 Stock Incentive Plan. No stock option grants were
    approved for Mr. or Ms. Paul.                                                                                                                                                               







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##### Table of Contents






PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant

Executive Officers.


Directors.


Section 16 Compliance.


Code of Ethics.


Audit Committee.







|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation








|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters



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##### Table of Contents





EQUITY COMPENSATION PLAN INFORMATION




|                                                              |  |                      |           |                      |  |                      |       |  |  |  |           |    
|------------------------------------------------------------- |  | -------------------- | --------- | -------------------- |  | -------------------- | ----- |  |  |  | --------- | ---
|                                                              |  |                      |           |                      |  | Number of Securities
|                                                              |  |                      |           |                      |  | Available for Future
|                                                              |  | Number of Securities |           |                      |  | Issuance Under      
|                                                              |  | to be Issued Upon    |           | Weighted-Average     |  | Equity Compensation 
|                                                              |  | Exercise of          |           | Exercise Price of    |  | Plans (Excluding    
|                                                              |  | Outstanding Options, |           | Outstanding Options, |  | Securities Reflected
|Plan category                                                 |  | Warrants and Rights  |           | Warrants and Rights  |  | in First Column)    
|                                                              |  |                      |           |                      |  |                     
|Equity compensation plans approved by security holders        |  |                      | 1,625,038 |                      |  | $                    | 22.85 |  |  |  | 2,972,674 | (1)
|Equity compensation plans not approved by security holders(2) |  |                      | N/A       |                      |  |                      | N/A   |  |  |  | N/A       |    
|                                                              |  |                      |           |                      |  |                      |       |  |  |  |           |    
|Total                                                         |  |                      | 1,625,038 |                      |  | $                    | 22.85 |  |  |  | 2,972,674 |    
|                                                              |  |                      |           |                      |  |                      |       |  |  |  |           |    






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Of the 6,000,000 shares currently authorized for issuance
    under our 1997 stock incentive plan, 2,733,280 remain available
    for future issuance. Under our 1998 employee stock purchase plan
    (ESPP), eligible employees may purchase shares annually by
    payroll deductions, subject to certain aggregate limitations, at
    a purchase price equal to the lower of either 85% of the fair
    market value of the companys shares on the offering
    commencement date or 85% of the fair market value of the
    companys shares one year from such date. Of the
    500,000 shares authorized under the ESPP, 239,394 remain
    available for future issuance. We did not offer the ESPP to
    employees in 2004 and do not intend to offer the plan to
    employees in 2005.
|   
|(2) | Both of the companys equity compensation plans have been
    approved by shareholders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             






|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services



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##### Table of Contents






PART IV







|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules

(a)(1) Financial Statements.




| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | Consolidated Financial Statements                                                                       
|
| | Report of Independent Registered Public Accounting Firm                                                 
|
| | Consolidated Balance Sheets as of December 31, 2004 and 2003                                            
|
| | Consolidated Statements of Income for the years ended
    December 31, 2004, 2003 and 2002              
|
| | Consolidated Statements of Shareholders Equity for the
    years ended December 31, 2004, 2003 and 2002
|
| | Consolidated Statements of Cash Flows for the years ended
    December 31, 2004, 2003 and 2002          



(a)(2) Financial Statement Schedules.




(a)(3) Exhibits.




(b) Exhibits.




(c) Financial Statements Excluded from Annual Report to
Shareholders.




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##### Table of Contents



SIGNATURES






| |                           
| | --------------------------
| | RENAISSANCE LEARNING, INC.



| |     |                   
| | --- | ------------------
| | By: | /s/ John R. Hickey

| |                                   
| | ----------------------------------
| |                                   
| | John R. Hickey                    
| | President, Chief Executive Officer
|
| | Date: February 21, 2005           



|                                                                                                                                                       |  |                                                                                                                 |  |                   |  |                  
|------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------- |  | ----------------- |  | -----------------
|Name                                                                                                                                                   |  | Title                                                                                                           |  | Date             
|                                                                                                                                                       |  |                                                                                                                 |  |                  
|                                                                                                                                                      
|/s/ John R. HickeyJohn
    R. Hickey                                                                                                                   |  | President and Chief Executive Officer (Principal Executive
    Officer)                                         |  | February 21, 2005
|                                                                                                                                                      
|/s/ Mary T. MinchMary
    T. Minch                                                                                                                     |  | Vice President-Finance, Chief Financial Officer, and Secretary
    (Principal Financial and Accounting Officer) |  | February 21, 2005
|                                                                                                                                                      
|Directors: Judith A. Paul, Terrance D. Paul, Addison L.
    Piper, John H. Grunewald, Gordon H. Gunnlaugsson, Harold E.
    Jordan and Judith A. Ryan.
|                                                                                                                                                      
|                                                                                                                                                      
|By:                                                                                                                                                    |  | /s/ John R. HickeyJohn
    R. Hickey
    Attorney-In-Fact*                                                      |  |                   |  | February 21, 2005




|  |                                                                                             
|- | --------------------------------------------------------------------------------------------
|* | Pursuant to authority granted by powers of attorney, copies of
    which are filed herewith.

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##### Table of Contents



Exhibit Index


|        |    |         |  |                                                                                                                                                    
|------- | -- | ------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |        
|Number  |    | Exhibit
|        |    |        
|        | 3  | .1      |  | Amended and Restated Articles of Incorporation of Registrant, as
    amended.(10)                                                                  
|        | 3  | .2      |  | Amended and Restated By-laws of Registrant, as amended.(7)                                                                                         
|        | 4  | .1      |  | Form of Stock Certificate.(2)                                                                                                                      
|        | 10 | .1      |  | 1997 Stock Incentive Plan (as amended and restated).(3)*                                                                                           
|        | 10 | .2      |  | Credit Agreement dated as of December 1, 2003, by and
    between Wells Fargo Bank, National Association and Registrant.                           
|        | 10 | .3      |  | First Amendment to Credit Agreement dated as of
    September 1, 2004 by and between Wells Fargo Bank, National
    Association and Registrant.(15)
|        | 10 | .4      |  | Amended and Restated Employee Stock Purchase Plan.(9)*                                                                                             
|        | 10 | .5      |  | Office Lease dated as of December 17, 1998 by and between
    Athena Holdings LLC and Institute for Academic Excellence,
    Inc.(5)               
|        | 10 | .6      |  | Real Estate Mortgage dated December 17, 1998 between Athena
    Holdings LLC and Registrant.(5)                                                    
|        | 10 | .7      |  | Expense Allocation Agreement dated October 19, 1999 between
    Registrant, Judith A. Paul and Terrance D. Paul.(6)*                               
|        | 10 | .8      |  | Severance Agreement between Registrant and Michael H. Baum dated
    June 27, 2003.(13)*                                                           
|        | 10 | .9      |  | Incentive Bonus Plan (13)*                                                                                                                         
|        | 10 | .10     |  | Transfer Agreement dated as of June 16, 2004 between
    Registrant and Terrance D. Paul.(14)*                                                     
|        | 10 | .11     |  | Assignment and Assumption of Transfer Agreement dated as of
    June 16, 2004 between Registrant and Terrance D. Paul.(14)*                        
|        | 10 | .12     |  | Non-Employee Director Compensation Summary.*                                                                                                       
|        | 10 | .13     |  | Executive Officer Compensation Summary.*                                                                                                           
|        | 14 | .1      |  | Code of Business Conduct and Ethics.(16)                                                                                                           
|        | 21 | .1      |  | Subsidiaries of Registrant.                                                                                                                        
|        | 23 | .1      |  | Consent of Independent Registered Public Accounting Firm.                                                                                          
|        | 24 | .1      |  | Directors Powers of Attorney.                                                                                                                     
|        | 31 | .1      |  | Section 302 Certification by John R. Hickey, Chief
    Executive Officer.                                                                          
|        | 31 | .2      |  | Section 302 Certification by Mary T. Minch, Chief Financial
    Officer.                                                                           
|        | 32 | .1      |  | Section 906 Certification by John R. Hickey, Chief
    Executive Officer.                                                                          
|        | 32 | .2      |  | Section 906 Certification by Mary T. Minch, Chief Financial
    Officer.                                                                           
|        | 99 | .1      |  | Schedule II  Valuation and Qualifying Accounts.                                                                                                   






| |     |                                                                                                                                
| | --- | -------------------------------------------------------------------------------------------------------------------------------
| | (1) | [Reserved].                                                                                                                    
|
| | (2) | Incorporated by reference to Registrants Form 10-Q
    for the quarter ended September 30, 1997 (SEC File
    No. 0-22187).   
|
| | (3) | Incorporated by reference to Registrants Form S-8
    filed on April 18, 2003 (Registration No. 333-104622).                  
|
| | (4) | Incorporated by reference to Registrants Form 10-K
    for the fiscal year ended December 31, 1997 (SEC File
    No. 0-22187).
|
| | (5) | Incorporated by reference to Registrants Form 10-K
    for the fiscal year ended December 31, 1998 (SEC File
    No. 0-22187).
|
| | (6) | Incorporated by reference to Registrants Form 10-K
    for the fiscal year ended December 31, 1999 (SEC File
    No. 0-22187).
|
| | (7) | Incorporated by reference to Registrants Form 10-Q
    for the quarter ended March 31, 2000 (SEC File
    No. 0-22187).       

53



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##### Table of Contents





| |     |                                                                                                                                
| | --- | -------------------------------------------------------------------------------------------------------------------------------
| | (8) | [Reserved].                                                                                                                    
|
| | (9) | Incorporated by reference to Registrants Form 10-K
    for the fiscal year ended December 31, 2000 (SEC File
    No. 0-22187).



|     |                                                                                                                                
|---- | -------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to Registrants Form 10-Q
    for the quarter ended March 31, 2001 (SEC File
    No. 0-22187).       
|    
|(11) | Incorporated by reference to Registrants Form 10-Q
    for the quarter ended March 31, 2002 (SEC File
    No. 0-22187)        
|    
|(12) | Incorporated by reference to Registrants Form 8-K
    dated May 22, 2002 (SEC File No. 0-22187).                              
|    
|(13) | Incorporated by reference to Registrants Form 10-Q
    for the quarter ended June 30, 2003 (SEC File
    No. 0-22187).        
|    
|(14) | Incorporated by reference to Registrants Form 10-Q
    for the quarter ended June 30, 2004 (SEC File
    No. 0-22187).        
|    
|(15) | Incorporated by reference to Registrants Form 10-Q
    for the quarter ended September 30, 2004 (SEC File
    No. 0-22187).   
|    
|(16) | Incorporated by reference to Registrants Form 10-K
    for the fiscal year ended December 31, 2003 (SEC File
    No. 0-22187).



| |   |                                                            
| | - | -----------------------------------------------------------
| | * | Management contracts or compensatory plans or arrangements.



54