##### 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, 2005

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




o þ


o þ


þ o


S-K 10-K 10-K. þ


12b-2


o þ o


12b-2 o þ




DOCUMENTS INCORPORATED BY REFERENCE












---



##### 










INDEX


|                                                         |  |                                                                                                                      |  |      |    | 
|-------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                         |  |                                                                                                                      |  | Page
|                                                         |  |                                                                                                                      |  |     
|PART I                                                  
|Item 1.                                                  |  | Business                                                                                                             |  |      | 2  | 
|                                                         |  | Overview                                                                                                             |  |      | 2  | 
|                                                         |  | Software, Portable Computing Solutions and
    Other Educational Products                                            |  |      | 3  | 
|                                                         |  | Professional Services                                                                                                |  |      | 5  | 
|                                                         |  | Product Development                                                                                                  |  |      | 6  | 
|                                                         |  | Selling and Marketing                                                                                                |  |      | 6  | 
|                                                         |  | Production                                                                                                           |  |      | 7  | 
|                                                         |  | Competition                                                                                                          |  |      | 7  | 
|                                                         |  | Intellectual Property                                                                                                |  |      | 7  | 
|                                                         |  | Employees                                                                                                            |  |      | 8  | 
|                                                         |  | Backlog                                                                                                              |  |      | 8  | 
|                                                         |  | Forward-Looking Statements                                                                                           |  |      | 8  | 
|Item 1A.                                                 |  | Risk Factors                                                                                                         |  |      | 8  | 
|Item 1B.                                                 |  | Unresolved Staff Comments                                                                                            |  |      | 12 | 
|Item 2.                                                  |  | Properties                                                                                                           |  |      | 13 | 
|Item 3.                                                  |  | Legal Proceedings                                                                                                    |  |      | 13 | 
|Item 4.                                                  |  | Submission of Matters to a Vote of
    Security Holders                                                              |  |      | 13 | 
|                                                        
|PART II                                                 
|Item 5.                                                  |  | Market for Registrants Common
    Equity, Related Stockholder Matters and Issuer Purchases of
    Equity Securities |  |      | 15 | 
|Item 6.                                                  |  | Selected Financial Data                                                                                              |  |      | 16 | 
|Item 7.                                                  |  | Managements Discussion and
    Analysis of Financial Condition and Results of Operations                            |  |      | 17 | 
|Item 7A.                                                 |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                       |  |      | 25 | 
|Item 8.                                                  |  | Financial Statements and Supplementary
    Data                                                                      |  |      | 26 | 
|Item 9.                                                  |  | Changes In and Disagreements With
    Accountants on Accounting and Financial Disclosure                             |  |      | 46 | 
|Item 9A.                                                 |  | Controls and Procedures                                                                                              |  |      | 46 | 
|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 | 
|Second Amendment to Credit Agreement                    
|Third Amendment to Credit Agreement                     
|Non-Employee Director Compensation Summary              
|Subsidiaries of the Company                             
|Consent of Independent Registered Public Accounting Firm
|Power of Attorney                                       
|302 Certification of CEO                                
|302 Certification of CFO                                
|906 Certification of CEO                                
|906 Certification of CFO                                
|Schedule II - Valution 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 Reader Accelerated Math Renaissance Place Renaissance Place


Accelerated Reader, Accelerated Reader




AlphaSmart 3000 Neo Dana AlphaSmart easy-to







|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | AR, AccelScan, AccelTest, Accelerated Math, Accelerated
    Reader, Accelerated Vocabulary, AlphaSmart, AlphaSmart 3000,
    Dana, English in a Flash, Math Facts in a Flash, Neo, Read Now
    with Power Up!, Renaissance, Renaissance Learning, Renaissance
    Place, STAR Early Literacy, STAR Reading, STAR Math and
    TestCheck are trademarks of Renaissance Learning, Inc.
    registered®,
    common law or pending registration in the United States and
    other countries. Other trademarks are the property of their
    respective owners.

2



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Renaissance Classroom
Response System. state-of Renaissance Learning






® 10-K 10-Q 8-K http://www.renlearn.com 10-K.





Software, Portable Computing Solutions and Other Educational
Products


Renaissance Place


Accelerated Reader Accelerated Reader Accelerated Reader Accelerated Reader Accelerated Reader Literacy Skills


STAR Reading STAR Reading


3



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STAR Early Literacy STAR Early Literacy


Accelerated Vocabulary Accelerated Vocabulary


Read Now with Power Up! Steck-Vaughn Read Now with
Power Up! e-learning Read
Now with Power Up!


Accelerated Math Accelerated Math AccelScan Accelerated Math


STAR Math STAR Reading. STAR
Math STAR Math


MathFacts in a Flash


English in a Flash


AlphaSmart Products easy-to -cost-of AS3000 Neo Dana. AlphaSmart


4



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AccelScan


Renaissance Classroom Response System state-of Renaissance Learning


Educator Resource Products.





Professional Services




Support Plans. 24-month


Training and Professional Development Services. on-site Accelerated Reader Accelerated Math


National School Renaissance Conference National School
Renaissance Conference,


Renaissance Consulting Renaissance Renaissance Renaissance


5



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on-site Renaissance


Renaissance Evaluation Service Renaissance


Remote Guided Implementation Renaissance


Renaissance Technical Services Renaissance Renaissance Place





Product Development









Selling and Marketing


National School Renaissance
Conference.


6



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Accelerated Reader Accelerated Math





Production


Accelerated Reader Accelerated Math AlphaSmart Renaissance Classroom Response System AccelScan





Competition









Intellectual Property




7



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Employees







Backlog


National School Renaissance
Conference.





Forward-Looking Statements


10-K,







|         |             
|-------- | ------------
|Item 1A. | Risk Factors

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


Dependence on Continued Product Development.


8



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




Management of Growth.


Selling and Marketing Strategy and Product Acceptance.


Risks of International Expansion.


Educational Philosophies.


9



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Dependence on Educational Institutions and Government
Funding.


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;

10



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| |   |                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------
| |  | the shipment of new products for which orders have been building
    for a period of time; and                
|
| |  | seasonal variations due to, among other things, the budget and
    school year cycles of our school customers.





| |   |                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.


11



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Shares Eligible for Future Sale.


Cash Dividends.


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


Acquisitions.


Divestitures.







|         |                          
|-------- | -------------------------
|Item 1B. | Unresolved Staff Comments



12



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








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








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



13



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EXECUTIVE OFFICERS OF THE REGISTRANT


|                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name and Age of Officer  |  | Office                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Judith Ames Paul  Age 59 |  | Ms. Paul is the co-founder of the company and has been chairman
    of the board of directors since February 2006. 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, and again from July 2003 until February
    2006, 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 59 |  | Mr. Paul is the co-founder of the company and has been our
    president and chief executive officer since February 2006. 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, and again from July 2003 until February 2006,
    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.                                                                                                                                                                                                                                                       
|Mary T. Minch  Age 39    |  | 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, Related
    Stockholder Matters and Issuer Purchases of Equity
    Securities

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           
|              |       |              |         |            |  |                  |       |                    
|October 1-31  |       |              | 201,600 |            |  | $                | 16.16 |                     |  |  | 201,600 |           |  |  | 2,676,958 | 
|November 1-30 |       |              | 577,743 | (1)        |  |                  | 17.85 |                     |  |  | 572,743 |           |  |  | 2,104,215 | 
|December 1-31 |       |              | 253,688 |            |  |                  | 19.08 |                     |  |  | 253,688 |           |  |  | 1,850,527 | 
|              |       |              |         |            |  |                  |       |                     |  |  |         |           |  |  |           | 
|              | Total |              |         | 1,033,031  |  |                  | $     | 17.84               |  |  |         | 1,028,031 |  |  |           |  | 
|              |       |              |         |            |  |                  |       |                     |  |  |         |           |  |  |           | 






|    |                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------
|(1) | Includes 5,000 shares purchased in an open-market
    transaction by one of our directors, Addison L. Piper.

15



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

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA


(In thousands, except per share amounts)


|                                                   |                            |                          |              |        |         |        |         |        |         |        |         |         |         |         |         |         |         |         |         |         |         |         | 
|-------------------------------------------------- | -------------------------- | ------------------------ | ------------ | ------ | ------- | ------ | ------- | ------ | ------- | ------ | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | 
|                                                   |                            | Year Ended December 31, 
|                                                   |                            |                         
|                                                   |                            | 2005                     |              | 2004   |         | 2003   |         | 2002   |         | 2001  
|                                                   |                            |                          |              |        |         |        |         |        |         |       
|Consolidated Income Statement Data                 |                            |                          |              |        |         |        |         |        |         |        |         |         |         |         |         |         |         |         |         |        
|Net sales:                                         |                            |                          |              |        |         |        |         |        |         |        |         |         |         |         |         |         |         |         |         |        
|                                                   | Products                   |                          | $            | 94,296 |         |        | $       | 91,482 |         |        | $       | 106,080 |         |         | $       | 108,406 |         |         | $       | 109,758 |        
|                                                   | Services                   |                          |              | 21,987 |         |        |         | 20,242 |         |        |         | 21,552  |         |         |         | 20,985  |         |         |         | 21,159  |        
|                                                   |                            |                          |              |        |         |        |         |        |         |        |         |         |         |         |         |         |         |         |         |        
|                                                   |                            | Total net sales          |              |        | 116,283 |        |         |        | 111,724 |        |         |         | 127,632 |         |         |         | 129,391 |         |         |         | 130,917 |        
|                                                   |                            |                          |              |        |         |        |         |        |         |        |         |         |         |         |         |         |         |         |         |        
|Cost of sales:                                     |                            |                          |              |        |         |        |         |        |         |        |         |         |         |         |         |         |         |         |         |        
|                                                   | Products                   |                          |              | 12,917 |         |        |         | 6,167  |         |        |         | 10,656  |         |         |         | 11,782  |         |         |         | 14,425  |        
|                                                   | Services                   |                          |              | 8,669  |         |        |         | 9,532  |         |        |         | 9,628   |         |         |         | 9,243   |         |         |         | 9,721   |        
|                                                   |                            |                          |              |        |         |        |         |        |         |        |         |         |         |         |         |         |         |         |         |        
|                                                   |                            | Total cost of sales      |              |        | 21,586  |        |         |        | 15,699  |        |         |         | 20,284  |         |         |         | 21,025  |         |         |         | 24,146  |        
|                                                   |                            |                          |              |        |         |        |         |        |         |        |         |         |         |         |         |         |         |         |         |        
|                                                   |                            |                          | Gross profit |        |         | 94,697 |         |        |         | 96,025 |         |         |         | 107,348 |         |         |         | 108,366 |         |         |         | 106,771 | 
|Operating expenses:                                |                            |                          |              |        |         |        |         |        |         |        |         |         |         |         |         |         |         |         |         |        
|                                                   | Product development        |                          |              | 17,046 |         |        |         | 14,536 |         |        |         | 14,881  |         |         |         | 14,960  |         |         |         | 15,626  |        
|                                                   | Selling and marketing      |                          |              | 30,778 |         |        |         | 30,551 |         |        |         | 27,997  |         |         |         | 28,013  |         |         |         | 26,508  |        
|                                                   | General and administrative |                          |              | 12,989 |         |        |         | 12,005 |         |        |         | 12,346  |         |         |         | 12,682  |         |         |         | 12,305  |        
|                                                   |                            |                          |              |        |         |        |         |        |         |        |         |         |         |         |         |         |         |         |         |        
|                                                   |                            | Total operating expenses |              |        | 60,813  |        |         |        | 57,092  |        |         |         | 55,224  |         |         |         | 55,655  |         |         |         | 54,439  |        
|                                                   |                            |                          |              |        |         |        |         |        |         |        |         |         |         |         |         |         |         |         |         |        
|                                                   |                            | Operating income         |              |        | 33,884  |        |         |        | 38,933  |        |         |         | 52,124  |         |         |         | 52,711  |         |         |         | 52,332  |        
|                                                   | Other, net                 |                          |              | 3,494  |         |        |         | 1,640  |         |        |         | 2,267   |         |         |         | 3,760   |         |         |         | 4,177   |        
|                                                   |                            |                          |              |        |         |        |         |        |         |        |         |         |         |         |         |         |         |         |         |        
|Income  continuing operations before income taxes |                            |                          | 37,378       |        |         |        | 40,573  |        |         |        | 54,391  |         |         |         | 56,471  |         |         |         | 56,509  |        
|Income taxes  continuing operations               |                            |                          | 13,211       |        |         |        | 15,012  |        |         |        | 19,406  |         |         |         | 21,744  |         |         |         | 21,673  |        
|                                                   |                            |                          |              |        |         |        |         |        |         |        |         |         |         |         |         |         |         |         |         |        
|Income  continuing operations                     |                            |                          | 24,167       |        |         |        | 25,561  |        |         |        | 34,985  |         |         |         | 34,727  |         |         |         | 34,836  |        
|Income (loss)  discontinued operations            |                            |                          | 584          |        |         |        | (2,859  | )      |         |        | (2,444  | )       |         |         | (3,289  | )       |         |         | (4,167  | )      
|                                                   |                            |                          |              |        |         |        |         |        |         |        |         |         |         |         |         |         |         |         |         |        
|Net income                                         |                            | $                        | 24,751       |        |         | $      | 22,702  |        |         | $      | 32,541  |         |         | $       | 31,438  |         |         | $       | 30,669  |        
|                                                   |                            |                          |              |        |         |        |         |        |         |        |         |         |         |         |         |         |         |         |         |        
|Earnings (loss) per share:                         |                            |                          |              |        |         |        |         |        |         |        |         |         |         |         |         |         |         |         |         |        
|                                                   | Basic:                     |                          |              |        |         |        |         |        |         |        |         |         |         |         |         |         |         |         |         |         |        
|                                                   |                            | Continuing operations    |              |        | 0.78    |        |         |        | 0.82    |        |         |         | 1.12    |         |         |         | 1.03    |         |         |         | 1.01    |        
|                                                   |                            | Discontinued operations  |              |        | 0.02    |        |         |        | (0.09   | )      |         |         | (0.07   | )       |         |         | (0.10   | )       |         |         | (0.12   | )      
|                                                   |                            |                          |              |        |         |        |         |        |         |        |         |         |         |         |         |         |         |         |         |        
|                                                   |                            | Net income               |              | $      | 0.80    |        |         | $      | 0.73    |        |         | $       | 1.05    |         |         | $       | 0.93    |         |         | $       | 0.89    |        
|                                                   |                            |                          |              |        |         |        |         |        |         |        |         |         |         |         |         |         |         |         |         |        
|                                                   | Diluted:                   |                          |              |        |         |        |         |        |         |        |         |         |         |         |         |         |         |         |         |         |        
|                                                   |                            | Continuing operations    |              |        | 0.78    |        |         |        | 0.82    |        |         |         | 1.12    |         |         |         | 1.02    |         |         |         | 1.00    |        
|                                                   |                            | Discontinued operations  |              |        | 0.02    |        |         |        | (0.09   | )      |         |         | (0.08   | )       |         |         | (0.10   | )       |         |         | (0.12   | )      
|                                                   |                            |                          |              |        |         |        |         |        |         |        |         |         |         |         |         |         |         |         |         |        
|                                                   |                            | Net income               |              | $      | 0.80    |        |         | $      | 0.73    |        |         | $       | 1.04    |         |         | $       | 0.92    |         |         | $       | 0.88    |        
|                                                   |                            |                          |              |        |         |        |         |        |         |        |         |         |         |         |         |         |         |         |         |        
|Cash dividends declared per share                  |                            | $                        | 0.20         |        |         | $      | 2.31*   |        |         | $      |        |         |         | $       |        |         |         | $       |        |        
|Consolidated Balance Sheet Data                    |                            |                          |              |        |         |        |         |        |         |        |         |         |         |         |         |         |         |         |         |        
|Working capital                                    |                            | $                        | 21,539       |        |         | $      | 41,815  |        |         | $      | 103,240 |         |         | $       | 74,496  |         |         | $       | 83,383  |        
|Total assets                                       |                            |                          | 128,382      |        |         |        | 114,724 |        |         |        | 159,601 |         |         |         | 147,611 |         |         |         | 159,961 |        
|Shareholders equity                               |                            |                          | 95,866       |        |         |        | 84,417  |        |         |        | 133,330 |         |         |         | 121,236 |         |         |         | 136,531 |        






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



16



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

Overview




off-the percentage-of










17



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Acquisition and Divestiture


easy-to




Results of Operations




Renaissance Place


Renaissance Place




18



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|                                                   |                            |                     |      |      |       |      |      |      |       |   |      |      |       |  
|-------------------------------------------------- | -------------------------- | ------------------- | ---- | ---- | ----- | ---- | ---- | ---- | ----- | - | ---- | ---- | ----- | -
|                                                   |                            | For the Years Ended
|                                                   |                            | December 31,       
|                                                   |                            |                    
|                                                   |                            | 2005                |      | 2004 |       | 2003
|                                                   |                            |                     |      |      |       |     
|Net Sales:                                         |                            |                     |      |      |       |      |      |      |       |   |      |     
|                                                   | Products                   |                     |      | 81.1 | %     |      |      | 81.9 | %     |   |      | 83.1 | %    
|                                                   | Services                   |                     |      | 18.9 |       |      |      | 18.1 |       |   |      | 16.9 |      
|                                                   |                            |                     |      |      |       |      |      |      |       |   |      |     
|                                                   |                            | Total net sales     |      |      | 100.0 | %    |      |      | 100.0 | % |      |      | 100.0 | %
|                                                   |                            |                     |      |      |       |      |      |      |       |   |      |     
|Cost of sales:                                     |                            |                     |      |      |       |      |      |      |       |   |      |     
|                                                   | Products                   |                     |      | 13.7 | %     |      |      | 6.7  | %     |   |      | 10.0 | %    
|                                                   | Services                   |                     |      | 39.4 |       |      |      | 47.1 |       |   |      | 44.7 |      
|                                                   |                            |                     |      |      |       |      |      |      |       |   |      |     
|                                                   |                            | Total cost of sales |      |      | 18.6  |      |      |      | 14.1  |   |      |      | 15.9  |  
|                                                   |                            |                     |      |      |       |      |      |      |       |   |      |     
|Gross profit:                                      |                            |                     |      |      |       |      |      |      |       |   |      |     
|                                                   | Products                   |                     |      | 86.3 |       |      |      | 93.3 |       |   |      | 90.0 |      
|                                                   | Services                   |                     |      | 60.6 |       |      |      | 52.9 |       |   |      | 55.3 |      
|                                                   |                            |                     |      |      |       |      |      |      |       |   |      |     
|                                                   |                            | Total gross profit  |      |      | 81.4  |      |      |      | 85.9  |   |      |      | 84.1  |  
|                                                   |                            |                     |      |      |       |      |      |      |       |   |      |     
|Operating expenses:                                |                            |                     |      |      |       |      |      |      |       |   |      |     
|                                                   | Product development        |                     |      | 14.7 |       |      |      | 13.0 |       |   |      | 11.7 |      
|                                                   | Selling and marketing      |                     |      | 26.5 |       |      |      | 27.4 |       |   |      | 21.9 |      
|                                                   | General and administrative |                     |      | 11.1 |       |      |      | 10.7 |       |   |      | 9.7  |      
|                                                   |                            |                     |      |      |       |      |      |      |       |   |      |     
|Operating income                                   |                            |                     | 29.1 |      |       |      | 34.8 |      |       |   | 40.8 |     
|Other, net                                         |                            |                     | 3.1  |      |       |      | 1.5  |      |       |   | 1.8  |     
|                                                   |                            |                     |      |      |       |      |      |      |       |   |      |     
|Income  continuing operations before income taxes |                            |                     | 32.2 |      |       |      | 36.3 |      |       |   | 42.6 |     
|Income taxes  continuing operations               |                            |                     | 11.4 |      |       |      | 13.4 |      |       |   | 15.2 |     
|                                                   |                            |                     |      |      |       |      |      |      |       |   |      |     
|Income  continuing operations                     |                            |                     | 20.8 |      |       |      | 22.9 |      |       |   | 27.4 |     
|                                                   |                            |                     |      |      |       |      |      |      |       |   |      |     
|Income  discontinued operations                   |                            |                     | 0.5  |      |       |      | (2.6 | )    |       |   | (1.9 | )   
|                                                   |                            |                     |      |      |       |      |      |      |       |   |      |     
|Net Income                                         |                            |                     | 21.3 | %    |       |      | 20.3 | %    |       |   | 25.5 | %   
|                                                   |                            |                     |      |      |       |      |      |      |       |   |      |     

Years Ended December 31, 2005 and 2004


Net Sales.




Cost of Sales.


19



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National School Renaissance Conference.




Product Development.


Selling and Marketing.


General and Administrative.


Operating Income.


Other income.


Income Tax Expense  Continuing Operations.


Discontinued Operations.


Years Ended December 31, 2004 and 2003


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


20



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Renaissance Place


National School
Renaissance Conference National School Renaissance
Conference.


Cost of Sales.


National School
Renaissance Conference.




Product Development.


Selling and Marketing.


General and Administrative.


Operating Income.


Income Tax Expense  Continuing Operations.


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Discontinued Operations.


Liquidity and Capital Resources












Off-Balance Sheet Arrangements and Aggregate Contractual
Obligations




Operating Leases.


Purchase Obligations. AlphaSmart AccelScan Renaissance Classroom
Response System.


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|                            |       |                        |       |           |  |       |       |       |  |           |       |       |  |   |     |     |  |   |   |   | 
|--------------------------- | ----- | ---------------------- | ----- | --------- |  | ----- | ----- | ----- |  | --------- | ----- | ----- |  | - | --- | --- |  | - | - | - | 
|                            |       | Payments Due by Period
|                            |       |                       
|                            |       |                        |       | Less Than |  | 1-3   |       | 3-5   |  | More Than
|Contractual Obligations     |       | Total                  |       | 1 Year    |  | Years |       | Years |  | 5 Years  
|                            |       |                        |       |           |  |       |       |       |  |          
|                            |       | (In Thousands)        
|Operating lease obligations |       | $                      | 2,956 |           |  | $     | 883   |       |  | $         | 1,798 |       |  | $ | 275 |     |  | $ |  |  
|Purchase obligations        |       |                        | 5,766 |           |  |       | 5,766 |       |  |           |      |       |  |   |    |     |  |   |  |  
|                            |       |                        |       |           |  |       |       |       |  |           |       |       |  |   |     |     |  |   |   |  
|                            | Total |                        | $     | 8,722     |  |       | $     | 6,649 |  |           | $     | 1,798 |  |   | $   | 275 |  |   | $ |  | 
|                            |       |                        |       |           |  |       |       |       |  |           |       |       |  |   |     |     |  |   |   |  

Retirement Plan.


Other Obligations.


Critical Accounting Policies and Estimates




Revenue Recognition. off-the percentage-of




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Impairment of Long-Lived Assets.




Software Support and Product Warranty Obligations.


Software Development Costs.


Taxes.




Recent Accounting Pronouncement








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Subsequent Event









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

Interest Rate Risk.


Market Risk.






Foreign Currency Exchange Rate Risk.


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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








Internal Control 
Integrated Framework




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





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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


As of December 31, 2005 and 2004


|                                     |                                                                                                                     |                                                                                                               |                                            |        |         |         |        |        |         |         | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------- | ------- | ------ | ------ | ------- | ------- | 
|                                     |                                                                                                                     | 2005                                                                                                          |                                            | 2004  
|                                     |                                                                                                                     |                                                                                                               |                                            |       
|                                     |                                                                                                                     | (In Thousands, Except                                                                                        
|                                     |                                                                                                                     | Share and                                                                                                    
|                                     |                                                                                                                     | Per Share Amounts)                                                                                           
|ASSETS                              
|Current assets:                      |                                                                                                                     |                                                                                                               |                                            |        |         |         |        |       
|                                     | Cash and cash equivalents                                                                                           |                                                                                                               | $                                          | 7,083  |         |         | $      | 27,460 |        
|                                     | Investment securities                                                                                               |                                                                                                               |                                            | 23,363 |         |         |        | 25,103 |        
|                                     | Accounts receivable, less allowance of $1,340 and $1,283,
    respectively                                          |                                                                                                               |                                            | 11,393 |         |         |        | 8,441  |        
|                                     | Inventories                                                                                                         |                                                                                                               |                                            | 4,138  |         |         |        | 2,364  |        
|                                     | Prepaid expenses                                                                                                    |                                                                                                               |                                            | 1,722  |         |         |        | 1,194  |        
|                                     | Deferred tax asset                                                                                                  |                                                                                                               |                                            | 3,693  |         |         |        | 3,800  |        
|                                     | Assets of discontinued operations                                                                                   |                                                                                                               |                                            |       |         |         |        | 1,149  |        
|                                     | Other current assets                                                                                                |                                                                                                               |                                            | 390    |         |         |        | 453    |        
|                                     |                                                                                                                     |                                                                                                               |                                            |        |         |         |        |       
|                                     |                                                                                                                     |                                                                                                               | Total current assets                       |        |         | 51,782  |        |        |         | 69,964  | 
|Investment securities                |                                                                                                                     |                                                                                                               | 4,132                                      |        |         |         | 21,003 |       
|Property, plant and equipment, net   |                                                                                                                     |                                                                                                               | 11,475                                     |        |         |         | 18,552 |       
|Deferred tax asset                   |                                                                                                                     |                                                                                                               | 738                                        |        |         |         | 1,620  |       
|Goodwill                             |                                                                                                                     |                                                                                                               | 45,906                                     |        |         |         | 2,757  |       
|Other intangibles, net               |                                                                                                                     |                                                                                                               | 6,787                                      |        |         |         | 192    |       
|Capitalized software, net            |                                                                                                                     |                                                                                                               | 420                                        |        |         |         | 636    |       
|Other receivables                    |                                                                                                                     |                                                                                                               | 5,909                                      |        |         |         |       |       
|Other non-current assets             |                                                                                                                     |                                                                                                               | 1,233                                      |        |         |         |       |       
|                                     |                                                                                                                     |                                                                                                               |                                            |        |         |         |        |       
|                                     |                                                                                                                     |                                                                                                               | Total assets                               |        | $       | 128,382 |        |        | $       | 114,724 | 
|                                     |                                                                                                                     |                                                                                                               |                                            |        |         |         |        |       
|                                    
|LIABILITIES AND SHAREHOLDERS EQUITY
|Current liabilities:                 |                                                                                                                     |                                                                                                               |                                            |        |         |         |        |       
|                                     | Accounts payable                                                                                                    |                                                                                                               | $                                          | 3,280  |         |         | $      | 1,226  |        
|                                     | Deferred revenue                                                                                                    |                                                                                                               |                                            | 18,255 |         |         |        | 16,484 |        
|                                     | Payroll and employee benefits                                                                                       |                                                                                                               |                                            | 4,156  |         |         |        | 3,983  |        
|                                     | Income taxes payable                                                                                                |                                                                                                               |                                            | 313    |         |         |        | 925    |        
|                                     | Liabilities of discontinued operations                                                                              |                                                                                                               |                                            |       |         |         |        | 1,650  |        
|                                     | Other current liabilities                                                                                           |                                                                                                               |                                            | 4,239  |         |         |        | 3,881  |        
|                                     |                                                                                                                     |                                                                                                               |                                            |        |         |         |        |       
|                                     |                                                                                                                     |                                                                                                               | Total current liabilities                  |        |         | 30,243  |        |        |         | 28,149  | 
|Deferred revenue                     |                                                                                                                     |                                                                                                               | 670                                        |        |         |         | 620    |       
|Deferred compensation                |                                                                                                                     |                                                                                                               | 1,603                                      |        |         |         | 1,354  |       
|                                     |                                                                                                                     |                                                                                                               |                                            |        |         |         |        |       
|                                     |                                                                                                                     |                                                                                                               | Total liabilities                          |        |         | 32,516  |        |        |         | 30,123  | 
|Minority interest                    |                                                                                                                     |                                                                                                               |                                           |        |         |         | 184    |       
|Shareholders equity:                |                                                                                                                     |                                                                                                               |                                            |        |         |         |        |       
|                                     | Common stock, $.01 par; shares authorized: 150,000,000; issued:
    34,736,647 shares at December 31, 2005 and 2004 |                                                                                                               |                                            | 347    |         |         |        | 347    |        
|                                     |                                                                                                                     | Additional paid-in capital                                                                                    |                                            |        | 56,522  |         |        |        | 54,490  |        
|                                     |                                                                                                                     | Retained earnings                                                                                             |                                            |        | 118,233 |         |        |        | 99,689  |        
|                                     |                                                                                                                     | Treasury stock, at cost: 4,387,594 shares at
    December 31, 2005; 3,865,280 shares at
    December 31, 2004 |                                            |        | (78,845 | )       |        |        | (70,213 | )      
|                                     |                                                                                                                     | Unearned restricted stock compensation                                                                        |                                            |        | (438    | )       |        |        |        |        
|                                     |                                                                                                                     | Accumulated other comprehensive income                                                                        |                                            |        | 47      |         |        |        | 104     |        
|                                     |                                                                                                                     |                                                                                                               |                                            |        |         |         |        |       
|                                     |                                                                                                                     |                                                                                                               | Total shareholders equity                 |        |         | 95,866  |        |        |         | 84,417  | 
|                                     |                                                                                                                     |                                                                                                               |                                            |        |         |         |        |       
|                                     |                                                                                                                     |                                                                                                               | Total liabilities and shareholders equity |        | $       | 128,382 |        |        | $       | 114,724 | 
|                                     |                                                                                                                     |                                                                                                               |                                            |        |         |         |        |       



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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF INCOME


For the Years Ended December 31, 2005, 2004 and 2003


|                                                   |                            |                                 |                          |            |      |         |        |        |       |         |        |         |       |         |      | 
|-------------------------------------------------- | -------------------------- | ------------------------------- | ------------------------ | ---------- | ---- | ------- | ------ | ------ | ----- | ------- | ------ | ------- | ----- | ------- | ---- | 
|                                                   |                            | 2005                            |                          | 2004       |      | 2003   
|                                                   |                            |                                 |                          |            |      |        
|                                                   |                            | (In Thousands, Except Per Share
|                                                   |                            | Amounts)                       
|Net Sales:                                         |                            |                                 |                          |            |      |         |        |        |       |         |        |        
|                                                   | Products                   |                                 | $                        | 94,296     |      |         | $      | 91,482 |       |         | $      | 106,080 |      
|                                                   | Services                   |                                 |                          | 21,987     |      |         |        | 20,242 |       |         |        | 21,552  |      
|                                                   |                            |                                 |                          |            |      |         |        |        |       |         |        |        
|                                                   |                            |                                 | Total net sales          |            |      | 116,283 |        |        |       | 111,724 |        |         |       | 127,632 |     
|                                                   |                            |                                 |                          |            |      |         |        |        |       |         |        |        
|Cost of sales:                                     |                            |                                 |                          |            |      |         |        |        |       |         |        |        
|                                                   | Products                   |                                 |                          | 12,917     |      |         |        | 6,167  |       |         |        | 10,656  |      
|                                                   | Services                   |                                 |                          | 8,669      |      |         |        | 9,532  |       |         |        | 9,628   |      
|                                                   |                            |                                 |                          |            |      |         |        |        |       |         |        |        
|                                                   |                            |                                 | Total cost of sales      |            |      | 21,586  |        |        |       | 15,699  |        |         |       | 20,284  |     
|                                                   |                            |                                 |                          |            |      |         |        |        |       |         |        |        
|                                                   |                            |                                 | Gross profit             |            |      | 94,697  |        |        |       | 96,025  |        |         |       | 107,348 |     
|Operating expenses:                                |                            |                                 |                          |            |      |         |        |        |       |         |        |        
|                                                   | Product development        |                                 |                          | 17,046     |      |         |        | 14,536 |       |         |        | 14,881  |      
|                                                   | Selling and marketing      |                                 |                          | 30,778     |      |         |        | 30,551 |       |         |        | 27,997  |      
|                                                   | General and administrative |                                 |                          | 12,989     |      |         |        | 12,005 |       |         |        | 12,346  |      
|                                                   |                            |                                 |                          |            |      |         |        |        |       |         |        |        
|                                                   |                            |                                 | Total operating expenses |            |      | 60,813  |        |        |       | 57,092  |        |         |       | 55,224  |     
|                                                   |                            |                                 |                          |            |      |         |        |        |       |         |        |        
|                                                   |                            |                                 | Operating income         |            |      | 33,884  |        |        |       | 38,933  |        |         |       | 52,124  |     
|Other income:                                      |                            |                                 |                          |            |      |         |        |        |       |         |        |        
|                                                   | Interest income            |                                 |                          | 1,324      |      |         |        | 1,072  |       |         |        | 1,927   |      
|                                                   | Other, net                 |                                 |                          | 2,170      |      |         |        | 568    |       |         |        | 340     |      
|                                                   |                            |                                 |                          |            |      |         |        |        |       |         |        |        
|Income  continuing operations before income taxes |                            |                                 | 37,378                   |            |      |         | 40,573 |        |       |         | 54,391 |        
|Income taxes  continuing operations               |                            |                                 | 13,211                   |            |      |         | 15,012 |        |       |         | 19,406 |        
|                                                   |                            |                                 |                          |            |      |         |        |        |       |         |        |        
|Income  continuing operations                     |                            |                                 | 24,167                   |            |      |         | 25,561 |        |       |         | 34,985 |        
|Income (loss)  discontinued operations            |                            |                                 | 584                      |            |      |         | (2,859 | )      |       |         | (2,444 | )      
|                                                   |                            |                                 |                          |            |      |         |        |        |       |         |        |        
|Net Income                                         |                            | $                               | 24,751                   |            |      | $       | 22,702 |        |       | $       | 32,541 |        
|                                                   |                            |                                 |                          |            |      |         |        |        |       |         |        |        
|Earnings (Loss) per share:                         |                            |                                 |                          |            |      |         |        |        |       |         |        |        
|                                                   |                            | Basic  Continuing operations   |                          | $          | 0.78 |         |        | $      | 0.82  |         |        | $       | 1.12  |        
|                                                   |                            | Discontinued
    operations     |                          |            | 0.02 |         |        |        | (0.09 | )       |        |         | (0.07 | )      
|                                                   |                            |                                 |                          |            |      |         |        |        |       |         |        |        
|                                                   |                            |                                 |                          | Net income |      | $       | 0.80   |        |       | $       | 0.73   |         |       | $       | 1.05 | 
|                                                   |                            |                                 |                          |            |      |         |        |        |       |         |        |        
|                                                   |                            | Diluted  Continuing operations |                          | $          | 0.78 |         |        | $      | 0.82  |         |        | $       | 1.12  |        
|                                                   |                            | Discontinued
    operations     |                          |            | 0.02 |         |        |        | (0.09 | )       |        |         | (0.08 | )      
|                                                   |                            |                                 |                          |            |      |         |        |        |       |         |        |        
|                                                   |                            |                                 |                          | Net income |      | $       | 0.80   |        |       | $       | 0.73   |         |       | $       | 1.04 | 
|                                                   |                            |                                 |                          |            |      |         |        |        |       |         |        |        



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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY


For the Years Ended December 31, 2005, 2004 and 2003


|                           |                                                   |                      |     |            |  |          |        |          |   |                  |         |               |   |               |         |         |   |   |      |      |   |   |      |     |   |   |         |         |        | 
|-------------------------- | ------------------------------------------------- | -------------------- | --- | ---------- |  | -------- | ------ | -------- | - | ---------------- | ------- | ------------- | - | ------------- | ------- | ------- | - | - | ---- | ---- | - | - | ---- | --- | - | - | ------- | ------- | ------ | 
|                           |                                                   |                      |     |            |  |          |        |          |   |                  |         | Other         |   | Accumulated  
|                           |                                                   | Common               |     | Additional |  |          |        |          |   | Unearned         |         | Comprehensive |   | Total        
|                           |                                                   | Stock                |     | Paid-in    |  | Retained |        | Treasury |   | Restricted Stock |         | Income        |   | Shareholders
|                           |                                                   | Amount               |     | Capital    |  | Earnings |        | Stock    |   | Compensation     |         | (Loss)        |   | Equity       
|                           |                                                   |                      |     |            |  |          |        |          |   |                  |         |               |   |              
|                           |                                                   | (In Thousands)      
|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  |        
|                           | Net income                                        |                      |     |           |  |          |        |         |   |                  |         | 24,751        |   |               |         |        |   |   |      |     |   |   |      |    |   |   |         | 24,751  |       
|                           | Foreign currency translation                      |                      |     |           |  |          |        |         |   |                  |         |              |   |               |         |        |   |   |      |     |   |   |      | (57 | ) |   |         | (57     | )     
|                           |                                                   |                      |     |            |  |          |        |          |   |                  |         |               |   |               |         |         |   |   |      |      |   |   |      |     |   |   |         |        
|                           |                                                   | Comprehensive income |     |            |  |          |        |          |   |                  |         |               |   |               |         |         |   |   |      |      |   |   |      |     |   |   |         |         | 24,694 | 
|                           | Dividends ($.20 per share)                        |                      |     |           |  |          |        |         |   |                  |         | (6,207        | ) |               |         |        |   |   |      |     |   |   |      |    |   |   |         | (6,207  | )     
|                           | Stock repurchased for treasury                    |                      |     |           |  |          |        |         |   |                  |         |              |   |               |         | (32,374 | ) |   |      |     |   |   |      |    |   |   |         | (32,374 | )     
|                           | Treasury shares issued for purchase of AlphaSmart |                      |     |           |  |          |        | 2,171    |   |                  |         |              |   |               |         | 20,895  |   |   |      |     |   |   |      |    |   |   |         | 23,066  |       
|                           | Exercise of stock options                         |                      |     |           |  |          |        | (350     | ) |                  |         |              |   |               |         | 2,455   |   |   |      |     |   |   |      |    |   |   |         | 2,105   |       
|                           | Tax benefit on stock options                      |                      |     |           |  |          |        | 112      |   |                  |         |              |   |               |         |        |   |   |      |     |   |   |      |    |   |   |         | 112     |       
|                           | Restricted stock grants                           |                      |     |           |  |          |        | 99       |   |                  |         |              |   |               |         | 392     |   |   |      | (491 | ) |   |      |    |   |   |         |        |       
|                           | Restricted stock compensation                     |                      |     |           |  |          |        |         |   |                  |         |              |   |               |         |        |   |   |      | 53   |   |   |      |    |   |   |         | 53      |       
|                           |                                                   |                      |     |            |  |          |        |          |   |                  |         |               |   |               |         |         |   |   |      |      |   |   |      |     |   |   |         |        
|Balance, December 31, 2005 |                                                   | $                    | 347 |            |  | $        | 56,522 |          |   | $                | 118,233 |               |   | $             | (78,845 | )       |   | $ | (438 | )    |   | $ | 47   |     |   | $ | 95,866  |        
|                           |                                                   |                      |     |            |  |          |        |          |   |                  |         |               |   |               |         |         |   |   |      |      |   |   |      |     |   |   |         |        






|    |                                                              
|--- | -------------------------------------------------------------
|(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, 2005, 2004 and 2003


|                                                                               |                                                                                              |                                                       |                                                  |         |        |         |         |         |       |         |        |         |        |         |  
|------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------- | ----------------------------------------------------- | ------------------------------------------------ | ------- | ------ | ------- | ------- | ------- | ----- | ------- | ------ | ------- | ------ | ------- | -
|                                                                               |                                                                                              | 2005                                                  |                                                  | 2004    |        | 2003   
|                                                                               |                                                                                              |                                                       |                                                  |         |        |        
|                                                                               |                                                                                              | (In Thousands)                                       
|Reconciliation of net income to net cash provided by operating
    activities: |                                                                                              |                                                       |                                                  |         |        |         |         |         |       |         |        |        
|                                                                               | Net income                                                                                   |                                                       | $                                                | 24,751  |        |         | $       | 22,702  |       |         | $      | 32,541  |       
|                                                                               | (Income) loss from discontinued operations                                                   |                                                       |                                                  | (584    | )      |         |         | 2,859   |       |         |        | 2,444   |       
|                                                                               |                                                                                              |                                                       |                                                  |         |        |         |         |         |       |         |        |        
|                                                                               | Income from continuing operations                                                            |                                                       |                                                  | 24,167  |        |         |         | 25,561  |       |         |        | 34,985  |       
|                                                                               | Noncash (income) expenses included in net income                                            |                                                       |                                                  |         |        |         |         |         |       |         |        |         |       
|                                                                               |                                                                                              | Depreciation and amortization                         |                                                  |         | 3,179  |         |         |         | 3,315 |         |        |         | 3,650  |        
|                                                                               |                                                                                              | Amortization of investment discounts/premiums         |                                                  |         | 396    |         |         |         | 696   |         |        |         | 1,616  |        
|                                                                               |                                                                                              | Deferred income taxes                                 |                                                  |         | 1,437  |         |         |         | 118   |         |        |         | 114    |        
|                                                                               |                                                                                              | Gain on sale of property                              |                                                  |         | (1,798 | )       |         |         |      |         |        |         |       |        
|                                                                               | Change in assets and liabilities, excluding the effects of
    acquisitions and divestitures |                                                       |                                                  |         |        |         |         |         |       |         |        |         |       
|                                                                               |                                                                                              | Accounts receivable                                   |                                                  |         | 1,903  |         |         |         | 4,090 |         |        |         | 9      |        
|                                                                               |                                                                                              | Inventories                                           |                                                  |         | 568    |         |         |         | (94   | )       |        |         | (623   | )      
|                                                                               |                                                                                              | Prepaid expenses                                      |                                                  |         | (369   | )       |         |         | 107   |         |        |         | 9      |        
|                                                                               |                                                                                              | Accounts payable and other liabilities                |                                                  |         | (1,532 | )       |         |         | (720  | )       |        |         | (1,311 | )      
|                                                                               |                                                                                              | Deferred revenue                                      |                                                  |         | 1,821  |         |         |         | 6,034 |         |        |         | 47     |        
|                                                                               |                                                                                              | Income tax benefit from the exercise of stock options |                                                  |         | 112    |         |         |         | 1,156 |         |        |         | 393    |        
|                                                                               |                                                                                              | Other current assets                                  |                                                  |         | 1,460  |         |         |         | 437   |         |        |         | 443    |        
|                                                                               |                                                                                              | Other                                                 |                                                  |         | 181    |         |         |         | (23   | )       |        |         | 419    |        
|                                                                               |                                                                                              |                                                       |                                                  |         |        |         |         |         |       |         |        |        
|                                                                               | Cash provided by operating activities                                                        |                                                       |                                                  | 31,525  |        |         |         | 40,677  |       |         |        | 39,751  |       
|                                                                               | Cash used by discontinued operations                                                         |                                                       |                                                  | (116    | )      |         |         | (3,437  | )     |         |        | (1,723  | )     
|                                                                               |                                                                                              |                                                       |                                                  |         |        |         |         |         |       |         |        |        
|                                                                               | Net cash provided by operating activities                                                    |                                                       |                                                  | 31,409  |        |         |         | 37,240  |       |         |        | 38,028  |       
|                                                                               |                                                                                              |                                                       |                                                  |         |        |         |         |         |       |         |        |        
|Cash flows from investing activities:                                          |                                                                                              |                                                       |                                                  |         |        |         |         |         |       |         |        |        
|                                                                               | Purchase of property, plant and equipment                                                    |                                                       |                                                  | (2,419  | )      |         |         | (1,046  | )     |         |        | (2,082  | )     
|                                                                               | Purchase of investment securities                                                            |                                                       |                                                  | (6,834  | )      |         |         | (46,408 | )     |         |        | (42,357 | )     
|                                                                               | Maturities/sales of investment securities                                                    |                                                       |                                                  | 25,049  |        |         |         | 48,949  |       |         |        | 73,045  |       
|                                                                               | Capitalized software development costs                                                       |                                                       |                                                  | (279    | )      |         |         | (563    | )     |         |        | (448    | )     
|                                                                               | Net proceeds from sale of property                                                           |                                                       |                                                  | 3,166   |        |         |         |        |       |         |        |        |       
|                                                                               | Net proceeds from sale of subsidiary                                                         |                                                       |                                                  | 75      |        |         |         |        |       |         |        |        |       
|                                                                               | Acquisitions of business, net of cash acquired                                               |                                                       |                                                  | (33,970 | )      |         |         |        |       |         |        | (521    | )     
|                                                                               |                                                                                              |                                                       |                                                  |         |        |         |         |         |       |         |        |        
|                                                                               | Cash provided by investing activities                                                        |                                                       |                                                  | (15,212 | )      |         |         | 932     |       |         |        | 27,637  |       
|                                                                               | Cash used by discontinued operations                                                         |                                                       |                                                  |        |        |         |         | (365    | )     |         |        | (354    | )     
|                                                                               |                                                                                              |                                                       |                                                  |         |        |         |         |         |       |         |        |        
|                                                                               |                                                                                              |                                                       | Net cash (used) provided by investing activities |         |        | (15,212 | )       |         |       | 567     |        |         |        | 27,283  |  
|                                                                               |                                                                                              |                                                       |                                                  |         |        |         |         |         |       |         |        |        
|Cash flows from financing activities:                                          |                                                                                              |                                                       |                                                  |         |        |         |         |         |       |         |        |        
|                                                                               | Return of capital to minority interest                                                       |                                                       |                                                  | (98     | )      |         |         | (54     | )     |         |        |        |       
|                                                                               | Proceeds from issuance of stock                                                              |                                                       |                                                  |        |        |         |         |        |       |         |        | 1,046   |       
|                                                                               | Proceeds from exercise of stock options                                                      |                                                       |                                                  | 2,105   |        |         |         | 4,331   |       |         |        | 1,674   |       
|                                                                               | Dividends paid                                                                               |                                                       |                                                  | (6,207  | )      |         |         | (71,609 | )     |         |        |        |       
|                                                                               | Purchase of treasury stock                                                                   |                                                       |                                                  | (32,374 | )      |         |         | (5,539  | )     |         |        | (23,727 | )     
|                                                                               |                                                                                              |                                                       |                                                  |         |        |         |         |         |       |         |        |        
|                                                                               |                                                                                              |                                                       | Net cash used by financing activities            |         |        | (36,574 | )       |         |       | (72,871 | )      |         |        | (21,007 | )
|                                                                               |                                                                                              |                                                       |                                                  |         |        |         |         |         |       |         |        |        
|Net (decrease) increase in cash                                                |                                                                                              |                                                       | (20,377                                          | )       |        |         | (35,064 | )       |       |         | 44,304 |        
|Cash and cash equivalents, beginning of period                                 |                                                                                              |                                                       | 27,460                                           |         |        |         | 62,524  |         |       |         | 18,220 |        
|                                                                               |                                                                                              |                                                       |                                                  |         |        |         |         |         |       |         |        |        
|Cash and cash equivalents, end of period                                       |                                                                                              | $                                                     | 7,083                                            |         |        | $       | 27,460  |         |       | $       | 62,524 |        
|                                                                               |                                                                                              |                                                       |                                                  |         |        |         |         |         |       |         |        |        
|Supplemental cash flow information                                             |                                                                                              |                                                       |                                                  |         |        |         |         |         |       |         |        |        
|Cash paid during the year for  Interest                                       |                                                                                              | $                                                     |                                                 |         |        | $       |        |         |       | $       |       |        
|                                                                               | Income taxes (net of refunds)                                                                |                                                       | $                                                | 11,121  |        |         | $       | 13,054  |       |         | $      | 17,172  |       



30



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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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





|    |                      
|--- | ---------------------
|(2) | Basis of presentation





|    |                     
|--- | --------------------
|(3) | Nature of operations





Accelerated Reader, STAR Reading, STAR Early Literacy,
Accelerated Vocabulary, Read Now with Power Up!, Accelerated
Math, STAR Math, MathFacts in a Flash, and English in a
Flash.


AlphaSmart Renaissance Classroom Response
System. Accelscan


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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |            
|--- | -----------
|(4) | Acquisition

easy-to




10-year




|                    |                        |                |        |        | 
|------------------- | ---------------------- | -------------- | ------ | ------ | 
|                    |                        | (In Thousands)
|Goodwill            |                        | $              | 43,134 |       
|Intangible assets:  |                        |                |        |       
|                    | Tradename              |                |        | 3,000  | 
|                    | Customer relationships |                |        | 4,150  | 
|Other assets        |                        |                | 11,609 |       
|                    |                        |                |        |       
|                    | Assets acquired        |                |        | 61,893 | 
|                    | Liabilities assumed    |                |        | 4,015  | 
|                    |                        |                |        |       
|Net assets acquired |                        | $              | 57,878 |       
|                    |                        |                |        |       



|                             |             |                |        |        | 
|---------------------------- | ----------- | -------------- | ------ | ------ | 
|                             |             | (In Thousands)
|Balance at December 31, 2003 |             | $              | 2,642  |       
|                             | Translation |                |        | 115    | 
|                             |             |                |        |       
|Balance at December 31, 2004 |             |                | 2,757  |       
|                             | Acquisition |                |        | 43,134 | 
|                             | Translation |                |        | 15     | 
|                             |             |                |        |       
|Balance at December 31, 2005 |             | $              | 45,906 |       
|                             |             |                |        |       

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                               |                            |                       |         |      |  |   |         |     | 
|---------------------------------------------- | -------------------------- | --------------------- | ------- | ---- |  | - | ------- | --- | 
|                                               |                            | Twelve Months Ended  
|                                               |                            | December 31,         
|                                               |                            |                      
|                                               |                            | 2005                  |         | 2004
|                                               |                            |                       |         |     
|                                               |                            | (In Thousands, Except
|                                               |                            | per Share Amounts)   
|Net sales                                      |                            | $                     | 131,576 |      |  | $ | 147,151 |    
|Income from continuing operations              |                            |                       | 24,104  |      |  |   | 26,971  |    
|Earnings per share from continuing operations: |                            |                       |         |      |  |   |         |    
|                                               | Basic earnings per share   |                       |         | .75  |  |   |         | .83 | 
|                                               | Diluted earnings per share |                       |         | .75  |  |   |         | .82 | 



|    |                                
|--- | -------------------------------
|(5) | Significant accounting policies



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





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



off-the percentage-of percentage-of percentage-of




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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








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



|                       |  |                |       |      |  |   |        | 
|---------------------- |  | -------------- | ----- | ---- |  | - | ------ | 
|                       |  | 2005           |       | 2004
|                       |  |                |       |     
|                       |  | (In Thousands)
|Cash and time deposits |  | $              | 7,083 |      |  | $ | 11,060 | 
|Municipal obligations  |  |                |      |      |  |   | 16,400 | 
|                       |  |                |       |      |  |   |        | 
|                       |  | $              | 7,083 |      |  | $ | 27,460 | 
|                       |  |                |       |      |  |   |        | 



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

held-to


held-to




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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                         |                         |                                   |        |        |        |          |        |        |        |   |        |        |        |   |        |        |        | 
|---------------------------------------- | ----------------------- | --------------------------------- | ------ | ------ | ------ | -------- | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                         |                         | 2005                              |        | 2004  
|                                         |                         |                                   |        |       
|                                         |                         | 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         |                                   |        | 3,000  |        |          |        | 2,976  |        |   |        | 3,762  |        |   |        | 3,748  |       
|                                         | Municipal bonds         |                                   |        | 20,363 |        |          |        | 20,270 |        |   |        | 19,845 |        |   |        | 19,790 |       
|                                         |                         |                                   |        |        |        |          |        |        |        |   |        |        |        |   |        |       
|                                         |                         | Current investment securities     |        |        | 23,363 |          |        |        | 23,246 |   |        |        | 25,103 |   |        |        | 25,038 | 
|                                         |                         |                                   |        |        |        |          |        |        |        |   |        |        |        |   |        |       
|Debt securities due in 1 to 2 years:     |                         |                                   |        |        |        |          |        |        |        |   |        |        |        |   |        |       
|                                         | Corporate bonds         |                                   |        |       |        |          |        |       |        |   |        | 3,000  |        |   |        | 2,968  |       
|                                         | Municipal bonds         |                                   |        | 2,529  |        |          |        | 2,513  |        |   |        | 16,649 |        |   |        | 16,593 |       
|Equity securities:                       |                         |                                   |        |        |        |          |        |        |        |   |        |        |        |   |        |       
|                                         | Mutual fund investments |                                   |        | 1,603  |        |          |        | 1,603  |        |   |        | 1,354  |        |   |        | 1,354  |       
|                                         |                         |                                   |        |        |        |          |        |        |        |   |        |        |        |   |        |       
|                                         |                         | Non-current investment securities |        |        | 4,132  |          |        |        | 4,116  |   |        |        | 21,003 |   |        |        | 20,915 | 
|                                         |                         |                                   |        |        |        |          |        |        |        |   |        |        |        |   |        |       
|Total investment securities              |                         | $                                 | 27,495 |        |        | $        | 27,362 |        |        | $ | 46,106 |        |        | $ | 45,953 |       
|                                         |                         |                                   |        |        |        |          |        |        |        |   |        |        |        |   |        |       



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

first-in,




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





| |                                  
| | ---------------------------------
| | (g) Property, plant and equipment





35



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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                 |                                     |                |        |        |  |   |        |        | 
|------------------------------------------------ | ----------------------------------- | -------------- | ------ | ------ |  | - | ------ | ------ | 
|                                                 |                                     | 2005           |        | 2004  
|                                                 |                                     |                |        |       
|                                                 |                                     | (In Thousands)
|Land and improvements                            |                                     | $              | 1,219  |        |  | $ | 3,646  |       
|Buildings                                        |                                     |                | 9,991  |        |  |   | 16,042 |       
|Furniture, fixtures and office equipment         |                                     |                | 4,729  |        |  |   | 5,641  |       
|Computer and production equipment                |                                     |                | 11,274 |        |  |   | 9,092  |       
|Other                                            |                                     |                | 1,667  |        |  |   | 1,700  |       
|                                                 |                                     |                |        |        |  |   |        |       
|                                                 | Total property, plant and equipment |                |        | 28,880 |  |   |        | 36,121 | 
|Less  accumulated depreciation and amortization |                                     |                | 17,405 |        |  |   | 17,569 |       
|                                                 |                                     |                |        |        |  |   |        |       
|Property, plant and equipment, net               |                                     | $              | 11,475 |        |  | $ | 18,552 |       
|                                                 |                                     |                |        |        |  |   |        |       



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





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





| |                  
| | -----------------
| | (j) Stock options



36



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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                                                                       |             |                           |        |      |  |      |        |      |  |   |        |      | 
|---------------------------------------------------------------------------------------------------------------------- | ----------- | ------------------------- | ------ | ---- |  | ---- | ------ | ---- |  | - | ------ | ---- | 
|                                                                                                                       |             | 2005                      |        | 2004 |  | 2003
|                                                                                                                       |             |                           |        |      |  |     
|                                                                                                                       |             | (In Thousands,           
|                                                                                                                       |             | Except Per Share Amounts)
|Net Income, as reported                                                                                                |             | $                         | 24,751 |      |  | $    | 22,702 |      |  | $ | 32,541 |     
|Deduct: total stock-based compensation expense determined under
    fair-value based method for all awards, net of tax |             |                           | 2,485  |      |  |      | 1,681  |      |  |   | 3,767  |     
|Pro forma net income                                                                                                   |             | $                         | 22,266 |      |  | $    | 21,021 |      |  | $ | 28,774 |     
|Basic earnings per share:                                                                                              |             |                           |        |      |  |      |        |      |  |   |        |     
|                                                                                                                       | As reported |                           | $      | 0.80 |  |      | $      | 0.73 |  |   | $      | 1.05 | 
|                                                                                                                       | Pro forma   |                           |        | 0.72 |  |      |        | 0.68 |  |   |        | 0.92 | 
|Diluted earnings per share:                                                                                            |             |                           |        |      |  |      |        |      |  |   |        |     
|                                                                                                                       | As reported |                           | $      | 0.80 |  |      | $      | 0.73 |  |   | $      | 1.04 | 
|                                                                                                                       | Pro forma   |                           |        | 0.72 |  |      |        | 0.67 |  |   |        | 0.92 | 
|The per share weighted average fair value of options granted
    under the plan during the year is:                    |             | $                         | 10.06  |      |  | $    | 14.08  |      |  | $ | 12.30  |     



|                         |  |      |       |      |  |  |       |  
|------------------------ |  | ---- | ----- | ---- |  |  | ----- | -
|                         |  | 2005 |       | 2004
|                         |  |      |       |     
|Dividend yield           |  |      | 1.01  | %    |  |  | 0.64  | %
|Expected volatility      |  |      | 57.08 | %    |  |  | 62.48 | %
|Risk-free interest rate  |  |      | 4.00  | %    |  |  | 3.39  | %
|Expected life (in years) |  |      | 5     |      |  |  | 6     |  







| |                     
| | --------------------
| | (k) Restricted Stock



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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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









|                                             |  |      |            |      |  |      |            |  |  |  |            | 
|-------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  |  | ---------- | 
|                                             |  | 2005 |            | 2004 |  | 2003
|                                             |  |      |            |      |  |     
|Basic weighted average shares outstanding    |  |      | 30,966,501 |      |  |      | 31,046,200 |  |  |  | 31,110,578 | 
|Dilutive effect of outstanding stock options |  |      | 63,151     |      |  |      | 153,611    |  |  |  | 194,853    | 
|                                             |  |      |            |      |  |      |            |  |  |  |            | 
|Diluted weighted average shares outstanding  |  |      | 31,029,652 |      |  |      | 31,199,811 |  |  |  | 31,305,431 | 
|                                             |  |      |            |      |  |      |            |  |  |  |            | 



| |                 
| | ----------------
| | (m) Income taxes





| |                                
| | -------------------------------
| | (n) Comprehensive income (loss)





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





| |                     
| | --------------------
| | (p) Other receivable



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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                      
| | ---------------------
| | (q) Reclassifications





|    |                                     
|--- | ------------------------------------
|(6) | Goodwill and other intangible assets



10-year




|                       |  |                   |       |                   |  |     |       |        |  |              |       |     |  |   |       |  |  |   |     |  |  |   |     | 
|---------------------- |  | ----------------- | ----- | ----------------- |  | --- | ----- | ------ |  | ------------ | ----- | --- |  | - | ----- |  |  | - | --- |  |  | - | --- | 
|                       |  | December 31, 2005 |       | December 31, 2004
|                       |  |                   |       |                  
|                       |  | Gross             |       | Accumulated       |  |     |       | Gross  |  | Accumulated  |       |    
|                       |  | Amount            |       | Amortization      |  | Net |       | Amount |  | Amortization |       | Net
|                       |  |                   |       |                   |  |     |       |        |  |              |       |    
|                       |  | (In Thousands)   
|Non-compete agreement  |  | $                 | 1,100 |                   |  | $   | 1,100 |        |  | $            |      |     |  | $ | 1,100 |  |  | $ | 908 |  |  | $ | 192 | 
|Tradename              |  |                   | 3,000 |                   |  |     |      |        |  |              | 3,000 |     |  |   |      |  |  |   |    |  |  |   |    | 
|Customer relationships |  |                   | 4,150 |                   |  |     | 363   |        |  |              | 3,787 |     |  |   |      |  |  |   |    |  |  |   |    | 
|                       |  |                   |       |                   |  |     |       |        |  |              |       |     |  |   |       |  |  |   |     |  |  |   |     | 
|Other intangibles      |  | $                 | 8,250 |                   |  | $   | 1,463 |        |  | $            | 6,787 |     |  | $ | 1,100 |  |  | $ | 908 |  |  | $ | 192 | 
|                       |  |                   |       |                   |  |     |       |        |  |              |       |     |  |   |       |  |  |   |     |  |  |   |     | 



|    |             
|--- | ------------
|(7) | Income taxes



|                             |                 |                |        |       |  |      |        |        |  |   |        |        | 
|---------------------------- | --------------- | -------------- | ------ | ----- |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                             |                 | 2005           |        | 2004  |  | 2003
|                             |                 |                |        |       |  |     
|                             |                 | (In Thousands)
|Current tax provision:       |                 |                |        |       |  |      |        |        |  |   |        |       
|                             | U.S. federal    |                | $      | 9,840 |  |      | $      | 12,341 |  |   | $      | 16,189 | 
|                             | State and local |                |        | 1,850 |  |      |        | 2,497  |  |   |        | 2,798  | 
|                             | Foreign         |                |        | 84    |  |      |        | 56     |  |   |        | 305    | 
|                             |                 |                |        |       |  |      |        |        |  |   |        |       
|Total current tax provision  |                 |                | 11,774 |       |  |      | 14,894 |        |  |   | 19,292 |       
|                             |                 |                |        |       |  |      |        |        |  |   |        |       
|Deferred tax provision:      |                 |                |        |       |  |      |        |        |  |   |        |       
|                             | U.S. federal    |                |        | 1,329 |  |      |        | 113    |  |   |        | 105    | 
|                             | State and local |                |        | 108   |  |      |        | 5      |  |   |        | 9      | 
|                             |                 |                |        |       |  |      |        |        |  |   |        |       
|Total deferred tax provision |                 |                | 1,437  |       |  |      | 118    |        |  |   | 114    |       
|                             |                 |                |        |       |  |      |        |        |  |   |        |       
|Provision for income taxes   |                 | $              | 13,211 |       |  | $    | 15,012 |        |  | $ | 19,406 |       
|                             |                 |                |        |       |  |      |        |        |  |   |        |       

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                               |                                                   |                |   |        |   |      |  |      |    |  |   |        |   |  |  |      |    |  |   |        |   |  |  |      |   
|------------------------------ | ------------------------------------------------- | -------------- | - | ------ | - | ---- |  | ---- | -- |  | - | ------ | - |  |  | ---- | -- |  | - | ------ | - |  |  | ---- | --
|                               |                                                   | 2005           |   | 2004   |   | 2003
|                               |                                                   |                |   |        |   |     
|                               |                                                   | (In Thousands)
|Effective rate reconciliation: |                                                   |                |   |        |   |      |  |      |    |  |   |        |   |  |  |      |    |  |   |        |   |  |  |     
|                               | Income tax provision at statutory tax rate        |                | $ | 13,083 |   |      |  | 35.0 | %  |  | $ | 14,201 |   |  |  | 35.0 | %  |  | $ | 19,037 |   |  |  | 35.0 | % 
|                               | State and local taxes, net of federal tax benefit |                |   | 1,273  |   |      |  | 3.4  | %  |  |   | 1,640  |   |  |  | 4.0  | %  |  |   | 1,852  |   |  |  | 3.3  | % 
|                               | Federal tax credits                               |                |   | (327   | ) |      |  | (0.8 | )% |  |   | (262   | ) |  |  | (0.6 | )% |  |   | (1,051 | ) |  |  | (1.9 | )%
|                               | Resolution of prior period tax matters            |                |   | (779   | ) |      |  | (2.1 | )% |  |   |       |   |  |  | 0.0  | %  |  |   |       |   |  |  | (0.0 | )%
|                               | Other                                             |                |   | (39    | ) |      |  | (0.2 | )% |  |   | (567   | ) |  |  | (1.4 | )% |  |   | (432   | ) |  |  | (0.8 | )%
|                               |                                                   |                |   |        |   |      |  |      |    |  |   |        |   |  |  |      |    |  |   |        |   |  |  |     
|                               | Provision for income taxes                        |                | $ | 13,211 |   |      |  | 35.3 | %  |  | $ | 15,012 |   |  |  | 37.0 | %  |  | $ | 19,406 |   |  |  | 35.6 | % 
|                               |                                                   |                |   |        |   |      |  |      |    |  |   |        |   |  |  |      |    |  |   |        |   |  |  |     



|                                              |                                   |                |       |        |   |   |       |       | 
|--------------------------------------------- | --------------------------------- | -------------- | ----- | ------ | - | - | ----- | ----- | 
|                                              |                                   | 2005           |       | 2004  
|                                              |                                   |                |       |       
|                                              |                                   | (In Thousands)
|Current deferred tax assets:                  |                                   |                |       |        |   |   |       |      
|                                              | Deferred revenue                  |                | $     | 854    |   |   | $     | 1,228 | 
|                                              | Expenses not currently deductible |                |       | 2,839  |   |   |       | 2,572 | 
|                                              |                                   |                |       |        |   |   |       |      
|Net current deferred tax assets               |                                   |                | 3,693 |        |   |   | 3,800 |      
|                                              |                                   |                |       |        |   |   |       |      
|Noncurrent deferred tax assets/(liabilities): |                                   |                |       |        |   |   |       |      
|                                              | Deferred revenue                  |                |       | 100    |   |   |       | 77    | 
|                                              | Expenses not currently deductible |                |       | 1,676  |   |   |       |      | 
|                                              | Depreciation and amortization     |                |       | 255    |   |   |       | 173   | 
|                                              | Intangibles                       |                |       | (1,293 | ) |   |       | 1,370 | 
|                                              |                                   |                |       |        |   |   |       |      
|Net noncurrent deferred tax assets            |                                   |                | 738   |        |   |   | 1,620 |      
|                                              |                                   |                |       |        |   |   |       |      
|Total deferred tax assets                     |                                   | $              | 4,431 |        |   | $ | 5,420 |      
|                                              |                                   |                |       |        |   |   |       |      



|    |                
|--- | ---------------
|(8) | Lines of credit





|    |                  
|--- | -----------------
|(9) | Lease commitments



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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|           |  |                |       | 
|---------- |  | -------------- | ----- | 
|           |  | (In Thousands)
|2006       |  | $              | 883   | 
|2007       |  |                | 790   | 
|2008       |  |                | 631   | 
|2009       |  |                | 378   | 
|2010       |  |                | 262   | 
|After 2010 |  |                | 12    | 
|           |  |                |       | 
|           |  | $              | 2,956 | 
|           |  |                |       | 



|     |           
|---- | ----------
|(10) | Litigation





|     |                 
|---- | ----------------
|(11) | Retirement plans











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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                             |       |                |       |       |  |      |       |       |  |   |       |       | 
|-------------------------------------------- | ----- | -------------- | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- | 
|                                             |       | 2005           |       | 2004  |  | 2003
|                                             |       |                |       |       |  |     
|                                             |       | (In Thousands)
|Employer matching contribution  401(k) Plan |       | $              | 1,027 |       |  | $    | 1,124 |       |  | $ | 1,133 |      
|Employer matching contribution  SERP        |       |                | 16    |       |  |      | 24    |       |  |   | 24    |      
|Loss related to unfunded SERP liability      |       |                |      |       |  |      | 16    |       |  |   | 118   |      
|                                             |       |                |       |       |  |      |       |       |  |   |       |      
|                                             | Total |                | $     | 1,043 |  |      | $     | 1,164 |  |   | $     | 1,275 | 
|                                             |       |                |       |       |  |      |       |       |  |   |       |      



|     |                     
|---- | --------------------
|(12) | Stock incentive plan



Stock option awards




|                                   |  |        |           |          |  |        |       |          |  |        |           |          |  |   |       |  |  |  |           |   |  |   |       | 
|---------------------------------- |  | ------ | --------- | -------- |  | ------ | ----- | -------- |  | ------ | --------- | -------- |  | - | ----- |  |  |  | --------- | - |  | - | ----- | 
|                                   |  | 2005   |           | 2004     |  | 2003  
|                                   |  |        |           |          |  |       
|                                   |  |        |           | Weighted |  |        |       | Weighted |  |        |           | Weighted
|                                   |  |        |           | Average  |  |        |       | Average  |  |        |           | Average 
|                                   |  |        |           | Exercise |  |        |       | Exercise |  |        |           | Exercise
|                                   |  | Shares |           | Price    |  | Shares |       | Price    |  | Shares |           | Price   
|                                   |  |        |           |          |  |        |       |          |  |        |           |         
|Outstanding at beginning of year   |  |        | 1,625,038 |          |  | $      | 22.85 |          |  |        | 1,989,383 |          |  | $ | 21.82 |  |  |  | 1,818,257 |   |  | $ | 22.16 | 
|Granted                            |  |        | 223,044   |          |  |        | 20.58 |          |  |        | 122,067   |          |  |   | 24.73 |  |  |  | 386,720   |   |  |   | 18.33 | 
|Exercised                          |  |        | (135,880  | )        |  |        | 15.49 |          |  |        | (285,522  | )        |  |   | 15.17 |  |  |  | (121,394  | ) |  |   | 13.44 | 
|Cancelled                          |  |        | (192,382  | )        |  |        | 28.82 |          |  |        | (200,890  | )        |  |   | 24.68 |  |  |  | (94,200   | ) |  |   | 24.78 | 
|                                   |  |        |           |          |  |        |       |          |  |        |           |          |  |   |       |  |  |  |           |   |  |   |       | 
|Outstanding at end of year         |  |        | 1,519,820 |          |  |        | 22.42 |          |  |        | 1,625,038 |          |  |   | 22.85 |  |  |  | 1,989,383 |   |  |   | 21.82 | 
|                                   |  |        |           |          |  |        |       |          |  |        |           |          |  |   |       |  |  |  |           |   |  |   |       | 
|Options exercisable at end of year |  |        | 1,515,381 |          |  | $      | 22.44 |          |  |        | 1,074,182 |          |  | $ | 23.12 |  |  |  | 1,079,932 |   |  | $ | 21.43 | 
|                                   |  |        |           |          |  |        |       |          |  |        |           |          |  |   |       |  |  |  |           |   |  |   |       | 



|                 |  |                     |           |                     |  |                  |      |             |  |                     |       |  |  |  |           |  |  |   |       | 
|---------------- |  | ------------------- | --------- | ------------------- |  | ---------------- | ---- | ----------- |  | ------------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                 |  | 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 |  |                     | 159,813   |                     |  |                  | 2.74 |             |  | $                   | 10.29 |  |  |  | 159,813   |  |  | $ | 10.29 | 
|$16.01 to $22.00 |  |                     | 617,334   |                     |  |                  | 6.40 |             |  |                     | 17.68 |  |  |  | 612,895   |  |  |   | 17.69 | 
|$22.01 to $28.00 |  |                     | 312,725   |                     |  |                  | 8.64 |             |  |                     | 24.37 |  |  |  | 312,725   |  |  |   | 24.37 | 
|$28.01 to $34.00 |  |                     | 282,305   |                     |  |                  | 5.40 |             |  |                     | 30.66 |  |  |  | 282,305   |  |  |   | 30.66 | 
|$34.01 to $40.00 |  |                     | 147,109   |                     |  |                  | 4.91 |             |  |                     | 35.45 |  |  |  | 147,109   |  |  |   | 35.45 | 
|$40.01 to $52.00 |  |                     | 534       |                     |  |                  | 5.55 |             |  |                     | 51.49 |  |  |  | 534       |  |  |   | 51.49 | 
|                 |  |                     |           |                     |  |                  |      |             |  |                     |       |  |  |  |           |  |  |   |       | 
|$ 8.00 to $51.58 |  |                     | 1,519,820 |                     |  |                  | 6.14 |             |  | $                   | 22.42 |  |  |  | 1,515,381 |  |  | $ | 22.44 | 
|                 |  |                     |           |                     |  |                  |      |             |  |                     |       |  |  |  |           |  |  |   |       | 

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Restricted stock awards




|     |                             
|---- | ----------------------------
|(13) | Employee stock purchase plan





|     |                     
|---- | --------------------
|(14) | Shareholders equity







|     |                  
|---- | -----------------
|(15) | Segment reporting



43



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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|     |                                            
|---- | -------------------------------------------
|(16) | Quarterly results of operations (unaudited)



|     |                                                    |                                          |                         |         |   |              |   |             |   |       |   |        |   |       |   |        |   |       |  
|---- | -------------------------------------------------- | ---------------------------------------- | ----------------------- | ------- | - | ------------ | - | ----------- | - | ----- | - | ------ | - | ----- | - | ------ | - | ----- | -
|     |                                                    | Quarter Ended                           
|     |                                                    |                                         
|     |                                                    | March 31                                 |                         | June 30 |   | September 30 |   | December 31
|     |                                                    |                                          |                         |         |   |              |   |            
|     |                                                    | (In Thousands, Except Per Share Amounts)
|2005 |                                                    |                                          |                         |         |   |              |   |             |   |       |   |        |   |       |   |       
|     | Net sales                                          |                                          | $                       | 27,557  |   |              | $ | 28,346      |   |       | $ | 31,389 |   |       | $ | 28,991 |  
|     | Gross profit                                       |                                          |                         | 23,608  |   |              |   | 24,210      |   |       |   | 23,992 |   |       |   | 22,887 |  
|     | Operating income                                   |                                          |                         | 8,876   |   |              |   | 11,150      |   |       |   | 7,399  |   |       |   | 6,459  |  
|     | Income  continuing operations before income taxes |                                          |                         | 9,332   |   |              |   | 11,652      |   |       |   | 7,803  |   |       |   | 8,591  |  
|     | Income taxes  continuing operations               |                                          |                         | 3,453   |   |              |   | 4,311       |   |       |   | 2,887  |   |       |   | 2,560  |  
|     | Income  continuing operations                     |                                          |                         | 5,879   |   |              |   | 7,341       |   |       |   | 4,916  |   |       |   | 6,031  |  
|     | Income  discontinued operations                   |                                          |                         | 584     |   |              |   |            |   |       |   |       |   |       |   |       |  
|     | Net income                                         |                                          |                         | 6,463   |   |              |   | 7,341       |   |       |   | 4,916  |   |       |   | 6,031  |  
|     | Earnings (loss) per share:                         |                                          |                         |         |   |              |   |             |   |       |   |        |   |       |   |        |  
|     |                                                    | Basic and diluted:                       |                         |         |   |              |   |             |   |       |   |        |   |       |   |        |   |      
|     |                                                    |                                          | Continuing operations   |         |   | 0.19         |   |             |   | 0.24  |   |        |   | 0.16  |   |        |   | 0.20  |  
|     |                                                    |                                          | Discontinued operations |         |   | 0.02         |   |             |   |      |   |        |   |      |   |        |   |      |  
|     |                                                    |                                          | Net income              |         |   | 0.21         |   |             |   | 0.24  |   |        |   | 0.16  |   |        |   | 0.20  |  
|     | Common stock price per share:                      |                                          |                         |         |   |              |   |             |   |       |   |        |   |       |   |        |  
|     |                                                    |                                          | High                    |         |   | 18.39        |   |             |   | 20.30 |   |        |   | 24.16 |   |        |   | 20.29 |  
|     |                                                    |                                          | Low                     |         |   | 15.25        |   |             |   | 15.67 |   |        |   | 16.09 |   |        |   | 13.69 |  
|2004 |                                                    |                                          |                         |         |   |              |   |             |   |       |   |        |   |       |   |       
|     | Net sales                                          |                                          | $                       | 30,955  |   |              | $ | 30,499      |   |       | $ | 25,011 |   |       | $ | 25,259 |  
|     | Gross profit                                       |                                          |                         | 25,717  |   |              |   | 26,787      |   |       |   | 21,483 |   |       |   | 22,038 |  
|     | Operating income                                   |                                          |                         | 10,360  |   |              |   | 13,204      |   |       |   | 6,804  |   |       |   | 8,565  |  
|     | Income  continuing operations before income taxes |                                          |                         | 10,749  |   |              |   | 13,499      |   |       |   | 7,335  |   |       |   | 8,990  |  
|     | Income taxes  continuing operations               |                                          |                         | 4,005   |   |              |   | 5,020       |   |       |   | 2,739  |   |       |   | 3,248  |  
|     | Income  continuing operations                     |                                          |                         | 6,744   |   |              |   | 8,479       |   |       |   | 4,596  |   |       |   | 5,742  |  
|     | Loss  discontinued operations                     |                                          |                         | (802    | ) |              |   | (794        | ) |       |   | (728   | ) |       |   | (535   | )
|     | Net income                                         |                                          |                         | 5,942   |   |              |   | 7,685       |   |       |   | 3,868  |   |       |   | 5,207  |  
|     | Earnings (loss) per share:                         |                                          |                         |         |   |              |   |             |   |       |   |        |   |       |   |        |  
|     |                                                    | Basic and diluted:                       |                         |         |   |              |   |             |   |       |   |        |   |       |   |        |   |      
|     |                                                    |                                          | Continuing operations   |         |   | 0.22         |   |             |   | 0.27  |   |        |   | 0.14  |   |        |   | 0.18  |  
|     |                                                    |                                          | Discontinued operations |         |   | (0.03        | ) |             |   | (0.02 | ) |        |   | (0.02 | ) |        |   | (0.01 | )
|     |                                                    |                                          | Net income              |         |   | 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 |  

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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|     |                                 
|---- | --------------------------------
|(17) | Recent accounting pronouncements









|     |                        
|---- | -----------------------
|(18) | Discontinued operations





|                                              |                         |                           |      |       |      |      |        |   |        |   |        |   |        |  
|--------------------------------------------- | ----------------------- | ------------------------- | ---- | ----- | ---- | ---- | ------ | - | ------ | - | ------ | - | ------ | -
|                                              |                         | 2005                      |      | 2004  |      | 2003
|                                              |                         |                           |      |       |      |     
|                                              |                         | (In Thousands)           
|Operating (loss)                              |                         | $                         | (192 | )     |      | $    | (4,538 | ) |        | $ | (3,877 | )
|Income tax benefit                            |                         |                           | 76   |       |      |      | 1,679  |   |        |   | 1,433  |  
|                                              |                         |                           |      |       |      |      |        |   |        |   |        |  
|                                              |                         | Loss from operations, net |      |       | (116 | )    |        |   | (2,859 | ) |        |   | (2,444 | )
|                                              |                         |                           |      |       |      |      |        |   |        |   |        |  
|(Loss) on disposal                            |                         |                           | (642 | )     |      |      |       |   |        |   |       |  
|                                              | Tax benefit on disposal |                           |      | 1,342 |      |      |        |  |        |   |        |  |       
|                                              |                         |                           |      |       |      |      |        |   |        |   |        |  
|Gain on disposal, net                         |                         |                           | 700  |       |      |      |       |   |        |   |       |  
|                                              |                         |                           |      |       |      |      |        |   |        |   |        |  
|Gain (loss) from discontinued operations, net |                         | $                         | 584  |       |      | $    | (2,859 | ) |        | $ | (2,444 | )
|                                              |                         |                           |      |       |      |      |        |   |        |   |        |  



|     |                  
|---- | -----------------
|(19) | 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


13a-15(e)




Managements Report on Internal Control Over Financial
Reporting


13a-15(f) Internal
Control  Integrated Framework Internal Control  Integrated Framework




46



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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


Internal Control  Integrated Framework








Internal
Control  Integrated Framework Internal Control  Integrated
Framework






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





47



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##### Table of Contents








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

Not applicable.


48



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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. S-K.


Audit Committee.







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








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

S-K


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##### Table of Contents



S-K


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        |  |                      | 1,515,381 |                      |  | $                    | 22.44 |  |  |  | 2,749,630 | (1)
|Equity compensation plans not approved by security holders(2) |  |                      | N/A       |                      |  |                      | N/A   |  |  |  | N/A       |    
|                                                              |  |                      |           |                      |  |                      |       |  |  |  |           |    
|Total                                                         |  |                      | 1,515,381 |                      |  | $                    | 22.44 |  |  |  | 2,749,630 |    
|                                                              |  |                      |           |                      |  |                      |       |  |  |  |           |    






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Of the 6,000,000 shares currently authorized for issuance
    under our 1997 stock incentive plan, 2,510,236 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 2005 and do not intend to offer the plan to
    employees in 2006.
|   
|(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, 2005 and 2004                                            
|
| | Consolidated Statements of Income for the years ended
    December 31, 2005, 2004 and 2003              
|
| | Consolidated Statements of Shareholders Equity for the
    years ended December 31, 2005, 2004 and 2003
|
| | Consolidated Statements of Cash Flows for the years ended
    December 31, 2005, 2004 and 2003          
|
| | Notes to Consolidated Financial Statements                                                              

(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/ Terrance D. Paul----------------------------------------------
    Terrance D. Paul
    President, Chief Executive Officer and a director
|
| |  | Date: February 22, 2006   



|                                                                                                                                    |  |                                                                                                                |  |                   |  |                  
|----------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------- |  | ----------------- |  | -----------------
|Name                                                                                                                                |  | Title                                                                                                          |  | Date             
|                                                                                                                                    |  |                                                                                                                |  |                  
|                                                                                                                                   
|/s/ Terrance D. PaulTerrance D. Paul                                                                                                |  | President, Chief Executive Officer (Principal Executive Officer)
    and a director                            |  | February 22, 2006
|                                                                                                                                   
|/s/ Mary T. MinchMary T. Minch                                                                                                      |  | Vice President-Finance, Chief Financial Officer and Secretary
    (Principal Financial and Accounting Officer) |  | February 22, 2006
|                                                                                                                                   
|Directors: Judith A. Paul, Addison L. Piper, John H.
    Grunewald, Gordon H. Gunnlaugsson, Harold E. Jordan and Judith
    A. Ryan
|                                                                                                                                   
|                                                                                                                                   
|By:                                                                                                                                 |  | /s/ Mary T. MinchMary T. Minch
    Attorney-In-Fact*                                                           |  |                   |  | February 22, 2006




|  |                                                                                             
|- | --------------------------------------------------------------------------------------------
|* | 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
|        |    |        
|        | 2  | .1      |  | LLC Interest purchase Agreement dated as of February 28,
    2005 among Renaissance Learning, Inc., Generation 21
    Learning Systems, LLC and John Stearns (pursuant to
    Item 601(b)(2) of Regulation S-K, the schedules and
    exhibits to the LLC Interest Purchase Agreement have been
    omitted; a copy of such schedules and exhibits will be
    supplementally provided to the Securities and Exchange
    Commission upon request).(17)                                                                                                            
|       
|        | 2  | .2      |  | Agreement and Plan of Merger and Reorganization by and among
    Renaissance Learning, Inc., RLI Acquisition Corp., Inc., RLI
    Acquisition Sub, LLC and AlphaSmart, Inc. dated as of
    January 24, 2005, as amended on April 20, 2005
    (pursuant to Item 601(b)(2) of Regulation S-K, the
    annex, exhibits and schedules to the Agreement and Plan of
    Merger and Reorganization have been omitted; a copy of such
    annex, exhibits and schedules will be supplementally provided to
    the Securities and Exchange Commission upon request).(18)
|       
|        | 2  | .3      |  | Purchase Agreement dated as of November 1, 2005 among
    Renaissance Learning, Inc. and DezCon, LLC (pursuant to
    Item 601(b)(2) of regulation S-K, the exhibits to the
    Purchase Agreement have been omitted; a copy of such exhibits
    will be supplementally provided to the Securities and Exchange
    Commission upon request).(19)                                                                                                                                                                                                                 
|       
|        | 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.(16)                                                                                                                                                                                                                                                                                                                                                                                                                                   
|       
|        | 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      |  | Second Amendment to Credit Agreement dated as of May 31,
    2005 by and between Wells Fargo Bank, National Association and
    Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                        
|       
|        | 10 | .5      |  | Third Amendment to Credit Agreement dated as of October 1,
    2005 by and between Wells Fargo Bank, National Association and
    Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                      
|       
|        | 10 | .6      |  | Amended and Restated Employee Stock Purchase Plan.(9)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|       
|        | 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      |  | Severance Agreement between Registrant and John R. Hickey dated
    February 15, 2006.(22)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|       
|        | 10 | .10     |  | Incentive Bonus Plan.(13)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|       
|        | 10 | .11     |  | Transfer Agreement dated as of June 16, 2004 between
    Registrant and Terrance D. Paul.(14)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       
|        | 10 | .12     |  | Assignment and Assumption of Transfer Agreement dated as of
    June 16, 2004 between Registrant and Terrance D. Paul.(14)*                                                                                                                                                                                                                                                                                                                                                                                                                                        
|       
|        | 10 | .13     |  | Non-Employee Director Compensation Summary.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       
|        | 10 | .14     |  | Executive Officer Compensation Summary.(20)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       
|        | 10 | .15     |  | Offer to Purchase effective as of November 1, 2005 among
    Renaissance Learning, Inc. and Planning Design Build, Inc.(19)                                                                                                                                                                                                                                                                                                                                                                                                                                        
|       
|        | 10 | .16     |  | Form of Restricted Stock Agreement.(20)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|       
|        | 10 | .17     |  | Form of Nonstatutory Stock Option Agreement between Renaissance
    Learning, Inc. and John R. Hickey.(22)*                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|       
|        | 10 | .18     |  | Form of Nonstatutory Stock Option Agreement between Renaissance
    Learning, Inc. and certain employees and consultants.(21)*                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       
|        | 10 | .19     |  | Form of Nonstatutory Stock Option Agreement between Renaissance
    Learning, Inc. and certain non-employee directors.(21)*                                                                                                                                                                                                                                                                                                                                                                                                                                        

53



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##### Table of Contents



|        |    |         |  |                                                                            
|------- | -- | ------- |  | ---------------------------------------------------------------------------
|Exhibit |    |        
|Number  |    | Exhibit
|        |    |        
|       
|        | 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 Terrance D. Paul, Chief
    Executive Officer.
|       
|        | 31 | .2      |  | Section 302 Certification by Mary T. Minch, Chief Financial
    Officer.   
|       
|        | 32 | .1      |  | Section 906 Certification by Terrance D. Paul, 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).           
|
| | (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).
|    
|(17) | Incorporated by reference to Registrants
    Form 8-K filed on
    March 4, 2005 (SEC File No. 0-22187).                          
|    
|(18) | Incorporated by reference to Registrants
    Form 8-K filed on
    April 26, 2005 (SEC File No. 0-22187).                         
|    
|(19) | Incorporated by reference to Registrants
    Form 8-K filed on
    November 4, 2005 (SEC File
    No. 0-22187).                   
|    
|(20) | Incorporated by reference to Registrants
    Form 10-Q for the
    quarter ended June 30, 2005 (SEC File No. 0-22187).            

54



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|     |                                                                                                                  
|---- | -----------------------------------------------------------------------------------------------------------------
|(21) | Incorporated by reference to Registrants
    Form 8-K filed on
    March 7, 2005 (SEC File No. 0-22187).        
|    
|(22) | Incorporated by reference to Registrants
    Form 8-K filed on
    February 21, 2006 (SEC File
    No. 0-22187).



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



55