UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington,
D.C. 20549

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|---------
|         
|         
|FORM 10‐K
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|  |                                                                                                                                  
|- | ---------------------------------------------------------------------------------------------------------------------------------
|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934: For the fiscal year ended December 31, 2009
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|  | 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.(Exact name of Registrant as specified in its charter)

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|-------------------------------------------------------------------- | -------------------------------------------
|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                                          | 54495-8036                                 
|(Address
 of principal executive offices)                            | (Zip
 Code)                                
|                                                                     |                                            
|Registrants
 telephone number, including area code: (715)
 424-3636
|                                                                     |                                            
|Securities
 registered pursuant to Section 12(b) of the Act:        
|                                                                     |                                            
|Title
 of each class:                                                | Name
 of each exchange on which registered:
|Common Stock, $.01 par value                                         | The NASDAQ Global Select Market            
|                                                                     |                                            
|Securities registered pursuant to Section 12(g) of the Act: None    

Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.   Yes o No x

Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No x

Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x
No o

Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the Registrant was
required to submit and post such files). Yes o No o

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

Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check One): Large
accelerated filer o
Accelerated filer x Non-accelerated
filer o (Do not check if a smaller reporting company)
Smaller reporting company o

Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o
No x

The
aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $129,041,000 as of June 30, 2009. As of February
22, 2010, there were 29,288,648 of the Registrants shares of common stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part
III is incorporated by reference from the Proxy Statement for the Registrants
Annual Meeting of Shareholders to be held on April 21, 2010.





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INDEX

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|-------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------- | - | ----
|                                                                     |                                                                                                               |   | Page
|                                                                     |                                                                                                               |   |     
|PART I                                                               |                                                                                                               |  
|                                                                     |                                                                                                               |   |     
|Item 1.                                                              | Business                                                                                                      |   |     
|Overview                                                             |                                                                                                               | 2
|Software, Laptop Computing Solutions and Other
 Educational Products |                                                                                                               | 3
|Professional Services                                                |                                                                                                               | 5
|Product Development                                                  |                                                                                                               | 6
|Selling and Marketing                                                |                                                                                                               | 6
|Production                                                           |                                                                                                               | 7
|Competition                                                          |                                                                                                               | 7
|Intellectual Property                                                |                                                                                                               | 8
|Employees                                                            |                                                                                                               | 8
|Backlog                                                              |                                                                                                               | 8
|Forward-Looking Statements                                           |                                                                                                               | 8
|Executive Officers of the Registrant                                 |                                                                                                               | 9
|Item 1A.                                                             | Risk Factors                                                                                                  |   | 11  
|Item 1B.                                                             | Unresolved Staff Comments                                                                                     |   | 16  
|Item 2.                                                              | Properties                                                                                                    |   | 16  
|Item 3.                                                              | Legal Proceedings                                                                                             |   | 16  
|Item 4.                                                              | Reserved                                                                                                      |   | 16  
|                                                                     |                                                                                                               |   |     
|PART II                                                              |                                                                                                               |  
|                                                                     |                                                                                                               |   |     
|Item 5.                                                              | Market for Registrants Common Equity, Related Stockholder
 Matters and Issuer Purchases of Equity Securities |   | 17  
|Item 6.                                                              | Selected Financial Data                                                                                       |   | 20  
|Item 7.                                                              | Managements Discussion and Analysis of Financial Condition
 and Results of Operations                        |   | 21  
|Item 7A.                                                             | Quantitative and Qualitative Disclosures About Market Risk                                                    |   | 33  
|Item 8.                                                              | Financial Statements and Supplementary Data                                                                   |   | 34  
|Item 9.                                                              | Changes In and Disagreements With Accountants on Accounting
 and Financial Disclosure                         |   | 57  
|Item 9A.                                                             | Controls and Procedures                                                                                       |   | 57  
|Item 9B.                                                             | Other Information                                                                                             |   | 57  
|                                                                     |                                                                                                               |   |     
|PART III                                                             |                                                                                                               |  
|                                                                     |                                                                                                               |   |     
|Item 10.                                                             | Directors and Executive Officers of the Registrant                                                            |   | 58  
|Item 11.                                                             | Executive Compensation                                                                                        |   | 58  
|Item 12.                                                             | Security Ownership of Certain Beneficial Owners and Management
 and Related Stockholder Matters               |   | 58  
|Item 13.                                                             | Certain Relationships and Related Transactions                                                                |   | 59  
|Item 14.                                                             | Principal Accountant Fees and Services                                                                        |   | 59  
|                                                                     |                                                                                                               |   |     
|PART IV                                                              |                                                                                                               |  
|                                                                     |                                                                                                               |   |     
|Item 15.                                                             | Exhibits and Financial Statement Schedules                                                                    |   | 60  

1

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PART I

Item 1. Business

Overview

Renaissance
Learning, Inc. is a leading provider of computer-based assessment technology
for pre-kindergarten through senior high (pre-K-12) schools and districts.
Our tools provide daily formative assessment and periodic progress-monitoring
technology to enhance core curriculum, support differentiated instruction, and
personalize practice in reading, writing, and math. Renaissance Learning
products help educators make the practice component of their existing curriculum
more effective by providing tools to personalize practice and easily manage the
daily activities for students of all levels.

Our
products, which support and enhance all curriculum and instructional
approaches, are backed by research studies that support the demonstrated
effectiveness of the products. Our products and services are primarily focused
on three key pre-K-12 curriculum areas: reading, writing, and math. Accelerated Reader*, STAR Reading, STAR Early Literacy, Successful Reader, and Read Now Power Up! comprise our reading
products. Our math products include Accelerated
Math, STAR Math, and Math Facts in a Flash. NEOlaptops and related software are our
primary writing and keyboarding products. We also address language acquisition
for English language learners with our English
in a Flash software. Our 2Know!
response system is a versatile classroom tool, which encourages classroom
participation and provides instantaneous feedback to instructors in any
educational setting. Our products also include an optical-mark card scanner,
which is primarily used with Accelerated
Math, to automate scoring and recordkeeping tasks. Additionally, our
product offerings include supplemental resources for educators and classroom
use such as handbooks, workbooks, and motivational items.

Our
flagship product, Accelerated Reader,
is software that provides information for motivating and monitoring increased
literature-based reading practice. We believe that Accelerated Reader and our other products have achieved
their significant market positions as a result of demonstrated effectiveness in
assisting educators accelerate learning and improve essential skills by
facilitating increased student practice, increasing the quality, quantity, and
timeliness of performance data available to educators, helping educators
motivate students and providing student access to low cost computing solutions.
Our products help educators manage student practice of curriculum, provide
targeted instruction, keep students engaged, and measure student progress in
order to accelerate student learning.

Our
educational software products are available on our web-based Renaissance Placesoftware platform. The Renaissance Place platform meets the needs
of district-wide installations such as: scalability, remote access, centralized
database, and server for multiple campus use, sophisticated statistical
analysis, ease of administration and support, and integration with student data
from other district systems. Renaissance
Place products are sold on a subscription basis typically for terms
of one year. Our popular Accelerated Reader
Enterprise and Accelerated Math
Enterprise packages are turnkey solutions consisting of the Renaissance Place platform with enhanced
features, unlimited access to all of our reading quizzes and math content,
remote software hosting, professional development and technical consulting
services. We are not actively selling new installations of our legacy desktop
products, which were typically sold as school-wide perpetual software licenses
with optional annual support plans, student expansions, and add-on reading
quizzes and math content libraries. A significant number of customers are still
using our legacy products and we continue to provide optional annual support
plans to these customers.



* 2Know!, Accelerated Math, Accelerated Reader, Accelerated
Vocabulary, AccelScan, AccelTest, Advanced Technology for Data Driven
Schools, AR, AR BookFinder, AR BookGuide, ATOS, English in a Flash, MathFacts
in a Flash, NEO, NEO 2, Read Now, Renaissance, Renaissance Home Connect,
Renaissance Learning, Renaissance Place, STAR Early Literacy, STAR Math, STAR
Reading, Successful Reader, Text2Speech and The
Only Laptop Designed for Classrooms are trademarks of Renaissance Learning,
Inc., and its subsidiaries, registered, common law, or pending registration in
the United States and other countries.

Steck-Vaughn and PowerUp! are trademarks of Houghton Mifflin
Harcourt Supplemental Publishers Inc. Google Docs is a trademark of Google,
Inc. All other product and company names should be considered trademarks of
their respective companies and organizations.

2

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We
offer a full line of professional service and support solutions that integrate
with, complement, and enhance the effectiveness of, our products. Sold
separately or bundled with our products to provide a complete solution, our
service offerings include professional development and product training
seminars and conferences, report and data analysis, program evaluation,
implementation coaching, web-based training, software support, software
installation, database conversion and integration services, and application
hosting.

Renaissance Learning, Inc. was founded in
1986 and is incorporated under the laws of the State of Wisconsin. Our common
stock trades on The NASDAQ Global Select
Market® under the symbol RLRN. Our principal executive
offices are located at 2911 Peach Street, P.O. Box 8036, Wisconsin Rapids,
Wisconsin 54495-8036 (telephone: (715) 424-3636). You may obtain, free of
charge, copies of this Annual Report on Form 10-K as well as our Quarterly
Reports on Form 10-Q and our Current Reports on Form 8-K (and amendments to
those reports) filed with, or furnished to, the Securities Exchange Commission
(the SEC) as soon as reasonably practicable after we have filed, or
furnished, such reports by accessing our website at http://www.renlearn.com,
clicking on About Us and scrolling down to the SEC Filings link. You may
read and copy any materials filed by us with the SEC at the SECs Public
Reference Room located at 100 F Street, NE, Washington, DC 20549. You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. Information contained on our website is not part of this
Annual Report on Form 10-K.

Software, Laptop Computing
Solutions and Other Educational Products

Accelerated Reader is software for motivating and monitoring
increased literature-based reading practice and for providing educators with
student progress information to support instruction. A student selects a book
at an appropriate reading level from a list of books for which the school has
an Accelerated Reader quiz, reads
the book, and then takes a multiple-choice quiz on a computer. For each book
read, Accelerated Reader tracks
the amount of reading practice achieved by calculating points based on the
length and difficulty of the book and the students performance on the quiz.
The information generated from this processtitles read, percent of
comprehension and amount of reading completedcreates a database of student
reading achievement from which reports are generated that help educators
monitor the amount and quality of reading practice for each individual student
and thereby effectively target their instruction of comprehension, vocabulary
and fluency. We currently have computerized book quizzes for Accelerated Reader on over 140,000 titles.
Accelerated Reader supports
recorded-voice versions of quizzes on literature books for emergent readers,
quizzes for assessing reading instruction assignments from reading textbooks,
vocabulary quizzes, and Literacy Skills
quizzes which allow educators to assess students proficiency on specific
skills found in state and district language arts standards.

STAR Reading is an easy to use, computer-adaptive,
formative reading assessment system that determines a students reading level,
statistically correlated to national norms, in ten minutes or less. STAR Reading adapts itself during testing
by utilizing proprietary branching logic that evaluates the pattern of the
students answers to determine the level of difficulty required for subsequent
questions. Tests can be administered several times a year and the results
provide educators with a database of statistically accurate reading level
information on their students, grades 1-12, from which they can generate useful
diagnostic reports and adjust instructional strategies accordingly.

STAR Early Literacy
computer adaptive assessment software provides educators with a fast, accurate,
and easy solution to assess the phonemic awareness, and other readiness and
literacy skills of students in grades pre-K-3. The software helps educators
identify each students specific strengths and diagnose specific weaknesses in
skills covered by early literacy curricula and standards. STAR Early Literacy allows the assessment
process to be quickly and easily repeated several times throughout a school
year at a lower cost and on a timelier basis than conventional assessments.

3

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Successful Reader is
a reading intervention program designed for struggling readers in grades 4-12.
The program combines explicit instruction with motivating reading activities to
strengthen comprehension skills and vocabulary. Successful Reader utilizes a book club approach, during
which students listen to audio recordings of high-interest titles, discuss the
text as a group, and engage in guided independent reading practice. For students
that require a more intensive intervention solution, we offer Read Now PowerUp! which employs a
comprehensive instruction model, multimedia instructional materials, a software
e-learning package hosted on a dedicated interactive website and professional
development services to support educators with implementation.

Accelerated Math software is a continuous progress
monitoring system that helps educators manage day-to-day classroom tasks by
producing daily, personalized math practice for students, correcting their
work, and reporting results immediately. Accelerated
Math automatically keeps records using our AccelScan optical mark reader and gives
educators progress-monitoring information each day. Content libraries available
for Accelerated Math range from
grade one through calculus and include: state standards-aligned libraries,
textbook-aligned libraries for popular math textbooks and extended response
libraries that integrate the application of multiple math objectives.

AccelScan,primarily used with Accelerated Math, is our innovative,
patented optical mark card reader. The reader has intelligent mark recognition
capability, which results in more accurate recognition of student marks by
distinguishing many degrees of darkness from a variety of marking instruments
and ignoring lighter erasures. AccelScan
automates scoring of assignments and updating of student records in Renaissance Place providing educators with
immediate information on student progress without manual scoring.

STAR Math is a computer-adaptive, formative math
assessment test and database that provides the same benefits as STAR Reading. STAR Math reports provide objective information to help
educators quickly place their students, monitor progress, and match instruction
to individual student levels. Fast, accurate, and easy to administer, STAR Math provides math scores for grades
1-12 in approximately 15 minutes, includes comparisons to national norms, and
can be administered several times throughout the school year to track student
development of math proficiency.

MathFacts in a Flash software helps educators motivate
students to master computational fluency. It gives students at all skill levels
valuable practice on their addition, subtraction, multiplication, and division
facts as well as on mental math skills such as squares and fraction/decimal
conversion. Timed tests administered by the system accurately measure students
practice and mastery, while detailed reports give educators timely and reliable
feedback on the progress of individual students or entire classrooms.

English in a Flash
software utilizes a research-based approach to helping educators accelerate the
language acquisition for students who are English Language Learners (ELLs) and
English as a Second Language (ESL) students. This vocabulary-based approach
employs a systematic method of learning language that does not rely upon
translation, grammatical instruction, or multimedia distractions, and is
significantly faster than traditional methods of language acquisition.

NEO Laptops are rugged, portable, easy-to-use, low
total-cost-of-ownership computing devices that can operate up to 700 hours on a
single set of AA batteries. NEO
laptops are designed specifically for use in K-12 schools and are particularly
well suited to keyboarding skill development and facilitating writing practice
in a classroom setting. Students in Renaissance
Place schools can use the NEO 2
to take Accelerated Readerquizzes
and practice their math facts using MathFacts
in a Flash. NEO
laptops run a variety of curriculum-specific software focused on skills
improvement and real-time formative assessment in writing, language arts,
keyboarding, technology literacy, and special needs. They also perform
word-processing, function as a calculator, are expandable, and feature advanced
wireless capabilities, thereby increasing student access to affordable portable
computing. In addition, the NEO 2
contains the functionality of, and integrates with, our 2Know! response system.

4

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2Know! response system is an interactive system that allows educators to easily
encourage student classroom participation and obtain instantaneous feedback
that can be used to quickly assess student comprehension and performance. The
system employs state-of-the-art radio frequency technology allowing wireless
communication between students handheld devices and Renaissance Learning software. Educators can use the system
and the large amount of available assessment content for quizzes, tests,
surveys and exercises while encouraging increased classroom participation and
saving time through automatic real-time scoring.

Educator Resource Products.We also produce videotapes, handbooks, lesson
books, workbooks, and motivational items for use by educators in conjunction
with our software and training programs.

Professional Services

We
offer a full line of professional services to our customers. Our services
include support plans for our software solutions, technical services, product
training, and multiple professional development options.

Support Plans. We offer extended service and support
plans that provide users of our products access to telephone support. Support
plans are packaged with software and also sold separately and typically cover a
period of 12 months.

Application Hosting. We provide optional hosting of our Renaissance Place software on our servers
at our data center, eliminating the need for customers to purchase, install,
and maintain server hardware and software. Additionally our hosting customers
receive the benefits of secure student information storage, regular backups to
ensure data integrity, and our technicians continually maintain the hardware
and update the software to provide optimal performance and functionality.

Other Technical Services. In addition to application hosting, we
provide our customers with a variety of services to help with the
implementation and support of their Renaissance
programs. These include system setup, software installation, troubleshooting,
technical training, data conversion, interface programming, and custom report
writing.

Training and Professional Development Services. Our professional development sessions provide
leadership development opportunities, instruct educators in proven best
practices to enhance their curriculum and instruction, and inform educators on
how to most effectively use our products and the information they generate. Our
content has been organized into beginning, advanced, and special topics that
can be delivered over time allowing educators to integrate best practices into
the classroom and assimilate information as they need it. We offer several
delivery options to meet specific customer needs and constraints including: (i)
online self-study, (ii) online webinars conducted by a Renaissance implementation specialist
using the web and a telephone, (iii) full-day professional development
seminars, (iv) consulting provided on an on-site or remote basis, (v)
implementation coaching in which the educator is paired with one of our
specialists for implementation support over an entire school year and (vi)
large training events like our regional symposiums.

Our
training and professional development services can be accessed online through
the Renaissance Training Center, which
is the gateway to all of our professional development services. Customers can
access online self-study content or webinars as well as register for regional
symposiums. The site also tracks each persons courses, online certificates,
continuing education (CEU) credits and maintains a transcript of completed
professional development.

5

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Product Development

We
believe that continued substantial investment in product development is
required to remain competitive and grow in the educational marketplace. We
invest continuously in the development of new products and services,
enhancement of existing products and services, development of new content for
existing products, development of tools to increase the efficiency of product
development, and scientific research that: generates concepts for new products
and services, validates the efficacy of our existing products and services and
provides useful feedback for improvement of new and existing products and
services. Further, we conduct research on best practices, perform field
validation of techniques, publish internally generated as well as third party
research, and gather information to guide the development of new and improved
products. For the years ended December 31, 2009, 2008, and 2007, our
development expenses were $16.5 million, $17.4 million and $18.5 million,
respectively (excluding capitalized amounts of $0.0 million, $0.1 million and
$0.2 million, respectively).

Selling and Marketing

We
market our educational products and services to teachers, school librarians,
principals, entire schools, school district personnel, and state departments of
education as well as internationally through our United Kingdom sales office
and distributors. Our sales and marketing strategy consists of direct marketing
to potential and existing customers and relationship selling through a dual
sales channel encompassing both a telesales organization primarily designed for
school level sales and a field sales team focused on multiple schools or
district wide sales. We use a variety of lead-generating techniques, including
trade shows, forums, road shows, advertisements in educational publications,
direct mail, websites, and referrals.

We
utilize reseller channels to sell our software and hardware products.
Currently, approximately 7% of our orders are made through resellers.

We
have resale arrangements with various book dealers and book publishers that
sell our software products to their customers, the end-users. Resellers of our
software do not stock any product; rather they sell software subscriptions or
other electronically delivered content to their customers. We provide the
subscription-based software to the end-user and recognize the related revenue
over the period of the subscription. For other electronic content, we provide
the product keys to the end-user customer, which allow for immediate download
and recognize the revenue when we provide the key.

Some
of our hardware products are also distributed by various third-party resellers.
We recognize the revenue from hardware sales when we deliver the hardware to
these resellers. We offer only limited return and stock exchange rights to our
hardware resellers. Stock returns and exchanges are generally limited to 60
days, require the payment of a restocking fee, and must be accompanied by a new
order for at least the same dollar amount. We accrue a provision for reseller
stock returns, price protection, and exchanges when we ship the hardware to the
reseller, however, due to the terms of our agreements with our hardware
resellers and the low incidence of actual returns we have historically
experienced, the amount is not currently, and has not historically, been
significant.

Part
of our distribution strategy is to develop cross-marketing arrangements with
third-party firms, which sell non-competing products into the education market.
We have formed strategic alliances with book distributors, publishers, and
other organizations in the pre-K-12 market to develop additional new product
opportunities and to enhance the channels available to sell and distribute our
products. These alliances take several forms. For example, we offer Accelerated Reader quizzes and Accelerated Math software libraries
aligned to popular textbook series and other curriculum materials. Our Read Now Power
Up! product is the result of a combined development effort and
cross-marketing arrangement with a major textbook publisher. We also have other
arrangements in which we have aligned our products to work with and/or
complement other educational materials.

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We
experience seasonal variations in customer orders primarily due to the budget
and school year cycles of our customers. Total quarterly orders received are
generally highest in the third quarter and to a lesser extent in the second
quarter. Our service revenues tend to be higher in the second and third
quarters due to customer preferences as to when services are delivered. The
transition to subscription-based products affects customer ordering patterns.
Compared to orders for non-subscription-based offerings, customer orders of our
subscription-based offerings tend to more closely follow school budgeting
patterns resulting in a more seasonal order pattern weighted to the second and
third calendar quarters. Also, after customers transition to our
subscription-based Enterprise
products, they no longer order reading quizzes and math libraries since access
to this content is included in their subscription. Historically, our customers
have ordered more of this content in the first and fourth quarters. The
combined effect is that a much greater proportion of a years orders are
expected in the second quarter and to an even greater extent in the third
quarter than we have experienced historically. Transitioning to
subscription-based software can also adversely affect orders for expansions,
add-on reading quizzes, and math libraries by customers who own our software
under perpetual license agreements, as they may delay purchases of expansions,
reading quizzes and math libraries while they are contemplating a transition to
subscription-based versions of our products.

Production

A
growing number of customers who purchase our software elect to have us host it,
thus giving them access to our products directly from our data center servers
through the internet. Our software products are also distributed on CD-ROM.
Bulk CD-ROM duplication is performed by third-party contractors. We produce
order-specific and smaller batches of CD-ROMs at our distribution facility. Accelerated Reader quizzes and Accelerated Math libraries can be
purchased and downloaded from our website and selected patches and software
updates are available for download on our website as well.

Our
NEO laptops, the 2Know! response system and our AccelScan scanners are produced to our
specifications by third-party contract manufacturers, some of which are located
outside of the United States. Other related products, including videotapes,
books, graphics, and motivational items, are produced by third-party vendors.

Competition

The
educational technology and professional development markets in which we operate
are very competitive and fragmented. We compete with many other companies
offering educational software products, computing devices, interactive response
systems, professional development, and technology consulting services to
schools. Education continues to emerge as a major global industry and potential
competitors, including large hardware manufacturers, software developers,
educational publishers, and consulting firms, may enter or increase their focus
on the schools market, resulting in greater competition for us. In addition, we
compete against other more traditional methods of education, training, and
testing, including pencil and paper testing.

As
we enter into new markets, existing competitors could increase the barriers to
entering these markets by driving prices lower or enhancing their products.
Success in selling our established products and services may cause competitors
to focus on us in their marketing efforts thereby increasing direct
competition. There can be no assurance that we will continue to be able to
market our products and services successfully or compete effectively in the
educational marketplace.

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Intellectual Property

We
regard certain of our technologies as proprietary and rely primarily on a
combination of patent, copyright, trademark, and trade secret laws, and
non-disclosure agreements to establish and protect our intellectual property
rights. We employ serialization techniques to prevent unauthorized installation
of our software products and related content. There can be no assurance that
the steps taken by us to protect our rights will adequately prevent and deter
misappropriation. In addition, while we do not believe that our products,
trademarks or other proprietary rights infringe upon the proprietary rights of
third parties, there can be no assurance that a third party will not make a
contrary assertion. The cost of responding to such assertions can be material,
regardless of whether an assertion is validated. The software publishing
industry has traditionally experienced widespread unauthorized reproduction of
products in violation of intellectual property rights. Such activity is
difficult to detect and legal proceedings to enforce intellectual property
rights are often burdensome and involve a high degree of uncertainty and costs.
There can be no assurance that our software products and content will not
experience unauthorized reproduction, which would have a material adverse
effect on our business, financial condition, and results of operations.

Employees

As
of February 1, 2010, we had 888 full-time and part-time employees. We believe
our relations with employees are good. None of our employees is represented by
a union or subject to collective bargaining agreements.

Backlog

As
of December 31, 2009 and 2008, we had backlogs that aggregated approximately
$60.1 million and $47.7 million, respectively. These backlogs include deferred
revenue related to software subscriptions, software support agreements,
technology consulting, and professional development of $59.5 million and $46.9
million at December 31, 2009 and 2008, respectively. We expect to realize
nearly all of the backlog in 2010 except for $5.3 million, which is reflected
as non-current deferred revenue on our balance sheet.

Financial Information about Segments

Note
13 to our consolidated financial statements sets forth the information for our
Educational Software and Services, and Educational Hardware segments.

Forward-Looking Statements

In
accordance with the Private Securities Litigation Reform Act of 1995, we can
obtain a safe-harbor for forward-looking statements by identifying those
statements and by accompanying those statements with cautionary statements,
which identify factors that could cause actual results to differ materially
from those in the forward-looking statements. Accordingly, the following
information contains or may contain forward-looking statements: (1) information
included or incorporated by reference in this Annual Report on Form 10-K, including,
without limitation, statements made under Item 1-Business and Item
7-Managements Discussion and Analysis of Financial Condition and Results of
Operations, and (2) statements with
respect to growth initiatives, growth prospects, projected sales, revenues,
earnings and costs, and product development schedules and plans, and
managements expectations regarding orders and financial results for future
periods included or incorporated by reference in their Annual Report in Form
10-K or in our future filings with the SEC or contained in written material,
releases and oral statements issued by us, or on our behalf. Our actual results
may differ materially from those contained in the forward-looking statements
identified above. Factors, which may cause such a difference to occur, include,
but are not limited to, the factors listed in Item 1A-Risk Factors.

8

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EXECUTIVE
OFFICERS OF THE REGISTRANT

|                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name and Age
of Officer  |  | Office                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|Judith Ames
 Paul Age 63 |  | 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.
 PaulAge 63  |  | Mr. Paul is the co-founder of the company and has been our chief
 executive officer since February 2006. From February 2006 to April 2006, Mr.
 Paul also served as our president. 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.                                                                                                                                                                                                                                                            
|                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|Steven A.
 SchmidtAge 55 |  | Mr. Schmidt has been our president and chief operating officer since
 April 2006. From November 2005 until January 2006, he served as our senior
 vice president, administration and operations. From July 2003 to November
 2005, Mr. Schmidt served as our executive vice president. From August 1999
 until November 2004, he served as our chief financial officer and secretary,
 and from August 1999 until July 2003, he also served as a vice president. Mr.
 Schmidt holds a bachelors degree in accountancy from the University of
 Wisconsin-La Crosse, and is a certified public accountant.                                                                                                                                                                                                                                                                                                                             
|                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|Mary T.
 MinchAge 43     |  | Ms. Minch has been our chief financial officer and secretary since
 November 2004 and has served as executive vice president  finance since
 November 2009. From January 2007 to November 2009, Ms. Minch served as our
 senior vice president  finance, and from December 2003 to January 2007, Ms.
 Minch served as our vice president  finance. 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. 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.
|                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|Paula K.
 OGormanAge 45 |  | Ms. OGorman has been our senior vice president  research &
 development since April 2008. From May 2004 to April 2008, Ms. OGorman served
 as the vice president  content development. From June 1999 to May 2004, Ms.
 OGorman held the position of general manager. Ms. OGorman holds a
 bachelors of science degree from the University of Minnesota.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

9

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|                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|----------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Mark W.
 PetersenAge 48 |  | Mr. Petersen has been our senior vice president  product management
 since January 2007. From February 2006 to January 2007, Mr. Petersen held the
 position of vice president  product line management. From November 2005 to
 February 2006, Mr. Petersen served as vice president  development. From
 September 2004 to November 2005, Mr. Petersen was the vice president 
 product development. From July 2003 to September 2004, Mr. Petersen held the
 position of vice president  product management & research. From April 2002
 to July 2003, Mr. Petersen served as vice president  product management.
 From February 2000 to April 2002, Mr. Petersen was the director of product
 management. From August 1999 to February 2000, Mr. Petersen served as senior
 product marketing manager. From May 1998 to August 1999, Mr. Petersen held
 the position of product marketing manager. Mr. Petersen holds a bachelors
 degree from the University of Wisconsin  Oshkosh.
|                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Marian L.
 StatonAge 61 |  | Ms. Staton has been our executive vice president  sales since
 November 2009. From June 2006 to November 2009, Ms. Staton served as the
 senior vice president  sales. From May 2005 to June 2006, Ms. Staton held
 the position of vice president  sales central region. From August 2001 to
 May 2005, Ms. Staton was a district sales representative. From January 2001
 to August 2001, Ms. Staton was a regional sales director. From August 1999 to
 January 2001, Ms. Staton served as the coordinator  library services. From
 June 1997 to August 1999, Ms. Staton held the position of reading Renaissance
 consultant. From July 1996 to June 1997, Ms. Staton served as an associate
 Renaissance consultant. Ms. Staton holds a bachelors of science degree from
 Texas Tech University, a masters in education degree from West Texas A&M University
 and a library endorsement from West Texas A&M University.                                                            
|                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Mark R.
 SwansonAge 45  |  | Mr. Swanson has been our chief technology officer since December
 2008. From November 2005 to December 2008, Mr. Swanson served as the senior
 vice president  research & development. From July 2004 to November 2005,
 Mr. Swanson held the position of vice president  advanced technology group.
 From August 2002 to July 2004, Mr. Swanson was our vice president  chief
 technology officer. From August 1995 to August 2002, Mr. Swanson served as
 the vice president  software engineering. From September 1992 to August
 1995, Mr. Swanson held the position of software engineering manager.                                                                                                                                                                                                                                                                                                                                                                                 
|                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Roy E. TrubyAge 70      |  | Mr. Truby has been our senior vice president  state & federal
 programs since June 2007. Prior to his employment with the Company, Mr. Truby
 served as a visiting scholar for the University of Idaho, as well as an
 ambassador for the National Center for Education Statistics and research
 organization Westat to chief state school officers and large urban school
 district superintendents, advising on National Assessment of Educational
 Progress and assessment issues. From 1989 to 2002, Mr. Truby served as the
 executive director of the National Assessment Governing Board, which has
 policy direction over National Assessment of Educational Progress. Mr. Truby
 holds a bachelors degree and a masters degree from Indiana University, and
 a Ph.D. from the University of Idaho.                                                                                                                                                                                

The
term of office of each executive officer is from one annual meeting of the
board of directors until the next annual meeting of the board of directors or
until a successor has been duly elected and qualified or until his or her death
or until he or she resigns or has been removed from office. There are no
arrangements or understandings between any of our executive officers and any
other person (not an officer or director of the company acting as such)
pursuant to which any of the executive officers were selected as an officer of
the company.

10

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Item 1A. Risk Factors

Reliance
on Single Product Line. Our Accelerated Reader software accounts for approximately 40%
of our orders. In addition, services related to Accelerated Reader account for
approximately 10% of our orders. An overall decline in sales of Accelerated Readeror related services
would have a material adverse effect on our business, financial condition, and
results of operations.

Geographic
Concentration of Sales. A substantial portion of our
sales is concentrated in Texas and California, each of which accounted for
approximately 13% of our net sales in 2009. If large numbers of schools or a
district or districts controlling a large number of schools in such states were
to discontinue purchasing our products and services, our business, financial
condition, and results of operations would be materially adversely affected.

Dependence
on Educational Institutions and Government Funding.
Substantially all of our revenue is derived from sales to educational
institutions, individual educators, and their other suppliers, which are
heavily dependent on federal, state, and local government funding. In addition,
the school appropriations process is often slow, unpredictable and subject to
many factors outside of our control. Budget cuts, curtailments, delays, changes
in leadership, shifts in priorities or general reductions in funding could
reduce or delay our revenues. Funding difficulties experienced by schools,
which have been exacerbated by the current economic downturn and state budget
deficits, could also slow or reduce purchases, which in turn could materially
harm our business.

Our
business may be adversely affected by changes in state educational funding,
resulting from changes in legislation, both at the federal and state levels,
changes in the state procurement process, changes in government leadership,
emergence of other priorities and changes in the condition of the local, state
or U.S. economy. Moreover, future reductions in federal funding and the state
and local tax bases could create an unfavorable environment, leading to budget
shortfalls resulting in a decrease in educational funding. Any decreased
funding for schools may harm our recurring and new business materially if our
customers are not able to find and obtain alternative sources of funding.

Alignment
with Government Initiatives.If our products and
services are not aligned with government sponsored education initiatives, or
such initiatives do not endorse, or do not complement, the principles and
methodologies underlying and associated with our products and services, demand
for our products and services could decline.

Philosophical
Opposition to our Products and Services may Reduce Demand for our Products and
Services and Harm our Reputation. Our products support
all teaching methods and curricula by focusing on continuous feedback,
increased student practice of essential skills, and demonstrated product
effectiveness through measurable results. Certain educators, academics,
politicians, and theorists, however, advocate philosophies of instruction that
can lead them to oppose certain educational products or services. These
philosophies can include, but are not limited to, opposition to standardized
testing or over-reliance on the same; opposition to computers or motivational
techniques and narrow focus on particular types of direct instruction. Such
philosophical opposition to our products and services may result in the spread
of negative views toward our product and services through traditional media,
social networking, and the internet, which could result in reduced demand for
our products and services.

Customer
Perception of Products and Services.Our customers
perception of our products and services is dependent upon the achievement of
positive results in customer schools. We provide our customers with
implementation assistance, telephone support, professional development, and
offer certification to schools and classrooms that employ best practices. If
customers do not achieve positive results with our products and services, or do
not receive the level of support that they expect, the reputation of our
company and our products and services may suffer, which could result in a
decline in our revenues.

11

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Dependence
on Continued Product Development. The educational
technology and services markets in which we compete are characterized by
evolving industry standards, frequent product introductions, and sudden
technological change. Our future success depends, to a significant extent, on a
number of factors, including our ability to enhance our existing products,
develop and successfully introduce new products in a timely fashion, and
respond quickly and cost effectively to technological change, including: shifts
in operating systems, hardware platforms, programming languages, alternative
delivery systems, the internet and other uncertainties. There can be no
assurance that new products will be as well received as our established
products, particularly since they may require technology and/or resources not
generally available in all schools. We attempt to maintain high standards for
the demonstrated academic effectiveness of our products. Our adherence to these
standards could delay or inhibit the introduction of new products. Moreover,
there can be no assurance that our products will not be rendered obsolete or
that we will have sufficient resources to make the necessary investments or be
able to develop and market the products required to maintain our competitive
position.

Success
of Product Strategy. Our product strategy is to
convert our customer base from perpetually-licensed, locally-installed versions
of our products to subscription-based versions of our products which are
delivered over the internet. If we are unsuccessful in the execution of this
strategy, we will incur significant additional costs and may lose customers,
which would have an adverse effect on our business.

Technology
which we are Dependent upon May not Continue to be Available.Licensed
technology may be embedded in our products, or be used to deliver products and
services to our customers. Such technology may not continue to be available to
us on commercially reasonable terms, or even at all. Additionally, third parties
may claim that these technologies infringe upon or violate third party
proprietary rights. These types of claims, regardless of the outcome, may be
costly to defend and may divert managements efforts and resources.

We
Use the Internet Extensively, and Federal or State Governments May Adopt Laws
That Could Expose Us to Substantial Liability or Taxation in Connection With
These Activities.As a result of increasing usage of
the Internet, federal and state governments may adopt additional laws regarding
commercial online services, the Internet, user privacy, intellectual property
rights, content, and taxation of online communications. Laws directly
applicable to online commerce or Internet communications are becoming more
prevalent and could expose us to substantial liability. Furthermore, various
proposals at the federal, state, and local levels could impose additional taxes
on Internet sales. New laws and additional taxes may decrease Internet use or
increase the costs thereof, and adversely affect the success of our online
business.

We
Could Experience System Failures, Software Errors or Capacity Constraints, Any
of Which Would Cause Interruptions in the Delivery of Electronic Products and
Services to Customers and May Cause us to Lose Customers.Any
significant delays, disruptions, or failures in the systems, or errors in the
software, that we use for the technology-based component of our products, as
well as for internal operations, could harm our business materially. We have
occasionally suffered computer and telecommunication outages or related
problems in the past. The growth of our customer base could strain our systems
in the future and magnify the consequences of any computer and
telecommunications problems that we may experience.

Many
of the systems that we use to deliver our services to customers are located in
a single facility. Although we have a disaster recovery plan, it is reasonably
likely that a disaster at our main data center would result in a significant disruption
of services we provide to our customers. In addition, our products could be
affected by failures associated with third party providers or by failures of
third party technology used in our products, and we may have no control over
remedying these failures. Any failures or problems with our systems or software
could force us to incur significant costs to remedy the failure or problem,
decrease customer demand for our products, tarnish our reputation or harm our
business materially.

Our
Systems Will Face Security Risks That Could Compromise the Privacy of Our
Customers.Our systems and websites face risks such as
unauthorized access attempts by hackers, denial of service attacks, computer
viruses and other disruptive problems. Although we have extensive security
safeguards in place, no system can be completely safe from malicious attacks.
Security breaches or problems could lead to misappropriation of our customers
information, our websites, our intellectual property and other rights, as well
as disruption in the use of our systems and websites. Any security breach
related to our systems could tarnish our reputation and expose us to damages
and litigation. We also may incur significant costs to maintain our security
precautions or to correct problems caused by security breaches. These
disruptions and interruptions could harm our business materially.

12

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If
either our Corporate Headquarters or Distribution Center are Damaged or
Destroyed, We Could Experience Significant Disruption of Our Business.
Our corporate headquarters, data center and the majority of our sales,
marketing, and administrative operations are located in a single facility in
Wisconsin. We store and distribute the majority of our hardware and printed
materials in another facility in Wisconsin. In the event that either of these
facilities are damaged or destroyed, our business would experience substantial
disruption and there would be delays in the recovery of our data center,
difficulties in providing services to our customers, the inability to take new
orders for a period of time, and delays in shipping hardware and printed
products to our customers. Our customers often make purchasing decisions very
close to the beginning of the school year, and any delivery delays at that time
of the year in particular could cause our customers to turn to competitors for
products that they need immediately. Although we maintain adequate property
insurance and business interruption insurance, the loss of customers could have
a long-term, detrimental impact on our reputation and business.

Reliance
on Statistical Studies to demonstrate effectiveness of our Products and
Services.We rely on statistical studies to
demonstrate that our products and related services improve student achievement.
We believe that these studies accurately reflect the performance of our
products. These studies, however, involve the following risks: (i) the sample
sizes used in our studies may yield results that are not representative of the
general population of students who use our products; (ii) the methods used to
gather the information upon which these studies are based depend on cooperation
from students and other participants, and inaccurate or incomplete responses
could distort results; (iii) schools studying the effectiveness of our products
may apply different methodologies and data collection techniques, making
results difficult to aggregate and compare; (iv) we facilitate the collection
and analysis of data for some of these studies; and (v) we hire researchers to
aggregate and present the results of some of these studies and, in some cases,
to conduct the studies. There is growing demand from the No Child Left Behind
Act and other sources for research and studies to demonstrate the effectiveness
of educational programs and products. Our selling and marketing efforts, as
well as our reputation, could be adversely impacted if the public, including
our existing and potential customers, is not convinced that the product
effectiveness is supported by the studies.

Limited
Protection of Intellectual Property and Proprietary Rights.
We regard certain of our technologies as proprietary and rely primarily on a
combination of patent, copyright, trademark and trade secret laws and employee
non-disclosure agreements to establish and protect our intellectual property
rights. We also employ serialization techniques to prevent unauthorized
installation of our software products and related content. There can be no
assurance that the steps taken by us to protect our rights will be adequate to
prevent or deter misappropriation or infringement. In addition, while we do not
believe that our products, trademarks or other proprietary rights infringe upon
the proprietary rights of third parties, there can be no assurance that a third
party will not make a contrary assertion. The cost of responding to such
assertions can be material, regardless of whether an assertion is validated.
The software publishing industry has traditionally experienced widespread
unauthorized reproduction of products in violation of intellectual property
rights. Such activity is difficult to detect and legal proceedings to enforce
intellectual property rights are often burdensome and involve a high degree of
uncertainty and costs. There can be no assurance that our software products and
the content will not experience unauthorized reproduction and distribution,
which would have a material adverse effect on our business, financial
condition, and results of operations.

We may not be Successful in Selling our Products and
Services through new Sales and Distribution Channels or into New Markets, which
may Limit our Growth.Our selling and marketing strategy includes
the development of new sales and distribution channels. There can be no
assurance that we will be successful in entering new markets and developing new
sales and distribution channels.

13

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Risks
of International Expansion.A component of our growth
strategy is the expansion of our operations in international markets. Doing
business in international markets is subject to a number of risks, including,
among others: acceptance by foreign educational systems of our approach to
educational products; lack of existing customer base; unexpected changes in
regulatory requirements; potentially adverse tax consequences; tariffs and
other trade barriers; difficulties in staffing and managing foreign operations;
changing economic conditions; exposure to different legal standards
(particularly with respect to intellectual property); burdens of complying with
a variety of foreign laws; and fluctuations in currency exchange rates. If any
of these risks were to materialize, our business, financial condition, and
results of operations could be adversely affected.

Highly
Competitive Industry. The educational technology and
professional development markets in which we operate are very competitive and
fragmented. We compete with other companies offering educational software
products, computing devices, interactive response systems, professional
development, and technology consulting services to schools. Education continues
to emerge as a major global industry and potential competitors, including large
hardware manufacturers, software developers, educational publishers, and consulting
firms, may enter or increase their focus on the schools market, resulting in
greater competition for us. In addition, we compete against more traditional
methods of education, training, and testing, including pencil and paper
testing.

As
we enter into new markets, existing competitors could increase the barriers to
entry by driving prices lower or making modifications to enhance their
products. Success in selling our established products and services may cause
competitors to focus on us in their marketing efforts thereby increasing direct
competition. There can be no assurance that we will continue to be able to
market our products successfully or compete effectively in the educational
marketplace.

Dependence
on Key Personnel. Our success depends to a significant
extent upon the continued active participation of certain key members of
management. We do not have employment agreements with these individuals and
have no current intention of entering into any such employment agreements. The
loss of the services of key personnel could have a material adverse effect on
our business, financial condition, and results of operations.

Ability
to Attract and Retain Qualified Personnel. Our future
success will depend, in part, upon our continuing ability to retain the
employees, including senior management personnel, who have assisted in the
development and marketing of our products and to attract and retain qualified
employees trained in computer technology, sales, marketing, finance, and other
disciplines to enhance our product offerings and broaden our operations. There
can be no assurance that we will continue to be able to attract and retain such
personnel. The failure to attract or retain the necessary personnel would have
a material adverse effect on our business, financial condition, and results of
operations.

Fluctuations
in Quarterly Performance. The transition to
subscription-based products has increased the seasonality of customer ordering
patterns. Compared to orders for non-subscription-based offerings, customer
orders of our subscription-based offerings tend to more closely follow school
budgeting cycles, resulting in a more seasonal order pattern weighted to the
second and, even more so, third calendar quarters.

Our
overall gross margins also fluctuate based upon the mix of software, hardware,
and service sales. We realize higher margins on our software product sales than
our hardware and service sales. Some of our revenues tend to be seasonal due to
annual school budget cycles, customer preferences as to when products and
services are delivered and the timing of our larger professional development
events, resulting in seasonal variations in margins.

In
addition, our quarterly results can also be affected by:

| |   |                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | delays in
 the development and/or shipment of new products;                                                                                                                                                   
| |   |                                                                                                                                                                                                               
| |  | the closing of large contract sales, such
 as those to school districts;                                                                                                                                      
| |   |                                                                                                                                                                                                               
| |  | changes in
 educational funding which can have a significant effect on quarterly results
 because customers may hold back orders in anticipation of funding or spend
 funds to meet defined funding deadlines;
| |   |                                                                                                                                                                                                               
| |  | the shipment of
 new products for which orders have been building for a period of time;                                                                                                                       

14

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

Share Price Volatility. Numerous factors,
many of which are beyond our control, may cause the market price of our common
stock to fluctuate significantly. These factors include announcements of technological
innovations and/or new products by us and our competitors, earnings releases
and other announcements by us and our competitors, expectations regarding
government funding levels for education, market conditions in the industry,
announcements by us of significant acquisitions and/or divestitures, and the
general state of the securities markets. The market price of our common stock
may decline significantly if we fail to meet our forecasts or the published
earnings estimates of analysts and others. In addition, quarterly fluctuations
of our results of operations as described above may cause a significant
variation in the market price of our common stock.

War,
Acts of War and Terrorism. Delays and reductions in
purchases of our products and services may occur as a result of war, acts of
war and terrorism, and the related impacts, including a reduction of funds
available to our customers to purchase our products and services and
disruptions in our ability to develop, produce and distribute products and
services to our customers. These events would have a material adverse effect on
our business, financial condition, and results of operations.

Concentration
of Share Ownership; Control by Principal Shareholders/Management.
As of February 22, 2010, our principal shareholders, Judith Paul and Terrance
Paul, our chairman and chief executive officer respectively, and co-founders of
the company, beneficially owned approximately 55% of our outstanding common
stock. As a result, these principal shareholders have the ability to control
and direct our business and affairs.

Shares
Eligible for Future Sale. Sales of a substantial
number of shares of our common stock in the public market could adversely
affect the market price of the common stock. As of February 22, 2010,
approximately 16.0 million shares of our common stock were held by affiliates
and may be publicly sold only if registered under the Securities Act of 1933 or
sold in accordance with an applicable exemption from registration, such as Rule
144. In addition, we have filed registration statements under the Securities
Act of 1933 to register an aggregate of 6.0 million shares of common stock
reserved for issuance under our 1997 Stock Incentive Plan and an aggregate of
500,000 shares of common stock reserved for issuance under our Employee Stock
Purchase Plan (ESPP), which will, when issued in accordance with such plans, be
eligible for immediate sale in the public market, subject to the Rule 144
resale limitations for affiliates. We did not offer the ESPP to our employees
in 2007, 2008 or 2009 and have no intention of offering it in 2010.

Cash
Dividends. In each of the four quarters of 2009, we
paid a cash dividend of $0.07 per share. Our dividend policy may be affected
by, among other things, our views on potential future capital requirements,
including those related to research and development, creation and expansion of
sales distribution channels, acquisitions, legal risks and stock repurchases.
Our dividend policy may change from time to time, and we cannot provide
assurance that we will continue to declare dividends at all or in any
particular amounts. A change in our dividend policy could have a negative
effect on the market price of our common stock.

15

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Possible
Antitakeover Effects of Certain Articles and By-Laws Provisions and Provisions
of Wisconsin Law. Our Amended and Restated Articles of
Incorporation and Amended and Restated By-Laws, along with Wisconsin statutory
law, contain provisions that could discourage potential acquisition proposals
and might delay or prevent a change in control of the company. Such provisions
could result in our being less attractive to a potential acquirer and could
result in the shareholders receiving less for their common stock than otherwise
might be available in the event of a takeover attempt.

Divestitures.
From time to time, we may, for any number of reasons, determine it is in our
best interests and in the interests of our shareholders to discontinue or
dispose of a business or product line. Divestitures involve a number of
difficulties and risks, including, among others, the diversion of management
time and resources and the resulting disruption to our ongoing business, and
unanticipated costs, and liabilities. If we are unable to manage the
divestiture process successfully or if we are incorrect in our assumptions
regarding the costs associated with a disposition, our business, financial
condition and results of operations could be adversely affected.

If
we Engage in Acquisitions, we may not Realize the Expected Benefits of Owning
the Acquired Businesses and our Business could be Adversely Affected due to a
Variety of Operational and Financial Risks.We
evaluate strategic opportunities from time to time, including acquisitions.
Acquisitions involve a number of difficulties and risks, including, among
others: the failure to integrate personnel, technology, research and
development, marketing and sales operations of the acquired company; the diversion
of management time and resources and the resulting disruption to our ongoing
business; the potential loss of the acquired companys customers, as well as
our own; and unanticipated costs and liabilities. Integration processes require
significant time and resources, and we may not be able to manage the process
successfully. If customers of the acquired company, or our customers, are
uncertain about our ability to operate on a combined basis with the acquired
company, they could delay or cancel orders for products and services. Moreover,
we may not successfully evaluate or utilize the acquired technology or
accurately forecast the financial impact of an acquisition transaction. If we
fail to integrate an acquired company or business successfully, our business,
financial condition, and results of operations could be adversely affected,
including the potential need to record a non-cash charge for the impairment of
goodwill and other intangibles.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our
corporate headquarters is located in Wisconsin Rapids, Wisconsin, in a 125,000
square foot facility owned by us, which was constructed in 1996. We lease
various other office and warehouse space. We believe our facilities are adequate
to support our operations for the foreseeable future.

Item 3. Legal Proceedings

We
are subject to various claims and proceedings covering a wide range of matters
that arise in the ordinary course of our business activities. We believe that
any liability that may ultimately arise from the resolution of these matters
will not have a material adverse effect on our financial position, results of
operations or shareholders equity.

Item 4. Reserved

16

---



PART II

Item 5. Market for
Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities

Market Information

Our
common stock is traded under the symbol RLRN on The NASDAQ Global Select Market®.
Information regarding the market prices of our common stock may be found in
Note 14 of the Notes to Consolidated Financial Statements.

Holders

As
of February 22, 2010, there were 728 record holders of our common stock.

Historical Dividends

In
each of the four quarters of 2009, we paid a cash dividend of $0.07 per share.
In each of the four quarters of 2008, we paid a cash dividend of $0.07 per
share along with a special dividend of $0.75 per share in the fourth quarter of
2008.

We
intend to continue to pay quarterly cash dividends, subject to capital
availability and a determination that cash dividends continue to be in the best
interests of the company and our shareholders. Our Board of Directors also
considers several additional factors when declaring dividends, including: (1)
the companys financial statements as of the most recent practicable date; (2)
the expected cash costs to deliver the products and services sold and recorded
as deferred revenue; (3) the companys ability to provide the products and
services underlying the amounts recorded as deferred revenue; (4) the
likelihood of recognizing amounts recorded as deferred revenue as net sales
based on the companys historical experience and most recent projections; (5)
the short time period over which such recognition has historically occurred and
is expected to occur; (6) seasonal cash flow; (7) general economic outlook; and
(8) other information, opinions, reports and statements prepared and presented
by the companys officers and employees about the companys business,
operations and financial condition.

Equity Compensation Plans

Information
regarding our equity compensation plans may be found in Item 12 of this 2009
Annual Report on Form 10-K and in Note 11 of the Notes to Consolidated
Financial Statements.

Performance Graph

The
following graph compares the total shareholder return on our common stock for
the five-year period from December 31, 2004 through December 31, 2009 with that
of the NASDAQ Composite Index and a peer group index constructed by us. The
companies included in our peer group index are The Princeton Review, Inc.
(REVU), School Specialty, Inc. (SCHS), Plato Learning, Inc. (TUTR), Scientific
Learning, Corp. (SCIL), and K12, Inc. (LRN).

The
total return calculations set forth below assume $100 invested on December 31,
2004 with reinvestment of dividends into additional shares of the same class of
securities at the frequency with which dividends were paid on such securities
through December 31, 2009. The stock performance graph shown in the graph below
should not be considered indicative of potential future stock price
performance.

17

---



|                                                                              
|------------------------------------------------------------------------------
|COMPARISON OF 5 YEAR CUMULATIVE TOTAL
 RETURN*                                
|Among Renaissance Learning, Inc., The NASDAQ Composite Index And A
 Peer Group

(LINE GRAPH)

| |                                                                                    
| | -----------------------------------------------------------------------------------
| |                                                                                    
| |                                                                                    
| | *$100
 invested on 12/31/04 in stock or index, including reinvestment of dividends.
| | Fiscal
 year ending December 31.                                                   

|                            |                   |        |        |        |       |        | 
|--------------------------- | ----------------- | ------ | ------ | ------ | ----- | ------ | 
|                            | Cumulative Return |       
|                            | 12/04             | 12/05  | 12/06  | 12/07  | 12/08 | 12/09  | 
|                            |                   |        |        |        |       |        | 
|Renaissance
 Learning, Inc. | 100.00            | 103.03 | 97.93  | 83.48  | 58.27 | 75.96  | 
|NASDAQ
 Composite           | 100.00            | 101.33 | 114.01 | 123.71 | 73.11 | 105.61 | 
|Peer Group                  | 100.00            | 94.67  | 92.06  | 90.93  | 54.73 | 65.66  | 
|                            |                   |        |        |        |       |        | 

Recent Sales of Unregistered Securities

There
were no sales of unregistered securities during the year ended December 31,
2009.

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

On
April 17, 2002, our Board of Directors authorized a repurchase program, which
provides for the repurchase of up to 5.0 million shares of our common stock. On
February 9, 2005, our Board of Directors authorized the repurchase of an
additional 3.0 million shares under the stock repurchase program. On February
6, 2008, our Board of Directors authorized the repurchase of an additional 1.0
million shares under the stock repurchase program.

18

---



No
time limit was placed on the duration of the repurchase program, nor is there
any dollar limit on the program. We repurchase shares on the open market as
well as from employees who elect to surrender restricted shares at the time of
vesting to pay their payroll withholding taxes. Repurchased shares will become
treasury shares and may be used for equity compensation plans, stock-based employee
benefit plans and for other general corporate purposes.

The
following table shows information relating to the repurchase of shares of our
common stock during the three months ended December 31, 2009:

|              |  |                                  |       |                                |   |                                                                                   |  |                                                                                    |       |  |  |           | 
|------------- |  | -------------------------------- | ----- | ------------------------------ | - | --------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------- | ----- |  |  | --------- | 
|Period        |  | Total Numberof Shares
 Purchased |       | Average Price
 Paid per
 Share |   | Total Number of
 SharesPurchased asPart of Publicly
 Announced Plans
 or Programs |  | Maximum Number
 of Shares that May
 Yet Be Purchased
 Under the Plans or
 Programs |      
|October 1-31  |  |                                  | 2,077 |                                | $ | 10.40                                                                             |  |                                                                                    | 2,077 |  |  | 1,213,010 | 
|              |  |                                  |       |                                |   |                                                                                   |  |                                                                                    |       |  |  |           | 
|November 1-30 |  |                                  |      |                                |   |                                                                                  |  |                                                                                    |      |  |  | 1,213,010 | 
|              |  |                                  |       |                                |   |                                                                                   |  |                                                                                    |       |  |  |           | 
|December 1-31 |  |                                  | 77    |                                |   | 10.93                                                                             |  |                                                                                    | 77    |  |  | 1,212,933 | 
|Total         |  |                                  | 2,154 |                                | $ | 10.42                                                                             |  |                                                                                    | 2,154 |  |  |           | 

19

---



Item 6. Selected
Financial Data

SELECTED HISTORICAL CONSOLIDATED FINANCIAL
DATA

|                                                           |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         | 
|---------------------------------------------------------- |  | ----------------------- | ------- | ---- | - | ------- | - | ---- | ------- | ---- | - | ------- |  | - | ------- | 
|                                                           |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         | 
|                                                           |  | Year Ended December 31, |        
|(In
 thousands, except per share amounts)                  |  | 2009                    |         | 2008 |   | 2007    |   | 2006 |         | 2005 |  
|Consolidated Income Statement Data                         |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         | 
|Net sales:                                                 |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         | 
|Products                                                   |  | $                       | 86,030  |      | $ | 84,540  |   | $    | 84,628  |      | $ | 90,750  |  | $ | 94,296  | 
|Services                                                   |  |                         | 35,483  |      |   | 30,683  |   |      | 23,304  |      |   | 20,778  |  |   | 21,987  | 
|Total net sales                                            |  |                         | 121,513 |      |   | 115,223 |   |      | 107,932 |      |   | 111,528 |  |   | 116,283 | 
|Cost of sales:                                             |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         | 
|Products                                                   |  |                         | 13,730  |      |   | 14,494  |   |      | 15,673  |      |   | 16,455  |  |   | 12,917  | 
|Services                                                   |  |                         | 11,691  |      |   | 13,263  |   |      | 11,830  |      |   | 10,011  |  |   | 8,669   | 
|Total cost of sales                                        |  |                         | 25,421  |      |   | 27,757  |   |      | 27,503  |      |   | 26,466  |  |   | 21,586  | 
|Gross profit                                               |  |                         | 96,092  |      |   | 87,466  |   |      | 80,429  |      |   | 85,062  |  |   | 94,697  | 
|Operating expenses:                                        |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         | 
|Product development                                        |  |                         | 16,494  |      |   | 17,396  |   |      | 18,506  |      |   | 17,291  |  |   | 17,046  | 
|Selling and marketing                                      |  |                         | 35,960  |      |   | 36,253  |   |      | 36,042  |      |   | 33,639  |  |   | 30,778  | 
|General and administrative                                 |  |                         | 13,113  |      |   | 15,283  |   |      | 14,951  |      |   | 16,330  |  |   | 12,989  | 
|Impairment of goodwill and intangible
 assets              |  |                         |        |      |   | 47,945  |   |      |        |      |   |        |  |   |        | 
|Total operating expenses                                   |  |                         | 65,567  |      |   | 116,877 |   |      | 69,499  |      |   | 67,260  |  |   | 60,813  | 
|Operating income (loss)                                    |  |                         | 30,525  |      |   | (29,411 | ) |      | 10,930  |      |   | 17,802  |  |   | 33,884  | 
|Other, net                                                 |  |                         | 452     |      |   | 819     |   |      | 1,178   |      |   | 1,234   |  |   | 3,494   | 
|Income (loss) - continuing operations
 before income taxes |  |                         | 30,977  |      |   | (28,592 | ) |      | 12,108  |      |   | 19,036  |  |   | 37,378  | 
|Income taxes - continuing operations                       |  |                         | 11,054  |      |   | 5,848   |   |      | 4,541   |      |   | 7,043   |  |   | 13,211  | 
|Income (loss) - continuing operations                      |  |                         | 19,923  |      |   | (34,440 | ) |      | 7,567   |      |   | 11,993  |  |   | 24,167  | 
|Income - discontinued operations                           |  |                         |        |      |   |        |   |      |        |      |   |        |  |   | 584     | 
|Net income (loss)                                          |  | $                       | 19,923  |      | $ | (34,440 | ) | $    | 7,567   |      | $ | 11,993  |  | $ | 24,751  | 
|                                                           |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         | 
|Earnings (loss) per share:                                 |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         | 
|Basic and diluted:                                         |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         | 
|Continuing operations                                      |  | $                       | 0.68    |      | $ | (1.18   | ) | $    | 0.26    |      | $ | 0.40    |  | $ | 0.78    | 
|Discontinued operations                                    |  |                         | 0.00    |      |   | 0.00    |   |      | 0.00    |      |   | 0.00    |  |   | 0.02    | 
|Net income (loss)                                          |  | $                       | 0.68    |      | $ | (1.18   | ) | $    | 0.26    |      | $ | 0.40    |  | $ | 0.80    | 
|                                                           |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         | 
|Cash dividends declared per share                          |  | $                       | 0.28    |      | $ | 1.03    | * | $    | 0.99    | *    | $ | 0.20    |  | $ | 0.20    | 
|                                                           |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         | 
|Consolidated Balance Sheet Data:                           |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         | 
|Working capital                                            |  | $                       | 1,210   |      | $ | (15,335 | ) | $    | (6,543  | )    | $ | 15,282  |  | $ | 21,539  | 
|Total assets                                               |  |                         | 83,266  |      |   | 56,926  |   |      | 113,300 |      |   | 117,711 |  |   | 128,382 | 
|Shareholders equity (deficit)                             |  |                         | 7,951   |      |   | (5,319  | ) |      | 57,987  |      |   | 79,571  |  |   | 95,866  | 

* Includes a
special dividend in 2008 and 2007 of $0.75 per share.

Generation21
Learning Systems, LLC (Generation21) was divested during 2005 and, therefore,
its results for all periods presented in the consolidated financial statements
are reflected as discontinued operations.

20

---



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

Overview

Renaissance
Learning, Inc. is a leading provider of computer-based assessment technology
for pre-K-12 schools. Our tools provide daily formative assessment and periodic
progress-monitoring technology to enhance core curriculum, support
differentiated instruction, and personalize practice in reading, writing, and
math. Renaissance Learning products help educators make the practice component
of their existing curriculum more effective by providing tools to personalize
practice and easily manage the daily activities for students of all levels.

Our
sales are derived primarily from the sale of software products, computerized
hardware products, and related services. Revenues are recorded net of
allowances for estimated returns, concessions, and bad debts.

Product
revenue is derived primarily from the sale of educational software and
hardware. Revenue from sales of hardware is generally recognized when the
product is shipped to the customer. Revenue recognition from sales of our
software depends on whether the software is licensed on a perpetual basis or as
a subscription. We recognize revenue from perpetually licensed software upon
delivery to customers. Subscription-based software sales are recognized as
revenue on a straight-line basis over the subscription period.

Service
revenue is derived primarily from: (i) product support services, (ii)
professional development and product training seminars and conferences, (iii)
application hosting, (iv) technical services, (v) consulting, and (vi) other
remote services. Product support services included with sales of perpetually
licensed software have a duration of 12 months or less and the associated
revenue is recognized at the time the software is shipped with the related
costs of providing the telephone support accrued for at the same time. Revenue
from professional development and product training seminars and conferences is
recognized when the seminar or conference is held. Revenue from other product
support services and application hosting is initially recorded as deferred
revenue and then recognized as revenue on a straight-line basis over the term
of the agreement, typically 12 months. Revenue from technical services, consulting
and other remote services is recognized as the services are performed or on a
straight-line basis over the contractual period.

Deferred
revenue includes: (i) amounts invoiced for products not yet delivered and
services not yet performed, (ii) advance invoicing on contracts and (iii) that
portion of product support agreements and subscription-based product sales that
has not yet been recognized as revenue.

We
expect that future changes in our products will likely result in the requirement
to apply the service revenue recognition rules to subscription sales of our
software when such software is hosted by us. The timing of this change is
currently uncertain and will depend on, among other things: (i) how we license
and price our products, (ii) what features are available in our products, and
(iii) whether our customers run our products at their own site as opposed to
being hosting at our site. Under the service revenue recognition rules, upfront
charges are recognized as revenue beyond the initial contractual period if the
relationship with the customer is expected to extend beyond the initial term
and the customer continues to benefit from the payment of the up-front fee (e.g., if subsequent renewals are priced at
a bargain to the initial up-front fee). The most significant effect this could
have on our financial statements is the deferral of upfront charges, for items
such as installation and data conversion, which are currently recognized as
revenue when the service is completed. This could have the effect of shifting
revenue to future periods and reducing reported earnings in periods when our
deferred revenue balances are increasing. Any such change would not affect our
cash flow.

It
is our practice to announce new products prior to when the products are ready
for shipment to allow customers sufficient lead time for budgeting and
curriculum purposes. This practice can result in fluctuations in backlog for
orders of new products. These orders are generally filled within a relatively
short period of time after the product is ready for shipment. Registrations for
seminars and conferences are generally received from customers in advance of
the events, resulting in a backlog for these services. Additionally, under
district-wide implementations, customers commit to a comprehensive solution
consisting of products and services in advance of delivery of the products and
services. The delivery of backlogged products and services in certain periods
can cause those periods to have higher revenue and higher revenue growth rates
than other periods.

21

---



Cost
of sales consists of expenses associated with sales of our software and
hardware products and the delivery of services. These costs include: (i)
personnel-related costs, (ii) costs of purchased materials such as our NEOlaptops, optical-mark card scanners, 2Know! response systems, educational
products, training materials, teacher and student guides, manuals, trade books,
audio books, and motivational items, (iii) shipping and freight costs, (iv)
amortization of capitalized development costs and (v) other overhead costs. We
realize higher gross profit margins on our software sales than on our hardware
and service sales.

We
expense all development costs associated with a software product until
technological feasibility is established, after which time such costs are
capitalized until the product is available for general release to customers.
Capitalized product development costs are amortized into cost of sales, beginning
when the product is available for general release, using the straight-line
method over their estimated economic life, which is generally estimated to be
24 months.

Results of Operations - Consolidated

Our
results of operations can be affected by many factors including the general
economic environment, state and federal government budgetary decisions, and the
length and complexity of the sales cycle for school districts. National trends,
federal and state legislation, Department of Education administrative policies,
and the way the foregoing align with our products and services can also impact
our business.

We
monitor several important issues, which are significant to the evaluation of
our financial condition, operating results, business challenges, and strategic
opportunities. Among the more important of these issues are:

| |                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) Our success and trends
 in maintaining and expanding our customer base, particularly with respect to
 our Accelerated Reader
 software, which accounts for approximately 40% of our orders. In addition,
 services related to Accelerated Reader account for approximately 10% of our
 orders;
| | (ii) The general state of
 K-12 educational funding in the United States; and                                                                                                                                                                                                                     
| | (iii) The state of K-12
 funding in certain large states, particularly California, Texas and Florida,
 which together make up about one-third of our total orders.                                                                                                                                

A
key part of our business strategy for maintaining and expanding our customer
base (and the related revenues) is to transition our traditional
perpetual-license-based customers to our newer subscription-based software
products. Our subscription-based products offer enhanced features, which
provide greater value to our customers, thereby contributing to increased
customer satisfaction. Our most popular subscription-based products, the Enterprise versions, include much greater
access to product content. The subscription-based products are offered with a
hosting option, which makes implementation of our software much easier and
greatly reduces the costs both to our customers to implement and to us to
develop and support the software. Customers who transition to our Accelerated Reader Enterprise subscription-based product from
our perpetual-license products have increased their average annual spending by
over $1,000 per school. Although this amount of incremental revenue could
change due to customer mix and other factors including additional purchases of
products and services, we expect that we will continue to see incremental
revenue as our perpetual-license customers transition to Accelerated Reader Enterprise. We have
also experienced an annual per customer revenue increase for our other
subscription-based products, but the increase has been most significant with
our Accelerated Reader Enterprise product.

We
track active usage of both our subscription and perpetual products via a
variety of measures including active subscriptions, recent customer support
requests, recent purchases of additional content, and recent participation in
training or professional development events. We continuously refine the
criteria used to develop this metric in order to provide what we believe is the
most useful information for managing and understanding our active customer
base. The most current methodology is applied to develop any historical
comparisons so that any presentation is on a consistent basis. Based on these
criteria, our approximate worldwide active customer counts for both our
perpetual and subscription-based licenses at the end of 2009 and 2008 were as
follows:

22

---



|                          |  |      |        |      |  |        | 
|------------------------- |  | ---- | ------ | ---- |  | ------ | 
|                          |  |      |        |      |  |        | 
|Product:                  |  | 2009 |        | 2008 | 
|Accelerated Reader        |  |      | 53,000 |      |  | 53,000 | 
|Accelerated Math          |  |      | 15,000 |      |  | 16,000 | 
|STAR Reading or STAR Math |  |      | 45,000 |      |  | 44,000 | 

We
believe the percentage of customers using the subscription-based Enterprise versions of our reading and
math products is an important indicator of the progress of this strategic
growth initiative and the magnitude of the growth opportunities still existing
with regard to this strategy. The percentage of customers using reading
products is more critical since the Accelerated
Reader is our most significant product and because we have
experienced a greater increase in per customer revenues from Accelerated Reader Enterprise compared to our other
subscription-based products. At the end of 2009, approximately 40% of our
active reading product customers were using the Enterprise version as compared to approximately one-third at
the end of 2008.

Our
strategic transition to subscription-based software products has affected, and
will continue to affect, our results of operations. We believe that this
strategy has the potential to generate more lifetime revenue per customer than
selling software under a perpetual-license model. Revenues from subscription-based
software sales are not completely incremental to our results, as customers who
make the transition no longer purchase annual support plans for our
perpetual-license products, and those who purchase our most popular
subscription-based product, the Enterprise
version, also no longer purchase add-on content. Revenues under the
subscription-based model are composed of both software and services. The gross
profit margins from subscription-based software products are slightly higher
than our historical gross profit margins on sales of perpetual-license
software. The subscription-based software business tends to generate a sales
mix somewhat more heavily weighted towards services. In addition, the services
we sell with our subscription-based software products tend to have a somewhat
higher gross profit margin than those sold with our perpetual-license software
products.

The
transition to subscription-based products has increased the seasonality of
customer ordering patterns. Compared to orders for non-subscription-based
offerings, customer orders of our subscription-based offerings tend to more
closely follow school budgeting cycles, resulting in a more seasonal order
pattern weighted to the second and, even more so, third calendar quarters.
Currently about 20% of our subscriptions have renewal dates in the second
quarter and about 60% of our subscriptions have renewal dates in the third
quarter. Also, after customers convert to the Enterprise
version, they no longer order reading quizzes and math libraries, since access
to this content is included in their subscription. The combined effect is that
a much greater proportion of a years orders are expected in the second quarter
and to an even greater extent in the third quarter. Historically, our customers
have ordered more of this content in the first and fourth quarters. Currently,
we receive about 25% of our orders in the second quarter and about 40% in the
third quarter.

Transitioning
our customer base to subscription-based software can adversely impact orders
for add-on reading quizzes and math libraries by causing customers who own our
software under perpetual-license agreements to delay purchases of add-on
content if they are contemplating converting to our Enterprise version subscription-based products.
Additionally, our subscription-based products are often sold at the school
district level. District level sales tend to be more complex, have a longer
sales cycle, and are typically for a larger dollar amount than sales made to
individual schools. Orders from district sales are more uneven and more
difficult to accurately predict than individual school-level sales and;
therefore, the timing of large district sales can significantly impact quarterly
order levels.

23

---



However,
as the transition to subscription-based products has progressed, we have built
substantial balances of deferred subscription revenue. Since this deferred
revenue is recognized ratably over the subscription period (generally twelve
months), it reduces the volatility of our reported revenue. This means that
revenues in a given period are not necessarily indicative of the orders placed
by our customers for our products and services during a given period.

Customer
orders for our products increased by approximately $10.0 million or 8%, in 2009
compared to 2008. In addition to the above factors, we believe that our third
and fourth quarter 2009 orders were positively affected by educational funds
provided by the American Recovery and Reinvestment Act, which generally first
became available to schools during the third quarter 2009. A recent survey by
the Center on Budget and Policy Priorities indicates that nearly all states are
still facing significant shortfalls in their fiscal year 2010 budget, and the
majority of states already anticipate a deficit for fiscal year 2011.

Therefore,
it appears likely that once the federal stimulus funds are used up, many states
may face budget challenges, which could affect funding for education. Once a
recovery in state revenue occurs, it is probable that growth in state spending
will lag as the states address needs that have built up in other areas, which
require funding. Therefore, it appears that the educational funding environment
could be challenging for the next few years.

We
have implemented several cost savings initiatives this year including a general
hiring freeze, reducing product development expenses related to some of our
lower-performing product lines, reorganizing our hardware sales group, and
implementing other general cost constraints. These initiatives reduced our
annualized expense base by approximately $4.0 million per year but only yielded
net savings of about $2.3 million in 2009 because the initiatives were
implemented throughout the year. During 2010, we expect our operating expenses
to be at similar levels to those of the latter half of 2009, offset somewhat by
moderate increases in selling and marketing expenses in order to achieve future
sales growth and for new business initiatives.

|                                           |  |      |       |      |  |       |    |  |       |  
|------------------------------------------ |  | ---- | ----- | ---- |  | ----- | -- |  | ----- | -
|Consolidated
 income statement data:       |  |      |       |      |  |       |    |  |       |  
|                                           |  | 2009 |       | 2008 |  | 2007  |   
|Net Sales:                                 |  |      |       |      |  |       |    |  |       |  
|Products                                   |  |      | 70.8  | %    |  | 73.4  | %  |  | 78.4  | %
|Services                                   |  |      | 29.2  |      |  | 26.6  |    |  | 21.6  |  
|Total net sales                            |  |      | 100.0 |      |  | 100.0 |    |  | 100.0 |  
|Cost of sales:                             |  |      |       |      |  |       |    |  |       |  
|Products                                   |  |      | 16.0  |      |  | 17.1  |    |  | 18.5  |  
|Services                                   |  |      | 32.9  |      |  | 43.2  |    |  | 50.8  |  
|Total cost of sales                        |  |      | 20.9  |      |  | 24.1  |    |  | 25.5  |  
|Gross profit:                              |  |      |       |      |  |       |    |  |       |  
|Products                                   |  |      | 84.0  |      |  | 82.9  |    |  | 81.5  |  
|Services                                   |  |      | 67.1  |      |  | 56.8  |    |  | 49.2  |  
|Total gross profit                         |  |      | 79.1  |      |  | 75.9  |    |  | 74.5  |  
|Operating expenses:                        |  |      |       |      |  |       |    |  |       |  
|Product development                        |  |      | 13.6  |      |  | 15.1  |    |  | 17.1  |  
|Selling and marketing                      |  |      | 29.6  |      |  | 31.4  |    |  | 33.4  |  
|General and administrative                 |  |      | 10.8  |      |  | 13.3  |    |  | 13.9  |  
|Impairment of goodwill & intangible assets |  |      |      |      |  | 41.6  |    |  |      |  
|Operating income (loss)                    |  |      | 25.1  |      |  | (25.5 | )  |  | 10.1  |  
|Other, net                                 |  |      | 0.4   |      |  | 0.7   |    |  | 1.1   |  
|Income (loss) before taxes                 |  |      | 25.5  |      |  | (24.8 | )  |  | 11.2  |  
|Income tax provision                       |  |      | 9.1   |      |  | 5.1   |    |  | 4.2   |  
|Net Income (loss)                          |  |      | 16.4  | %    |  | (29.9 | )% |  | 7.0   | %



|                                                                                                                                                                                                             
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The
 amounts above are expressed as a percentage of net sales, except that
 individual components of cost of sales and gross profit are shown as a
 percentage of their corresponding component of net sales.

24

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Consolidated Results
Years Ended December 31, 2009 and 2008

Net Sales. Our net sales increased by $6.3
million, or 5.5%, to $121.5 million in 2009 from $115.2 million in 2008. Orders
were $10.0 million higher in 2009 than in 2008; however, higher orders were
offset by a $4.0 million increase in the net amount of revenue deferred as
compared to last year.

Product revenue increased by $1.5 million,
or 1.8%, to $86.0 million in 2009, from $84.5 million in 2008. Revenue from
software increased $3.3 million due to high interest in our subscription based
products; partially offset by a $1.8 million combined decrease in sales of
laptops, response systems and scanners as these products are generally viewed
as more discretionary purchases in time of tight school budgets.

Service revenue increased by $4.8 million,
or 15.6%, to $35.5 million in 2009 from $30.7 million in 2008. The primary
components of the change in service revenue were an increase of $4.6 million in
hosting and other technical services; and an increase of $1.9 million in
telephone support and other remote services; partially offset by a $1.7 million
decrease in onsite professional development services.

Cost of Sales. The cost of sales of
products decreased by $0.8 million, or 5.3%, to $13.7 million in 2009 from
$14.5 million in 2008. As a percentage of product sales, the cost of sales of
products decreased to 16.0% in 2009 from 17.1% in 2008. Product cost of sales
improvement was due to the higher proportion of software in the 2009 sales mix
as compared to 2008, as our margins are higher on software than on hardware,
and to lower production costs for our scanners.

The
cost of sales of services decreased by $1.6 million, or 11.8%, to $11.7 million
in 2009 from $13.3 million in 2008. Over half of the dollar decrease was due to
savings from not holding a National Conference in 2009, with the remainder of
the dollar decrease attributable to cost efficiencies in our other services. As
a percentage of sales of services, the cost of sales of services decreased to
32.9% in 2009 from 43.2% in 2008.

Our
overall gross profit margin percentage increased to 79.1% in 2009 from 75.9% in
2008. The improvement is attributable to the increased profitability on products
and services explained above, tempered by an overall revenue mix weighted more
heavily towards services in 2008.

Product Development. Product development
expense, which excludes amounts capitalized, decreased by $0.9 million, or
5.2%, to $16.5 million in 2009 from $17.4 million in 2008. As a percentage of
net sales, product development expenses decreased to 13.6% in 2009 from 15.1%
in 2008. The primary reason for the decrease in product development expenses is
savings from the restructuring and cost reduction efforts, implemented in the
first quarter of 2009, to better align our product development capacity with
our product opportunities.

Selling and Marketing. Selling and
marketing expenses decreased by $0.3 million, or 0.8%, to $36.0 million in 2009
from $36.3 million in 2008. Selling expenses increased by $0.3 million due to
higher commissions associated with higher order levels this year and marketing
expenses decreased by $0.6 million due to cost efficiencies in our advertising
programs. As a percentage of net sales, selling and marketing expenses
decreased to 29.6% in 2009 from 31.4% in 2008.

General and Administrative. General and
administrative expenses decreased by $2.2 million, or 14.2%, to $13.1 million
in 2009 from $15.3 million in 2008. The decrease is due to a $0.6 million
charge taken in the prior year for a legal settlement regarding defective parts
from a supplier, $0.4 million of fees incurred in the prior year to cancel
certain future professional development events, and in 2009, we received $0.3
million in a legal settlement. The remainder of the decrease is attributable to
staff reductions and other non-payroll cost constraints implemented in the
current year as part of our cost reduction efforts. As a percentage of net
sales, general and administrative costs decreased to 10.8% in 2009 from 13.3%
in 2008.

25

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Impairment of Goodwill and Intangible Assets.
In 2008, we recorded the following pretax impairment charges related to the
2005 acquisition of AlphaSmart: (i) $44.0 million for the goodwill, (ii) $3.0
million for the AlphaSmart trademark and (iii) $0.9 million for the customer
relationships. The economic downturn that occurred in 2008 caused us to lower
growth expectations, which in turn resulted in a lower valuation of this
product line and; consequently, the aforementioned impairment charges.

Operating Income. Operating income was
$30.5 million in 2009 compared to an operating loss of $29.4 million in 2008.
The 2008 operating loss was primarily a result of the AlphaSmart impairment
charges that were partially offset by earnings from ongoing operations. The
impairment charges negatively affected 2008 operating income by $47.9 million
and net income after tax by $46.5 million.

Other Income. Other income, which was
mainly interest income from our investment securities, decreased to $0.5
million in 2009 from $0.8 million in 2008 due to lower market rates of return
on fixed income investments.

Income Tax Provision. In 2009, the annual
effective rate of our provision for income taxes was 35.7%. In 2008 the annual
effective rate of our provision for income taxes was -20.5%. Our annual
effective income tax rate, excluding the tax effect of the impairment charge to
goodwill and other intangibles, was 36.7% in 2008. Since the write down of the
AlphaSmart goodwill was not deductible for income tax purposes it did not
generate a current tax benefit, resulting in tax expense of $5.8 million during
2008 in spite of the reported pre-tax loss. The tax accounting treatment of the
goodwill write down is the primary reason for the difference between the 2009
and 2008 income tax rates.

Consolidated Results
Years Ended December 31, 2008 and 2007

Net Sales. Our net sales increased by $7.3
million, or 6.8%, to $115.2 million in 2008 from $107.9 million in 2007.
Revenue in 2008 increased primarily due to recognition of deferred revenue from
orders received in earlier periods and to a lesser extent by increased orders
for our products and services received in 2008. Customer orders for our
products and services increased by approximately $1.0 million, or 0.8%, in 2008
as compared to 2007. During 2008, deferred revenue increased by $8.5 million as
compared to an increase of $13.7 million in 2007.

Product
revenue decreased by $0.1 million, or 0.1%, to $84.5
million in 2008, essentially unchanged from $84.6 million in 2007.

Service revenue increased by $7.4 million,
or 31.7%, to $30.7 million in 2008 from $23.3 million in 2007. Nearly all
service categories achieved growth, with the largest increases in our remote
technical services, primarily hosting and installations. Service revenues also
increased because we held a National Conference in the first quarter of 2008,
but did not hold a National Conference in 2007.

Cost
of Sales. The cost of sales of products decreased by
$1.2 million, or 7.5%, to $14.5 million in 2008 from $15.7 million in 2007. As
a percentage of product sales, the cost of sales of products decreased to 17.1%
in 2008 from 18.5% in 2007 primarily due to lower manufacturing costs of our
scanner and a product mix shift in the laptop line to the more profitable NEOs.

The
cost of sales of services increased by $1.5 million, or 12.7%, to $13.3 million
in 2008 from $11.8 million in 2007. As a percentage of sales of services, the
cost of sales of services decreased to 43.2% in 2008 from 50.8% in 2007. The
improvement resulted from growth of our more profitable technical service offerings,
especially hosting, and increased utilization of our fixed costs during 2008.

Our
overall gross profit margin percentage increased to 75.9% in 2008 from 74.5% in
2007. The improvement is attributable to the increased profitability on products
and services explained above, tempered by an overall revenue mix weighted more
heavily towards services in 2008.

26

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Product
Development. Product development expense, which
excludes amounts capitalized, decreased by $1.1 million, or 6.0%, to $17.4
million in 2008 from $18.5 million in 2007. As a percentage of net sales,
product development expenses decreased to 15.1% in 2008 from 17.1% in 2007. The
reduction in product development expenses was primarily due to: (i) a charge of
$0.5 million in 2007 to reorganize our product development resources, reducing
staff and assets related to the laptop line, (ii) ongoing savings from the
restructuring in 2008 and (iii) research costs incurred in 2007 related to the
expansion of the United Kingdom product offerings.

Selling
and Marketing. Selling and marketing expenses
increased by $0.3 million, or 0.1%, to $36.3 million in 2008 from $36.0 million
in 2007. Selling and marketing expenses increased in 2008, partly due to
increased commissions as a result of higher customer order levels and, higher
promotional expenses related to the NEO; partially offset by lower spending on
advertising and direct marketing. As a percentage of net sales, selling and
marketing expenses were 31.4% in 2008 compared to 33.4% in 2007.

General
and Administrative. General and administrative
expenses increased by $0.3 million, or 2.2%, to $15.3 million in 2008 from
$15.0 million in 2007. General and administrative expenses increased in 2008
primarily due to: a charge of $0.6 million related to a lawsuit regarding
defective parts from a supplier for which we received an unfavorable court
decision and a $0.4 million charge to terminate contracts for professional
development events where we altered the timing or location of those events;
partially offset by other cost reductions. As a percentage of net sales,
general and administrative costs decreased to 13.3% in 2008 from 13.9% in 2007.

Impairment of Goodwill and Intangible Assets.
In 2008, we recorded the following pretax impairment charges related to the
2005 acquisition of AlphaSmart: (i) $44.0 million of goodwill, (ii) $3.0
million for the AlphaSmart trademark, and (iii) $0.9 million for the customer
relationships. The economic downturn that occurred in 2008 caused us to lower
growth expectations, which in turn resulted in a lower valuation of this
product line and; consequently, the aforementioned impairment charges.

Operating Income. An operating loss of
$29.4 million occurred in 2008 compared to operating income of $10.9 million in
2007. The 2008 operating loss was primarily a result of the AlphaSmartimpairment charges, which were partially offset by earnings from ongoing
operations. The impairment charges negatively impacted 2008 operating income by
$47.9 million and net income after tax by $46.5 million.

Other Income. Other income, which was
mainly interest income from our investment securities, decreased to $0.8
million in 2008 from $1.2 million in 2007 due to somewhat lower average cash
balances in 2008 and to lower market rates of return on fixed income
investments.

Income
Tax Provision. In 2008 the annual effective rate of
our provision for income taxes was -20.5%. The tax accounting treatment of the
goodwill write down is the primary reason for the difference between the 2008
tax rate and the 2007 income tax rate of 37.5% since the write down of the
AlphaSmart goodwill was not deductible for income tax purposes and did not
generate a current tax benefit, resulting in tax expense of $5.8 million during
2008 in spite of the reported pre-tax loss.

|                                            |  |      |        |      |   |        |  |   |        | 
|------------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------ | 
|Results of Operations  Segments            | 
|(Dollars in Thousands)                      |  | 2009 |        | 2008 |   | 2007   | 
|Educational
 Software and Services Segment: |  |      |        |      |   |        |  |   |        | 
|Revenues                                    |  | $    | 99,327 |      | $ | 92,517 |  | $ | 85,068 | 
|Gross profit                                |  |      | 84,628 |      |   | 75,552 |  |   | 68,136 | 
|Gross profit %                              |  |      | 85.2%  |      |   | 81.7%  |  |   | 80.1%  | 
|                                            |  |      |        |      |   |        |  |   |        | 
|Educational
 Hardware Segment:              |  |      |        |      |   |        |  |   |        | 
|Revenues                                    |  | $    | 22,186 |      | $ | 22,706 |  | $ | 22,864 | 
|Gross profit                                |  |      | 11,464 |      |   | 11,914 |  |   | 12,293 | 
|Gross profit %                              |  |      | 51.7%  |      |   | 52.5%  |  |   | 53.8%  | 

27

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Educational Software
and Services Segment
Years Ended December 31, 2009 and 2008

Segment
revenues increased by $6.8 million, or 7.4%, to $99.3 million in 2009 from
$92.5 million in 2008. This improvement was primarily due to increased revenue
from our subscription based software products and related services, such as
hosting, phone support, and technical services; offset by a decrease of $1.7
million in onsite professional development revenue.

Gross
profit increased by $9.0 million to $84.6 million in 2009 from $75.6 million in
2008. As a percentage of revenue, gross profit increased to 85.2% from 81.7% in
the prior year. This improvement resulted primarily from the higher proportion
of segment revenue attributable to subscription-based software and related
services in 2009, which are more profitable than our onsite professional
development services.

Educational Software
and Services Segment 
Years Ended December 31, 2008 and 2007

Segment
revenues increased by $7.4 million, or 8.8%, to $92.5 million in 2008 from
$85.1 million in 2007. This improvement was primarily due to increased revenue
from our subscription based software products and related services, such as
hosting, support and technical services; and to a lesser extent, because we
held a National Conference in 2008 and did not hold one in 2007.

Gross profit
increased by $7.5 million to $75.6 million in 2008 from $68.1 million in 2007.
As a percentage of revenue, gross profit increased to 81.7% from 80.1% in the
prior year. This improvement resulted primarily from the higher proportion of
our revenue mix attributable to subscription-based software and related
services in 2008, which are more profitable than our onsite professional
development services.

Educational Hardware
Segment 
Years Ended December 31, 2009 and 2008

Segment
revenues decreased by $0.5 million, or 2.3%, to $22.2 million in 2009 from
$22.7 million in 2008. Segment revenues decreased because of: (i) a price
reduction that went into effect in late 2008, and (ii) these products are
generally viewed as more discretionary purchases and schools delay purchasing
them in time of tight school budgets.

Gross profit
decreased by $0.4 million to $11.5 million in 2009 from $11.9 million in 2008.
As a percentage of revenue, gross profit was relatively unchanged at 51.7% in
2009, and 52.5% in 2008.

Educational Hardware
Segment 
Years Ended December 31, 2008 and 2007

Segment
revenues were essentially unchanged at $22.7 million in 2008 and $22.9 million
in 2007.

Gross
profit decreased by $0.4 million to $11.9 million in 2008 from $12.3 million in
2007. As a percentage of revenue, gross profit decreased to 52.5% in 2008, from
53.8% in 2007. This decrease was primarily due to a charge taken in late 2008
to write off excess inventory related to discontinued laptop models.

Liquidity and Capital Resources

As
of December 31, 2009, our cash, cash equivalents, and investment securities
were $44.1 million, compared to $17.8 million at December 31, 2008. During
2009, our cash flow from operations was $34.3 million.

28

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As
of December 31, 2009, we have a $15.0 million secured revolving line of credit
with a bank, which is available until July 1, 2010. The line of credit bears
interest at either a floating rate or a fixed rate for a period of up to 90
days based on LIBOR plus 1.5%. The rate is at our option and is determined at
the time of borrowing. We also have a $2.0 million unsecured revolving line of
credit with a bank available until April 30, 2010, which bears interest at the
prime rate less 1.0%. As of December 31, 2009, the lines of credit had not been
used.

On
April 17, 2002, our Board of Directors authorized a repurchase program, which
provides for the repurchase of up to 5.0 million shares of our common stock. On
February 9, 2005, our Board of Directors authorized the repurchase of an
additional 3.0 million shares under the stock repurchase program. On February
6, 2008, our Board of Directors authorized the repurchase of an additional 1.0
million shares under the stock repurchase program.

No
time limit was placed on the duration of the repurchase program, nor is there
any dollar limit on the program. We repurchase shares on the open market as
well as from employees who elect to surrender restricted shares at the time of
vesting to pay their payroll withholding taxes. Repurchased shares will become
treasury shares and may be used for equity compensation plans, stock-based
employee benefit plans and for other general corporate purposes. From January
1, 2009 through December 31, 2009, we repurchased approximately 22,000 shares
at a cost of $0.2 million. Since the original authorization of the repurchase
program in 2002, we have repurchased approximately 7.8 million shares at a cost
of $135.2 million. Depending on our stock valuation, cash availability and
other factors, we may repurchase additional shares as a beneficial use of our
cash to enhance shareholder value.

In
each of the four quarters of 2009, we paid a cash dividend of $0.07 per share.
In each of the four quarters of 2008, we paid a cash dividend of $0.07 per
share along with a special dividend of $0.75 per share in the fourth quarter of
2008.

We
intend to continue to pay quarterly cash dividends, subject to capital
availability and a determination that cash dividends continue to be in the best
interests of the company and our shareholders. Our Board of Directors also
considers several additional factors when declaring dividends, including: (1)
the companys financial statements as of the most recent practicable date; (2)
the expected cash costs to deliver the products and services sold and recorded
as deferred revenue; (3) the companys ability to provide the products and
services underlying the amounts recorded as deferred revenue; (4) the
likelihood of recognizing amounts recorded as deferred revenue as net sales
based on the companys historical experience and most recent projections; (5)
the short time period over which such recognition has historically occurred and
is expected to occur; (6) seasonal cash flow; (7) general economic outlook; and
(8) other information, opinions, reports and statements prepared and presented
by the companys officers and employees about the companys business,
operations and financial condition.

We
believe our strong cash position coupled with cash flow from operations will be
sufficient to meet both our short-term and long-term working capital
requirements.

Off-Balance Sheet Arrangements and Aggregate
Contractual Obligations

We
do not have any off-balance sheet transactions, arrangements, or obligations
(including contingent obligations), that would have a material effect on our
financial results.

Operating Leases.
We enter into operating leases, primarily for facilities that we occupy in
order to carry out our business operations. We utilize operating leases for
some of our facilities to gain flexibility as compared to purchasing facilities
outright and to limit our exposure to many of the risks of owning commercial
property, particularly with regard to international operations. These
agreements are generally for terms of one to five years. Some of the leases
have early termination clauses, but they generally cannot be terminated early
for reasons other than breach of the lease agreement. We terminated the lease
on a small office facility in early 2009 for which we had a 90-day no-penalty
option to terminate. We do not anticipate the early termination of any significant
lease agreement in 2010. For each of the years ended December 31, 2009, 2008
and 2007, we incurred expenses of approximately $1.7 million, $1.6 million, and
$2.2 million, respectively, related to these operating leases.

29

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Purchase Obligations. We enter into
commitments with certain suppliers to purchase our hardware products, such as
Neo laptops, AccelScan scanners and the 2Know! response system. The majority of
these obligations will be satisfied within one year.

Tax audit settlements and deposits.
Currently we do not anticipate making any significant cash payments related to
the settlement of tax audits in 2010 or deposits for unsettled audit issues.
Estimation of the amounts and timing of payments in periods after 2010 are
highly uncertain and therefore are not included in the table.

As
of December 31, 2009, our approximate contractual obligations for operating
leases, tax audit payments and purchase obligations (by period due) were as
follows:

|                            |  |   |       |  |   |                  |  |   |            |  |   |            |  |   |                   | 
|--------------------------- |  | - | ----- |  | - | ---------------- |  | - | ---------- |  | - | ---------- |  | - | ----------------- | 
|Payments due by period:    
|(In Thousands)              |  |   | Total |  |   | Less than
1 year |  |   | 1-3

years |  |   | 3-5

years |  |   | More than
5 years | 
|Operating lease obligations |  | $ | 3,744 |  | $ | 1,469            |  | $ | 1,556      |  | $ | 718        |  | $ | 1                 | 
|Tax audit related payments  |  |   |      |  |   |                 |  |   |           |  |   |           |  |   |                  | 
|Purchase obligations        |  |   | 2,427 |  |   | 2,418            |  |   | 9          |  |   |           |  |   |                  | 
|Total                       |  | $ | 6,171 |  | $ | 3,887            |  | $ | 1,565      |  | $ | 718        |  | $ | 1                 | 

Supplemental
Executive Retirement Plan. We have established a Supplemental
Executive Retirement Plan (SERP) for the provision of retirement benefits to
members of senior management. Under the terms of the plan, participants elect
to defer receipt of a portion of their compensation and invest their deferrals
in certain mutual funds, which are nearly identical to the investment
selections offered to participants in our 401(k) retirement plan. Upon a SERP
participants retirement (or certain other events), we have an obligation to
pay the current market value of the participants account balance. As of
December 31, 2009, we have fully funded the $1.9 million aggregate contractual
obligation for future payments to SERP participants. Payouts of our obligations
related to the SERP are dependent on when participants leave service and how
they elect to receive their accrued benefit payments, which can range from a
single lump-sum payment to a 10-year series of payments. Due to the inherent
uncertainties in predicting when the SERP obligations will be paid, they are
not included in the above table. The SERP is more fully described in Note 10 of
the Notes to Consolidated Financial Statements.

Other Obligations.
As of December 31, 2009, we did not hold any long-term debt obligations,
long-term purchase obligations or material capital lease obligations.

Critical Accounting Policies and Estimates

The
foregoing discussion is based on our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. Preparation of financial statements in
conformity with accounting principles generally accepted in the United States
of America (US GAAP) requires management to make judgments, estimates, and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. The
following is a list of our critical accounting policies defined as those
policies that we believe are the most important to the portrayal of our financial
condition and results of operations and/or require managements significant
judgments and estimates. This is not intended to be a comprehensive list of all
of our accounting policies. Our significant accounting policies are more fully
described in Note 3 of the Notes to Consolidated Financial Statements.

30

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Revenue
Recognition. In general, we are required under US GAAP
to recognize revenue when all of the following have occurred: persuasive
evidence of an arrangement exists, product delivery and acceptance has occurred
or a service has been performed, pricing is fixed and determinable, and
collectability is probable. Revenue is recognized as follows: (i) at the time
of shipment to customers for perpetually licensed off-the-shelf software products
and related telephone support with a duration of 12 months or less sold with
the product, (ii) as seminars are performed for training and professional
development services, (iii) straight-line over the term of the support
agreement for other software support agreements, (iv) as the service is
performed or on a straight-line basis over the contractual period for
application hosting, technical and consulting services and (v) straight-line
over the subscription period for subscription based products and services.
Accordingly, management is required to make judgments as to: the fair value of
the elements of an arrangement, whether an element of an arrangement is
software or a service, whether pricing is fixed and determinable, and whether
collectability is reasonably assured. The accounting rules are complex,
sometimes vague, and are subject to interpretation, which exposes us to risk in
our revenue recognition practices.

Expenses
are accounted for using the accrual method of accounting. They are recognized
and matched against revenues for the reporting period presented in the
financial statements, or recognized as period expenses depending on the
requirement of the applicable accounting rule. The accrual method of accounting
requires that we make estimates for expenses not yet fully realized at the time
of preparation of our financial statements. For example, we record accruals for
sales returns and doubtful accounts at the time of revenue recognition based
upon historical experience as well as other factors that in our judgment could
reasonably be expected to cause sales returns or doubtful accounts to differ
from historical experience. Such allowances may require adjustments if future
returns or bad debt activity differs from our estimates. Therefore, the need to
make estimates exposes us to the risk that the amount of expense reported in
any given period may vary significantly from actual results.

Goodwill
and Long-Lived Assets. We assess the value of our
goodwill on at least an annual basis by comparing its fair value with its
carrying value. Fair value is determined primarily based on valuation analysis
performed by management using a discounted cash flow methodology. The valuation
analysis requires significant judgments and estimates to be made regarding
future cash flows. Our estimates could be materially impacted by factors such
as overall economic conditions, competitive forces, customer behavior, product
acceptance, specific industry factors, and changes in interest rates. In 2008,
we recorded a material impairment charge related to goodwill and other
intangibles.

In
2007 and 2006, our laptop revenues decreased due in part to difficulties in
integrating the selling operations of AlphaSmart into our overall organization.
Early results in 2008 were encouraging, but the worsening economic climate
resulted in schools and districts becoming very cautious with their spending,
causing laptop orders to decline sharply in the fourth quarter of 2008. Laptops
are generally viewed as a more discretionary purchase in times of tight school
budgets and curtailed spending. As we believed the economic problems could be
relatively prolonged, we lowered our forecast for orders of laptops and writing
software, which resulted in impairment charges in 2008 related to the
AlphaSmart acquisition as follows: (i) goodwill of $44.0 million, (ii)
trademark of $3.0 million, and (iii) customer relationships of $0.9 million.

Product
Warranty Obligations. We record a liability for the
estimated cost of hardware warranties at the time of sale. Estimated costs are
based on our historical cost experience of fulfilling these obligations as well
as other factors that in our judgment could reasonably be expected to affect
those costs, such as trends in product return rates. If there were a
significant adverse change in product return rates or if other factors used in
our estimates vary significantly from actual experience, there may be a need to
accrue additional costs in future periods.

Software
Development Costs. We capitalize certain software
development costs incurred after technological feasibility is achieved.
Capitalized software development costs are amortized on a product-by-product
basis using the straight-line method over their estimated economic life, which
is generally estimated to be 24 months. Amortization begins when the products
are available for general release to customers. If the actual economic life of
our products is shorter than our estimates, it could result in an impairment
charge in future periods.

31

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Taxes. At the end of each interim
reporting period, we estimate the effective income tax rate anticipated to be
applicable for the full fiscal year. The estimated effective income tax rate
contemplates the expected jurisdiction where income is earned (e.g., United
States compared to non-United States), the estimated amount of certain tax
credits, as well as tax planning strategies. If the actual distribution of
taxable income by jurisdiction varies from our expectations, if the actual
amount of tax credits varies from our estimates, or if the results of tax
planning strategies are different from our estimates, adjustments to the
effective income tax rate may be required in the period such determination is
made and could also affect later periods.

We
record a liability for uncertain tax positions based on our estimate of the
potential exposure. Due to the subjectivity and complex nature of the
underlying issues, there is significant inherent uncertainty in these
estimates. Actual payments or assessments may differ from our estimates and
require tax provision adjustments in future periods.

Recent Accounting Pronouncements

In
October 2009, the Financial Accounting Standards Board (FASB) issued an
amendment to its previously released guidance on revenue arrangements with
multiple deliverables. The amendment becomes effective at the beginning of our
2011 fiscal year; however, early adoption is permitted. The pronouncement
addresses how to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting and how the arrangement
consideration should be allocated among the separate units of accounting. The
pronouncement may be applied retrospectively or prospectively for new or
materially modified arrangements. The company is currently assessing the impact
the adoption of this guidance will have on the companys consolidated financial
statements.

In
October 2009, the FASB issued an amendment to its previously released guidance
on revenue arrangements for tangible products that include software elements.
The amendment becomes effective at the beginning of our 2011 fiscal year;
however, early adoption is permitted. The pronouncement removes tangible products
from the scope of the software revenue guidance if the products contain both
software and non-software components that function together to deliver a
products essential functionality and provides guidance on determining whether
software deliverables in an arrangement that includes a tangible product are
within the scope of the software revenue guidance. The pronouncement may be
applied retrospectively or prospectively for new or materially modified
arrangements. The company is currently assessing the impact the adoption of
this guidance will have on the companys consolidated financial statements.

In
June 2008, the FASB issued an amendment to its previously released guidance on
determining whether instruments granted in share-based payment transactions are
participating securities, which became effective for us at the beginning of our
2009 fiscal year. The new guidance requires that unvested share-based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall be included in
the computation of basic earnings per share. This also requires retroactive
restatement of earnings per share for all prior periods presented in the
financial statements and footnotes. Adoption of this amendment did not have a
material impact on our basic or diluted earnings per share.

In
April 2008, the FASB issued an amendment to its previously released guidance on
determination of the useful life of intangible assets, which became effective
for us at the beginning of our 2009 fiscal year. The new guidance generally
requires the use of a consistent useful life for an intangible asset when
computing amortization, for the period of expected cash flows used to estimate
the fair value of the asset, and for other accounting purposes. Adoption of
this amendment did not affect our consolidated financial statements.

32

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In
December 2007, the FASB issued an amendment to its previously released guidance
on business combinations, which became effective for us at the beginning of our
2009 fiscal year. The statement retains the purchase method of accounting for
acquisitions, but requires a number of changes, including changes in the way
assets and liabilities are recognized in purchase accounting. It also changes
the recognition of assets acquired and liabilities assumed arising from
contingencies, requires the capitalization of in-process research and
development at fair value, and requires the expensing of acquisition-related
costs as incurred. Adoption of this amendment did not materially affect our
consolidated financial statements.

In
December 2007, the FASB issued an amendment to its previously released guidance
on noncontrolling interests in consolidated financial statements, which became
effective for us at the beginning of our 2009 fiscal year. This changes the
accounting and reporting for minority interests, which are recharacterized as
noncontrolling interests and classified as a component of equity. This new
consolidation method significantly changes the accounting for transactions with
minority interest holders. Adoption of this amendment did not affect our
consolidated financial statements.

Item 7A. Quantitative
and Qualitative Disclosures About Market Risk

Interest Rate Risk. Our exposure to market
interest rate risk consists of: (i) the increase or decrease in the amount of
interest income we can earn on our investment portfolio and (ii) the decrease
or increase in the value of our investment security portfolio if market
interest rates increase or decrease, respectively. We anticipate that we will
have sufficient liquidity to hold our investments to maturity; therefore, we do
not expect to recognize any material losses or gains related to an increase or
decrease in market interest rates.

Market Risk. Our
exposure to market risk relates to the quality of the holdings in our
investment security portfolio. The fair market value of our investments is
subject to increases or decreases in value resulting from the performance of
the securities issuer, from upgrades or downgrades in the creditworthiness of
the securities issuer, upgrades or downgrades in the creditworthiness of the
insurer of the securities, and from changes in general market conditions.

We
seek to manage our exposure to market risk by investing in accordance with our
corporate investment policy as established by our Board of Directors. The goals
of the policy are: (i) preservation of capital, (ii) provision of adequate
liquidity to meet projected cash requirements, (iii) minimization of risk of
principal loss through diversification, and (iv) maximization of yields in
relationship to the guidelines, risk, market conditions, and tax
considerations.

Our
investment policy permits investments in obligations of the U.S. Treasury
department and its agencies, money market funds, certificates of deposit, and
high quality investment-grade corporate and municipal interest-bearing
obligations. The policy requires diversification to prevent excess
concentration of issuer risk and requires the maintenance of minimum liquidity
levels. The policy precludes investment in equity securities except for the
specific purpose of funding the obligations related to our Supplemental Executive
Retirement Plan (see Note 10 of the Notes to Consolidated Financial
Statements). As of December 31, 2009, our investment securities had a market
value of approximately $7.9 million and a carrying value of $7.9 million. Due
to the type and duration of our investments, we do not expect to realize any
material gains or losses related to market risk.

Foreign Currency Exchange Rate Risk.
The financial position and results of operations of our foreign subsidiaries
are measured using local currency. Revenues and expenses of such subsidiaries
have been translated into U.S. dollars using average exchange rates prevailing
during the period. Assets and liabilities have been translated at the rates of
exchange on the balance sheet date. We use the historical exchange rates
published by the OANDA Corporation for these translations. Translation gains or
losses are deferred as a separate component of shareholders equity. Aggregate
foreign currency transaction gains and losses are included in determining net
income. As such, our operating results are affected by fluctuations in the
value of the U.S. dollar compared to the British pound, Canadian dollar and the
Euro. At this time, foreign exchange rate risk is not significant due to the
relative size of our foreign operations and revenues derived from sales in
foreign currencies.

33

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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

We have audited the
accompanying consolidated balance sheets of Renaissance Learning, Inc. and
subsidiaries (the Company) as of December 31, 2009 and 2008, and the related
consolidated statements of income, shareholders equity, and cash flows for
each of the three years in the period ended December 31, 2009. Our audits also
included the financial statement schedule listed in the Index at Item 15(a)(2).
We also have audited the Companys internal control over financial reporting as
of December 31, 2009, based on criteria established in Internal Control 
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Companys management is responsible for these
financial statements and financial statement schedule, for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Managements Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule and an opinion on the Companys internal control
over financial reporting based on our audits.

We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. Our audit of internal control
over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the
circumstances. We believe
that our audits provide a reasonable basis for our opinions.

A companys internal control
over financial reporting is a process designed by, or under the supervision of,
the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys board of directors,
management, and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a
material effect on the financial statements.

Because of the inherent
limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the effectiveness of the
internal control over financial reporting to future periods are subject to the
risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.

As described in Note 6 to the
Consolidated Financial Statements, on January 1, 2007, the Company adopted FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes.

In our opinion, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Renaissance Learning, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2009, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein. Also, in our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as
of December 31, 2009, based on the criteria established in Internal Control 
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.

/s/ Deloitte & Touche LLP

Milwaukee, Wisconsin 
March 10, 2010

34

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2009 and 2008

|                                                                                                                 |  |      |         |      |   |         |  
|---------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | -
|                                                                                                                 |  |      |         |      |  
|(In Thousands, Except Share and Per Share Amounts)                                                               |  | 2009 |         | 2008 |  
|ASSETS                                                                                                           |  |      |         |      |   |         |  
|Current assets:                                                                                                  |  |      |         |      |   |         |  
|Cash and cash equivalents                                                                                        |  | $    | 36,207  |      | $ | 9,509   |  
|Investment securities                                                                                            |  |      | 3,278   |      |   | 4,894   |  
|Accounts receivable, less allowance of $1,392 and $1,090, respectively                                           |  |      | 10,535  |      |   | 8,083   |  
|Inventories                                                                                                      |  |      | 4,290   |      |   | 5,504   |  
|Prepaid expenses                                                                                                 |  |      | 1,962   |      |   | 1,999   |  
|Income taxes receivable                                                                                          |  |      | 3,679   |      |   | 3,301   |  
|Deferred tax asset                                                                                               |  |      | 3,827   |      |   | 4,183   |  
|Other current assets                                                                                             |  |      | 629     |      |   | 144     |  
|Total current assets                                                                                             |  |      | 64,407  |      |   | 37,617  |  
|Investment securities                                                                                            |  |      | 4,650   |      |   | 3,383   |  
|Property, plant and equipment, net                                                                               |  |      | 6,848   |      |   | 8,621   |  
|Deferred tax asset                                                                                               |  |      | 2,808   |      |   | 2,742   |  
|Goodwill                                                                                                         |  |      | 2,827   |      |   | 2,750   |  
|Other intangibles, net                                                                                           |  |      | 897     |      |   | 1,178   |  
|Capitalized software, net                                                                                        |  |      | 22      |      |   | 174     |  
|Other non-current assets                                                                                         |  |      | 807     |      |   | 461     |  
|Total assets                                                                                                     |  | $    | 83,266  |      | $ | 56,926  |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                             |  |      |         |      |   |         |  
|Current liabilities:                                                                                             |  |      |         |      |   |         |  
|Accounts payable                                                                                                 |  | $    | 921     |      | $ | 1,712   |  
|Deferred revenue                                                                                                 |  |      | 54,224  |      |   | 43,975  |  
|Payroll and employee benefits                                                                                    |  |      | 5,404   |      |   | 3,981   |  
|Other current liabilities                                                                                        |  |      | 2,648   |      |   | 3,284   |  
|Total current liabilities                                                                                        |  |      | 63,197  |      |   | 52,952  |  
|Deferred revenue                                                                                                 |  |      | 5,262   |      |   | 2,950   |  
|Deferred compensation and other employee benefits                                                                |  |      | 1,871   |      |   | 1,342   |  
|Income taxes payable                                                                                             |  |      | 4,801   |      |   | 4,868   |  
|Other noncurrent liabilities                                                                                     |  |      | 184     |      |   | 133     |  
|Total liabilities                                                                                                |  |      | 75,315  |      |   | 62,245  |  
|Shareholders equity:                                                                                            |  |      |         |      |   |         |  
|Common stock, $.01 par; shares authorized: 150,000,000; issued:
 34,736,647 shares at December 31, 2009 and 2008 |  |      | 347     |      |   | 347     |  
|Additional paid-in capital                                                                                       |  |      | 51,159  |      |   | 51,735  |  
|Retained earnings                                                                                                |  |      | 50,255  |      |   | 38,492  |  
|Treasury stock, at cost: 5,461,905 shares at December 31, 2009;
 5,557,679 shares at December 31, 2008           |  |      | (93,659 | )    |   | (95,568 | )
|Accumulated other comprehensive income (loss)                                                                    |  |      | (151    | )    |   | (325    | )
|Total shareholders equity                                                                                       |  |      | 7,951   |      |   | (5,319  | )
|Total liabilities and shareholders equity                                                                       |  | $    | 83,266  |      | $ | 56,926  |  

The accompanying notes to the consolidated financial statements are an
integral part of these balance sheets.

35

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2009, 2008 and 2007

|                                                   |  |      |         |      |   |         |   |   |         | 
|-------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | - | - | ------- | 
|                                                   |  |      |         |      |   |         |  
|(In Thousands, Except per Share
 Amounts)          |  | 2009 |         | 2008 |   | 2007    |  
|Net Sales:                                         |  |      |         |      |   |         |   |   |         | 
|Products                                           |  | $    | 86,030  |      | $ | 84,540  |   | $ | 84,628  | 
|Services                                           |  |      | 35,483  |      |   | 30,683  |   |   | 23,304  | 
|Total net sales                                    |  |      | 121,513 |      |   | 115,223 |   |   | 107,932 | 
|Cost of sales:                                     |  |      |         |      |   |         |   |   |         | 
|Products                                           |  |      | 13,730  |      |   | 14,494  |   |   | 15,673  | 
|Services                                           |  |      | 11,691  |      |   | 13,263  |   |   | 11,830  | 
|Total cost of sales                                |  |      | 25,421  |      |   | 27,757  |   |   | 27,503  | 
|Gross profit                                       |  |      | 96,092  |      |   | 87,466  |   |   | 80,429  | 
|Operating expenses:                                |  |      |         |      |   |         |   |   |         | 
|Product development                                |  |      | 16,494  |      |   | 17,396  |   |   | 18,506  | 
|Selling and marketing                              |  |      | 35,960  |      |   | 36,253  |   |   | 36,042  | 
|General and administrative                         |  |      | 13,113  |      |   | 15,283  |   |   | 14,951  | 
|Impairment of goodwill and other intangible assets |  |      |        |      |   | 47,945  |   |   |        | 
|Total operating expenses                           |  |      | 65,567  |      |   | 116,877 |   |   | 69,499  | 
|Operating income (loss)                            |  |      | 30,525  |      |   | (29,411 | ) |   | 10,930  | 
|Other income:                                      |  |      |         |      |   |         |   |   |         | 
|Interest income                                    |  |      | 212     |      |   | 696     |   |   | 1,009   | 
|Other, net                                         |  |      | 240     |      |   | 123     |   |   | 169     | 
|Income (loss) before taxes                         |  |      | 30,977  |      |   | (28,592 | ) |   | 12,108  | 
|Income tax provision                               |  |      | 11,054  |      |   | 5,848   |   |   | 4,541   | 
|Net income (loss)                                  |  | $    | 19,923  |      | $ | (34,440 | ) | $ | 7,567   | 
|                                                   |  |      |         |      |   |         |   |   |         | 
|Earnings (loss) per share:                         |  |      |         |      |   |         |   |   |         | 
|Basic and diluted                                  |  | $    | 0.68    |      | $ | (1.18   | ) | $ | 0.26    | 

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

36

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
For the Years Ended December 31, 2009, 2008 and 2007

|                                                          |  |                    |     |                              |   |                    |   |                 |         |                                      |   |                                           |   |   |      |   |   |         |  
|--------------------------------------------------------- |  | ------------------ | --- | ---------------------------- | - | ------------------ | - | --------------- | ------- | ------------------------------------ | - | ----------------------------------------- | - | - | ---- | - | - | ------- | -
|                                                          |  |                    |     |                              |   |                    |   |                 |         |                                      |   |                                           |  
|(In Thousands)                                            |  | Common
 Stock
 (1) |     | Additional
 Paid-in
 Capital |   | Retained
 Earnings |   | Treasury
 Stock |         | Other
 Comprehensive
 Income
 (Loss) |   | Accumulated
 Total
 Shareholders
 Equity |  
|Balance, December 31, 2006                                |  | $                  | 347 |                              | $ | 54,125             |   | $               | 124,290 |                                      | $ | (99,265                                   | ) | $ | 74   |   | $ | 79,571  |  
|                                                          |  |                    |     |                              |   |                    |   |                 |         |                                      |   |                                           |   |   |      |   |   |         |  
|Net income                                                |  |                    |    |                              |   |                   |   |                 | 7,567   |                                      |   |                                          |   |   |     |   |   | 7,567   |  
|Foreign currency translation                              |  |                    |    |                              |   |                   |   |                 |        |                                      |   |                                          |   |   | 119  |   |   | 119     |  
|Comprehensive income                                      |  |                    |     |                              |   |                    |   |                 |         |                                      |   |                                           |   |   |      |   |   | 7,686   |  
|Dividends ($.99 per share)                                |  |                    |    |                              |   |                   |   |                 | (28,699 | )                                    |   |                                          |   |   |     |   |   | (28,699 | )
|Stock repurchased for treasury                            |  |                    |    |                              |   | 1                  |   |                 |        |                                      |   | (1,435                                    | ) |   |     |   |   | (1,434  | )
|Exercise of stock options                                 |  |                    |    |                              |   | (15                | ) |                 |        |                                      |   | 30                                        |   |   |     |   |   | 15      |  
|Share-based compensation                                  |  |                    |    |                              |   | 1,109              |   |                 |        |                                      |   |                                          |   |   |     |   |   | 1,109   |  
|Effect of adoption of new acct principle                  |  |                    |     |                              |   |                    |   |                 | (271    | )                                    |   |                                           |   |   |      |   |   | (271    | )
|Excess tax benefits from share-based payment arrangements |  |                    |    |                              |   | 10                 |   |                 |        |                                      |   |                                          |   |   |     |   |   | 10      |  
|Restricted stock grants                                   |  |                    |    |                              |   | (2,547             | ) |                 |        |                                      |   | 2,547                                     |   |   |     |   |   |        |  
|Balance, December 31, 2007                                |  |                    | 347 |                              |   | 52,683             |   |                 | 102,887 |                                      |   | (98,123                                   | ) |   | 193  |   |   | 57,987  |  
|Net loss                                                  |  |                    |    |                              |   |                   |   |                 | (34,440 | )                                    |   |                                          |   |   |     |   |   | (34,440 | )
|Foreign currency translation                              |  |                    |    |                              |   |                   |   |                 |        |                                      |   |                                          |   |   | (518 | ) |   | (518    | )
|Comprehensive loss                                        |  |                    |     |                              |   |                    |   |                 |         |                                      |   |                                           |   |   |      |   |   | (34,958 | )
|Dividends ($1.03 per share)                               |  |                    |    |                              |   |                   |   |                 | (29,955 | )                                    |   |                                          |   |   |     |   |   | (29,955 | )
|Stock repurchased for treasury                            |  |                    |    |                              |   | (1                 | ) |                 |        |                                      |   | (155                                      | ) |   |     |   |   | (156    | )
|Exercise of stock options                                 |  |                    |    |                              |   | (95                | ) |                 |        |                                      |   | 348                                       |   |   |     |   |   | 253     |  
|Share-based compensation                                  |  |                    |    |                              |   | 1,397              |   |                 |        |                                      |   |                                          |   |   |     |   |   | 1,397   |  
|Excess tax benefits from share-based payment arrangements |  |                    |    |                              |   | 113                |   |                 |        |                                      |   |                                          |   |   |     |   |   | 113     |  
|Restricted stock grants                                   |  |                    |    |                              |   | (2,362             | ) |                 |        |                                      |   | 2,362                                     |   |   |     |   |   |        |  
|Balance, December 31, 2008                                |  |                    | 347 |                              |   | 51,735             |   |                 | 38,492  |                                      |   | (95,568                                   | ) |   | (325 | ) |   | (5,319  | )
|Net income                                                |  |                    |    |                              |   |                   |   |                 | 19,923  |                                      |   |                                          |   |   |     |   |   | 19,923  |  
|Foreign currency translation                              |  |                    |    |                              |   |                   |   |                 |        |                                      |   |                                          |   |   | 174  |   |   | 174     |  
|Comprehensive income                                      |  |                    |     |                              |   |                    |   |                 |         |                                      |   |                                           |   |   |      |   |   | 20,097  |  
|Dividends ($.28 per share)                                |  |                    |    |                              |   |                   |   |                 | (8,160  | )                                    |   |                                          |   |   |     |   |   | (8,160  | )
|Stock repurchased for treasury                            |  |                    |    |                              |   |                   |   |                 |        |                                      |   | (204                                      | ) |   |     |   |   | (204    | )
|Share-based compensation                                  |  |                    |    |                              |   | 1,504              |   |                 |        |                                      |   |                                          |   |   |     |   |   | 1,504   |  
|Excess tax benefits from share-based payment arrangements |  |                    |    |                              |   | 33                 |   |                 |        |                                      |   |                                          |   |   |     |   |   | 33      |  
|Restricted stock grants                                   |  |                    |    |                              |   | (2,113             | ) |                 |        |                                      |   | 2,113                                     |   |   |     |   |   |        |  
|Balance, December 31, 2009                                |  | $                  | 347 |                              | $ | 51,159             |   | $               | 50,255  |                                      | $ | (93,659                                   | ) | $ | (151 | ) | $ | 7,951   |  

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

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

37

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|                                                    
|----------------------------------------------------
|RENAISSANCE LEARNING, INC. AND SUBSIDIARIES         
|CONSOLIDATED STATEMENTS OF CASH FLOWS               
|For the Years Ended December 31, 2009, 2008 and 2007

|                                                                                           |  |      |        |      |   |         |   |   |         |  
|------------------------------------------------------------------------------------------ |  | ---- | ------ | ---- | - | ------- | - | - | ------- | -
|                                                                                           |  |      |        |      |   |         |   |   |         |  
|(In Thousands)                                                                             |  | 2009 |        | 2008 |   | 2007    |  
|                                                                                           |  |      |        |      |   |         |   |   |         |  
|Reconciliation
 of net income to net cash provided by operating activities:                |  |      |        |      |   |         |   |   |         |  
|Net income (loss)                                                                          |  | $    | 19,923 |      | $ | (34,440 | ) | $ | 7,567   |  
|Adjustments to arrive at cash provided by operating activities:                            |  |      |        |      |   |         |   |   |         |  
|Depreciation and amortization                                                              |  |      | 2,558  |      |   | 3,718   |   |   | 3,838   |  
|Amortization of investment discounts/premiums                                              |  |      | (48    | )    |   | 107     |   |   | 34      |  
|Share-based compensation expense                                                           |  |      | 1,504  |      |   | 1,397   |   |   | 1,109   |  
|Impairment of goodwill and other intangible assets                                         |  |      |       |      |   | 47,945  |   |   |        |  
|Deferred income taxes                                                                      |  |      | 393    |      |   | (1,270  | ) |   | (1,305  | )
|Excess tax benefits from share based payment arrangements                                  |  |      | (33    | )    |   | (113    | ) |   | (10     | )
|(Gain) loss on sale of property                                                            |  |      | (165   | )    |   | 223     |   |   | 30      |  
|Change in assets and liabilities, excluding the effects of
 acquisitions and divestitures: |  |      |        |      |   |         |   |   |         |  
|Accounts receivable                                                                        |  |      | (2,452 | )    |   | 708     |   |   | 1,737   |  
|Inventories                                                                                |  |      | 1,214  |      |   | 768     |   |   | (2,165  | )
|Prepaid expenses                                                                           |  |      | 35     |      |   | 198     |   |   | (331    | )
|Income taxes                                                                               |  |      | (514   | )    |   | (1,637  | ) |   | 2,715   |  
|Accounts payable and other liabilities                                                     |  |      | 47     |      |   | (783    | ) |   | (1,147  | )
|Deferred revenue                                                                           |  |      | 12,561 |      |   | 8,543   |   |   | 13,747  |  
|Other current assets                                                                       |  |      | (485   | )    |   | 156     |   |   | (203    | )
|Other                                                                                      |  |      | (191   | )    |   | (579    | ) |   | 337     |  
|Net
 cash provided by operating activities                                                 |  |      | 34,347 |      |   | 24,941  |   |   | 25,953  |  
|Cash
 flows from investing activities:                                                     |  |      |        |      |   |         |   |   |         |  
|Purchase of property, plant and equipment                                                  |  |      | (1,081 | )    |   | (1,281  | ) |   | (2,147  | )
|Purchase of investment securities                                                          |  |      | (4,025 | )    |   |        |   |   | (26,441 | )
|Maturities/sales of investment securities                                                  |  |      | 4,865  |      |   | 8,185   |   |   | 33,746  |  
|Capitalized software development costs                                                     |  |      |       |      |   | (142    | ) |   | (203    | )
|Net proceeds from sale of property                                                         |  |      | 923    |      |   | 118     |   |   | 570     |  
|Net cash provided by investing activities                                                  |  |      | 682    |      |   | 6,880   |   |   | 5,525   |  
|Cash
 flows from financing activities:                                                     |  |      |        |      |   |         |   |   |         |  
|Proceeds from exercise of stock options                                                    |  |      |       |      |   | 348     |   |   | 30      |  
|Excess tax benefits from share-based payment arrangements                                  |  |      | 33     |      |   | 113     |   |   | 10      |  
|Dividends paid                                                                             |  |      | (8,160 | )    |   | (29,955 | ) |   | (28,699 | )
|Purchase of treasury stock                                                                 |  |      | (204   | )    |   | (155    | ) |   | (1,435  | )
|Net cash used by financing activities                                                      |  |      | (8,331 | )    |   | (29,649 | ) |   | (30,094 | )
|Net
 increase in cash and cash equivalents                                                 |  |      | 26,698 |      |   | 2,172   |   |   | 1,384   |  
|Cash
 and cash equivalents, beginning of period                                            |  |      | 9,509  |      |   | 7,337   |   |   | 5,953   |  
|Cash and
 cash equivalents, end of period                                                  |  | $    | 36,207 |      | $ | 9,509   |   | $ | 7,337   |  
|                                                                                           |  |      |        |      |   |         |   |   |         |  
|Supplemental
 cash flow information                                                        |  |      |        |      |   |         |   |   |         |  
|Cash
 paid during the year for - Income taxes (net of refunds)                             |  | $    | 11,098 |      | $ | 8,046   |   | $ | 2,979   |  
|                                                                                           |  |      |        |      |   |         |   |   |         |  

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

38

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The
consolidated financial statements include the financial results of Renaissance
Learning, Inc. (Renaissance Learning) and our subsidiaries (collectively, the
Company). All significant
intercompany transactions and accounts have been eliminated in
consolidation.

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

Renaissance
Learning, Inc. is a leading provider of technology for personalizing reading,
math, and writing practice for pre-kindergarten through senior high
(pre-K-12) schools and districts. Our
products accelerate learning and improve test scores by facilitating increased
student practice of essential skills, increasing the quality, quantity, and
timeliness of performance data available to educators, helping educators
motivate students, and providing student access to low cost computing
solutions.

Our
educational software covers a wide range of subject areas including reading,
early literacy, math, writing, vocabulary, and language acquisition. Our flagship product is Accelerated Reader, which provides
educators with information for motivating and monitoring increased
literature-based reading practice and to support instruction. Our software and service brands also
include: STAR Reading, STAR Early Literacy,
Successful Reader, Read Now Power Up!, Accelerated Math, STAR Math, MathFacts
in a Flash,andEnglish in a
Flash.

Our
hardware products include NEOlaptop-computing
devices that run curriculum-specific software focused on skills improvement and
real-time formative assessments. The
units offer schools the ability to provide students with significantly improved
access to portable computing at a fraction of the cost of conventional personal
computers. Our 2Know!response
system allows educators to easily encourage student classroom participation and
obtain instantaneous feedback that can be used to quickly assess student
comprehension and performance.
Additionally, we sell our patented AccelScan
optical-mark card scanner, which is used primarily with Accelerated Math to automate scoring and
recordkeeping tasks.

We
offer a full line of professional service and support solutions that integrate
with, complement, and enhance the effectiveness of, our products. Sold separately or bundled with our products
to provide a complete solution, our service offerings include professional
development and product training seminars and conferences, report and data
analysis, program evaluation, implementation coaching, remote web-based
training, software support, software installation, database conversion and
integration services and application hosting.

We
utilize reseller channels to sell our software and hardware products.
Currently, we receive approximately 7% of our orders from resellers.

We
have resale arrangements with various book dealers and book publishers that
sell our software products to their customers, the end-users. Resellers of our
software do not stock any product; rather they sell software subscriptions or
other electronically delivered content to their customers. We provide the
subscription software to the end-user and recognize the related revenue over
the period of the subscription. For other electronic content, we provide the
product keys to the end-user customer, which allow for immediate download and
recognize the revenue when we provide the key.

39

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIESNOTES TO
CONSOLIDATED FINANCIAL STATEMENTS  (continued)

Some
of our hardware products are also distributed by various third-party resellers.
We recognize the revenue from hardware sales when we deliver the hardware to
these resellers. We offer only limited return and stock exchange rights to our
hardware resellers. Stock returns and exchanges are generally limited to 60
days, require the payment of a restocking fee, and must be accompanied by a new
order for at least the same dollar amount. We accrue a provision for reseller
price protection, stock returns, and exchanges when we ship the hardware to the
reseller, however, due to the terms of our agreements with our hardware
resellers and the low incidence of actual returns we have experienced, the
amount is not currently, and has not historically, been significant.

|    |                                 
|--- | --------------------------------
|(3) | Significant
 accounting policies

(a)          Basis
of presentation

Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America (US GAAP).

(b)          Use
of estimates

Preparation
of financial statements in conformity with US GAAP requires us to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual
results could differ from those estimates.

(c)          Revenue
recognition

Revenues
are recorded net of allowances for estimated returns, concessions, and bad
debts.

Product
revenue is derived primarily from the sale of educational software and
hardware. Revenue from sales of
hardware is generally recognized when the product is shipped to the
customer. Revenue recognition from
sales of our software depends on whether the software is licensed on a
perpetual basis or as a subscription.
We recognize revenue from perpetually licensed software upon delivery to
customers. Subscription-based software
sales are recognized as revenue on a straight-line basis over the subscription
period.

Service
revenue is derived primarily from: (i) product support services, (ii) professional
development and product training seminars and conferences, (iii) application
hosting, (iv) technical services, (v) consulting, and (vi) other remote
services. Product support services
included with sales of perpetually licensed software have a duration of 12
months or less and the associated revenue is recognized at the time the
software is shipped with the related costs of providing the telephone support
accrued for at the same time. Revenue
from professional development and product training seminars and conferences is
recognized when the seminar or conference is held. Revenue from other product support services and application
hosting is initially recorded as deferred revenue and then recognized as
revenue on a straight-line basis over the term of the agreement, typically 12
months. Revenue from technical
services, consulting and other remote services is recognized as the services
are performed or on a straight-line basis over the contractual period.

Revenue and cost of revenue from bundled
arrangements are allocated between product and services in our consolidated
statement of operations. For revenue, the basis of allocation is the relative
value of each element of the bundled arrangement when sold separately in actual
transactions with customers. Costs of sales are based on the actual cost of
delivering the products and rendering the services.

40

---



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Deferred
revenue includes (i) amounts invoiced for products not yet delivered and
services not yet performed, (ii) advance invoicing on contracts, and (iii) that
portion of support agreements and subscription-based product sales that has not
yet been recognized as revenue.

(d)          Impairment
or Disposal of Long-Lived Assets

We
evaluate the recoverability of the carrying amount of long-lived assets
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be fully recoverable. We evaluate the recoverability of
goodwill and other intangible assets with indefinite useful lives annually, or
more frequently if events or circumstances indicate that an asset may be
impaired. Management uses its judgment to determine when an impairment test is
necessary. Examples of factors which could trigger an impairment review
include: (i) a significant decrease in the market value of an asset, (ii) a
significant change in the extent or manner in which an asset is used and (iii)
significant adverse changes in legal factors or the business climate that
impact the value of an asset.

Impairment
losses are measured as the amount by which the carrying value of an asset
exceeds its estimated fair value. Estimating fair value may require that we
forecast future cash flows related to the asset subject to review. These
forecasts require assumptions about demand for our products and services,
future market conditions, technological developments, the appropriate discount
rate, and future growth rates. Changes to these assumptions could result in an
impairment charge in future periods.

We
performed testing of our goodwill and other intangible assets at December 31,
2009 and 2008. Our testing in 2009 indicated that there was no impairment of
our goodwill and other intangible assets. Our testing in 2008 indicated that
the goodwill and other intangible assets related to the 2005 acquisition of the
AlphaSmart laptop business were
impaired. See Note 4 for additional information.

(e)          Cash
and cash equivalents

Cash
amounts on deposit at banks, money market funds, and highly liquid debt
instruments purchased with an original maturity date of three months or less
are included in cash and cash equivalents. Cash and cash equivalents consisted
solely of cash and money market funds at December 31, 2009 and 2008.

(f)          Investment
securities

Debt
securities have an original maturity of more than three months and a remaining
maturity of less than 24 months. Our investments in debt securities consist of
certificates of deposit, auction rate securities, and municipal bonds.
Municipal bonds are classified as held-to-maturity and are carried at amortized
cost. The fair value of our debt securities listed below is based on quoted
market prices.

The
equity securities we own are held for the purpose of funding our Supplemental
Executive Retirement Plan (SERP), as further described in Note 10. These
equity securities are classified as trading and are therefore carried at their
current fair value based on quoted market prices. Our investments in equity
securities consist entirely of various mutual fund shares in amounts that
conform to the aggregate investment selections of the participants in the SERP.

41

---



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

| |                                          |  |                 |       |             |   |                 |  |             |       |  |   |       | 
| | ---------------------------------------- |  | --------------- | ----- | ----------- | - | --------------- |  | ----------- | ----- |  | - | ----- | 
| | Investment
 securities at December 31:   |  |                 |       |             |   |                 |  |             |       |  |   |       | 
| |                                          |  | 2009            |       | 2008        |  
| | (In Thousands)                           |  | Carrying
 Value |       | Fair
 Value |   | Carrying
 Value |  | Fair
 Value |      
| | Debt securities due in less than 1 year: |  |                 |       |             |   |                 |  |             |       |  |   |       | 
| | Municipal bonds                          |  | $               | 2,528 |             | $ | 2,534           |  | $           | 4,894 |  | $ | 4,940 | 
| | Certificates of deposit                  |  |                 | 750   |             |   | 748             |  |             |      |  |   |      | 
| | Current investment securities            |  |                 | 3,278 |             |   | 3,282           |  |             | 4,894 |  |   | 4,940 | 
| | Debt securities due in 1 to 2 years:     |  |                 |       |             |   |                 |  |             |       |  |   |       | 
| | Municipal bonds                          |  |                 | 1,490 |             |   | 1,489           |  |             | 2,002 |  |   | 2,015 | 
| | Certificates of deposit                  |  |                 | 1,250 |             |   | 1,246           |  |             |      |  |   |      | 
| | Equity securities:                       |  |                 |       |             |   |                 |  |             |       |  |   |       | 
| | Mutual fund investments                  |  |                 | 1,910 |             |   | 1,910           |  |             | 1,381 |  |   | 1,381 | 
| | Non-current investment securities        |  |                 | 4,650 |             |   | 4,645           |  |             | 3,383 |  |   | 3,396 | 
| | Total investment securities              |  | $               | 7,928 |             | $ | 7,927           |  | $           | 8,277 |  | $ | 8,336 | 

| |     |            
| | --- | -----------
| | (g) | Inventories

Inventories
are carried at the lower of first-in, first-out (FIFO) cost or market.
Inventories primarily consist of purchased materials, which include laptop
computing devices, optical-mark card scanners, interactive response systems,
educational products, training materials, manuals, and motivational items.

| |     |                  
| | --- | -----------------
| | (h) | Advertising costs

Advertising
costs are expensed as the advertising takes place. Advertising expenses for
2009, 2008, and 2007 were approximately $3.6 million, $4.2 million and $4.6
million, respectively.

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

Property,
plant, and equipment are recorded at cost and are depreciated over their
estimated useful lives using principally the straight-line method for financial
reporting purposes. Maintenance and repair costs are charged to expense as
incurred, and renewals and improvements that significantly extend the useful
life of an asset are added to the plant and equipment accounts. Depreciation
expense was $2.1 million, $2.8 million and $2.8 million for 2009, 2008 and
2007, respectively.

The
estimated useful lives for property, plant, and equipment are as follows:
buildings-25 to 40 years; furniture, fixtures and office equipment-5 to 8
years; computer and production equipment-3 to 5 years; vehicles-5 years; and
leasehold improvements-the lease term.

42

---



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

| |                                                   |  |      |        |      |   |        | 
| | ------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | 
| | Net
 property plant and equipment at December 31: |  |      |        |      |   |        | 
| | (In Thousands)                                    |  | 2009 |        | 2008 |  
| |                                                   |  |      |        |      |   |        | 
| | Land and improvements                             |  | $    | 1,133  |      | $ | 1,146  | 
| | Buildings                                         |  |      | 9,440  |      |   | 9,520  | 
| | Furniture, fixtures and office equipment          |  |      | 3,682  |      |   | 4,088  | 
| | Computer and production equipment                 |  |      | 13,238 |      |   | 12,771 | 
| | Other                                             |  |      | 666    |      |   | 1,511  | 
| | Total property, plant and equipment               |  |      | 28,159 |      |   | 29,036 | 
| | Less - accumulated depreciation and amortization  |  |      | 21,311 |      |   | 20,415 | 
| | Property, plant and equipment, net                |  | $    | 6,848  |      | $ | 8,621  | 

| |     |                           
| | --- | --------------------------
| | (j) | Software development costs

We
capitalize certain software development costs incurred after technological
feasibility is achieved. Capitalized costs are reported at the lower of
amortized cost or net realizable value. Capitalized software development costs
are amortized on a product-by-product basis using the straight-line method over
their estimated economic life, which is generally estimated to be 24 months.
Amortization begins when the products are available for general release to
customers. All other research and development expenditures are charged to
product development expense in the period incurred. When capitalized software
is fully amortized, the balance is removed from the capitalized software and
accumulated amortization accounts. Amounts capitalized were approximately $0.0
million, $0.1 million and $0.2 million in 2009, 2008, and 2007, respectively.
Amortization expense of approximately $0.2 million, $0.4 million and $0.5
million for 2009, 2008 and 2007, respectively, is included in cost of
sales-products in the consolidated statements of income. At December 31, 2009
and 2008, accumulated amortization of capitalized software development costs
was $0.2 million and $0.2 million, respectively.

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

We
grant trade credit to our customers in the ordinary course of business. The
majority of our customers are schools or school districts, although we do sell
some of our products through resellers. Concentrations of credit risk with
respect to trade receivables are limited due to the significant number of
customers and their geographic dispersion. In 2009, 2008, and 2007, no single
customer represented more than 10% of net sales or accounts receivable.

| |     |                         
| | --- | ------------------------
| | (l) | Share-based compensation

Restricted
shares or restricted stock units are granted to certain employees and our
directors. For employees, restricted stock awards generally vest over a period
of four years and for non-employee directors, upon termination of the
individuals tenure on our board. Restricted stock awards to employees are
expensed over the vesting period and those made to our non-employee directors
are expensed when granted (see Note 11). Any tax benefit from the compensation
deduction allowed for tax purposes that are in excess of reported compensation
expense (excess tax benefits) is reflected in our statements of cash flow as a
financing cash flow.

43

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

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

Basic
earnings per common share (Basic EPS) is computed by dividing net income by
the weighted average number of common shares and participating securities
outstanding during the period. Participating securities include unvested
restricted share awards that have a nonforfeitable right to dividends or
dividend equivalents. Common shares and participating securities issued or
reacquired during the period are weighted for only the portion of the period
during which they were outstanding.

Diluted
earnings per common share (Diluted EPS) has been computed based on the
weighted average number of common shares and other participating securities
outstanding, increased by the number of additional common shares that would
have been outstanding if the potentially dilutive stock option shares and
non-participating restricted share awards had been issued.

The
computation of Diluted EPS does not assume conversion, exercise, or contingent
issuance of securities that may have an antidilutive effect on earnings per
share (Antidilutive Securities). Antidilutive Securities include: (i) stock
options with an exercise price greater than the average market price for the
period, (ii) non-participating restricted stock awards with a grant price
greater than the average market price for the period, (iii) non-participating
restricted stock awards with unearned compensation costs attributable to future
service which exceed the average market price for the period, and (iv) in a
period with a loss, all stock options and non-participating restricted stock
awards. For the years ended December 31, 2009, 2008 and 2007, the number of
Antidilutive Securities were approximately 603,000, 753,000 and 835,000,
respectively.

| |                                                            |  |      |            |      |   |            |   |   |            | 
| | ---------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | - | - | ---------- | 
| | Weighted average shares outstanding and earning per share: |  |      |            |      |   |            |   |   |            | 
| |                                                            |  | 2009 |            | 2008 |   | 2007       |  
| | Basic weighted average shares outstanding                  |  |      | 29,222,327 |      |   | 29,101,765 |   |   | 29,014,945 | 
| | Dilutive effect of outstanding stock options               |  |      |           |      |   |           |   |   | 2,982      | 
| | Dilutive effect of non-participating restricted shares     |  |      | 60         |      |   |           |   |   | 163        | 
| | Diluted weighted average shares outstanding                |  |      | 29,222,387 |      |   | 29,101,765 |   |   | 29,018,090 | 
| |                                                            |  |      |            |      |   |            |  
| | Earnings (loss) per share, basic and diluted               |  | $    | .68        |      | $ | (1.18      | ) | $ | .26        | 

In
June 2008, the FASB issued an amendment to its previously released guidance on
determining whether instruments
granted in share-based payment transactions are participating securities,which became effective for us at the
beginning of our 2009 fiscal year. The
new guidance requires that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation
of basic earnings per share. This also requires retroactive restatement of
earnings per share for all prior periods presented in the financial statements
and footnotes. Adoption of this amendment did not have a material impact on our
basic or diluted earnings per share.

|                                                       |  |      |            |      |   |            | 
|------------------------------------------------------ |  | ---- | ---------- | ---- | - | ---------- | 
|As previously reported:                                |  |      |            |      |   |            | 
|                                                       |  | 2008 |            | 2007 |  
|Basic weighted average shares outstanding              |  |      | 28,761,366 |      |   | 28,792,337 | 
|Dilutive effect of outstanding stock options           |  |      |           |      |   | 2,982      | 
|Dilutive effect of non-participating restricted shares |  |      |           |      |   | 31,301     | 
|Diluted weighted average shares outstanding            |  |      | 28,761,366 |      |   | 28,826,620 | 
|                                                       |  |      |            |      |   |            | 
|Earnings (loss) per share, basic and diluted           |  | $    | (1.20      | )    | $ | .26        | 

44

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

| |     |             
| | --- | ------------
| | (n) | Income taxes

Income
Taxes are accounted for using an asset and liability based approach. Deferred
income tax assets and liabilities are recorded to reflect the tax consequences
on future years of temporary differences between financial and tax accounting
of revenue and expense items (see Note 5). When it is anticipated that a
deferred tax asset is not likely to be fully realized, we are required to
record a valuation allowance against that deferred tax asset.

In
the ordinary course of business, there is inherent uncertainty in quantifying
the ultimate outcome of positions taken on income tax returns. For uncertain tax
positions, we are required to reserve all or a portion of the related tax
benefit based on our evaluation of the relevant facts, circumstances, and
information available at the reporting dates. Amounts reserved for uncertain
tax positions are not recognized into income until: (i) the closing of the
statute of limitations, (ii) a significant change in facts or circumstances
that would require a revision of the estimated amount reserved, or (iii)
settlement of the issue with the appropriate tax authority. See Note 6 for
additional disclosures regarding uncertain tax position.

| |     |                            
| | --- | ---------------------------
| | (o) | Comprehensive income (loss)

Our
comprehensive income (loss) includes foreign currency translation adjustments,
which are included in accumulated other comprehensive income in the
consolidated statements of shareholders equity. At December 31, 2009, 2008 and
2007, accumulated other comprehensive income consisted entirely of foreign
currency translation adjustments, which resulted from translation of the
balance sheets of our international operations to U.S. dollars using the
exchange rate in effect on the balance sheet date.

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

We
include shipping and handling fees billed to customers in net sales. The related
shipping and handling costs are included in cost of sales.

| |     |                                 
| | --- | --------------------------------
| | (q) | Sales, use and value added taxes

We
do not include sales, use, value added or similar taxes billed to customers in
net sales.

| |     |                                         
| | --- | ----------------------------------------
| | (r) | Product warranty and support obligations

We
recognize expense for the estimated costs of hardware warranties and software
support at the time the related revenue is recognized. For hardware warranty,
we estimate the costs based on historical and projected product failure rates, historical
and projected repair costs and knowledge of specific product failures (if any).
The specific hardware warranty terms and conditions vary depending upon the
product sold, but generally include technical support, parts and repair labor
over a period generally ranging from 90 days to three years. For software
warranty, we estimate the costs to provide customers with service during the
term of the support period. We regularly reevaluate our estimates to assess the
adequacy of the recorded warranty and support liabilities and adjust the
amounts as necessary.

Changes
in our aggregate product warranty and support obligations are shown in the
following table. Amounts expensed for and costs of providing warranty support
include amounts related to original warranties, extended service contracts, and
software subscription support.

45

---



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

|                                                                                                                |  |   |        |  
|--------------------------------------------------------------------------------------------------------------- |  | - | ------ | -
|Product
 warranty and support obligations:                                                                      |  |   |        |  
|(In
 Thousands)                                                                                                 |  |   |        |  
|Balance at December 31, 2007                                                                                    |  | $ | 1,303  |  
|Amount expensed for new warranty and support obligations and changes
 in estimates for pre-existing obligations |  |   | 4,015  |  
|Cost of warranty and support provided during the year                                                           |  |   | (4,152 | )
|Balance at December 31, 2008                                                                                    |  |   | 1,166  |  
|Amount expensed for new warranty and support obligations and changes
 in estimates for pre-existing obligations |  |   | 3,505  |  
|Cost of warranty and support provided during the year                                                           |  |   | (3,799 | )
|Balance at December 31, 2009                                                                                    |  | $ | 872    |  

Our
deferred revenue for product warranty and support obligations was $5.1 million
and $3.4 million at December 31, 2009 and 2008, respectively.

(s)        Fair
value measurements

Certain
of our assets and liabilities are reported at fair value in our consolidated
financial statements. US GAAP establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value. As
presented in the tables below, this hierarchy consists of three broad levels
with level 1 inputs having the highest priority, followed by level 2, and
lastly, level 3. Level 1 inputs consist of quoted prices in active markets for
identical assets and liabilities. Level 2 inputs are other observable evidence
of fair value, such as: quoted prices for similar assets and liabilities or
other market-corroborated evidence of fair value. Level 3 inputs are
unobservable evidence of fair market value, such as: a discounted cash flows
model or other pricing model.

The
tables below provide fair value measurement information for these assets and
liabilities as of December 31, 2009 and 2008. The carrying values of cash and
cash equivalents, accounts receivable, and accounts payable (including income
taxes payable and accrued expenses), approximated fair value at December 31,
2009 and 2008 and accordingly those assets and liabilities are not presented in
the following tables.

|                                                |  |                  |       |                    |   |                 |  |                                |       |                 |   |       |  |   |   | 
|----------------------------------------------- |  | ---------------- | ----- | ------------------ | - | --------------- |  | ------------------------------ | ----- | --------------- | - | ----- |  | - | - | 
|                                                |  |                  |       |                    |   |                 |  |                                |       |                 |   |       |  |   |   | 
|2009                                            |  |                  |       |                    |   |                 |  | Fair
 Value Measurements Using |      
|(In Thousands)                                  |  | Carrying
 Amount |       | Total
 Fair
 Value |   | Level 1
 Inputs |  | Level 2
 Inputs                |       | Level 3
 Inputs |  
|Current investment
 securities                  |  | $                | 3,278 |                    | $ | 3,282           |  | $                              |      |                 | $ | 3,282 |  | $ |  | 
|Non-current investment
 securities              |  |                  | 2,740 |                    |   | 2,735           |  |                                |      |                 |   | 2,735 |  |   |  | 
|Assets held related to SERP
 plan (see Note 10) |  |                  | 1,910 |                    |   | 1,910           |  |                                | 1,910 |                 |   |      |  |   |  | 

|                                                |  |                  |       |                    |   |                 |  |                                |       |                 |   |       |  |   |   | 
|----------------------------------------------- |  | ---------------- | ----- | ------------------ | - | --------------- |  | ------------------------------ | ----- | --------------- | - | ----- |  | - | - | 
|                                                |  |                  |       |                    |   |                 |  |                                |       |                 |   |       |  |   |   | 
|2008                                            |  |                  |       |                    |   |                 |  | Fair
 Value Measurements Using |      
|(In Thousands)                                  |  | Carrying
 Amount |       | Total
 Fair
 Value |   | Level 1
 Inputs |  | Level 2
 Inputs                |       | Level 3
 Inputs |  
|Current investment
 securities                  |  | $                | 4,894 |                    | $ | 4,940           |  | $                              |      |                 | $ | 4,940 |  | $ |  | 
|Non-current investment
 securities              |  |                  | 2,002 |                    |   | 2,015           |  |                                |      |                 |   | 2,015 |  |   |  | 
|Assets held related to SERP
 plan (see Note 10) |  |                  | 1,381 |                    |   | 1,381           |  |                                | 1,381 |                 |   |      |  |   |  | 

46

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

(4)          Goodwill and other intangible assets

Under
US GAAP, goodwill is not amortized and we are required to assess goodwill
annually for impairment by applying a fair-value-based test. We performed
testing of our goodwill and other intangible assets at December 31, 2009 and
2008. Fair values of our goodwill and other intangible assets were estimated
using the expected present value of future cash flows which rely on estimates,
judgments and assumptions (see Note 3(d)) that we believe were appropriate in
the circumstances. In 2008, we recorded a material impairment charge related to
goodwill and other intangibles.

Our
testing in 2009 indicated that there was no impairment of our goodwill and
other intangible assets. Our testing in 2008 indicated that the goodwill and
other intangible assets related to the 2005 acquisition of the AlphaSmart laptop business were impaired.
In 2007 and 2006, our laptop revenues decreased due in part to difficulties in
integrating the selling operations of AlphaSmart
into our overall organization; however, we expected various strategic
initiatives would result in improved order rates and financial results for this
business in 2008 and beyond. Early results in 2008 were encouraging, but the worsening economic climate
resulted in schools and districts becoming very cautious with their spending,
causing laptop orders to decline sharply in the fourth quarter of 2008. Laptops
are generally viewed as a more discretionary purchase in times of tight school
budgets and curtailed spending. As we believe the economic problems and the
related impact on the laptop business could be relatively prolonged, we lowered
our forecast for laptop orders, which resulted in an impairment charge to
goodwill of $44.0 million and an impairment charge to customer relationships of
$0.9 million. In addition, we made a strategic decision to discontinue future
use of the AlphaSmart tradename,
which resulted in a complete write off of the tradename intangible in the
amount of $3.0 million.

|                                  |  |      |         |      |   |         |  
|--------------------------------- |  | ---- | ------- | ---- | - | ------- | -
|Summary
 of changes in goodwill:  |  |      |         |      |   |         |  
|(In Thousands)                    |  | 2009 |         | 2008 |  
|                                  |  |      |         |      |  
|Original cost                     |  | $    | 46,745  |      | $ | 47,065  |  
|Accumulated impairment losses     |  |      | (43,995 | )    |   |        |  
|Net balance at beginning of
 year |  |      | 2,750   |      |   | 47,065  |  
|Impairment losses                 |  |      |        |      |   | (43,995 | )
|Other goodwill adjustments        |  |      |        |      |   | (205    | )
|Currency translation              |  |      | 77      |      |   | (115    | )
|Balance at December 31:           |  | $    | 2,827   |      | $ | 2,750   |  

The
customer relationships intangible has a 10-year estimated useful life and is
being amortized on an accelerated method. The following table sets forth the
actual amortization expense for the last three fiscal years and estimated
amortization expense for the next five fiscal years.

|                 |  |                       |     | 
|---------------- |  | --------------------- | --- | 
|                 |  |                       |     | 
|(In
 Millions)   |  | Amortization
 Expense |    
|2007 (actual)    |  | $                     | 0.5 | 
|2008             |  |                       | 0.5 | 
|2009             |  |                       | 0.3 | 
|                 |  |                       |     | 
|2010 (estimated) |  | $                     | 0.2 | 
|2011             |  |                       | 0.2 | 
|2012             |  |                       | 0.1 | 
|2013             |  |                       | 0.1 | 
|2014             |  |                       | 0.1 | 

47

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

|                                   |  |           |   |                         |   |           |   |                         |        |   |   |        |  
|---------------------------------- |  | --------- | - | ----------------------- | - | --------- | - | ----------------------- | ------ | - | - | ------ | -
|Other
 intangibles at December 31: |  |           |   |                         |   |           |   |                         |        |   |   |        |  
|                                   |  | 2009      |   | 2008                    |  
|(In
 Thousands)                    |  | Tradename |   | Customer
 Relationships |   | Tradename |   | Customer
 Relationships |       
|Gross amount                       |  | $         |  |                         | $ | 4,150     |   | $                       | 3,000  |   | $ | 4,150  |  
|Accumulated amortization           |  |           |  |                         |   | (2,303    | ) |                         |       |   |   | (2,022 | )
|Impairment                         |  |           |  |                         |   | (950      | ) |                         | (3,000 | ) |   | (950   | )
|Net carrying value                 |  | $         |  |                         | $ | 897       |   | $                       |       |   | $ | 1,178  |  

(5)        Income
taxes

In
2009 the annual effective rate of our provision for income taxes was 35.7%
compared to -20.5% in 2008. Excluding the tax effect of the impairment charge
to goodwill and other intangibles, our effective rate in 2008 was 36.7%. Since
the write down of the AlphaSmart
goodwill is not deductible for income tax purposes it did not generate a tax
benefit, which resulted in tax expense of $5.8 million during 2008 in spite of
the reported pre-tax loss. The tax accounting treatment of the goodwill write
down is the primary reason for the difference between the actual rate of -20.5%
and the 2009 effective rate.

|                              |  |      |        |      |   |        |   |   |        |  
|----------------------------- |  | ---- | ------ | ---- | - | ------ | - | - | ------ | -
|Provision
 for income taxes:  |  |      |        |      |   |        |   |   |        |  
|(In
 Thousands)               |  | 2009 |        | 2008 |   | 2007   |  
|Current tax provision:        |  |      |        |      |   |        |   |   |        |  
|U.S. federal                  |  | $    | 10,167 |      | $ | 6,504  |   | $ | 5,081  |  
|State and local               |  |      | 447    |      |   | 541    |   |   | 696    |  
|Foreign                       |  |      | 47     |      |   | 73     |   |   | 69     |  
|Total current tax provision   |  |      | 10,661 |      |   | 7,118  |   |   | 5,846  |  
|Deferred tax provision:       |  |      |        |      |   |        |   |   |        |  
|U.S. federal                  |  |      | 375    |      |   | (1,198 | ) |   | (1,231 | )
|State and local               |  |      | 18     |      |   | (72    | ) |   | (74    | )
|Total deferred tax
 provision |  |      | 393    |      |   | (1,270 | ) |   | (1,305 | )
|Provision for income taxes    |  | $    | 11,054 |      | $ | 5,848  |   | $ | 4,541  |  

|                                                  |  |        |        |      |  |        |    |   |         |        |  |       |    |   |       |   |  |      |   
|------------------------------------------------- |  | ------ | ------ | ---- |  | ------ | -- | - | ------- | ------ |  | ----- | -- | - | ----- | - |  | ---- | --
|Effective
 rate reconciliation:                   |  |        |        |      |  |        |   
|                                                  |  | 2009   |        | 2008 |  | 2007   |   
|(In
 Thousands)                                   |  | Amount |        | %    |  | Amount |    | % |         | Amount |  | %     |   
|                                                  |  |        |        |      |  |        |    |   |         |        |  |       |    |   |       |   |  |      |   
|Income tax provision at statutory tax rate        |  | $      | 10,842 |      |  | 35.0   | %  | $ | (10,007 | )      |  | 35.0  | %  | $ | 4,239 |   |  | 35.0 | % 
|                                                  |  |        |        |      |  |        |    |   |         |        |  |       |    |   |       |   |  |      |   
|State and local taxes, net of federal tax benefit |  |        | 730    |      |  | 2.4    | %  |   | 432     |        |  | (1.5  | %) |   | 379   |   |  | 3.1  | % 
|Federal tax credits and
 exclusions               |  |        | (758   | )    |  | (2.5   | %) |   | (509    | )      |  | 1.8   | %  |   | (469  | ) |  | (3.9 | %)
|Provision for uncertain tax
 positions            |  |        | 68     |      |  | 0.2    | %  |   | 249     |        |  | (0.9  | %) |   | 507   |   |  | 4.2  | % 
|Goodwill impairment                               |  |        |       |      |  |       |    |   | 15,398  |        |  | (53.9 | %) |   |      |   |  |     |   
|Other                                             |  |        | 172    |      |  | 0.6    | %  |   | 285     |        |  | (1.0  | %) |   | (115  | ) |  | (0.9 | %)
|Provision for income taxes                        |  | $      | 11,054 |      |  | 35.7   | %  | $ | 5,848   |        |  | (20.5 | %) | $ | 4,541 |   |  | 37.5 | % 

48

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(continued)

|                                               |  |      |       |      |   |       |  
|---------------------------------------------- |  | ---- | ----- | ---- | - | ----- | -
|Deferred
 taxes at December 31:                |  |      |       |      |   |       |  
|(In Thousands)                                 |  | 2009 |       | 2008 |  
|Current deferred tax
 assets:                  |  |      |       |      |   |       |  
|Deferred revenue                               |  | $    | 1,240 |      | $ | 1,742 |  
|Expenses not currently deductible              |  |      | 2,587 |      |   | 2,441 |  
|Net current deferred tax assets                |  |      | 3,827 |      |   | 4,183 |  
|Noncurrent deferred tax
 assets (liabilities): |  |      |       |      |   |       |  
|Deferred revenue                               |  |      | 92    |      |   | 105   |  
|Expenses not currently deductible              |  |      | 1,808 |      |   | 1,888 |  
|Depreciation and amortization                  |  |      | 1,075 |      |   | 780   |  
|Intangibles                                    |  |      | (167  | )    |   | (31   | )
|Net noncurrent deferred tax
 asset             |  |      | 2,808 |      |   | 2,742 |  
|Total deferred tax assets                      |  | $    | 6,635 |      | $ | 6,925 |  

|    |                        
|--- | -----------------------
|(6) | Uncertain Tax Positions

We
file income tax returns with the U.S., various states and certain foreign
jurisdictions. Our most significant
jurisdictions are the U.S. and the state of Wisconsin. We are no longer subject to examinations by
the U.S. for years before 2006. We are
no longer subject to examinations by Wisconsin for years before 2007. For the
remaining jurisdictions, with few exceptions, we are no longer subject to
examinations by tax authorities for years before 2005. We are not currently under examination by
the U.S. Internal Revenue Service or the state of Wisconsin.

|                                                                             |  |     |       |                       |   |       |   |   |       |  
|---------------------------------------------------------------------------- |  | --- | ----- | --------------------- | - | ----- | - | - | ----- | -
|Reconciliation of beginning and ending amount of unrecognized tax
 benefits: |  |     |       |                       |   |       |   |   |       |  
|(In Thousands)                                                               |  | Tax |       | Interest &
 penalties |   | Total |  
|Balance at January 1, 2008                                                   |  | $   | 3,689 |                       | $ | 1,415 |   | $ | 5,104 |  
|Additions for tax positions related to the current year                      |  |     | 512   |                       |   | 28    |   |   | 540   |  
|Additions for tax positions of prior years                                   |  |     | 114   |                       |   | 40    |   |   | 154   |  
|Reductions due to lapse of applicable statute of limitations                 |  |     | (302  | )                     |   | (81   | ) |   | (383  | )
|Settlements                                                                  |  |     | (385  | )                     |   | (162  | ) |   | (547  | )
|Balance at December 31,
 2008                                                |  |     | 3,628 |                       |   | 1,240 |   |   | 4,868 |  
|Additions for tax positions related to the current year                      |  |     | 654   |                       |   | 18    |   |   | 672   |  
|(Deductions) additions for tax positions of prior years                      |  |     | (161  | )                     |   | 439   |   |   | 278   |  
|Reductions due to lapse of applicable statute of limitations                 |  |     | (342  | )                     |   | (112  | ) |   | (454  | )
|Settlements                                                                  |  |     | (383  | )                     |   | (180  | ) |   | (563  | )
|Balance at December 31,
 2009                                                |  | $   | 3,396 |                       | $ | 1,405 |   | $ | 4,801 |  

Included
in the unrecognized tax benefits of $3.4 million at December 31, 2009 is $2.9
million of tax benefits that, if recognized, would reduce our annual effective
tax rate. We have an unresolved tax
dispute with the state of Wisconsin related to our 2000-2006 tax returns for
which we believe it is reasonably possible a settlement could be reached
sometime in 2010. The actual timing of any settlement or the amount thereof is
highly uncertain. The total amount of unrecognized tax benefits related to this
issue are approximately $0.7 million, inclusive of tax, interest and penalties.
We have not recognized any of the tax benefits related to the items disputed
with Wisconsin, so any settlement will decrease the balance of our unrecognized
tax benefits. Excluding the effects of the possible settlement of this tax
dispute, we do not anticipate that our total amount of unrecognized tax
benefits will significantly change during 2010. We do not anticipate being required to make any payments related
to tax positions that will have a significant adverse impact on our financial
position, results of operations or shareholders equity.

49

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(continued)

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

As
of December 31, 2009, we have a $15.0 million secured revolving line of credit
with a bank, which is available until July 1, 2010. The line of credit bears
interest at either a floating rate or a fixed rate for a period of up to 90
days based on LIBOR plus 1.5%. The rate
is at our option and is determined at the time of borrowing. We also have a $2.0 million unsecured
revolving line of credit with a bank available until April 30, 2010, which
bears interest at the prime rate less 1.0%.
We did not draw on the lines of credit during 2009, 2008 or 2007.

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

We
are party to various operating leases for office and warehouse facilities we
occupy to carry out our business operations. Certain of these leases provide for scheduled rent increases based
on price-level factors. We have not entered into leases that call for
contingent rent. In most cases, management expects that, in the normal course
of business, leases will be renewed or replaced. Approximate rent expense for
2009, 2008, and 2007 was $1.7 million, $1.6 million and $2.2 million,
respectively.

Future
approximate minimum rental payments (including estimated operating costs)
required under operating leases as of December 31, 2009 are as follows:

|                |  |   |       | 
|--------------- |  | - | ----- | 
|                |  |   |       | 
|(In
 Thousands) |  |   |       | 
|2010            |  | $ | 1,468 | 
|2011            |  |   | 862   | 
|2012            |  |   | 693   | 
|2013            |  |   | 556   | 
|2014            |  |   | 161   | 
|After 2014      |  |   | 4     | 
|                |  | $ | 3,744 | 



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

We
are subject to various claims and proceedings covering a wide range of matters
that arise in the ordinary course of business activities. We believe that any liability that may
ultimately arise from the resolution of these matters will not have a material
adverse effect on our financial position, results of operations or
shareholders equity.

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

In
order to provide retirement benefits for our employees, we have established a
defined contribution 401(k) savings plan covering all employees in the United States
who meet certain service requirements and a Supplemental Executive Retirement
Plan (SERP) available to senior management.

Employees
participating in the 401(k) plan may elect to contribute up to 92% of their
annual pretax compensation subject to certain IRS limitations. SERP participants may elect to defer up to
20% of their annual pretax compensation to the SERP.

50

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(continued)

Vesting
and employer matching contributions are the same under both plans. Vesting of employer contributions takes
place ratably over an employees first four years of service with full vesting
of past and future employer contributions once four years of service is
reached.

Employer
matching contributions are currently $0.75 for each $1.00 contributed by a
participant and are limited to a maximum of 4.5% of a participants pretax
compensation. For those employees participating in the SERP, the maximum
employer contribution is determined on a combined basis with the 401(k) plan.
Discretionary employer contributions may also be made to the plans. No discretionary contributions were made to
the plans in 2009, 2008, or 2007.

SERP
participants elect to defer receipt of a portion of their compensation and
invest their deferrals in certain mutual funds, which are nearly identical to
the investment selections offered to participants in our 401(k) plan. The
liability for the SERP is included in deferred compensation and other employee
benefits. The SERP is fully funded and the related investments are classified
as investment securities on our consolidated balance sheets. Our liability for the SERP was $1.9 million
at December 31, 2009 and $1.3 million, at December 31, 2008.

|                                                |  |      |       |      |   |       |  |   |       | 
|----------------------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | ----- | 
|Summary of expense related to retirement plans: |  |      |       |      |   |       |  |   |       | 
|(In
 Thousands)                                 |  | 2009 |       | 2008 |   | 2007  | 
|Employer matching
 contribution - 401(k) plan   |  | $    | 1,601 |      | $ | 1,573 |  | $ | 1,459 | 
|Employer matching
 contribution - SERP          |  |      | 16    |      |   | 18    |  |   | 18    | 
|Total                                           |  | $    | 1,617 |      | $ | 1,591 |  | $ | 1,477 | 

|     |                         
|---- | ------------------------
|(11) | Equity Compensation Plan

We
have established the 1997 Stock Incentive Plan (the Plan) for our officers,
key employees, non-employee directors, and consultants. A combined maximum of
6.0 million options, stock appreciation rights (SARs) and share awards may be
granted under the Plan. No incentive
stock options (ISOs) or SARs have been granted under the Plan. At December 31, 2009, there were
approximately 1.9 million shares available for issuance under the Plan.

During
the year ended December 31, 2009, we recognized approximately $1.5 million in
share-based compensation expense related to restricted stock. During the year ended December 31, 2008, we
recognized compensation expense of approximately $1.4 million related to
restricted stock. Cash received from
stock option exercises was $0 in 2009 and approximately $262,000 in 2008. The total income tax benefit related to
share-based compensation, which is recorded in additional paid-in capital, was
approximately $34,000 and $113,000 for the years ended December 31, 2009 and
2008, respectively.

(a)
Stock option awards - Options
granted under the Plan may be in the form of nonqualified stock options
(NSOs) or, ISOs, which comply with Section 422 of the Internal Revenue Code.
The exercise price of the options is the market value of our common stock at
the date of grant. Options become
exercisable ratably over their respective vesting period, which ranges from
immediate vesting up to a four-year vesting period. The options expire 10 years
from the grant date.

We
did not grant any stock options during 2009 or 2008. The weighted average grant
date fair value per share of options granted during 2007 was $12.37. The total intrinsic value of options
exercised during the years ended 2009, 2008 and 2007 were $0, $25,857, and
$4,592, respectively.

51

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

For options
granted during 2007, the fair value per share was estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions:

|                         |  |  |       |  
|------------------------ |  |  | ----- | -
|Dividend yield           |  |  | 2.01  | %
|Expected volatility      |  |  | 48.21 | %
|Risk-free interest rate  |  |  | 4.37  | %
|Expected life (in years) |  |  | 5     |  

The following
tables provide a summary of option activity under the Plan during 2009 and information
about options outstanding as of December 31, 2009:

|                                    |  |  |          |   |   |                                    |  |  |                                                       |  |   |                             | 
|----------------------------------- |  |  | -------- | - | - | ---------------------------------- |  |  | ----------------------------------------------------- |  | - | --------------------------- | 
|Stock Options                       |  |  | Shares   |   |   | Weighted
 average
 exercise
 price |  |  | Weightedaverage
 remaining
 contractual
 term (years) |  |   | Aggregate
 intrinsic
 value | 
|Outstanding at beginning of
 year   |  |  | 750,449  |   | $ | 23.64                              |  |  |                                                       |  |   |                             | 
|Granted                             |  |  |         |   |   |                                   |  |  |                                                       |  |   |                             | 
|Exercised                           |  |  |         |   |   |                                   |  |  |                                                       |  |   |                             | 
|Forfeitures                         |  |  | (149,625 | ) |   | 22.34                              |  |  |                                                       |  |   |                             | 
|                                    |  |  |          |   |   |                                    |  |  |                                                       |  |   |                             | 
|Outstanding at end of year          |  |  | 600,824  |   | $ | 23.96                              |  |  | 2.6                                                   |  | $ | 0                           | 
|                                    |  |  |          |   |   |                                    |  |  |                                                       |  |   |                             | 
|Options exercisable at end
 of year |  |  | 600,824  |   | $ | 23.96                              |  |  | 2.6                                                   |  | $ | 0                           | 

|                        |  |         |         |                                    |   |                                                 |  |  |     | 
|----------------------- |  | ------- | ------- | ---------------------------------- | - | ----------------------------------------------- |  |  | --- | 
|Range ofexercise
 price |  | Options |         | Weighted
 average 
 exercise price |   | Weightedaverageremainingcontractualterm (years) | 
|$8.00 to $16.00         |  |         | 4,522   |                                    | $ | 14.77                                           |  |  | 0.3 | 
|$16.01 to $22.00        |  |         | 269,697 |                                    |   | 16.90                                           |  |  | 3.1 | 
|$22.01 to $29.00        |  |         | 83,840  |                                    |   | 24.47                                           |  |  | 4.6 | 
|$29.01 to $34.00        |  |         | 173,894 |                                    |   | 30.63                                           |  |  | 1.4 | 
|$34.01 to $40.00        |  |         | 68,337  |                                    |   | 34.64                                           |  |  | 1.6 | 
|$40.01 to $52.00        |  |         | 534     |                                    |   | 51.49                                           |  |  | 1.6 | 
|$8.00 to $51.58         |  |         | 600,824 |                                    | $ | 23.96                                           |  |  | 2.6 | 

52

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

(b) Restricted
stock awards Restricted
shares or restricted stock units (Restricted Stock Awards) are granted to
certain employees and our non-employee directors. For employees, Restricted
Stock Awards generally vest over a period of four years and for non-employee
directors, upon termination of the individuals tenure on our board. Restricted Stock Awards to
employees are expensed over the vesting period, and those made to our
non-employee directors are expensed when granted. Unearned restricted stock
compensation is recorded based on the market price on the grant date and is
expensed equally over the vesting period.

The weighted
average grant date fair value of Restricted Stock Awards granted during 2009,
2008 and 2007 was $9.37, $12.33, and $12.93 respectively. The weighted average
vest date fair value of Restricted Stock Awards vested during the years ended
2009, 2008, and 2007 was $11.29, $13.18, and $12.66, respectively.

The
following table provides a summary of Restricted Stock Award activity under the
Plan during 2009 and information about unvested Restricted Stock Awards as of
December 31, 2009:

|                                                               |  |        |          |                                         |   |                                                      |  |                                  |     |  |   |       | 
|-------------------------------------------------------------- |  | ------ | -------- | --------------------------------------- | - | ---------------------------------------------------- |  | -------------------------------- | --- |  | - | ----- | 
|Nonvested
 Restricted Stock Awards                             |  | Shares |          | Weighted
 averagegrant date
 fair value |   | Weighted 
 average
 remaining
 vesting period(years) |  | Aggregate
 intrinsicvalue ($000) |    
|Outstanding at beginning of
 year                              |  |        | 329,282  |                                         | $ | 13.57                                                |  |                                  |     |  |   |       | 
|Granted                                                        |  |        | 128,955  |                                         |   | 9.37                                                 |  |                                  |     |  |   |       | 
|Vested                                                         |  |        | (127,653 | )                                       |   | 11.29                                                |  |                                  |     |  |   |       | 
|Forfeitures                                                    |  |        | (11,033  | )                                       |   | 12.39                                                |  |                                  |     |  |   |       | 
|Outstanding at end of year                                     |  |        | 319,551  |                                         | $ | 12.82                                                |  |                                  | 2.4 |  | $ | 3,630 | 
|                                                               |  |        |          |                                         |   |                                                      |  |                                  |     |  |   |       | 
|Unrecognized compensation
 expense at December 31, 2009 ($000) |  | $      | 2,100    |                                         |   |                                                      |  |                                  |     |  |   |       | 

|     |                     
|---- | --------------------
|(12) | Shareholders
equity

On
April 17, 2002, our Board of Directors authorized a repurchase program, which
provides for the repurchase of up to 5.0 million shares of our common stock. On
February 9, 2005, our Board of Directors authorized the repurchase of an
additional 3.0 million shares under the stock repurchase program. On February
6, 2008, our Board of Directors authorized the repurchase of an additional 1.0
million shares under the stock repurchase program.

No
time limit was placed on the duration of the repurchase program, nor is there
any dollar limit on the program. We repurchase shares on the open market as
well as from employees who elect to surrender shares at the time of vesting to
pay their payroll withholding taxes. Repurchased shares will become treasury
shares and may be used for equity compensation plans, stock-based employee
benefit plans and for other general corporate purposes. Since initial
authorization was granted, we have repurchased approximately 7.8 million shares
of common stock at a cost of $135.2 million under this repurchase program.

53

---



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

|                                           |  |  |                               |  |                                               |       |                                                       |   |       | 
|------------------------------------------ |  |  | ----------------------------- |  | --------------------------------------------- | ----- | ----------------------------------------------------- | - | ----- | 
|Summary of 2009 stock
repurchase activity: |  |  |                               |  |                                               |      
|                                           |  |  | Number of shares
 repurchased |  | Weighted average
 repurchased price perShare* |       | Aggregate annual cost 
 of repurchased stock*
 ($000) |  
|                                           | 
|2009                                       |  |  | 22,148                        |  | $                                             | 9.23  |                                                       | $ | 204   | 
|2008                                       |  |  | 11,650                        |  |                                               | 13.25 |                                                       |   | 154   | 
|2007                                       |  |  | 117,480                       |  |                                               | 12.22 |                                                       |   | 1,435 | 
|                                          
|* Includes broker
 commission              |  |  |                               |  |                                               |       |                                                       |   |       | 

On
April 14, 1999, our shareholders approved an amendment to the Companys Amended
and Restated Articles of Incorporation to increase the authorized common stock
of the Company from 50.0 million shares to 150.0 million shares with a $.01 par
value per share. The Companys Amended and Restated Articles of Incorporation
also includes authorization to issue up to 5.0 million shares of preferred stock
with a $.01 par value per share. No preferred stock has been issued.

|     |                    
|---- | -------------------
|(13) | Segment information

We
determine our operating segments based on the information used by our executive
officers to allocate resources and assess performance. As a result of certain
operational changes, the Company determined in the fourth quarter 2009 that it
had two reportable segments instead of one as previously reported. Prior
periods have been restated to show the results of the two reportable segments.
Gross profit is the primary measurement our executive officers use to assess
segment performance. Our reportable segments are:

| |                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ● Educational Software and Services. This
 segment derives its revenue from our software products; services related to
 our software such as product support, professional development, hosting, and
 other technical services; scanners sold for use with our math software; our
 reading intervention products; and various classroom resources such as
 printed materials and motivational items.
| |                                                                                                                                                                                                                                                                                                                                                                                                     
| | ● Educational Hardware. This segment
 derives its revenue from our laptops, classroom response systems, and
 services such as professional development, and extended support plans sold in
 connection with these hardware products.                                                                                                                                                                

The
accounting polices of the segments are the same as those described in Note 3 Significant Accounting Policies.There
are no intercompany transactions between the segments. All segment revenues are
with external customers. International revenues and operations are not
significant at this time. We do not segregate assets by segments in assessing
segment performance since substantially all assets are multi-use and shared
between the two segments. Depreciation and amortization included in segment
gross profit is not material.

|                  |  |                                   |        |                       |   |                     |  |   |         | 
|----------------- |  | --------------------------------- | ------ | --------------------- | - | ------------------- |  | - | ------- | 
|Segment
Revenues: |  |                                   |        |                       |   |                    
|(In
 Thousands)   |  | Educational
 Softwareand Services |        | Educational
 Hardware |   | Consolidated
 Total | 
|2009              |  | $                                 | 99,327 |                       | $ | 22,186              |  | $ | 121,513 | 
|2008              |  |                                   | 92,517 |                       |   | 22,706              |  |   | 115,223 | 
|2007              |  |                                   | 85,068 |                       |   | 22,864              |  |   | 107,932 | 

54

---



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

|                       |  |                                     |        |                                          |   |                     |  |                                 |        |               |   |                                    |   |   |       |  |   |         |  
|---------------------- |  | ----------------------------------- | ------ | ---------------------------------------- | - | ------------------- |  | ------------------------------- | ------ | ------------- | - | ---------------------------------- | - | - | ----- |  | - | ------- | -
|Segment profitability: |  |                                     |        |                                          |   |                     |  |                                 |        |               |   |                                    |   |   |       | 
|                       |  | Segment
 Gross Profit               |        | Reconciliation
 to Net Income Before Tax |  
|(In Thousands)         |  | Educational
 Software and
 Services |        | Educational
 Hardware                    |   | Consolidated
 Total |  | ConsolidatedOperating
 Expenses |        | Other
 Income |   | Consolidated Net
 Income BeforeTax |  
|2009                   |  | $                                   | 84,628 |                                          | $ | 11,464              |  | $                               | 96,092 |               | $ | 65,567                             |   | $ | 452   |  | $ | 30,977  |  
|2008                   |  |                                     | 75,552 |                                          |   | 11,914              |  |                                 | 87,466 |               |   | 116,877                            | * |   | 819   |  |   | (28,592 | )
|2007                   |  |                                     | 68,136 |                                          |   | 12,293              |  |                                 | 80,429 |               |   | 69,499                             |   |   | 1,178 |  |   | 12,108  |  

*
2008 operating expense includes goodwill and intangibles impairment charges of
$47.9 million (see Note 4).

| |      |                                             
| | ---- | --------------------------------------------
| | (14) | Quarterly
 results of operations (unaudited)

The
following table sets forth unaudited consolidated income statement data for
each quarter of the last two fiscal years. This unaudited quarterly financial
information is prepared on the same basis as the annual information presented
in the consolidated financial statements and, in our opinion, reflects all
adjustments (consisting of normal recurring entries) necessary for a fair
presentation of the information. The operating results for any quarter are not
necessarily indicative of results for future periods.

|                                          |  |               |        |         |   |              |  |             |        |  |   |         |  
|----------------------------------------- |  | ------------- | ------ | ------- | - | ------------ |  | ----------- | ------ |  | - | ------- | -
|                                          |  |               |       
|                                          |  | Quarter Ended |       
|(In Thousands, Except Per Share
 Amounts) |  | March 31      |        | June 30 |   | September 30 |  | December 31 |       
|2009                                      |  |               |        |         |   |              |  |             |        |  |   |         |  
|Net sales                                 |  | $             | 28,870 |         | $ | 28,464       |  | $           | 31,754 |  | $ | 32,425  |  
|Gross profit                              |  |               | 22,968 |         |   | 22,106       |  |             | 24,642 |  |   | 26,376  |  
|Operating income                          |  |               | 6,133  |         |   | 6,606        |  |             | 7,577  |  |   | 10,209  |  
|Income - before income taxes              |  |               | 6,281  |         |   | 6,640        |  |             | 7,795  |  |   | 10,261  |  
|Income taxes                              |  |               | 2,374  |         |   | 2,510        |  |             | 2,590  |  |   | 3,580   |  
|Net income                                |  |               | 3,907  |         |   | 4,130        |  |             | 5,205  |  |   | 6,681   |  
|Earnings per share:                       |  |               |        |         |   |              |  |             |        |  |   |         |  
|Basic and diluted                         |  |               | 0.13   |         |   | 0.14         |  |             | 0.18   |  |   | 0.23    |  
|Common stock price per share:             |  |               |        |         |   |              |  |             |        |  |   |         |  
|High                                      |  |               | 9.78   |         |   | 10.18        |  |             | 10.82  |  |   | 11.98   |  
|Low                                       |  |               | 6.35   |         |   | 8.33         |  |             | 8.94   |  |   | 9.08    |  
|2008                                      |  |               |        |         |   |              |  |             |        |  |   |         |  
|Net sales                                 |  | $             | 29,386 |         | $ | 28,047       |  | $           | 28,200 |  | $ | 29,590  |  
|Gross profit                              |  |               | 21,589 |         |   | 21,515       |  |             | 21,360 |  |   | 23,002  |  
|Operating income (loss)                   |  |               | 4,055  |         |   | 4,915        |  |             | 3,660  |  |   | (42,041 | )
|Income (loss) - before income taxes       |  |               | 4,223  |         |   | 5,087        |  |             | 3,935  |  |   | (41,837 | )
|Income taxes                              |  |               | 1,605  |         |   | 1,753        |  |             | 1,365  |  |   | 1,125   |  
|Net income (loss)                         |  |               | 2,618  |         |   | 3,334        |  |             | 2,570  |  |   | (42,962 | )
|Earnings (loss) per share:                |  |               |        |         |   |              |  |             |        |  |   |         |  
|Basic and diluted                         |  |               | 0.09   |         |   | 0.11         |  |             | 0.09   |  |   | (1.47   | )
|Common stock price per share:             |  |               |        |         |   |              |  |             |        |  |   |         |  
|High                                      |  |               | 14.82  |         |   | 15.06        |  |             | 15.04  |  |   | 13.64   |  
|Low                                       |  |               | 12.58  |         |   | 11.21        |  |             | 10.58  |  |   | 6.61    |  

Earnings per share amounts for each quarter are required to
be calculated independently and therefore may not total to the amount
calculated for the full year.

55

---



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

|     |                                 
|---- | --------------------------------
|(15) | Recent accounting pronouncements

In
October 2009, the Financial Accounting Standards Board (FASB) issued an
amendment to its previously released guidance on revenue arrangements with
multiple deliverables. The amendment becomes effective at the beginning of our
2011 fiscal year; however, early adoption is permitted. The pronouncement
addresses how to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting and how the arrangement
consideration should be allocated among the separate units of accounting. The
pronouncement may be applied retrospectively or prospectively for new or
materially modified arrangements. The company is currently assessing the impact
the adoption of this guidance will have on the companys consolidated financial
statements.

In
October 2009, the FASB issued an amendment to its previously released guidance
on revenue arrangements for tangible
products that include software elements. The
amendment becomes effective at
the beginning of our 2011 fiscal year; however, early adoption is permitted.
The pronouncement removes tangible products from the scope of the software
revenue guidance if the products contain both software and non-software
components that function together to deliver a products essential
functionality and provides guidance on determining whether software
deliverables in an arrangement that includes a tangible product are within the
scope of the software revenue guidance. The pronouncement may be applied
retrospectively or prospectively for new or materially modified arrangements.
The company is currently assessing the impact the adoption of this guidance
will have on the companys consolidated financial statements.

In
June 2008, the FASB issued an amendment to its previously released guidance on
determining whether instruments
granted in share-based payment transactions are participating securities,which became effective for us at the
beginning of our 2009 fiscal year. The
new guidance requires that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation
of basic earnings per share. This also requires retroactive restatement of
earnings per share for all prior periods presented in the financial statements
and footnotes. Adoption of this amendment did not have a material impact on our
basic or diluted earnings per share.

In
April 2008, the FASB issued an amendment to its previously released guidance on
determination of the useful life
of intangible assets,which
became effective for us at the beginning of our 2009 fiscal year. The new guidance generally requires the use of a consistent useful life for
an intangible asset when computing amortization, for the period of expected
cash flows used to estimate the fair value of the asset, and for other
accounting purposes. Adoption of this amendment did not affect our consolidated
financial statements.

In
December 2007, the FASB issued an amendment to its previously released guidance
on business combinations, which became effective for us at the beginning of our
2009 fiscal year. The statement retains the purchase method of accounting for
acquisitions, but requires a number of changes, including changes in the way
assets and liabilities are recognized in purchase accounting. It also changes
the recognition of assets acquired and liabilities assumed arising from
contingencies, requires the capitalization of in-process research and
development at fair value, and requires the expensing of acquisition-related
costs as incurred. Adoption of this amendment did not affect our consolidated
financial statements.

In
December 2007, the FASB issued an amendment to its previously released guidance
on noncontrolling interests in
consolidated financial statements,which
became effective for us at the beginning of our 2009 fiscal year. This will
change the accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests and classified as a component of
equity. This new consolidation method will significantly change the accounting
for transactions with minority interest holders. Adoption of this amendment did
not materially affect our consolidated financial statements.

56

---



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

|     |                 
|---- | ----------------
|(16) | Subsequent event

On
February 10, 2010, our Board of Directors declared a quarterly cash dividend of
$0.07 per share, payable March 8, 2010 to shareholders of record as of February
22, 2010.

The
company has evaluated all subsequent events that occurred up to the time of the
companys issuance of its financial statements on March 10, 2010.

Item 9. Changes In and
Disagreements with Accountants on Accounting and Financial Disclosure

Not
applicable.

Item 9A. Controls and
Procedures

Conclusion Regarding the Effectiveness of
Disclosure Controls and Procedures

Under
the supervision and with the participation of our management, including our
chief executive officer and chief financial officer, we conducted an evaluation
of our disclosure controls and procedures, as such term is defined under Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended
(the Exchange Act). Based on this evaluation, management, including our chief
executive officer and chief financial officer, concluded that our disclosure
controls and procedures were effective as of December 31, 2009.

There
has been no change in our internal control over financial reporting that has
occurred during the quarter ended December 31, 2009 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.

Managements Report on Internal Control Over
Financial Reporting

Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined under Rule 13a-15(f)
promulgated under the Exchange Act. Under the supervision and with the
participation of our management, including our chief executive officer and
chief financial officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework in Internal Control - Integrated Frameworkissued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on our evaluation using the framework in Internal
Control  Integrated Framework, our management concluded that our
internal control over financial reporting was effective as of December 31, 2009
and during the year then ended.

The
effectiveness of our internal control over financial reporting has been audited
by Deloitte & Touche LLP, our independent registered public accounting
firm, as stated in their report, which is included herein.

Item 9B. Other
Information

Not
applicable.

57

---



PART III

Item 10. Directors and
Executive Officers of the Registrant

| |     |                                                                                                                                                                                                                                                                                                                                          
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | Executive Officers. Reference is made to
 Executive Officers of the Registrant in Part I hereof.                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                          
| | (b) | Directors. The information required by this Item
 is set forth in our Proxy Statement for the Annual Meeting of Shareholders to
 be held on April 21, 2010 under the caption Proposal One: Election of
 Directors, which information is incorporated by reference herein.                                                              
| |     |                                                                                                                                                                                                                                                                                                                                          
| | (c) | Section 16 Compliance. The information
 required by this Item is set forth in our Proxy Statement for the Annual
 Meeting of Shareholders to be held on April 21, 2010 under the caption
 Section 16(a) Beneficial Ownership Reporting Compliance, which information
 is incorporated by reference herein.                             
| |     |                                                                                                                                                                                                                                                                                                                                          
| | (d) | Code of Ethics. We have adopted a code of
 ethics pursuant to Item 406 of Regulation S-K. A copy of our code of ethics
 is incorporated by reference herein (see Exhibit 14.1 of Exhibit Index).                                                                                                                                         
| |     |                                                                                                                                                                                                                                                                                                                                          
| | (e) | Audit Committee and Audit Committee Financial Expert.
 The information required by this Item is set forth in our Proxy Statement for
 the Annual Meeting of Shareholders to be held on April 21, 2010 under the
 caption Proposal One: Election of Directors - Audit Committee, which information
 is incorporated by reference herein.

Item 11. Executive
Compensation

The
information required by this Item is set forth in our Proxy Statement for the
Annual Meeting of Shareholders to be held on April 21, 2010 under the captions
Executive Compensation, Non-Employee Director Compensation, Compensation
Committee Report and Compensation Committee Interlocks and Insider
Participation, which information is incorporated by reference herein.

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

The
information required by Item 403 of Regulation S-K is set forth in our Proxy
Statement for the Annual Meeting of Shareholders to be held on April 21, 2010
under the caption Security Ownership of Management and Certain Beneficial
Owners, which information is incorporated by reference herein.

The
information required by Item 201(d) of Regulation S-K is set forth below.

EQUITY COMPENSATION PLAN INFORMATION

The
following table sets forth certain information about shares of our common stock
outstanding and available for issuance under our existing equity compensation
plans, which consist of our 1997 stock incentive plan and our 1998 employee
stock purchase plan (this latter plan is currently inactive). The table details
securities authorized for issuance under our equity compensation plans as of
December 31, 2009. The table below does not include awards, exercises, or
cancellations under our equity compensation plans subsequent to December 31,
2009.

58

---



|                                                                                               |  |                                                                                                 |         |                                                                                |   |                                                                                                                                          |  |  |           |    
|---------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- | ------- | ------------------------------------------------------------------------------ | - | ---------------------------------------------------------------------------------------------------------------------------------------- |  |  | --------- | ---
|Common
 stock oustanding and available for issuance under existing equity
 compensation plans: | 
|Plan
 category                                                                                 |  | Number
 of securities to
 be issued upon exercise of
 outstanding options,
 warrants and rights |         | Weighted-average
 exercise price of
 outstanding options,
 warrants and rights |   | Number
 of securities
 available for future issuance
 under equity compensation
 plans (excluding securities
 reflected in first column) | 
|Equity compensation plans approved by security holders                                         |  |                                                                                                 | 600,824 |                                                                                | $ | 23.96                                                                                                                                    |  |  | 2,159,927 | (1)
|Equity compensation plans not approved by security holders(2)                                  |  |                                                                                                 | N/A     |                                                                                |   | N/A                                                                                                                                      |  |  | N/A       |    
|Total                                                                                          |  |                                                                                                 | 600,824 |                                                                                | $ | 23.96                                                                                                                                    |  |  | 2,159,927 |    

| | 
| | 
| | 

(1) Of the 6,000,000 shares
authorized for issuance under our 1997 stock incentive plan, 1,920,533 remain
available for future issuance as of December 31, 2009. Under our 1998 employee
stock purchase plan (ESPP), 239,394 shares remain available for future
issuance. We did not offer the ESPP to employees in 2009 and do not intend to
offer the plan to employees in 2010.

(2) Both of the companys
equity compensation plans have been approved by shareholders.

Item 13. Certain
Relationships and Related Transactions

The
information required by this Item is set forth in our Proxy Statement for the
Annual Meeting of Shareholders to be held on April 21, 2010 under the caption
Certain Relationships and Transactions, which information is incorporated by
reference herein.

Item 14. Principal
Accountant Fees and Services

The
information required by this Item is set forth in our Proxy Statement for the
Annual Meeting of Shareholders to be held on April 21, 2010 under the caption
Audit Committee Report, which information is incorporated by reference
herein.

59

---



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, 2009 and 2008                                         
|        |                                                                                                       
|        | Consolidated
 Statements of Income for the years ended December 31, 2009, 2008 and 2007               
|        |                                                                                                       
|        | Consolidated
 Statements of Shareholders Equity for the years ended December 31, 2009,
 2008 and 2007
|        |                                                                                                       
|        | Consolidated
 Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007           
|        |                                                                                                       
|        | Notes to
 Consolidated Financial Statements                                                           
|        |                                                                                                       
|(a) (2) | Financial Statement Schedules.                                                                        
|        |                                                                                                       
|        | See the
 Exhibit Index, which is incorporated by reference herein.                                    
|        |                                                                                                       
|(a) (3) | Exhibits.                                                                                             
|        |                                                                                                       
|        | See (b)
 below.                                                                                       
|        |                                                                                                       
|(b)     | Exhibits.                                                                                             
|        |                                                                                                       
|        | See the
 Exhibit Index, which is incorporated by reference herein.                                    
|        |                                                                                                       
|(c)     | Financial Statements Excluded from Annual Report to Shareholders.                                     
|        |                                                                                                       
|        | Not
 applicable.                                                                                      

60

---



|                                                                                                                                                                                                                    |                             |                                       
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | --------------------------------------
|SIGNATURES                                                                                                                                                                                                         
|                                                                                                                                                                                                                    |                             |                                       
|Pursuant
 to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
 1934, the Registrant has duly caused this report to be signed on its behalf
 by the undersigned, thereunto duly authorized.
|                                                                                                                                                                                                                   
|                                                                                                                                                                                                                    |                            
|                                                                                                                                                                                                                    | RENAISSANCE
 LEARNING, INC.
|                                                                                                                                                                                                                    |                            
|                                                                                                                                                                                                                    |                            
|                                                                                                                                                                                                                    |                            
|                                                                                                                                                                                                                    | By:                         | /s/ Terrance
 D. Paul                 
|                                                                                                                                                                                                                    |                             | Terrance D. Paul                      
|                                                                                                                                                                                                                    |                             | Chief Executive Officer and a Director
|                                                                                                                                                                                                                    |                            
|                                                                                                                                                                                                                    | Date: March
 10, 2010      
|                                                                                                                                                                                                                    |                            
|Pursuant
 to the requirements of the Securities Exchange Act of 1934, this report has
 been signed below by the following persons on behalf of the Registrant and in
 the capacities and on the dates indicated:   

|                                                                                                                            |                           |                                   |                |       |  |  |      |  | 
|--------------------------------------------------------------------------------------------------------------------------- | ------------------------- | --------------------------------- | -------------- | ----- |  |  | ---- |  | 
|                                                                                                                            | Name                      |                                   |                | Title |  |  | Date | 
|                                                                                                                            |                           |                                  
|                                                                                                                            |                           |                                  
|/s/ Terrance D. Paul                                                                                                        |                           | Chief
 Executive Officer          | March 10, 2010
|Terrance D.
 Paul                                                                                                           |                           | (Principal
 Executive Officer)    |               
|                                                                                                                            | and a
 Director           |                                  
|                                                                                                                            |                           |                                  
|/s/ Mary T.
 Minch                                                                                                          |                           | Executive
 Vice President-        | March 10, 2010
|Mary T.
 Minch                                                                                                              |                           | Finance,
 Chief Financial Officer |               
|                                                                                                                            | and
 Secretary (Principal |                                  
|                                                                                                                            | Financial
 and Accounting |                                  
|                                                                                                                            | Officer)                  |                                  
|                                                                                                                            |                          
|Directors: Judith A.
 Paul, Addison L. Piper, John H. Grunewald, Mark D. Musick, Harold E. Jordan,
 and Randall J. Erickson

|    |                                                                                            |  |               
|--- | ------------------------------------------------------------------------------------------ |  | --------------
|By: | /s/ Mary T.
 Minch                                                                         |  | March 10, 2010
|    | Mary T.
 Minch                                                                             | 
|    | Attorney-In-Fact*                                                                          | 
|    |                                                                                            | 
|    | *Pursuant to authority granted by powers of
 attorney, copies of which are filed herewith.

61

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EXHIBIT INDEX

|              |         |                                                                                                                                           
|------------- | ------- | ------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber | Exhibit
|              |         |                                                                                                                                           
|3.1           |         | Amended and Restated
 Articles of Incorporation of Registrant, as amended.(1)                                                             
|              |         |                                                                                                                                           
|3.2           |         | Amended and Restated
 By-Laws of Registrant, as amended.(2)                                                                               
|              |         |                                                                                                                                           
|4.1           |         | Form of Stock Certificate.(3)                                                                                                             
|              |         |                                                                                                                                           
|10.1          |         | Amended and Restated
 Employee Stock Purchase Plan.(4)*                                                                                   
|              |         |                                                                                                                                           
|10.2          |         | 1997 Stock Incentive Plan
 (Amended and Restated Effective April 16, 2003).(5)*                                                           
|              |         |                                                                                                                                           
|10.3          |         | Incentive Bonus Plan
 (Amended and Restated Effective July 1, 2008).(6)*                                                                  
|              |         |                                                                                                                                           
|10.4          |         | Form of Nonstatutory Stock
 Option Agreement between Registrant and certain employees and consultants.(7)*                                
|              |         |                                                                                                                                           
|10.5          |         | Form of Nonstatutory Stock
 Option Agreement between Registrant and certain non-employee directors.(7)*                                   
|              |         |                                                                                                                                           
|10.6          |         | Form of Restricted Stock
 Agreement with certain executive officers.(8)*                                                                  
|              |         |                                                                                                                                           
|10.7          |         | Form of Restricted Stock
 Agreement with certain non-employee directors.(8)*                                                              
|              |         |                                                                                                                                           
|10.8          |         | Form of Restricted Stock
 Unit Agreement with certain non-employee directors.(9)*                                                         
|              |         |                                                                                                                                           
|10.9          |         | Form of Non-Employee
 Director Indemnification Agreement.(10)                                                                             
|              |         |                                                                                                                                           
|10.10         |         | Credit Agreement dated as
 of October 1, 2007 by and between Registrant and Wells Fargo Bank, National Association.(11)                   
|              |         |                                                                                                                                           
|10.11         |         | First Amendment to Credit
Agreement dated as of November 5, 2008 by and between Registrant and Wells Fargo Bank,
National Association.(12)
|              |         |                                                                                                                                           
|10.12         |         | Second Amendment to Credit
 Agreement dated as of July 1, 2009 by and between Registrant and Wells Fargo Bank, National
 Association. (13)
|              |         |                                                                                                                                           
|14.1          |         | Code of Business Conduct
 and Ethics. (14)                                                                                                
|              |         |                                                                                                                                           
|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.                                                                                         

62

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|     |                                                                                                                          
|---- | -------------------------------------------------------------------------------------------------------------------------
|(1)  | Incorporated by reference
 to Registrants Form 10-Q for the quarter ended March 31, 2001 (SEC File No.
 0-22187).       
|     |                                                                                                                          
|(2)  | Incorporated by reference
 to Registrants Form 10-Q for the quarter ended March 31, 2000 (SEC File No.
 0-22187).       
|     |                                                                                                                          
|(3)  | Incorporated by reference
 to Registrants Amendment No. 2 to Form 8-A filed on August 9, 2006 (SEC File No. 0-22187).   
|     |                                                                                                                          
|(4)  | Incorporated by reference
 to Registrants Form 10-K for the fiscal year ended December 31, 2000 (SEC
 File No. 0-22187).
|     |                                                                                                                          
|(5)  | Incorporated by reference
 to Registrants Form S-8 filed on April 18, 2003 (SEC File No. 333-104622).                   
|     |                                                                                                                          
|(6)  | Incorporated by reference
 to Registrants Form 10-Q for the quarter ended June 30, 2008 (SEC File No.
 0-22187).        
|     |                                                                                                                          
|(7)  | Incorporated by reference
 to Registrants Form 8-K filed on March 7, 2005 (SEC File No. 0-22187).                       
|     |                                                                                                                          
|(8)  | Incorporated by reference
 to Registrants Form 8-K filed on May 10, 2006 (SEC File No. 0-22187).                        
|     |                                                                                                                          
|(9)  | Incorporated by reference
 to Registrants Form 10-Q for the quarter ended September 30, 2006 (SEC File
 No. 0-22187).   
|     |                                                                                                                          
|(10) | Incorporated by reference
 to Registrants Form 8-K filed on January 29, 2007 (SEC File No. 0-22187).                    
|     |                                                                                                                          
|(11) | Incorporated by reference
 to Registrants Form 10-Q for the quarter ended September 30, 2007 (SEC File
 No. 0-22187).   
|     |                                                                                                                          
|(12) | Incorporated by reference
 to Registrants Form 10-Q for the quarter ended September 30, 2008 (SEC File
 No. 0-22187).   
|     |                                                                                                                          
|(13) | Incorporated by reference
 to Registrants Form 10-Q for the quarter ended June 30, 2009 (SEC File No.
 0-22187).        
|     |                                                                                                                          
|(14) | Incorporated by reference
 to Registrants Form 10-K for the fiscal year ended December 31, 2008 (SEC
 File No. 0-22187).

|  |                                                                                                                                                                                                                                                                                                                                                                                                                             
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Management
 contract or compensatory plan or arrangement.                                                                                                                                                                                                                                                                                                                                                                   
|  |                                                                                                                                                                                                                                                                                                                                                                                                                             
|  | THE REGISTRANT WILL
 FURNISH A COPY OF ANY OF THE FOREGOING EXHIBITS UPON THE REQUEST OF A
 SHAREHOLDER AFTER THE PAYMENT OF A FEE BY SUCH SHAREHOLDER, WHICH SHALL
 REPRESENT REGISTRANTS REASONABLE EXPENSES INCURRED IN FURNISHING ANY SUCH
 EXHIBIT. REQUESTS SHOULD BE SENT TO RENAISSANCE LEARNING, INC., 2911 PEACH
 STREET, P.O. BOX 8036, WISCONSIN RAPIDS, WISCONSIN 54495-8036, ATTENTION:
 CORPORATE SECRETARY.

63

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