|                                  
|----------------------------------
|UNITED STATES                     
|SECURITIES AND EXCHANGE COMMISSION
|Washington,
 D.C. 20549           
|                                  
|                                  
|                                  
|FORM 10-K                         
|                                  
|                                  



|  |                                                                                                                                    
|- | -----------------------------------------------------------------------------------------------------------------------------------
|x | ANNUAL REPORT PURSUANT TO SECTION
 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934: For the fiscal year ended
 December 31, 2008
|  |                                                                                                                                    
|  | 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)            
|                                                                   |  |                                     
|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 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. x

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 $100,463,000 as of June 30, 2008. As of February
20, 2009, there were 29,175,335 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 29, 2009.





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INDEX

|         |                                                                                                               |  |    | 
|-------- | ------------------------------------------------------------------------------------------------------------- |  | -- | 
|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                                                                                         |  | 7 
|         | Employees                                                                                                     |  | 8 
|         | Backlog                                                                                                       |  | 8 
|         | Forward-Looking Statements                                                                                    |  | 8 
|         | Executive Officers of the Registrant                                                                          |  | 9 
|Item 1A. | Risk Factors                                                                                                  |  | 10
|Item 1B. | Unresolved Staff Comments                                                                                     |  | 14
|Item 2.  | Properties                                                                                                    |  | 14
|Item 3.  | Legal Proceedings                                                                                             |  | 14
|Item 4.  | Submission of Matters to a Vote of Security Holders                                                           |  | 14
|         |                                                                                                               |  |    | 
|PART II  |                                                                                                               |  |   
|         |                                                                                                               |  |    | 
|Item 5.  | Market for Registrants Common Equity,
 Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 15
|Item 6.  | Selected Financial Data                                                                                       |  | 18
|Item 7.  | Managements Discussion and Analysis of
 Financial Condition and Results of Operations                        |  | 19
|Item 7A. | Quantitative and Qualitative Disclosures
 About Market Risk                                                   |  | 28
|Item 8.  | Financial Statements and Supplementary Data                                                                   |  | 30
|Item 9.  | Changes In and Disagreements With
 Accountants on Accounting and Financial Disclosure                         |  | 51
|Item 9A. | Controls and Procedures                                                                                       |  | 51
|Item 9B. | Other Information                                                                                             |  | 52
|         |                                                                                                               |  |    | 
|PART III |                                                                                                               |  |   
|         |                                                                                                               |  |    | 
|Item 10. | Directors and Executive Officers of the
 Registrant                                                           |  | 53
|Item 11. | Executive Compensation                                                                                        |  | 53
|Item 12. | Security Ownership of Certain Beneficial
 Owners and Management and Related Stockholder Matters               |  | 53
|Item 13. | Certain Relationships and Related
 Transactions                                                               |  | 54
|Item 14. | Principal Accountant Fees and Services                                                                        |  | 54
|         |                                                                                                               |  |    | 
|PART IV  |                                                                                                               |  |   
|         |                                                                                                               |  |    | 
|Item 15. | Exhibits and Financial Statement Schedules                                                                    |  | 55

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 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,
learning cards 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 two separate platforms: our
web-based Renaissance Placesoftware
platform and our traditional desktop versions that run on local area networks
of individual schools. 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 primarily on a subscription basis typically for terms of one year. Our
popular Accelerated Reader Enterprise
and Accelerated Math Enterprise
packages are turn-key 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. Enterprise
versions of Accelerated
Reader and Accelerated Math are sold on a
subscription basis. Our desktop products are relatively simple to set up and
maintain for an individual school and are typically sold as school-wide
perpetual software licenses with optional annual support plans, student
expansions, and add-on reading quizzes and math content libraries.

| | 
| | 
| | 

* 2Know!, Accelerated Math, Accelerated Reader, Accelerated
Vocabulary, AccelScan, AccelTest, Advanced Technology for Essential Practice,
AlphaSmart, 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, Renaissance Receiver,
Renaissance Responder, 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 is a trademark 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, distance 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 131,000 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
for 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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Read Now Power Up! is
a comprehensive reading intervention curriculum solution for grades 5-9 that
combines the instructional materials of Steck-Vaughn with the technology of
Renaissance Learning to help educators assist students identified as struggling
readers. Read
Now Power Up! 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. These components work together to help educators direct
students to material appropriate to their reading ability, provide the
extensive practice crucial to improving reading skills, and develop the range
of skills necessary to read successfully, from phonemic awareness through
fluency and comprehension.

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. Accelerated
Math offers content libraries that 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, 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, provides 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, 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 is
based on a systematic method of learning language without reliance upon
translation, grammatical instruction, or multimedia distractions, which 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 independently or complement existing computers and 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. Renaissance
Place schools have the ability to administer Accelerated Reader quizzes
using the NEO
2, which effectively leverages the functionality and benefits of
these two popular products in an educational setting. 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, math learning cards,
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 optimize 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 Centerwhich
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, 2008, 2007, and 2006, our
development expenses were $17.4 million, $18.5 million and $17.3 million,
respectively (excluding capitalized amounts of $0.1 million, $0.2 million and
$0.7 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, advertisements in educational publications, direct mail, websites
and referrals.

We
have resale arrangements with various book dealers and book publishers that
sell our software products to their customers. These firms are particularly
receptive to such alliances because the use of our products in schools
encourages increased purchases of the books and other products that they sell.
Some of our hardware products are also distributed by various third-party
resellers. We offer only limited, short-term price protection and stock
balancing rights to our resellers.

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.

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 impact 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.

6

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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-ROMs are produced 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 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 and services successfully or compete
effectively in the educational marketplace.

Intellectual
Property

We
regard certain of our technologies as proprietary and rely primarily on a combination
of patent, copyright, trademark, and trade secret laws as well as 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 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
will not experience unauthorized reproduction, which would have a material
adverse effect on our business, financial condition and results of operations.

7

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Employees

As
of February 1, 2009, we had 985 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, 2008 and 2007, we had backlogs that aggregated approximately
$47.7 million and $39.6 million, respectively. These backlogs include deferred
revenue related to software subscriptions, software support agreements, technology
consulting and professional development of $46.9 million and $38.4 million at
December 31, 2008 and 2007, respectively. Substantially all of the 2008 backlog
is expected to be realized during 2009.

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 62  |  | Ms. Paul is the co-founder of the company and has been chairman of
 the board of directors since February 2006. From 1986 until July 2001, and
 again from August 2002 until July 2003, Ms. Paul served as chairman of the
 board, and from July 2001 until August 2002, and again from July 2003 until
 February 2006, Ms. Paul served as co-chairman with Mr. Paul. Ms. Paul has
 been a director since 1986. Ms. Paul acts as our spokesperson and is a
 leading teacher advocate. Ms. Paul holds a bachelors degree in elementary
 education from the University of Illinois. Judith Paul is Terrance Pauls
 wife.                                                                                                                                                                                                      
|                          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Terrance D. Paul
 Age 62  |  | 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. Schmidt
 Age 54 |  | 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. Minch
 Age 42     |  | Ms. Minch has been our chief financial officer and secretary since
 November 2004 and has served as senior vice president, finance since January
 2007. 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.

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.

9

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Item 1A. Risk Factors

Reliance on
Single Product Line. Our Accelerated Reader software and
supplemental Accelerated Reader quizzes accounted for approximately 38%,
38% and 37% of our net sales in 2008, 2007 and 2006, respectively. An overall
decline in sales of Accelerated Readerand supplemental
quizzes 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 several states, including California, Texas, Florida, Georgia
and North Carolina, which accounted for approximately 15%, 12%, 6%, 4% and 3%,
respectively, of our net sales in 2008. 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. There can be no assurance that
educational institutions and/or individual educators will continue to invest in
technology-based products and professional development for reading and other
curricula or continue to respond favorably to our marketing. Our inability to
sustain the number of products sold or number of schools served would adversely
affect our business, financial condition and results of operations. Because of
our dependence on educational institutions, the funding of which is largely
dependent on government support, a substantial decrease in government budgets
or funding for educational software or technology would have a material adverse
effect on our business, financial condition and results of operations. Economic
slow downs such as the current one have the potential to negatively affect
school funding and can therefore adversely impact the sale of our products and
services to schools. In addition, certain aspects of government sponsored
education initiatives may not endorse, or be complementary to, the principles
and methodologies underlying and associated with our products and services,
which could adversely affect our business, financial condition and results of
operations.

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.

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.

10

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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. 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.

Selling and
Marketing Strategy and Product Acceptance. Our selling and marketing
strategy includes the introduction of new products and services directed at new
markets as well as the development of new sales and distribution channels.
There can be no assurance that we will be successful in offering new products
and services, entering new markets and developing new sales and distribution
channels or that any such products or services, if introduced, will achieve
acceptance in the marketplace.

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.

Educational
Philosophies. 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; narrow focus on particular types of
direct instruction; and subjective opinions of what research supports product
effectiveness. These philosophical stances have the capacity to negatively
influence the market for our products and services, and such influence could
have a material adverse impact on demand for our products and services and thus
on our business, financial condition and results of operations.

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.

11

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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. We generally deliver products as orders
are received. Our reported revenue in any quarter can be affected by a variety
of factors, including:

| |                                                              |                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                             | delays in
 the development and/or shipment of new products;                                                                                                                                                                                                                     
| |                                                              |                                                                                                                                                                                                                                                                                 
| |                                                             | the closing
 of large contract sales, such as those to school districts;                                                                                                                                                                                                        
| |                                                              |                                                                                                                                                                                                                                                                                 
| |                                                             | the shipment
 of new products for which orders have been building for a period of time;                                                                                                                                                                                         
| |                                                              |                                                                                                                                                                                                                                                                                 
| |                                                             | seasonal
 variations due to, among other things, the budget and school year cycles of
 our school customers and annual ordering patterns related to
 subscription-based products and services, particularly Accelerated Reader Enterprise
 and Accelerated
 Math Enterprise; and
| |                                                              |                                                                                                                                                                                                                                                                                 
| |                                                             | seasonal
 variations due to delays in reading quiz and math library order patterns as
 customers consider upgrading to Accelerated Reader Enterprise and Accelerated Math
 Enterprise, which include access to all of our reading quizzes and
 math libraries.                  
| |                                                              |                                                                                                                                                                                                                                                                                 
| | In addition,
 our quarterly results can also be affected by:
| |                                                             
| |                                                             | 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.                                                                                                                                                                                                                                 

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.

12

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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 20, 2009, our principal shareholders, Judith Paul and Terrance
Paul, our chairman and chief executive officer, respectively, and co-founders
of the company, beneficially owned approximately 65% 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 20, 2009, approximately 19.0 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 6,000,000 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 2006, 2007 or 2008
and have no intention of offering it in 2009.

Cash
Dividends. We declared quarterly cash dividends of $0.07 per share
for each of the four quarters of 2008. We also declared a special dividend of
$0.75 per share during 2008. 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.

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.

13

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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.

Acquisitions.
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. Submission of
Matters to a Vote of Security Holders

We
did not submit any matters to a vote of our security holders during the fourth
quarter of the fiscal year ended December 31, 2008.

14

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PART II

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

Market Information

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 20, 2009, there were 601 record holders of our common stock.

Historical Dividends

We
declared quarterly cash dividends of: $0.05 per share in the first and second
quarter of 2007 and $0.07 in the third and fourth quarter of 2007 along with a
special dividend of $0.75 per share in the third quarter of 2007. We declared
quarterly cash dividends of $0.07 per share in each of the four quarters of
2008 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: the Companys financial
statements as of the most recent practicable date, the expected cash costs to
deliver the products and services recorded as deferred revenue, the companys
ability to provide the products and services underlying amounts recorded as
deferred revenue, the likelihood of recognizing amounts recorded as deferred
revenue as net sales based on the Companys historical experience and most
recent projections and the short time period over which such recognition has
historically occurred and is expected to occur and, 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 2008
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, 2003 through December 31, 2008 with that
of the NASDAQ Composite Index and two peer group indices constructed by us. The
companies included in our old peer group index are Blackboard Inc. (BBBB),
Learning Tree International, Inc. (LTRE), The Princeton Review, Inc. (REVU),
School Specialty, Inc. (SCHS), Skillsoft Public Company Limited (SKIL) and
Plato Learning, Inc. (TUTR). The companies included in our new 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). We
changed the mix of companies in our peer group index from last year to this year
because the new peer group is more representative of the K-12 market in which
we compete. The new peer group index is intended to provide a better tool for
comparison.

The
total return calculations set forth below assume $100 invested on December 31,
2003 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, 2008. The stock performance graph shown in the graph below
should not be considered indicative of potential future stock price
performance.

15

---



COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*Among Renaissance Learning, Inc., The NASDAQ
Composite Index,

A New Peer Group And An Old Peer Group  (LINE GRAPH)

* $100 invested on 12/31/03 in
stock & index-including reinvestment of dividends. Fiscal year ending December 31.

|                           |  |                    |        |       |  |        |  |       |        |       |  |        |  |  |        |  |  |       | 
|-------------------------- |  | ------------------ | ------ | ----- |  | ------ |  | ----- | ------ | ----- |  | ------ |  |  | ------ |  |  | ----- | 
|                           |  | Cumulative
 Return |       
|                           |  | 12/03              |        | 12/04 |  | 12/05  |  | 12/06 |        | 12/07 |  | 12/08  | 
|                           |  |                    |        |       |  |        |  |       |        |       |  |        |  |  |        |  |  |       | 
|Renaissance Learning, Inc. |  |                    | 100.00 |       |  | 83.85  |  |       | 86.39  |       |  | 82.12  |  |  | 70.00  |  |  | 48.86 | 
|NASDAQ Composite           |  |                    | 100.00 |       |  | 110.08 |  |       | 112.88 |       |  | 126.51 |  |  | 138.13 |  |  | 80.47 | 
|New Peer Group             |  |                    | 100.00 |       |  | 94.54  |  |       | 89.50  |       |  | 87.03  |  |  | 85.96  |  |  | 51.74 | 
|Old Peer Group             |  |                    | 100.00 |       |  | 80.41  |  |       | 89.66  |       |  | 89.90  |  |  | 118.59 |  |  | 73.35 | 

Recent Sales of Unregistered Securities

There
were no sales of unregistered securities during the year ended December 31, 2008.

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 5,000,000 shares of our common stock. On
February 9, 2005, our Board of Directors authorized the repurchase of an
additional 3,000,000 shares under the stock repurchase program. On February 6,
2008 our Board of Directors authorized the repurchase of an additional 1,000,000
shares under the stock repurchase program.

16

---



No
time limit was placed on the duration of the repurchase program, nor is there
any dollar limit on the program. 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, 2008:

|              |  |                                    |     |                                  |   |                                                                                        |  |                                                                                   |     |  |  |           | 
|------------- |  | ---------------------------------- | --- | -------------------------------- | - | -------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------- | --- |  |  | --------- | 
|Period        |  | Total Number
 of Shares
 Purchased |     | Average Price 
 Paid per 
 Share |   | Total Number of
 Shares Purchased
 as Part of 
 Publicly
 Announced Plans
 or Programs |  | Maximum Number of
 Shares that May Yet Be
 Purchased Under the
 Plans or Programs |    
|October 1-31  |  |                                    | 151 |                                  | $ | 9.89                                                                                   |  |                                                                                   | 151 |  |  | 1,235,117 | 
|              |  |                                    |     |                                  |   |                                                                                        |  |                                                                                   |     |  |  |           | 
|November 1-30 |  |                                    |    |                                  |   |                                                                                       |  |                                                                                   |    |  |  | 1,235,117 | 
|              |  |                                    |     |                                  |   |                                                                                        |  |                                                                                   |     |  |  |           | 
|December 1-31 |  |                                    | 36  |                                  |   | 8.84                                                                                   |  |                                                                                   | 36  |  |  | 1,235,081 | 
|Total         |  |                                    | 187 |                                  | $ | 9.69                                                                                   |  |                                                                                   | 187 |  |  |           | 

17

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Item 6. Selected Financial Data

SELECTED HISTORICAL CONSOLIDATED FINANCIAL
DATA
(In thousands, except per share amounts)

|                                                           |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         |   
|---------------------------------------------------------- |  | ----------------------- | ------- | ---- | - | ------- | - | ---- | ------- | ---- | - | ------- |  | - | ------- | --
|                                                           |  | Year Ended December 31, |        
|                                                           |  | 2008                    |         | 2007 |   | 2006    |   | 2005 |         | 2004 |  
|Consolidated Income Statement Data                         |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         |   
|Net sales:                                                 |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         |   
|Products                                                   |  | $                       | 84,540  |      | $ | 84,628  |   | $    | 90,750  |      | $ | 94,296  |  | $ | 91,482  |   
|Services                                                   |  |                         | 30,683  |      |   | 23,304  |   |      | 20,778  |      |   | 21,987  |  |   | 20,242  |   
|Total net sales                                            |  |                         | 115,223 |      |   | 107,932 |   |      | 111,528 |      |   | 116,283 |  |   | 111,724 |   
|Cost of sales:                                             |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         |   
|Products                                                   |  |                         | 14,494  |      |   | 15,673  |   |      | 16,455  |      |   | 12,917  |  |   | 6,167   |   
|Services                                                   |  |                         | 13,263  |      |   | 11,830  |   |      | 10,011  |      |   | 8,669   |  |   | 9,532   |   
|Total cost of sales                                        |  |                         | 27,757  |      |   | 27,503  |   |      | 26,466  |      |   | 21,586  |  |   | 15,699  |   
|Gross profit                                               |  |                         | 87,466  |      |   | 80,429  |   |      | 85,062  |      |   | 94,697  |  |   | 96,025  |   
|Operating expenses:                                        |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         |   
|Product development                                        |  |                         | 17,396  |      |   | 18,506  |   |      | 17,291  |      |   | 17,046  |  |   | 14,536  |   
|Selling and marketing                                      |  |                         | 36,253  |      |   | 36,042  |   |      | 33,639  |      |   | 30,778  |  |   | 30,551  |   
|General and administrative                                 |  |                         | 15,283  |      |   | 14,951  |   |      | 16,330  |      |   | 12,989  |  |   | 12,005  |   
|Impairment of goodwill and intangible
 assets              |  |                         | 47,945  |      |   |        |   |      |        |      |   |        |  |   |        |   
|Total operating expenses                                   |  |                         | 116,877 |      |   | 69,499  |   |      | 67,260  |      |   | 60,813  |  |   | 57,092  |   
|Operating income (loss)                                    |  |                         | (29,411 | )    |   | 10,930  |   |      | 17,802  |      |   | 33,884  |  |   | 38,933  |   
|Other, net                                                 |  |                         | 819     |      |   | 1,178   |   |      | 1,234   |      |   | 3,494   |  |   | 1,640   |   
|Income (loss) - continuing operations
 before income taxes |  |                         | (28,592 | )    |   | 12,108  |   |      | 19,036  |      |   | 37,378  |  |   | 40,573  |   
|Income taxes - continuing operations                       |  |                         | 5,848   |      |   | 4,541   |   |      | 7,043   |      |   | 13,211  |  |   | 15,012  |   
|Income (loss) - continuing operations                      |  |                         | (34,440 | )    |   | 7,567   |   |      | 11,993  |      |   | 24,167  |  |   | 25,561  |   
|Income (loss) - discontinued operations                    |  |                         |        |      |   |        |   |      |        |      |   | 584     |  |   | (2,859  | ) 
|Net income (loss)                                          |  | $                       | (34,440 | )    | $ | 7,567   |   | $    | 11,993  |      | $ | 24,751  |  | $ | 22,702  |   
|                                                           |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         |   
|Earnings (loss) per share:                                 |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         |   
|Basic and diluted:                                         |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         |   
|Continuing operations                                      |  | $                       | (1.20   | )    | $ | 0.26    |   | $    | 0.41    |      | $ | 0.78    |  | $ | 0.82    |   
|Discontinued operations                                    |  |                         | 0.00    |      |   | 0.00    |   |      | 0.00    |      |   | 0.02    |  |   | (0.09   | ) 
|Net income (loss)                                          |  | $                       | (1.20   | )    | $ | 0.26    |   | $    | 0.41    |      | $ | 0.80    |  | $ | 0.73    |   
|                                                           |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         |   
|Cash dividends declared per share                          |  | $                       | 1.03    | *    | $ | 0.99    | * | $    | 0.20    |      | $ | 0.20    |  | $ | 2.31    | **
|                                                           |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         |   
|Consolidated Balance Sheet Data:                           |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         |   
|Working capital                                            |  | $                       | (15,335 | )    | $ | (6,543  | ) | $    | 15,282  |      | $ | 21,539  |  | $ | 41,815  |   
|Total assets                                               |  |                         | 56,926  |      |   | 113,300 |   |      | 117,711 |      |   | 128,382 |  |   | 114,724 |   
|Shareholders equity (deficit)                             |  |                         | (5,319  | )    |   | 57,987  |   |      | 79,571  |      |   | 95,866  |  |   | 84,417  |   

|                                                                    | 
|------------------------------------------------------------------- | 
|* Includes a
 special dividend in 2008 and 2007 of $0.75 per share.
|                                                                    | 
|** Includes a
 special dividend in 2004 of $2.15 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.

18

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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 an
allowance for estimated returns. Allowances for bad debts are also recorded at
the time of the sale.

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: (i) off-the-shelf or customized and (ii) whether it
is licensed on a perpetual basis or as a subscription. We recognize revenue
from off-the-shelf perpetually licensed software sales upon delivery to
customers. Subscription-based software sales are recognized as revenue on a
straight-line basis over the subscription period. Sales of software that
require substantial modification or customization are recognized as revenue
using the percentage-of-completion method of accounting. Revenues and deferred
revenues from software that require substantial modification or customization are
not significant in any of the years presented.

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.

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.

19

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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, manuals
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

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

An
important component of our software product strategy is a transition to a
subscription-based software sales model. We believe that a business model based
on subscription-based software offers long-term advantages over traditional
perpetual licensing, including: (i) improved product utilization leading to
higher levels of customer satisfaction, (ii) product adoption by more schools,
(iii) more lifetime revenue per customer and, (iv) a more predictable and
reliable revenue stream.

We
believe the percentage of customers using the subscription-based Enterprise version of our reading and math
products is an important indicator of: (i) the progress of this strategic
growth initiative, (ii) the magnitude of the growth opportunities still
existing with regard to this strategy and, (iii) the impact of the new seasonal
patterns on our business. As of the end of 2008, approximately 32% of our
active reading product customers were using the Enterprise version. Worldwide, we currently have
approximately 55,000 active Accelerated
Reader customers, 19,000 active Accelerated
Math customers and, 47,000 active STAR
Readingand STAR Math
customers. Customer counts have been adjusted from those previously reported as
we refined our counting process with respect to various factors, including: the
definition of an active customer school, how we count schools involved in a
district implementation and, how to handle transfers of products and
subscriptions between schools.

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 is
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 impact 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.

This
transition can also significantly affect reported financial results. Since our Renaissance Place product and service
offerings are typically sold on a subscription basis with a term of 12 months,
a large portion of our revenue is initially deferred and recognized into income
over the subscription period. Driven primarily by sales of our
subscription-based Enterprise
software packages, deferred revenue increased $8.5 million and $13.7 million,
over the years ended December 31, 2008 and 2007, respectively. This timing
difference between receipt
of an order and revenue recognition, on subscription based products and
services, can result in reported revenue being significantly lower or
significantly higher than the amount of orders received in any given period and
can also affect comparative results from one period to another.

20

---



Additionally,
our Renaissance Place products
are often sold at the school district level and district level sales are more
complex, have a longer sales cycle, and are typically for a larger dollar
amount than sales made to individual schools. Revenues from district sales are
therefore more uneven and more difficult to accurately predict than individual
school level sales. Consequently, our revenues and results of operations can be
significantly impacted by the timing of large district orders.

Large
infrequent charges are another factor that can significantly affect our results
of operations. In 2008 we recorded: (i) a non-cash, non-recurring charge of
$46.5 million (after tax) for impairment of goodwill and other intangible
assets related to the 2005 acquisition of AlphaSmart,
(ii) 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, (iii)
a $0.4 million charge to terminate contracts for professional development
events where we altered the timing or location of those events. In 2007 we took
a charge of $0.5 million to reorganize our product development resources,
reducing staff and assets related to the laptop line. Our 2006 net income and
results of operations was impacted by a charge of $1.9 million in separation
expense, primarily for former executives.

The
following table sets forth certain consolidated income statement data 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:

|                                           |  |      |       |      |  |       |   |  |       |  
|------------------------------------------ |  | ---- | ----- | ---- |  | ----- | - |  | ----- | -
|                                           |  | 2008 |       | 2007 |  | 2006  |  
|Net Sales:                                 |  |      |       |      |  |       |   |  |       |  
|Products                                   |  |      | 73.4  | %    |  | 78.4  | % |  | 81.4  | %
|Services                                   |  |      | 26.6  |      |  | 21.6  |   |  | 18.6  |  
|Total net sales                            |  |      | 100.0 |      |  | 100.0 |   |  | 100.0 |  
|Cost of sales:                             |  |      |       |      |  |       |   |  |       |  
|Products                                   |  |      | 17.1  |      |  | 18.5  |   |  | 18.1  |  
|Services                                   |  |      | 43.2  |      |  | 50.8  |   |  | 48.2  |  
|Total cost of sales                        |  |      | 24.1  |      |  | 25.5  |   |  | 23.7  |  
|Gross profit:                              |  |      |       |      |  |       |   |  |       |  
|Products                                   |  |      | 82.9  |      |  | 81.5  |   |  | 81.9  |  
|Services                                   |  |      | 56.8  |      |  | 49.2  |   |  | 51.8  |  
|Total gross profit                         |  |      | 75.9  |      |  | 74.5  |   |  | 76.3  |  
|Operating expenses:                        |  |      |       |      |  |       |   |  |       |  
|Product development                        |  |      | 15.1  |      |  | 17.1  |   |  | 15.5  |  
|Selling and marketing                      |  |      | 31.4  |      |  | 33.4  |   |  | 30.2  |  
|General and administrative                 |  |      | 13.3  |      |  | 13.9  |   |  | 14.6  |  
|Impairment of goodwill & intangible assets |  |      | 41.6  |      |  |      |   |  |      |  
|Operating income (loss)                    |  |      | (25.5 | )    |  | 10.1  |   |  | 16.0  |  
|Other, net                                 |  |      | 0.7   |      |  | 1.1   |   |  | 1.1   |  
|Income (loss) before taxes                 |  |      | (24.8 | )    |  | 11.2  |   |  | 17.1  |  
|Income tax provision                       |  |      | 5.1   |      |  | 4.2   |   |  | 6.3   |  
|Net Income (loss)                          |  |      | (29.9 | )%   |  | 7.0   | % |  | 10.8  | %

21

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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 the current year. 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.

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
is 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.

22

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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 of goodwill, (ii) $3.0 million for the AlphaSmart trademark and,
(iii) $0.9 million for the customer relationships. The overall current economic
climate, the more discretionary nature of school purchases of the laptop
products and, recent sales performance of this product line have caused us to
lower our 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 AlphaSmart impairment 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 is 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%. 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 is not deductible for income tax purposes it does 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 in 2008 for the difference between
the 37% rate and the actual rate of -20.5% reflected in the financial
statements. This compares to income tax expense of $4.5 million that was
recorded in 2007 at an effective income tax rate of 37.5% of pre-tax income.

Years Ended December 31, 2007 and 2006

Net
Sales.Our net sales decreased by $3.6 million, or
3.2%, to $107.9 million in 2007 from $111.5 million in 2006. A significant
portion of this decline was related to our customers purchasing more
subscription-based products and services, particularly Accelerated Reader.
Revenues from subscription-based products are initially deferred and then
recognized ratably over the subscription period, generally one year, while the
majority of revenues from non-subscription-based sales are recognized
immediately upon delivery. During 2007, deferred revenue increased by $13.7
million as compared to an increase of $5.7 million in 2006. Customer orders for
our products and services increased by approximately $5.2 million, or 4.3%, in
2007 as compared to 2006.

Product
revenue decreased by $6.1 million, or 6.7 %, to $84.6
million in 2007 from $90.7 million in 2006. Product revenues decreased
primarily due to the significant increase in deferred revenue and to a lesser
extent due to lower laptop sales.

Service
revenue increased by $2.5 million, or 12.2%, to $23.3
million in 2007 compared to $20.8 million in 2006. Service revenues increased
primarily due to order improvements for technical services such as application
hosting and installations, and in professional development services, both
remote and onsite, partially offset by the impact of not holding a national conference
in 2007.

Cost
of Sales.The cost of sales of products decreased by
$0.8 million, or 4.7%, to $15.7 million in 2007 from $16.5 million in 2006. As
a percentage of product sales, the cost of sales of products was 18.5% in 2007,
relatively unchanged from 18.1% in 2006.

The
cost of sales of services increased by $1.8 million, or 18.2%, to $11.8 million
in 2007 from $10.0 million in 2006. As a percentage of sales of services, the
cost of sales of services increased to 50.8% in 2007 from 48.2% in 2006
primarily due to personnel and infrastructure additions that were required for
some of our remote and technical services, and to price reductions in some of
our on-site professional development service offerings.

23

---



Our
overall gross profit margin percentage decreased to 74.5% in 2007 from 76.3% in
2006. This resulted from the lower service margins and the higher proportion of
total revenue attributable to services in 2007.

Product
Development.Product development expense, which
excludes amounts capitalized, increased by $1.2 million, or 6.9%, to $18.5
million in 2007 from $17.3 million in 2006. As a percentage of net sales,
product development expenses increased to 17.1% in 2007 from 15.5% in 2006. We
capitalized product development expenses of $0.2 million in 2007 compared to
$0.7 million in 2006. Product development expenses were higher in 2007
primarily due to: (i) a $0.5 million restructuring cost related to a partial
reorganization of product development resources for the laptop line in 2007,
(ii) the higher level of software development cost capitalized in 2006 than in
2007 and, (iii) a $0.3 million increase in research and development costs
related to our United Kingdom products.

Selling
and Marketing.Selling and marketing expenses
increased by $2.4 million, or 7.1%, to $36.0 million in 2007 from $33.6 million
in 2006. Selling and marketing expenses increased in 2007, partly due to
increased commissions as a result of higher customer order levels and partly
due to salaries as a result of our sales force expansion; partially offset by
lower spending on advertising and direct marketing. As a percentage of net
sales, selling and marketing expenses were 33.4% in 2007 compared to 30.2% in
2006.

General
and Administrative.General and administrative
expenses decreased by $1.4 million, or 8.4%, to $14.9 million in 2007 from
$16.3 million in 2006. General and administrative expenses were lower in 2007
primarily due to the impact of an executive severance charge of $1.9 million
taken in 2006. As a percentage of net sales, general and administrative
expenses decreased to 13.9% in 2007 from 14.6% in 2006.

Operating
Income.Operating income decreased by $6.9 million, or
38.6%, to $10.9 million in 2007 from $17.8 million in 2006. As a percentage of
net sales, operating income decreased to 10.1% in 2007 from 16.0% in 2006 due
to the combined effect of the factors discussed above.

Other
Income. Other income, which is mainly interest income
from our investment securities, was $1.2 million in 2007, unchanged from 2006.

Income
Tax Provision. Income tax expense of $4.5 million,
from continuing operations, was recorded in 2007 at an effective income tax
rate of 37.5% of pre-tax income, compared to $7.0 million, or 37.0%, of pre-tax
income for 2006. The higher tax rate in 2007 was primarily the result of the
adoption of the new accounting standard for uncertain tax positions, Financial
Interpretation No. 48 (FIN 48). The method for estimating, accruing and
recognizing expenses and benefits of uncertain income tax positions under FIN
48 is substantially different than under the previous accounting standard.

Liquidity and Capital Resources

As
of December 31, 2008, our cash, cash equivalents and investment securities were
$17.8 million, down $6.7 million from $24.5 million at December 31, 2007.
During 2008, we generated operating cash flow of $24.9 million.

As
of December 31, 2008 we have a $15.0 million secured revolving line of
credit with a bank which is available until July 1, 2009. 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, 2009 which
bears interest at the prime rate less 1.0%. As of December 31, 2008, the lines
of credit had not been used.

24

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On
April 17, 2002, our Board of Directors authorized the repurchase of up to
5,000,000 shares of our common stock, on February 9, 2005, our Board of
Directors authorized the repurchase of an additional 3,000,000 shares, and on
February 6, 2008, our Board of Directors authorized the repurchase of an
additional 1,000,000
shares under the stock repurchase program. No time limit was placed on the
duration of the repurchase program. Repurchased shares will become treasury
shares and will be used for stock-based employee benefit plans, equity
compensation plans and, for other general corporate purposes. From January 1,
2008 through December 31, 2008, we repurchased approximately 12,000 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 $135.0 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.

We
declared quarterly cash dividends of: $0.05 per share in the first and second
quarter of 2007 and $0.07 in the third and fourth quarter of 2007 along with a
special dividend of $0.75 per share in the third quarter of 2007. We declared
quarterly cash dividends of $0.07 per share in each of the four quarters of
2008 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: the companys financial
statements as of the most recent practicable date, the expected cash costs to
deliver the products and services recorded as deferred revenue, the companys
ability to provide the products and services underlying amounts recorded as
deferred revenue, the likelihood of recognizing amounts recorded as deferred
revenue as net sales based on the companys historical experience and most
recent projections and the short time period over which such recognition has
historically occurred and is expected to occur and, 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 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 by either the lessor or us for reasons other
than breach of the lease agreement. We plan to terminate the lease on a small
office facility in early 2009 for which we have a 90-day no-penalty option to
terminate. We do not anticipate the early termination of any other lease
agreements. For each of the years ended December 31, 2008, 2007 and 2006, we
incurred expenses of approximately $1.6 million, $2.2 million, and $2.0
million, respectively, related to these operating leases.

Purchase
Obligations. We enter into commitments with certain
suppliers to purchase components for our hardware products, such as AlphaSmart
computing devices, 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 or deposits
for unsettled audit issues. Estimation of the amounts and timing of payments in
periods after 2009 are highly uncertain and therefore are not included in the
table.

25

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As
of December 31, 2008, our approximate contractual obligations for operating
leases, tax audit payments and purchase obligations (by period due) were as
follows:

|                             |  |                        |       |                   |   |            |  |            |       |                    |   |     |  |   |   | 
|---------------------------- |  | ---------------------- | ----- | ----------------- | - | ---------- |  | ---------- | ----- | ------------------ | - | --- |  | - | - | 
|Contractual
 Obligations     |  | Payments Due by Period |      
|(In Thousands)               |  | Total                  |       | Less than 1
 year |   | 1-3
 years |  | 3-5
 years |       | More than
 5 years |  
|Operating
 lease obligations |  | $                      | 3,660 |                   | $ | 1,426      |  | $          | 1,548 |                    | $ | 686 |  | $ |  | 
|Tax audit
 related payments  |  |                        |      |                   |   |           |  |            |      |                    |   |    |  |   |  | 
|Purchase
 obligations        |  |                        | 2,292 |                   |   | 2,274      |  |            | 18    |                    |   |    |  |   |  | 
|Total                        |  | $                      | 5,952 |                   | $ | 3,700      |  | $          | 1,566 |                    | $ | 686 |  | $ |  | 

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 repay the current market value of the participants account
balance. As of December 31, 2008, we have fully funded the $1.3 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 repaid, 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, 2008, 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. The preparation of these financial statements
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.

Revenue
Recognition. We recognize revenue from our software
products in accordance with Statement of Position No. 97-2 Software Revenue Recognitionissued
by the Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants. Under this accounting standard, revenue is
recognized when 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 collectibility 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) on the
percentage-of-completion basis for software products which require significant
customization or modification, (iii) as seminars are performed for training
and
professional development services, (iv) straight-line over the term of the
support agreement for other software support agreements, (v) as the service is
performed or on a straight-line basis over the contractual period for
application hosting, technical and consulting services and, (vi) 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 a software arrangement, whether pricing is fixed and determinable,
whether collectibility is reasonably assured and, what the percentage of
completion is as of the financial reporting date.

26

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Expenses
are recognized and matched against revenues for the reporting period presented
in the financial statements. 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.
Changes in such allowances may be required if future returns or bad debt
activity differs from our estimates.

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
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 believe the economic problems could be
relatively prolonged, we lowered our forecast for orders of laptops and writing
software, which resulted in impairment charges 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.

Software
Support and Product Warranty Obligations.We record a liability for the estimated cost of
software support and hardware warranties at the time of sale. Estimated costs
are based upon 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 the cost of providing telephone support
and product return rates. If the actual costs of fulfilling these obligations
differ from our estimates, it could result in additional charges to cost of
sales 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.

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.

27

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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
December 2007, the FASB issued SFAS No. 141(R) Business Combination (SFAS
141R). SFAS 141R establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any noncontrolling interest in the acquiree
and the goodwill acquired. SFAS 141R also establishes disclosure requirements to
enable the evaluation of the nature and financial effects of the business
combination. SFAS 141R is effective for us on January 1, 2009. The impact of
SFAS 141R on our future consolidated financial statements will depend on the
size and nature of future acquisitions.

In
December 2007, the FASB issued SFAS No. 160 Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51
(SFAS 160). SFAS 160 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. SFAS 160 is effective for us on January 1, 2009. SFAS 160 is not
expected to have a material effect on our consolidated financial statements.

In
February 2007, the FASB issued SFAS No. 159 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment of FASB Statement No. 115,
(SFAS 159). This standard permits entities to measure many financial
instruments and certain other items at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The provisions of SFAS 159 were effective for us on January 1,
2008. We did not elect the fair value option and therefore SFAS 159 had no
effect on our consolidated financial statements.

In
September 2006, the FASB issued SFAS No. 157 Fair Value Measurements,
(SFAS 157), to establish a consistent framework for measuring fair value and
expand disclosures on fair value measurements. The provisions of SFAS 157 were
effective for us on January 1, 2008. The adoption of SFAS 157 had no impact on
our consolidated financial statements, but the adoption did result in
additional disclosures as set forth in Note 3(r) of Notes to 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 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 credit worthiness of the securities issuer, upgrades or
downgrades in the credit worthiness 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.

28

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Our
investment policy permits investments in obligations of the U.S. Treasury
department and its agencies, money market funds 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, 2008, our investment
securities had a market value of approximately $8.3 million and a carrying
value of $8.3 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, Euro and Indian rupee.
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
currency.

29

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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,
2008 and 2007, and the related consolidated statements of income, shareholders
equity, and cash flows for each of the three years in the period ended December
31, 2008. 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, 2008, based on criteria established
in Internal Control  Integrated Frameworkissued
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, 2008 and 2007, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2008, 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, 2008, based on the criteria established in Internal Control  Integrated Frameworkissued
by the Committee of Sponsoring Organizations of the Treadway Commission.

/s/ Deloitte & Touche LLP

Milwaukee, Wisconsin 
March 6, 2009

30

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES 
CONSOLIDATED BALANCE SHEETS 
As of December 31, 2008 and 2007

|                                                                                                                 |  |                                                     |         |      |   |         |  
|---------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------- | ------- | ---- | - | ------- | -
|                                                                                                                 |  | 2008                                                |         | 2007 |  
|                                                                                                                 |  |                                                     |         |      |  
|                                                                                                                 |  | (In Thousands, Except Share and
 Per Share Amounts) |        
|ASSETS                                                                                                           |  |                                                     |         |      |   |         |  
|Current assets:                                                                                                  |  |                                                     |         |      |   |         |  
|Cash and cash equivalents                                                                                        |  | $                                                   | 9,509   |      | $ | 7,337   |  
|Investment securities                                                                                            |  |                                                     | 4,894   |      |   | 8,136   |  
|Accounts receivable, less allowance of $1,090 and
$1,072,
 respectively                                          |  |                                                     | 8,083   |      |   | 8,791   |  
|Inventories                                                                                                      |  |                                                     | 5,504   |      |   | 6,273   |  
|Prepaid expenses                                                                                                 |  |                                                     | 1,999   |      |   | 2,197   |  
|Income taxes receivable                                                                                          |  |                                                     | 3,301   |      |   | 1,450   |  
|Deferred tax asset                                                                                               |  |                                                     | 4,183   |      |   | 4,406   |  
|Other current assets                                                                                             |  |                                                     | 144     |      |   | 300     |  
|Total current assets                                                                                             |  |                                                     | 37,617  |      |   | 38,890  |  
|Investment securities                                                                                            |  |                                                     | 3,383   |      |   | 8,982   |  
|Property, plant and equipment, net                                                                               |  |                                                     | 8,621   |      |   | 10,578  |  
|Deferred tax asset                                                                                               |  |                                                     | 2,742   |      |   | 1,587   |  
|Goodwill                                                                                                         |  |                                                     | 2,750   |      |   | 47,065  |  
|Other intangibles, net                                                                                           |  |                                                     | 1,178   |      |   | 5,579   |  
|Capitalized software, net                                                                                        |  |                                                     | 174     |      |   | 452     |  
|Other non-current assets                                                                                         |  |                                                     | 461     |      |   | 167     |  
|Total assets                                                                                                     |  | $                                                   | 56,926  |      | $ | 113,300 |  
|LIABILITIES
 AND SHAREHOLDERS EQUITY                                                                            |  |                                                     |         |      |   |         |  
|Current liabilities:                                                                                             |  |                                                     |         |      |   |         |  
|Accounts payable                                                                                                 |  | $                                                   | 1,712   |      | $ | 2,011   |  
|Deferred revenue                                                                                                 |  |                                                     | 43,975  |      |   | 35,675  |  
|Payroll and employee benefits                                                                                    |  |                                                     | 3,981   |      |   | 4,184   |  
|Other current liabilities                                                                                        |  |                                                     | 3,284   |      |   | 3,563   |  
|Total current liabilities                                                                                        |  |                                                     | 52,952  |      |   | 45,433  |  
|Deferred revenue                                                                                                 |  |                                                     | 2,950   |      |   | 2,707   |  
|Deferred compensation and other employee benefits                                                                |  |                                                     | 1,342   |      |   | 1,933   |  
|Income taxes payable                                                                                             |  |                                                     | 4,868   |      |   | 5,104   |  
|Other noncurrent liabilities                                                                                     |  |                                                     | 133     |      |   | 136     |  
|Total liabilities                                                                                                |  |                                                     | 62,245  |      |   | 55,313  |  
|Shareholders equity:                                                                                            |  |                                                     |         |      |   |         |  
|Common stock, $.01 par; shares authorized:
150,000,000; issued:
 34,736,647 shares at December 31, 2008 and 2007 |  |                                                     | 347     |      |   | 347     |  
|Additional paid-in capital                                                                                       |  |                                                     | 51,735  |      |   | 52,683  |  
|Retained earnings                                                                                                |  |                                                     | 38,492  |      |   | 102,887 |  
|Treasury stock, at cost: 5,557,679 shares at
December 31, 2008;
 5,703,450 shares at December 31, 2007           |  |                                                     | (95,568 | )    |   | (98,123 | )
|Accumulated other comprehensive income
(loss)                                                                    |  |                                                     | (325    | )    |   | 193     |  
|Total shareholders equity                                                                                       |  |                                                     | (5,319  | )    |   | 57,987  |  
|Total liabilities and shareholders
equity                                                                       |  | $                                                   | 56,926  |      | $ | 113,300 |  

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

31

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF INCOME 
For the Years Ended December 31, 2008, 2007 and 2006

|                                                   |  |                                           |         |      |   |         |  |   |         | 
|-------------------------------------------------- |  | ----------------------------------------- | ------- | ---- | - | ------- |  | - | ------- | 
|                                                   |  | 2008                                      |         | 2007 |   | 2006    | 
|                                                   |  | (In Thousands,
 Except Per Share Amounts) |        
|Net Sales:                                         |  |                                           |         |      |   |         |  |   |         | 
|Products                                           |  | $                                         | 84,540  |      | $ | 84,628  |  | $ | 90,750  | 
|Services                                           |  |                                           | 30,683  |      |   | 23,304  |  |   | 20,778  | 
|Total net sales                                    |  |                                           | 115,223 |      |   | 107,932 |  |   | 111,528 | 
|Cost of sales:                                     |  |                                           |         |      |   |         |  |   |         | 
|Products                                           |  |                                           | 14,494  |      |   | 15,673  |  |   | 16,455  | 
|Services                                           |  |                                           | 13,263  |      |   | 11,830  |  |   | 10,011  | 
|Total cost of sales                                |  |                                           | 27,757  |      |   | 27,503  |  |   | 26,466  | 
|Gross profit                                       |  |                                           | 87,466  |      |   | 80,429  |  |   | 85,062  | 
|Operating expenses:                                |  |                                           |         |      |   |         |  |   |         | 
|Product development                                |  |                                           | 17,396  |      |   | 18,506  |  |   | 17,291  | 
|Selling and marketing                              |  |                                           | 36,253  |      |   | 36,042  |  |   | 33,639  | 
|General and administrative                         |  |                                           | 15,283  |      |   | 14,951  |  |   | 16,330  | 
|Impairment of goodwill and other intangible
assets |  |                                           | 47,945  |      |   |        |  |   |        | 
|Total operating expenses                           |  |                                           | 116,877 |      |   | 69,499  |  |   | 67,260  | 
|Operating income (loss)                            |  |                                           | (29,411 | )    |   | 10,930  |  |   | 17,802  | 
|Other income:                                      |  |                                           |         |      |   |         |  |   |         | 
|Interest income                                    |  |                                           | 696     |      |   | 1,009   |  |   | 1,078   | 
|Other, net                                         |  |                                           | 123     |      |   | 169     |  |   | 156     | 
|Income (loss) before taxes                         |  |                                           | (28,592 | )    |   | 12,108  |  |   | 19,036  | 
|Income tax provision                               |  |                                           | 5,848   |      |   | 4,541   |  |   | 7,043   | 
|Net income (loss)                                  |  | $                                         | (34,440 | )    | $ | 7,567   |  | $ | 11,993  | 
|                                                   |  |                                           |         |      |   |         |  |   |         | 
|Earnings (loss) per share:                         |  |                                           |         |      |   |         |  |   |         | 
|Basic and diluted                                  |  | $                                         | (1.20   | )    | $ | 0.26    |  | $ | 0.41    | 

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

32

---



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
For the Years Ended December 31, 2008, 2007 and 2006

|                                                          |  |                        |     |                            |   |                  |   |               |         |                                   |   |                                         |   |   |      |   |   |         |  
|--------------------------------------------------------- |  | ---------------------- | --- | -------------------------- | - | ---------------- | - | ------------- | ------- | --------------------------------- | - | --------------------------------------- | - | - | ---- | - | - | ------- | -
|                                                          |  | Common StockAmount (1) |     | Additional
 Paid-inCapital |   | RetainedEarnings |   | TreasuryStock |         | Other
 ComprehensiveIncome (Loss) |   | Accumulated
 Total
 ShareholdersEquity |  
|                                                          |  | (In Thousands)         |    
|Balance, December 31, 2005                                |  | $                      | 347 |                            | $ | 56,084           |   | $             | 118,233 |                                   | $ | (78,845                                 | ) | $ | 47   |   | $ | 95,866  |  
|                                                          |  |                        |     |                            |   |                  |   |               |         |                                   |   |                                         |   |   |      |   |   |         |  
|Net income                                                |  |                        |    |                            |   |                 |   |               | 11,993  |                                   |   |                                        |   |   |     |   |   | 11,993  |  
|Foreign currency translation                              |  |                        |    |                            |   |                 |   |               |        |                                   |   |                                        |   |   | 27   |   |   | 27      |  
|Comprehensive income                                      |  |                        |     |                            |   |                  |   |               |         |                                   |   |                                         |   |   |      |   |   | 12,020  |  
|Dividends ($.20 per share)                                |  |                        |    |                            |   |                 |   |               | (5,936  | )                                 |   |                                        |   |   |     |   |   | (5,936  | )
|Stock repurchased for treasury                            |  |                        |    |                            |   |                 |   |               |        |                                   |   | (22,474                                 | ) |   |     |   |   | (22,474 | )
|Exercise of stock options                                 |  |                        |    |                            |   | (2               | ) |               |        |                                   |   | 18                                      |   |   |     |   |   | 16      |  
|Payment for cancellation of stock options                 |  |                        |    |                            |   | (1,001           | ) |               |        |                                   |   |                                        |   |   |     |   |   | (1,001  | )
|Share-based compensation                                  |  |                        |    |                            |   | 687              |   |               |        |                                   |   |                                        |   |   |     |   |   | 687     |  
|Excess tax benefits from share-based payment arrangements |  |                        |    |                            |   | 393              |   |               |        |                                   |   |                                        |   |   |     |   |   | 393     |  
|Restricted stock grants                                   |  |                        |    |                            |   | (2,036           | ) |               |        |                                   |   | 2,036                                   |   |   |     |   |   |        |  
|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 income (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  | )

(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.

33

---



RENAISSANCE LEARNING, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2008, 2007 and 2006

|                                                                                           |  |                |         |      |   |         |   |   |         |  
|------------------------------------------------------------------------------------------ |  | -------------- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                           |  | 2008           |         | 2007 |   | 2006    |  
|                                                                                           |  | (In Thousands) |        
|Reconciliation of net income to net cash
 provided by operating activities:                |  |                |         |      |   |         |   |   |         |  
|Net income (loss)                                                                          |  | $              | (34,440 | )    | $ | 7,567   |   | $ | 11,993  |  
|Adjustments to arrive at cash provided by
 operating activities:                           |  |                |         |      |   |         |   |   |         |  
|Depreciation and amortization                                                              |  |                | 3,718   |      |   | 3,838   |   |   | 3,541   |  
|Amortization of investment
 discounts/premiums                                             |  |                | 107     |      |   | 34      |   |   | 163     |  
|Share-based compensation expense                                                           |  |                | 1,397   |      |   | 1,109   |   |   | 687     |  
|Impairment of goodwill and other intangible
 assets                                        |  |                | 47,945  |      |   |        |   |   |        |  
|Deferred income taxes                                                                      |  |                | (1,270  | )    |   | (1,305  | ) |   | 2,719   |  
|Excess tax benefits from share based
 payment arrangements                                 |  |                | (113    | )    |   | (10     | ) |   | (393    | )
|(Gain) loss on sale of property                                                            |  |                | 223     |      |   | 30      |   |   | (4      | )
|Change in assets and liabilities, excluding
 the effects of acquisitions and divestitures: |  |                |         |      |   |         |   |   |         |  
|Accounts receivable                                                                        |  |                | 708     |      |   | 1,737   |   |   | 938     |  
|Inventories                                                                                |  |                | 768     |      |   | (2,165  | ) |   | (334    | )
|Prepaid expenses                                                                           |  |                | 198     |      |   | (331    | ) |   | (291    | )
|Income taxes                                                                               |  |                | (1,637  | )    |   | 2,715   |   |   | (975    | )
|Accounts payable and other liabilities                                                     |  |                | (783    | )    |   | (1,147  | ) |   | (1,405  | )
|Deferred revenue                                                                           |  |                | 8,543   |      |   | 13,747  |   |   | 5,711   |  
|Other current assets                                                                       |  |                | 156     |      |   | (203    | ) |   | 293     |  
|Other                                                                                      |  |                | (579    | )    |   | 337     |   |   | (375    | )
|Net cash provided by operating activities                                                  |  |                | 24,941  |      |   | 25,953  |   |   | 22,268  |  
|Cash flows
 from investing activities:                                                     |  |                |         |      |   |         |   |   |         |  
|Purchase of property, plant and equipment                                                  |  |                | (1,281  | )    |   | (2,147  | ) |   | (2,819  | )
|Purchase of investment securities                                                          |  |                |        |      |   | (26,441 | ) |   | (20,040 | )
|Maturities/sales of investment securities                                                  |  |                | 8,185   |      |   | 33,746  |   |   | 23,220  |  
|Capitalized software development costs                                                     |  |                | (142    | )    |   | (203    | ) |   | (689    | )
|Proceeds from mortgage note                                                                |  |                |        |      |   |        |   |   | 5,909   |  
|Net proceeds from sale of property                                                         |  |                | 118     |      |   | 570     |   |   | 23      |  
|Net cash provided by investing activities                                                  |  |                | 6,880   |      |   | 5,525   |   |   | 5,604   |  
|Cash flows
 from financing activities:                                                     |  |                |         |      |   |         |   |   |         |  
|Proceeds from exercise of stock options                                                    |  |                | 348     |      |   | 30      |   |   | 16      |  
|Payment for cancellation of stock options                                                  |  |                |         |      |   |        |   |   | (1,001  | )
|Excess tax benefits from share-based
 payment arrangements                                 |  |                | 113     |      |   | 10      |   |   | 393     |  
|Dividends paid                                                                             |  |                | (29,955 | )    |   | (28,699 | ) |   | (5,936  | )
|Purchase of treasury stock                                                                 |  |                | (155    | )    |   | (1,435  | ) |   | (22,474 | )
|Net cash used by financing activities                                                      |  |                | (29,649 | )    |   | (30,094 | ) |   | (29,002 | )
|Net increase (decrease) in cash and cash
 equivalents                                      |  |                | 2,172   |      |   | 1,384   |   |   | (1,130  | )
|Cash and cash equivalents, beginning of
 period                                            |  |                | 7,337   |      |   | 5,953   |   |   | 7,083   |  
|Cash and cash equivalents, end of period                                                   |  | $              | 9,509   |      | $ | 7,337   |   | $ | 5,953   |  
|                                                                                           |  |                |         |      |   |         |   |   |         |  
|Supplemental cash flow information                                                         |  |                |         |      |   |         |   |   |         |  
|Cash
 paid during the year for -Income taxes (net of refunds)                              |  | $              | 8,046   |      | $ | 2,979   |   | $ | 5,281   |  

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

34

---



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 other
software and service brands include: STAR Reading, STAR Early Literacy, Read Now Power
Up!, Accelerated Math, STAR Math, MathFacts in a FlashandEnglish 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.

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

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

The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported 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.

35

---



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

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

We
recognize revenue from our software products in accordance with Statement of
Position No. 97-2 Software Revenue Recognition(SOP 97-2)issued
by the Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants. Revenues are recorded net of an allowance for
estimated returns. Allowances for bad debts are also recorded at the time of
the sale.

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: (i) off-the-shelf or customized
and (ii) whether it is licensed on a perpetual basis or as a subscription. We
recognize revenue from off-the-shelf perpetually licensed software sales upon
shipment to customers. Subscription-based software sales are recognized as
revenue on a straight-line basis over the subscription period. Sales of
software that require substantial modification or customization are recognized
as revenue using the percentage-of-completion method of accounting. Revenues
and deferred revenues from software that require substantial modification or
customization are not significant in any of the years presented.

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 support agreements and subscription-based product sales that has not
yet been recognized as revenue.

| |     |                                              
| | --- | ---------------------------------------------
| | (c) | 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 requires 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.

36

---



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

We
performed testing of our goodwill and other intangible assets at December 31,
2008 and 2007. Our testing in 2007 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.

| |     |                                                                                                                                                                                                                                                                                        
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (d) | Cash and cash equivalents                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                        
| |     | Cash amounts
 on deposit at banks 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 time
 deposits at December 31, 2008 and 2007.
| |     |                                                                                                                                                                                                                                                                                        
| | (e) | Investment securities                                                                                                                                                                                                                                                                  

We
classify our investment securities as held-to-maturity, available for sale
or, trading in accordance with the provisions of Statement of Financial
Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity
Securities (SFAS 115).

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
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.

Auction
rate securities are classified as available for sale. Auction rate securities
are liquid investments with interest rates that are reset through a Dutch
auction process that occurs every 7 to 49 days, depending on the terms of the
individual security. The underlying securities have long-term maturities. Our
auction rate securities are stated at cost, which closely approximates fair
market value and, therefore, there were no unrealized gains or losses related
to these securities included in accumulated other comprehensive income (loss).

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.

37

---



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

Investment
securities consisted of the following at December 31:

| |                                          |  |                 |       |             |   |                 |  |             |        |  |   |        | 
| | ---------------------------------------- |  | --------------- | ----- | ----------- | - | --------------- |  | ----------- | ------ |  | - | ------ | 
| |                                          |  | 2008            |       | 2007        |  
| |                                          |  | Carrying
 Value |       | Fair
 Value |   | Carrying
 Value |  | Fair
 Value |       
| |                                          |  | (In Thousands)  |      
| | Debt securities due in less than 1 year: |  |                 |       |             |   |                 |  |             |        |  |   |        | 
| | Auction rate securities                  |  | $               |      |             | $ |                |  | $           | 2,500  |  | $ | 2,500  | 
| | Municipal bonds                          |  |                 | 4,894 |             |   | 4,940           |  |             | 5,636  |  |   | 5,654  | 
| | Current investment securities            |  |                 | 4,894 |             |   | 4,940           |  |             | 8,136  |  |   | 8,154  | 
| | Debt securities due in 1 to 2 years:     |  |                 |       |             |   |                 |  |             |        |  |   |        | 
| | Municipal bonds                          |  |                 | 1,502 |             |   | 1,515           |  |             | 7,051  |  |   | 7,078  | 
| | Other                                    |  |                 | 500   |             |   | 500             |  |             |       |  |   |       | 
| | Equity securities:                       |  |                 |       |             |   |                 |  |             |        |  |   |        | 
| | Mutual fund investments                  |  |                 | 1,381 |             |   | 1,381           |  |             | 1,931  |  |   | 1,931  | 
| | Non-current investment securities        |  |                 | 3,383 |             |   | 3,396           |  |             | 8,982  |  |   | 9,009  | 
| | Total investment securities              |  | $               | 8,277 |             | $ | 8,336           |  | $           | 17,118 |  | $ | 17,163 | 

(f)          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.

(g)          
Advertising costs

Advertising
costs are expensed as the advertising takes place. Advertising expenses for 2008,
2007 and 2006 were approximately $4.2 million, $4.6 million and, $6.5 million,
respectively.

(h)          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 $2.8 million, $2.8 million and, $2.5 million for 2008, 2007 and,
2006, 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.

38

---



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

Net
property, plant and equipment consisted of the following at December 31:

| |                                                   |  |                 |        |      |   |        | 
| | ------------------------------------------------- |  | --------------- | ------ | ---- | - | ------ | 
| |                                                   |  | 2008            |        | 2007 |  
| |                                                   |  | (In
 Thousands) |       
| | Land and improvements                             |  | $               | 1,146  |      | $ | 1,146  | 
| | Buildings                                         |  |                 | 9,520  |      |   | 9,587  | 
| | Furniture, fixtures and
 office equipment         |  |                 | 4,088  |      |   | 4,772  | 
| | Computer and production
 equipment                |  |                 | 12,771 |      |   | 12,870 | 
| | Other                                             |  |                 | 1,511  |      |   | 1,490  | 
| | Total property, plant and equipment               |  |                 | 29,036 |      |   | 29,865 | 
| | Less - accumulated
 depreciation and amortization |  |                 | 20,415 |      |   | 19,287 | 
| | Property, plant and
 equipment, net               |  | $               | 8,621  |      | $ | 10,578 | 

(i)          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 $0.1
million, $0.2 million and $0.7 million in 2008, 2007 and 2006, respectively.
Amortization expense of approximately $0.4 million, $0.5 million and $0.4
million for 2008, 2007 and 2006, respectively, is included in cost of
sales-products in the consolidated statements of income. At December 31, 2008
and 2007, accumulated amortization of capitalized software development costs
was $0.2 million and $0.4 million, respectively.

(j)          
Sales and concentration of credit risks

We
grant 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 2008, 2007, and 2006, no single customer
represented more than 10% of net sales or accounts receivable.

(k)          Share-based
compensation

Effective
January 1, 2006, we adopted Statement of Financial Accounting Standards No.
123(R) Share-Based Payments
(SFAS 123R), using the modified prospective application transition method.
This method requires compensation cost to be recognized beginning on the
effective date: (a) based on the requirements of SFAS 123R for all share-based
payments granted after the effective date and, (b) based on the requirements of
SFAS 123R for all awards granted to employees prior to the effective date of
SFAS 123R that remain unvested on the effective date. As such, prior periods do
not reflect restated amounts.

39

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

No
stock-based employee compensation expense related to stock options or our stock
purchase plans was reflected in net income prior to January 1, 2006. SFAS 123R
requires us to report the tax benefit from the tax deduction that is in excess
of recognized compensation costs (excess tax benefits) as a financing cash
flow. 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).

(l)          Earnings
per common share

Earnings
per share is computed in accordance with Statement of Financial Accounting
Standards No. 128 Earnings per Share (SFAS
128). Basic earnings per common share (Basic EPS) is computed by dividing
income available to common shareholders by the weighted average number of
common shares outstanding during the period. Shares issued and shares
reacquired during the period are weighted for the portion of the period they
were outstanding.

Diluted
earnings per common share (Diluted EPS) is computed similarly to Basic EPS
except that the weighted average number of shares outstanding is increased to
include the number of additional common shares that would have been outstanding
if the potentially dilutive common shares had been issued. Our potentially
dilutive common shares consist of unexercised stock options and restricted
shares.

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). Consequentially, stock options with an
exercise price greater than the average market price for the period; restricted
stock awards with a grant price greater than the average market price for the
period and; all outstanding potential common shares in a period with a loss;
are Antidilutive Securities. For the years ended December 31, 2008, 2007 and 2006,
the number of Antidilutive Securities were approximately 1,080,000, 919,000 and
849,000, respectively.

The
weighted average shares outstanding are as follows:

| |                                               |  |      |            |      |  |            |  |  |            | 
| | --------------------------------------------- |  | ---- | ---------- | ---- |  | ---------- |  |  | ---------- | 
| |                                               |  | 2008 |            | 2007 |  | 2006       | 
| | Basic weighted average
 shares outstanding    |  |      | 28,761,366 |      |  | 28,792,337 |  |  | 29,551,309 | 
| | Dilutive effect of
 outstanding stock options |  |      |           |      |  | 2,982      |  |  | 7,626      | 
| | Dilutive effect of
 restricted shares         |  |      |           |      |  | 31,301     |  |  | 10,325     | 
| | Diluted weighted average
 shares outstanding  |  |      | 28,761,366 |      |  | 28,826,620 |  |  | 29,569,260 | 

(m)          Income
taxes

We
account for income taxes according to the provisions of Statement of Financial
Accounting Standards No. 109 Accounting for
Income Taxes (SFAS 109). SFAS 109 requires an asset and liability
based approach to accounting for income taxes. 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). Valuation allowances are provided when it is
anticipated that a deferred tax asset is not likely to be fully realized.
Effective January 1, 2007, we adopted Financial Interpretation No. 48 Accounting for Uncertainty in Income Taxes
(FIN 48) and account for liabilities related to uncertain tax positions in
accordance with its provisions (see Note 6).

40

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

(n)          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, 2008, 2007 and
2006, 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.

(o)         
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.

(p)          Sales,
use and value added taxes

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

(q)          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. Our deferred revenue for product warranty and support
obligations is $3.4 million and $2.6 million for 2008 and 2007, respectively.

The
changes in our aggregate product warranty and support liabilities were as
follows:

|                                                                                                                |  |                |        |  
|--------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ | -
|                                                                                                                |  | (In Thousands) |       
|Balance at December 31, 2006                                                                                    |  | $              | 1,195  |  
|Amount expensed for new warranty and support obligations and changes
 in estimates for pre-existing obligations |  |                | 4,571  |  
|Cost of warranty and support provided during the year                                                           |  |                | (4,463 | )
|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  |  

(r)        
Fair value measurements

41

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

Certain
of our assets and liabilities are reported at fair value in our consolidated
financial statements. Statement of Financial Accounting Standards No. 157 Fair Value Measurements (SFAS 157)
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
following tables provide fair value measurement information for these assets
and liabilities as of December 31, 2008 and 2007. The carrying values of cash
and cash equivalents, accounts receivable, accounts payable (including income
taxes payable and accrued expenses), goodwill and, other intangible assets
approximated fair value at December 31, 2008 and 2007. These assets and
liabilities are not presented in the following tables. See Note 3(c) and Note 4
regarding goodwill and other intangible assets.

|                                   |                  |      |                   |  |                 |       |                 |                               |                 |  |   |     |  |   |   | 
|---------------------------------- | ---------------- | ---- | ----------------- |  | --------------- | ----- | --------------- | ----------------------------- | --------------- |  | - | --- |  | - | - | 
|                                   |                  | 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 |                 |                               | 1,515           |  |   | 500 |  |   |  | 
|SERP liability (see Note
 10)      |                  |      | 1,381             |  |                 | 1,381 |                 |                               | 1,381           |  |   |    |  |   |  | 

|                                   |  |      |                  |  |   |                   |  |                               |                 |  |   |                 |  |   |                 | 
|---------------------------------- |  | ---- | ---------------- |  | - | ----------------- |  | ----------------------------- | --------------- |  | - | --------------- |  | - | --------------- | 
|                                   |  | 2007
|                                   |  |      |                  |  |   |                   |  | Fair Value Measurements Using
|(In Thousands)                     |  |      | Carrying
 Amount |  |   | Total Fair
 Value |  |                               | Level 1
 Inputs |  |   | Level 2
 Inputs |  |   | Level 3
 Inputs | 
|Current investment
 securities     |  | $    | 8,136            |  | $ | 8,154             |  | $                             | 5,654           |  | $ | 2,500           |  | $ |                | 
|Non-current investment
 securities |  |      | 7,051            |  |   | 7,078             |  |                               | 7,078           |  |   |                |  |   |                | 
|SERP liability (see Note
 10)      |  |      | 1,931            |  |   | 1,931             |  |                               | 1,931           |  |   |                |  |   |                | 

|    |                                     
|--- | ------------------------------------
|(4) | Goodwill and other intangible assets

Under
Statement of Financial Accounting Standards No. 142 Goodwill and Other Intangible Assets (SFAS 142), we are
required to assess goodwill and other intangibles with indefinite lives at
least annually for impairment by applying a fair-value-based test. We performed
testing of our goodwill and other intangible assets at December 31, 2008 and
2007. 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(c)) that we believe were appropriate in
the circumstances.

Our
testing in 2007 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,

42

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

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.

The
following table summarizes the change in goodwill:

|                             |  |                 |         |  
|---------------------------- |  | --------------- | ------- | -
|                             |  | (In
 Thousands) |        
|Balance at December 31, 2006 |  | $               | 46,973  |  
|Currency translation         |  |                 | 92      |  
|Balance at December 31, 2007 |  |                 | 47,065  |  
|Impairment                   |  |                 | (43,995 | )
|Other goodwill adjustments   |  |                 | (205    | )
|Currency translation         |  |                 | (115    | )
|Balance at December 31, 2008 |  | $               | 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 |    
|2006 (actual)    |  | $                     | 0.7 | 
|2007             |  |                       | 0.5 | 
|2008             |  |                       | 0.5 | 
|                 |  |                       |     | 
|2009 (estimated) |  | $                     | 0.3 | 
|2010             |  |                       | 0.2 | 
|2011             |  |                       | 0.2 | 
|2012             |  |                       | 0.1 | 
|2013             |  |                       | 0.1 | 

Other
intangibles consisted of the following:

|                       |  |                   |       |                           |   |            |  |     |       |               |   |                           |  |     |       |  |   |       |  |   |       | 
|---------------------- |  | ----------------- | ----- | ------------------------- | - | ---------- |  | --- | ----- | ------------- | - | ------------------------- |  | --- | ----- |  | - | ----- |  | - | ----- | 
|                       |  | December 31, 2008 |       | December 31, 2007         |  
|                       |  | Gross
 Amount     |       | Accumulated
 Amortization |   | Impairment |  | Net |       | Gross
 Amount |   | Accumulated
 Amortization |  | Net |      
|                       |  | (In
 Thousands)   |      
|Tradename              |  | $                 | 3,000 |                           | $ |           |  | $   | 3,000 |               | $ |                          |  | $   | 3,000 |  | $ |      |  | $ | 3,000 | 
|Customer relationships |  |                   | 4,150 |                           |   | 2,022      |  |     | 950   |               |   | 1,178                     |  |     | 4,150 |  |   | 1,571 |  |   | 2,579 | 
|Other intangibles      |  | $                 | 7,150 |                           | $ | 2,022      |  | $   | 3,950 |               | $ | 1,178                     |  | $   | 7,150 |  | $ | 1,571 |  | $ | 5,579 | 

43

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

|    |             
|--- | ------------
|(5) | Income taxes

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 is not deductible for income tax purposes it does 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 in 2008 for the difference between
the 37.0% rate and the actual rate of -20.5% reflected in the financial
statements. This compares to an income tax provision in 2007 of $4.5 million at
an effective rate of 37.5% and an income tax provision in 2006 of $7.0 million
at an effective rate of 37.0%.

The provision
for income taxes from continuing operations consisted of:

|                              |  |                |        |      |   |        |   |   |       | 
|----------------------------- |  | -------------- | ------ | ---- | - | ------ | - | - | ----- | 
|                              |  |                |        |      |   |        |   |   |       | 
|                              |  | 2008           |        | 2007 |   | 2006   |  
|                              |  | (In Thousands) |       
|Current tax provision:        |  |                |        |      |   |        |   |   |       | 
|U.S. federal                  |  | $              | 6,504  |      | $ | 5,081  |   | $ | 3,783 | 
|State and local               |  |                | 541    |      |   | 696    |   |   | 518   | 
|Foreign                       |  |                | 73     |      |   | 69     |   |   | 23    | 
|Total current tax
 provision  |  |                | 7,118  |      |   | 5,846  |   |   | 4,324 | 
|Deferred tax provision:       |  |                |        |      |   |        |   |   |       | 
|U.S. federal                  |  |                | (1,198 | )    |   | (1,231 | ) |   | 2,571 | 
|State and local               |  |                | (72    | )    |   | (74    | ) |   | 148   | 
|Total deferred tax
 provision |  |                | (1,270 | )    |   | (1,305 | ) |   | 2,719 | 
|Provision for income taxes    |  | $              | 5,848  |      | $ | 4,541  |   | $ | 7,043 | 

Effective rate
reconciliation:

|                                                  |  |                 |         |      |  |       |    |   |       |   |  |      |    |   |       |   |  |      |   
|------------------------------------------------- |  | --------------- | ------- | ---- |  | ----- | -- | - | ----- | - |  | ---- | -- | - | ----- | - |  | ---- | --
|                                                  |  | 2008            |         | 2007 |  | 2006  |   
|                                                  |  | (In
 Thousands) |        
|Income tax provision at statutory tax rate        |  | $               | (10,007 | )    |  | 35.0  | %  | $ | 4,239 |   |  | 35.0 | %  | $ | 6,663 |   |  | 35.0 | % 
|State and local taxes, net of federal tax benefit |  |                 | 432     |      |  | (1.5  | %) |   | 379   |   |  | 3.1  | %  |   | 433   |   |  | 2.3  | % 
|Federal tax credits and exclusions                |  |                 | (509    | )    |  | 1.8   | %  |   | (469  | ) |  | (3.9 | %) |   | (82   | ) |  | (0.4 | %)
|Provision for uncertain tax positions             |  |                 | 249     |      |  | (0.9  | %) |   | 507   |   |  | 4.2  | %  |   | 171   |   |  | 0.9  | % 
|Goodwill impairment                               |  |                 | 15,398  |      |  | (53.9 | %) |   |      |   |  |     |    |   |      |   |  |     |   
|Other                                             |  |                 | 285     |      |  | (1.0  | %) |   | (115  | ) |  | (0.9 | %) |   | (142  | ) |  | (0.8 | %)
|Provision for income taxes                        |  | $               | 5,848   |      |  | (20.5 | %) | $ | 4,541 |   |  | 37.5 | %  | $ | 7,043 |   |  | 37.0 | % 

44

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

Deferred
tax assets consisted of the following at December 31:

|                                               |  |                |       |      |   |        |  
|---------------------------------------------- |  | -------------- | ----- | ---- | - | ------ | -
|                                               |  | 2008           |       | 2007 |  
|                                               |  | (In Thousands) |      
|Current deferred tax
 assets:                  |  |                |       |      |   |        |  
|Deferred revenue                               |  | $              | 1,742 |      | $ | 1,768  |  
|Expenses not currently deductible              |  |                | 2,441 |      |   | 2,638  |  
|Net current deferred tax
 assets               |  |                | 4,183 |      |   | 4,406  |  
|Noncurrent deferred tax
 assets (liabilities): |  |                |       |      |   |        |  
|Deferred revenue                               |  |                | 105   |      |   | 104    |  
|Expenses not currently deductible              |  |                | 1,888 |      |   | 2,401  |  
|Depreciation and amortization                  |  |                | 780   |      |   | 495    |  
|Intangibles                                    |  |                | (31   | )    |   | (1,413 | )
|Net noncurrent deferred
 tax asset             |  |                | 2,742 |      |   | 1,587  |  
|Total deferred tax assets                      |  | $              | 6,925 |      | $ | 5,993  |  

|    |                        
|--- | -----------------------
|(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 2005. 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 2004. We are
not currently under examination by the U.S. Internal Revenue Service or the
state of Wisconsin. We are currently under examination by the state of
Tennessee for 2005 and 2006.

A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:

|                                                             |  |     |       |                       |   |       |   |   |       |  
|------------------------------------------------------------ |  | --- | ----- | --------------------- | - | ----- | - | - | ----- | -
|(In
 Thousands)                                              |  | Tax |       | Interest &
 penalties |   | Total |  
|Balance at January 1, 2007                                   |  | $   | 3,034 |                       | $ | 1,159 |   | $ | 4,193 |  
|Additions for tax positions related to the current year      |  |     | 730   |                       |   | 40    |   |   | 770   |  
|Additions for tax positions of prior years                   |  |     | 61    |                       |   | 265   |   |   | 326   |  
|Reductions due to lapse of applicable statute of limitations |  |     | (55   | )                     |   | (17   | ) |   | (72   | )
|Settlements                                                  |  |     | (81   | )                     |   | (32   | ) |   | (113  | )
|Balance at December 31,
 2007                                |  |     | 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 |  

Included
in the unrecognized tax benefits of $3.6 million at December 31, 2008 is $3.0
million of tax benefits that, if recognized, would reduce our annual effective
tax rate. We do not anticipate that our total amount of unrecognized tax
benefits will significantly change during 2009 or that we will be 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.

45

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

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

As
of December 31, 2008 we have a $15.0 million secured revolving line of credit
with a bank which is available until July 1, 2009. 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, 2009 which bears interest at the
prime rate less 1.0%. We did not draw on the lines of credit during 2008, 2007
or 2006.

|    |                  
|--- | -----------------
|(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 2008, 2007 and 2006 was $1.6 million, $2.2 million
and $2.0 million, respectively.

Future
approximate minimum rental payments (including estimated operating costs)
required under operating leases as of December 31, 2008 are as follows:

| |            |  |                |       | 
| | ---------- |  | -------------- | ----- | 
| |            |  | (In Thousands) |      
| |            |  |                |       | 
| | 2009       |  | $              | 1,426 | 
| | 2010       |  |                | 954   | 
| | 2011       |  |                | 594   | 
| | 2012       |  |                | 393   | 
| | 2013       |  |                | 293   | 
| | After 2013 |  |                |      | 
| |            |  | $              | 3,660 | 

|    |           
|--- | ----------
|(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.

46

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
NOTES 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 2008, 2007 or 2006.

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 $1.3 million at December 31, 2008 and $1.9 million, at December
31, 2007.

The
following summarizes our expense under these retirement plans:

|                                              |  |                 |       |      |   |       |  |   |       | 
|--------------------------------------------- |  | --------------- | ----- | ---- | - | ----- |  | - | ----- | 
|                                              |  | 2008            |       | 2007 |   | 2006  | 
|                                              |  | (In
 Thousands) |      
|                                              |  |                 |      
|Employer matching
 contribution - 401(k) plan |  | $               | 1,573 |      | $ | 1,459 |  | $ | 1,318 | 
|Employer matching
 contribution - SERP        |  |                 | 18    |      |   | 18    |  |   | 15    | 
|Total                                         |  | $               | 1,591 |      | $ | 1,477 |  | $ | 1,333 | 

(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
6,000,000 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, 2008, there were approximately 2.0 million
shares available for issuance under the Plan.

During
the year ended December 31, 2008, we recognized approximately $1.4 million in
share-based compensation expense related to restricted stock. During the year
ended December 31, 2007, we recognized compensation expense of approximately
$1.0 million related to restricted stock and $0.1 million related to stock
options. Cash received from stock option exercises was approximately $262,000
in 2008 and $17,000 in 2007. The total income tax benefit related to
share-based compensation, which is recorded in additional paid-in capital, was
approximately $113,000 and $10,000 for the years ended December 31, 2008 and
2007, 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.

47

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

We
did not grant any stock options during 2008. The weighted average grant date fair
value per share of options granted during 2007 and 2006 was $12.37 and $14.86,
respectively. The total intrinsic value of options exercised during the years
ended 2008, 2007 and 2006 were $25,857, $4,592 and, $1,001,693, respectively.

For
options granted during 2007 and 2006. 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:

|                         |  |      |        |      |  |        | 
|------------------------ |  | ---- | ------ | ---- |  | ------ | 
|                         |  | 2007 |        | 2006 | 
|Dividend yield           |  |      | 2.01%  |      |  | 1.39%  | 
|Expected volatility      |  |      | 48.21% |      |  | 55.00% | 
|Risk-free interest rate  |  |      | 4.37%  |      |  | 4.66%  | 
|Expected life (in years) |  |      | 5      |      |  | 5      | 

The
following tables provide a summary of option activity under the Plan during
2008 and information about options outstanding as of December 31, 2008:

|                                    |  |        |          |                                    |   |                                                         |  |                                    |     |  |   |       | 
|----------------------------------- |  | ------ | -------- | ---------------------------------- | - | ------------------------------------------------------- |  | ---------------------------------- | --- |  | - | ----- | 
|Stock
 Options                      |  | Shares |          | Weighted
 average
 exercise
 price |   | Weighted
 average
 remaining
 contractual
 term (years) |  | Aggregate
 intrinsic
 value ($000) |    
|Outstanding at beginning
 of year   |  |        | 880,297  |                                    | $ | 22.85                                                   |  |                                    |     |  |   |       | 
|Granted                             |  |        |         |                                    |   |                                                        |  |                                    |     |  |   |       | 
|Exercised                           |  |        | (20,244  | )                                  |   | 12.50                                                   |  |                                    |     |  |   |       | 
|Forfeitures                         |  |        | (109,604 | )                                  |   | 19.33                                                   |  |                                    |     |  |   |       | 
|Outstanding at end of year          |  |        | 750,449  |                                    | $ | 23.64                                                   |  |                                    | 3.1 |  | $ | 6,747 | 
|Options exercisable at end
 of year |  |        | 750,449  |                                    | $ | 23.64                                                   |  |                                    | 3.1 |  | $ | 6,747 | 

|                          |  |         |         |                                   |   |                                                        |  |     |  | 
|------------------------- |  | ------- | ------- | --------------------------------- | - | ------------------------------------------------------ |  | --- |  | 
|Range of
 exercise
 price |  | Options |         | Weighted
 average
 exercise price |   | Weighted average
 remaining
 contractual term
 (years) | 
|$8.00 to
 $16.00          |  |         | 38,182  |                                   | $ | 11.89                                                  |  | 1.0 |  | 
|$16.01 to
 $22.00         |  |         | 345,271 |                                   |   | 17.65                                                  |  | 3.4 |  | 
|$22.01 to
 $29.00         |  |         | 87,194  |                                   |   | 24.44                                                  |  | 5.4 |  | 
|$29.01 to
 $34.00         |  |         | 181,002 |                                   |   | 30.63                                                  |  | 2.4 |  | 
|$34.01 to
 $40.00         |  |         | 98,266  |                                   |   | 35.49                                                  |  | 1.9 |  | 
|$40.01 to
 $52.00         |  |         | 534     |                                   |   | 51.49                                                  |  | 2.6 |  | 
|$8.00 to
 $51.58          |  |         | 750,449 |                                   | $ | 23.64                                                  |  | 3.1 |  | 

48

---



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
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 2008, 2007 and 2006 was $12.33, $12.93 and, $14.16 respectively. The
total fair value of Restricted Stock Awards vested during the years ended 2008,
2007 and 2006 was $13.18, $12.66 and, $11.42, respectively.

The
following table provides a summary of Restricted Stock Award activity under the
Plan during 2008 and information about nonvested Restricted Stock Awards as of
December 31, 2008:

|                                                               |  |        |         |                                           |   |                                                       |  |                                    |     |  |   |       | 
|-------------------------------------------------------------- |  | ------ | ------- | ----------------------------------------- | - | ----------------------------------------------------- |  | ---------------------------------- | --- |  | - | ----- | 
|Nonvested
 Restricted Stock Awards                             |  | Shares |         | Weighted
 average
 grant date
 fair value |   | Weighted
 average
 remaining
 vesting period
 (years) |  | Aggregate
 intrinsic
 value ($000) |    
|Outstanding at beginning
 of year                              |  |        | 249,885 |                                           | $ | 14.16                                                 |  |                                    |     |  |   |       | 
|Granted                                                        |  |        | 137,715 |                                           |   | 12.33                                                 |  |                                    |     |  |   |       | 
|Vested                                                         |  |        | (57,780 | )                                         |   | 13.18                                                 |  |                                    |     |  |   |       | 
|Forfeitures                                                    |  |        | (538    | )                                         |   | 13.71                                                 |  |                                    |     |  |   |       | 
|Outstanding at end of year                                     |  |        | 329,282 |                                           | $ | 13.57                                                 |  |                                    | 2.6 |  | $ | 2,960 | 
|                                                               |  |        |         |                                           |   |                                                       |  |                                    |     |  |   |       | 
|Unrecognized compensation
 expense at December 31, 2008 ($000) |  | $      | 2,532   |                                           |   |                                                       |  |                                    |     |  |   |       | 

(12)  
Shareholders equity

On
April 17, 2002, our Board of Directors authorized the repurchase of up to
5,000,000 shares of our common stock, on February 9, 2005, our Board of
Directors authorized the repurchase of an additional 3,000,000 shares of common
stock and on February 6, 2008, our Board of Directors authorized the purchase
of an additional 1,000,000 shares under the repurchase program. No time limit
was placed on the duration of the repurchase program. 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 $135.0 million under this
repurchase program.

A
summary of stock repurchase activity is as follows:

|     |  |                               |           |                                                 |   |                                                      |  |   |        | 
|---- |  | ----------------------------- | --------- | ----------------------------------------------- | - | ---------------------------------------------------- |  | - | ------ | 
|     |  | Number of shares
 repurchased |           | Weighted average
 repurchased price
 per share* |   | Aggregate annual
 cost of repurchased
 stock* ($000) | 
|2008 |  |                               | 11,650    |                                                 | $ | 13.25                                                |  | $ | 156    | 
|2007 |  |                               | 117,480   |                                                 | $ | 12.22                                                |  | $ | 1,434  | 
|2006 |  |                               | 1,461,216 |                                                 | $ | 15.38                                                |  | $ | 22,474 | 
|     |  |                               |           |                                                 |   |                                                      |  |   |        | 

* Includes broker commission

49

---



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

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 50,000,000 shares to 150,000,000 shares with a $.01 par
value per share. The Companys Amended and Restated Articles of Incorporation
also includes authorization to issue up to 5,000,000 shares of preferred stock
with a $.01 par value per share. No preferred stock has been issued.

(13)  
Segment reporting

Statement
of Financial Accounting Statement No. 131 Disclosures
about Segments of an Enterprise and Related Information (SFAS 131)
establishes annual and interim reporting standards for an enterprises business
segments and related disclosures about its products, services, geographic areas
and major customers. The method of determining what information to report is
based on the way management organizes the operating segments within the Company
for making operating decisions and assessing financial performance. In
addition, SFAS 131 applies both qualitative and quantitative aggregation rules
to operating segments in order to determine the final reportable segments.
Under SFAS 131, we have one reportable segment. Foreign market operations are
not significant at this time.

(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                            |       
|                                    |  | March 31                                 |        | June 30 |   | September 30 |  | December 31 |       
|                                    |  | (In Thousands, Except Per Share Amounts) |       
|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   |         |   | 0.12         |  |             | 0.09   |  |   | (1.49   | )
|Common stock price per share:       |  |                                          |        |         |   |              |  |             |        |  |   |         |  
|High                                |  |                                          | 14.82  |         |   | 15.06        |  |             | 15.04  |  |   | 13.64   |  
|Low                                 |  |                                          | 12.58  |         |   | 11.21        |  |             | 10.58  |  |   | 6.61    |  

|                              |  |                                          |        |  |   |        |  |   |        |  |   |        | 
|----------------------------- |  | ---------------------------------------- | ------ |  | - | ------ |  | - | ------ |  | - | ------ | 
|                              |  | (In Thousands, Except Per Share Amounts) |       
|2007                          |  |                                          |       
|Net sales                     |  | $                                        | 26,688 |  | $ | 27,177 |  | $ | 25,809 |  | $ | 28,258 | 
|Gross profit                  |  |                                          | 20,118 |  |   | 20,244 |  |   | 18,969 |  |   | 21,098 | 
|Operating income              |  |                                          | 1,805  |  |   | 3,161  |  |   | 1,898  |  |   | 4,066  | 
|Income - before income taxes  |  |                                          | 2,107  |  |   | 3,485  |  |   | 2,188  |  |   | 4,328  | 
|Income taxes                  |  |                                          | 790    |  |   | 1,307  |  |   | 821    |  |   | 1,623  | 
|Net income                    |  |                                          | 1,317  |  |   | 2,178  |  |   | 1,367  |  |   | 2,705  | 
|Earnings per share:           |  |                                          |        |  |   |        |  |   |        |  |   |        | 
|Basic and diluted             |  |                                          | 0.05   |  |   | 0.08   |  |   | 0.05   |  |   | 0.09   | 
|Common stock price per share: |  |                                          |        |  |   |        |  |   |        |  |   |        | 
|High                          |  |                                          | 17.94  |  |   | 13.29  |  |   | 13.81  |  |   | 15.75  | 
|Low                           |  |                                          | 12.51  |  |   | 10.97  |  |   | 10.92  |  |   | 11.37  | 

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

50

---



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

(15)  
Recent accounting pronouncements

In
December 2007, the FASB issued SFAS No. 141(R) Business
Combinations (SFAS 141R). SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R
also establishes disclosure requirements to enable the evaluation of the nature
and financial effects of the business combination. SFAS 141R is effective for
us on January 1, 2009. The impact of SFAS 141R on our future consolidated
financial statements will depend on the size and nature of future acquisitions.

In
December 2007, the FASB issued SFAS No. 160 Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB No. 51
(SFAS 160). SFAS 160 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. SFAS 160 is effective for us on January 1, 2009. SFAS 160 is not
expected to have a material effect on our consolidated financial statements.

In
February 2007, the FASB issued SFAS No. 159 The
Fair Value Option for Financial Assets and Financial Liabilities  Including an
amendment of FASB Statement No. 115 (SFAS 159). This standard
permits entities to measure many financial instruments and certain other items
at fair value. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings
caused by measuring related assets and liabilities differently without having
to apply complex hedge accounting provisions. The provisions of SFAS 159 were
effective for us on January 1, 2008. We did not elect the fair value option and
therefore SFAS 159 had no effect on our consolidated financial statements.

In
September 2006, the FASB issued SFAS No. 157 Fair
Value Measurements (SFAS 157), to establish a consistent framework
for measuring fair value and expand disclosures on fair value measurements. The
provisions of SFAS 157 were effective for us on January 1, 2008. The adoption
of SFAS 157 had no impact on our consolidated financial statements, but the
adoption did result in additional disclosures as set forth in Note 3(r).

(16)  
Subsequent event

On
February 11, 2009 our Board of Directors declared a quarterly cash dividend of
$0.07 per share.

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, 2008.

51

---



There
has been no change in our internal control over financial reporting that has
occurred during the quarter ended December 31, 2008 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, 2008
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.

52

---



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 29, 2009 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 29, 2009 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 29, 2009 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 29, 2009 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 29, 2009
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, 2008. The table below does not include awards, exercises or
cancellations under our equity compensation plans subsequent to December 31,
2008.

53

---



|                                                              |  |                                                                                                |         |                                                                                |   |                                                                                                                                          |  |  |           |    
|------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------- | ------- | ------------------------------------------------------------------------------ | - | ---------------------------------------------------------------------------------------------------------------------------------------- |  |  | --------- | ---
|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        |  |                                                                                                | 750,449 |                                                                                | $ | 23.64                                                                                                                                    |  |  | 2,288,882 | (1)
|Equity compensation plans not approved by security holders(2) |  |                                                                                                | N/A     |                                                                                |   | N/A                                                                                                                                      |  |  | N/A       |    
|Total                                                         |  |                                                                                                | 750,449 |                                                                                | $ | 23.64                                                                                                                                    |  |  | 2,288,882 |    

| | 
| | 
| | 

(1) Of the 6,000,000 shares
authorized for issuance under our 1997 stock incentive plan, 2,049,488 remain
available for future issuance as of December 31, 2008. 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 2008 and do not intend to
offer the plan to employees in 2009.

(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 29, 2009 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 29, 2009 under the caption
Audit Committee Report, which information is incorporated by reference
herein.

54

---



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, 2008 and 2007                                         
|       |                                                                                                       
|       | Consolidated
 Statements of Income for the years ended December 31, 2008, 2007 and 2006               
|       |                                                                                                       
|       | Consolidated
 Statements of Shareholders Equity for the years ended December 31, 2008,
 2007 and 2006
|       |                                                                                                       
|       | Consolidated
 Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006           
|       |                                                                                                       
|       | 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.                                                                                      

55

---



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
 6, 2009       

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 6,
 2009
|Terrance D.
 Paul     |  | (Principal
 Executive Officer) 
 and a Director             |  |               
|                      |  |                                                             |  |               
|/s/ Mary T.
 Minch    |  | Senior Vice
 President-Finance,                             |  | March 6, 2009 
|Mary T.
 Minch        |  | Chief
 Financial Officer                                    |  |               
|                      |  | and
 Secretary (Principal Financial and Accounting Officer) |  |               

|           |                                                                                                                   
|---------- | ------------------------------------------------------------------------------------------------------------------
|Directors: | Judith A.
 Paul, Addison L. Piper, John H. Grunewald, Gordon H. Gunnlaugsson, Harold E.
 Jordan and Judith A. Ryan

|    |                    |  |              
|--- | ------------------ |  | -------------
|By: | /s/ Mary T.
 Minch |  | March 6, 2009
|    | Mary T.
 Minch     |  |              
|    | Attorney-In-Fact*  |  |              

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

56

---



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)
|              |  |                                                                                                                                             
|14.1          |  | Code of
 Business Conduct and Ethics.                                                                                                       
|              |  |                                                                                                                                             
|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.                                                                                           

57

---



|     |                                                                                                                          
|---- | -------------------------------------------------------------------------------------------------------------------------
|(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).   

|  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | 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.

58

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