##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549



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FORM 10-Q



|  |  |                                                                                                                                      
|- |  | -------------------------------------------------------------------------------------------------------------------------------------
|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED JUNE 30, 2003.

OR

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

Commission file number: 0-22187

RENAISSANCE LEARNING, INC.
(Exact name of Registrant as Specified in its Charter)

|                               |  |                    
|------------------------------ |  | -------------------
|Wisconsin                      |  | 39-1559474         
|(State or other                |  | (I.R.S. Employer   
|jurisdiction of incorporation) |  | Identification No.)

2911 Peach Street
P.O. Box 8036
Wisconsin Rapids, Wisconsin
(Address of principal executive offices)

54495-8036
(Zip Code)

(715) 424-3636
(Registrants telephone number, including area code)

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

Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes x No o

Indicate the number of shares outstanding of each of the issuers
classes of common stock, as of the latest practicable date.

|                              |  |                |  | 
|----------------------------- |  | -------------- |  | 
|                              |  | Outstanding at | 
|Class                         |  | July 31, 2003  | 
|                              |  |                | 
|Common Stock, $0.01 par value |  | 30,818,892     | 





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TABLE OF CONTENTS



|                                  |                                                                                               |                                                                                                              |  |  |  |  |  | 
|--------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION   
|                                  | Item 1. Financial Statements                                                                 
|                                  |                                                                                               | Condensed Consolidated Balance Sheets at June 30, 2003 and December 31, 2002                                
|                                  |                                                                                               | Condensed Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 2003 and 2002
|                                  |                                                                                               | Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002             
|                                  | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                  | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                  | Item 4. Controls and Procedures                                                              
|Part II  OTHER INFORMATION      
|                                  | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                  | Item 6. Exhibits and Reports on Form 8-K                                                     
|EX-10.1 Severance Agreement      
|EX-10.2 Incentive Bonus Plan     
|EX-31.1 Section 302 Certification
|EX-31.2 Section 302 Certification
|EX-32.1 Section 906 Certification
|EX-32.2 Section 906 Certification



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##### Table of Contents



RENAISSANCE LEARNING, INC.

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003



|                               |  |                                                                                                              |  |     
|------------------------------ |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|                               |  |                                                                                                              |  | Page
|                               |  |                                                                                                              |  |     
|PART I - FINANCIAL INFORMATION |  |                                                                                                             
|Item 1.                        |  | Financial Statements                                                                                         |  |     
|                               |  | Condensed Consolidated Balance Sheets at June 30, 2003
and December 31, 2002                                 |  | 1   
|                               |  | Condensed Consolidated Statements of Income for the
Three Months and Six Months Ended
June 30, 2003 and 2002 |  | 2   
|                               |  | Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2003 and 2002              |  | 3   
|                               |  | Notes to Unaudited Condensed Consolidated Financial Statements                                               |  | 4   
|Item 2.                        |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations                        |  | 7   
|Item 3.                        |  | Quantitative and Qualitative Disclosures About
Market Risk                                                   |  | 11  
|Item 4.                        |  | Controls and Procedures                                                                                      |  | 11  
|PART II - OTHER INFORMATION    |  |                                                                                                             
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                                          |  | 12  
|Item 6.                        |  | Exhibits and Reports on Form 8-K                                                                             |  | 12  

- Index -





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##### Table of Contents












PART I  FINANCIAL INFORMATION

Item 1. Financial Statements

RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)

|                                   |                                                                                                                      |                                            |                                      |         |         |                                 |        |         |              |  |  | 
|---------------------------------- | -------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------ | ------- | ------- | ------------------------------- | ------ | ------- | ------------ |  |  | 
|                                   |                                                                                                                      |                                            |                                      |         |         | June 30,                        |        |         | December 31, | 
|                                   |                                                                                                                      |                                            |                                      |         |         | 2003                            |        |         | 2002         | 
|                                   |                                                                                                                      |                                            |                                      |         |         |                                 |        |         |              | 
|                                   |                                                                                                                      |                                            |                                      |         |         | (In Thousands, Except Share and |       
|                                   |                                                                                                                      |                                            |                                      |         |         | Per Share Amounts)              |       
|                                   |                                                                                                                      |                                            |                                      | ASSETS  |         |                                 |        |         |              |  |  | 
|Current assets:                    |                                                                                                                      |                                            |                                      |         |         |                                 |        |        
|                                   | Cash and cash equivalents                                                                                            |                                            | $                                    | 28,950  |         |                                 | $      | 18,220  |             
|                                   | Investment securities                                                                                                |                                            |                                      | 57,387  |         |                                 |        | 60,269  |             
|                                   | Accounts receivable, less allowances of
$1,712 in 2003 and $1,654 in 2002                                            |                                            |                                      | 10,188  |         |                                 |        | 12,619  |             
|                                   | Inventories                                                                                                          |                                            |                                      | 1,684   |         |                                 |        | 1,724   |             
|                                   | Prepaid expenses                                                                                                     |                                            |                                      | 718     |         |                                 |        | 1,411   |             
|                                   | Deferred tax asset                                                                                                   |                                            |                                      | 4,115   |         |                                 |        | 3,710   |             
|                                   | Other current assets                                                                                                 |                                            |                                      | 1,168   |         |                                 |        | 1,331   |             
|                                   |                                                                                                                      |                                            |                                      |         |         |                                
|                                   |                                                                                                                      | Total current assets                       |                                      |         | 104,210 |                                 |        |         | 99,284       | 
|Investment securities              |                                                                                                                      |                                            | 8,287                                |         |         |                                 | 21,347 |        
|Property, plant and equipment, net |                                                                                                                      |                                            | 21,461                               |         |         |                                 | 21,085 |        
|Deferred tax asset                 |                                                                                                                      |                                            | 2,006                                |         |         |                                 | 1,942  |        
|Goodwill                           |                                                                                                                      |                                            | 2,313                                |         |         |                                 | 2,313  |        
|Other intangibles, net             |                                                                                                                      |                                            | 625                                  |         |         |                                 | 874    |        
|Capitalized software, net          |                                                                                                                      |                                            | 610                                  |         |         |                                 | 659    |        
|Other non-current assets           |                                                                                                                      |                                            |                                     |         |         |                                 | 107    |        
|                                   |                                                                                                                      |                                            |                                      |         |         |                                
|                                   |                                                                                                                      | Total assets                               |                                      | $       | 139,512 |                                 |        | $       | 147,611      | 
|                                   |                                                                                                                      |                                            |                                      |         |         |                                
|                                   |                                                                                                                      |                                            | LIABILITIES AND SHAREHOLDERS EQUITY |         |         |                                 |        |         |              |  | 
|Current liabilities:               |                                                                                                                      |                                            |                                      |         |         |                                 |        |        
|                                   | Accounts payable                                                                                                     |                                            | $                                    | 2,601   |         |                                 | $      | 3,643   |             
|                                   | Deferred revenue                                                                                                     |                                            |                                      | 9,144   |         |                                 |        | 10,397  |             
|                                   | Payroll and employee benefits                                                                                        |                                            |                                      | 3,525   |         |                                 |        | 4,263   |             
|                                   | Income taxes payable                                                                                                 |                                            |                                      | 2,447   |         |                                 |        | 2,372   |             
|                                   | Other current liabilities                                                                                            |                                            |                                      | 5,130   |         |                                 |        | 4,605   |             
|                                   |                                                                                                                      |                                            |                                      |         |         |                                
|                                   |                                                                                                                      | Total current liabilities                  |                                      |         | 22,847  |                                 |        |         | 25,280       | 
|                                   | Deferred revenue                                                                                                     |                                            |                                      | 769     |         |                                 |        | 930     |             
|                                   |                                                                                                                      |                                            |                                      |         |         |                                
|                                   |                                                                                                                      | Total liabilities                          |                                      |         | 23,616  |                                 |        |         | 26,210       | 
|Minority interest                  |                                                                                                                      |                                            | 159                                  |         |         |                                 | 165    |        
|Shareholders equity               |                                                                                                                      |                                            |                                      |         |         |                                 |        |        
|                                   | Common stock, $.01 par; shares authorized: 150,000,000;
issued: 34,736,647 shares at June 30, 2003 and Dec. 31, 2002 |                                            |                                      | 347     |         |                                 |        | 347     |             
|                                   | Additional paid-in capital                                                                                           |                                            |                                      | 54,081  |         |                                 |        | 54,423  |             
|                                   | Retained earnings                                                                                                    |                                            |                                      | 132,691 |         |                                 |        | 116,055 |             
|                                   | Treasury stock, at cost 3,931,362 shares June 30, 2003;
2,737,672 shares Dec. 31, 2002                               |                                            |                                      | (71,115 | )       |                                 |        | (49,480 | )           
|                                   | Accumulated other comprehensive loss                                                                                 |                                            |                                      | (267    | )       |                                 |        | (109    | )           
|                                   |                                                                                                                      |                                            |                                      |         |         |                                
|                                   |                                                                                                                      | Total shareholders equity                 |                                      |         | 115,737 |                                 |        |         | 121,236      | 
|                                   |                                                                                                                      |                                            |                                      |         |         |                                
|                                   |                                                                                                                      | Total liabilities and shareholders equity |                                      | $       | 139,512 |                                 |        | $       | 147,611      | 
|                                   |                                                                                                                      |                                            |                                      |         |         |                                

See accompanying notes to condensed consolidated financial statements.

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)

|                     |         |                            |                          |      |                                          |        |        |                |        |        |        |      |        |        |        |      |        |        | 
|-------------------- | ------- | -------------------------- | ------------------------ | ---- | ---------------------------------------- | ------ | ------ | -------------- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | ---- | ------ | ------ | 
|                     |         |                            |                          |      | Three Months                             |        |        | Six Months     |       
|                     |         |                            |                          |      | Ended June 30,                           |        |        | Ended June 30, |       
|                     |         |                            |                          |      |                                          |        |        |                |       
|                     |         |                            |                          |      | 2003                                     |        |        | 2002           |        |        | 2003   |      |        | 2002   |       
|                     |         |                            |                          |      |                                          |        |        |                |        |        |        |      |        |        |       
|                     |         |                            |                          |      | (In Thousands, Except Per Share Amounts) |       
|Net sales:           |         |                            |                          |      |                                          |        |        |                |        |        |        |      |        |        |        |     
|                     |         | Products                   |                          | $    | 28,698                                   |        |        | $              | 29,045 |        |        | $    | 55,888 |        |        | $    | 57,931 |       
|                     |         | Services                   |                          |      | 4,918                                    |        |        |                | 4,175  |        |        |      | 11,955 |        |        |      | 9,979  |       
|                     |         |                            |                          |      |                                          |        |        |                |        |        |        |     
|                     |         |                            | Total net sales          |      |                                          | 33,616 |        |                |        | 33,220 |        |      |        | 67,843 |        |      |        | 67,910 | 
|                     |         |                            |                          |      |                                          |        |        |                |        |        |        |     
|Cost of sales:       |         |                            |                          |      |                                          |        |        |                |        |        |        |      |        |        |        |     
|                     |         | Products                   |                          |      | 2,856                                    |        |        |                | 2,964  |        |        |      | 6,024  |        |        |      | 5,827  |       
|                     |         | Services                   |                          |      | 2,045                                    |        |        |                | 1,803  |        |        |      | 5,402  |        |        |      | 5,036  |       
|                     |         |                            |                          |      |                                          |        |        |                |        |        |        |     
|                     |         |                            | Total cost of sales      |      |                                          | 4,901  |        |                |        | 4,767  |        |      |        | 11,426 |        |      |        | 10,863 | 
|                     |         |                            |                          |      |                                          |        |        |                |        |        |        |     
|                     |         |                            | Gross profit             |      |                                          | 28,715 |        |                |        | 28,453 |        |      |        | 56,417 |        |      |        | 57,047 | 
|Operating expenses:  |         |                            |                          |      |                                          |        |        |                |        |        |        |      |        |        |        |     
|                     |         | Product development        |                          |      | 4,201                                    |        |        |                | 4,181  |        |        |      | 8,664  |        |        |      | 8,626  |       
|                     |         | Selling and marketing      |                          |      | 6,748                                    |        |        |                | 7,481  |        |        |      | 14,851 |        |        |      | 15,973 |       
|                     |         | General and administrative |                          |      | 3,942                                    |        |        |                | 3,472  |        |        |      | 7,405  |        |        |      | 7,435  |       
|                     |         |                            |                          |      |                                          |        |        |                |        |        |        |     
|                     |         |                            | Total operating expenses |      |                                          | 14,891 |        |                |        | 15,134 |        |      |        | 30,920 |        |      |        | 32,034 | 
|                     |         |                            |                          |      |                                          |        |        |                |        |        |        |     
|                     |         |                            | Operating income         |      |                                          | 13,824 |        |                |        | 13,319 |        |      |        | 25,497 |        |      |        | 25,013 | 
|Other income:        |         |                            |                          |      |                                          |        |        |                |        |        |        |      |        |        |        |     
|                     |         | Interest income            |                          |      | 483                                      |        |        |                | 880    |        |        |      | 1,038  |        |        |      | 1,742  |       
|                     |         | Other, net                 |                          |      | 229                                      |        |        |                | 209    |        |        |      | 406    |        |        |      | 304    |       
|                     |         |                            |                          |      |                                          |        |        |                |        |        |        |     
|Income before taxes  |         |                            | 14,536                   |      |                                          |        | 14,408 |                |        |        | 26,941 |      |        |        | 27,059 |     
|Income tax provision |         |                            | 5,560                    |      |                                          |        | 5,605  |                |        |        | 10,305 |      |        |        | 10,501 |     
|                     |         |                            |                          |      |                                          |        |        |                |        |        |        |     
|Net income           |         | $                          | 8,976                    |      |                                          | $      | 8,803  |                |        | $      | 16,636 |      |        | $      | 16,558 |     
|                     |         |                            |                          |      |                                          |        |        |                |        |        |        |     
|Earnings per share:  |         |                            |                          |      |                                          |        |        |                |        |        |        |      |        |        |        |     
|                     | Basic   |                            | $                        | 0.29 |                                          |        | $      | 0.25           |        |        | $      | 0.53 |        |        | $      | 0.48 |       
|                     | Diluted |                            | $                        | 0.29 |                                          |        | $      | 0.25           |        |        | $      | 0.53 |        |        | $      | 0.47 |       

See accompanying notes to condensed consolidated financial statements.

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited)

|                                                                           |                                                    |                                                |                                                  |         |                           |         |        |         |        |         |  
|-------------------------------------------------------------------------- | -------------------------------------------------- | ---------------------------------------------- | ------------------------------------------------ | ------- | ------------------------- | ------- | ------ | ------- | ------ | ------- | -
|                                                                           |                                                    |                                                |                                                  |         | Six Months Ended June 30, |        
|                                                                           |                                                    |                                                |                                                  |         |                           |        
|                                                                           |                                                    |                                                |                                                  |         | 2003                      |         |        | 2002    |       
|                                                                           |                                                    |                                                |                                                  |         |                           |         |        |         |       
|                                                                           |                                                    |                                                |                                                  |         | (In thousands)            |        
|Reconciliation of net income to net cash provided by operating activities: |                                                    |                                                |                                                  |         |                           |         |        |        
|                                                                           | Net income                                         |                                                | $                                                | 16,636  |                           |         | $      | 16,558  |       
|                                                                           | Noncash (income) expenses included in net income - |                                                |                                                  |         |                           |         |        |         |       
|                                                                           |                                                    | Depreciation and amortization                  |                                                  |         | 2,071                     |         |        |         | 2,384  |        
|                                                                           |                                                    | Amortization of investment discounts/premiums  |                                                  |         | 964                       |         |        |         | 1,057  |        
|                                                                           |                                                    | Deferred income taxes                          |                                                  |         | (469                      | )       |        |         | (34    | )      
|                                                                           | Change in assets and liabilities -                 |                                                |                                                  |         |                           |         |        |         |       
|                                                                           |                                                    | Accounts receivable                            |                                                  |         | 2,431                     |         |        |         | (1,663 | )      
|                                                                           |                                                    | Inventories                                    |                                                  |         | 40                        |         |        |         | 198    |        
|                                                                           |                                                    | Prepaid expenses                               |                                                  |         | 692                       |         |        |         | 364    |        
|                                                                           |                                                    | Accounts payable and other current liabilities |                                                  |         | (1,015                    | )       |        |         | (584   | )      
|                                                                           |                                                    | Deferred revenue                               |                                                  |         | (1,415                    | )       |        |         | 360    |        
|                                                                           |                                                    | Other current assets                           |                                                  |         | 163                       |         |        |         | (172   | )      
|                                                                           |                                                    | Other                                          |                                                  |         | (85                       | )       |        |         | 201    |        
|                                                                           |                                                    |                                                |                                                  |         |                           |        
|                                                                           |                                                    |                                                | Net cash provided by operating activities        |         |                           | 20,013  |        |         |        | 18,669  |  
|                                                                           |                                                    |                                                |                                                  |         |                           |        
|Cash flows from investing activities:                                      |                                                    |                                                |                                                  |         |                           |         |        |        
|                                                                           | Purchase of property, plant and equipment          |                                                |                                                  | (1,900  | )                         |         |        | (1,089  | )     
|                                                                           | Purchase of investment securities                  |                                                |                                                  | (22,593 | )                         |         |        | (45,585 | )     
|                                                                           | Maturities/sales of investment securities          |                                                |                                                  | 37,570  |                           |         |        | 28,559  |       
|                                                                           | Capitalized software development costs             |                                                |                                                  | (220    | )                         |         |        | (363    | )     
|                                                                           |                                                    |                                                |                                                  |         |                           |        
|                                                                           |                                                    |                                                | Net cash provided (used) by investing activities |         |                           | 12,857  |        |         |        | (18,478 | )
|                                                                           |                                                    |                                                |                                                  |         |                           |        
|Cash flows from financing activities:                                      |                                                    |                                                |                                                  |         |                           |         |        |        
|                                                                           | Proceeds from issuance of stock                    |                                                |                                                  | 1,047   |                           |         |        | 1,066   |       
|                                                                           | Proceeds from exercise of stock options            |                                                |                                                  | 540     |                           |         |        | 990     |       
|                                                                           | Purchase of treasury stock                         |                                                |                                                  | (23,727 | )                         |         |        |        |       
|                                                                           |                                                    |                                                |                                                  |         |                           |        
|                                                                           |                                                    |                                                | Net cash (used) provided by financing activities |         |                           | (22,140 | )      |         |        | 2,056   |  
|                                                                           |                                                    |                                                |                                                  |         |                           |        
|Net increase in cash                                                       |                                                    |                                                | 10,730                                           |         |                           |         | 2,247  |        
|Cash and cash equivalents, beginning of period                             |                                                    |                                                | 18,220                                           |         |                           |         | 35,904 |        
|                                                                           |                                                    |                                                |                                                  |         |                           |        
|Cash and cash equivalents, end of period                                   |                                                    | $                                              | 28,950                                           |         |                           | $       | 38,151 |        
|                                                                           |                                                    |                                                |                                                  |         |                           |        

See accompanying notes to condensed consolidated financial statements.

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Consolidation

The condensed consolidated financial statements include the financial results
of Renaissance Learning, Inc. (Renaissance Learning) and our subsidiaries. Our significant
subsidiaries include Renaissance Corporate Services, Inc. and Generation21 Learning Systems, LLC (Generation21).
All significant intercompany transactions have been eliminated in the condensed consolidated financial statements.

2. Basis of Presentation and Accounting Policies

The condensed consolidated financial statements reflect all adjustments
(consisting only of normal recurring adjustments) which are, in our opinion,
necessary for a fair presentation of the results of the interim periods, and are
presented on an unaudited basis. These financial statements should be read in
conjunction with the financial information contained in our Annual Report on
Form 10-K for the year ended December 31, 2002, which is on file with the U.S.
Securities and Exchange Commission.

The results of operations for the three and six month periods ended
June 30, 2003 and 2002 are not necessarily indicative of the results to be
expected for the full year.

3. Earnings Per Common Share

Basic earnings per common share 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 has been computed based on the weighted average number
of common shares outstanding, increased by the number of additional common
shares that would have been outstanding if the potentially dilutive stock option
shares had been issued.

On April 17, 2002, our Board of Directors authorized a new repurchase
program which provides for the repurchase of up to 5,000,000 shares of our
common stock. 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 and for other general corporate purposes.
During the period of January 1, 2003 through June 30, 2003, we repurchased 1.3
million shares at a cost of $23.7 million under the current repurchase program.
Through June 30, 2003, the cumulative repurchases under the current program were
4.0 million shares at a cost of $72.9 million.

The weighted average shares outstanding are as follows:

|                                             |  |                            |            |  |                          |  |            |      |  |  |            |  |  |  |            | 
|-------------------------------------------- |  | -------------------------- | ---------- |  | ------------------------ |  | ---------- | ---- |  |  | ---------- |  |  |  | ---------- | 
|                                             |  | Three Months Ended June 30 |            |  | Six Months Ended June 30 | 
|                                             |  |                            |            |  |                          | 
|                                             |  | 2003                       |            |  | 2002                     |  |            | 2003 |  |  | 2002       | 
|                                             |  |                            |            |  |                          |  |            |      |  |  |            | 
|Basic weighted average shares outstanding    |  |                            | 30,927,711 |  |                          |  | 34,680,079 |      |  |  | 31,289,921 |  |  |  | 34,662,259 | 
|Dilutive effect of outstanding stock options |  |                            | 164,238    |  |                          |  | 261,200    |      |  |  | 133,538    |  |  |  | 273,120    | 
|                                             |  |                            |            |  |                          |  |            |      |  |  |            | 
|Diluted weighted average shares outstanding  |  |                            | 31,091,949 |  |                          |  | 34,941,279 |      |  |  | 31,423,459 |  |  |  | 34,935,379 | 
|                                             |  |                            |            |  |                          |  |            |      |  |  |            | 

For the three months ended June 30, 2003 and 2002, 833,432 and 445,107
shares attributable to outstanding stock options were excluded from the
calculation of diluted earning per share because the effect was antidilutive.
For the six months ended June 30, 2003 and 2002, 902,542 and 445,107 shares
attributable to outstanding stock options were excluded from the calculation of
diluted earnings per share because the effect was antidilutive. These options
could be dilutive in the future.

4. Comprehensive Income

Total comprehensive income was $16,478,000 and $16,306,000 in the first
six months of 2003 and 2002, respectively. For the quarters ended June 30, 2003
and 2002, comprehensive income was $8,889,000 and $8,703,000, respectively. Our
comprehensive income includes foreign currency translation adjustments. In 2002,
our comprehensive income also included the remaining unamortized balance of
unrealized gains and losses on our held-to-maturity securities that were
previously classified as available-for-sale.

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5. Goodwill and Other Intangible Assets

In accordance with SFAS No. 142 Goodwill and Other Intangible Assets,
goodwill is not amortized but is tested at least annually for impairment. Our
other intangible assets have finite lives and are amortized over their estimated
useful lives of four years for algorithms and software code, and five years for
the non-compete agreement.

For the three months ended June 30, 2003 and 2002, we recognized
amortization expense on other intangibles of $114,000 and $134,000,
respectively. For the six months ended June 30, 2003 and 2002, we recognized
amortization expense of $249,000 and $269,000 respectively. No goodwill or other
intangibles were acquired or impaired during the six months ended June 30, 2003.
Other intangibles consisted of the following (in thousands):

|                             |  |               |       |  |                   |   |       |             |       |   |          |       |  |              |       |  |             |   |       |  |  |   |     | 
|---------------------------- |  | ------------- | ----- |  | ----------------- | - | ----- | ----------- | ----- | - | -------- | ----- |  | ------------ | ----- |  | ----------- | - | ----- |  |  | - | --- | 
|                             |  | June 30, 2003 |       |  | December 31, 2002 |  
|                             |  |               |       |  |                   |  
|                             |  | Gross         |       |  |                   |   |       |             | Other |   |          | Gross |  |              |       |  |             |   | Other | 
|                             |  | Carrying      |       |  | Accumulated       |   |       | Intangibles |       |   | Carrying |       |  | Accumulated  |       |  | Intangibles |  
|                             |  | Amount        |       |  | Amortization      |   |       | Net         |       |   | Amount   |       |  | Amortization |       |  | Net         |  
|                             |  |               |       |  |                   |   |       |             |       |   |          |       |  |              |       |  |             |  
|Algorithms and software code |  | $             | 2,124 |  |                   | $ | 2,021 |             |       | $ | 103      |       |  | $            | 2,124 |  |             | $ | 1,882 |  |  | $ | 242 | 
|Non-compete agreement        |  |               | 1,100 |  |                   |   | 578   |             |       |   | 522      |       |  |              | 1,100 |  |             |   | 468   |  |  |   | 632 | 
|                             |  |               |       |  |                   |   |       |             |       |   |          |       |  |              |       |  |             |  
|Other intangibles            |  | $             | 3,224 |  |                   | $ | 2,599 |             |       | $ | 625      |       |  | $            | 3,224 |  |             | $ | 2,350 |  |  | $ | 874 | 
|                             |  |               |       |  |                   |   |       |             |       |   |          |       |  |              |       |  |             |  

Other intangibles are scheduled to be fully amortized by the fourth
quarter of 2005 with corresponding amortization estimated to be $147,000,
$286,000, and $192,000, for the remainder of 2003 and the years ended 2004, and
2005, respectively.

6. Stock Option Plan

We have established the 1997 Stock Incentive Plan for our officers, key
employees, non-employee directors and consultants. Had compensation cost been
determined for our stock option portion of the plan based on the fair value at
the grant dates for awards consistent with the alternative method set forth
under SFAS 123, our net income and earnings per share would have been adjusted
to the pro forma amounts indicated below:

|                                                                                                                   |                     |   |                                          |      |  |                |       |      |      |   |        |      |  |   |        |      | 
|------------------------------------------------------------------------------------------------------------------ | ------------------- | - | ---------------------------------------- | ---- |  | -------------- | ----- | ---- | ---- | - | ------ | ---- |  | - | ------ | ---- | 
|                                                                                                                   |                     |   | Three Months                             |      |  | Six Months     |      
|                                                                                                                   |                     |   | Ended June 30,                           |      |  | Ended June 30, |      
|                                                                                                                   |                     |   | 2003                                     |      |  | 2002           |       |      | 2003 |   |        | 2002 | 
|                                                                                                                   |                     |   |                                          |      |  |                |       |      |      |   |        |      | 
|                                                                                                                   |                     |   | (In thousands, except per share amounts) |     
|Net Income, as reported                                                                                            |                     | $ | 8,976                                    |      |  | $              | 8,803 |      |      | $ | 16,636 |      |  | $ | 16,558 |     
|Deduct: Total stock-based compensation
expense determined under fair-value based
method for all awards, net of tax |                     |   | 854                                      |      |  |                | 1,107 |      |      |   | 1,771  |      |  |   | 2,215  |     
|                                                                                                                   |                     |   |                                          |      |  |                |       |      |      |   |        |     
|Pro forma net income                                                                                               |                     | $ | 8,122                                    |      |  | $              | 7,696 |      |      | $ | 14,865 |      |  | $ | 14,343 |     
|                                                                                                                   |                     |   |                                          |      |  |                |       |      |      |   |        |     
|Earnings per share:                                                                                                |                     |   |                                          |      |  |                |       |      |      |   |        |      |  |   |        |     
|                                                                                                                   | Basic as reported   |   | $                                        | 0.29 |  |                | $     | 0.25 |      |   | $      | 0.53 |  |   | $      | 0.48 | 
|                                                                                                                   |                     |   |                                          |      |  |                |       |      |      |   |        |     
|                                                                                                                   | Basic pro forma     |   | $                                        | 0.26 |  |                | $     | 0.22 |      |   | $      | 0.48 |  |   | $      | 0.41 | 
|                                                                                                                   |                     |   |                                          |      |  |                |       |      |      |   |        |     
|                                                                                                                   | Diluted as reported |   | $                                        | 0.29 |  |                | $     | 0.25 |      |   | $      | 0.53 |  |   | $      | 0.47 | 
|                                                                                                                   |                     |   |                                          |      |  |                |       |      |      |   |        |     
|                                                                                                                   | Diluted pro forma   |   | $                                        | 0.26 |  |                | $     | 0.22 |      |   | $      | 0.47 |  |   | $      | 0.41 | 
|                                                                                                                   |                     |   |                                          |      |  |                |       |      |      |   |        |     

No options were granted during the second quarter of 2003. The
fair value of options granted in the second quarter 2002 and the first six
months of 2003 and 2002 were estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:

|                         |  |                |     |  |                |  |        |      |  |  |        |  |  |  |        | 
|------------------------ |  | -------------- | --- |  | -------------- |  | ------ | ---- |  |  | ------ |  |  |  | ------ | 
|                         |  | Three Months   |     |  | Six Months     | 
|                         |  | Ended June 30, |     |  | Ended June 30, | 
|                         |  | 2003           |     |  | 2002           |  |        | 2003 |  |  | 2002   | 
|                         |  |                |     |  |                |  |        |      |  |  |        | 
|Dividend yield           |  |                | N/A |  |                |  | 0%     |      |  |  | 0%     |  |  |  | 0%     | 
|Expected volatility      |  |                | N/A |  |                |  | 80.53% |      |  |  | 77.39% |  |  |  | 81.60% | 
|Risk-free interest rate  |  |                | N/A |  |                |  | 4.83%  |      |  |  | 2.97%  |  |  |  | 4.63%  | 
|Expected life (in years) |  |                | N/A |  |                |  | 6      |      |  |  | 6      |  |  |  | 6      | 



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7. Segment Reporting

Our reportable segments are strategic business units that offer different products and services. We have two
reportable segments: software and training.

Summarized financial information concerning our reportable segments is
shown in the following table:

|                         |  |                |        |   |                |   |        |      |  |   |        |   |  |   |        |  
|------------------------ |  | -------------- | ------ | - | -------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                         |  | Three Months   |        |   | Six Months     |  
|                         |  | Ended June 30, |        |   | Ended June 30, |  
|                         |  |                |        |   |                |  
|                         |  | 2003           |        |   | 2002           |   |        | 2003 |  |   | 2002   |  
|                         |  |                |        |   |                |   |        |      |  |   |        |  
|                         |  | (In thousands) |       
|Revenues:                |  |                |        |   |                |   |        |      |  |   |        |   |  |   |        |  
|Software                 |  | $              | 30,046 |   |                | $ | 29,851 |      |  | $ | 58,660 |   |  | $ | 59,559 |  
|Training                 |  |                | 3,570  |   |                |   | 3,369  |      |  |   | 9,183  |   |  |   | 8,351  |  
|                         |  |                |        |   |                |   |        |      |  |   |        |  
|Total revenues           |  | $              | 33,616 |   |                | $ | 33,220 |      |  | $ | 67,843 |   |  | $ | 67,910 |  
|                         |  |                |        |   |                |   |        |      |  |   |        |  
|Operating income (loss): |  |                |        |   |                |   |        |      |  |   |        |   |  |   |        |  
|Software                 |  | $              | 14,180 |   |                | $ | 14,125 |      |  | $ | 25,691 |   |  | $ | 26,654 |  
|Training                 |  |                | (356   | ) |                |   | (806   | )    |  |   | (194   | ) |  |   | (1,641 | )
|                         |  |                |        |   |                |   |        |      |  |   |        |  
|Total operating income   |  | $              | 13,824 |   |                | $ | 13,319 |      |  | $ | 25,497 |   |  | $ | 25,013 |  
|                         |  |                |        |   |                |   |        |      |  |   |        |  

For the periods presented, revenues derived outside the United States
are not material.

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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

The following table sets forth certain consolidated income statement
data as a percentage of net sales, except that individual components of costs of
sales and gross profit are shown as a percentage of their corresponding
component of net sales:

|                     |                            |                     |      |                |       |   |                |      |       |      |      |      |       |   |      |      |       |  
|-------------------- | -------------------------- | ------------------- | ---- | -------------- | ----- | - | -------------- | ---- | ----- | ---- | ---- | ---- | ----- | - | ---- | ---- | ----- | -
|                     |                            |                     |      | Three Months   |       |   | Six Months     |     
|                     |                            |                     |      | Ended June 30, |       |   | Ended June 30, |     
|                     |                            |                     |      |                |       |   |                |     
|                     |                            |                     |      | 2003           |       |   | 2002           |      |       | 2003 |      |      | 2002  |  
|                     |                            |                     |      |                |       |   |                |      |       |      |      |      |       |  
|Net Sales:           |                            |                     |      |                |       |   |                |      |       |      |      |      |       |   |      |     
|                     | Products                   |                     |      | 85.4           | %     |   |                | 87.4 | %     |      |      | 82.4 | %     |   |      | 85.3 | %    
|                     | Services                   |                     |      | 14.6           |       |   |                | 12.6 |       |      |      | 17.6 |       |   |      | 14.7 |      
|                     |                            |                     |      |                |       |   |                |      |       |      |      |     
|                     |                            | Total net sales     |      |                | 100.0 | % |                |      | 100.0 | %    |      |      | 100.0 | % |      |      | 100.0 | %
|                     |                            |                     |      |                |       |   |                |      |       |      |      |     
|Cost of sales:       |                            |                     |      |                |       |   |                |      |       |      |      |      |       |   |      |     
|                     | Products                   |                     |      | 9.9            | %     |   |                | 10.2 | %     |      |      | 10.8 | %     |   |      | 10.1 | %    
|                     | Services                   |                     |      | 41.6           |       |   |                | 43.2 |       |      |      | 45.2 |       |   |      | 50.5 |      
|                     |                            |                     |      |                |       |   |                |      |       |      |      |     
|                     |                            | Total cost of sales |      |                | 14.6  |   |                |      | 14.3  |      |      |      | 16.8  |   |      |      | 16.0  |  
|                     |                            |                     |      |                |       |   |                |      |       |      |      |     
|Gross profit:        |                            |                     |      |                |       |   |                |      |       |      |      |      |       |   |      |     
|                     | Products                   |                     |      | 90.1           |       |   |                | 89.8 |       |      |      | 89.2 |       |   |      | 89.9 |      
|                     | Services                   |                     |      | 58.4           |       |   |                | 56.8 |       |      |      | 54.8 |       |   |      | 49.5 |      
|                     |                            |                     |      |                |       |   |                |      |       |      |      |     
|                     |                            | Total gross profit  |      |                | 85.4  |   |                |      | 85.7  |      |      |      | 83.2  |   |      |      | 84.0  |  
|                     |                            |                     |      |                |       |   |                |      |       |      |      |     
|Operating expenses:  |                            |                     |      |                |       |   |                |      |       |      |      |      |       |   |      |     
|                     | Product development        |                     |      | 12.5           |       |   |                | 12.6 |       |      |      | 12.8 |       |   |      | 12.7 |      
|                     | Selling and marketing      |                     |      | 20.1           |       |   |                | 22.5 |       |      |      | 21.9 |       |   |      | 23.5 |      
|                     | General and administrative |                     |      | 11.7           |       |   |                | 10.5 |       |      |      | 10.9 |       |   |      | 10.9 |      
|                     |                            |                     |      |                |       |   |                |      |       |      |      |     
|Operating income     |                            |                     | 41.1 |                |       |   | 40.1           |      |       |      | 37.6 |      |       |   | 36.9 |     
|Other, net           |                            |                     | 2.1  |                |       |   | 3.3            |      |       |      | 2.1  |      |       |   | 3.0  |     
|                     |                            |                     |      |                |       |   |                |      |       |      |      |     
|Income before taxes  |                            |                     | 43.2 |                |       |   | 43.4           |      |       |      | 39.7 |      |       |   | 39.9 |     
|Income tax provision |                            |                     | 16.5 |                |       |   | 16.9           |      |       |      | 15.2 |      |       |   | 15.5 |     
|                     |                            |                     |      |                |       |   |                |      |       |      |      |     
|Net income           |                            |                     | 26.7 | %              |       |   | 26.5           | %    |       |      | 24.5 | %    |       |   | 24.4 | %   
|                     |                            |                     |      |                |       |   |                |      |       |      |      |     

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Three Months Ended June 30, 2003 and 2002

Net Sales. Our net sales increased by $396,000, or 1.2%, to $33.6
million in the second quarter of 2003 from $33.2 million in the second quarter
of 2002. Product sales decreased by $348,000, or 1.2%, to $28.7 million in the
second quarter of 2003 from $29.0 million in the second quarter of 2002. While
sales of several of our established products declined for the period, sales of
Accelerated Reader* quizzes, with over 68,000 available book titles, improved
somewhat over the same period in 2002. In addition, sales of our new products
introduced in 2002, which we believe are still significantly below their
expected potential, were 40% higher than any of the previous three quarters when
all six products were available.

Service revenue, which consists of revenue from sales of training
sessions, implementation consulting services, technical consulting services and
software support agreements, increased by $743,000, or 17.8%, to $4.9 million in
the second quarter of 2003 from $4.2 million in the second quarter of 2002.
Revenues from technical consulting and software support agreements recognized
during the quarter increased 11.2% over the same quarter in 2002 primarily due
to the delivery of more technical consulting services. Sales from our training
business, which includes implementation consulting services as well as the
traditional classroom training sessions, continue to benefit from having
districts under contract and improved by over 20%. Growth rates may slow in the
near term depending on the success of our field sales team in signing new
district deals to replace contracts that are being completed.

While it appears that school funding for the 2003-04 school year will
be little changed or lower than the tight funding levels of the 2002-03 school
year, we expect our expanding field sales force along with our other marketing
initiatives and new products to help us achieve slight revenue and earnings
growth for 2003 despite these difficult market conditions. During the second
quarter we announced Read Now*, our new comprehensive reading intervention
solution for elementary, middle, and high school students, which will help
teachers quickly improve the reading skills of struggling readers. Read Now* is
expected to be available later this year.

Cost of Sales. The cost of sales of products was $2.9 million in the
second quarter of 2003 compared to $3.0 million in the second quarter 2002. As a
percentage of product sales, the cost of sales of products decreased to 9.9% in
the second quarter of 2003 from 10.2% in the second quarter of 2002. The
decrease in cost of sales of products is due to a sales mix of higher margin
products. The cost of sales of services increased by $242,000, or 13.4%, to $2.0
million in the second quarter of 2003 from $1.8 million in the second quarter of
2002. As a percentage of sales of services, the cost of sales of services
decreased to 41.6% in the second quarter of 2003 from 43.2% in the second
quarter of 2002 due to efficiency gains in the training business. Our overall
gross profit margin decreased to 85.4% in the second quarter of 2003 from 85.7%
in the second quarter of 2002. The slight decline in overall gross profit margin
was due to services making up a larger portion of the total revenue this quarter
as compared to the same quarter in 2002.

Product Development. Product development expenses were $4.2 million in
the second quarter of 2003, which was essentially unchanged from the second
quarter of 2002. As a percentage of net sales, product development costs were
12.5% in the second quarter of 2003 versus 12.6% in the second quarter of 2002.
We do not expect a significant change in product development expense levels in
the near term.

Selling and Marketing. Selling and marketing expenses decreased by
$733,000, or 9.8%, to $6.7 million in the second quarter of 2003 from $7.5
million in the second quarter of 2002. As a percentage of net sales, selling and
marketing expenses declined to 20.1% in the second quarter of 2003 from 22.5% in
the second quarter of 2002. The reduction in selling and marketing expenses was
the result of increased internal efficiencies in marketing and the consolidation
of the inside sales force groups completed late in 2002. Beginning with the
third quarter of 2003, we expect sales and marketing expenses to exceed the
amount incurred in the comparable prior year period due primarily to higher
costs related to the field sales force expansion and aggressive marketing plans,
including promotion of our newly announced Read Now* product.



---

|*Accelerated Math®, Accelerated Reader®, Accelerated Vocabulary®,
Accelerated Writer®, AccelScan®, Fluent Reader®, Generation21®, Math
Renaissance®, Perfect Copy®, Read Now®, Reading Renaissance®,
Renaissance®, School Renaissance®, StandardsMaster®, STAR Early
Literacy®, STAR Math®, STAR Reading®, and Surpass® are registered
trademarks of the company. AccelTest, eSchoolOffice, MathFacts in a
Flash, Renaissance Learning, TKM, Total Knowledge Management,
and Writing Renaissance are common law trademarks of the company.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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General and Administrative. General and administrative expenses
increased by $470,000, or 13.5%, to $3.9 million in the second quarter of 2003
from $3.5 million in the second quarter of 2002. These costs were higher
primarily due to a one-time charge recorded for employee separation expenses
this quarter. As a percentage of net sales, general and administrative costs
increased to 11.7% in the second quarter of 2003 from 10.5% in the second
quarter of 2002. For the remaining quarters of 2003, we expect that general and
administrative expenses will be closer to the first quarter of 2003 level.

Operating Income. Operating income increased by $504,000, or 3.8%, to
$13.8 million in the second quarter of 2003 from $13.3 million in the second
quarter of 2002. As a percentage of net sales, operating income increased to
41.1% in the second quarter of 2003 from 40.1% in the second quarter of 2002.

Income Tax Expense. Income tax expense of $5.6 million was recorded in
the second quarter of 2003 at an effective income tax rate of 38.3% of income
before taxes compared to $5.6 million, or 38.9% of income before taxes, in the
second quarter of 2002. We expect to maintain our effective tax rate at or below
38.5% for 2003.

Six Months Ended June 30, 2003 and 2002

Net Sales. Our net sales of $67.8 million in the first six months of
2003 were $67,000 less than the $67.9 million in the first six months of 2002.
Product sales declined by $2.0 million, or 3.5%, to $55.9 million in the first
six months of 2003 from $57.9 million in the same period in 2002. While sales of
several of our established products declined for the period, sales of our new
products introduced in 2002, helped to partly offset these declines.

Service revenue, which consist of revenue from sales of training
sessions, implementation consulting services, our National Conference, technical
consulting services and software support agreements, increased by $2.0 million,
or 19.8%, in the first six months of 2003 to $12.0 million from $10.0 million in
the first six months of 2002. Sales from our training business, which includes
implementation consulting services, our National Conference, as well as the
traditional classroom training sessions, increased by 22.6% in the first half of
2003 over the first half of 2002. Revenues from technical consulting and
software support agreements recognized during the first six months of 2003
increased 15.3% over the same period in 2002 primarily due to higher revenue
from support agreements and, to a lesser extent, to the delivery of more
technical consulting services. The increase in training revenues is a result of
having school districts under contract for professional development. Growth
rates may slow in the near term depending on the success of our field sales team
in signing new district deals to replace contracts that are being completed.

Cost of Sales. The cost of sales of products increased by $197,000, or
3.4%, to $6.0 million in the first six months of 2003 from $5.8 million in the
first six months of 2002. As a percentage of product sales, the cost of sales of
products increased to 10.8% in the first half of 2003 from 10.1% in the first
half of 2002. This increase in cost is due to a slight reduction in scanner
profitability as well as a product mix that included more scanners than in the
same period of 2002. The cost of sales of services increased by $366,000, or
7.3%, to $5.4 million in the first six months of 2003 from $5.0 million in the
same period in 2002. As a percentage of sales of services, the cost of sales of
services decreased to 45.2% in the first six months of 2003 from 50.5% in the
first six months of 2002. This decrease is a result of efficiency gains in the
training business and lower costs for our 2003 annual National Renaissance
Conference held in Nashville versus costs for the conference in San Antonio last
year. Our overall gross profit margin decreased to 83.2% in the first six months
of 2003 from 84.0% in the first six months of 2002. The slight decline in
overall gross profit margin was due to services making up a larger portion of
the total revenue in the first six months of 2003 as compared to the same period
in 2002.

Product Development. Product development expenses were essentially flat
at $8.7 million or 12.8% of sales in the first six months of 2003, compared to
$8.6 million or 12.7% of sales for the first six months of 2002. We do not
expect a significant change in product development expense levels in the near
term.

Selling and Marketing. Selling and marketing expenses decreased by $1.1
million, or 7.0%, to $14.9 million in the first half of 2003 from $16.0 million
in the first half of 2002. The reduction in selling and marketing expenses was
the result of increased internal efficiencies in marketing and the consolidation
of the inside sales force groups completed late in 2002. As a percentage of net
sales, selling and marketing expenses declined to 21.9% in the first half of
2003 from 23.5% in the first six months of 2002. Beginning with the third
quarter of 2003, we expect sales and marketing expenses to exceed the amount
incurred in the comparable prior year period due primarily to higher costs
related to the field sales force expansion and aggressive marketing plans,
including promotion of our newly announced Read Now*product.

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General and Administrative. General and administrative expenses were
$7.4 million, or 10.9% of sales in the first six months of 2002, which reflected
no change from the same period in 2002. For the remaining quarters of 2003, we
expect that general and administrative expenses will be closer to the first
quarter of 2003 level.

Operating Income. Operating income increased by $484,000, or 1.9%, to
$25.5 million in the first six months of 2003 from $25.0 million in the same
period in 2002. As a percentage of net sales, operating income increased to
37.6% in the first half of 2003 from 36.9% in the first half of 2002.

Income Tax Expense. Income tax expense of $10.3 million was recorded in
the first six months of 2003 at an effective income tax rate of 38.3% of income
before taxes compared to $10.5 million, or 38.8% of income before taxes, in the
first half of 2002. We expect to maintain our effective tax rate at or below
38.5% for 2003.

Liquidity and Capital Resources

As of June 30, 2003, our cash, cash equivalents and investment
securities were $94.6 million, down $5.2 million from the December 31, 2002
total of $99.8 million. The decrease of $5.2 million in the first half of 2003
is primarily due to $20.0 million in cash provided by operating activities
offset by cash paid for stock repurchases of $23.7 million and $1.9 million
invested in property, plant and equipment during the first half of 2003. 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.

At June 30, 2003, we had a $15.0 million unsecured revolving line of
credit with a bank that is available until March 31, 2004. The line of credit
bears interest at either a floating rate based on the prime rate less 1.0%, or a
fixed rate for a period of up to 90 days based on LIBOR plus 1.25%. 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, which is available until
April 30, 2004. The line of credit bears interest based on the prime rate less
1.0%. As of June 30, 2003, the lines of credit had not been used.

On April 17, 2002, our Board of Directors authorized the repurchase of
up to 5,000,000 shares of our common stock. 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 and for other
general corporate purposes. During the period of January 1, 2003 through June
30, 2003 we repurchased 1.3 million shares at a cost of $23.7 million.

Off-Balance Sheet Arrangements

We do not utilize any special purpose entities or other off-balance
sheet arrangements.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make judgments, estimates and assumptions that affect the amounts
reported in the financial statements. Actual results could differ from those
estimates. There have not been any significant changes to our critical
accounting policies that were disclosed in our Annual Report on Form 10-K for
the year ended December 31, 2002, which is on file with the U.S. Securities and
Exchange Commission.

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
foregoing Managements Discussion and Analysis of Financial Condition and
Results of Operations contains certain forward-looking statements relating to
growth plans, projected sales, revenues, earnings and costs, and product
development schedules and plans. Our actual results may differ materially from
those contained in the forward-looking statements herein. Factors which may
cause such a difference to occur include (i) a delay or reduction in school
purchases of our products due to state budgetary constraints resulting in a
reduction in the funds available to schools and (ii) those factors identified in
Item 1, Business, Forward-Looking Statements, contained in our Form 10-K for the
year ended December 31, 2002, which factors are incorporated herein by reference
to such Form 10-K.

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Item 3. 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, and from changes in general market
conditions. We seek to manage our exposure to market risk by investing according
to our board-approved investment policy which has the following goals: (i)
preservation of capital, (ii) provision of adequate liquidity to meet projected
cash requirements, (iii) minimization of risk of principal loss through
diversified short and medium term investments, and (iv) maximization of yields
in relationship to the guidelines, risk, market conditions and tax
considerations.

Our investment policy specifically defines that our investments (i)
have a maximum maturity of 36 months, (ii) meet a minimum portfolio liquidity
requirement that 10% of the portfolio shall be available on 30 days notice and
not more than 30% of the portfolio will have a maturity in excess of 24 months,
(iii) meet minimum credit quality requirements specified in the plan based on
the type of investment, (iv) meet the concentration limit of not more than 10%
in any one issuer other than the US Treasury or its agencies, or money market
funds, and (v) meet certain maximum maturity or tender option limits based on
its minimum credit rating. As of June 30, 2003 our investment securities had a
market value of approximately $66.1 million and a carrying value of $65.7
million.

Our investment policy parameters preclude investment in equity
securities and require that the Board of Directors review the policy annually
and on an interim basis as required.

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 at average exchange rates prevailing during the period. Assets and
liabilities have been translated at the rates of exchange at the balance sheet
date. 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
Australian dollar, British pound, Canadian dollar, and Indian rupee. At this
time, foreign operations are not material.




Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our reports filed under the
Securities Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the Securities and Exchange
Commission, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), as appropriate, to allow timely decisions regarding required
disclosures. In designing and evaluating the companys disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control procedures and management was necessarily required
to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.

As of June 30, 2003, an evaluation was performed under the supervision
and with the participation of management, including our CEO and CFO, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on that evaluation, management, including the CEO and CFO,
concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in reports that we file or
submit under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. There has been no change in our internal
control over financial reporting that has occurred during the quarter ended June
30, 2003 that has materially affected, or is reasonably likely to materially
affect, such internal control over financial reporting.

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Part II  OTHER INFORMATION

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



|(a) |  | On April 16, 2003, the Company held its Annual Meeting of Shareholders.                                                                                                                                                                   
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Not applicable.                                                                                                                                                                                                                           
|   
|(c) |  | Set forth below are descriptions of the matters voted upon at the
Annual Meeting of Shareholders and the number of votes cast for,
against or withheld, as well as the number of abstentions and broker
non-votes, as to each such matter.



| | 1. |  | Eight directors were elected to serve until the 2003 Annual
Meeting of Shareholders and until their successors are elected and
qualified. The results of this proposal are as follows:
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|    |  |                        |  |     |            |  |          |  |           | 
|--- |  | ---------------------- |  | --- | ---------- |  | -------- |  | --------- | 
|    |  |                        |  | For |            |  | Withheld | 
|    |  |                        |  |     |            |  |          | 
|(1) |  | Judith A. Paul         |  |     | 29,214,098 |  |          |  | 472,322   | 
|(2) |  | Terrance D. Paul       |  |     | 29,213,898 |  |          |  | 472,522   | 
|(3) |  | Michael H. Baum        |  |     | 29,212,399 |  |          |  | 474,021   | 
|(4) |  | John R. Hickey         |  |     | 29,212,583 |  |          |  | 473,837   | 
|(5) |  | John H. Grunewald      |  |     | 29,637,681 |  |          |  | 48,739    | 
|(6) |  | Gordon H. Gunnlaugsson |  |     | 29,637,781 |  |          |  | 48,639    | 
|(7) |  | Harold E. Jordan       |  |     | 29,637,881 |  |          |  | 48,539    | 
|(8) |  | Addison L. Piper       |  |     | 28,235,493 |  |          |  | 1,450,927 | 



| | 2. |  | Renaissance Learning, Inc.s amended 1997 Stock Incentive Plan was
approved with 27,066,139 votes for this action, 423,231 votes against,
16,990 votes abstained and 2,180,079 broker non-votes.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(d) |  | Not applicable.
|--- |  | ---------------




Item 6. Exhibits and Reports on Form 8-K



|(a) |  | Exhibits.
|--- |  | ---------

|            |  |                                                                                               
|----------- |  | ----------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                   
|            |  |                                                                                               
|10.1        |  | Severance Agreement between Renaissance Learning, Inc. and Michael H. Baum dated June 27, 2003
|            |  |                                                                                               
|10.2        |  | Incentive Bonus Plan approved on July 16, 2003                                                
|            |  |                                                                                               
|31.1        |  | Section 302 certification by John R. Hickey                                                   
|            |  |                                                                                               
|31.2        |  | Section 302 certification by Steven A. Schmidt                                                
|            |  |                                                                                               
|32.1        |  | Section 906 certification by John R. Hickey                                                   
|            |  |                                                                                               
|32.2        |  | Section 906 certification by Steven A. Schmidt                                                



|(b) |  | Forms 8-K. The following Form 8-K filings were made during the three months
ended June 30, 2003:
|--- |  | ------------------------------------------------------------------------------------------------



| | 1. |  | Form 8-K dated April 16, 2003 (filed on April 23, 2003);
Press release regarding financial results for the first quarter of
2003.                                                                                                                     
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Form 8-K dated June 27, 2003 (filed on June 30, 2003);
Press release announcing the resignation of Michael H. Baum from
his positions as a director of the Company and as the Companys
Executive Vice President, Organizational Learning Initiatives.

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SIGNATURES

Pursuant to the requirements 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.                          
|                |  |  |  | (Registrant)                                        
|                |  |  |  |                                                     
|August 11, 2003 |  |  |  | /s/ John R. Hickey                                  
|                |  |  |  |                                                     
|Date            |  |  |  | John R. Hickey                                      
|                |  |  |  | President and Chief Executive Officer               
|                |  |  |  | (Principal Executive Officer)                       
|                |  |  |  |                                                     
|August 11, 2003 |  |  |  | /s/ Steven A. Schmidt                               
|                |  |  |  |                                                     
|Date            |  |  |  | Steven A. Schmidt                                   
|                |  |  |  | Executive Vice President and Chief Financial Officer
|                |  |  |  | (Principal Financial and Accounting Officer)        

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Index to Exhibits

|            |  |                                                                                               
|----------- |  | ----------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                   
|            |  |                                                                                               
|10.1        |  | Severance Agreement between Renaissance Learning, Inc. and Michael H. Baum dated June 27, 2003
|            |  |                                                                                               
|10.2        |  | Incentive Bonus Plan approved on July 16, 2003                                                
|            |  |                                                                                               
|31.1        |  | Section 302 certification by John R. Hickey                                                   
|            |  |                                                                                               
|31.2        |  | Section 302 certification by Steven A. Schmidt                                                
|            |  |                                                                                               
|32.1        |  | Section 906 certification by John R. Hickey                                                   
|            |  |                                                                                               
|32.2        |  | Section 906 certification by Steven A. Schmidt