##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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FORM 10-K



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|  |                                                                                                                                          
|- | -----------------------------------------------------------------------------------------------------------------------------------------
|þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934: For the fiscal year ended
    December 31, 2003

OR



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

Commission File No. 0-22187

RENAISSANCE LEARNING, INC.

(Exact name of Registrant as specified in its
charter)


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



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

Common Stock, $.01 par value

(Title of class)


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 þ          No o

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

Indicate by check mark whether the Registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act of
1934).     Yes þ          No o

The aggregate market value of the voting stock
held by nonaffiliates of the Registrant was approximately
$165,100,000 as of June 30, 2003. As of February 27,
2004, there were 30,996,358 of the Registrants shares of
common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III is incorporated by reference from
the Proxy Statement for the Annual Meeting of Shareholders to be
held on April 21, 2004.



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INDEX

|                                              |  |                                                                                                          |  |      |    | 
|--------------------------------------------- |  | -------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                              |  |                                                                                                          |  | Page
|                                              |  |                                                                                                          |  |     
|PART I                                       
|Item 1.                                       |  | Business                                                                                                 |  |      |    | 
|                                              |  | Overview                                                                                                 |  |      | 2  | 
|                                              |  | Products                                                                                                 |  |      | 3  | 
|                                              |  | Product Development                                                                                      |  |      | 7  | 
|                                              |  | Selling and Marketing                                                                                    |  |      | 7  | 
|                                              |  | Production                                                                                               |  |      | 8  | 
|                                              |  | Competition                                                                                              |  |      | 8  | 
|                                              |  | Intellectual Property                                                                                    |  |      | 9  | 
|                                              |  | Employees                                                                                                |  |      | 9  | 
|                                              |  | Backlog                                                                                                  |  |      | 9  | 
|                                              |  | Forward-Looking
    Statements                                                                           |  |      | 9  | 
|Item 2.                                       |  | Properties                                                                                               |  |      | 13 | 
|Item 3.                                       |  | Legal
    Proceedings                                                                                    |  |      | 13 | 
|Item 4.                                       |  | Submission of Matters to
    a Vote of Security Holders                                                  |  |      | 13 | 
|PART II                                      
|Item 5.                                       |  | Market for
    Registrants Common Equity and Related Stockholder
    Matters                            |  |      | 15 | 
|Item 6.                                       |  | Selected Financial
    Data                                                                              |  |      | 16 | 
|Item 7.                                       |  | Managements
    Discussion and Analysis of Financial Condition and
    Results   of Operations          |  |      | 17 | 
|Item 7A.                                      |  | Quantitative and
    Qualitative Disclosure About Market Risk                                            |  |      | 23 | 
|Item 8.                                       |  | Financial Statements and
    Supplementary Data                                                          |  |      | 25 | 
|Item 9.                                       |  | Changes In and
    Disagreements With Accountants on Accounting
    and   Financial Disclosure           |  |      | 45 | 
|Item 9A.                                      |  | Controls and
    Procedures                                                                              |  |      | 45 | 
|PART III                                     
|Item 10.                                      |  | Directors and Executive
    Officers of the Registrant                                                   |  |      | 46 | 
|Item 11.                                      |  | Executive
    Compensation                                                                               |  |      | 46 | 
|Item 12.                                      |  | Security Ownership of
    Certain Beneficial Owners and Management and   Related
    Stockholder Matters |  |      | 46 | 
|Item 13.                                      |  | Certain Relationships and
    Related Transactions                                                       |  |      | 47 | 
|Item 14.                                      |  | Principal Accountant Fees
    and Services                                                               |  |      | 47 | 
|PART IV                                      
|Item 15.                                      |  | Exhibits, Financial
    Statement Schedules, and Reports on Form 8-K                                     |  |      | 48 | 
|Credit Agreement dated as of 12/1/03         
|Code of Business Conduct and Ethics          
|Subsidiaries of Registrant                   
|Consent of Deloitte & Touche LLP             
|Directors' Power of Attorney                 
|302 Certification of Chief Executive Officer 
|302 Certification of Chief Financial Officer 
|906 Certification of Chief Executive Officer 
|906 Certification of Chief Financial Officer 
|Schedule II-Valuation and Qualifying Accounts



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PART I




Item 1. Business




Overview

Renaissance Learning, Inc. is a leading provider
of learning information systems software and school improvement
programs to pre-kindergarten through senior high
(pre-K-12) schools in the United States and Canada.
Our computer-based learning information systems and related
training, school improvement programs, professional development
and technical services help educators motivate students,
accelerate learning, improve test scores, and help students
master standards by increasing the quality, quantity, and
timeliness of performance data available to educators to
facilitate increased student practice of essential skills and
support instruction. Learning information systems provide
benefits to educators similar to those management information
systems provide to business managers. As of December 31,
2003, we had sold our products to more than 65,000, or
approximately 50%, of the K-12 schools in North America.

Our flagship product, Accelerated Reader*,
is software which provides information for motivating and
monitoring increased literature-based reading practice and to
support instruction. We believe that Accelerated Readerhas achieved a leading market position as a result of its
demonstrated effectiveness in improving student reading levels
and overall academic performance. We publish several other
learning information system products including STAR Reading,
Accelerated Math, STAR Math, STAR Early Literacy, Fluent Reader,
StandardsMaster, Accelerated Writer, AccelTest, MathFacts in a
Flashand Accelerated Vocabulary.

In 2003, we released Accelerated Grammar and
Spelling,which uses real-world applications to help
teachers build the language skills of students and diagnose
students grammar and spelling skills and Read Nowwhich is a reading intervention program designed to work
with Accelerated Readerand other Reading Renaissancesoftware to help educators assist struggling readers,
elementary through high school. During the fourth quarter of
2003, we also released our new Renaissance Placeweb-based product line. Renaissance Place enables
schools and districts to centralize all the information from
Renaissanceproducts into a single accessible database,
allowing for consolidated school and district wide reporting,
improved ease of use, and enhanced service and support.

In addition to our learning information system
products, we provide professional development opportunities for
educators through on- and off-site seminars, consulting
services, web-based training, and educator support materials.
Renaissancepractices enable educators to use the
information provided by our technology to increase guided
practice time with essential skills and personalized instruction
for every student. Our seminars include Reading Renaissance,
Math Renaissance, Writing Renaissance, Renaissance Early
Literacy, The Reading Renaissance Librarian, Successful Grant
Writing for Educators, Renaissance Classroom Management,and
Renaissance Test Strategies. Our consultants work with
teachers, librarians, principals and administrators to improve
instructional programs, solve problems and help achieve optimal
results through Renaissanceimplementation.

We provide custom assessment software and related
services to educational publishers which support many of the
popular textbook series used in K-12 and post-secondary
educational institutions. Additionally, we sell
Generation21enterprise software for training and
knowledge management throughout organizations. AccelScan,
our optical-mark card scanner, is used with several of our
learning information system products to automate scoring and
recordkeeping tasks for educators and students.

Renaissance Learning, Inc. was founded in 1986
and is incorporated under the laws of the State of Wisconsin.
Our common stock trades on The Nasdaq Stock Market® under
the symbol RLRN. Our principal executive offices are
located at 2911 Peach Street, P.O. Box 8036, Wisconsin
Rapids, Wisconsin




* AR, Accelerated Math, Accelerated
Reader, Accelerated Vocabulary, Accelerated Writer, AccelScan,
Generation21, Math Renaissance, MathFacts in a Flash,
Read Now, Reading Renaissance, StandardsMaster, STAR Early
Literacy, STAR Math,and STAR Readingare registered
trademarks of Renaissance Learning, Inc. Accelerated Grammar
and Spelling, AccelTest, Renaissance, Renaissance Learning,
Renaissance Place,and Writing Renaissanceare common
law trademarks of Renaissance Learning, Inc.


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54495-8036 (telephone: (715) 424-3636). You
may obtain, free of charge, copies of this Annual Report on
Form 10-K as well as our Quarterly Reports on
Form 10-Q and our Current Reports on Form 8-K (and
amendments to those reports) filed with, or furnished to, the
Securities Exchange Commission as soon as reasonably practicable
after we have filed, or furnished, such reports by accessing our
website at http://www.renlearn.com, clicking on
About Us and scrolling down to the SEC
Filings link. Information contained on our website is not
part of this Annual Report on Form 10-K.





Products

Software and Support Services

We offer software products to educators primarily
for use in pre-K-12 schools, as well as support services to the
users of our software products. These software products help
educators improve student academic performance by intensifying
skills practice and increasing the quality, quantity, and
timeliness of information available to educators to support
instruction. We sell training and knowledge management software
and services to corporate and governmental customers and also
provide custom assessment software and related services to
educational publishers. Our software and support services
accounted for approximately 87%, 87%, and 86% of our net sales
in 2003, 2002, and 2001, respectively. Summary financial
information relating to the software segment of our business can
be found in Item 8, Financial Statements and Supplementary
Data (specifically, refer to note 14 of the Notes to
Consolidated Financial Statements).



| |                   
| | ------------------
| | Accelerated Reader

Accelerated Readeris a learning information system for
motivating and monitoring increased literature-based reading
practice and for providing information to support instruction. A
student selects a book at an appropriate reading level from a
list of books for which the school has an Accelerated Readerquiz, reads the book, and then takes a multiple-choice quiz
on a computer. For each book read, Accelerated Readertracks the amount of reading practice achieved by
calculating points based on the length and difficulty of the
book and the students performance on the quiz. The
information generated from this process  titles read,
percent of comprehension and amount of reading
completed  creates a database of student reading
achievement, from which reports are generated that help
educators monitor the amount and quality of reading practice for
each individual student and thereby effectively target their
instruction of comprehension, vocabulary, and fluency.
Accelerated Reader supports recorded-voice versions of
quizzes on literature books for emergent readers and quizzes for
assessing reading instruction assignments found in reading
textbooks, magazines and other curricula. Accelerated Readerincludes built-in Spanish-English capabilities and supports
Literacy Skillsquizzes which allow educators to assess
students proficiency on 24 specific skills found in
state and district language arts standards. We developed quizzes
on over 11,000 book titles in 2003 and currently have a library
of computerized book quizzes on more than 73,000 titles.



| |              
| | -------------
| | Fluent Reader

Fluent Readeris a
system for improving the fluency of emergent and struggling
students. This program incorporates four proven strategies of
modeled reading, repeated oral reading, self-monitoring and
information feedback to help improve reading fluency. Fluent
Readerincludes a placement test to determine each
students independent reading level, features to identify
specific words that are causing difficulty, handles
record-keeping chores and provides key information reports to
monitor student progress.



| |             
| | ------------
| | STAR Reading

STAR Readingis an
easy to use, computer-adaptive reading test and database that
determines a students reading level, statistically
correlated to national norms, in ten minutes or less. STAR
Readingadapts itself during testing by utilizing
proprietary branching logic that evaluates the pattern of the
students answers to determine the level of difficulty
required for subsequent questions. Tests can be administered
several times a year and the results provide educators with a
database of statistically accurate reading level information on

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their students, grades 1  12, from
which they can generate useful diagnostic reports and adjust
instructional strategies accordingly.




| |                    
| | -------------------
| | STAR Early Literacy

STAR Early Literacyis computer-adaptive diagnostic
assessment software that can pinpoint the phonemic awareness,
phonics, vocabulary and other key literacy skills of pre-K-3
students in approximately 10 minutes per student. The
softwares computer-adaptive testing and 2,400-item test
bank allow repeated assessments throughout the school year,
identifying specific strengths and diagnosing specific
weaknesses in skills covered by early literacy curricula and
standards.



| |                       
| | ----------------------
| | Accelerated Vocabulary

Accelerated Vocabularyis vocabulary development software
that helps teachers and librarians accelerate student vocabulary
acquisition, reduce paperwork, support instruction, and make
vocabulary learning fun for students. Accelerated Vocabularypromotes word learning from research proven in-context
reading of book passages. Reports generated by the system help
educators assess student progress and monitor their vocabulary
skills practice.



| |                 
| | ----------------
| | Accelerated Math

Accelerated Mathis
a task-level learning information system that helps students
master math objectives from grade one through calculus. It
employs algorithm technology to automatically align assignments
to academic objectives and tracks mastery of each objective by
student. Like Accelerated Reader, Accelerated Mathencourages and monitors student practice of foundational
skills, while providing immediate feedback on performance to
students and teachers. Using the reports and assignments
Accelerated Mathgenerates, teachers can individualize
instruction without increasing their workload. Accelerated
Mathoffers state standards-aligned libraries,
textbook-aligned libraries for popular math textbooks and
extended response libraries that integrate the application of
multiple math objectives. An AccelScan optical-mark card
scanner is included with the sale of Accelerated Mathsite licenses to efficiently handle all scoring and
record-keeping chores, minimizing teacher effort and paperwork.



| |          
| | ---------
| | STAR Math

STAR Mathis a
computer-adaptive math test and database that provides the same
benefits as STAR Reading. STAR Mathreports
provide objective information to help educators instantly place
their students, monitor progress, and match instruction to
individual student levels. Quick, accurate, and easy to
administer, STAR Mathprovides math scores for first
grade through high school in approximately 15 minutes, provides
comparisons to national norms, forecasts results on major
high-stakes tests, and can be administered several times
throughout the school year to track math development.



| |                     
| | --------------------
| | MathFacts in a Flash

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



| |                   
| | ------------------
| | Accelerated Writer

Accelerated Writeris a writing improvement system that
combines short, focused lessons with powerful writing management
software to help educators teach students to recognize specific
qualities of good writing, to use those qualities in their own
writing, and anonymously rate those qualities in each
others writing. Students using the program increase their
writing practice and learn to become skilled evaluators of
writing.

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This system also allows educators to easily
monitor students writing activities and progress, and
provides continuous detailed feedback on student writing
achievement.




| |                                     
| | ------------------------------------
| | Accelerated Grammar and
    Spelling

Accelerated Grammar and Spellingsoftware offers practice and skills
assessment in grammar, usage, mechanics, and spelling for
students in grades 3-9. This innovative program helps educators
diagnose students grammar and spelling skills while also
helping to capture students interest and motivate them to
improve. It uses in-context editing and spelling to give
students valuable practice locating and correcting the most
common language skills errors. Schools can expand their usage of
the program by purchasing additional content libraries which are
specific to a grade level and essential skill area.



| |                
| | ---------------
| | StandardsMaster

StandardsMasteris a
comprehensive standards mastery assessment and web-based
reporting system for districts and schools that provides
feedback to educators on how students are progressing toward
state standards in reading, math and language arts. Informative
assessment data provided by the program helps educators adjust
instruction, intervene with specific student groups, and ensure
adequate progress on the year-end summative state test. Students
take paper-and-pencil or online assessments and results become
available immediately by district, school, teacher, class,
student and other relevant demographic characteristics.
StandardsMasteris provided on a subscription basis to
assure that educators have up-to-date versions of software and
assessment items each year.



| |                  
| | -----------------
| | Renaissance Place

Renaissance Placeeditions are the integrated, web-based
versions of our popular software products, utilizing
client-server and enterprise-scale database technology.
Renaissance Placeproducts enable schools and districts
to centralize the information from Renaissanceproducts
into a single web-accessible database, simplifying installation,
maintenance and support for our customers. Renaissance Placegenerates reports, provides statistical analysis, and
streamlines system management. Renaissance Placeis sold
on a yearly subscription basis, which includes a users
license, telephone support and updates and upgrades. In 2003, we
launched Renaissance Placeeditions of STAR Reading,
STAR Early Literacyand STAR Mathwith other products
expected to be available in 2004. Renaissance Placeeditions of StandardsMasterand Fluent Readerwere released in 2002.



| |         
| | --------
| | Read Now

Read Nowis a
research-proven reading intervention program that helps
educators assist elementary, middle, and high school students
who are struggling readers. Read Nowfocuses on the five
essential types of skills and strategies for effective reading
instruction: phonemic awareness, phonics, fluency, vocabulary,
and comprehension. Read Nowincludes our Fluent Readerand Accelerated Vocabularysoftware, on-site
consulting, ongoing interactive support from a Renaissancecoach, and supplemental printed materials covering
implementation of the program and teaching of essential skills
and strategies.



| |          
| | ---------
| | AccelScan

AccelScanis our
optical mark card reader that offers intelligent mark
recognition capability. This capability results in more accurate
recognition of student marks by distinguishing many degrees of
darkness from a variety of marking instruments and ignoring
lighter erasures. This high-speed reader is used in conjunction
with several of our software products to automate scoring of
assignments and updating of student records, thereby providing
educators with immediate information on student progress without
spending time grading paperwork.

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| |                                         
| | ----------------------------------------
| | Support Plans and Technical
    Services

We offer Expert Support Plans (ESPs)
that provide users of our software products access to telephone
support. Packaged with software kits and also sold separately
under 12- or 24-month agreements, ESPs entitle educators to
unlimited expert phone support for our products. We also offer
software hosting, data integration, and installation services.



| |             
| | ------------
| | Generation21

Generation21is an
integrated training and knowledge management system that
captures, stores and delivers knowledge for entire
organizations. The system spans enterprise-wide learning needs
including a full suite of integrated e-learning features
supporting content creation and management, instructor-led
training, remote learning and access via wireless technology.
Generation21s flagship product, Gen21
Enterprise, supports both online and classroom-based
learning. Gen21 Enterprises unique architecture is
based on how organizations manage knowledge and utilizes our
patent pending Universal Knowledge Object technology
to deliver relevant information to employees on the job, where
most learning actually occurs.

Generation21is
recognized by industry analysts as a leader in bridging the gap
between traditional enterprise learning systems and knowledge
management applications. Customers range from Fortune 100 global
clients to mid-size enterprises in a wide variety of industries
and state government agencies.



| |                           
| | --------------------------
| | Custom Assessment Products

We provide custom assessment products to
educational publishers for the K-12 and post-secondary education
market. We customize the content of these software products to
align with specific textbooks and other publisher instructional
materials. Alignment of content to individual state performance
standards along with an intuitive educator interface, ensure an
easy and effective tool for educators to deliver printed or
on-line test content, integrated with existing curricula and
classroom materials.

Renaissance Professional Development

We offer professional development programs,
consulting services, web-based training, and products that help
educators successfully combine use of our software products with
proven classroom techniques in order to increase the
effectiveness of their instruction, leading to improved student
achievement. Revenues from professional development accounted
for approximately 13%, 13%, and 14% of our net sales in 2003,
2002, and 2001, respectively.

We offer a variety of seminars and workshops,
which are conducted throughout the year at various hotel
locations in the United States, and on-site training programs
pursuant to which our training staff visits an individual
school, school district or region to conduct a seminar or
workshop. Since the inception of our training programs in late
1993 through December 31, 2003, we have trained over
500,000 educators, of whom approximately 70,000 were trained in
2003. We believe that our professional development programs
increase the utilization of our learning information systems in
schools, resulting in increased sales of add-on products such as
Accelerated Reader quizzes,Accelerated Mathlibraries, student software expansions as well as increased
overall customer interest in our other products and services
which tend to complement each other.

We also hold an annual National School
Renaissance Conference. The conference provides teachers and
administrators with opportunities to network, receive
professional development training, hear the latest research,
view our newest products and services, and plan future uses of
our products and services. About 5,000 educators attended each
of our conferences in 2003, 2002 and 2001. Our 2004 National
School Renaissance Conference will be held in Orlando, Florida.

Summary financial information relating to the
training segment of our business can be found in Item 8,
Financial Statements and Supplementary Data (specifically, refer
to note 14 of the Notes to Consolidated Financial
Statements).

6



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| |                    
| | -------------------
| | Reading Renaissance

The Reading Renaissanceprogram provides
educators with professional development training to most
effectively use our software products such as the Accelerated
Reader, STAR Reading, STAR Early Literacyand the learning
information they generate. This training combines technology and
Renaissance-effective teaching practices that result in
improved student achievement, better student attitudes, and less
paperwork for teachers.



| |                 
| | ----------------
| | Math Renaissance

One-day Math Renaissanceseminars instruct
educators in techniques to enhance their math curriculum and
instruction methods through effective use of Accelerated
Math, STAR Mathand MathFacts in a Flash. The
information provided by the software enables educators to
improve math skills for every student, first grade through
calculus, and increase test scores.



| |                           
| | --------------------------
| | Other Renaissance Services

Other service offerings include additional
professional development seminars, assistance in grant writing,
and customized consulting services to make Renaissance
implementation successful.



| |                   
| | ------------------
| | Educator Resources

We also produce videotapes, handbooks, lesson
books, math learning cards, and workbooks for use by educators
in conjunction with our software and training programs. Further,
we conduct research on best practices, perform field validation
of techniques, publish internally generated as well as
third-party research and gather information to guide the
development of our learning information systems.




Product Development

We believe that continued substantial investment
in product development is required to remain competitive and
grow in the educational marketplace. We invest continuously in
the development of new products and services, enhancement of
existing products and services, development of tools to increase
the efficiency of product development, and scientific research
which generates concepts for new products and services,
validates the efficacy of our existing products and services and
provides useful feedback for improvement of new and existing
products and services. For the years ended December 31,
2003, 2002, and 2001, respectively, our development expenditures
were $17.4 million, $18.0 million, and
$18.3 million (including capitalized amounts of $448,000,
$729,000 and $484,000).

We conduct research on our products and services
in order to accumulate information against which to develop new,
and refine existing, products and services. We conduct rigorous
scientific research into learning theory, information theory and
the effectiveness of our products and services in accelerating
learning as well as patterns of usage of our products in actual
classroom settings. Data acquired and understanding gained from
this process is used as an integral part of our product
development process.

Concepts for new products and services are
refined based on feedback from our customers, which we solicit
and incorporate throughout our development process. Proposals
based on the refined concepts are formulated by our product
management, product development, marketing and engineering
groups and submitted to management for review to determine which
should be developed into prototypes. These prototypes are then
tested in customer schools and further refined. Before beginning
production, management evaluates each new product or service to
determine that it is desired by educators, is effective in
meeting their needs, is scientifically based, and satisfies the
requirements of major state and federal guidelines.




Selling and Marketing

We market our educational products and services
to teachers, school librarians, principals, entire schools, and
school districts, as well as internationally through our
subsidiaries in Canada, Australia, and the United

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Kingdom. Our custom assessment products provided
to educational publishers are typically distributed by
publishers to educators in conjunction with sales of their
related textbooks. Our training and knowledge management
software is currently sold primarily to corporate and
governmental customers. We experience seasonal variations in our
sales due to the budget and school-year cycles of our customers.
Additionally, our service revenues tend to be more seasonal than
product revenues due to customer preferences as to when services
are delivered and due to the timing of our National Conference.


Our sales and marketing strategy consists
primarily of direct marketing to potential and existing
customers, and through our geographically dispersed field sales
representatives. We use a variety of lead-generating techniques,
including trade shows, advertisements in educational
publications, direct mail, websites, and referrals. Once product
literature has been forwarded to a prospective customer, one of
our in-house staff of telephone sales representatives contacts
the prospect to answer questions and, ultimately, direct them to
a purchase. For potential district sales, meetings are arranged
by a field sales representative to discuss purchase and
implementation of our software products and professional
development services on a comprehensive district-wide multi-year
basis.

We also have resale arrangements with various
book dealers and book publishers that sell our products to their
customers. These firms are particularly receptive to such
alliances because the use of our products in schools encourages
increased purchases of the books and other products that they
sell. We do not offer price protection or stock balancing rights
to our resellers.

Part of our distribution strategy is to develop
cross-marketing arrangements with third-party firms which sell
non-competing products into the education market. We have formed
strategic alliances with book distributors and publishers in
order to develop additional new product opportunities and to
enhance the channels available to sell and distribute our
products. We have alliances with several leading educational
publishers including Scott Foresman, Macmillan/ McGraw-Hill,
Houghton Mifflins School Division, and Harcourt School
Publishers, in which we offer Accelerated Readerquizzes
aligned to the publishers reading selections. We have
similar alliances with Houghton Mifflins School Division,
Saxon, and Glencoe/ McGraw-Hill in which we offer Accelerated
Mathsoftware libraries which are aligned to mirror the
objectives, problem types, and presentations in their textbooks.




Production

Most of our software products are currently
distributed on CD-ROM. Bulk CD-ROMs are produced by third-party
contractors. We produce order-specific and smaller batches of
CD-ROMs at our distribution facilities. Other related products,
including videotapes, books, graphics, and motivational items,
are produced by third-party vendors. AccelScanscanners
are produced to our specifications by a third-party contract
manufacturer. Our on-line ordering and delivery system
introduced in 1999 has been highly successful in selling
Accelerated Readerquizzes as well as other products over
the Internet. Additionally, our users can download selected
patches and software updates from our website.




Competition

The educational technology and professional
development markets in which we operate are very competitive. We
compete with many other companies offering educational software
products and professional development services to schools. In
addition, we compete against more traditional methods of
education, training and testing, including pencil and paper
testing. Our existing competitors may continue to broaden their
product lines, and potential competitors, including large
hardware manufacturers, software developers, and educational
publishers, may enter or increase their focus on the school
market, resulting in greater competition for us. Success in
selling our products, particularly our reading products, may
cause competitors to focus on our products in their marketing
efforts thereby increasing direct competition. There can be no
assurance that we will continue to be able to market our
products and services successfully or compete effectively in the
educational marketplace.

8



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Intellectual Property

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




Employees

As of February 1, 2004, we had 988 full and
part-time employees. We believe our relations with employees are
good. None of our employees is represented by a union or subject
to collective bargaining agreements.




Backlog

As of December 31, 2003 and 2002, we had
backlogs that aggregated approximately $16.5 million and
$20.2 million, respectively. The backlogs at
December 31, 2003 and 2002 are primarily made up of the
portion of software support agreements and subscription-based
sales not yet recognized as revenue, professional development
services and technical services not yet performed, and of
registrations for our National School Renaissance Conference.
Substantially all of the 2003 backlog is expected to be realized
during 2004.




Forward-Looking Statements

In accordance with the Private Securities
Litigation Reform Act of 1995, we can obtain a
safe-harbor for forward-looking statements by
identifying those statements and by accompanying those
statements with cautionary statements which identify factors
that could cause actual results to differ materially from those
in the forward-looking statements. Accordingly, the following
information contains or may contain forward-looking statements:
(1) information included or incorporated by reference in
this Annual Report on Form 10-K, including, without
limitation, statements made under Item 1, Business and
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations, including,
without limitation, statements with respect to growth plans,
projected sales, revenues, earnings and costs, and product
development schedules and plans, (2) information included
or incorporated by reference in our future filings with the
Securities and Exchange Commission including, without
limitation, statements with respect to growth plans, projected
sales, revenues, earnings and costs, and product development
schedules and plans and (3) information contained in
written material, releases and oral statements issued by us, or
on our behalf, including, without limitation, statements with
respect 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 identified above. Factors which may
cause such a difference to occur include, but are not limited
to, the following:

Reliance on Single Product
Line.Our Accelerated Readersoftware and supplemental Accelerated Readerquizzes
accounted for approximately 35%, 35%, and 34% of our net sales
in 2003, 2002, and 2001, respectively. An overall decline in
sales of Accelerated Readerand supplemental quizzes
would have a material adverse effect on our business, financial
condition, and results of operations.

9



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

Management of
Growth.We have experienced periods of
rapid growth in the past and anticipate continued growth in the
future. Rapid growth may place a strain on our financial,
management, systems, and other resources. Our ability to manage
our growth effectively will require us to attract, train,
motivate, manage, and retain key employees and to improve our
operational, financial, and management information systems. If
we are unable to maintain and manage growth effectively, our
business, financial condition, and results of operations could
be adversely affected.

Selling and Marketing Strategy and Product
Acceptance.Our business strategy
includes the introduction of new products and services directed
at new markets as well as the development of new sales and
distribution channels. For example, our Generation21 Learning
Systems subsidiary, sells enterprise software for training and
knowledge management primarily to businesses and government
organizations. We have historically focused on the education
market and have significantly less experience in developing and
marketing products and services to business or government
customers. Additionally, in the educational market, we are
increasing our district-level field sales efforts. Historically
our primary selling efforts have been directed towards
individual schools through telephone sales representatives and
we have significantly less experience selling our products and
services to school districts through a field sales force. There
can be no assurance that we will be successful in offering new
products and services, entering new markets and developing new
sales and distribution channels as planned or that any such
products or services, if introduced, will achieve acceptance in
the marketplace.

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

Educational
Philosophies.Our products do not
espouse a particular philosophy of instruction; rather we
support all teaching methods and curricula by focusing on
continuous feedback, increased student practice of essential
skills, and demonstrated product effectiveness through
measurable results. Certain educators, academics, politicians,
and theorists, however, declaim strong philosophies of
instruction, that can lead them to oppose educational products
or services that fall outside a very narrow definition. These
philosophies can include, but are not limited to, opposition to
standardized testing or over-reliance on the same; opposition to
computers or motivational techniques; exclusive focus on
particular types of direct instruction; and highly technical
definitions of acceptable research. Some of these philosophical
stances have the capacity to negatively influence the market for
our products and services, and such influence could have a
material adverse impact on demand and thus on our business,
financial condition, and results of operations.

10



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Dependence on Educational Institutions and
Government Funding.Substantially all
of our revenue is derived from sales to educational
institutions, individual educators, and suppliers thereto. There
can be no assurance that educational institutions and/or
individual educators will continue to invest in technology-based
products and professional development for reading and other
curricula or continue to respond favorably to our marketing. Our
inability to increase the number of products sold or number of
schools served would adversely affect our business, financial
condition, and results of operations. Because of our dependence
on educational institutions, the funding of which is largely
dependent on government support, a substantial decrease in
government budgets or funding for educational software or
technology would have a material adverse effect on our business,
financial condition, and results of operations. Any economic
slow downs, which negatively affect school funding, such as the
current recessionary economic environment, adversely impact the
sale of our products and services to schools. In addition,
certain aspects of government sponsored education initiatives
may not endorse, or be complementary to, the principles and
methodologies underlying and associated with our products and
services, which could adversely affect our business, financial
condition, and results of operations.

Geographic Concentration of
Sales.A substantial portion of our
sales is concentrated in several states, including California,
Texas, Michigan, Florida, and Georgia, which accounted for
approximately $17.0 million, $10.2 million,
$5.9 million, $5.8 million, and $5.1 million,
respectively, of our net sales in 2003. If large numbers of
schools or a district or districts controlling a large number of
schools in such states were to discontinue purchasing our
products and services, our business, financial condition, and
results of operations would be materially adversely affected.

Highly Competitive
Industry.The educational technology
and professional development markets in which we operate are
very competitive. We compete with other companies offering
educational software products to schools. In addition, we
compete against more traditional methods of education, training
and testing, including pencil and paper testing. Our existing
competitors may continue to broaden their product lines, and
potential competitors, including large hardware manufacturers,
software developers and educational publishers, may enter or
increase their focus on the school market, resulting in greater
competition for us. Success in selling our products,
particularly our reading products, may cause competitors to
focus on our products in their marketing efforts thereby
increasing direct competition. There can be no assurance that we
will continue to be able to market our products successfully or
compete effectively in the educational marketplace.

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

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

Fluctuations in Quarterly
Performance.We generally ship
products as orders are received, and therefore, we have
historically operated without a significant backlog of products.
Thus, product revenues in any quarter are substantially
dependent on the quantity of product orders received in that
quarter. The quantity of product orders in any quarter can be
affected by a variety of factors, including:



| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | delays in the development and/or shipment of new
    products;             
|
| |  | the closing of large contract sales, such as
    those to school districts;

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

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



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

Our overall gross margins also fluctuate based
upon the mix of product sales and service sales. We realize
higher margins on our software product sales than our scanners
and service sales. Service revenues tend to be more seasonal
than product revenues due to customer preferences as to when
services are delivered and due to the timing of our National
Conference, resulting in seasonal variations in margins.

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

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

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

Concentration of Share Ownership; Control by
Principal Shareholders/ Management.As
of February 27, 2004, our principal shareholders, Judith
Paul and Terrance Paul, co-chairmen and co-founders of the
company, beneficially owned approximately 75% of our outstanding
common stock. As a result, these principal shareholders have the
ability to control and direct our business and affairs.

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Shares Eligible for Future
Sale.Sales of a substantial number of
shares of our common stock in the public market could adversely
affect the market price of the common stock. As of
February 27, 2004, approximately 23.2 million shares
of our common stock were held by affiliates and may
be publicly sold only if registered under the Securities Act of
1933 or sold in accordance with an applicable exemption from
registration, such as Rule 144. In addition, we have filed
registration statements under the Securities Act of 1933 to
register an aggregate of 6,000,000 shares of common stock
reserved for issuance under our 1997 Stock Incentive Plan and an
aggregate of 500,000 shares of common stock reserved for
issuance under our Employee Stock Purchase Plan
(ESPP), which will, when issued in accordance with
such plans, be eligible for immediate sale in the public market,
subject to the Rule 144 resale limitations for affiliates.
In 2003, we did not offer the ESPP to our employees and do not
intend to offer the ESPP in 2004.

Cash Dividends.We
declared a special cash dividend of $2.15 per share and our
first quarterly cash dividend of $.04 per share on
January 28, 2004. We intend to continue to pay quarterly
cash dividends, subject to capital availability and a
determination that cash dividends continue to be in the best
interests of the company and our shareholders. However, our
dividend policy may be affected by, among other things, our
views on potential future capital requirements, including those
related to research and development, creation and expansion of
sales distribution channels, and acquisitions, legal risks, and
stock repurchases. Our dividend policy may change from time to
time, and we cannot provide assurance that we will continue to
declare dividends at all or in any particular amounts. A change
in our dividend policy could have a negative effect on the
market price of our common stock.

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




Item 2. Properties

Our corporate headquarters and software
operations are located in Wisconsin Rapids, Wisconsin, in a
125,000 square foot facility owned by us which was
constructed in 1996. We also own a 34,000 square foot
distribution facility in Wisconsin Rapids, Wisconsin. Our field
sales, professional development, and field research operations
are based in a 74,000 square foot facility, constructed in
1998, in Madison, Wisconsin owned by Athena Holdings LLC
(Athena). We own 70% of Athena and we lease
43,000 square feet of the facility from Athena.
Additionally, we lease various other office space primarily to
accommodate subsidiary operations. We believe our facilities are
adequate to support our operations for the foreseeable future.






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

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






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

We did not submit any matters to a vote of our
security holders during the fourth quarter of the fiscal year
ended December 31, 2003.

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EXECUTIVE OFFICERS OF THE REGISTRANT

|                          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name and Age of Officer   |  | Office                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Judith Ames Paul  Age 57  |  | Ms. Paul is the co-founder of the company and has
    been co-chairman of the board of directors with Mr. Paul
    since July 2003. From 1986 until July 2001, and again from
    August 2002 until July 2003, Ms. Paul served as chairman of
    the board, and from July 2001 until August 2002, Ms. Paul
    served as co-chairman with Mr. Paul. Ms. Paul has been
    a director since 1986. Ms. Paul acts as our spokesperson
    and is a leading teacher advocate. Ms. Paul holds a
    bachelors degree in elementary education from the
    University of Illinois.                                                                                                                                                                                               
|Terrance D. Paul  Age 57  |  | Mr. Paul is the co-founder of the company and has
    been co-chairman of the board of directors with Ms. Paul
    since July 2003. From August 2002 until July 2003, Mr. Paul
    served as our chief executive officer. From July 1996 until July
    2001, Mr. Paul served as vice chairman of the board and
    from July 2001 until August 2002, Mr. Paul served as
    co-chairman with Ms. Paul. Mr. Paul has been a
    director since 1986. Mr. Paul holds a law degree from the
    University of Illinois and an MBA from Bradley University.
    Terrance Paul is Judith Pauls husband.                                                                                                                                                                         
|John R. Hickey  Age 48    |  | Mr. Hickey has been our chief executive officer
    and president since July 2003. Mr. Hickey served as our
    president and chief operating officer from July 1996 until July
    2003 and has served as a director since October 1996.
    Mr. Hickey holds a bachelors degree in international
    business and history from the University of Wisconsin.                                                                                                                                                                                                                                                                                                                                                                                                               
|Steven A. Schmidt  Age 49 |  | Mr. Schmidt has been our executive vice
    president, chief financial officer and secretary since July
    2003. Mr. Schmidt joined the company in August 1999 as vice
    president, chief financial officer and secretary. From January
    1998 until December 1998, he served as corporate controller for
    Wausau-Mosinee Paper Corporation, a specialty paper
    manufacturer. From June 1993 until December 1997,
    Mr. Schmidt was vice president finance, secretary and
    treasurer for Wausau Paper Mills Company, a publicly traded
    specialty paper manufacturer headquartered in Wausau, Wisconsin.
    Mr. Schmidt holds a bachelors degree in accountancy
    from the University of Wisconsin-LaCrosse, and is a Certified
    Public Accountant.

The term of office of each executive officer is
from one annual meeting of the board of directors until the next
annual meeting of the board of directors or until a successor
for each is selected.

There are no arrangements or understandings
between any of our executive officers and any other person (not
an officer or director of the company acting as such) pursuant
to which any of the executive officers were selected as an
officer of the company.

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PART II






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

Market Information

Our common stock is traded under the symbol
RLRN on The Nasdaq Stock Market®, and
quotations are supplied by the National Association of
Securities Dealers, Inc. Information regarding the market prices
of our common stock may be found in Note 15 of Notes to
Consolidated Financial Statements included in
Item 8  Financial Statements and
Supplementary Data.

Holders

As of February 27, 2004, there were 711
record holders of the common stock.

Historical Dividends

For the years ended December 31, 2003 and
2002, no dividends or other distributions were paid to
shareholders. On January 28, 2004, our Board of Directors
declared a special cash dividend of $2.15 per share and its
first quarterly cash dividend of $.04 per share, both
payable March 1, 2004 to shareholders of record as of
February 13, 2004. We intend to continue to pay quarterly
cash dividends, subject to capital availability and a
determination that cash dividends continue to be in the best
interests of the company and our shareholders.

Recent Sales of Unregistered
Securities

There were no sales of unregistered securities
during the year ended December 31, 2003.

15



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##### Table of Contents








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

SELECTED HISTORICAL CONSOLIDATED FINANCIAL
DATA

(In thousands, except per share
amounts)


|                                   |                                    |                          |         |         |         |      |         |         |         |      |         |         |         |   |         |        |         |   |        |        |        | 
|---------------------------------- | ---------------------------------- | ------------------------ | ------- | ------- | ------- | ---- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------ | ------- | - | ------ | ------ | ------ | 
|                                   |                                    |                         
|                                   |                                    | Year Ended December 31, 
|                                   |                                    |                         
|                                   |                                    | 2003                     |         | 2002    |         | 2001 |         | 2000    |         | 1999
|                                   |                                    |                          |         |         |         |      |         |         |         |     
|Consolidated Income Statement Data |                                    |                          |         |         |         |      |         |         |         |      |         |         |         |   |         |        |         |   |        |       
|Net sales:                         |                                    |                          |         |         |         |      |         |         |         |      |         |         |         |   |         |        |         |   |        |       
|                                   | Products                           |                          | $       | 107,863 |         |      | $       | 109,503 |         |      | $       | 110,702 |         |   | $       | 87,004 |         |   | $      | 67,608 |       
|                                   | Services                           |                          |         | 22,681  |         |      |         | 21,729  |         |      |         | 21,652  |         |   |         | 19,987 |         |   |        | 15,980 |       
|                                   |                                    |                          |         |         |         |      |         |         |         |      |         |         |         |   |         |        |         |   |        |       
|                                   |                                    | Total net sales          |         |         | 130,544 |      |         |         | 131,232 |      |         |         | 132,354 |   |         |        | 106,991 |   |        |        | 83,588 | 
|                                   |                                    |                          |         |         |         |      |         |         |         |      |         |         |         |   |         |        |         |   |        |       
|Cost of sales:                     |                                    |                          |         |         |         |      |         |         |         |      |         |         |         |   |         |        |         |   |        |       
|                                   | Products                           |                          |         | 10,826  |         |      |         | 11,930  |         |      |         | 14,857  |         |   |         | 11,621 |         |   |        | 7,768  |       
|                                   | Services                           |                          |         | 10,256  |         |      |         | 9,741   |         |      |         | 9,936   |         |   |         | 10,300 |         |   |        | 7,557  |       
|                                   |                                    |                          |         |         |         |      |         |         |         |      |         |         |         |   |         |        |         |   |        |       
|                                   |                                    | Total cost of sales      |         |         | 21,082  |      |         |         | 21,671  |      |         |         | 24,793  |   |         |        | 21,921  |   |        |        | 15,325 | 
|                                   |                                    |                          |         |         |         |      |         |         |         |      |         |         |         |   |         |        |         |   |        |       
|                                   |                                    | Gross profit             |         |         | 109,462 |      |         |         | 109,561 |      |         |         | 107,561 |   |         |        | 85,070  |   |        |        | 68,263 | 
|Operating expenses:                |                                    |                          |         |         |         |      |         |         |         |      |         |         |         |   |         |        |         |   |        |       
|                                   | Product development                |                          |         | 17,000  |         |      |         | 17,266  |         |      |         | 17,800  |         |   |         | 14,922 |         |   |        | 8,500  |       
|                                   | Selling and marketing              |                          |         | 30,623  |         |      |         | 30,974  |         |      |         | 29,731  |         |   |         | 24,166 |         |   |        | 21,546 |       
|                                   | General and administrative         |                          |         | 13,593  |         |      |         | 13,830  |         |      |         | 14,322  |         |   |         | 11,833 |         |   |        | 10,115 |       
|                                   | Purchased research and development |                          |         |        |         |      |         |        |         |      |         |        |         |   |         |       |         |   |        | 1,080  |       
|                                   |                                    |                          |         |         |         |      |         |         |         |      |         |         |         |   |         |        |         |   |        |       
|                                   |                                    | Total operating expenses |         |         | 61,216  |      |         |         | 62,070  |      |         |         | 61,853  |   |         |        | 50,921  |   |        |        | 41,241 | 
|                                   |                                    |                          |         |         |         |      |         |         |         |      |         |         |         |   |         |        |         |   |        |       
|                                   |                                    | Operating income         |         |         | 48,246  |      |         |         | 47,491  |      |         |         | 45,708  |   |         |        | 34,149  |   |        |        | 27,022 | 
|Other, net                         |                                    |                          | 2,266   |         |         |      | 3,760   |         |         |      | 4,187   |         |         |   | 3,385   |        |         |   | 2,067  |       
|                                   |                                    |                          |         |         |         |      |         |         |         |      |         |         |         |   |         |        |         |   |        |       
|Income before taxes                |                                    |                          | 50,512  |         |         |      | 51,251  |         |         |      | 49,895  |         |         |   | 37,534  |        |         |   | 29,089 |       
|Income tax provision               |                                    |                          | 17,971  |         |         |      | 19,813  |         |         |      | 19,226  |         |         |   | 14,601  |        |         |   | 11,943 |       
|                                   |                                    |                          |         |         |         |      |         |         |         |      |         |         |         |   |         |        |         |   |        |       
|                                   | Net income                         |                          | $       | 32,541  |         |      | $       | 31,438  |         |      | $       | 30,669  |         |   | $       | 22,933 |         |   | $      | 17,146 |       
|                                   |                                    |                          |         |         |         |      |         |         |         |      |         |         |         |   |         |        |         |   |        |       
|Basic earnings per share (1)       |                                    | $                        | 1.05    |         |         | $    | 0.93    |         |         | $    | 0.89    |         |         | $ | 0.67    |        |         | $ | 0.50   |       
|Diluted earnings per share (1)     |                                    |                          | 1.04    |         |         |      | 0.92    |         |         |      | 0.88    |         |         |   | 0.67    |        |         |   | 0.50   |       
|Consolidated Balance Sheet Data    |                                    |                          |         |         |         |      |         |         |         |      |         |         |         |   |         |        |         |   |        |       
|Working capital                    |                                    | $                        | 102,703 |         |         | $    | 74,496  |         |         | $    | 83,383  |         |         | $ | 59,897  |        |         | $ | 42,900 |       
|Total assets                       |                                    |                          | 159,431 |         |         |      | 147,611 |         |         |      | 159,961 |         |         |   | 118,221 |        |         |   | 88,419 |       
|Shareholders equity               |                                    |                          | 133,330 |         |         |      | 121,236 |         |         |      | 136,531 |         |         |   | 99,670  |        |         |   | 74,935 |       



---



|    |                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------
|(1) | Per share data have been restated to reflect a
    2-for-1 stock split in the form of a dividend effective
    February 26, 1999.

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

Overview

Renaissance Learning, Inc. is a leading provider
of learning information systems software and school improvement
programs to pre-kindergarten through senior high
(pre-K-12) schools in the United States and Canada.
Our computer-based learning information systems and related
training, school improvement programs, professional development,
and technical services help educators motivate students,
accelerate learning, improve test scores, and help students
master standards by increasing the quality, quantity, and
timeliness of performance data available to educators to
facilitate increased student practice of essential skills and
support instruction.

Our sales are derived primarily from the sale of
software products and related services. Revenues are recorded
net of an allowance for estimated returns. Allowances for bad
debts are also recorded at the time of the sale. Product revenue
is derived primarily from the sale of software products. We
recognize revenue from sales of our off-the-shelf software
products at the time of shipment to customers. We recognize
revenue from the sale of software products which require
significant customization or modification on the
percentage-of-completion method of accounting. Revenue from
subscription-based products is recognized on a straight-line
basis over the subscription period.

Service revenue is primarily derived from
(i) training seminars, (ii) consulting services,
(iii) technical services, and (iv) software telephone
support agreements. Revenue from training seminars is recognized
when the seminar is performed. Revenue from consulting and
technical services is recognized as the services are performed
or on a straight-line basis over the contractual period.
Telephone support included with software sales has a duration of
twelve months or less and is recognized at the time the software
is shipped with the related costs of providing the telephone
support accrued for at the same time. Revenue from other
software support agreements is initially recorded as deferred
revenue and recognized as revenue on a straight-line basis over
12 or 24 months depending on the term of the agreement.
Deferred revenue includes (i) amounts invoiced for products
not yet delivered and services not yet performed,
(ii) advance invoicing on contracts, and (iii) that
portion of software support agreements and subscription-based
product sales that has not yet been recognized as revenue.

Because software products are generally shipped
as orders are received, we have historically operated without a
significant backlog of products. However, it is our practice to
announce new products prior to when the products are ready for
shipment to allow customers sufficient lead time for budgeting
and curriculum purposes. This practice can result in a
significant backlog for orders of new products. These orders are
generally filled within a relatively short period of time after
the product is ready for shipment. Registrations for training
seminars are generally received from customers in advance of
training events, resulting in a backlog for these services.
Additionally, under district-wide implementations, customers
commit to a comprehensive package of software and services in
advance of delivery of the products and services. The delivery
of backlogged products and services in certain periods can cause
those periods to have higher revenue and higher revenue growth
rates than other periods.

Cost of sales consists of expenses associated
with sales of software products, support agreements, and other
services. These costs include: (i) personnel-related costs,
(ii) costs of purchased materials such as optical-mark card
scanners, educational products, training materials, manuals and
motivational items, (iii) shipping and freight costs,
(iv) amortization of capitalized development costs, and
(v) other overhead costs. We recognize higher gross margins
on our software product sales than on our scanners and service
sales.

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

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In August 2003, we purchased a start-up
enterprise in order to obtain a potential new product concept
related to language acquisition software. This in-process
technology and related learning methodology were instrumental in
the development of our new English in a Flashsoftware
for helping teachers with English language learners and English
as a second language students. English in a Flashis
expected to be released during the 2004-2005 school year.

Results of Operations

Our annual results of operations can be
influenced by, among other things, general economic factors and
the related impact on state and federal budgetary policy. School
funding is typically a priority budget item and thus exhibits
less volatility in economic downturns than other programs.
However, in highly recessionary periods or in periods of
sustained economic slow down, curtailments in school funding can
be significant.

The difficult funding environment experienced in
the 2002-03 and 2003-04 school years have contributed to the
reductions in revenue that we incurred in fiscal 2003 and 2002.
We have mitigated some of the effects of the budgetary
environment by focusing on several initiatives that have
increased sales. These include new product and service
introductions and an emerging emphasis on district-wide selling.
We expect that our continued focus on products that accelerate
learning combined with our efforts to establish a presence at
the district level where more spending decisions will likely be
made in the future, will allow us to return to periods of
revenue growth.

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

|                     |                            |                     |      |      |       |      |      |      |       |   |      |      |       |  
|-------------------- | -------------------------- | ------------------- | ---- | ---- | ----- | ---- | ---- | ---- | ----- | - | ---- | ---- | ----- | -
|                     |                            |                    
|                     |                            | For the Years Ended
|                     |                            | December 31,       
|                     |                            |                    
|                     |                            | 2003                |      | 2002 |       | 2001
|                     |                            |                     |      |      |       |     
|Net Sales:           |                            |                     |      |      |       |      |      |      |       |   |      |     
|                     | Products                   |                     |      | 82.6 | %     |      |      | 83.4 | %     |   |      | 83.6 | %    
|                     | Services                   |                     |      | 17.4 |       |      |      | 16.6 |       |   |      | 16.4 |      
|                     |                            |                     |      |      |       |      |      |      |       |   |      |     
|                     |                            | Total net sales     |      |      | 100.0 | %    |      |      | 100.0 | % |      |      | 100.0 | %
|                     |                            |                     |      |      |       |      |      |      |       |   |      |     
|Cost of sales:       |                            |                     |      |      |       |      |      |      |       |   |      |     
|                     | Products                   |                     |      | 10.0 | %     |      |      | 10.9 | %     |   |      | 13.4 | %    
|                     | Services                   |                     |      | 45.2 |       |      |      | 44.8 |       |   |      | 45.9 |      
|                     |                            |                     |      |      |       |      |      |      |       |   |      |     
|                     |                            | Total cost of sales |      |      | 16.1  |      |      |      | 16.5  |   |      |      | 18.7  |  
|                     |                            |                     |      |      |       |      |      |      |       |   |      |     
|Gross profit:        |                            |                     |      |      |       |      |      |      |       |   |      |     
|                     | Products                   |                     |      | 90.0 |       |      |      | 89.1 |       |   |      | 86.6 |      
|                     | Services                   |                     |      | 54.8 |       |      |      | 55.2 |       |   |      | 54.1 |      
|                     |                            |                     |      |      |       |      |      |      |       |   |      |     
|                     |                            | Total gross profit  |      |      | 83.9  |      |      |      | 83.5  |   |      |      | 81.3  |  
|                     |                            |                     |      |      |       |      |      |      |       |   |      |     
|Operating expenses:  |                            |                     |      |      |       |      |      |      |       |   |      |     
|                     | Product development        |                     |      | 13.0 |       |      |      | 13.2 |       |   |      | 13.4 |      
|                     | Selling and marketing      |                     |      | 23.5 |       |      |      | 23.6 |       |   |      | 22.6 |      
|                     | General and administrative |                     |      | 10.4 |       |      |      | 10.5 |       |   |      | 10.8 |      
|                     |                            |                     |      |      |       |      |      |      |       |   |      |     
|Operating income     |                            |                     | 37.0 |      |       |      | 36.2 |      |       |   | 34.5 |     
|Other, net           |                            |                     | 1.7  |      |       |      | 2.9  |      |       |   | 3.2  |     
|                     |                            |                     |      |      |       |      |      |      |       |   |      |     
|Income before taxes  |                            |                     | 38.7 |      |       |      | 39.1 |      |       |   | 37.7 |     
|Income tax provision |                            |                     | 13.8 |      |       |      | 15.1 |      |       |   | 14.5 |     
|                     |                            |                     |      |      |       |      |      |      |       |   |      |     
|Net income           |                            |                     | 24.9 | %    |       |      | 24.0 | %    |       |   | 23.2 | %   
|                     |                            |                     |      |      |       |      |      |      |       |   |      |     

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Years Ended December 31, 2003 and
2002

Net Sales.Our net
sales declined by $688,000, or 0.5%, to $130.5 million in
2003 from $131.2 million in 2002. Product sales decreased
by $1.6 million, or 1.5%, to $107.9 million in 2003
from $109.5 million in 2002. Revenues of our established
products declined by 4.9% in 2003 versus 2002, while sales of
our new products helped to offset these declines somewhat. We
released several new products during 2003, as follows:
Accelerated Grammar and Spelling software, which helps
teachers build the language skills of students, and diagnose
students grammar and spelling skills; Read Now,
reading intervention program; and Renaissance Place,the
integrated, web-based versions of our software products which
utilizes client-server and enterprise-scale data base technology.

Service revenue increased by $952,000, or 4.4%,
to $22.7 million in 2003 compared to $21.7 million in
2002. Most of the improvement is attributable to software
support and consulting revenues which increased by 9.2% due to
our new products and a larger installed base, while professional
development services were relatively unchanged. Approximately
70,000 educators attended our Renaissancetraining
programs in 2003 compared to approximately 75,000 in 2002.

The adverse school funding environment we
experienced in 2003 has continued and we do not expect any
significant improvement over the balance of the 2003-2004 school
year. We expect that the first half of 2004 will remain
challenging with the first quarter being particularly weak. For
the full year 2004, we expect that our expanding and maturing
field sales team, our new products and our other initiatives
will result in low- to mid-single digit percentage sales growth
over the full year 2003.

Cost of Sales.The
cost of sales of products decreased by $1.1 million, or
9.3%, to $10.8 million in 2003 from $11.9 million in
2002. As a percentage of product sales, the cost of sales of
products decreased to 10.0% from 10.9% in 2002. Over half of the
decrease is due to an improved profit margin on our publisher
assessment business related to improved efficiencies. The
remainder is primarily due to lower amortization expense related
to capitalized development costs.

The cost of sales of services increased by
$514,000, or 5.3%, to $10.3 million in 2003 from
$9.7 million in 2002. As a percentage of sales of services,
the cost of sales of services increased slightly to 45.2% in
2003 from 44.8% in 2002, driven mainly by some low margin
technical support services included in 2003.

Our overall gross profit margin improved to 83.9%
in 2003 from 83.5% in 2002 due primarily to the improved product
margins mentioned earlier.

Product Development.Product development expenses (excluding amount capitalized)
decreased slightly to $17.0 million in 2003 from
$17.3 million in 2002. We continue to invest in the
development of new products, enhancement of existing products
including new platforms, and development of tools to increase
the efficiency of product development. We expect product
development expenses to remain relatively constant through 2004
at approximately $4.0 to $4.5 million per quarter.

Selling and
Marketing.Selling and marketing
expenses were relatively unchanged at $30.6 million in 2003
compared to $31.0 million in 2002. We incurred additional
costs related to the expansion of our field sales team but these
costs were substantially offset by reductions in advertising and
other cost savings efforts. As a percentage of net sales,
selling and marketing expenses were 23.5% in 2003 compared to
23.6% in 2002. Selling and marketing expenses are expected to
increase for the full year 2004 due to the continued expansion
of our field sales force.

General and
Administrative.General and
administrative expenses decreased by $237,000, or 1.7%, to
$13.6 million in 2003 from $13.8 million in 2002. We
continue to closely monitor and control general and
administrative costs. As a percentage of net sales, general and
administrative costs decreased to 10.4% in 2003 from 10.5% in
2002.

Operating Income.Operating income increased by $755,000, or 1.6%, to
$48.2 million in 2003 from $47.5 million in 2002. As a
percentage of net sales, operating income increased to 37.0% in
2003 from 36.2% in 2002 primarily as a result of decreased
operating expenses.

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Income Taxes.Income
tax expense of $18.0 million was recorded in 2003 at an
effective income tax rate of 35.6% compared to
$19.8 million and 38.7% effective income tax rate in 2002.
The third quarter of 2003 included a tax benefit of
$1.0 million related to tax credits for research activities
in excess of previously estimated amounts. Excluding the benefit
of the tax credits for research activities from earlier periods,
which are non-recurring, our effective rate for the year would
have been 37.5%. We expect to maintain our effective tax rate at
or somewhat below 37.5% in 2004.

Years Ended December 31, 2002 and
2001

Net Sales.Our net
sales decreased by $1.2 million, or 0.8%, to
$131.2 million in 2002 from $132.4 million in 2001.
Product sales decreased by $1.2 million, or 1.1%, to
$109.5 million in 2002 from $110.7 million in 2001. In
2002, we experienced revenue declines for nearly all of our
products due to the economic downturn which has resulted in
school funding pressures and, consequently, decreased demand for
our products. Sales of Accelerated Reader quizzes and
STAR Early Literacysoftware increased somewhat and,
together with sales of the new products we introduced in 2002,
partially offset the declines in sales of our other products.

Service revenue, was $21.7 million in 2002,
an increase of $77,000 over 2001, or 0.4%. Increased software
support and consulting revenues were offset by a decline in our
training revenues. Approximately 75,000 educators attended
our Renaissancetraining programs in 2002 compared to
approximately 80,000 in 2001.

Cost of Sales.The
cost of sales of products decreased by $2.9 million, or
19.7%, to $11.9 million in 2002 from $14.9 million in
2001. As a percentage of product sales, the cost of sales of
products decreased to 10.9% from 13.4% in 2001. Our
re-engineered, lower cost AccelScanscanner, completed
late in 2001, is the primary reason for the improvement in the
gross profit margin on sales of products.

The cost of sales of services decreased by
$195,000, or 2.0%, to $9.7 million in 2002 from
$9.9 million in 2001. As a percentage of sales of services,
the cost of sales of services decreased to 44.8% in 2002 from
45.9% in 2001. The improved margin on service sales is primarily
due to software support services, for which revenues increased
while the related costs remained relatively constant.

Our overall gross profit margin increased 2.2% to
83.5% in 2002 from 81.3% in 2001 due primarily to the improved
profit margin on scanners.

Product Development.Product development expenses decreased by $534,000, or 3.0%, to
$17.3 million in 2002 from $17.8 million in 2001.
These costs decreased primarily due to staff level and
facilities cost reductions in certain subsidiary operations
during 2002, and to slightly higher levels of software
development costs capitalized due to the introduction of a
number of new products in 2002. As a percentage of net sales,
product development costs decreased to 13.2% in 2002 from 13.4%
in 2001.

Selling and
Marketing.Selling and marketing
expenses increased by $1.2 million, or 4.2%, to
$31.0 million in 2002 from $29.7 million in 2001.
These expenses increased primarily due to increased costs of
selling at the district level, and increased wages and related
benefit costs associated with hiring additional personnel to
(i) support sales of our expanded product line and district
contracts, and (ii) pursue state and federal funding
opportunities. As a percentage of net sales, selling and
marketing expenses increased to 23.6% in 2002 from 22.6% in 2001.

General and
Administrative.General and
administrative expenses decreased by $492,000, or 3.4%, to
$13.8 million in 2002 from $14.3 million in 2001.
These costs decreased primarily due to reduced wages and reduced
benefit costs associated with certain staff reductions, lower
professional fees, and reduced recruiting costs associated with
lower levels of new general and administrative staff hires in
2002. As a percentage of net sales, general and administrative
costs decreased to 10.5% in 2002 from 10.8% in 2001.

Operating Income.Operating income increased by $1.8 million, or 3.9%, to
$47.5 million in 2002 from $45.7 million in 2001. As a
percentage of net sales, operating income increased to 36.2% in
2002 from 34.5% in 2001.

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Income Taxes.Income
tax expense of $19.8 million was recorded in 2002 at an
effective income tax rate of 38.7% compared to
$19.2 million and 38.5% effective income tax rate in 2001.

Liquidity and Capital Resources

As of December 31, 2003, our cash, cash
equivalents and investment securities were $111.8 million,
up $12.0 million from the December 31, 2002 total of
$99.8 million. The net increase is due primarily to
$38.0 million in cash provided by operating activities
offset by stock repurchases of $23.7 million and
$2.4 million invested in new property, plant and equipment.

At December 31, 2003, we had a
$15.0 million unsecured revolving line of credit with a
bank which is available until May 31, 2005. 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 available until April 30, 2005. The line of credit
bears interest based on the prime rate less 1.0%. As of
December 31, 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 December 31, 2003, we
repurchased 1.3 million shares at a cost of
$23.7 million. Since authorization, we have repurchased
4.0 million shares at a cost of $72.9 million under
this repurchase program. Depending on our stock valuation, we
may repurchase additional shares as a beneficial use of our cash
to enhance shareholder value.

On January 28, 2004, our Board of Directors
declared a special cash dividend of $2.15 per share and our
first quarterly cash dividend of $.04 per share, both
payable March 1, 2004 to shareholders of record as of
February 13, 2004. Total dividends paid out of cash and
cash equivalents on March 1, 2004 were $67.9 million.
We intend to continue to pay quarterly cash dividends, subject
to capital availability and a determination that cash dividends
continue to be in the best interests of the company and our
shareholders.

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

Off-Balance Sheet Arrangements and Aggregate
Contractual Obligations

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

We enter into operating leases, primarily for
facilities that we occupy in order to carry out our business
operations. Operating leases give us more flexibility than
purchasing facilities outright and limit our exposure to many of
the risks of owning commercial property, especially as it
pertains to foreign jurisdictions. These agreements generally
are for terms of one to five years and cannot be terminated by
either the lessor or us for reasons other than breach of the
lease agreement. We do not anticipate early termination of any
of these agreements. For each of the years ended
December 31, 2003, 2002 and 2001, we incurred expenses of
approximately $1.1 million, with respect to these operating
leases.

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As of December 31, 2003, our aggregate
contractual obligations for future payments under these
operating leases (by period due) were approximately:

|           |  |                |       | 
|---------- |  | -------------- | ----- | 
|           |  | (In Thousands)
|2004       |  | $              | 982   | 
|2005       |  |                | 806   | 
|2006       |  |                | 503   | 
|2007       |  |                | 184   | 
|After 2007 |  |                | 100   | 
|           |  |                |       | 
|           |  | $              | 2,575 | 
|           |  |                |       | 

As of December 31, 2003, we did not hold any
long-term debt obligations, capital-lease obligations, or
long-term purchase obligations.

Critical Accounting Policies and
Estimates

The foregoing discussion is based on our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial
statements requires management to make judgments, estimates and
assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ
from those estimates. The following is a list of our critical
accounting policies defined as those policies that we believe
are the most important to the portrayal of our financial
condition and results of operations and/or require
managements significant judgments and estimates. This is
not intended to be a comprehensive list of all of our accounting
policies. Our significant accounting policies are more fully
described in Note 4 to our Notes to Consolidated Financial
Statements.

Revenue Recognition.We recognize revenue in accordance with Statement of Position
No. 97-2 Software Revenue Recognition issued by
the Accounting Standards Executive Committee of the AICPA. Under
this accounting standard, revenue is recognized when the
following have occurred: persuasive evidence of an arrangement
exists, product delivery and acceptance has occurred or a
service has been performed, pricing is fixed and determinable,
and collectibility is probable. Revenue is recognized as
follows: (i) at the time of shipment to customers for
off-the-shelf software products and related telephone support
with a duration of 12 months or less sold with the product,
(ii) on the percentage-of-completion basis for software
products which require significant customization or
modification, (iii) as seminars are performed for training,
(iv) straight-line over the term of the support agreement
for other software support agreements, (v) as the service
is performed or on a straight-line basis over the contractual
period for technical and consulting services, and
(vi) straight-line over the subscription period for
subscription based products. Accordingly, management is required
to make judgments as to whether pricing is fixed and
determinable, whether collectibility is reasonably assured and
what the percentage of completion is as of the financial
reporting date.

Expenses are recognized and matched against
revenues for the reporting period presented in the financial
statements. We record accruals for sales returns and doubtful
accounts at the time of revenue recognition based upon
historical experience as well as other factors that in our
judgment could reasonably be expected to cause sales returns or
doubtful accounts to differ from historical experience. Changes
in such allowances may be required if future returns or bad debt
activity differs from our estimates.

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

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

Software Support
Obligations.We record a liability for
the estimated cost of software support at the time of sale.
Estimated costs are based upon our historical cost experience of
fulfilling these obligations as well as other factors that in
our judgment could reasonably be expected to affect those costs,
such as trends in the cost of providing telephone support. If
the actual costs of fulfilling these obligations differ from our
estimates, it could result in additional charges to cost of
sales in future periods.

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

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

We record a liability for potential tax
assessments based on our estimate of the potential exposure. Due
to the subjectivity and complex nature of the underlying issues,
actual payments or assessments may differ from our estimates and
require tax provision adjustments in future periods.






|         |                                                              
|-------- | -------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosure
    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 requires:
(i) that each investment have a maximum maturity of
36 months, (ii) that at least 10% of the portfolio be
available on 30 days notice and not more than 30% of the
portfolio have a maturity in excess of 24 months,
(iii) that each investment meet minimum credit quality
requirements, (iv) that our portfolio be diversified such
that not more than 10% is invested in any one issuer (other than
the US Treasury or its agencies, or money market funds), and
(v) that each investment meet certain maximum maturity or
tender option limits based on its minimum credit rating. As of
December 31, 2003 our investment securities had a market
value of approximately $49.4 million and a carrying value
of $49.3 million.

23



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##### Table of Contents



Our investment policy parameters preclude
investment in equity securities and requires 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 using average
exchange rates prevailing during the period. Assets and
liabilities have been translated at the rates of exchange on 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 exchange rate
risk is not significant due to the relative size of our foreign
operations.

24



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##### Table of Contents








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

INDEPENDENT AUDITORS REPORT

To the Board of Directors and Shareholders
of

Renaissance Learning, Inc. and
Subsidiaries:


We have audited the accompanying consolidated
balance sheets of Renaissance Learning, Inc. and subsidiaries,
as of December 31, 2003 and 2002, and the related
consolidated statements of income, shareholders equity and
cash flows for the years then ended. These financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audit. The consolidated financial
statements of Renaissance Learning, Inc. as of and for the year
ended December 31, 2001 were audited by other auditors who
have ceased operations. Those other auditors expressed an
unqualified opinion on those consolidated financial statements
in their report dated January 18, 2002.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, such 2003 and 2002 financial
statements present fairly, in all material respects, the
financial position of Renaissance Learning, Inc. and
subsidiaries, as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally
accepted in the United States of America.

As described in note 5 to the consolidated
financial statements, on January 1, 2002, the Company
adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets.



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

Milwaukee, Wisconsin

January 16, 2004, except for Note 17,


as to which the date is January 28, 2004


25



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##### Table of Contents



THE REPORT SET FORTH BELOW IS A COPY OF A
PREVIOUSLY ISSUED AUDIT REPORT BY ARTHUR ANDERSEN LLP. THIS
REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN
CONNECTION WITH ITS INCLUSION IN THIS FORM 10-K.

WE WILL NOT BE ABLE TO OBTAIN THE WRITTEN
CONSENT OF ARTHUR ANDERSEN LLP AS REQUIRED BY SECTION 7 OF
THE SECURITIES ACT OF 1933 FOR OUR REGISTRATION STATEMENTS ON
FORM S-8. ACCORDINGLY, INVESTORS WILL NOT BE ABLE TO SUE
ARTHUR ANDERSEN LLP PURSUANT TO SECTION 11(a)(4) OF THE
SECURITIES ACT WITH RESPECT TO ANY SUCH REGISTRATION STATEMENTS
AND, THEREFORE, ULTIMATE RECOVERY ON A SUCCESSFUL CLAIM MAY BE
LIMITED. THE ABILITY OF INVESTORS TO RECOVER FROM ARTHUR
ANDERSEN LLP MAY ALSO BE LIMITED AS A RESULT OF ARTHUR ANDERSEN
LLPS FINANCIAL CONDITION OR OTHER MATTERS RESULTING FROM
THE VARIOUS CIVIL AND CRIMINAL LAWSUITS AGAINST THAT
FIRM.

REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS

To the Board of Directors and Shareholders
of

Renaissance Learning, Inc. and
Subsidiaries:


We have audited the accompanying consolidated
balance sheets of Renaissance Learning, Inc. (a Wisconsin
corporation, the Company) and subsidiaries as of
December 31, 2001 and 2000, and the related consolidated
statements of income, equity and cash flows for each of the
three years in the period ended December 31, 2001. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Renaissance Learning, Inc.
and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the
United States.



| |                    
| | -------------------
| | ARTHUR ANDERSEN LLP

Milwaukee, Wisconsin

January 18, 2002


26



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##### Table of Contents



RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of December 31, 2003 and
2002


|                                   |                                                                                                                         |                                                                                                              |                                            |        |         |         |        |        |         |         | 
|---------------------------------- | ----------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------ | ------- | ------- | ------ | ------ | ------- | ------- | 
|                                   |                                                                                                                         | 2003                                                                                                         |                                            | 2002  
|                                   |                                                                                                                         |                                                                                                              |                                            |       
|                                   |                                                                                                                         |                                                                                                             
|                                   |                                                                                                                         | (In Thousands, Except                                                                                       
|                                   |                                                                                                                         | Share and Per Share                                                                                         
|                                   |                                                                                                                         | Amounts)                                                                                                    
|ASSETS                             |                                                                                                                         |                                                                                                              |                                            |        |         |         |        |       
|Current assets:                    |                                                                                                                         |                                                                                                              |                                            |        |         |         |        |       
|                                   | Cash and cash equivalents                                                                                               |                                                                                                              | $                                          | 62,524 |         |         | $      | 18,220 |        
|                                   | Investment securities                                                                                                   |                                                                                                              |                                            | 42,825 |         |         |        | 60,269 |        
|                                   | Accounts receivable, less allowance of $1,629 and
    $1,654, respectively                                              |                                                                                                              |                                            | 13,182 |         |         |        | 12,619 |        
|                                   | Inventories                                                                                                             |                                                                                                              |                                            | 2,354  |         |         |        | 1,724  |        
|                                   | Prepaid expenses                                                                                                        |                                                                                                              |                                            | 1,352  |         |         |        | 1,411  |        
|                                   | Deferred tax asset                                                                                                      |                                                                                                              |                                            | 3,743  |         |         |        | 3,710  |        
|                                   | Other current assets                                                                                                    |                                                                                                              |                                            | 889    |         |         |        | 1,331  |        
|                                   |                                                                                                                         |                                                                                                              |                                            |        |         |         |        |       
|                                   |                                                                                                                         |                                                                                                              | Total current assets                       |        |         | 126,869 |        |        |         | 99,284  | 
|Investment securities              |                                                                                                                         |                                                                                                              | 6,485                                      |        |         |         | 21,347 |       
|Property, plant and equipment, net |                                                                                                                         |                                                                                                              | 20,536                                     |        |         |         | 21,085 |       
|Deferred tax asset                 |                                                                                                                         |                                                                                                              | 1,795                                      |        |         |         | 1,942  |       
|Goodwill                           |                                                                                                                         |                                                                                                              | 2,642                                      |        |         |         | 2,313  |       
|Other intangibles, net             |                                                                                                                         |                                                                                                              | 478                                        |        |         |         | 874    |       
|Capitalized software, net          |                                                                                                                         |                                                                                                              | 626                                        |        |         |         | 659    |       
|Other non-current assets           |                                                                                                                         |                                                                                                              |                                           |        |         |         | 107    |       
|                                   |                                                                                                                         |                                                                                                              |                                            |        |         |         |        |       
|                                   |                                                                                                                         |                                                                                                              | Total assets                               |        | $       | 159,431 |        |        | $       | 147,611 | 
|                                   |                                                                                                                         |                                                                                                              |                                            |        |         |         |        |       
|                                   |                                                                                                                         |                                                                                                              | LIABILITIES AND SHAREHOLDERS
    EQUITY   |        |         |         |        |        |         |         | 
|Current liabilities:               |                                                                                                                         |                                                                                                              |                                            |        |         |         |        |       
|                                   | Accounts payable                                                                                                        |                                                                                                              | $                                          | 3,144  |         |         | $      | 3,643  |        
|                                   | Deferred revenue                                                                                                        |                                                                                                              |                                            | 10,705 |         |         |        | 10,397 |        
|                                   | Payroll and employee benefits                                                                                           |                                                                                                              |                                            | 3,153  |         |         |        | 3,771  |        
|                                   | Income taxes payable                                                                                                    |                                                                                                              |                                            | 2,295  |         |         |        | 2,372  |        
|                                   | Other current liabilities                                                                                               |                                                                                                              |                                            | 4,869  |         |         |        | 4,605  |        
|                                   |                                                                                                                         |                                                                                                              |                                            |        |         |         |        |       
|                                   |                                                                                                                         |                                                                                                              | Total current liabilities                  |        |         | 24,166  |        |        |         | 24,788  | 
|Deferred revenue                   |                                                                                                                         |                                                                                                              | 800                                        |        |         |         | 930    |       
|Deferred compensation              |                                                                                                                         |                                                                                                              | 958                                        |        |         |         | 492    |       
|                                   |                                                                                                                         |                                                                                                              |                                            |        |         |         |        |       
|                                   |                                                                                                                         |                                                                                                              | Total liabilities                          |        |         | 25,924  |        |        |         | 26,210  | 
|Minority interest                  |                                                                                                                         |                                                                                                              | 177                                        |        |         |         | 165    |       
|Shareholders equity:              |                                                                                                                         |                                                                                                              |                                            |        |         |         |        |       
|                                   | Common stock, $.01 par; shares authorized:
    150,000,000; issued: 34,736,647 shares at December 31,
    2003 and 2002 |                                                                                                              |                                            | 347    |         |         |        | 347    |        
|                                   |                                                                                                                         | Additional paid-in capital                                                                                   |                                            |        | 54,167  |         |        |        | 54,423  |        
|                                   |                                                                                                                         | Retained earnings                                                                                            |                                            |        | 148,596 |         |        |        | 116,055 |        
|                                   |                                                                                                                         | Treasury stock, at cost 3,860,802 shares at
    December 31, 2003; 2,737,672 shares at
    December 31, 2002 |                                            |        | (69,838 | )       |        |        | (49,480 | )      
|                                   |                                                                                                                         | Accumulated other comprehensive income (loss)                                                                |                                            |        | 58      |         |        |        | (109    | )      
|                                   |                                                                                                                         |                                                                                                              |                                            |        |         |         |        |       
|                                   |                                                                                                                         |                                                                                                              | Total shareholders equity                 |        |         | 133,330 |        |        |         | 121,236 | 
|                                   |                                                                                                                         |                                                                                                              |                                            |        |         |         |        |       
|                                   |                                                                                                                         |                                                                                                              | Total liabilities and shareholders equity |        | $       | 159,431 |        |        | $       | 147,611 | 
|                                   |                                                                                                                         |                                                                                                              |                                            |        |         |         |        |       

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

27



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##### Table of Contents



RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended December 31, 2003,
2002 and 2001


|                     |                            |                                          |                          |         |      |         |        |         |      |         |        |         |      |         | 
|-------------------- | -------------------------- | ---------------------------------------- | ------------------------ | ------- | ---- | ------- | ------ | ------- | ---- | ------- | ------ | ------- | ---- | ------- | 
|                     |                            | 2003                                     |                          | 2002    |      | 2001   
|                     |                            |                                          |                          |         |      |        
|                     |                            |                                         
|                     |                            | (In Thousands, Except Per Share Amounts)
|Net Sales:           |                            |                                          |                          |         |      |         |        |         |      |         |        |        
|                     | Products                   |                                          | $                        | 107,863 |      |         | $      | 109,503 |      |         | $      | 110,702 |     
|                     | Services                   |                                          |                          | 22,681  |      |         |        | 21,729  |      |         |        | 21,652  |     
|                     |                            |                                          |                          |         |      |         |        |         |      |         |        |        
|                     |                            |                                          | Total net sales          |         |      | 130,544 |        |         |      | 131,232 |        |         |      | 132,354 | 
|                     |                            |                                          |                          |         |      |         |        |         |      |         |        |        
|Cost of sales:       |                            |                                          |                          |         |      |         |        |         |      |         |        |        
|                     | Products                   |                                          |                          | 10,826  |      |         |        | 11,930  |      |         |        | 14,857  |     
|                     | Services                   |                                          |                          | 10,256  |      |         |        | 9,741   |      |         |        | 9,936   |     
|                     |                            |                                          |                          |         |      |         |        |         |      |         |        |        
|                     |                            |                                          | Total cost of sales      |         |      | 21,082  |        |         |      | 21,671  |        |         |      | 24,793  | 
|                     |                            |                                          |                          |         |      |         |        |         |      |         |        |        
|                     |                            |                                          | Gross profit             |         |      | 109,462 |        |         |      | 109,561 |        |         |      | 107,561 | 
|Operating expenses:  |                            |                                          |                          |         |      |         |        |         |      |         |        |        
|                     | Product development        |                                          |                          | 17,000  |      |         |        | 17,266  |      |         |        | 17,800  |     
|                     | Selling and marketing      |                                          |                          | 30,623  |      |         |        | 30,974  |      |         |        | 29,731  |     
|                     | General and administrative |                                          |                          | 13,593  |      |         |        | 13,830  |      |         |        | 14,322  |     
|                     |                            |                                          |                          |         |      |         |        |         |      |         |        |        
|                     |                            |                                          | Total operating expenses |         |      | 61,216  |        |         |      | 62,070  |        |         |      | 61,853  | 
|                     |                            |                                          |                          |         |      |         |        |         |      |         |        |        
|                     |                            |                                          | Operating income         |         |      | 48,246  |        |         |      | 47,491  |        |         |      | 45,708  | 
|Other income:        |                            |                                          |                          |         |      |         |        |         |      |         |        |        
|                     | Interest income            |                                          |                          | 1,927   |      |         |        | 3,207   |      |         |        | 3,925   |     
|                     | Other, net                 |                                          |                          | 339     |      |         |        | 553     |      |         |        | 262     |     
|                     |                            |                                          |                          |         |      |         |        |         |      |         |        |        
|Income before taxes  |                            |                                          | 50,512                   |         |      |         | 51,251 |         |      |         | 49,895 |        
|Income tax provision |                            |                                          | 17,971                   |         |      |         | 19,813 |         |      |         | 19,226 |        
|                     |                            |                                          |                          |         |      |         |        |         |      |         |        |        
|Net income           |                            | $                                        | 32,541                   |         |      | $       | 31,438 |         |      | $       | 30,669 |        
|                     |                            |                                          |                          |         |      |         |        |         |      |         |        |        
|Earnings per share:  |                            |                                          |                          |         |      |         |        |         |      |         |        |        
|                     |                            | Basic                                    |                          | $       | 1.05 |         |        | $       | 0.93 |         |        | $       | 0.89 |        
|                     |                            | Diluted                                  |                          | $       | 1.04 |         |        | $       | 0.92 |         |        | $       | 0.88 |        

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

28



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##### Table of Contents



RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

For the Years Ended December 31, 2001,
2002 and 2003


|                           |                                      |                      |     |            |   |          |        |          |   |               |         |               |   |   |         |         |   |   |      |      |   |   |         |         |        | 
|-------------------------- | ------------------------------------ | -------------------- | --- | ---------- | - | -------- | ------ | -------- | - | ------------- | ------- | ------------- | - | - | ------- | ------- | - | - | ---- | ---- | - | - | ------- | ------- | ------ | 
|                           |                                      |                      |     |            |   |          |        |          |   | Other         |         | Accumulated  
|                           |                                      | Common               |     | Additional |   |          |        |          |   | Comprehensive |         | Total        
|                           |                                      | Stock                |     | Paid-in    |   | Retained |        | Treasury |   | Income        |         | Shareholders
|                           |                                      | Amount(1)            |     | Capital    |   | Earnings |        | Stock    |   | (Loss)        |         | Equity       
|                           |                                      |                      |     |            |   |          |        |          |   |               |         |              
|                           |                                      |                     
|                           |                                      | (In Thousands)      
|Balance, December 31, 2000 |                                      | $                    | 343 |            |   | $        | 45,769 |          |   | $             | 53,948  |               |   | $ | (325    | )       |   | $ | (65  | )    |   | $ | 99,670  |        
|                           | Net income                           |                      |     |           |   |          |        |         |   |               |         | 30,669        |   |   |         |        |   |   |      |     |   |   |         | 30,669  |       
|                           | Foreign currency translation         |                      |     |           |   |          |        |         |   |               |         |              |   |   |         |        |   |   |      | (6   | ) |   |         | (6      | )     
|                           | Unrealized loss on securities        |                      |     |           |   |          |        |         |   |               |         |              |   |   |         |        |   |   |      | 261  |   |   |         | 261     |       
|                           |                                      |                      |     |            |   |          |        |          |   |               |         |               |   |   |         |         |   |   |      |      |   |   |         |        
|                           |                                      | Comprehensive income |     |            |  |          |        |          |  |               |         |               |  |   |         |         |  |   |      |      |  |   |         |         | 30,924 | 
|                           | Employee stock purchase plan         |                      |     | 1          |   |          |        | 814      |   |               |         |              |   |   |         |        |   |   |      |      |   |   |         | 815     |       
|                           | Exercise of stock options            |                      |     | 2          |   |          |        | 3,215    |   |               |         |              |   |   |         |        |   |   |      |     |   |   |         | 3,217   |       
|                           | Tax benefit on stock options         |                      |     |           |   |          |        | 1,905    |   |               |         |              |   |   |         |        |   |   |      |     |   |   |         | 1,905   |       
|                           |                                      |                      |     |            |   |          |        |          |   |               |         |               |   |   |         |         |   |   |      |      |   |   |         |        
|Balance, December 31, 2001 |                                      |                      | 346 |            |   |          | 51,703 |          |   |               | 84,617  |               |   |   | (325    | )       |   |   | 190  |      |   |   | 136,531 |        
|                           | Net income                           |                      |     |           |   |          |        |         |   |               |         | 31,438        |   |   |         |        |   |   |      |     |   |   |         | 31,438  |       
|                           | Foreign currency translation         |                      |     |           |   |          |        |         |   |               |         |              |   |   |         |        |   |   |      | (58  | ) |   |         | (58     | )     
|                           | Unrealized gains on securities       |                      |     |           |   |          |        |         |   |               |         |              |   |   |         |        |   |   |      | (241 | ) |   |         | (241    | )     
|                           |                                      |                      |     |            |   |          |        |          |   |               |         |               |   |   |         |         |   |   |      |      |   |   |         |        
|                           |                                      | Comprehensive income |     |            |  |          |        |          |  |               |         |               |  |   |         |         |  |   |      |      |  |   |         |         | 31,139 | 
|                           | Stock repurchased for treasury       |                      |     |           |   |          |        |         |   |               |         |              |   |   |         | (49,155 | ) |   |      |     |   |   |         | (49,155 | )     
|                           | Employee stock purchase plan         |                      |     |           |   |          |        | 1,066    |   |               |         |              |   |   |         |        |   |   |      |     |   |   |         | 1,066   |       
|                           | Exercise of stock options            |                      |     | 1          |   |          |        | 1,219    |   |               |         |              |   |   |         |        |   |   |      |     |   |   |         | 1,220   |       
|                           | Tax benefit on stock options         |                      |     |           |   |          |        | 378      |   |               |         |              |   |   |         |        |   |   |      |     |   |   |         | 378     |       
|                           | Stock option grants to non-employees |                      |     |           |   |          |        | 57       |   |               |         |              |   |   |         |        |   |   |      |     |   |   |         | 57      |       
|                           |                                      |                      |     |            |   |          |        |          |   |               |         |               |   |   |         |         |   |   |      |      |   |   |         |        
|Balance, December 31, 2002 |                                      |                      | 347 |            |   |          | 54,423 |          |   |               | 116,055 |               |   |   | (49,480 | )       |   |   | (109 | )    |   |   | 121,236 |        
|                           | Net income                           |                      |     |           |   |          |        |         |   |               |         | 32,541        |   |   |         |        |   |   |      |     |   |   |         | 32,541  |       
|                           | Foreign currency translation         |                      |     |           |   |          |        |         |   |               |         |              |   |   |         |        |   |   |      | 167  |   |   |         | 167     |       
|                           |                                      |                      |     |            |   |          |        |          |   |               |         |               |   |   |         |         |   |   |      |      |   |   |         |        
|                           |                                      | Comprehensive income |     |            |  |          |        |          |  |               |         |               |  |   |         |         |  |   |      |      |  |   |         |         | 32,708 | 
|                           | Stock repurchased for treasury       |                      |     |           |   |          |        |         |   |               |         |              |   |   |         | (23,727 | ) |   |      |     |   |   |         | (23,727 | )     
|                           | Employee stock purchase plan         |                      |     |           |   |          |        | (131     | ) |               |         |              |   |   |         | 1,177   |   |   |      |     |   |   |         | 1,046   |       
|                           | Exercise of stock options            |                      |     |           |   |          |        | (561     | ) |               |         |              |   |   |         | 2,192   |   |   |      |     |   |   |         | 1,631   |       
|                           | Tax benefit on stock options         |                      |     |           |   |          |        | 393      |   |               |         |              |   |   |         |        |   |   |      |     |   |   |         | 393     |       
|                           | Stock option grants to non-employees |                      |     |           |   |          |        | 43       |   |               |         |              |   |   |         |        |   |   |      |     |   |   |         | 43      |       
|                           |                                      |                      |     |            |   |          |        |          |   |               |         |               |   |   |         |         |   |   |      |      |   |   |         |        
|Balance, December 31, 2003 |                                      | $                    | 347 |            |   | $        | 54,167 |          |   | $             | 148,596 |               |   | $ | (69,838 | )       |   | $ | 58   |      |   | $ | 133,330 |        
|                           |                                      |                      |     |            |   |          |        |          |   |               |         |               |   |   |         |         |   |   |      |      |   |   |         |        




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

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

29



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##### Table of Contents



RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

For the Years Ended December 31, 2003,
2002 and 2001


|                                                                               |                                                                                          |                                               |                                                      |         |       |         |         |         |       |         |        |         |       |         |  
|------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------- | --------------------------------------------- | ---------------------------------------------------- | ------- | ----- | ------- | ------- | ------- | ----- | ------- | ------ | ------- | ----- | ------- | -
|                                                                               |                                                                                          | 2003                                          |                                                      | 2002    |       | 2001   
|                                                                               |                                                                                          |                                               |                                                      |         |       |        
|                                                                               |                                                                                          |                                              
|                                                                               |                                                                                          | (In Thousands)                               
|Reconciliation of net income to net cash provided
    by operating activities: |                                                                                          |                                               |                                                      |         |       |         |         |         |       |         |        |        
|                                                                               | Net income                                                                               |                                               | $                                                    | 32,541  |       |         | $       | 31,438  |       |         | $      | 30,669  |      
|                                                                               | Noncash (income) expenses included in net
    income 
    Depreciation and amortization |                                               |                                                      | 3,923   |       |         |         | 4,633   |       |         |        | 5,736   |      
|                                                                               |                                                                                          | Amortization of investment discounts/premiums |                                                      |         | 1,618 |         |         |         | 2,146 |         |        |         | 317   |        
|                                                                               |                                                                                          | Deferred income taxes                         |                                                      |         | 114   |         |         |         | 323   |         |        |         | (938  | )      
|                                                                               | Change in assets and liabilities 
    Accounts receivable                               |                                               |                                                      | (563    | )     |         |         | (221    | )     |         |        | (1,062  | )    
|                                                                               |                                                                                          | Inventories                                   |                                                      |         | (630  | )       |         |         | (76   | )       |        |         | (125  | )      
|                                                                               |                                                                                          | Prepaid expenses                              |                                                      |         | 59    |         |         |         | (348  | )       |        |         | 141   |        
|                                                                               |                                                                                          | Accounts payable and other liabilities        |                                                      |         | (70   | )       |         |         | 178   |         |        |         | 6,059 |        
|                                                                               |                                                                                          | Deferred revenue                              |                                                      |         | 178   |         |         |         | 3,047 |         |        |         | 1,417 |        
|                                                                               |                                                                                          | Other current assets                          |                                                      |         | 442   |         |         |         | (19   | )       |        |         | (467  | )      
|                                                                               |                                                                                          | Other                                         |                                                      |         | 416   |         |         |         | 439   |         |        |         | (263  | )      
|                                                                               |                                                                                          |                                               |                                                      |         |       |         |         |         |       |         |        |        
|                                                                               |                                                                                          |                                               | Net cash provided by operating activities            |         |       | 38,028  |         |         |       | 41,540  |        |         |       | 41,484  |  
|                                                                               |                                                                                          |                                               |                                                      |         |       |         |         |         |       |         |        |        
|Cash flows from investing activities:                                          |                                                                                          |                                               |                                                      |         |       |         |         |         |       |         |        |        
|                                                                               | Purchase of property, plant and equipment                                                |                                               |                                                      | (2,436  | )     |         |         | (1,572  | )     |         |        | (2,452  | )    
|                                                                               | Purchase of investment securities                                                        |                                               |                                                      | (42,357 | )     |         |         | (60,816 | )     |         |        | (68,729 | )    
|                                                                               | Maturities/sales of investment securities                                                |                                               |                                                      | 73,045  |       |         |         | 50,575  |       |         |        | 38,102  |      
|                                                                               | Capitalized software development costs                                                   |                                               |                                                      | (448    | )     |         |         | (729    | )     |         |        | (484    | )    
|                                                                               | Acquisitions                                                                             |                                               |                                                      | (521    | )     |         |         |        |       |         |        | (704    | )    
|                                                                               |                                                                                          |                                               |                                                      |         |       |         |         |         |       |         |        |        
|                                                                               |                                                                                          |                                               | Net cash provided (used) by investing
    activities |         |       | 27,283  |         |         |       | (12,542 | )      |         |       | (34,267 | )
|                                                                               |                                                                                          |                                               |                                                      |         |       |         |         |         |       |         |        |        
|Cash flows from financing activities:                                          |                                                                                          |                                               |                                                      |         |       |         |         |         |       |         |        |        
|                                                                               | Proceeds from issuance of stock                                                          |                                               |                                                      | 1,046   |       |         |         | 1,066   |       |         |        | 815     |      
|                                                                               | Proceeds from exercise of stock options                                                  |                                               |                                                      | 1,674   |       |         |         | 1,277   |       |         |        | 3,217   |      
|                                                                               | Purchase of treasury stock                                                               |                                               |                                                      | (23,727 | )     |         |         | (49,025 | )     |         |        |        |      
|                                                                               |                                                                                          |                                               |                                                      |         |       |         |         |         |       |         |        |        
|                                                                               |                                                                                          |                                               | Net cash (used) provided by financing
    activities |         |       | (21,007 | )       |         |       | (46,682 | )      |         |       | 4,032   |  
|                                                                               |                                                                                          |                                               |                                                      |         |       |         |         |         |       |         |        |        
|Net increase (decrease) in cash                                                |                                                                                          |                                               | 44,304                                               |         |       |         | (17,684 | )       |       |         | 11,249 |        
|Cash and cash equivalents, beginning of period                                 |                                                                                          |                                               | 18,220                                               |         |       |         | 35,904  |         |       |         | 24,655 |        
|                                                                               |                                                                                          |                                               |                                                      |         |       |         |         |         |       |         |        |        
|Cash and cash equivalents, end of period                                       |                                                                                          | $                                             | 62,524                                               |         |       | $       | 18,220  |         |       | $       | 35,904 |        
|                                                                               |                                                                                          |                                               |                                                      |         |       |         |         |         |       |         |        |        
|Supplemental cash flow information                                             |                                                                                          |                                               |                                                      |         |       |         |         |         |       |         |        |        
|Cash paid during the year for                                                 |                                                                                          |                                               |                                                      |         |       |         |         |         |       |         |        |        
|                                                                               | Interest                                                                                 |                                               | $                                                    |        |       |         | $       |        |       |         | $      |        |      
|                                                                               | Income taxes (net of refunds)                                                            |                                               | $                                                    | 17,172  |       |         | $       | 20,845  |       |         | $      | 16,376  |      

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

30



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##### Table of Contents



RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

(1) Consolidation

Our consolidated financial statements include the
financial results of Renaissance Learning, Inc.
(Renaissance Learning) and its subsidiaries
(collectively, the Company). Renaissance
Learnings significant operating subsidiaries include
Renaissance Corporate Services, Inc. and Generation21 Learning
Systems, LLC (Generation21). All significant
intercompany transactions have been eliminated in the
consolidated financial statements.



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

Renaissance Learning is a provider of learning
information systems to pre-K-12 schools in the United States and
Canada. Our flagship product is the Accelerated Reader,
software which provides information for motivating and
monitoring increased literature-based reading practice and to
support instruction. Our software products also include STAR
Reading,a computer-adaptive reading test and database, and
Accelerated Mathand STAR Math, software products
that apply to math the principles that have made the reading
software effective in improving academic performance.
Additionally, we publish and distribute several other learning
information system products.

Renaissance Learning develops and performs
professional development services, which provide educators with
professional development opportunities through on- and off-site
seminars, consulting services, web-based training, and educator
support materials. Teacher training is provided through
Reading Renaissance, Math Renaissance, and a variety of
other professional development seminars.

Renaissance Corporate Services, Inc. provides
customized software to educational publishers for assessment and
skills practice in reading, language arts, math, science, and
other subjects and also develops content for certain products
distributed by Renaissance Learning. Generation21 sells
enterprise software for organization-wide training and knowledge
management to corporate and governmental customers. Renaissance
Learning also has subsidiaries in Australia, Canada, India, and
the United Kingdom.



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

Effective August 19, 2003, we acquired a
start-up enterprise in order to obtain certain in-process
research and development. The transaction was accounted for
using the purchase method of accounting, with a total purchase
price of $521,000. The purchase price was allocated based on the
fair values of the assets acquired and liabilities assumed and
included an allocation of $329,000 to goodwill (see
Note 5). The operating results of this company, which are
not material to our consolidated financial statements, are
included in our consolidated financial statements since the date
of acquisition.

Pro forma data is not provided relating to the
above acquisition because it would not differ significantly from
historical results.



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

(a) Use of estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

31



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RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(b) Revenue recognition

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

Product revenue is derived primarily from the
sale of software products. We recognize revenue from sales of
off-the-shelf software products at the time of shipment to
customers. We recognize revenue from the sale of software
products which require significant modification or customization
on the percentage-of-completion method of accounting.
Accordingly, revenue is deferred for advance payments from
customers that are in excess of revenues recognized under the
percentage-of-completion method of accounting. Included in
accounts receivable at December 31, 2003 and 2002 is
$96,000 and $284,000, respectively, of amounts recognized as
revenue under the percentage-of-completion method which are not
yet billed to the customers. Revenue from subscription-based
products is recognized on a straight-line basis over the
subscription period.

Service revenue is derived from (i) training
seminars, (ii) consulting services, (iii) technical
services, and (iv) software telephone support agreements.
Revenue from training seminars is recognized when the seminar is
performed. Revenue from consulting and technical services is
recognized as the service is performed or on a straight-line
basis over the contractual period. Telephone support included
with software sales has a duration of twelve months or less and
is recognized at the time the software is shipped with the
related costs of providing the telephone support accrued for at
the same time. Revenue from other software support agreements is
initially recorded as deferred revenue and recognized as revenue
on a straight-line basis over 12 or 24 months depending on
the term of the agreement.

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

(c) Cash and cash equivalents

Cash amounts on deposit at banks and highly
liquid debt instruments purchased with an original maturity date
of three months or less are included in cash and cash
equivalents. Debt instruments are carried at cost, which
approximates market value due to the short-term nature of those
instruments. Cash and cash equivalents consisted of the
following at December 31:

|                       |  |                |        |      |  |   |        | 
|---------------------- |  | -------------- | ------ | ---- |  | - | ------ | 
|                       |  | 2003           |        | 2002
|                       |  |                |        |     
|                       |  |               
|                       |  | (In Thousands)
|Cash and time deposits |  | $              | 9,924  |      |  | $ | 9,220  | 
|Municipal obligations  |  |                | 32,300 |      |  |   | 9,000  | 
|Corporate obligations  |  |                | 20,300 |      |  |   |       | 
|                       |  |                |        |      |  |   |        | 
|                       |  | $              | 62,524 |      |  | $ | 18,220 | 
|                       |  |                |        |      |  |   |        | 

(d) Investment securities

Investment securities have an original maturity
of more than three months and a remaining maturity of less than
twenty-four months. All of our investment securities are
classified as held-to-maturity and are carried at amortized
cost. The fair value of our investment securities listed below
are based on quoted market prices. As of December 31, 2003
and 2002, investment securities consisted entirely of corporate
notes and municipal obligations.

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RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Investment securities consisted of the following
at December 31:

|                         |                 |                                        |        |        |  |          |        |        |  |   |        |        |  |   |        |        | 
|------------------------ | --------------- | -------------------------------------- | ------ | ------ |  | -------- | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|                         |                 |                                       
|                         |                 | Held-to-Maturity Investment Securities
|                         |                 |                                       
|                         |                 |                                        |        |       
|                         |                 | 2003                                   |        | 2002  
|                         |                 |                                        |        |       
|                         |                 | Carrying                               |        | Fair   |  | Carrying |        | Fair  
|                         |                 | Value                                  |        | Value  |  | Value    |        | Value 
|                         |                 |                                        |        |        |  |          |        |       
|                         |                 |                                       
|                         |                 | (In Thousands)                        
|Due in less than 1 year: |                 |                                        |        |        |  |          |        |        |  |   |        |        |  |   |        |       
|                         | Corporate bonds |                                        | $      | 18,224 |  |          | $      | 18,304 |  |   | $      | 36,023 |  |   | $      | 36,163 | 
|                         | Municipal bonds |                                        |        | 24,601 |  |          |        | 24,628 |  |   |        | 24,246 |  |   |        | 24,331 | 
|                         |                 |                                        |        |        |  |          |        |        |  |   |        |        |  |   |        |       
|                         |                 |                                        | 42,825 |        |  |          | 42,932 |        |  |   | 60,269 |        |  |   | 60,494 |       
|                         |                 |                                        |        |        |  |          |        |        |  |   |        |        |  |   |        |       
|Due in 1 to 2 years:     |                 |                                        |        |        |  |          |        |        |  |   |        |        |  |   |        |       
|                         | Corporate bonds |                                        |        | 3,902  |  |          |        | 3,904  |  |   |        | 16,073 |  |   |        | 16,337 | 
|                         | Municipal bonds |                                        |        | 2,583  |  |          |        | 2,582  |  |   |        | 5,274  |  |   |        | 5,303  | 
|                         |                 |                                        |        |        |  |          |        |        |  |   |        |        |  |   |        |       
|                         |                 |                                        | 6,485  |        |  |          | 6,486  |        |  |   | 21,347 |        |  |   | 21,640 |       
|                         |                 |                                        |        |        |  |          |        |        |  |   |        |        |  |   |        |       
|                         |                 | $                                      | 49,310 |        |  | $        | 49,418 |        |  | $ | 81,616 |        |  | $ | 82,134 |       
|                         |                 |                                        |        |        |  |          |        |        |  |   |        |        |  |   |        |       

(e) Inventories

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

(f) Catalog and advertising
costs

Costs related to direct response advertising,
primarily catalogs, are capitalized and amortized over their
expected period of future benefits. At December 31, 2003
and 2002, capitalized catalog costs of $0 and approximately
$65,000, respectively, are included in prepaid expenses. All
other advertising costs are expensed as the advertising takes
place. Advertising expenses for 2003, 2002 and 2001 were
approximately $7.2 million, $8.5 million and
$9.5 million, respectively.

(g) Property, plant and
equipment

Property, plant and equipment are recorded at
cost and are depreciated over their estimated useful lives using
principally the straight-line method for financial reporting
purposes. Maintenance and repair costs are charged to expense as
incurred, and renewals and improvements that significantly
extend the useful life of an asset are added to the plant and
equipment accounts. Depreciation expense was $3.0 million,
$3.5 million and $3.9 million for 2003, 2002 and 2001,
respectively.

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

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RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                                     |                                     |                |        |        |  |   |        |        | 
|---------------------------------------------------- | ----------------------------------- | -------------- | ------ | ------ |  | - | ------ | ------ | 
|                                                     |                                     | 2003           |        | 2002  
|                                                     |                                     |                |        |       
|                                                     |                                     |               
|                                                     |                                     | (In Thousands)
|Land and improvements                                |                                     | $              | 3,642  |        |  | $ | 3,637  |       
|Buildings                                            |                                     |                | 16,004 |        |  |   | 15,993 |       
|Furniture, fixtures and office equipment             |                                     |                | 5,986  |        |  |   | 5,743  |       
|Computer and production equipment                    |                                     |                | 10,443 |        |  |   | 10,277 |       
|Other                                                |                                     |                | 1,545  |        |  |   | 422    |       
|                                                     |                                     |                |        |        |  |   |        |       
|                                                     | Total property, plant and equipment |                |        | 37,620 |  |   |        | 36,072 | 
|Less  accumulated depreciation and
    amortization |                                     |                | 17,084 |        |  |   | 14,987 |       
|                                                     |                                     |                |        |        |  |   |        |       
|Property, plant and equipment, net                   |                                     | $              | 20,536 |        |  | $ | 21,085 |       
|                                                     |                                     |                |        |        |  |   |        |       

(h) Software development costs

We capitalize certain software development costs
incurred after technological feasibility is achieved.
Capitalized costs are reported at the lower of amortized cost or
net realizable value. Capitalized software development costs are
amortized on a product-by-product basis using the straight-line
method over the estimated economic life of the products which is
generally estimated to be 24 months. Amortization begins
when the products are available for general release to
customers. All other research and development expenditures are
charged to product development expense in the period incurred.
When capitalized software is fully amortized, the balance is
removed from the capitalized software and accumulated
amortization accounts. Amounts capitalized were approximately
$448,000, $729,000 and $484,000 in 2003, 2002 and 2001,
respectively. Amortization expense of approximately $481,000,
$576,000 and $560,000 for 2003, 2002 and 2001, respectively, is
included in cost of sales-products in the consolidated
statements of income. At December 31, 2003 and 2002,
accumulated amortization of capitalized software development
costs was $1,043,000 and $1,309,000, respectively.

(i) Sales and concentration of credit
risks

We grant credit to customers in the ordinary
course of business. The majority of our customers are schools or
school districts, although we do sell some of our products
through resellers. Concentrations of credit risk with respect to
trade receivables are limited due to the significant number of
customers and their geographic dispersion. In 2003, 2002, and
2001, no customer represented more than 10% of net sales.

(j) Stock-based compensation

We elected, as permitted by SFAS 123
Accounting for Stock Based Compensation, to follow
the intrinsic value based method of accounting for stock options
consistent with Accounting Principles Board Opinion No. 25
(APB 25) Accounting for Stock Issued to
Employees and to provide the pro forma disclosures of net
income and earnings per share as if the fair value based method
had been applied. Under the intrinsic value method, compensation
cost for stock options is measured by the excess, if any, of the
quoted price of our stock at the measurement date over the
exercise price. The Black-Scholes option-pricing model was used
to compute the fair value of each option granted for purposes of
the pro forma disclosures required by SFAS 123. The
disclosures required by SFAS 123 are presented in
Footnote 11.

34



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RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(k) Earnings per common share

Earnings per share is computed in accordance with
SFAS 128 Earnings per Share. Basic earnings per
common share (Basic EPS) is computed by dividing
income available to common stockholders by the weighted average
number of common shares outstanding during the period. Shares
issued and shares reacquired during the period are weighted for
the portion of the period they were outstanding.

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

The computation of Diluted EPS does not assume
conversion, exercise or contingent issuance of securities that
may have an antidilutive effect on earnings per share.
Consequently, stock options with an exercise price greater than
the average market price for the period are not included in the
computation of potentially dilutive common shares. For the years
ended December 31, 2003, 2002 and 2001, respectively, there
were 807,319; 721,631; and 83,833 options excluded from the
computation of potentially dilutive weighted average common
shares.

The weighted average shares outstanding are as
follows:

|                                             |  |      |            |      |  |      |            |  |  |  |            | 
|-------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  |  | ---------- | 
|                                             |  | 2003 |            | 2002 |  | 2001
|                                             |  |      |            |      |  |     
|Basic weighted average shares outstanding    |  |      | 31,110,578 |      |  |      | 33,858,579 |  |  |  | 34,515,540 | 
|Dilutive effect of outstanding stock options |  |      | 194,853    |      |  |      | 209,137    |  |  |  | 330,860    | 
|                                             |  |      |            |      |  |      |            |  |  |  |            | 
|Diluted weighted average shares outstanding  |  |      | 31,305,431 |      |  |      | 34,067,716 |  |  |  | 34,846,400 | 
|                                             |  |      |            |      |  |      |            |  |  |  |            | 

(l) Income taxes

We account for income taxes according to the
provisions of SFAS 109, Accounting for Income
Taxes. SFAS 109 requires an asset and liability based
approach to accounting for income taxes. Deferred income tax
assets and liabilities are recorded to reflect the tax
consequences on future years of temporary differences between
financial and tax accounting of revenue and expense items.
Valuation allowances are provided when it is anticipated that
some or all of a deferred tax asset is not likely to be realized.

(m) Derivative financial
instruments

In June 1998, the Financial Accounting Standards
Board (FASB) issued SFAS 133, Accounting
for Derivative Instruments and Hedging Activities. This
standard, as amended, requires that entities recognize
derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. We adopted this
standard on January 1, 2001. The adoption of this statement
has not had an impact on the consolidated financial statements,
as we have not utilized derivative instruments.

(n) Comprehensive income (loss)

Our comprehensive income (loss) includes foreign
currency translation adjustments, which are included in
accumulated other comprehensive income (loss) in the
consolidated statements of shareholders equity. On
January 1, 2002, we reclassified our investment securities
to held-to-maturity from available-for-sale and have amortized
the balance of unrealized gains and losses as allowed by the
SFAS 115 Accounting for Certain Investments in Debt
and Equity Securities. This reclassification of our
investments did not have an impact on our reported net income
for any of the periods presented. At December 31, 2003 and
2002, accumulated other comprehensive income (loss) consisted
entirely of foreign currency translation adjustments.

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RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(o) Shipping and handling revenues and
costs

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

(p) Reclassifications

Certain previously reported amounts have been
reclassified to conform with the 2003 presentation.



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

On June 30, 2001, the FASB issued
SFAS 142 Goodwill and Other Intangible Assets.
Under this new standard, goodwill acquired after June 30,
2001 is not amortized over its useful life and starting
January 1, 2002, amortization expense is no longer recorded
for goodwill acquired on or before June 30, 2001.

We adopted the provisions of SFAS 142
effective January 1, 2002. Assembled workforce does not
meet the criteria of SFAS 142 for recognition apart from
goodwill, therefore, as of January 1, 2002, we reclassified
the $441,000 unamortized balance of assembled workforce to
goodwill. SFAS 142 requires that we assess goodwill at
least annually for impairment by applying a fair-value-based
test. We completed this testing at December 31, 2003, and
found no instances of impairment of our recorded goodwill. All
of our goodwill and other intangible assets are assigned to our
software segment.

In accordance with SFAS 142, the effect of
this accounting change is reflected prospectively. Supplemental
comparative disclosure as if the change had been retroactively
applied to the year ended December 31, 2001 is as follows:

|                     |                                   |                       |        |        |      | 
|-------------------- | --------------------------------- | --------------------- | ------ | ------ | ---- | 
|                     |                                   | Twelve Months Ended  
|                     |                                   | December 31, 2001    
|                     |                                   |                      
|                     |                                   | (In Thousands, Except
|                     |                                   | Per Share Amounts)   
|Net income:          |                                   |                       |        |       
|                     | As reported                       |                       | $      | 30,669 |     
|                     | Goodwill amortization, net of tax |                       |        | 346    |     
|                     |                                   |                       |        |       
|Pro forma net income |                                   | $                     | 31,015 |       
|                     |                                   |                       |        |       
|Earnings per share:  |                                   |                       |        |       
|                     | Basic:                            |                       |        |        |     
|                     |                                   | As reported           |        | $      | 0.89 | 
|                     |                                   | Pro forma             |        |        | 0.90 | 
|                     | Diluted:                          |                       |        |        |     
|                     |                                   | As reported           |        | $      | 0.88 | 
|                     |                                   | Pro forma             |        |        | 0.89 | 

Goodwill of $329,000 was acquired with the
purchase of a start-up enterprise in 2003 (see Note 3). For
the year ended December 31, 2003, we recognized
amortization expense of $396,000 on other intangibles with
finite lives. Other intangibles with finite lives are scheduled
to be fully amortized in 2005 with corresponding amortization
estimated to be $285,000 and $193,000 for the years ended 2004
and 2005, respectively. The estimated useful lives are four
years for algorithms and software code and five years for a
non-compete agreement.

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RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Other intangibles consisted of the following:

|                             |  |                   |       |                   |  |              |       |          |  |              |     |              |  |   |       |  |  |   |       |  |  |   |     | 
|---------------------------- |  | ----------------- | ----- | ----------------- |  | ------------ | ----- | -------- |  | ------------ | --- | ------------ |  | - | ----- |  |  | - | ----- |  |  | - | --- | 
|                             |  |                   |       |                  
|                             |  | December 31, 2003 |       | December 31, 2002
|                             |  |                   |       |                  
|                             |  | Gross             |       |                   |  | Other        |       | Gross    |  |              |     | Other       
|                             |  | Carrying          |       | Accumulated       |  | Intangibles, |       | Carrying |  | Accumulated  |     | Intangibles,
|                             |  | Amount            |       | Amortization      |  | Net          |       | Amount   |  | Amortization |     | Net         
|                             |  |                   |       |                   |  |              |       |          |  |              |     |             
|                             |  |                  
|                             |  | (In Thousands)   
|Algorithms and software code |  | $                 | 2,124 |                   |  | $            | 2,058 |          |  | $            | 66  |              |  | $ | 2,124 |  |  | $ | 1,882 |  |  | $ | 242 | 
|Non-compete agreement        |  |                   | 1,100 |                   |  |              | 688   |          |  |              | 412 |              |  |   | 1,100 |  |  |   | 468   |  |  |   | 632 | 
|                             |  |                   |       |                   |  |              |       |          |  |              |     |              |  |   |       |  |  |   |       |  |  |   |     | 
|Other intangibles            |  | $                 | 3,224 |                   |  | $            | 2,746 |          |  | $            | 478 |              |  | $ | 3,224 |  |  | $ | 2,350 |  |  | $ | 874 | 
|                             |  |                   |       |                   |  |              |       |          |  |              |     |              |  |   |       |  |  |   |       |  |  |   |     | 



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

The provision for income taxes consisted of:

|                                       |                 |                |        |        |  |      |        |        |  |   |        |        |  
|-------------------------------------- | --------------- | -------------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | -
|                                       |                 | 2003           |        | 2002   |  | 2001
|                                       |                 |                |        |        |  |     
|                                       |                 |               
|                                       |                 | (In Thousands)
|Current tax provision:                 |                 |                |        |        |  |      |        |        |  |   |        |       
|                                       | U.S. federal    |                | $      | 14,831 |  |      | $      | 16,538 |  |   | $      | 17,409 |  
|                                       | State and local |                |        | 2,721  |  |      |        | 2,952  |  |   |        | 2,755  |  
|                                       | Foreign         |                |        | 305    |  |      |        |       |  |   |        |       |  
|                                       |                 |                |        |        |  |      |        |        |  |   |        |       
|Total current tax provision            |                 |                | 17,857 |        |  |      | 19,490 |        |  |   | 20,164 |       
|                                       |                 |                |        |        |  |      |        |        |  |   |        |       
|Deferred tax provision (benefit):      |                 |                |        |        |  |      |        |        |  |   |        |       
|                                       | U.S. federal    |                |        | 105    |  |      |        | 313    |  |   |        | (848   | )
|                                       | State and local |                |        | 9      |  |      |        | 10     |  |   |        | (90    | )
|                                       |                 |                |        |        |  |      |        |        |  |   |        |       
|Total deferred tax provision (benefit) |                 |                | 114    |        |  |      | 323    |        |  |   | (938   | )     
|                                       |                 |                |        |        |  |      |        |        |  |   |        |       
|Provision for income taxes             |                 | $              | 17,971 |        |  | $    | 19,813 |        |  | $ | 19,226 |       
|                                       |                 |                |        |        |  |      |        |        |  |   |        |       

Effective rate reconciliation:

|                                                  |  |                |        |      |  |      |       |   |  |   |        |   |  |  |       |   |  |   |        |   |  |  |       |  
|------------------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ----- | - |  | - | ------ | - |  |  | ----- | - |  | - | ------ | - |  |  | ----- | -
|                                                  |  |                |        |      |  |     
|                                                  |  | 2003           |        | 2002 |  | 2001
|                                                  |  |                |        |      |  |     
|                                                  |  |                |        |      |  |      |       |   |  |   |        |  
|                                                  |  |               
|                                                  |  | (In Thousands)
|Income tax provision at statutory tax rate        |  | $              | 17,679 |      |  |      | 35.0% |   |  | $ | 17,937 |   |  |  | 35.0% |   |  | $ | 17,463 |   |  |  | 35.0% |  
|State and local taxes, net of federal tax benefit |  |                | 1,775  |      |  |      | 3.5%  |   |  |   | 1,925  |   |  |  | 3.8%  |   |  |   | 1,732  |   |  |  | 3.4%  |  
|Federal research credit                           |  |                | (1,051 | )    |  |      | (2.1% | ) |  |   | (250   | ) |  |  | (0.5% | ) |  |   | (200   | ) |  |  | (0.5% | )
|Other                                             |  |                | (432   | )    |  |      | (0.8% | ) |  |   | 201    |   |  |  | 0.4%  |   |  |   | 231    |   |  |  | 0.5%  |  
|                                                  |  |                |        |      |  |      |       |   |  |   |        |   |  |  |       |   |  |   |        |   |  |  |       |  
|Provision for income taxes                        |  | $              | 17,971 |      |  |      | 35.6% |   |  | $ | 19,813 |   |  |  | 38.7% |   |  | $ | 19,226 |   |  |  | 38.4% |  
|                                                  |  |                |        |      |  |      |       |   |  |   |        |   |  |  |       |   |  |   |        |   |  |  |       |  

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RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Deferred tax assets consisted of the following at
December 31:

|                                   |                                   |                |       |       |  |   |       |       | 
|---------------------------------- | --------------------------------- | -------------- | ----- | ----- |  | - | ----- | ----- | 
|                                   |                                   | 2003           |       | 2002 
|                                   |                                   |                |       |      
|                                   |                                   |               
|                                   |                                   | (In Thousands)
|Current deferred tax assets:       |                                   |                |       |       |  |   |       |      
|                                   | Deferred revenue                  |                | $     | 1,063 |  |   | $     | 1,303 | 
|                                   | Expenses not currently deductible |                |       | 2,680 |  |   |       | 2,407 | 
|                                   |                                   |                |       |       |  |   |       |      
|Net current deferred tax assets    |                                   |                | 3,743 |       |  |   | 3,710 |      
|                                   |                                   |                |       |       |  |   |       |      
|Noncurrent deferred tax assets:    |                                   |                |       |       |  |   |       |      
|                                   | Deferred revenue                  |                |       | 78    |  |   |       | 101   | 
|                                   | Depreciation and amortization     |                |       | 190   |  |   |       | 296   | 
|                                   | Intangibles                       |                |       | 1,527 |  |   |       | 1,545 | 
|                                   |                                   |                |       |       |  |   |       |      
|Net noncurrent deferred tax assets |                                   |                | 1,795 |       |  |   | 1,942 |      
|                                   |                                   |                |       |       |  |   |       |      
|Total deferred tax assets          |                                   | $              | 5,538 |       |  | $ | 5,652 |      
|                                   |                                   |                |       |       |  |   |       |      



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

We have a $15.0 million unsecured revolving
line of credit with a bank, which is available until
March 31, 2005. 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 available until
April 30, 2005. The line of credit bears interest based on
the prime rate less 1.0%. As of December 31, 2003, the
lines of credit had not been used.



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

We are party to various operating leases for
equipment and office facilities. Rent expense for 2003, 2002 and
2001 was approximately $1.1 million each year.

Future approximate minimum rental payments
(including estimated operating costs) required under operating
leases as of December 31, 2003 are as follows:

|           |  |                |       | 
|---------- |  | -------------- | ----- | 
|           |  | (In Thousands)
|2004       |  | $              | 982   | 
|2005       |  |                | 806   | 
|2006       |  |                | 503   | 
|2007       |  |                | 184   | 
|After 2007 |  |                | 100   | 
|           |  |                |       | 
|           |  | $              | 2,575 | 
|           |  |                |       | 



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

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

38



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##### Table of Contents



RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

We have established a defined contribution 401(k)
Savings Plan covering all employees in the United States who
meet certain service requirements and a Supplemental Executive
Retirement Plan (SERP) available to members of
senior management, for the provision of retirement benefits to
our employees.

Employees participating in the 401(k) plan may
elect to contribute up to 50% of their annual pretax
compensation subject to certain IRS limitations. SERP
participants may elect to defer up to 20% of their annual pretax
compensation to the SERP.

Vesting and employer matching contributions are
the same under both plans. Beginning in 2003, vesting of
employer contributions takes place ratably over an
employees first four years of service with full vesting of
past and future employer contributions once four years of
service is reached. Prior to 2003, employees were fully vested
in employer contributions immediately.

Employer matching contributions are currently
$0.75 for each $1.00 contributed by a participant and are
limited to a maximum of 4.5% of a participants pretax
income. Prior to 2003, employer matching contributions were
$0.66 for each $1.00 contributed by a participant and were
limited to 4.0% of a participants pretax compensation. For
those employees participating in the SERP, the maximum employer
contribution is determined on a combined basis with the 401(k)
plan. Discretionary employer contributions may also be made to
the plans. There were no discretionary contributions made in
2003, 2002 or 2001 to the plans.

Our liability for benefits payable to SERP
participants is unfunded. All amounts credited to a SERP
participants account are hypothetically invested in
certain publicly traded investment funds, as directed by each
participant. Accordingly, changes in the market value of the
investment funds chosen by SERP participants will cause our
liability for this benefit to increase or decrease with a
corresponding loss or gain in our statement of income and
results of operations. The liability for this SERP is classified
as deferred compensation in the consolidated balance sheets.

The following summarizes our expense under these
retirement plans:

|                                                 |       |                |       |       |  |      |       |       |  |   |       |     | 
|------------------------------------------------ | ----- | -------------- | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | --- | 
|                                                 |       | 2003           |       | 2002  |  | 2001
|                                                 |       |                |       |       |  |     
|                                                 |       |               
|                                                 |       | (In Thousands)
|Employer matching contribution  401(k)
    Plan |       | $              | 1,268 |       |  | $    | 1,071 |       |  | $ | 1,002 |    
|Employer matching contribution  SERP            |       |                | 24    |       |  |      | 19    |       |  |   | 13    |    
|Loss (gain) related to unfunded SERP liability   |       |                | 118   |       |  |      | (43   | )     |  |   | (29   | )  
|                                                 |       |                |       |       |  |      |       |       |  |   |       |    
|                                                 | Total |                | $     | 1,410 |  |      | $     | 1,047 |  |   | $     | 986 | 
|                                                 |       |                |       |       |  |      |       |       |  |   |       |    



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

We have established the 1997 Stock Incentive Plan
(the Plan) for our officers, key employees,
non-employee directors and consultants. Options granted under
the plan may be in the form of nonqualified stock options
(NSO) or incentive stock options which comply with
Section 422 of the Internal Revenue Code (ISO).
A combined maximum of 6,000,000 options, stock appreciation
rights (SAR) and share awards may be granted under
the plan. The exercise price of the options is the market value
of our common stock at the date of grant. Generally, options
vest and become exercisable ratably over a four-year period,
commencing one year after the grant date. The options expire
10 years from the grant date. As of December 31, 2003,
only NSOs have been granted; no ISOs, SARs or share awards have
been granted under the plan.

We use the intrinsic value method as prescribed
in APB 25, Accounting for Stock Issued to
Employees, to account for stock based compensation
arrangements. Had compensation cost been determined

39



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RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

for the stock option grants based on the fair
value method set forth under SFAS 123, net income and
earnings per share would have been adjusted to the pro forma
amounts indicated below:

|                                                                                                                           |          |                       |        |      |      |      |        |   |      |   |        |   |      | 
|-------------------------------------------------------------------------------------------------------------------------- | -------- | --------------------- | ------ | ---- | ---- | ---- | ------ | - | ---- | - | ------ | - | ---- | 
|                                                                                                                           |          | 2003                  |        | 2002 |      | 2001
|                                                                                                                           |          |                       |        |      |      |     
|                                                                                                                           |          |                      
|                                                                                                                           |          | (In Thousands, Except
|                                                                                                                           |          | Per Share Amounts)   
|Net Income, as reported                                                                                                    |          | $                     | 32,541 |      |      | $    | 31,438 |   |      | $ | 30,669 |  
|Deduct: total stock-based compensation expense
    determined under fair-value based method for all awards, net of
    tax |          |                       | 3,767  |      |      |      | 4,429  |   |      |   | 5,129  |  
|Pro forma net income                                                                                                       |          | $                     | 28,774 |      |      | $    | 27,009 |   |      | $ | 25,540 |  
|Earnings per share:                                                                                                        |          |                       |        |      |      |      |        |   |      |   |        |  
|                                                                                                                           | Basic:   |                       |        |      |      |      |        |   |      |   |        |   |     
|                                                                                                                           |          | As reported           |        | $    | 1.05 |      |        | $ | 0.93 |   |        | $ | 0.89 | 
|                                                                                                                           |          | Pro forma             |        |      | 0.92 |      |        |   | 0.80 |   |        |   | 0.74 | 
|                                                                                                                           | Diluted: |                       |        |      |      |      |        |   |      |   |        |   |     
|                                                                                                                           |          | As reported           |        | $    | 1.04 |      |        | $ | 0.92 |   |        | $ | 0.88 | 
|                                                                                                                           |          | Pro forma             |        |      | 0.92 |      |        |   | 0.80 |   |        |   | 0.73 | 
|The per share weighted average fair value of
    options granted under the plan during the year is:                        |          | $                     | 12.30  |      |      | $    | 16.01  |   |      | $ | 27.36  |  

The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions:

|                         |  |      |       |      |  |      |       |   |  |  |       |  
|------------------------ |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                         |  | 2003 |       | 2002 |  | 2001
|                         |  |      |       |      |  |     
|Dividend yield           |  |      | 0     | %    |  |      | 0     | % |  |  | 0     | %
|Expected volatility      |  |      | 75.20 | %    |  |      | 80.27 | % |  |  | 85.19 | %
|Risk-free interest rate  |  |      | 3.09  | %    |  |      | 3.91  | % |  |  | 4.78  | %
|Expected life (in years) |  |      | 6     |      |  |      | 6     |   |  |  | 10    |  

A summary of stock option activity under the plan
is as follows:

|                                   |  |        |           |          |  |        |       |          |  |        |           |          |  |   |       |  |  |  |           |   |  |   |       | 
|---------------------------------- |  | ------ | --------- | -------- |  | ------ | ----- | -------- |  | ------ | --------- | -------- |  | - | ----- |  |  |  | --------- | - |  | - | ----- | 
|                                   |  |        |           |          |  |       
|                                   |  | 2003   |           | 2002     |  | 2001  
|                                   |  |        |           |          |  |       
|                                   |  |        |           | Weighted |  |        |       | Weighted |  |        |           | Weighted
|                                   |  |        |           | Average  |  |        |       | Average  |  |        |           | Average 
|                                   |  |        |           | Exercise |  |        |       | Exercise |  |        |           | Exercise
|                                   |  | Shares |           | Price    |  | Shares |       | Price    |  | Shares |           | Price   
|                                   |  |        |           |          |  |        |       |          |  |        |           |         
|Outstanding at beginning of year   |  |        | 1,818,257 |          |  | $      | 22.16 |          |  |        | 1,421,911 |          |  | $ | 22.06 |  |  |  | 1,348,152 |   |  | $ | 18.27 | 
|Granted                            |  |        | 386,720   |          |  |        | 18.33 |          |  |        | 578,857   |          |  |   | 22.40 |  |  |  | 384,422   |   |  |   | 31.83 | 
|Exercised                          |  |        | (121,394  | )        |  |        | 13.44 |          |  |        | (75,557   | )        |  |   | 16.15 |  |  |  | (207,310  | ) |  |   | 15.47 | 
|Cancelled                          |  |        | (94,200   | )        |  |        | 24.78 |          |  |        | (106,954  | )        |  |   | 26.45 |  |  |  | (103,353  | ) |  |   | 22.21 | 
|                                   |  |        |           |          |  |        |       |          |  |        |           |          |  |   |       |  |  |  |           |   |  |   |       | 
|Outstanding at end of year         |  |        | 1,989,383 |          |  |        | 21.82 |          |  |        | 1,818,257 |          |  |   | 22.16 |  |  |  | 1,421,911 |   |  |   | 22.06 | 
|                                   |  |        |           |          |  |        |       |          |  |        |           |          |  |   |       |  |  |  |           |   |  |   |       | 
|Options exercisable at end of year |  |        | 1,079,932 |          |  | $      | 21.43 |          |  |        | 839,512   |          |  | $ | 19.06 |  |  |  | 580,478   |   |  | $ | 16.08 | 
|                                   |  |        |           |          |  |        |       |          |  |        |           |          |  |   |       |  |  |  |           |   |  |   |       | 

40



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##### Table of Contents



RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes information about
stock options outstanding at December 31, 2003:

|                 |  |                     |           |                     |  |                  |      |             |  |                     |       |  |  |  |           |  |  |   |       | 
|---------------- |  | ------------------- | --------- | ------------------- |  | ---------------- | ---- | ----------- |  | ------------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                 |  |                     |           |                    
|                 |  | Outstanding Options |           | Exercisable Options
|                 |  |                     |           |                    
|                 |  |                     |           | Weighted Average    |  |                  |      |             |  | Weighted Average   
|Range of         |  | Options             |           | Remaining           |  | Weighted Average |      | Options     |  | Exercise Price of  
|Exercise Price   |  | Outstanding         |           | Contractual Life    |  | Exercise Price   |      | Exercisable |  | Exercisable Options
|                 |  |                     |           |                     |  |                  |      |             |  |                    
|$ 8.00 to $16.00 |  |                     | 380,031   |                     |  |                  | 4.77 |             |  | $                   | 11.62 |  |  |  | 376,283   |  |  | $ | 11.59 | 
|$16.01 to $22.00 |  |                     | 855,014   |                     |  |                  | 8.02 |             |  |                     | 17.84 |  |  |  | 300,762   |  |  |   | 19.40 | 
|$22.01 to $28.00 |  |                     | 82,711    |                     |  |                  | 9.03 |             |  |                     | 24.66 |  |  |  | 24,646    |  |  |   | 24.71 | 
|$28.01 to $34.00 |  |                     | 444,062   |                     |  |                  | 7.41 |             |  |                     | 30.67 |  |  |  | 221,168   |  |  |   | 30.27 | 
|$34.01 to $40.00 |  |                     | 226,456   |                     |  |                  | 6.93 |             |  |                     | 35.43 |  |  |  | 156,569   |  |  |   | 35.88 | 
|$40.01 to $46.00 |  |                     |          |                     |  |                  | 0.00 |             |  |                     | 0.00  |  |  |  |          |  |  |   | 0.00  | 
|$46.01 to $52.00 |  |                     | 1,109     |                     |  |                  | 7.56 |             |  |                     | 51.47 |  |  |  | 504       |  |  |   | 51.47 | 
|                 |  |                     |           |                     |  |                  |      |             |  |                     |       |  |  |  |           |  |  |   |       | 
|$ 8.00 to $51.58 |  |                     | 1,989,383 |                     |  |                  | 7.18 |             |  | $                   | 21.82 |  |  |  | 1,079,932 |  |  | $ | 21.43 | 
|                 |  |                     |           |                     |  |                  |      |             |  |                     |       |  |  |  |           |  |  |   |       | 



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

Effective July 1, 1998, we adopted an
Employee Stock Purchase Plan (ESPP) which allows
employees to purchase shares of common stock through payroll
deductions, up to 10% of eligible compensation. The purchase
price is equal to 85% of the fair market value of the common
stock on either the first or last day of the subscription
period, whichever is lower. A total of 500,000 shares are
available for purchase under the plan. We have elected to apply
APB 25 Accounting for Stock Issued to
Employees, as amended by FASB Interpretation No. 44
(FIN 44), in accounting for stock-based plans.
Accordingly, no expense is recognized for employee stock
purchases through the plan. Shares of common stock issued with
respect to the plan were approximately 65,000 shares in
January 2003 for fiscal 2002 and 43,000 shares in January
2002 for fiscal 2001, at a per share price, representing 85% of
the fair market value as described above, of $16.07 and $24.65,
respectively.

In 2003, we did not offer the ESPP to our
employees and do not intend to offer the ESPP in 2004.



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

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 December 31, 2003, we
repurchased 1.3 million shares at a cost of
$23.7 million. Since authorization, we have repurchased
4.0 million common shares at a cost of $72.9 million
under this repurchase program.

On April 14, 1999, our shareholders approved
an amendment to the Companys Amended and Restated Articles
of Incorporation to increase the authorized common stock of the
Company from 50,000,000 shares to 150,000,000 shares
with a $.01 par value per share. The Companys Amended
and Restated Articles of Incorporation also includes
authorization to issue up to 5,000,000 shares of preferred
stock with a $.01 par value per share. No preferred stock
has been issued.



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

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

The software segment produces learning
information system software primarily for the pre-K-12 school
market in the United States, Canada, the United Kingdom and
Australia. The software assists educators in

41



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##### Table of Contents



RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

assessing and monitoring student development by
increasing the quantity, quality and timeliness of student
performance data in the areas of reading, math and writing. The
software segment also includes training and knowledge management
enterprise software, which is currently sold primarily to
corporate and government customers, and custom assessment
software and services sold to educational publishers. Revenue
from the software segment includes product revenue from the sale
of software and scanners and service revenue from the sale of
software support agreements and technical services.

The training segment provides professional
development opportunities for educators through on- and off-site
seminars, consulting services, web-based training, and educator
support materials. Revenue from the training segment includes
service revenue from a variety of seminars presented in hotels
and schools across the country, from consulting services, and
from the annual National School Renaissance Conference, and
product revenue from the sale of educator resource materials.

The accounting policies of the reportable
segments are the same as those described in Note 4 of Notes
to Consolidated Financial Statements. Intersegment sales and
transfers and revenue derived outside of the United States are
not significant.

Summarized financial information concerning the
reportable segments is as follows:

|     |                               |                |   |          |  |       |   |        |   |  |   |         | 
|---- | ----------------------------- | -------------- | - | -------- |  | ----- | - | ------ | - |  | - | ------- | 
|     |                               | Software       |   | Training |  | Total
|     |                               |                |   |          |  |      
|     |                               |               
|     |                               | (In Thousands)
|2003 |                               |                |   |          |  |       |   |        |   |  |   |        
|     | Revenues                      |                | $ | 114,008  |  |       | $ | 16,536 |   |  | $ | 130,544 | 
|     | Operating income (loss)       |                |   | 49,007   |  |       |   | (761   | ) |  |   | 48,246  | 
|     | Total assets                  |                |   | 149,028  |  |       |   | 10,403 |   |  |   | 159,431 | 
|     | Capital expenditures          |                |   | 2,262    |  |       |   | 174    |   |  |   | 2,436   | 
|     | Depreciation and amortization |                |   | 3,143    |  |       |   | 780    |   |  |   | 3,923   | 
|2002 |                               |                |   |          |  |       |   |        |   |  |   |        
|     | Revenues                      |                | $ | 113,825  |  |       | $ | 17,407 |   |  | $ | 131,232 | 
|     | Operating income (loss)       |                |   | 49,259   |  |       |   | (1,768 | ) |  |   | 47,491  | 
|     | Total assets                  |                |   | 136,129  |  |       |   | 11,482 |   |  |   | 147,611 | 
|     | Capital expenditures          |                |   | 1,067    |  |       |   | 505    |   |  |   | 1,572   | 
|     | Depreciation and amortization |                |   | 3,757    |  |       |   | 876    |   |  |   | 4,633   | 
|2001 |                               |                |   |          |  |       |   |        |   |  |   |        
|     | Revenues                      |                | $ | 114,472  |  |       | $ | 17,882 |   |  | $ | 132,354 | 
|     | Operating income (loss)       |                |   | 46,108   |  |       |   | (400   | ) |  |   | 45,708  | 
|     | Total assets                  |                |   | 148,763  |  |       |   | 11,198 |   |  |   | 159,961 | 
|     | Capital expenditures          |                |   | 1,490    |  |       |   | 962    |   |  |   | 2,452   | 
|     | Depreciation and amortization |                |   | 4,776    |  |       |   | 960    |   |  |   | 5,736   | 

The reported measures are consistent with those
used in measuring amounts in the consolidated financial
statements. It is our opinion, however, that because many
synergistic benefits between the segments cannot be precisely
quantified, this information provides an incomplete measure of
the training segment operating profit or loss, and should not be
viewed in isolation. We evaluate the performance of the training
segment based on many factors not captured by the financial
accounting system and often evaluate our financial performance
on a total entity basis.



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

The following table sets forth unaudited
consolidated income statement data for each quarter of the last
two fiscal years. The unaudited quarterly financial information
has been prepared on the same basis as the annual information
presented in the consolidated financial statements and, in
managements opinion, reflects

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RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

all adjustments (consisting of normal recurring
entries) necessary for a fair presentation of the information
provided. The operating results for any quarter are not
necessarily indicative of results for any future period.

|     |                                      |                                          |   |         |       |              |   |             |       |  |   |        |       |  |   |        |       | 
|---- | ------------------------------------ | ---------------------------------------- | - | ------- | ----- | ------------ | - | ----------- | ----- |  | - | ------ | ----- |  | - | ------ | ----- | 
|     |                                      |                                         
|     |                                      | Quarter Ended                           
|     |                                      |                                         
|     |                                      | March 31                                 |   | June 30 |       | September 30 |   | December 31
|     |                                      |                                          |   |         |       |              |   |            
|     |                                      |                                         
|     |                                      | (In Thousands, Except Per Share Amounts)
|2003 |                                      |                                          |   |         |       |              |   |             |       |  |   |        |       |  |   |       
|     | Net sales                            |                                          | $ | 34,226  |       |              | $ | 33,616      |       |  | $ | 31,315 |       |  | $ | 31,387 |      
|     | Gross profit                         |                                          |   | 27,702  |       |              |   | 28,716      |       |  |   | 26,224 |       |  |   | 26,821 |      
|     | Operating income                     |                                          |   | 11,674  |       |              |   | 13,825      |       |  |   | 10,924 |       |  |   | 11,825 |      
|     | Income tax provision                 |                                          |   | 4,744   |       |              |   | 5,560       |       |  |   | 3,188  |       |  |   | 4,479  |      
|     | Net income                           |                                          |   | 7,661   |       |              |   | 8,976       |       |  |   | 8,277  |       |  |   | 7,627  |      
|     | Basic and diluted earnings per share |                                          |   | 0.24    |       |              |   | 0.29        |       |  |   | 0.27   |       |  |   | 0.25   |      
|     | Common stock price per share:        |                                          |   |         |       |              |   |             |       |  |   |        |       |  |   |        |      
|     |                                      | High                                     |   |         | 19.91 |              |   |             | 24.09 |  |   |        | 26.90 |  |   |        | 26.82 | 
|     |                                      | Low                                      |   |         | 15.90 |              |   |             | 16.20 |  |   |        | 21.10 |  |   |        | 22.22 | 
|2002 |                                      |                                          |   |         |       |              |   |             |       |  |   |        |       |  |   |       
|     | Net sales                            |                                          | $ | 34,689  |       |              | $ | 33,220      |       |  | $ | 32,428 |       |  | $ | 30,895 |      
|     | Gross profit                         |                                          |   | 28,593  |       |              |   | 28,453      |       |  |   | 26,909 |       |  |   | 25,606 |      
|     | Operating income                     |                                          |   | 11,693  |       |              |   | 13,319      |       |  |   | 11,649 |       |  |   | 10,830 |      
|     | Income tax provision                 |                                          |   | 4,896   |       |              |   | 5,605       |       |  |   | 4,829  |       |  |   | 4,483  |      
|     | Net income                           |                                          |   | 7,755   |       |              |   | 8,803       |       |  |   | 7,714  |       |  |   | 7,166  |      
|     | Basic and diluted earnings per share |                                          |   | 0.22    |       |              |   | 0.25        |       |  |   | 0.23   |       |  |   | 0.22   |      
|     | Common stock price per share:        |                                          |   |         |       |              |   |             |       |  |   |        |       |  |   |        |      
|     |                                      | High                                     |   |         | 35.65 |              |   |             | 35.30 |  |   |        | 21.32 |  |   |        | 20.99 | 
|     |                                      | Low                                      |   |         | 26.26 |              |   |             | 20.22 |  |   |        | 13.87 |  |   |        | 14.58 | 

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



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

In November 2002, the FASB issued FIN 45,
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 requires that the guarantor recognize,
at the inception of certain guarantees, a liability for the fair
value of the obligation undertaken in issuing such guarantee.
FIN 45 also requires additional disclosure requirements
about the guarantors obligations under certain guarantees
that it has issued. The initial recognition and measurement
provisions of this interpretation are applicable on a
prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements of this
interpretation are effective for financial statement periods
ending after December 15, 2002. The adoption did not have a
material effect on our financial position, results of operations
or shareholders equity.

In December 2002, the FASB issued SFAS 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure, which provides alternative
methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation as
originally provided by SFAS 123 Accounting for
Stock-Based Compensation. Additionally, SFAS 148
amends the disclosure requirements of SFAS 123 to require
prominent disclosure in both the annual and interim financial
statements about the method of accounting for stock-based
compensation and the effect of the method used on reported
results. The disclosure requirements of SFAS 148 are
effective for all financial statements for fiscal years ending
after December 15, 2002. The adoption of SFAS 148 did
not have a material impact on our financial position, results of
operations or shareholders equity.

43



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##### Table of Contents



RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In January 2003, the FASB issued FIN 46,
Consolidation of Variable Interest Entities (revised
December 2003). The interpretation requires an investor with a
majority of the variable interests in a variable interest entity
to consolidate the entity and also requires majority and
significant variable interest investors to provide certain
disclosures. A variable interest entity is an entity in which
the equity investors do not have a controlling interest or the
equity investment at risk is insufficient to finance the
entitys activities without receiving additional
subordinated financial support from the other parties. This
pronouncement requires the consolidation of variable interest
entities created after January 31, 2003. Consolidation
provisions apply for periods ending after March 15, 2004
for variable interest entities, other than special purpose
entities, created prior to February 1, 2003. We do not have
any variable interest entities, including special purpose
entities, that must be consolidated and therefore the adoption
of the provision of FIN 46 will not have an impact on or
financial position, results of operations or shareholders
equity.



|     |                 
|---- | ----------------
|(17) | Subsequent Event

On January 28, 2004, our Board of Directors
declared a special cash dividend of $2.15 per share and our
first quarterly dividend of $.04 per share, both payable
March 1, 2004 to shareholders of record as of
February 13, 2004. Total dividends paid out of cash and
cash equivalents on March 1, 2004 were $67.9 million.

44



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##### Table of Contents








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

We changed independent accountants in May 2002
from Arthur Andersen LLP to Deloitte & Touche LLP.
Information regarding the change in accountants was reported in
our current report on Form 8-K dated May 22, 2002.




Item 9A.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 December 31, 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 December 31, 2003
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

45



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##### Table of Contents






PART III






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

(a) Executive Officers. Reference is
made to Executive Officers of the Registrant in
Part I hereof.

(b) Directors. The information
required by this Item is set forth in our Proxy Statement for
the Annual Meeting of Shareholders to be held on April 21,
2004 under the caption Proposal One: Election of
Directors, which information is incorporated by reference
herein.

(c) Section 16 Compliance. The
information required by this Item is set forth in our Proxy
Statement for the Annual Meeting of Shareholders to be held on
April 21, 2004 under the caption Section 16(a)
Beneficial Ownership Reporting Compliance, which
information is incorporated by reference herein.

(d) Code of Ethics. We have adopted a
code of ethics pursuant to Item 406 of Regulation S-K.
A copy of our code of ethics is attached as an exhibit hereto.

(e) Audit Committee. The information
required by this Item is set forth in our Proxy Statement for
the Annual Meeting of Shareholders to be held on April 21,
2004 under the caption Proposal One: Election of
Directors  Audit Committee, which information
is incorporated by reference herein.






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

The information required by this Item is set
forth in our Proxy Statement for the Annual Meeting of
Shareholders to be held on April 21, 2004 under the
captions Executive Compensation, Severance
Agreements, Non-Employee Director
Compensation, Compensation Committee Report,
Compensation Committee Interlocks and Insider
Participation, and Performance Graph, which
information is incorporated by reference herein.






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

The information required by Item 403 of
Regulation S-K is set forth in our Proxy Statement for the
Annual Meeting of Shareholders to be held on April 21, 2004
under the caption Security Ownership of Management and
Certain Beneficial Owners, which information is
incorporated by reference herein.

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

46



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##### Table of Contents



EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth certain
information about shares of our common stock outstanding and
available for issuance under our existing equity compensation
plans, which consist of our 1997 stock incentive plan and our
1998 employee stock purchase plan (this latter plan is currently
inactive). The table details securities authorized for issuance
under our equity compensation plans as of December 31,
2003. The table below does not include awards, exercises or
cancellations under our equity compensation plans subsequent to
December 31, 2003.

|                                                                   |  |                      |           |                      |  |                       |       |  |  |  |           |    
|------------------------------------------------------------------ |  | -------------------- | --------- | -------------------- |  | --------------------- | ----- |  |  |  | --------- | ---
|                                                                   |  |                      |           |                      |  | Number of Securities 
|                                                                   |  |                      |           |                      |  | Remaining Available  
|                                                                   |  |                      |           |                      |  | for Future Issuance  
|                                                                   |  | Number of Securities |           |                      |  | Under Equity         
|                                                                   |  | to be Issued Upon    |           | Weighted-Average     |  | Compensation Plans   
|                                                                   |  | Exercise of          |           | Exercise Price of    |  | (Excluding Securities
|                                                                   |  | Outstanding Options, |           | Outstanding Options, |  | Reflected in First   
|Plan category                                                      |  | Warrants and Rights  |           | Warrants and Rights  |  | Column)              
|                                                                   |  |                      |           |                      |  |                      
|Equity compensation plans approved by security
    holders         |  |                      | 1,989,383 |                      |  | $                     | 21.82 |  |  |  | 3,094,741 | (1)
|Equity compensation plans not approved by
    security holders (2) |  |                      | N/A       |                      |  |                       | N/A   |  |  |  | N/A       |    
|                                                                   |  |                      |           |                      |  |                       |       |  |  |  |           |    
|Total                                                              |  |                      | 1,989,383 |                      |  | $                     | 21.82 |  |  |  | 3,094,741 |    
|                                                                   |  |                      |           |                      |  |                       |       |  |  |  |           |    



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Of the 6,000,000 shares currently authorized
    for issuance under our 1997 stock incentive plan, 2,855,347
    remain available for future issuance. Under our 1998 employee
    stock purchase plan (ESPP), eligible employees may purchase
    shares annually by payroll deductions, subject to certain
    aggregate limitations, at a purchase price equal to the lower of
    either 85% of the fair market value of the companys shares
    on the offering commencement date or 85% of the fair market
    value of the companys shares one year from such date. Of
    the 500,000 shares authorized under the ESPP, 239,394
    remain available for future issuance. We did not offer the ESPP
    to employees in 2003 and do not intend to offer the plan to
    employees in 2004.
|   
|(2) | Both of the companys equity compensation
    plans have been approved by shareholders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             






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

The information required by this Item is set
forth in our Proxy Statement for the Annual Meeting of
Shareholders to be held on April 21, 2004 under the caption
Certain Relationships and Transactions, which
information is incorporated by reference herein.






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

The information required by this Item is set
forth in our Proxy Statement for the Annual Meeting of
Shareholders to be held on April 21, 2004 under the caption
Audit Committee Report, which information is
incorporated by reference herein.

47



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##### Table of Contents






PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

(a)(1) Financial Statements.



| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | Consolidated Financial Statements                                                                       
|
| | Independent Auditors Report                                                                            
|
| | Report of Independent Public Accountants                                                                
|
| | Consolidated Balance Sheets as of
    December 31, 2003 and 2002                                        
|
| | Consolidated Statements of Income for the years
    ended December 31, 2003, 2002 and 2001              
|
| | Consolidated Statements of Shareholders
    Equity for the years ended December 31, 2003, 2002 and 2001
|
| | Consolidated Statements of Cash Flows for the
    years ended December 31, 2003, 2002 and 2001          
|
| | Notes to Consolidated Financial Statements                                                              

(a)(2) Financial Statement
Schedules.

See the Exhibit Index, which is incorporated
by reference herein.

(a)(3) Exhibits.

See (c) below.

(b) Reports on Form 8-K.

We did not file any Current Reports on
Form 8-K during the three months ended December 31,
2003; we only furnished such reports.

(c) Exhibits.

See the Exhibit Index, which is incorporated
by reference herein.

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

Not applicable.

48



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##### Table of Contents



SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



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



| |     |                   
| | --- | ------------------
| | By: | /s/ JOHN R. HICKEY

| |                                   
| | ----------------------------------
| |                                   
| | John R. Hickey                    
| | President, Chief Executive Officer
|
| | Date: March 5, 2004               

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated:

|                                                                                                                                                    |  |                                                                                                       |  |               |  |              
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------- |  | ------------- |  | -------------
|                                                                                                                                                    |  |                                                                                                       |  |              
|Name                                                                                                                                                |  | Title                                                                                                 |  | Date         
|                                                                                                                                                    |  |                                                                                                       |  |              
|                                                                                                                                                   
|/s/ JOHN R. HICKEYJohn R. Hickey                                                                                                                    |  | President and Chief Executive Officer (Principal
    Executive Officer)                               |  | March 5, 2004
|                                                                                                                                                   
|/s/ STEVEN A. SCHMIDTSteven A. Schmidt                                                                                                              |  | Executive Vice President and Chief Financial
    Officer (Principal Financial and Accounting Officer) |  | March 5, 2004
|Directors: Judith A. Paul, John R. Hickey,
    Addison L. Piper, John H. Grunewald, Gordon H.
    Gunnlaugsson, Harold E. Jordan and Judith A. Ryan
|                                                                                                                                                   
|By:                                                                                                                                                 |  | /s/ JOHN R. HICKEYJohn R. Hickey
    Attorney-In-Fact*                                                |  |               |  | March 5, 2004




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


49



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##### Table of Contents



Exhibit Index

|        |      |         |  |                                                                                                                                     
|------- | ---- | ------- |  | ------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |        
|Number  |      | Exhibit
|        |      |        
|        | 3.1  |         |  | Amended and Restated Articles of Incorporation of
    Registrant, as amended.(10)                                                   
|        | 3.2  |         |  | Amended and Restated By-laws of Registrant, as
    amended.(7)                                                                      
|        | 4.1  |         |  | Form of Stock Certificate.(2)                                                                                                       
|        | 10.1 |         |  | 1997 Stock Incentive Plan (as amended and
    restated).(3)*                                                                        
|        | 10.2 |         |  | Credit Agreement dated as of December 1,
    2003, by and between Wells Fargo Bank, National Association and
    Registrant.        
|        | 10.3 |         |  | Amended and Restated Employee Stock Purchase
    Plan. (9)*                                                                         
|        | 10.4 |         |  | Office Lease dated as of December 17, 1998
    by and between Athena Holdings LLC and Institute for Academic
    Excellence, Inc.(5)
|        | 10.5 |         |  | Real Estate Mortgage dated December 17, 1998
    between Athena Holdings LLC and Registrant.(5)                                     
|        | 10.6 |         |  | Expense Allocation Agreement dated
    October 19, 1999 between Registrant, Judith A. Paul and
    Terrance D. Paul.(6)             
|        | 10.7 |         |  | Severance Agreement between Registrant and
    Michael H. Baum dated June 27, 2003. (13)*                                           
|        | 10.8 |         |  | Incentive Bonus Plan (13)*                                                                                                          
|        | 14.1 |         |  | Code of Business Conduct and Ethics                                                                                                 
|        | 16.1 |         |  | Letter of Arthur Andersen LLP regarding change in
    certifying accountant.(12)                                                    
|        | 21.1 |         |  | Subsidiaries of Registrant.                                                                                                         
|        | 23.1 |         |  | Consent of Deloitte & Touche LLP.                                                                                                   
|        | 23.2 |         |  | Consent of Arthur Andersen LLP (omitted pursuant
    to Rule 437a under the Securities Act of 1933).                                
|        | 24.1 |         |  | Directors Powers of Attorney.                                                                                                      
|        | 31.1 |         |  | Section 302 Certification by John R. Hickey,
    Chief Executive Officer.                                                           
|        | 31.2 |         |  | Section 302 Certification by Steven A.
    Schmidt, Chief Financial Officer.                                                        
|        | 32.1 |         |  | Section 906 Certification by John R. Hickey,
    Chief Executive Officer.                                                           
|        | 32.2 |         |  | Section 906 Certification by Steven A.
    Schmidt, Chief Financial Officer.                                                        
|        | 99.1 |         |  | Schedule II  Valuation and
    Qualifying Accounts.                                                                                




|     |                                                                                                                                
|---- | -------------------------------------------------------------------------------------------------------------------------------
|(1)  | [Reserved].                                                                                                                    
|    
|(2)  | Incorporated by reference to Registrants
    Form 10-Q for the quarter ended September 30, 1997
    (SEC File No. 0-22187).   
|    
|(3)  | Incorporated by reference to Registrants
    Form S-8 filed on April 18, 2003 (Registration
    No. 333-104622).              
|    
|(4)  | Incorporated by reference to Registrants
    Form 10-K for the fiscal year ended December 31, 1997
    (SEC File No. 0-22187).
|    
|(5)  | Incorporated by reference to Registrants
    Form 10-K for the fiscal year ended December 31, 1998
    (SEC File No. 0-22187).
|    
|(6)  | Incorporated by reference to Registrants
    Form 10-K for the fiscal year ended December 31, 1999
    (SEC File No. 0-22187).
|    
|(7)  | Incorporated by reference to Registrants
    Form 10-Q for the quarter ended March 31, 2000 (SEC
    File No. 0-22187).       
|    
|(8)  | [Reserved].                                                                                                                    
|    
|(9)  | Incorporated by reference to Registrants
    Form 10-K for the fiscal year ended December 31, 2000
    (SEC File No. 0-22187).
|    
|(10) | Incorporated by reference to Registrants
    Form 10-Q for the quarter ended March 31, 2001 (SEC
    File No. 0-22187).       

50



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##### Table of Contents





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



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

THE REGISTRANT WILL FURNISH A COPY OF ANY OF THE
FOREGOING EXHIBITS UPON THE REQUEST OF A SHAREHOLDER AFTER THE
PAYMENT OF A FEE BY SUCH SHAREHOLDER WHICH SHALL REPRESENT
REGISTRANTS REASONABLE EXPENSES INCURRED IN FURNISHING ANY
SUCH EXHIBIT.

51