##### 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, 2002

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 $225,200,000 as of
June 30, 2002. As of February 28, 2003, there were
31,501,855 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 16, 2003.



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TABLE OF CONTENTS



|                                                                                                                                                 |                                                                                                         |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                                                                                                                          
|Products                                                                                                                                        
|Product Development                                                                                                                             
|Selling and Marketing                                                                                                                           
|Production                                                                                                                                      
|Competition                                                                                                                                     
|Intellectual Property                                                                                                                           
|Employees                                                                                                                                       
|Backlog                                                                                                                                         
|Forward-Looking Statements                                                                                                                      
|                                                                                                                                                 | Item 2. Properties                                                                                     
|                                                                                                                                                 | Item 3. Legal Proceedings                                                                              
|                                                                                                                                                 | Item 4. Submission of Matters to a Vote of Security Holders                                            
|EXECUTIVE OFFICERS OF THE REGISTRANT                                                                                                            
|PART II                                                                                                                                         
|                                                                                                                                                 | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                          
|                                                                                                                                                 | Item 6. Selected Financial Data                                                                        
|                                                                                                                                                 | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|                                                                                                                                                 | Item 7A. Quantitative and Qualitative Disclosure About Market Risk                                     
|                                                                                                                                                 | Item 8. Financial Statements and Supplementary Data                                                    
|INDEPENDENT AUDITORS REPORT                                                                                                                    
|REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                                                                                                        
|RENAISSANCE LEARNING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of December 31, 2002 and 2001                                        
|RENAISSANCE LEARNING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2002, 2001 and 2000              
|RENAISSANCE LEARNING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY For the Years Ended December 31, 2000, 2001 and 2002
|RENAISSANCE LEARNING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2002, 2001 and 2000          
|RENAISSANCE LEARNING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                          
|                                                                                                                                                 | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|PART III                                                                                                                                        
|                                                                                                                                                 | Item 10. Directors and Executive Officers of the Registrant                                            
|                                                                                                                                                 | Item 11. Executive Compensation                                                                        
|                                                                                                                                                 | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|                                                                                                                                                 | Item 13. Certain Relationships and Related Transactions                                                
|                                                                                                                                                 | Item 14. Controls and Procedures                                                                       
|PART IV                                                                                                                                         
|                                                                                                                                                 | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                              
|SIGNATURES                                                                                                                                      
|Exhibit Index                                                                                                                                   
|EX-21.1 Subsidiaries of Registrant                                                                                                              
|EX-23.1 Consent of Deloitte & Touche LLP                                                                                                        
|EX-24.1 Directors' Powers of Attorney                                                                                                           
|EX-99.1 Schedule II-Valuation/Qualifying Accounts                                                                                               
|EX-99.2 Section 906 Certification by Terrance Paul                                                                                              
|EX-99.3 Section 906 Certification by Steve Schmidt                                                                                              



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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 consulting 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, 2002, we had sold our
products to more than 62,000, 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. AR Universal*, the
latest version of our Accelerated Reader program,
supports recorded-voice versions of quizzes on literature books
for emergent readers and quizzes for assessing reading
instruction assignments such as those found in reading
textbooks, magazines, and other curricula.

Our other primary learning information system
products include STAR Reading*, Accelerated Math*, STAR
Math*, STAR Early Literacy*,and Perfect Copy*.In
2002, we released several new products: Fluent Reader*
repeated reading software for struggling readers;
StandardsMaster* instant assessment and Web-based
reporting software; Accelerated Writer* writing
improvement system; AccelTest*test preparation and
management software; MathFacts in a Flash*software for
mastering computational fluency; and Accelerated
Vocabulary* vocabulary development software. Our newest
product, Accelerated Grammar and Spelling*,is expected
to be released prior to the beginning of the 2003-2004 school
year. Accelerated Grammar and Spellinguses real-world
applications to help teachers build the language skills of
students and diagnose students grammar and spelling
skills, and will replace Perfect Copy when it is released
later in 2003.

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.
Renaissance* practices 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, Renaissance
Diagnosis and Intervention, Renaissance Leadership, 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
Generation21* enterprise 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.






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






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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 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 the pre-K-12 marketplace, 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 also sell training and knowledge
management software and services to corporate and governmental
customers and provide custom assessment software and related
services to educational publishers. Our software and support
services accounted for approximately 87%, 86%, and 85% of our
net sales in 2002, 2001, and 2000, 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 done 
creates a database of student reading achievement, from which
educators can generate reports to monitor the amount and quality
of reading practice for each of their students and provide
information to support teachers instruction of
comprehension, vocabulary, and fluency. AR Universal, the
most recent version, 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
Reader includes built-in Spanish-English capabilities and
supports Literacy Skills quizzes which allow educators to
assess students proficiency on 24 specific skills found in
state and district language arts standards and standardized
tests. We developed quizzes on over 11,000 book titles in 2002
and currently have a library of computerized book quizzes on
more than 62,000 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 students
independent reading level, features to identify specific words
that are causing difficulty, handles record-keeping chores and
provides key management reports to monitor student progress.



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

STAR Readingis a
computer-adaptive reading test that provides classroom teachers
with reading scores statistically correlated to national norms
in ten minutes or less at the computer. STAR Readingadapts itself to

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each students reading level by applying a
proprietary branching logic that evaluates the pattern of the
students answers to determine the level of difficulty
required for subsequent questions. STAR Readinguses a
two-stage test to help educators pinpoint students reading
levels more accurately and efficiently. The results from this
test provide educators with a database of statistically accurate
reading level information on their students from which they can
generate useful reports and adjust instructional strategies
accordingly. STAR Readingis easy to use and can be
administered several times per year.




| |                    
| | -------------------
| | 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 management 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 Accelerated Readerbooks. Reports help
educators assess and monitor each students vocabulary
progress and provide individualized lists of mastered vocabulary
words for students.



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

Accelerated Mathis
a task-level learning information system that helps students
meet math objectives, first grade through calculus. It employs
algorithm technology to automatically align assignments to
academic objectives and tracks mastery of each objective. 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 Math offers state
standards-aligned libraries, textbook-aligned libraries for
popular math textbooks, extended response libraries that
integrate the application of multiple math objectives, and math
learning cards, which are instructional supplements for
assisting with teaching math objectives aligned to
Accelerated Mathlibraries. An AccelScanoptical-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. Additional scanners are also sold separately.



| |          
| | ---------
| | 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
new 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 and forecasts results on
major high-stakes tests. Like STAR Reading,it can be
administered 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 of how
individuals or entire classes are progressing.

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

Accelerated Writeris a writing improvement system that
combines short, focused lessons with powerful writing management
software to help educators teach students how to recognize
specific qualities of good writing, improve the use of those
qualities in their own writing, and anonymously rate those
qualities in each others writing. Through use of the
Accelerated Writer system, students increase their
writing practice and learn to become skilled evaluators of
writing. This system also allows educators to more easily
monitor students writing activities and progress, and
provides them with continuous detailed feedback on student
writing achievement.



| |             
| | ------------
| | Perfect Copy

Perfect Copysoftware helps educators improve
students core writing skills using in-context editing to
cover the rules of grammar, punctuation, and word usage. Our
Perfect Copyproduct offering will be replaced by
Accelerated Grammar and Spellingwhich has a more
comprehensive set of features for the improvement of writing
skills.



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

Accelerated Grammar and Spellingsoftware offers practice and skills
assessment in grammar, usage, mechanics, and spelling skills of
students in grades 2-9, with high school content also
available. 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 grade-level specific content libraries
covering grammar, usage and mechanics or spelling.
Accelerated Grammar and Spellingwill replace Perfect
Copywhen it is released later in 2003.



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

StandardsMasteris
an instant assessment and Web-based reporting system that
provides feedback to educators on how students are progressing
toward state standards in reading, math and language arts.
Informative feedback 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.



| |          
| | ---------
| | AccelTest

AccelTestis a test
creation, scoring and gradebook system that enables educators to
create and manage quizzes, tests and other exercises, score them
immediately and have results automatically entered into an
electronic gradebook. Using the system, an educator works
through easy-to-follow prompts to generate assignments
containing different types of questions, such as multiple
choice, true/false and matching. Other features of the system
include automatic shuffling of questions and answer order,
instant scoring using our AccelScancard reader, instant
grade recording and the ability to monitor late and incomplete
assignments.



| |          
| | ---------
| | 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 works with
Accelerated Math, Accelerated Writer, AccelTest, and
StandardsMaster software. The use of AccelScanallows for automatic scoring of assignments and updating of
student records, providing educators with immediate information
on student progress without spending time grading paperwork.

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| |                     
| | --------------------
| | Expert Support Plans

We offer Expert Support Plans (ESPs)
that provide users of our software products access to telephone
support. Packaged with kits and also sold separately under 12-
or 24-month agreements, ESPs entitle educators to unlimited
expert phone support to resolve technical issues with our
products, networks, and other software interacting with our
products.



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

Generation21is an
integrated training and knowledge management system that
captures, stores and delivers knowledge enterprise-wide. The
system spans enterprise learning needs including a full suite of
integrated e-learning features supporting content creation and
management, instructor-led training, and remote learning.
Additionally, the Generation21system includes features
which allow access to knowledge databases via wireless
technology. We sell the system primarily to businesses and
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 products to align with
specific textbooks and other publisher instructional materials.
The intuitive educator interface and precisely aligned content
of these products assure that they are easy and effective for
educators to use 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%, 14%, and 15% of our net sales in 2002,
2001, and 2000, 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, 2002, we have trained over
430,000 educators, of whom approximately 75,000 were trained in
2002. 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 increase
overall customer interest in our other products and services
which tend to complement each other.

To encourage educators who have completed
Renaissancetraining to fully implement the methodology,
we initiated the Renaissance Certificationprogram in
1995. This program recognizes educators who meet certain
objective implementation standards related to the amount of
accountable student practice of essential skills, regular
diagnosis and intervention with at-risk students, and other key
variables. Renaissance Certificationgives administrators
an effective way to manage the implementation of Renaissancemethodology by motivating teachers, librarians and
principals and providing clear, measurable standards. As of
February 1, 2003 more than 15,000 teachers, librarians
and principals have certified as Renaissance Modeland
Master Educators.

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).



| |                    
| | -------------------
| | 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 Literacy

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and 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 Seminars

Our other professional development programs
include: Renaissance Early Literacy; Writing Renaissance; The
Reading Renaissance Librarian; Renaissance Diagnosis and
Intervention; Renaissance Leadership; Renaissance Classroom
Management; and Renaissance Test Strategies. These
professional development seminars and workshops combine
effective use of technology with proven classroom techniques to
increase both educator effectiveness and student achievement. In
addition, we offer a Grant-Writing Workshopto teach the
process of successfully securing grants.

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 both generates concepts for new products and services as
well as validates and provides valuable feedback on the
effectiveness of existing products and services. For the years
ended December 31, 2002, 2001, and 2000, respectively, our
development expenditures were $18.0 million,
$18.3 million, and $15.4 million (including
capitalized amounts of $729,000, $484,000 and $477,000).

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 are used as an integral part of our product
development process to develop new product concepts and to
improve the effectiveness of our existing products and services.

These concepts for new products and services are
then refined based on feedback from our customers, which we
solicit and incorporate throughout our development process.
Based on the refined concepts, proposals are then formulated by
our product management, product development, marketing and
engineering groups and reviewed by management to determine which
should be developed into prototypes. These prototypes are then
tested in customer schools. Before beginning production,
management makes a final evaluation of 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.

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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 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 school customers. Additionally, our service revenues tend
to be more seasonal than product revenues, with service revenues
typically being highest in the third quarter.

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 current or potential
customer, one of our in-house staff of telephone sales
representatives contacts the customer to answer questions and,
ultimately, direct the customer to a purchase. For potential
district sales, customer meetings are arranged with 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.

In addition, we have resale arrangements with
various book dealers and book publishers that are authorized to
sell our products to their customers. These firms are
particularly receptive to such alliances because 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 and
distributors.

Part of our distribution strategy is to develop
cross-marketing arrangements with third-party firms selling
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 existing
products. We have alliances with several leading educational
publishers including Scott Foresman, Macmillan/ McGraw-Hill,
Houghton Mifflin Companys School Division, and Harcourt
School Publishers, in which we offer Accelerated Readerquizzes aligned to the publishers reading selections
to help teachers assess student comprehension and monitor
students reading growth. We have similar alliances with
Houghton Mifflin Companys School Division, Saxon, and with
Glencoe/ McGraw-Hill in which we offer Accelerated Mathsoftware libraries aligned with their school textbook
programs that mirror the objectives, problem types, and
presentations in their textbooks.

We held our third annual National School
Renaissance Conference in February 2002 in San Antonio, Texas.
The conference provided about 5,000 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. The
2003 conference was held at Nashville, Tennessee in February
2003 with over 5,000 educators in attendance.




Production

Currently, most of our software products are
distributed on CD-ROM or diskettes. Bulk CD-ROMs are produced by
third-party contractors. We produce order-specific and smaller
batches of CD-ROMs at our distribution facilities. Diskettes are
duplicated and packaged at our distribution facilities. Other
related products, including videotapes, books, graphics, and
motivational items, are produced by third-party vendors.
AccelScanscanners are manufactured 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.

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Competition

The educational technology and professional
development markets in which we operate are very competitive. We
compete with 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.




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
proprietary 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 an assertion may be material,
whether or not the 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, 2003, we had 997 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, 2002 and 2001, we had
backlogs that aggregated approximately $11.7 million and
$7.4 million, respectively. The backlogs at
December 31, 2002 and 2001 are primarily made up of
professional development services not yet performed and of
registrations for our National School Renaissance Conference.
Substantially all of the 2002 backlog is expected to be realized
during 2003.




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

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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%, 34%, and 34% of our net sales in 2002, 2001,
and 2000, respectively. An overall decline in sales of
Accelerated Readerand supplemental quizzes, including
sales through book distributors, would have a material adverse
effect on our business, financial condition, and results of
operations.

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 will depend, to a significant extent, on a number of
factors, including our ability to enhance our existing products
and develop and successfully introduce new products, including
new products designed for use in other areas of the curriculum,
our ability to introduce new products in a timely fashion and
our ability to respond quickly and in a cost effective manner to
technological change, including shifts in operating systems,
languages, alternative delivery systems and other environments.
There can be no assurance that new products will be as well
received as our established products, particularly since such
other products 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 historically experienced rapid
growth. 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 were 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

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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 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.

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 down which would negatively affect school funding could
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,
Florida, North Carolina, and Georgia, which accounted for
approximately $19.1 million, $12.2 million,
$6.0 million, $5.3 million, and $5.2 million,
respectively, of our net sales in 2002. 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 chairman,
Judith Paul, and our chief executive officer, Terrance Paul.
Ms. Paul acts as our spokesperson and coordinates our
public relations and customer communications policies.
Mr. Paul is responsible for our long-term strategic
planning, new product development strategy, sales and marketing
strategy and overall direction of our company, and plays a key
role in our research activities. 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 would have a
material adverse effect on our business, financial condition,
and results of operations.

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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 the following:



| |   |                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | delays in the development and/or shipment of new
    products can adversely affect our revenue in one or more
    quarters;                                                                                                            
|
| |  | the closing of large contract sales, such as
    those to school districts;                                                                                                                                                            
|
| |  | the shipment of new products for which orders
    have been building for some period of time can cause the
    revenues in the quarter in which shipment occurs to be higher
    than revenues in preceding or subsequent quarters; and
|
| |  | seasonal variations due to, among other things,
    the budget and school year cycles of our school customers.                                                                                                                         

In addition to fluctuations in product orders,
our quarterly results can also be affected by the following:



| |   |                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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
significantly higher margins on our product sales. Service
revenues tend to be more seasonal than product revenues,
resulting in seasonal variations in margins. Quarterly service
revenues are typically highest in the third quarter.

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 proprietary 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 an assertion may be material,
whether or not the assertion is

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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 28, 2003, our principal shareholders, Judith
Paul, our chairman, and Terrance Paul, our chief executive
officer, 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.

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 28, 2003, approximately 23.6 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 3,000,000 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, which will,
when issued in accordance with such plans, be eligible for
immediate sale in the public market, subject to the
Rule 144 resale limitations for affiliates. We intend to
file an amendment to the registration statement relating to our
1997 Stock Incentive Plan in April 2003 to register an
additional 3,000,000 shares thereafter (assuming we receive
shareholder approval of this increase under the plan).

Our principal shareholders, Judith and Terrance
Paul, have adopted a securities trading plan with respect to a
portion of their company common stock. The plan provides for the
sale of approximately 2% of the Pauls current holdings of
common stock on an annual basis. The plan provides for monthly
sales, subject to various legal and contractual limitations.

Cash Dividends.We
currently intend to retain all of our future earnings to fund
growth, acquisition opportunities and the operation of our
business. Future cash dividends, if any, will be at the
discretion of our board of directors and will depend upon, among
other things, our future operations and earnings, capital
requirements and surplus, general financial condition,
contractual restrictions, and such other factors as the board of
directors may deem relevant.

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, training, and
field research operations are located 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

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Athena. Additionally, we lease various other
office space 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

There were no matters submitted during the fourth
quarter of fiscal 2002 to a vote of our security holders.

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EXECUTIVE OFFICERS OF THE REGISTRANT

|                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name and Age of Officer    |  | Office                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Judith Ames Paul   Age 56  |  | Ms. Paul is the co-founder of the company and has
    been chairman of the board of directors since August 2002. From
    1986 until July 2001, 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
    coordinates our public relations and customer communication
    policies. Ms. Paul is a leading teacher advocate.
    Ms. Paul holds a bachelors degree in elementary
    education from the University of Illinois.                                                                                                                                  
|Terrance D. Paul   Age 56  |  | Mr. Paul is the co-founder of the company
    and has been our chief executive officer since August 2002. 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 47    |  | Mr. Hickey has been our president and chief
    operating officer since July 1996 and a director since October
    1996. Mr. Hickey holds a bachelors degree in
    international business and history from the University of
    Wisconsin.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|Michael H. Baum   Age 55   |  | Mr. Baum has been our executive vice president in
    charge of all organizational learning initiatives since August
    2002 and a director since September 1994. From July 1996 until
    August 2002, Mr. Baum served as our chief executive
    officer. Mr. Baum holds a bachelors degree and a
    masters degree in teaching from Yale University and an MBA
    from Northwestern University.                                                                                                                                                                                                                                                                                                                             
|                          
|Steven A. Schmidt   Age 48 |  | Mr. Schmidt has been our vice president, chief
    financial officer and secretary since August 1999. 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,
    after having served the company since August 1992 as corporate
    controller. 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. The table below sets forth the reported
high and low closing sale prices for shares of our common stock
on The Nasdaq Stock Market® during the indicated quarters.

|                                    |                |      |   |        |  |  |   |        | 
|----------------------------------- | -------------- | ---- | - | ------ |  |  | - | ------ | 
|                                    |                | High |   | Low   
|                                    |                |      |   |       
|Fiscal year ended December 31, 2002 |                |      |   |        |  |  |   |       
|                                    | First Quarter  |      | $ | 35.650 |  |  | $ | 26.260 | 
|                                    | Second Quarter |      |   | 35.300 |  |  |   | 20.220 | 
|                                    | Third Quarter  |      |   | 21.320 |  |  |   | 13.870 | 
|                                    | Fourth Quarter |      |   | 20.990 |  |  |   | 14.580 | 
|Fiscal year ended December 31, 2001 |                |      |   |        |  |  |   |       
|                                    | First Quarter  |      | $ | 37.188 |  |  | $ | 26.063 | 
|                                    | Second Quarter |      |   | 53.410 |  |  |   | 27.625 | 
|                                    | Third Quarter  |      |   | 52.000 |  |  |   | 28.650 | 
|                                    | Fourth Quarter |      |   | 39.940 |  |  |   | 24.570 | 

Holders

As of February 7, 2003, there were
863 record holders of the common stock.

Historical Dividends

For the years ended December 31, 2002 and
2001, no dividends or other distributions were paid to
shareholders. We currently intend to retain all of our future
earnings to fund growth, acquisition opportunities and the
operation of our business. Future cash dividends, if any, will
be at the discretion of our board of directors and will depend
upon, among other things, our future operations and earnings,
capital requirements and surplus, general financial condition,
contractual restrictions, and such other factors as the board of
directors may deem relevant.

Recent Sales of Unregistered
Securities

There were no sales of unregistered securities
during the year ended December 31, 2002.

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Item 6. Selected Financial
Data

SELECTED HISTORICAL CONSOLIDATED FINANCIAL
DATA

(In thousands, except per share
amounts)


|                                           |                                    |                          |         |         |         |      |         |         |         |      |         |        |         |   |        |        |        |   |        |        |        | 
|------------------------------------------ | ---------------------------------- | ------------------------ | ------- | ------- | ------- | ---- | ------- | ------- | ------- | ---- | ------- | ------ | ------- | - | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                           |                                    |                         
|                                           |                                    | Year Ended December 31, 
|                                           |                                    |                         
|                                           |                                    | 2002                     |         | 2001    |         | 2000 |         | 1999    |         | 1998
|                                           |                                    |                          |         |         |         |      |         |         |         |     
|Consolidated Income Statement Data
    (1) |                                    |                          |         |         |         |      |         |         |         |      |         |        |         |   |        |        |        |   |        |       
|Net sales:                                 |                                    |                          |         |         |         |      |         |         |         |      |         |        |         |   |        |        |        |   |        |       
|                                           | Products                           |                          | $       | 109,503 |         |      | $       | 110,702 |         |      | $       | 87,004 |         |   | $      | 67,608 |        |   | $      | 44,064 |       
|                                           | Services                           |                          |         | 21,729  |         |      |         | 21,652  |         |      |         | 19,987 |         |   |        | 15,980 |        |   |        | 11,084 |       
|                                           |                                    |                          |         |         |         |      |         |         |         |      |         |        |         |   |        |        |        |   |        |       
|                                           |                                    | Total net sales          |         |         | 131,232 |      |         |         | 132,354 |      |         |        | 106,991 |   |        |        | 83,588 |   |        |        | 55,148 | 
|                                           |                                    |                          |         |         |         |      |         |         |         |      |         |        |         |   |        |        |        |   |        |       
|Cost of sales:                             |                                    |                          |         |         |         |      |         |         |         |      |         |        |         |   |        |        |        |   |        |       
|                                           | Products                           |                          |         | 11,930  |         |      |         | 14,857  |         |      |         | 11,621 |         |   |        | 7,768  |        |   |        | 4,375  |       
|                                           | Services                           |                          |         | 9,741   |         |      |         | 9,936   |         |      |         | 10,300 |         |   |        | 7,557  |        |   |        | 4,496  |       
|                                           |                                    |                          |         |         |         |      |         |         |         |      |         |        |         |   |        |        |        |   |        |       
|                                           |                                    | Total cost of sales      |         |         | 21,671  |      |         |         | 24,793  |      |         |        | 21,921  |   |        |        | 15,325 |   |        |        | 8,871  | 
|                                           |                                    |                          |         |         |         |      |         |         |         |      |         |        |         |   |        |        |        |   |        |       
|                                           |                                    | Gross profit             |         |         | 109,561 |      |         |         | 107,561 |      |         |        | 85,070  |   |        |        | 68,263 |   |        |        | 46,277 | 
|Operating expenses:                        |                                    |                          |         |         |         |      |         |         |         |      |         |        |         |   |        |        |        |   |        |       
|                                           | Product development                |                          |         | 17,266  |         |      |         | 17,800  |         |      |         | 14,922 |         |   |        | 8,500  |        |   |        | 5,140  |       
|                                           | Selling and marketing              |                          |         | 30,974  |         |      |         | 29,731  |         |      |         | 24,166 |         |   |        | 21,546 |        |   |        | 13,712 |       
|                                           | General and administrative         |                          |         | 13,830  |         |      |         | 14,322  |         |      |         | 11,833 |         |   |        | 10,115 |        |   |        | 7,529  |       
|                                           | Purchased research and development |                          |         |        |         |      |         |        |         |      |         |       |         |   |        | 1,080  |        |   |        | 475    |       
|                                           |                                    |                          |         |         |         |      |         |         |         |      |         |        |         |   |        |        |        |   |        |       
|                                           |                                    | Total operating expenses |         |         | 62,070  |      |         |         | 61,853  |      |         |        | 50,921  |   |        |        | 41,241 |   |        |        | 26,856 | 
|                                           |                                    |                          |         |         |         |      |         |         |         |      |         |        |         |   |        |        |        |   |        |       
|                                           |                                    | Operating income         |         |         | 47,491  |      |         |         | 45,708  |      |         |        | 34,149  |   |        |        | 27,022 |   |        |        | 19,421 | 
|Other, net                                 |                                    |                          | 3,760   |         |         |      | 4,187   |         |         |      | 3,385   |        |         |   | 2,067  |        |        |   | 1,615  |       
|                                           |                                    |                          |         |         |         |      |         |         |         |      |         |        |         |   |        |        |        |   |        |       
|Income before taxes                        |                                    |                          | 51,251  |         |         |      | 49,895  |         |         |      | 37,534  |        |         |   | 29,089 |        |        |   | 21,036 |       
|Income tax provision                       |                                    |                          | 19,813  |         |         |      | 19,226  |         |         |      | 14,601  |        |         |   | 11,943 |        |        |   | 8,844  |       
|                                           |                                    |                          |         |         |         |      |         |         |         |      |         |        |         |   |        |        |        |   |        |       
|                                           | Net income                         |                          | $       | 31,438  |         |      | $       | 30,669  |         |      | $       | 22,933 |         |   | $      | 17,146 |        |   | $      | 12,192 |       
|                                           |                                    |                          |         |         |         |      |         |         |         |      |         |        |         |   |        |        |        |   |        |       
|Basic earnings per share (2)               |                                    | $                        | 0.93    |         |         | $    | 0.89    |         |         | $    | 0.67    |        |         | $ | 0.50   |        |        | $ | 0.36   |       
|Diluted earnings per share (2)             |                                    |                          | 0.92    |         |         |      | 0.88    |         |         |      | 0.67    |        |         |   | 0.50   |        |        |   | 0.36   |       
|Consolidated Balance Sheet Data            |                                    |                          |         |         |         |      |         |         |         |      |         |        |         |   |        |        |        |   |        |       
|Working capital                            |                                    | $                        | 74,004  |         |         | $    | 83,081  |         |         | $    | 59,801  |        |         | $ | 42,900 |        |        | $ | 34,193 |       
|Total assets                               |                                    |                          | 147,611 |         |         |      | 159,961 |         |         |      | 118,221 |        |         |   | 88,419 |        |        |   | 68,280 |       
|Shareholders equity                       |                                    |                          | 121,236 |         |         |      | 136,531 |         |         |      | 99,670  |        |         |   | 74,935 |        |        |   | 55,059 |       






|    |                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In July 1999, we acquired Generation21 Learning
    Systems, LLC in a transaction accounted for as a
    pooling-of-interests. Accordingly, financial information for all
    periods presented has been restated to include the results of
    Generation21.
|   
|(2) | 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 consulting 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 flagship product, Accelerated Reader,
is software which provides information for motivating and
monitoring increased literature-based reading practice and to
support instruction. AR Universal, the latest version of
our Accelerated Readerprogram, supports recorded-voice
versions of quizzes on literature books for emergent readers and
quizzes for assessing reading instruction assignments such as
those found in reading textbooks, magazines and other curricula.
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, including: STAR Early Literacy, Perfect Copy,
Fluent Reader, StandardsMaster, Accelerated Writer, AccelTest,
MathFacts in a Flash, and Accelerated Vocabulary.

In 2002, we released several new products:
Fluent Readerrepeated reading software for struggling
readers; StandardsMasterinstant assessment and Web-based
reporting software; Accelerated Writerwriting
improvement system; AccelTesttest preparation and
management software; MathFacts in a Flash software for
mastering computational fluency; and Accelerated
Vocabulary vocabulary development software. In addition, we
provide custom assessment software and services to educational
publishers, enterprise software for training and knowledge
management throughout organizations, and an optical-mark card
scanner.

We develop and perform Renaissanceprofessional development services, which provide educators
with professional development opportunities through on- and
off-site seminars, consulting services, Web-based training, and
educator support materials. We provide teacher training through
our Reading Renaissance, Math Renaissance, Writing
Renaissance, Renaissance Early Literacy, The Reading Renaissance
Librarian, Renaissance Diagnosis and Intervention, Renaissance
Leadership, Renaissance Classroom Management,and
Renaissance Test Strategies seminars.

Our sales are derived primarily from the sale of
software products, software support agreements, and professional
development 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 derived from (i) training
seminars, (ii) consulting services, and (iii) software
support agreements whereby we provide ongoing customer support
as well as unspecified product upgrades if and when available.
Revenue from training seminars is recognized when the seminar is
performed. Revenue from consulting 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 separately sold 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 support agreement. Deferred revenue includes
(i) payments received for products not yet delivered,
(ii) advance payments on contract revenues,
(iii) payments received for training and consulting

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services not yet performed, and (iv) that
portion of separately sold 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 the time at which such products
will be 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 professional development 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 somewhat higher sales and higher sales
growth rates than other periods.

Cost of sales consists of expenses associated
with sales of software products, support agreements, and
professional development 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 significantly higher gross margins on our
product sales than on our service sales. An optical-mark card
scanner is included with the sale of all Accelerated Mathsite licenses and additional scanners are sold separately.
The gross profit margin on hardware is not as high as the gross
profit margin on software. We began shipping hardware in 1998
and as sales of hardware increased, the overall product margin
percentage declined in 1999 and 2000. Late in 2001, we began
selling our new lower cost scanner which resulted in an increase
in the gross profit margin that we realize on hardware 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 using the straight-line method over the estimated economic
life of the product, which is generally estimated to be
24 months.

In November 2000, our subsidiary, Renaissance
Corporate Services, Inc., acquired the assets and business of
Engineering Software Associates, Inc. (ESA),
Minneapolis, Minnesota, a provider of test generation and
tutorial software to college textbook publishers. Post-secondary
textbook publishers have commissioned ESA software to support
textbooks on a wide variety of subjects. Instructors using the
texts can administer tests to students on paper, via networks or
over the Internet.

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##### Table of Contents



Results of Operations

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,       
|                     |                            |                    
|                     |                            | 2002                |      | 2001 |       | 2000
|                     |                            |                     |      |      |       |     
|Net Sales:           |                            |                     |      |      |       |      |      |      |       |   |      |     
|                     | Products                   |                     |      | 83.4 | %     |      |      | 83.6 | %     |   |      | 81.3 | %    
|                     | Services                   |                     |      | 16.6 |       |      |      | 16.4 |       |   |      | 18.7 |      
|                     |                            |                     |      |      |       |      |      |      |       |   |      |     
|                     |                            | Total net sales     |      |      | 100.0 | %    |      |      | 100.0 | % |      |      | 100.0 | %
|                     |                            |                     |      |      |       |      |      |      |       |   |      |     
|Cost of sales:       |                            |                     |      |      |       |      |      |      |       |   |      |     
|                     | Products                   |                     |      | 10.9 | %     |      |      | 13.4 | %     |   |      | 13.4 | %    
|                     | Services                   |                     |      | 44.8 |       |      |      | 45.9 |       |   |      | 51.5 |      
|                     |                            |                     |      |      |       |      |      |      |       |   |      |     
|                     |                            | Total cost of sales |      |      | 16.5  |      |      |      | 18.7  |   |      |      | 20.5  |  
|                     |                            |                     |      |      |       |      |      |      |       |   |      |     
|Gross profit:        |                            |                     |      |      |       |      |      |      |       |   |      |     
|                     | Products                   |                     |      | 89.1 |       |      |      | 86.6 |       |   |      | 86.6 |      
|                     | Services                   |                     |      | 55.2 |       |      |      | 54.1 |       |   |      | 48.5 |      
|                     |                            |                     |      |      |       |      |      |      |       |   |      |     
|                     |                            | Total gross profit  |      |      | 83.5  |      |      |      | 81.3  |   |      |      | 79.5  |  
|                     |                            |                     |      |      |       |      |      |      |       |   |      |     
|Operating expenses:  |                            |                     |      |      |       |      |      |      |       |   |      |     
|                     | Product development        |                     |      | 13.2 |       |      |      | 13.4 |       |   |      | 13.9 |      
|                     | Selling and marketing      |                     |      | 23.6 |       |      |      | 22.6 |       |   |      | 22.6 |      
|                     | General and administrative |                     |      | 10.5 |       |      |      | 10.8 |       |   |      | 11.1 |      
|                     |                            |                     |      |      |       |      |      |      |       |   |      |     
|Operating income     |                            |                     | 36.2 |      |       |      | 34.5 |      |       |   | 31.9 |     
|Other, net           |                            |                     | 2.9  |      |       |      | 3.2  |      |       |   | 3.2  |     
|                     |                            |                     |      |      |       |      |      |      |       |   |      |     
|Income before taxes  |                            |                     | 39.1 |      |       |      | 37.7 |      |       |   | 35.1 |     
|Income tax provision |                            |                     | 15.1 |      |       |      | 14.5 |      |       |   | 13.7 |     
|                     |                            |                     |      |      |       |      |      |      |       |   |      |     
|Net income           |                            |                     | 24.0 | %    |       |      | 23.2 | %    |       |   | 21.4 | %   
|                     |                            |                     |      |      |       |      |      |      |       |   |      |     

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 current 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.

Our new products which began shipping in 2002
include: Fluent Reader repeated reading software for
struggling readers; StandardsMasterinstant assessment
and Web-based reporting software; Accelerated Writerwriting improvement system; AccelTesttest
preparation and management software; MathFacts in a Flashsoftware for mastering computational fluency; and
Accelerated Vocabularyvocabulary development software.
Our newest product, Accelerated Grammar and Spelling,is
expected to be released prior to the beginning of the 2003-2004
school year and will replace Perfect Copy. Accelerated
Grammar and Spellinguses real-world applications to help
teachers build the language skills of students, and diagnose
students grammar and spelling skills.

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Service revenue, which consists primarily of
revenue from sales of training and consulting sessions and
software support agreements, 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.

We believe that school funding pressures will
continue into 2003 and expect that first quarter 2003 revenues
will likely be down from the same quarter in 2002. Further, we
believe that the positive impacts of our field sales force
expansion, marketing initiatives, and the new products
introduced in 2002 will result in positive year over year
revenue growth in the second half of 2003 and, as a result, we
expect that revenues for the full year of 2003 will be up
modestly over 2002.

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. We continue to
invest in the development of new products, enhancement of
existing products, and development of tools to increase the
efficiency of product development. As a percentage of net sales,
product development costs decreased to 13.2% in 2002 from 13.4%
in 2001. We expect product development expenses to continue at
approximately these levels for the near term.

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. Sales and
marketing expenses are expected to increase in 2003 compared to
2002 due to expansion of our field sales force, however, first
quarter costs are expected to be at a similar level to first
quarter of 2002.

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.

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.
We expect to maintain our effective tax rate below 39.0% in 2003.

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Years Ended December 31, 2001 and
2000

Net Sales.Our net
sales increased by $25.4 million, or 23.7%, to
$132.4 million in 2001 from $107.0 million in 2000.
Product sales increased by $23.7 million, or 27.2%, to
$110.7 million in 2001 from $87.0 million in 2000. The
increase in product sales is primarily attributable to
(i) increased sales of math products, including follow-on
sales of accelerated math libraries and optical-mark card
scanners, (ii) increased sales of Accelerated Readerquizzes, to a larger base of Accelerated Readerschools, and (iii) sales of STAR Early Literacy,
which was released late in the second quarter of 2001. A fourth
quarter 2001 math software promotion contributed to a quarterly
increase of about 1,400 schools using math products.

Service revenue, which consists primarily of
revenue from sales of training sessions and software support
agreements, increased by $1.7 million, or 8.3%, to
$21.7 million in 2001 from $20.0 million in 2000. The
majority of this increase is attributable to a 20.5% increase in
revenue recognized on software support agreements. Revenues from
training sessions grew slightly over 2000. Approximately 80,000
educators attended our Renaissancetraining programs in
2001.

Cost of Sales.The
cost of sales of products increased by $3.2 million, or
27.8%, to $14.9 million in 2001 from $11.6 million in
2000. As a percentage of product sales, the cost of sales of
products remained constant at 13.4%. Late in 2001, we completed
the reengineering of our AccelScanoptical-mark card
scanner for lower cost. The lower cost has enabled us to lower
the list price and still achieve improved margins on the new
scanner sales.

The cost of sales of services decreased by
$364,000, or 3.5%, to $9.9 million in 2001 from
$10.3 million in 2000. As a percentage of sales of
services, the cost of sales of services decreased to 45.9% in
2001 from 51.5% in 2000. The improvement was due to stronger
sales in the software support business and improved cost
efficiencies in both the training and software support
businesses.

Our overall gross profit margin increased 1.8% to
81.3% in 2001 from 79.5% in 2000 due to improved gross profit
margins on services and to a higher proportion of products in
the sales mix during 2001.

Product Development.Product development expenses increased
by $2.9 million, or 19.3%, to $17.8 million in 2001
from $14.9 million in 2000. These expenses increased
primarily due to increased staff and consulting costs associated
with new product development including several new products
announced in late 2001 and early 2002: Fluent Reader,
StandardsMaster, Accelerated Writer, MathFacts in a Flash,
Accelerated Vocabulary, and AccelTest, which shipped
in 2002.

Increased product development expenses are also
attributed to: our new AccelScanoptical-mark card
scanner which was totally reengineered in 2001; continued
development of a suite of Web-based versions of our existing
core products; and new products at various stages of
development. As a percentage of net sales, product development
costs decreased to 13.4% in 2001 from 13.9% in 2000.

Selling and Marketing.Selling and marketing expenses
increased by $5.6 million, or 23.0%, to $29.7 million
in 2001 from $24.2 million in 2000. These expenses
increased primarily due to (i) direct mailings to an
increased customer and prospect base, (ii) increased wages
and related benefit costs associated with hiring additional
personnel to market and promote a broader product line,
(iii) costs related to selling and marketing our
district-wide school improvement program, and (iv) costs of
marketing the Generation21 enterprise-wide training and
knowledge management software. As a percentage of net sales,
selling and marketing expenses remained constant at 22.6%.

General and Administrative.General and administrative expenses
increased by $2.5 million, or 21.0%, to $14.3 million
in 2001 from $11.8 million in 2000. The higher expenses for
2001 are largely due to increased wages and related benefit
costs associated with the hiring of additional personnel, and
professional fees, to support a larger base of business
including Generation21 and the acquisition of Engineering
Software Associates which was completed in November of 2000. As
a percentage of net sales, general and administrative costs
decreased to 10.8% in 2001 from 11.1% in 2000.

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Operating Income.Operating income increased by
$11.6 million, or 33.8%, to $45.7 million in 2001 from
$34.1 million in 2000. As a percentage of net sales,
operating income increased to 34.5% in 2001 from 31.9% in 2000.

Income Taxes.Income
tax expense of $19.2 million was recorded in 2001 at an
effective income tax rate of 38.5% compared to
$14.6 million and 38.9% effective income tax rate in 2000.

Liquidity and Capital Resources

As of December 31, 2002, our cash, cash
equivalents and investment securities were $99.8 million,
down by $9.7 million from the December 31, 2001 total
of $109.6 million. The net decrease is due primarily to
$41.5 million in net cash provided by operating activities
offset by stock repurchases of $49.0 million. We believe
our strong cash position coupled with cash flow from operations
will be sufficient to meet both our short-term and long-term
working capital requirements.

At December 31, 2002, we had a
$15.0 million unsecured revolving line of credit with a
bank which is available until March 31, 2004. The line of
credit bears interest at either a floating rate based on the
prime rate less 1.0%, or a fixed rate for a period of up to
90 days based on LIBOR plus 1.25%. The rate is at our
option and is determined at the time of borrowing. We also have
a $2.0 million unsecured revolving line of credit with a
bank available until April 30, 2004. The line of credit
bears interest based on the prime rate less 1.0%. As of
December 31, 2002, 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
July 1, 2002 through December 31, 2002 we repurchased
2,712,572 shares at a cost of $49,155,463. Subsequently, during
the period of January 1, 2003 through February 28,
2003 we repurchased 565,845 shares at a cost of $10,060,259.

Off-Balance Sheet Arrangements

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

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 and 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. The following
represents a summary 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.

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 separately sold
software support agreements,

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(v) as the service is performed or on a
straight-line basis over the contractual period for consulting
services, and (vi) straight-line over the subscription
period for subscription based products. Accordingly, management
is required to make judgements 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. Changes in such allowances may be
required if future returns or bad debt activity differs from
historical experience.

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.

Impairment losses are measured as the amount by
which the carrying value of an asset exceeds its estimated fair
value. We are required to make estimates of 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 and Warranty Obligations.We record a liability for the
estimated cost of software support and hardware warranty
obligations at the time of sale. Estimated costs are based upon
our historical cost experience of fulfilling these obligations
as well as other factors that in our judgment could reasonably
be expected to affect those costs, such as trends in the cost of
providing telephone support and anticipated hardware warranty
claim rates. If the actual costs of fulfilling these obligations
differ from our estimates, it could result in additional charges
to cost of sales in future periods.

Software Development Costs.We capitalize certain software
development costs incurred after technological feasibility is
achieved. Capitalized software development costs are amortized
on a product-by-product basis using the straight-line method
over 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) as well as tax planning
strategies. If the actual distribution of taxable income by
jurisdiction varies from our expectations 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.

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

Our investment policy specifically defines that
our investments (i) have a maximum maturity of
36 months or less, (ii) meet a minimum portfolio
liquidity requirement that 10% of the portfolio shall be
available on 30 days notice and not more than 30% of the
portfolio will have a maturity in excess of 24 months,
(iii) meet minimum credit quality requirements specified in
the plan based on the type of investment, (iv) meet the
concentration limit of not more than 10% in any one issuer other
than the US Treasury or its agencies, or money market funds, and
(v) meet certain maximum maturity or tender option limits
based on its minimum credit rating. As of December 31, 2002
our investment securities had a market value of approximately
$82,134,000 and a carrying value of $81,616,000.

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

Foreign Currency Exchange Rate
Risk.The financial position and
results of operations of our foreign subsidiaries are measured
using local currency. Revenues and expenses of such subsidiaries
have been translated into U.S. dollars at average exchange rates
prevailing during the period. Assets and liabilities have been
translated at the rates of exchange at the balance sheet date.
Translation gains or losses are deferred as a separate component
of shareholders equity. Aggregate foreign currency
transaction gains and losses are included in determining net
income. As such, our operating results are affected by
fluctuations in the value of the U.S. dollar compared to the
Australian dollar, British pound, Canadian dollar, and Indian
Rupee. At this time, foreign operations are not material.

24



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|        |                                                
|------- | -----------------------------------------------
|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 sheet of Renaissance Learning, Inc. (a Wisconsin
Corporation) and subsidiaries, as of December 31, 2002, and
the related consolidated statement of income, shareholders
equity and cash flows for the year 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
December 31, 2001 and for the years ended December 31,
2001 and 2000 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 audit 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 audit
provides a reasonable basis for our opinion.

In our opinion, such 2002 financial statements
present fairly, in all material respects, the financial position
of Renaissance Learning, Inc. and subsidiaries, as of
December 31, 2002, and the results of their operations and
their cash flows for the year 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 17, 2003


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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


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RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of December 31, 2002 and
2001


|                                         |                                                                                                                                 |                                                                             |                                            |        |         |         |        |        |        |         | 
|---------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------- | ------- | ------ | ------ | ------ | ------- | 
|                                         |                                                                                                                                 | 2002                                                                        |                                            | 2001  
|                                         |                                                                                                                                 |                                                                             |                                            |       
|                                         |                                                                                                                                 |                                                                            
|                                         |                                                                                                                                 | (In Thousands, Except                                                      
|                                         |                                                                                                                                 | Share and Per Share                                                        
|                                         |                                                                                                                                 | Amounts)                                                                   
|ASSETS                                   |                                                                                                                                 |                                                                             |                                            |        |         |         |        |       
|Current assets:                          |                                                                                                                                 |                                                                             |                                            |        |         |         |        |       
|                                         | Cash and cash equivalents                                                                                                       |                                                                             | $                                          | 18,220 |         |         | $      | 35,904 |       
|                                         | Investment securities                                                                                                           |                                                                             |                                            | 60,269 |         |         |        | 49,288 |       
|                                         | Accounts receivable, less allowance of $1,654 in
    2002 and $1,723 in 2001                                                    |                                                                             |                                            | 12,619 |         |         |        | 12,397 |       
|                                         | Inventories                                                                                                                     |                                                                             |                                            | 1,724  |         |         |        | 1,648  |       
|                                         | Prepaid expenses                                                                                                                |                                                                             |                                            | 1,411  |         |         |        | 1,063  |       
|                                         | Deferred tax asset                                                                                                              |                                                                             |                                            | 3,710  |         |         |        | 3,606  |       
|                                         | Other current assets                                                                                                            |                                                                             |                                            | 1,331  |         |         |        | 1,312  |       
|                                         |                                                                                                                                 |                                                                             |                                            |        |         |         |        |       
|                                         |                                                                                                                                 |                                                                             | Total current assets                       |        |         | 99,284  |        |        |        | 105,218 | 
|Investment securities                    |                                                                                                                                 |                                                                             | 21,347                                     |        |         |         | 24,364 |       
|Property, plant and equipment, net       |                                                                                                                                 |                                                                             | 21,085                                     |        |         |         | 23,007 |       
|Deferred tax asset                       |                                                                                                                                 |                                                                             | 1,942                                      |        |         |         | 2,238  |       
|Goodwill                                 |                                                                                                                                 |                                                                             | 2,313                                      |        |         |         | 2,313  |       
|Other intangibles, net                   |                                                                                                                                 |                                                                             | 874                                        |        |         |         | 1,412  |       
|Capitalized software, net                |                                                                                                                                 |                                                                             | 659                                        |        |         |         | 506    |       
|Other non-current assets                 |                                                                                                                                 |                                                                             | 107                                        |        |         |         | 903    |       
|                                         |                                                                                                                                 |                                                                             |                                            |        |         |         |        |       
|                                         |                                                                                                                                 |                                                                             | Total assets                               |        | $       | 147,611 |        |        | $      | 159,961 | 
|                                         |                                                                                                                                 |                                                                             |                                            |        |         |         |        |       
|LIABILITIES AND SHAREHOLDERS
    EQUITY |                                                                                                                                 |                                                                             |                                            |        |         |         |        |       
|Current liabilities:                     |                                                                                                                                 |                                                                             |                                            |        |         |         |        |       
|                                         | Accounts payable                                                                                                                |                                                                             | $                                          | 3,643  |         |         | $      | 2,769  |       
|                                         | Deferred revenue                                                                                                                |                                                                             |                                            | 10,397 |         |         |        | 7,184  |       
|                                         | Payroll and employee benefits                                                                                                   |                                                                             |                                            | 4,263  |         |         |        | 3,845  |       
|                                         | Income taxes payable                                                                                                            |                                                                             |                                            | 2,372  |         |         |        | 4,196  |       
|                                         | Other current liabilities                                                                                                       |                                                                             |                                            | 4,605  |         |         |        | 4,143  |       
|                                         |                                                                                                                                 |                                                                             |                                            |        |         |         |        |       
|                                         |                                                                                                                                 |                                                                             | Total current liabilities                  |        |         | 25,280  |        |        |        | 22,137  | 
|                                         | Deferred revenue                                                                                                                |                                                                             |                                            | 930    |         |         |        | 1,097  |       
|                                         |                                                                                                                                 |                                                                             |                                            |        |         |         |        |       
|                                         |                                                                                                                                 |                                                                             | Total liabilities                          |        |         | 26,210  |        |        |        | 23,234  | 
|Minority interest                        |                                                                                                                                 |                                                                             | 165                                        |        |         |         | 196    |       
|Shareholders equity:                    |                                                                                                                                 |                                                                             |                                            |        |         |         |        |       
|                                         | Common stock, $.01 par; shares authorized:
    150,000,000;
    issued: 34,736,647 shares in 2002
    34,617,861 shares in 2001 |                                                                             |                                            | 347    |         |         |        | 346    |       
|                                         |                                                                                                                                 | Additional paid-in capital                                                  |                                            |        | 54,423  |         |        |        | 51,702 |        
|                                         |                                                                                                                                 | Retained earnings                                                           |                                            |        | 116,055 |         |        |        | 84,618 |        
|                                         |                                                                                                                                 | Treasury stock, at cost 2,737,672 shares in 2002;
    25,100 shares in 2001 |                                            |        | (49,480 | )       |        |        | (325   | )      
|                                         |                                                                                                                                 | Accumulated other comprehensive income (loss)                               |                                            |        | (109    | )       |        |        | 190    |        
|                                         |                                                                                                                                 |                                                                             |                                            |        |         |         |        |       
|                                         |                                                                                                                                 |                                                                             | Total shareholders equity                 |        |         | 121,236 |        |        |        | 136,531 | 
|                                         |                                                                                                                                 |                                                                             |                                            |        |         |         |        |       
|                                         |                                                                                                                                 |                                                                             | Total liabilities and shareholders equity |        | $       | 147,611 |        |        | $      | 159,961 | 
|                                         |                                                                                                                                 |                                                                             |                                            |        |         |         |        |       

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

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RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES


CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended December 31, 2002,
2001 and 2000


|                     |                            |                           |        |         |         |      |        |         |         |   |        |        |         | 
|-------------------- | -------------------------- | ------------------------- | ------ | ------- | ------- | ---- | ------ | ------- | ------- | - | ------ | ------ | ------- | 
|                     |                            | 2002                      |        | 2001    |         | 2000
|                     |                            |                           |        |         |         |     
|                     |                            |                          
|                     |                            | (In Thousands            
|                     |                            | Except Per Share Amounts)
|Net Sales:           |                            |                           |        |         |         |      |        |         |         |   |        |       
|                     | Products                   |                           | $      | 109,503 |         |      | $      | 110,702 |         |   | $      | 87,004 |        
|                     | Services                   |                           |        | 21,729  |         |      |        | 21,652  |         |   |        | 19,987 |        
|                     |                            |                           |        |         |         |      |        |         |         |   |        |       
|                     |                            | Total net sales           |        |         | 131,232 |      |        |         | 132,354 |   |        |        | 106,991 | 
|                     |                            |                           |        |         |         |      |        |         |         |   |        |       
|Cost of sales:       |                            |                           |        |         |         |      |        |         |         |   |        |       
|                     | Products                   |                           |        | 11,930  |         |      |        | 14,857  |         |   |        | 11,621 |        
|                     | Services                   |                           |        | 9,741   |         |      |        | 9,936   |         |   |        | 10,300 |        
|                     |                            |                           |        |         |         |      |        |         |         |   |        |       
|                     |                            | Total cost of sales       |        |         | 21,671  |      |        |         | 24,793  |   |        |        | 21,921  | 
|                     |                            |                           |        |         |         |      |        |         |         |   |        |       
|                     |                            | Gross profit              |        |         | 109,561 |      |        |         | 107,561 |   |        |        | 85,070  | 
|Operating expenses:  |                            |                           |        |         |         |      |        |         |         |   |        |       
|                     | Product development        |                           |        | 17,266  |         |      |        | 17,800  |         |   |        | 14,922 |        
|                     | Selling and marketing      |                           |        | 30,974  |         |      |        | 29,731  |         |   |        | 24,166 |        
|                     | General and administrative |                           |        | 13,830  |         |      |        | 14,322  |         |   |        | 11,833 |        
|                     |                            |                           |        |         |         |      |        |         |         |   |        |       
|                     |                            | Total operating expenses  |        |         | 62,070  |      |        |         | 61,853  |   |        |        | 50,921  | 
|                     |                            |                           |        |         |         |      |        |         |         |   |        |       
|                     |                            | Operating income          |        |         | 47,491  |      |        |         | 45,708  |   |        |        | 34,149  | 
|Other income:        |                            |                           |        |         |         |      |        |         |         |   |        |       
|                     | Interest income            |                           |        | 3,207   |         |      |        | 3,925   |         |   |        | 3,046  |        
|                     | Other, net                 |                           |        | 553     |         |      |        | 262     |         |   |        | 339    |        
|                     |                            |                           |        |         |         |      |        |         |         |   |        |       
|Income before taxes  |                            |                           | 51,251 |         |         |      | 49,895 |         |         |   | 37,534 |       
|Income tax provision |                            |                           | 19,813 |         |         |      | 19,226 |         |         |   | 14,601 |       
|                     |                            |                           |        |         |         |      |        |         |         |   |        |       
|Net income           |                            | $                         | 31,438 |         |         | $    | 30,669 |         |         | $ | 22,933 |       
|                     |                            |                           |        |         |         |      |        |         |         |   |        |       
|Earnings per share:  |                            |                           |        |         |         |      |        |         |         |   |        |       
|                     | Basic                      |                           | $      | 0.93    |         |      | $      | 0.89    |         |   | $      | 0.67   |        
|                     | Diluted                    |                           | $      | 0.92    |         |      | $      | 0.88    |         |   | $      | 0.67   |        

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

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RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

For the Years Ended December 31, 2000,
2001 and 2002


|                           |                                      |                      |        |            |   |          |     |          |   |               |        |               |   |        |         |        |   |   |         |         |   |   |      |      |   |   |         |         |        | 
|-------------------------- | ------------------------------------ | -------------------- | ------ | ---------- | - | -------- | --- | -------- | - | ------------- | ------ | ------------- | - | ------ | ------- | ------ | - | - | ------- | ------- | - | - | ---- | ---- | - | - | ------- | ------- | ------ | 
|                           |                                      |                      |        |            |   |          |     |          |   |               |        | Accumulated   |   |       
|                           |                                      |                      |        |            |   |          |     |          |   | Other         |        |              
|                           |                                      | Common Stock(1)      |        | Additional |   |          |     |          |   | Comprehensive |        | Total        
|                           |                                      |                      |        | Paid-in    |   | Retained |     | Treasury |   | Income        |        | Shareholders
|                           |                                      | Shares               |        | Amount     |   | Capital  |     | Earnings |   | Stock         |        | (Loss)        |   | Equity
|                           |                                      |                      |        |            |   |          |     |          |   |               |        |               |   |       
|                           |                                      |                     
|                           |                                      | (In Thousands)      
|Balance, December 31, 1999 |                                      |                      | 34,183 |            |   | $        | 342 |          |   | $             | 43,621 |               |   | $      | 31,015  |        |   | $ |        |         |   | $ | (43  | )    |   |   | 74,935  |        
|                           | Net income                           |                      |        |           |   |          |     |         |   |               |        |              |   |        |         | 22,933 |   |   |         |        |   |   |      |     |   |   |         | 22,933  |       
|                           | Foreign currency translation         |                      |        |           |   |          |     |         |   |               |        |              |   |        |         |       |   |   |         |        |   |   |      | (26  | ) |   |         | (26     | )     
|                           | Unrealized loss on securities        |                      |        |           |   |          |     |         |   |               |        |              |   |        |         |       |   |   |         |        |   |   |      | 4    |   |   |         | 4       |       
|                           |                                      |                      |        |            |   |          |     |          |   |               |        |               |   |        |         |        |   |   |         |         |   |   |      |      |   |   |         |        
|                           |                                      | Comprehensive income |        |            |  |          |     |          |  |               |        |               |  |        |         |        |  |   |         |         |  |   |      |      |  |   |         |         | 22,911 | 
|                           | Stock repurchased for treasury       |                      |        | (25        | ) |          |     |         |   |               |        |              |   |        |         |       |   |   |         | (325    | ) |   |      |      |   |   |         | (325    | )     
|                           | Employee stock purchase plan         |                      |        | 51         |   |          |     |         |   |               |        | 490           |   |        |         |       |   |   |         |        |   |   |      |      |   |   |         | 490     |       
|                           | Exercise of stock options            |                      |        | 94         |   |          |     | 1        |   |               |        | 1,191         |   |        |         |       |   |   |         |        |   |   |      |     |   |   |         | 1,192   |       
|                           | Tax benefit on stock options         |                      |        |           |   |          |     |         |   |               |        | 461           |   |        |         |       |   |   |         |        |   |   |      |     |   |   |         | 461     |       
|                           | Stock option grants to non-employees |                      |        |           |   |          |     |         |   |               |        | 6             |   |        |         |       |   |   |         |        |   |   |      |     |   |   |         | 6       |       
|                           |                                      |                      |        |            |   |          |     |          |   |               |        |               |   |        |         |        |   |   |         |         |   |   |      |      |   |   |         |        
|Balance, December 31, 2000 |                                      |                      | 34,303 |            |   |          | 343 |          |   |               | 45,769 |               |   |        | 53,948  |        |   |   | (325    | )       |   |   | (65  | )    |   |   | 99,670  |        
|                           | Net income                           |                      |        |           |   |          |     |         |   |               |        |              |   |        |         | 30,669 |   |   |         |        |   |   |      |     |   |   |         | 30,669  |       
|                           | Foreign currency translation         |                      |        |           |   |          |     |         |   |               |        |              |   |        |         |       |   |   |         |        |   |   |      | (6   | ) |   |         | (6      | )     
|                           | Unrealized gains on securities       |                      |        |           |   |          |     |         |   |               |        |              |   |        |         |       |   |   |         |        |   |   |      | 261  |   |   |         | 261     |       
|                           |                                      |                      |        |            |   |          |     |          |   |               |        |               |   |        |         |        |   |   |         |         |   |   |      |      |   |   |         |        
|                           |                                      | Comprehensive income |        |            |  |          |     |          |  |               |        |               |  |        |         |        |  |   |         |         |  |   |      |      |  |   |         |         | 30,924 | 
|                           | Employee stock purchase plan         |                      |        | 82         |   |          |     | 1        |   |               |        | 814           |   |        |         |       |   |   |         |        |   |   |      |     |   |   |         | 815     |       
|                           | Exercise of stock options            |                      |        | 208        |   |          |     | 2        |   |               |        | 3,215         |   |        |         |       |   |   |         |        |   |   |      |     |   |   |         | 3,217   |       
|                           | Tax benefit on stock options         |                      |        |           |   |          |     |         |   |               |        | 1,905         |   |        |         |       |   |   |         |        |   |   |      |     |   |   |         | 1,905   |       
|                           |                                      |                      |        |            |   |          |     |          |   |               |        |               |   |        |         |        |   |   |         |         |   |   |      |      |   |   |         |        
|Balance, December 31, 2001 |                                      |                      | 34,593 |            |   |          | 346 |          |   |               | 51,703 |               |   |        | 84,617  |        |   |   | (325    | )       |   |   | 190  |      |   |   | 136,531 |        
|                           | Net income                           |                      |        |           |   |          |     |         |   |               |        |              |   |        |         | 31,438 |   |   |         |        |   |   |      |     |   |   |         | 31,438  |       
|                           | Foreign currency translation         |                      |        |           |   |          |     |         |   |               |        |              |   |        |         |       |   |   |         |        |   |   |      | (58  | ) |   |         | (58     | )     
|                           | Unrealized loss on securities        |                      |        |           |   |          |     |         |   |               |        |              |   |        |         |       |   |   |         |        |   |   |      | (241 | ) |   |         | (241    | )     
|                           |                                      |                      |        |            |   |          |     |          |   |               |        |               |   |        |         |        |   |   |         |         |   |   |      |      |   |   |         |        
|                           |                                      | Comprehensive income |        |            |  |          |     |          |  |               |        |               |  |        |         |        |  |   |         |         |  |   |      |      |  |   |         |         | 31,139 | 
|                           | Stock repurchased for treasury       |                      |        | (2,713     | ) |          |     |         |   |               |        |              |   |        |         |       |   |   |         | (49,155 | ) |   |      |     |   |   |         | (49,155 | )     
|                           | Employee stock purchase plan         |                      |        | 43         |   |          |     |         |   |               |        | 1,066         |   |        |         |       |   |   |         |        |   |   |      |     |   |   |         | 1,066   |       
|                           | Exercise of stock options            |                      |        | 76         |   |          |     | 1        |   |               |        | 1,219         |   |        |         |       |   |   |         |        |   |   |      |     |   |   |         | 1,220   |       
|                           | Tax benefit on stock options         |                      |        |           |   |          |     |         |   |               |        | 378           |   |        |         |       |   |   |         |        |   |   |      |     |   |   |         | 378     |       
|                           | Stock option grants to non-employees |                      |        |           |   |          |     |         |   |               |        | 57            |   |        |         |       |   |   |         |        |   |   |      |     |   |   |         | 57      |       
|                           |                                      |                      |        |            |   |          |     |          |   |               |        |               |   |        |         |        |   |   |         |         |   |   |      |      |   |   |         |        
|Balance, December 31, 2002 |                                      |                      | 31,999 |            |   | $        | 347 |          |   | $             | 54,423 |               |   | $      | 116,055 |        |   | $ | (49,480 | )       |   | $ | (109 | )    |   | $ | 121,236 |        
|                           |                                      |                      |        |            |   |          |     |          |   |               |        |               |   |        |         |        |   |   |         |         |   |   |      |      |   |   |         |        




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

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RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

For the Years Ended December 31, 2002,
2001 and 2000


|                                                                               |                                                        |                                                |                                                      |         |       |         |        |         |        |         |        |         |       |         |  
|------------------------------------------------------------------------------ | ------------------------------------------------------ | ---------------------------------------------- | ---------------------------------------------------- | ------- | ----- | ------- | ------ | ------- | ------ | ------- | ------ | ------- | ----- | ------- | -
|                                                                               |                                                        | 2002                                           |                                                      | 2001    |       | 2000   
|                                                                               |                                                        |                                                |                                                      |         |       |        
|                                                                               |                                                        |                                               
|                                                                               |                                                        | (In Thousands)                                
|Reconciliation of net income to net cash provided
    by operating activities: |                                                        |                                                |                                                      |         |       |         |        |         |        |         |        |        
|                                                                               | Net income                                             |                                                | $                                                    | 31,438  |       |         | $      | 30,669  |        |         | $      | 22,933  |      
|                                                                               | Noncash (income) expenses included in net
    income  |                                                |                                                      |         |       |         |        |         |        |         |        |         |      
|                                                                               |                                                        | Depreciation and amortization                  |                                                      |         | 4,633 |         |        |         | 5,736  |         |        |         | 4,769 |        
|                                                                               |                                                        | Amortization of investment discounts/premiums  |                                                      |         | 2,146 |         |        |         | 317    |         |        |         | (330  | )      
|                                                                               |                                                        | Deferred income taxes                          |                                                      |         | 323   |         |        |         | (938   | )       |        |         | (194  | )      
|                                                                               | Change in assets and liabilities                      |                                                |                                                      |         |       |         |        |         |        |         |        |         |      
|                                                                               |                                                        | Accounts receivable                            |                                                      |         | (221  | )       |        |         | (1,062 | )       |        |         | 1,009 |        
|                                                                               |                                                        | Inventories                                    |                                                      |         | (76   | )       |        |         | (125   | )       |        |         | 225   |        
|                                                                               |                                                        | Prepaid expenses                               |                                                      |         | (348  | )       |        |         | 141    |         |        |         | 378   |        
|                                                                               |                                                        | Accounts payable and other current liabilities |                                                      |         | 178   |         |        |         | 6,059  |         |        |         | 4,294 |        
|                                                                               |                                                        | Deferred revenue                               |                                                      |         | 3,047 |         |        |         | 1,417  |         |        |         | 475   |        
|                                                                               |                                                        | Other current assets                           |                                                      |         | (19   | )       |        |         | (467   | )       |        |         | (547  | )      
|                                                                               |                                                        | Other                                          |                                                      |         | 439   |         |        |         | (263   | )       |        |         | (178  | )      
|                                                                               |                                                        |                                                |                                                      |         |       |         |        |         |        |         |        |        
|                                                                               |                                                        |                                                | Net cash provided by operating activities            |         |       | 41,540  |        |         |        | 41,484  |        |         |       | 32,834  |  
|                                                                               |                                                        |                                                |                                                      |         |       |         |        |         |        |         |        |        
|Cash flows from investing activities:                                          |                                                        |                                                |                                                      |         |       |         |        |         |        |         |        |        
|                                                                               | Purchase of property, plant and equipment              |                                                |                                                      | (1,572  | )     |         |        | (2,452  | )      |         |        | (3,720  | )    
|                                                                               | Purchase of investment securities                      |                                                |                                                      | (60,816 | )     |         |        | (68,729 | )      |         |        | (47,910 | )    
|                                                                               | Maturities/sales of investment securities              |                                                |                                                      | 50,575  |       |         |        | 38,102  |        |         |        | 22,744  |      
|                                                                               | Capitalized software development costs                 |                                                |                                                      | (729    | )     |         |        | (484    | )      |         |        | (477    | )    
|                                                                               | Acquisitions                                           |                                                |                                                      |        |       |         |        | (704    | )      |         |        | (2,995  | )    
|                                                                               |                                                        |                                                |                                                      |         |       |         |        |         |        |         |        |        
|                                                                               |                                                        |                                                | Net cash used by investing activities                |         |       | (12,542 | )      |         |        | (34,267 | )      |         |       | (32,358 | )
|                                                                               |                                                        |                                                |                                                      |         |       |         |        |         |        |         |        |        
|Cash flows from financing activities:                                          |                                                        |                                                |                                                      |         |       |         |        |         |        |         |        |        
|                                                                               | Proceeds from issuance of stock                        |                                                |                                                      | 1,066   |       |         |        | 815     |        |         |        | 490     |      
|                                                                               | Proceeds from exercise of stock options                |                                                |                                                      | 1,277   |       |         |        | 3,217   |        |         |        | 1,192   |      
|                                                                               | Return of equity to minority partner                   |                                                |                                                      |        |       |         |        |        |        |         |        | (60     | )    
|                                                                               | Purchase of treasury stock                             |                                                |                                                      | (49,025 | )     |         |        |        |        |         |        | (325    | )    
|                                                                               |                                                        |                                                |                                                      |         |       |         |        |         |        |         |        |        
|                                                                               |                                                        |                                                | Net cash (used) provided by financing
    activities |         |       | (46,682 | )      |         |        | 4,032   |        |         |       | 1,297   |  
|                                                                               |                                                        |                                                |                                                      |         |       |         |        |         |        |         |        |        
|Net (decrease) increase in cash                                                |                                                        |                                                | (17,684                                              | )       |       |         | 11,249 |         |        |         | 1,773  |        
|Cash and cash equivalents, beginning of period                                 |                                                        |                                                | 35,904                                               |         |       |         | 24,655 |         |        |         | 22,882 |        
|                                                                               |                                                        |                                                |                                                      |         |       |         |        |         |        |         |        |        
|Cash and cash equivalents, end of period                                       |                                                        | $                                              | 18,220                                               |         |       | $       | 35,904 |         |        | $       | 24,655 |        
|                                                                               |                                                        |                                                |                                                      |         |       |         |        |         |        |         |        |        

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

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RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

(1) Consolidation

The consolidated financial statements include the
financial results of Renaissance Learning, Inc.
(Renaissance Learning) and 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. The Companys flagship product is the
Accelerated Reader, software which provides information
for motivating and monitoring increased literature-based reading
practice and to support instruction. The Companys software
products also include STAR Reading, a computer-adaptive
reading test and database, and Accelerated Math and
STAR Math, software products that apply to math the
principles that have made the reading software effective in
improving academic performance. Additionally, the Company
publishes and distributes several other learning information
system products, including: STAR Early Literacy, Perfect
Copy, Fluent Reader, StandardsMaster, Accelerated Writer,
AccelTest, MathFacts in a Flash, and Accelerated
Vocabulary.

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, Writing Renaissance,
Renaissance Early Literacy, The Reading Renaissance Librarian,
Renaissance Diagnosis and Intervention, Renaissance Leadership,
Renaissance Classroom Management, and Renaissance Test
Strategiesseminars.

Renaissance Corporate Services, Inc. provides
customized software to educational publishers for assessment and
skills practice in math, science, and other subjects and also
develops content for certain products distributed by the
Company. 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 November 17, 2000, the Company
acquired the business and assets of Engineering Software
Associates, Inc. (ESA), Minneapolis, Minnesota, a
provider of assessment and tutorial software to college textbook
publishers. The transaction was accounted for using the purchase
method of accounting, with a total purchase price of
$3.8 million including the assumption of less than $100,000
of certain liabilities. The purchase price was subject to
post-closing adjustments related to the finalization of certain
estimated working capital accounts. The purchase price was
allocated based on the fair values of the assets acquired and
liabilities assumed and included an allocation to intangibles
and goodwill (see Note 5). The operating results of ESA are
included in the consolidated financial statements of the Company
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

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RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

(b) Revenue recognition

The Company recognizes revenue in accordance with
Statement of Position No. 97-2 Software Revenue
Recognition issued by the Accounting Standards Executive
Committee of the AICPA. 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. The Company recognizes revenue from
sales of its off-the-shelf software products at the time of
shipment to customers. The Company recognizes 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,
2002 and 2001 is $284,000 and $443,000, respectively, of amounts
recognized as revenue under the percentage-of-completion method
which are not yet billed to the customer. 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, and (iii) software
support agreements whereby the Company provides ongoing customer
support as well as unspecified product upgrades if and when
available. Revenue from training seminars is recognized when the
seminar is performed. Revenue from consulting 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 separately sold 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 support agreement.

Deferred revenue includes (i) payments
received for products not yet delivered, (ii) advance
payments on contract revenues, (iii) payments received for
training and consulting services not yet performed, and
(iv) that portion of separately sold software support
agreements and subscription-based product sales that has not yet
been recognized as revenue.

(c) Cash and cash equivalents

The Company considers cash amounts on deposit at
banks and highly liquid debt instruments purchased with an
original maturity date of three months or less to be cash
equivalents. Debt instruments are carried at cost, which
approximates market value. Cash and cash equivalents consisted
of the following at December 31:

|                       |  |                |        |      |  |   |        | 
|---------------------- |  | -------------- | ------ | ---- |  | - | ------ | 
|                       |  | 2002           |        | 2001
|                       |  |                |        |     
|                       |  |               
|                       |  | (In Thousands)
|Cash and time deposits |  | $              | 9,220  |      |  | $ | 14,119 | 
|Municipal obligations  |  |                | 9,000  |      |  |   | 20,900 | 
|Corporate notes        |  |                |       |      |  |   | 885    | 
|                       |  |                |        |      |  |   |        | 
|                       |  | $              | 18,220 |      |  | $ | 35,904 | 
|                       |  |                |        |      |  |   |        | 

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RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(d) Investment securities

Investment securities have an original maturity
of more than three months and a remaining maturity of less than
twenty-four months. As of December 31, 2002 and 2001,
investment securities consisted entirely of corporate notes and
municipal obligations. 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 Statement of Financial
Accounting Standards No. 115 (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.

Investment securities consisted of the following
at December 31, 2002:

|                         |                 |                                        |        |              |  |          |     |       |  |   |     |     |   |   |        |        | 
|------------------------ | --------------- | -------------------------------------- | ------ | ------------ |  | -------- | --- | ----- |  | - | --- | --- | - | - | ------ | ------ | 
|                         |                 |                                       
|                         |                 | Held-to-Maturity Investment Securities
|                         |                 |                                       
|                         |                 |                                        |        |              |  |         
|                         |                 |                                        |        | Gross        |  |         
|                         |                 |                                        |        | Unrecognized |  |         
|                         |                 |                                        |        | Holding:     |  |         
|                         |                 | Net Carrying                           |        |              |  | Fair    
|                         |                 | Amount                                 |        | Gains        |  | (Losses) |     | Value
|                         |                 |                                        |        |              |  |          |     |      
|                         |                 |                                       
|                         |                 | (In Thousands)                        
|Due in less than 1 year: |                 |                                        |        |              |  |          |     |       |  |   |     |     |   |   |        |       
|                         | Corporate bonds |                                        | $      | 36,023       |  |          | $   | 157   |  |   | $   | (17 | ) |   | $      | 36,163 | 
|                         | Municipal bonds |                                        |        | 24,246       |  |          |     | 85    |  |   |     |    |   |   |        | 24,331 | 
|Due in 1 to 2 years:     |                 |                                        |        |              |  |          |     |       |  |   |     |     |   |   |        |       
|                         | Corporate bonds |                                        |        | 16,073       |  |          |     | 267   |  |   |     | (3  | ) |   |        | 16,337 | 
|                         | Municipal bonds |                                        |        | 5,274        |  |          |     | 29    |  |   |     |    |   |   |        | 5,303  | 
|                         |                 |                                        |        |              |  |          |     |       |  |   |     |     |   |   |        |       
|                         |                 | $                                      | 81,616 |              |  | $        | 538 |       |  | $ | (20 | )   |   | $ | 82,134 |       
|                         |                 |                                        |        |              |  |          |     |       |  |   |     |     |   |   |        |       

(e) Supplemental disclosure of cash flow
information

|               |              |                |   |        |  |      |   |        |  |  |   |        | 
|-------------- | ------------ | -------------- | - | ------ |  | ---- | - | ------ |  |  | - | ------ | 
|               |              | 2002           |   | 2001   |  | 2000
|               |              |                |   |        |  |     
|               |              |               
|               |              | (In Thousands)
|Cash paid for: |              |                |   |        |  |      |   |        |  |  |   |       
|               | Interest     |                | $ |       |  |      | $ |       |  |  | $ |       | 
|               | Income Taxes |                |   | 20,845 |  |      |   | 16,376 |  |  |   | 11,641 | 

(f) Inventories

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

(g) 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, 2002
and 2001, capitalized catalog costs of approximately $65,000 and
$45,000, respectively, are included in prepaid expenses. All
other advertising costs are expensed the first time the
advertising takes place. Advertising expenses for 2002, 2001 and
2000 were approximately $8.5 million, $9.5 million and
$8.0 million, respectively.

(h) Property, plant and
equipment

Property, plant and equipment are recorded at
cost and are depreciated over the estimated useful lives of the
assets using principally the straight-line method for financial
reporting purposes. Maintenance and repair

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RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

costs are charged to expense as incurred, and
renewals and improvements that extend the useful life of the
assets are added to the plant and equipment accounts.
Depreciation expense was $3.5 million, $3.9 million
and $3.6 million for 2002, 2001 and 2000, 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.

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

|                                                     |                                     |                |        |        |  |   |        |        | 
|---------------------------------------------------- | ----------------------------------- | -------------- | ------ | ------ |  | - | ------ | ------ | 
|                                                     |                                     | 2002           |        | 2001  
|                                                     |                                     |                |        |       
|                                                     |                                     |               
|                                                     |                                     | (In Thousands)
|Land and improvements                                |                                     | $              | 3,637  |        |  | $ | 3,637  |       
|Buildings                                            |                                     |                | 15,993 |        |  |   | 16,160 |       
|Furniture, fixtures and office equipment             |                                     |                | 5,743  |        |  |   | 5,533  |       
|Computer and production equipment                    |                                     |                | 10,277 |        |  |   | 9,495  |       
|Vehicles                                             |                                     |                | 80     |        |  |   | 129    |       
|Leasehold improvements                               |                                     |                | 177    |        |  |   | 171    |       
|Construction in progress                             |                                     |                | 165    |        |  |   | 139    |       
|                                                     |                                     |                |        |        |  |   |        |       
|                                                     | Total property, plant and equipment |                |        | 36,072 |  |   |        | 35,264 | 
|Less  accumulated depreciation and
    amortization |                                     |                | 14,987 |        |  |   | 12,257 |       
|                                                     |                                     |                |        |        |  |   |        |       
|Property, plant and equipment, net                   |                                     | $              | 21,085 |        |  | $ | 23,007 |       
|                                                     |                                     |                |        |        |  |   |        |       

(i) Software development costs

The Company capitalizes 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 capitalized
software and accumulated amortization of capitalized software.
Amounts capitalized were approximately $729,000, $484,000 and
$477,000 in 2002, 2001 and 2000, respectively. Amortization
expense of approximately $576,000, $560,000 and $391,000 for
2002, 2001 and 2000, respectively, are included in cost of
sales-products in the consolidated statements of income. At
December 31, 2002 and 2001, accumulated amortization of
capitalized software development costs was $1,309,000 and
$905,000, respectively.

(j) Sales and concentration of credit
risks

The Company grants credit to customers in the
ordinary course of business. The majority of the Companys
customers are schools. Concentrations of credit risk with
respect to trade receivables are limited due to the significant
number of customers and their geographic dispersion. In 2002,
2001, and 2000 no customer represented more than 10% of net
sales or of total accounts receivable at December 31, 2002,
or 2001.

(k) Stock-based compensation

The Company 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

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RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 the Companys 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.

(l) 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 dilutive potential common shares had
been issued. SFAS 128 requires that the Company compute dilutive
potential common shares using the treasury stock method. Under
the treasury stock method, the proceeds from stock option
exercises are assumed to be used by the Company to purchase
common stock at the average market price during the period. The
net incremental shares (the difference between the number of
shares assumed issued and the number of shares assumed
purchased) is the number of dilutive potential common shares for
the Diluted EPS computation.

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, 2002, 2001 and 2000, respectively, there
were 939,021; 83,833; and 485,996 options excluded from the
computation of potentially dilutive common shares.

The weighted average shares outstanding are as
follows:

|                                            |  |      |            |      |  |      |            |  |  |  |            | 
|------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  |  | ---------- | 
|                                            |  | 2002 |            | 2001 |  | 2000
|                                            |  |      |            |      |  |     
|Basic weighted average shares outstanding   |  |      | 33,858,579 |      |  |      | 34,515,540 |  |  |  | 34,236,609 | 
|Dilutive effect of stock options            |  |      | 209,137    |      |  |      | 330,860    |  |  |  | 191,528    | 
|                                            |  |      |            |      |  |      |            |  |  |  |            | 
|Diluted weighted average shares outstanding |  |      | 34,067,716 |      |  |      | 34,846,400 |  |  |  | 34,428,137 | 
|                                            |  |      |            |      |  |      |            |  |  |  |            | 

(m) Income taxes

The Company accounts 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.

(n) 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. The

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RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Company adopted this standard on January 1,
2001. The adoption of this statement has not had an impact on
the consolidated financial statements, as the Company has not
utilized derivative instruments.

(o) Comprehensive income (loss)

The Companys comprehensive income
(loss) includes foreign currency translation adjustments
and unrealized gains and losses on available-for-sale
securities, which are included in accumulated other
comprehensive income (loss) in the Companys 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, 2002,
accumulated other comprehensive loss consisted entirely of
foreign currency translation adjustments.

(p) Reclassifications

Certain previously reported amounts have been
reclassified to conform with the 2002 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. SFAS 142 requires
that goodwill be assessed at least annually for impairment by
applying a fair-value-based test.

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 a new fair-market-value test be
applied to determine if goodwill and other intangible assets
with indefinite lives are impaired based on their values as of
January 1, 2002. We completed this testing in the first
quarter of 2002 and again at December 31, 2002, and found
no instances of impairment of our recorded goodwill. All of our
goodwill and other intangible assets are assigned to our
software segment.

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RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 years ended December 31, 2001 and 2000 is as
follows:

|                     |                                   |                       |        |        |      |      |        |        |      |   |        |        |      | 
|-------------------- | --------------------------------- | --------------------- | ------ | ------ | ---- | ---- | ------ | ------ | ---- | - | ------ | ------ | ---- | 
|                     |                                   |                      
|                     |                                   | Twelve Months Ended  
|                     |                                   | December 31,         
|                     |                                   |                      
|                     |                                   | 2002                  |        | 2001   |      | 2000
|                     |                                   |                       |        |        |      |     
|                     |                                   |                      
|                     |                                   | (In Thousands, Except
|                     |                                   | Per Share Amounts)   
|Net income:          |                                   |                       |        |        |      |      |        |        |      |   |        |       
|                     | Reported net income               |                       | $      | 31,438 |      |      | $      | 30,669 |      |   | $      | 22,933 |     
|                     | Goodwill amortization, net of tax |                       |        |       |      |      |        | 346    |      |   |        | 216    |     
|                     |                                   |                       |        |        |      |      |        |        |      |   |        |       
|Pro forma net income |                                   | $                     | 31,438 |        |      | $    | 31,015 |        |      | $ | 23,149 |       
|                     |                                   |                       |        |        |      |      |        |        |      |   |        |       
|Earnings per share:  |                                   |                       |        |        |      |      |        |        |      |   |        |       
|                     | Basic:                            |                       |        |        |      |      |        |        |      |   |        |        |     
|                     |                                   | As reported           |        | $      | 0.93 |      |        | $      | 0.89 |   |        | $      | 0.67 | 
|                     |                                   | Pro forma             |        |        |      |      |        |        | 0.90 |   |        |        | 0.68 | 
|                     | Diluted:                          |                       |        |        |      |      |        |        |      |   |        |        |     
|                     |                                   | As reported           |        | $      | 0.92 |      |        | $      | 0.88 |   |        | $      | 0.67 | 
|                     |                                   | Pro forma             |        |        |      |      |        |        | 0.89 |   |        |        | 0.67 | 

For the year ended December 31, 2002, we
recognized amortization expense of $538,000 on other intangibles
with finite lives. No goodwill or other intangibles were
acquired or impaired during the year ended December 31,
2002. During the first quarter of 2002, we retired a fully
amortized $210,000 intangible related to a trade name which is
no longer used by the Company. Other intangibles with finite
lives are scheduled to be fully amortized by 2006 with
corresponding amortization estimated to be $395,000, $286,000,
and $193,000, for the years ended 2003, 2004, and 2005,
respectively. The estimated useful lives are four years for
algorithms and software code and five years for the non-compete
agreement.

Other intangibles consisted of the following:

|                             |  |                   |       |                   |  |             |       |          |  |              |     |             |  |   |       |  |  |   |       |  |  |   |       | 
|---------------------------- |  | ----------------- | ----- | ----------------- |  | ----------- | ----- | -------- |  | ------------ | --- | ----------- |  | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|                             |  |                   |       |                  
|                             |  | December 31, 2002 |       | December 31, 2001
|                             |  |                   |       |                  
|                             |  | Gross             |       |                   |  | Other       |       | Gross    |  |              |     | Other      
|                             |  | Carrying          |       | Accumulated       |  | Intangibles |       | Carrying |  | Accumulated  |     | Intangibles
|                             |  | Amount            |       | Amortization      |  | Net         |       | Amount   |  | Amortization |     | Net        
|                             |  |                   |       |                   |  |             |       |          |  |              |     |            
|                             |  |                  
|                             |  | (In Thousands)   
|Algorithms and software code |  | $                 | 2,124 |                   |  | $           | 1,882 |          |  | $            | 242 |             |  | $ | 2,124 |  |  | $ | 1,565 |  |  | $ | 559   | 
|Trade name                   |  |                   |      |                   |  |             |      |          |  |              |    |             |  |   | 210   |  |  |   | 210   |  |  |   |      | 
|Non-compete agreement        |  |                   | 1,100 |                   |  |             | 468   |          |  |              | 632 |             |  |   | 1,100 |  |  |   | 247   |  |  |   | 853   | 
|                             |  |                   |       |                   |  |             |       |          |  |              |     |             |  |   |       |  |  |   |       |  |  |   |       | 
|Other intangibles            |  | $                 | 3,224 |                   |  | $           | 2,350 |          |  | $            | 874 |             |  | $ | 3,434 |  |  | $ | 2,022 |  |  | $ | 1,412 | 
|                             |  |                   |       |                   |  |             |       |          |  |              |     |             |  |   |       |  |  |   |       |  |  |   |       | 

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##### Table of Contents



RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(6) Income taxes

The provision for income taxes consisted of:

|                                       |                 |                |        |        |  |      |        |        |   |   |        |        |  
|-------------------------------------- | --------------- | -------------- | ------ | ------ |  | ---- | ------ | ------ | - | - | ------ | ------ | -
|                                       |                 | 2002           |        | 2001   |  | 2000
|                                       |                 |                |        |        |  |     
|                                       |                 |               
|                                       |                 | (In Thousands)
|Current tax provision:                 |                 |                |        |        |  |      |        |        |   |   |        |       
|                                       | U.S. federal    |                | $      | 16,538 |  |      | $      | 17,409 |   |   | $      | 12,537 |  
|                                       | State and local |                |        | 2,952  |  |      |        | 2,755  |   |   |        | 2,258  |  
|                                       |                 |                |        |        |  |      |        |        |   |   |        |       
|Total current tax provision            |                 |                | 19,490 |        |  |      | 20,164 |        |   |   | 14,795 |       
|                                       |                 |                |        |        |  |      |        |        |   |   |        |       
|Deferred tax provision (benefit):      |                 |                |        |        |  |      |        |        |   |   |        |       
|                                       | U.S. federal    |                |        | 313    |  |      |        | (848   | ) |   |        | (162   | )
|                                       | State and local |                |        | 10     |  |      |        | (90    | ) |   |        | (32    | )
|                                       |                 |                |        |        |  |      |        |        |   |   |        |       
|Total deferred tax provision (benefit) |                 |                | 323    |        |  |      | (938   | )      |   |   | (194   | )     
|                                       |                 |                |        |        |  |      |        |        |   |   |        |       
|Provision for income taxes             |                 | $              | 19,813 |        |  | $    | 19,226 |        |   | $ | 14,601 |       
|                                       |                 |                |        |        |  |      |        |        |   |   |        |       

Effective rate reconciliation:

|                                                  |  |                |        |      |  |      |       |   |  |   |        |  |  |  |       |  |  |   |        |  |  |  |       | 
|------------------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ----- | - |  | - | ------ |  |  |  | ----- |  |  | - | ------ |  |  |  | ----- | 
|                                                  |  |                |        |      |  |     
|                                                  |  | 2002           |        | 2001 |  | 2000
|                                                  |  |                |        |      |  |     
|                                                  |  |                |        |      |  |      |       |   |  |   |        | 
|                                                  |  |               
|                                                  |  | (In Thousands)
|Income tax provision at statutory tax rate        |  | $              | 17,937 |      |  |      | 35.0% |   |  | $ | 17,463 |  |  |  | 35.0% |  |  | $ | 13,137 |  |  |  | 35.0% | 
|State and local taxes, net of federal tax benefit |  |                | 1,925  |      |  |      | 3.8%  |   |  |   | 1,732  |  |  |  | 3.4%  |  |  |   | 1,424  |  |  |  | 3.8%  | 
|Other                                             |  |                | (49    | )    |  |      | (0.1% | ) |  |   | 31     |  |  |  | 0.1%  |  |  |   | 40     |  |  |  | 0.1%  | 
|                                                  |  |                |        |      |  |      |       |   |  |   |        |  |  |  |       |  |  |   |        |  |  |  |       | 
|Provision for income taxes                        |  | $              | 19,813 |      |  |      | 38.7% |   |  | $ | 19,226 |  |  |  | 38.5% |  |  | $ | 14,601 |  |  |  | 38.9% | 
|                                                  |  |                |        |      |  |      |       |   |  |   |        |  |  |  |       |  |  |   |        |  |  |  |       | 

Deferred tax assets consisted of the following at
December 31:

|                                   |                                   |                |       |       |  |   |       |       | 
|---------------------------------- | --------------------------------- | -------------- | ----- | ----- |  | - | ----- | ----- | 
|                                   |                                   | 2002           |       | 2001 
|                                   |                                   |                |       |      
|                                   |                                   |               
|                                   |                                   | (In Thousands)
|Current deferred tax assets:       |                                   |                |       |       |  |   |       |      
|                                   | Deferred revenue                  |                | $     | 1,303 |  |   | $     | 1,491 | 
|                                   | Expenses not currently deductible |                |       | 2,407 |  |   |       | 2,115 | 
|                                   |                                   |                |       |       |  |   |       |      
|Net current deferred tax assets    |                                   |                | 3,710 |       |  |   | 3,606 |      
|                                   |                                   |                |       |       |  |   |       |      
|Noncurrent deferred tax assets:    |                                   |                |       |       |  |   |       |      
|                                   | Deferred revenue                  |                |       | 101   |  |   |       | 186   | 
|                                   | Depreciation and amortization     |                |       | 296   |  |   |       | 247   | 
|                                   | Intangibles                       |                |       | 1,545 |  |   |       | 1,805 | 
|                                   |                                   |                |       |       |  |   |       |      
|Net noncurrent deferred tax assets |                                   |                | 1,942 |       |  |   | 2,238 |      
|                                   |                                   |                |       |       |  |   |       |      
|Total deferred tax assets          |                                   | $              | 5,652 |       |  | $ | 5,844 |      
|                                   |                                   |                |       |       |  |   |       |      

(7) Lines of credit

The Company has a $15.0 million unsecured
revolving line of credit with a bank, which is available until
March 31, 2004. The line of credit bears interest at either
a floating rate based on the prime rate less 1.0%, or a fixed
rate for a period of up to 90 days based on LIBOR plus
1.25%. The rate is at the option of the Company and is
determined at the time of borrowing. The Company also has a
$2.0 million unsecured revolving line of

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RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

credit with a bank available until April 30,
2004. The line of credit bears interest based on the prime rate
less 1.0%. As of December 31, 2002, the lines of credit had
not been used.

(8) Lease commitments

The Company is party to various operating leases
for equipment and for office facilities at some of its
subsidiaries. Rent expense for 2002, 2001 and 2000 was
approximately $1,106,000, $1,057,000 and $840,000, respectively.

Future approximate minimum rental payments
(including estimated operating costs) required under operating
leases as of December 31, 2002 are as follows:

|     |  |                |       | 
|---- |  | -------------- | ----- | 
|     |  | (In Thousands)
|2003 |  | $              | 1,042 | 
|2004 |  |                | 859   | 
|2005 |  |                | 839   | 
|2006 |  |                | 512   | 
|2007 |  |                | 154   | 

(9) Litigation

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

(10) Defined contribution benefit
plan

The Company has a defined contribution 401(k)
benefit plan covering all of its full-time employees meeting
certain service requirements. The plan provided for matching
employer contributions based on 66% of employees elective
contributions up to 6% of compensation. The plan allowed
employee contributions of up to 15% of compensation subject to
the statutory maximum deferred amount. Discretionary employer
contributions may also be made to the plan. There were no
discretionary contributions made in 2002, 2001 or 2000. Expense
under the plan totaled approximately $1,071,000 in 2002,
$1,002,000 in 2001 and $814,000 in 2000.

In 2003, the plan will provide for matching
employer contributions based on 75% of employees elective
contributions up to 6% of compensation. The Company is also
changing to a four-year vesting schedule for the company
contributions versus immediate vesting in prior years. The plan
will allow employee contributions of up to 50% of wages subject
to the statutory maximum deferral amount.

(11) Stock option plan

The Company has established the 1997 Stock
Incentive Plan (the Plan) for its 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 3,000,000 options,
stock appreciation rights (SARs) and share awards
may be granted under the plan. Of this amount, not more than
1,500,000 shares may be subject to ISOs. The exercise price of
the stock options is the market value of the common stock at the
date of grant. Generally, the 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.

Had compensation cost been determined for the
Companys stock option portion of the plan based on the
fair value at the grant dates for awards consistent with the
alternative method set forth under SFAS 123, the

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##### Table of Contents



RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Companys net income and earnings per share
would have been adjusted to the pro forma amounts indicated
below:

|                                                         |                                                                                                                            |                       |   |        |  |      |   |        |  |  |   |        | 
|-------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------- | --------------------- | - | ------ |  | ---- | - | ------ |  |  | - | ------ | 
|                                                         |                                                                                                                            | 2002                  |   | 2001   |  | 2000
|                                                         |                                                                                                                            |                       |   |        |  |     
|                                                         |                                                                                                                            |                      
|                                                         |                                                                                                                            | (In Thousands, Except
|                                                         |                                                                                                                            | Per Share Amounts)   
|Net Income                                               |                                                                                                                            |                       |   |        |  |      |   |        |  |  |   |       
|                                                         | As reported                                                                                                                |                       | $ | 31,438 |  |      | $ | 30,669 |  |  | $ | 22,933 | 
|                                                         | Deduct: total stock-based compensation expense
    Determined under fair-value based method for all awards, net of
    tax |                       |   | 4,429  |  |      |   | 5,129  |  |  |   | 4,157  | 
|                                                         | Pro forma                                                                                                                  |                       | $ | 27,009 |  |      | $ | 25,540 |  |  | $ | 18,776 | 
|Diluted net income per common share                      |                                                                                                                            |                       |   |        |  |      |   |        |  |  |   |       
|                                                         | As reported                                                                                                                |                       | $ | 0.92   |  |      | $ | 0.88   |  |  | $ | 0.67   | 
|                                                         | Pro forma                                                                                                                  |                       |   | 0.80   |  |      |   | 0.73   |  |  |   | 0.55   | 
|The per share weighted average fair value of
    options |                                                                                                                            |                       |   |        |  |      |   |        |  |  |   |       
|                                                         | Granted under the Plan during the year is:                                                                                 |                       | $ | 16.01  |  |      | $ | 27.36  |  |  | $ | 23.57  | 

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 for 2002,
2001 and 2000, respectively: dividend yield of 0%, expected
volatility of 80.27%, 85.19% and 88.12%, risk-free interest
rates of 3.91%, 4.78% and 6.21%, and expected lives of 6, 10 and
10 years for the options.

As of December 31, 2002, only NSOs have been
granted; no ISOs, SARs or share awards have been granted under
the plan. A summary of stock option activity under the plan for
2002, 2001 and 2000 is as follows:

|                                   |  |        |           |          |  |        |       |          |  |        |           |          |  |   |       |  |  |  |           |   |  |   |       | 
|---------------------------------- |  | ------ | --------- | -------- |  | ------ | ----- | -------- |  | ------ | --------- | -------- |  | - | ----- |  |  |  | --------- | - |  | - | ----- | 
|                                   |  |        |           |          |  |       
|                                   |  | 2002   |           | 2001     |  | 2000  
|                                   |  |        |           |          |  |       
|                                   |  |        |           | Weighted |  |        |       | Weighted |  |        |           | Weighted
|                                   |  |        |           | average  |  |        |       | average  |  |        |           | average 
|                                   |  |        |           | exercise |  |        |       | exercise |  |        |           | exercise
|                                   |  | Shares |           | price    |  | Shares |       | price    |  | Shares |           | price   
|                                   |  |        |           |          |  |        |       |          |  |        |           |         
|Outstanding at beginning of year   |  |        | 1,421,911 |          |  | $      | 22.06 |          |  |        | 1,348,152 |          |  | $ | 18.27 |  |  |  | 1,271,268 |   |  | $ | 16.24 | 
|Granted                            |  |        | 578,857   |          |  |        | 22.40 |          |  |        | 384,422   |          |  |   | 31.83 |  |  |  | 235,382   |   |  |   | 26.79 | 
|Exercised                          |  |        | (75,557   | )        |  |        | 16.15 |          |  |        | (207,310  | )        |  |   | 15.47 |  |  |  | (94,215   | ) |  |   | 12.65 | 
|Cancelled                          |  |        | (106,954  | )        |  |        | 26.45 |          |  |        | (103,353  | )        |  |   | 22.21 |  |  |  | (64,283   | ) |  |   | 17.61 | 
|                                   |  |        |           |          |  |        |       |          |  |        |           |          |  |   |       |  |  |  |           |   |  |   |       | 
|Outstanding at end of year         |  |        | 1,818,257 |          |  |        | 22.16 |          |  |        | 1,421,911 |          |  |   | 22.06 |  |  |  | 1,348,152 |   |  |   | 18.27 | 
|                                   |  |        |           |          |  |        |       |          |  |        |           |          |  |   |       |  |  |  |           |   |  |   |       | 
|Options exercisable at end of year |  |        | 839,512   |          |  | $      | 19.06 |          |  |        | 580,478   |          |  | $ | 16.08 |  |  |  | 421,889   |   |  | $ | 14.56 | 
|                                   |  |        |           |          |  |        |       |          |  |        |           |          |  |   |       |  |  |  |           |   |  |   |       | 

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, 2002

|                 |  |             |           |                  |  |                  |      |             |  |                     |       |  |  |  |         |  |  |   |       | 
|---------------- |  | ----------- | --------- | ---------------- |  | ---------------- | ---- | ----------- |  | ------------------- | ----- |  |  |  | ------- |  |  | - | ----- | 
|                 |  |             |           | 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 $13.00 |  |             | 275,372   |                  |  |                  | 5.73 |             |  | $                   | 9.60  |  |  |  | 238,451 |  |  | $ | 9.30  | 
|$13.00 to $16.50 |  |             | 194,438   |                  |  |                  | 5.76 |             |  |                     | 14.08 |  |  |  | 186,332 |  |  |   | 14.04 | 
|$16.50 to $18.50 |  |             | 354,635   |                  |  |                  | 9.60 |             |  |                     | 16.92 |  |  |  | 5,025   |  |  |   | 17.16 | 
|$18.50 to $22.00 |  |             | 257,215   |                  |  |                  | 6.65 |             |  |                     | 20.49 |  |  |  | 185,432 |  |  |   | 20.50 | 
|$22.00 to $30.00 |  |             | 179,641   |                  |  |                  | 8.03 |             |  |                     | 28.76 |  |  |  | 55,853  |  |  |   | 28.35 | 
|$30.00 to $33.50 |  |             | 310,063   |                  |  |                  | 8.53 |             |  |                     | 31.33 |  |  |  | 65,761  |  |  |   | 30.14 | 
|$33.50 to $51.58 |  |             | 246,893   |                  |  |                  | 7.97 |             |  |                     | 35.45 |  |  |  | 102,658 |  |  |   | 36.16 | 
|                 |  |             |           |                  |  |                  |      |             |  |                     |       |  |  |  |         |  |  |   |       | 
|$ 8.00 to $51.58 |  |             | 1,818,257 |                  |  |                  | 7.63 |             |  | $                   | 22.16 |  |  |  | 839,512 |  |  | $ | 19.06 | 
|                 |  |             |           |                  |  |                  |      |             |  |                     |       |  |  |  |         |  |  |   |       | 

(12) Employee stock purchase
plan

Effective July 1, 1998, the Company 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. The Company has elected
to apply APB 25 Accounting for Stock Issued to
Employees, as amended by FASB Interpretation No. 44
(FIN 44), in accounting for its stock-based
plans. Accordingly, the Company does not recognize compensation
expense for employee stock purchases. The Company issued
approximately 65,000 shares of common stock in January 2003 for
fiscal 2002, 43,000 shares in January 2002 for fiscal 2001, and
82,000 shares in January 2001 for fiscal 2000 with respect to
the plan, at a per share price, representing 85% of the fair
market value as described above, of $16.07, $24.65, and $9.93
respectively.

In 2003, the Company does not intend to offer the
ESPP to its employees.

(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
July 1, 2002 through December 31, 2002 we repurchased
2,712,572 shares at a cost of $49,155,463.

On April 14, 1999, the Companys
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

The Companys reportable segments are
strategic business units that offer different products and
services. They are managed separately because each business
requires different technology and marketing strategies. The
Company has two reportable segments: software and training.

41



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##### Table of Contents



RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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 sold with
software or sold separately, and service revenue from the sale
of software support agreements.

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
Companys reportable segments is shown in the following
table:

|     |                               |                |   |          |  |       |   |        |   |  |   |         | 
|---- | ----------------------------- | -------------- | - | -------- |  | ----- | - | ------ | - |  | - | ------- | 
|     |                               | Software       |   | Training |  | Total
|     |                               |                |   |          |  |      
|     |                               |               
|     |                               | (In Thousands)
|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   | 
|2000 |                               |                |   |          |  |       |   |        |   |  |   |        
|     | Revenues                      |                | $ | 91,319   |  |       | $ | 15,672 |   |  | $ | 106,991 | 
|     | Operating income (loss)       |                |   | 34,616   |  |       |   | (467   | ) |  |   | 34,149  | 
|     | Total assets                  |                |   | 106,575  |  |       |   | 11,646 |   |  |   | 118,221 | 
|     | Capital expenditures          |                |   | 2,909    |  |       |   | 811    |   |  |   | 3,720   | 
|     | Depreciation and amortization |                |   | 3,882    |  |       |   | 887    |   |  |   | 4,769   | 

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.

42



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##### Table of Contents



RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

The following table sets forth unaudited
consolidated income statement data for each quarter of the
Companys 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 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)
|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                                     |   |         | 35.650 |              |   |             | 35.300 |  |   |        | 21.320 |  |   |        | 20.990 | 
|      |                                      | Low                                      |   |         | 26.260 |              |   |             | 20.220 |  |   |        | 13.870 |  |   |        | 14.580 | 
|2001: |                                      |                                          |   |         |        |              |   |             |        |  |   |        |        |  |   |       
|      | Net sales                            |                                          | $ | 30,181  |        |              | $ | 32,666      |        |  | $ | 36,551 |        |  | $ | 32,956 |       
|      | Gross profit                         |                                          |   | 23,210  |        |              |   | 26,973      |        |  |   | 29,885 |        |  |   | 27,493 |       
|      | Operating income                     |                                          |   | 7,412   |        |              |   | 11,338      |        |  |   | 14,837 |        |  |   | 12,121 |       
|      | Income tax provision                 |                                          |   | 3,234   |        |              |   | 4,810       |        |  |   | 6,118  |        |  |   | 5,064  |       
|      | Net income                           |                                          |   | 5,167   |        |              |   | 7,683       |        |  |   | 9,731  |        |  |   | 8,088  |       
|      | Basic and diluted earnings per share |                                          |   | 0.15    |        |              |   | 0.22        |        |  |   | 0.28   |        |  |   | 0.23   |       
|      | Common stock price per share:        |                                          |   |         |        |              |   |             |        |  |   |        |        |  |   |        |       
|      |                                      | High                                     |   |         | 37.188 |              |   |             | 53.410 |  |   |        | 52.000 |  |   |        | 39.940 | 
|      |                                      | Low                                      |   |         | 26.063 |              |   |             | 27.625 |  |   |        | 28.650 |  |   |        | 24.570 | 



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

In June 2001, the FASB issued SFAS 143,
Accounting for Asset Retirement Obligations, which
requires entities to recognize the fair value of a liability for
legal obligations associated with the retirement of tangible
long-lived assets in the period incurred, if a reasonable
estimate of the fair value can be made. We are required to adopt
SFAS 143 on January 1, 2003. The adoption is not
expected to have a material impact on our financial position,
results of operations or shareholders equity.

In August 2001, the FASB issued SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, which addresses financial accounting and reporting
for the impairment of long-lived assets. The statement provides
a single accounting model for long-lived assets to be disposed
of. Under SFAS 144, the presentation of discontinued
operations is broadened to include a component of an entity
rather than being limited to a segment of a business. Also,
accrual of future operating losses of discontinued businesses
will no longer be permitted. We were required to adopt
SFAS 144 on January 1, 2002. The adoption had no
impact on our financial position, results of operations or
shareholders equity.

In July 2002, the FASB issued SFAS 146,
Accounting for Costs Associated with Exit or Disposal
Activities, which addresses financial accounting and
reporting associated with exit or disposal activities.

43



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##### Table of Contents



RENAISSANCE LEARNING, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Under SFAS 146, costs associated with an
exit or disposal activity shall be recognized and measured at
their fair value in the period in which the liability is
incurred rather than at the date of a commitment to an exit or
disposal plan. We are required to adopt SFAS 146 for all
exit and disposal activities initiated after December 31,
2002. The adoption is not expected to have a material impact on
our financial position, results of operations or
shareholders equity.

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 is not
expected to have a material impact 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 is
not expected to have a material impact on our financial
position, results of operations or shareholders equity.






|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|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.

44



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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 16,
2003 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 16, 2003 under the caption Section 16(a)
Beneficial Ownership Reporting Compliance, 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 16, 2003 under the
captions Executive Compensation, 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 this Item is set
forth in our Proxy Statement for the Annual Meeting of
Shareholders to be held on April 16, 2003 under the
captions Security Ownership of Management and Certain
Beneficial Owners and Proposal Two: Approval of the
Companys 1997 Stock Incentive Plan, as Amended and
Restated, which information is incorporated by reference
herein.






|         |                                                   
|-------- | --------------------------------------------------
|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 16, 2003 under the caption
Certain Relationships and Transactions, which
information is incorporated by reference herein.






|         |                        
|-------- | -----------------------
|Item 14. | 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.

Within 90 days prior to the filing date of
this report, 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 have been no significant changes in our
internal controls or in other factors that could significantly
affect these controls subsequent to the evaluation, including
any corrective actions with regard to significant deficiencies
or material weaknesses.

45



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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, 2002 and 2001                                        
|
| | Consolidated Statements of Income for the years
    ended December 31, 2002, 2001 and 2000              
|
| | Consolidated Statements of Shareholders
    Equity for the years ended December 31, 2002, 2001 and 2000
|
| | Consolidated Statements of Cash Flows for the
    years ended December 31, 2002, 2001 and 2000          
|
| | 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.

There were no reports on Form 8-K filed for
the three months ended December 31, 2002.

(c) Exhibits.

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

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

Not applicable.

46



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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/ TERRANCE D. PAUL

| |                        
| | -----------------------
| |                        
| | Terrance D. Paul       
| | Chief Executive Officer
|
| | Date: March 7, 2003    

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

|                                                                                                                                                                            |  |                                                                                                        |  |               |  |              
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------ |  | ------------- |  | -------------
|                                                                                                                                                                            |  |                                                                                                        |  |              
|Name                                                                                                                                                                        |  | Title                                                                                                  |  | Date         
|                                                                                                                                                                            |  |                                                                                                        |  |              
|/s/ TERRANCE D. PAULTerrance D. Paul                                                                                                                                        |  | Chief Executive Officer and a Director (Principal
    Executive Officer)                               |  | March 7, 2003
|                                                                                                                                                                           
|/s/ STEVEN A. SCHMIDTSteven A. Schmidt                                                                                                                                      |  | Secretary, Vice President and Chief Financial
    Officer (Principal Financial and Accounting Officer) |  | March 7, 2003
|Directors: Judith A. Paul, John R. Hickey,
    Michael H. Baum, Timothy P. Welch, Addison L. Piper,
    John H. Grunewald, Gordon H. Gunnlaugsson, and Harold
    E. Jordan
|                                                                                                                                                                           
|By:                                                                                                                                                                         |  | /s/ TERRANCE D. PAULTerrance D. Paul
    Attorney-In-Fact*                                             |  |               |  | March 7, 2003




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


47



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##### Table of Contents



Section 302 Certification of Periodic
Report

I, Terrance D. Paul, certify that:

1. I have reviewed this annual report on
Form 10-K of Renaissance Learning, Inc.;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and
procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this annual report is being prepared;

b) evaluated the effectiveness of the
registrants disclosure controls and procedures as of a
date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and

c) presented in this annual report our
conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):

a) all significant deficiencies in the
design or operation of internal controls which could adversely
affect the registrants ability to record, process,
summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal
controls; and

b) any fraud, whether or not material, that
involves management or other employees who have a significant
role in the registrants internal controls; and

6. The registrants other certifying
officers and I have indicated in this annual report whether or
not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: March 7, 2003



| |                        
| | -----------------------
| | /s/ TERRANCE D. PAUL   
| |                        
| | Terrance D. Paul       
| | Chief Executive Officer

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Section 302 Certification of Periodic
Report

I, Steven A. Schmidt, certify that:

1. I have reviewed this annual report on
Form 10-K of Renaissance Learning, Inc.;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and
procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this annual report is being prepared;

b) evaluated the effectiveness of the
registrants disclosure controls and procedures as of a
date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and

c) presented in this annual report our
conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):

a) all significant deficiencies in the
design or operation of internal controls which could adversely
affect the registrants ability to record, process,
summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal
controls; and

b) any fraud, whether or not material, that
involves management or other employees who have a significant
role in the registrants internal controls; and

6. The registrants other certifying
officers and I have indicated in this annual report whether or
not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: March 7, 2003



| |                                                          
| | ---------------------------------------------------------
| | /s/ STEVEN A. SCHMIDT                                    
| |                                                          
| | Steven A. Schmidt                                        
| | Chief Financial Officer, Secretary and Vice
    President

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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)*                                                                                                                                                                                
|        | 10.3(a) |         |  | Credit Agreement dated as of December 31,
    1997, by and between Norwest Bank Wisconsin, National
    Association and Registrant.(4)                                                                                                      
|        | 10.3(b) |         |  | First Amendment to Credit Agreement dated as of
    December 31, 1997, by and between Norwest Bank Wisconsin,
    National Association and Registrant.(7)                                                                                   
|        | 10.3(c) |         |  | Second Amendment to Credit Agreement dated as of
    December 31, 1997, by and between Norwest Bank Wisconsin,
    National Association and Registrant.(7)                                                                                  
|        | 10.3(d) |         |  | Third Amendment to Credit Agreement dated as of
    December 31, 1997, by and between Wells Fargo Bank
    Wisconsin, National Association (formerly known as Norwest Bank
    Wisconsin, National Association) and Registrant.(9)          
|        | 10.3(e) |         |  | Fourth Amendment to Credit Agreement dated as of
    December 31, 1997, by and between Wells Fargo Bank,
    National Association (as successor in interest to Wells Fargo
    Bank Wisconsin, National Association) and
    Registrant.(11)
|        | 10.4    |         |  | Amended and Restated Employee Stock Purchase
    Plan.(9)*                                                                                                                                                                                  
|        | 10.5    |         |  | Office Lease dated as of December 17, 1998
    by and between Athena Holdings LLC and Institute for Academic
    Excellence, Inc.(5)                                                                                                        
|        | 10.6    |         |  | Real Estate Mortgage dated December 17, 1998
    between Athena Holdings LLC and Registrant.(5)                                                                                                                                             
|        | 10.7    |         |  | Expense Allocation Agreement dated
    October 19, 1999 between Registrant, Judith A. Paul and
    Terrance D. Paul.(6)                                                                                                                     
|        | 10.8    |         |  | Letter Agreement between Registrant and John R.
    Hickey dated March 12, 2001.(10)*                                                                                                                                                       
|        | 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.                                                                                                                                                                                                              
|        | 99.1    |         |  | Schedule II  Valuation and
    Qualifying Accounts.                                                                                                                                                                                        
|        | 99.2    |         |  | Section 906 Certification by Terrance D.
    Paul, Chief Executive Officer.                                                                                                                                                                 
|        | 99.3    |         |  | Section 906 Certification by Steven A.
    Schmidt, Chief Financial Officer.                                                                                                                                                                




|    |                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------
|(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 October 28, 1997 (Registration
    No. 333-38867).             
|   
|(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].                                                                                                                    

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|     |                                                                                                                                
|---- | -------------------------------------------------------------------------------------------------------------------------------
|(9)  | Incorporated by reference to Registrants
    Form 10-K for the fiscal year ended December 31, 2000
    (SEC File No. 0-22187).
|    
|(10) | Incorporated by reference to Registrants
    Form 10-Q for the quarter ended March 31, 2001 (SEC
    File No. 0-22187).       
|    
|(11) | Incorporated by reference to Registrants
    Form 10-Q for the quarter ended March 31, 2002 (SEC
    File No. 0-22187)        
|    
|(12) | Incorporated by reference to Registrants
    Form 8-K dated May 22, 2002 (SEC File
    No. 0-22187).                          



| |   |                                                                
| | - | ---------------------------------------------------------------
| | * | 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