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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

OR

Commission file number: 0-22187

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

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

54495-8036
(Zip Code)

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

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

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

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

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RENAISSANCE LEARNING, INC.

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

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

See accompanying notes to condensed consolidated financial statements.

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

See accompanying notes to condensed consolidated financial statements.

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

See accompanying notes to condensed consolidated financial statements.

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

1. Consolidation

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

2. Basis of Presentation and Accounting Policies

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

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

3. Earnings Per Common Share

     Basic earnings per common share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Shares issued and shares reacquired during the period are weighted for the portion of the period they were outstanding. Diluted earnings per common share has been computed based on the weighted average number of common shares outstanding, increased by the number of additional common shares that would have been outstanding if the potentially dilutive stock option shares had been issued.

     On April 17, 2002, our Board of Directors authorized a new repurchase program which provides for the repurchase of up to 5,000,000 shares of our common stock. No time limit was placed on the duration of the repurchase program. Repurchased shares will become treasury shares and will be used for stock-based employee benefit plans and for other general corporate purposes. During the period of January 1, 2003 through June 30, 2003, we repurchased 1.3 million shares at a cost of $23.7 million under the current repurchase program. Through June 30, 2003, the cumulative repurchases under the current program were 4.0 million shares at a cost of $72.9 million.

     The weighted average shares outstanding are as follows:

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

4. Comprehensive Income

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

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5. Goodwill and Other Intangible Assets

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

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

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

6. Stock Option Plan

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

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

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7. Segment Reporting

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

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

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

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

Results of Operations

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

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Three Months Ended June 30, 2003 and 2002

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

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

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

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

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

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

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

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

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

Six Months Ended June 30, 2003 and 2002

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

     As of June 30, 2003, our cash, cash equivalents and investment securities were $94.6 million, down $5.2 million from the December 31, 2002 total of $99.8 million. The decrease of $5.2 million in the first half of 2003 is primarily due to $20.0 million in cash provided by operating activities offset by cash paid for stock repurchases of $23.7 million and $1.9 million invested in property, plant and equipment during the first half of 2003. We believe our strong cash position coupled with cash flow from operations will be sufficient to meet both our short-term and long-term working capital requirements.

     At June 30, 2003, we had a $15.0 million unsecured revolving line of credit with a bank that is available until March 31, 2004. The line of credit bears interest at either a floating rate based on the prime rate less 1.0%, or a fixed rate for a period of up to 90 days based on LIBOR plus 1.25%. The rate is at our option and is determined at the time of borrowing. We also have a $2.0 million unsecured revolving line of credit with a bank, which is available until April 30, 2004. The line of credit bears interest based on the prime rate less 1.0%. As of June 30, 2003, the lines of credit had not been used.

     On April 17, 2002, our Board of Directors authorized the repurchase of up to 5,000,000 shares of our common stock. No time limit was placed on the duration of the repurchase program. Repurchased shares will become treasury shares and will be used for stock-based employee benefit plans and for other general corporate purposes. During the period of January 1, 2003 through June 30, 2003 we repurchased 1.3 million shares at a cost of $23.7 million.

Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Estimates

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

Forward-Looking Statements

     In accordance with the Private Securities Litigation Reform Act of 1995, we can obtain a “safe-harbor” for forward-looking statements by identifying those statements and by accompanying those statements with cautionary statements which identify factors that could cause actual results to differ materially from those in the forward-looking statements. Accordingly, the foregoing “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains certain forward-looking statements relating to growth plans, projected sales, revenues, earnings and costs, and product development schedules and plans. Our actual results may differ materially from those contained in the forward-looking statements herein. Factors which may cause such a difference to occur include (i) a delay or reduction in school purchases of our products due to state budgetary constraints resulting in a reduction in the funds available to schools and (ii) those factors identified in Item 1, Business, Forward-Looking Statements, contained in our Form 10-K for the year ended December 31, 2002, which factors are incorporated herein by reference to such Form 10-K.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

     Market Risk. Our exposure to market risk relates to the quality of the holdings in our investment security portfolio. The fair market value of our investments is subject to increases or decreases in value resulting from the performance of the securities issuer, from upgrades or downgrades in the credit worthiness of the securities issuer, and from changes in general market conditions. We seek to manage our exposure to market risk by investing according to our board-approved investment policy which has the following goals: (i) preservation of capital, (ii) provision of adequate liquidity to meet projected cash requirements, (iii) minimization of risk of principal loss through diversified short and medium term investments, and (iv) maximization of yields in relationship to the guidelines, risk, market conditions and tax considerations.

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

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

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

Item 4. Controls and Procedures

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

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

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Part II — OTHER INFORMATION

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

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

1.

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

2.

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

(d)

Not applicable.

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits.

(b)

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

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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.