UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

OR

Commission file number: 0-22187

RENAISSANCE LEARNING, INC.

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 þ No o

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

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

RENAISSANCE LEARNING, INC.

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

RENAISSANCE LEARNING, INC. AND SUBSIDIARIES

See accompanying notes to condensed consolidated financial statements.

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES

See accompanying notes to condensed consolidated financial statements.

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES

See accompanying notes to condensed consolidated financial statements.

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES

1. Consolidation

     The condensed consolidated financial statements include the financial results of Renaissance Learning, Inc. and our subsidiaries. Our only significant subsidiary, as of March 31, 2005 is Renaissance Corporate Services Inc. Generation21 Learning Systems, LLC was divested during the first quarter of 2005 and, therefore, its results for all periods presented in the financial statements are reflected as discontinued operations.

2. Basis of Presentation

     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, 2004, which is on file with the U.S. Securities and Exchange Commission (“2004 Annual Report”).

     The results of operations for the three-month periods ended March 31, 2005 and 2004 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 net income 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 the repurchase of up to 5,000,000 shares of our common stock. On February 9, 2005, our Board of Directors authorized the repurchase of up to an additional 3,000,000 shares under our stock repurchase program. No time limit was placed on the duration of the stock repurchase program, nor is there any dollar limit on the 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 quarter ending March 31, 2005, we repurchased 237,400 shares at a cost of $3.9 million. As of March 31, 2005 the cumulative number of shares repurchased under this program was 4.5 million with an aggregate cost of $82.3 million.

     The weighted average shares outstanding are as follows:

     For the three months ended March 31, 2005 and 2004, respectively, there were 1,281,374 and 667,500 shares attributable to outstanding stock options excluded from the calculation of diluted earnings per share because their effect was antidilutive. These options could be dilutive in the future.

4. Comprehensive Income

     Total comprehensive income was $6.5 million and $6.0 million in the first quarter of 2005 and 2004, respectively. Our comprehensive income includes net income and foreign currency translation adjustments.

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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 intangibles consist solely of a non-compete agreement which we amortize over its estimated useful life of five years. The non-compete agreement will be fully amortized at the end of 2005. For the three months ended March 31, 2005 and 2004, we recognized amortization expense on other intangibles of $55,000 and $74,000, respectively. No goodwill or other intangibles were acquired or impaired during the first quarter of 2005 or 2004. The non-compete agreement has an original cost of $1,100,000. Associated accumulated amortization was $908,000 at December 31, 2004 and was $962,000 at March 31, 2005.

6. Stock Option Plan

     We have established the 1997 Stock Incentive Plan for our officers, key employees and non-employee directors. The intrinsic value method as prescribed in APB 25, “Accounting for Stock Issued to Employees”, is used to account for stock based compensation arrangements. Had compensation cost been determined for our plan based on the fair value at the grant dates for awards consistent with the alternative method set forth under SFAS 123, “Accounting for Stock-Based Compensation,” our net income and earnings per share would have been adjusted to the pro forma amounts indicated below:

In April 2005 our Board of Directors approved the acceleration of vesting of the unvested stock options under our 1997 Stock Incentive Plan. This resulted in options to purchase approximately 438,000 shares of our common stock becoming immediately exercisable. All of the unvested stock options for which vesting was accelerated were “underwater”, with exercise prices greater than the closing price of our common stock on the date of acceleration. Vesting of the options was accelerated as part of our plan to transition the equity-based portion of our executive compensation plan from stock options to grants of restricted stock, which we believe will be a more effective performance incentive and retention tool. Also, accelerated vesting of the options will produce more favorable impact on our future results of operations in light of SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”). SFAS 123R, which we will be required to adopt effective January 1, 2006, requires that compensation cost attributed to stock options and other forms of share-based payment be recognized in the financial statements. We estimate that early vesting of these options will result in approximately $1.1 million less future compensation expense that would otherwise have been recognized over the remaining life of the options beginning on January 1, 2006.

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     The fair value of options granted in the first quarter of 2005 and 2004 were estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

7. Dividends

     On April 20, 2005, our Board of Directors declared a quarterly cash dividend of $.05 per share, payable June 1, 2005 to shareholders of record as of May 13, 2005.

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

Results of Operations

     Our results of operations can be affected by many factors including the general economic environment and its impact on state and federal budgetary decisions, the length and complexity of the sales cycle for school districts, and the impacts on revenue of transitioning some of our offerings to new subscription-based products and services which results in a significant portion of the revenue being initially deferred and recognized as revenue over the subscription period. Our first quarter revenues are also impacted by seasonality because schools and districts typically make their purchasing plans and renew their subscriptions for the new academic school year in the second and third quarters. Each of these factors negatively impacted our results of operations for the three month period ended March 31, 2005.

     Generation21 Learning Systems, LLC was divested during the first quarter of 2005 and, therefore, its results for all periods presented in the financial statements are reflected as discontinued operations.

     The following table sets forth certain consolidated income statement data in dollars and 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 March 31, 2005 and 2004

     Net Sales. Our net sales decreased by $3.4 million, or 11.0%, to $27.6 million in the first quarter of 2005 from $31.0 million in the first quarter of 2004. Product sales declined by $3.7 million, or 14.8%, to $21.1 million in the first quarter of 2005 from $24.8 million in the first quarter of 2004. Revenues were down for all core products with the largest decline in Accelerated Math*. We now only sell this product as part of our comprehensive Math Renaissance solution which increased the initial price of the product and likely affected sales over the short-term, however, we believe this approach will lead to long-term growth of the product.

     Service revenue for the first quarter of 2005 was $6.4 million, an increase of $280,000 from the first quarter 2004 revenues of $6.2 million. A 17% increase in attendance at our National Conference, to about 3,500 from about 3,000 in the previous year, resulted in an increase in service revenue of $190,000 for the first quarter of 2005 compared to 2004. We also experienced growth in revenue from software support and from some of our newer service offerings such as academic coaching and technical consulting which were partially offset by declines in revenue from our on-site training events.

     Overall revenue levels continued to be impacted by constraints in school spending related to the state budget difficulties of the past several years. We also believe that the seasonality of our customers’ buying patterns is becoming more pronounced as more schools transition to our subscription products and services which typically follow the academic school year cycle, resulting in order and reorder patterns shifting to a greater degree into the second and third quarters when schools and districts are making plans for the upcoming school year as well as renewing existing subscriptions.

     Cost of Sales. The cost of sales of products decreased by $0.5 million, or 30.2%, to $1.2 million in the first quarter of 2005 from $1.7 million in the first quarter of 2004. As a percentage of product sales, the cost of sales of products decreased to 5.6% in the first quarter of 2005 from 6.9% in the first quarter of 2004. This decrease is due primarily to reduced scanner warranty costs and continued cost efficiencies in delivering custom assessment products.

     The cost of sales of services decreased by $0.8 million, or 21.9%, to $2.8 million in the first quarter of 2005 from $3.5 million in the first quarter of 2004. As a percentage of sales of services, the cost of sales of services decreased to 42.9% in the first quarter of 2005 from 57.5% in the first quarter of 2004. The significant improvement can be attributed to three categories of services: the national conference, where we achieved significantly improved profitability; our coaching services, where we were ramping up our cost structure ahead of revenue recognition in the prior year; and software support, where we are seeing margin improvement due to reduced discounting.

     Product Development. Product development expenses were $3.6 million in the first quarter of 2005, unchanged from first quarter of 2004. As a percentage of net sales, product development costs increased to 13.1% in the first quarter of 2005 from 11.6% in the first quarter of 2004 primarily due to the decline in sales.

     Selling and Marketing. Selling and marketing expenses of $8.0 million in the first quarter of 2005 were down by $0.6 million, or 6.7%, from $8.6 million in the first quarter of 2004. As a percentage of net sales, selling and marketing expenses increased to 29.2% in the first quarter of 2005 from 27.9% in the first quarter of 2004.

     General and Administrative. General and administrative expenses were $3.0 million for the first quarter of 2005, compared to $3.1 million in the first quarter of 2004. As a percentage of net sales, general and administrative expenses increased to 11.1% from 10.1% due to the decline in sales.

     Operating Income. Operating income was $8.9 million, or 32.2% of net sales in the first quarter of 2005, compared to $10.4 million, or 33.5% of net sales in the first quarter of 2004.

     Income Tax Expense -Continuing Operations. Income tax expense of $3.4 million, for continuing operations, was recorded in the first quarter of 2005 at an effective income tax rate of 37.0% of pre-tax income, compared to $4.0 million, or 37.3% of pre-tax income in the first quarter of 2004.

* AR, AccelScan, AccelTest, Accelerated Grammar and Spelling, Accelerated Math, Accelerated Reader, Accelerated Vocabulary, Accelerated Writer, Fluent Reader, Math Facts in a Flash, Math Renaissance, Read Now, Reading Renaissance, Renaissance, Renaissance Learning, Renaissance Place, School Renaissance, STAR Early Literacy, STAR Reading, STAR Math, StandardsMaster, TestCheck and Writing Renaissance are trademarks of Renaissance Learning, Inc. registered ® or pending registration in the United States, with other applications issued or pending in other countries.

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     Discontinued Operations. We recorded a gain on the sale of Generation21 of approximately $0.7 million, including a one-time tax benefit of $1.1 million. When combined with the operating losses incurred in January and February for that subsidiary, the net income from discontinued operations totaled approximately $0.6 million in the first quarter of 2005. The net operating loss from Generation21 in the first quarter 2004 resulted in a net loss of approximately $0.8 million in that period.

Liquidity and Capital Resources

     As of March 31, 2005, our cash, cash equivalents and investment securities were $75.6 million, up $2.0 million from the December 31, 2004 total of $73.6 million. We continue to maintain a strong cash position, which we believe, when coupled with cash flow from operations, will be sufficient to meet both our short-term and long-term working capital requirements including the cash required to acquire AlphaSmart, Inc. which is expected to close during the second quarter of 2005.

     At March 31, 2005, we had a $15.0 million unsecured revolving line of credit with a bank that is available until May 31, 2006. 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, 2006. The line of credit bears interest based on the prime rate less 1.0%. As of March 31, 2005, 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. On February 9, 2005, our Board of Directors authorized the repurchase of up to an additional 3,000,000 shares under our stock repurchase program. No time limit was placed on the duration of the stock repurchase program, nor is there any dollar limit on the 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 quarter ended March 31, 2005, we repurchased 237,400 at a cost of $3.9 million. Since authorization, we have repurchased 4.5 million shares at a cost of $82.3 million under this repurchase program. Depending on our stock valuation, cash availability and other factors, we may repurchase additional shares as a beneficial use of our cash to enhance shareholder value.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

     As of March 31, 2005, we did not have any off-balance sheet transactions, arrangements, or obligations (including contingent obligations) that would have a material effect on our financial results.

     We enter into operating leases, primarily for facilities that we occupy in order to carry out our business operations. As of March 31, 2005, there has been no material change in our operating leases from that disclosed in our 2004 Annual Report.

     As of March 31, 2005, there has been no change in our long-term debt obligations, capital-lease obligations or long-term purchase obligations from that disclosed in our 2004 Annual Report.

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 and accompanying notes. Actual results could differ from those estimates. There have been no significant changes to our critical accounting policies that were disclosed in our 2004 Annual Report.

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

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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; Risk Factors contained in our 2004 Annual Report on Form 10-K, which factors are incorporated herein by reference to such report.

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 exposure to market risk by investing in accordance with our corporate investment policy as established by our Board of Directors. The goals of the policy are: (i) preservation of capital, (ii) provision of adequate liquidity to meet projected cash requirements, (iii) minimization of risk of principal loss through diversified short and medium term investments, and (iv) maximization of yields in relationship to the guidelines, risk, market conditions and tax considerations.

     Our investment policy specifically requires that: (i) each investment have a maximum maturity of 36 months, (ii) at least 10% of the portfolio be available on 30 days notice and not more than 30% of the portfolio have a maturity in excess of 24 months, (iii) each investment meet minimum credit quality requirements, (iv) our portfolio be diversified such that not more than 10% is invested in any one issuer (other than the US Treasury or its agencies, or money market funds), and (v) each investment meet certain maximum maturity or tender option limits based on its minimum credit rating. Our investment policy generally precludes investment in equity securities except for the investment in funds for the purpose of hedging the market value exposure on the supplemental Executive Retirement Plan (see note 10 of our Notes to Consolidated Financial Statements contained in our 2004 Annual Report, which note is incorporated herein by reference to such report). Due to the type and duration of investments in our portfolio, we do not expect to realize any material gains or losses related to market risk. As of March 31, 2005 our investment securities had a market value of approximately $36.0 million and a carrying value of $36.3 million.

     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 exchange rate risk is not significant due to the relative size of our foreign operations.

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 objectives and management was necessarily required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

     As of March 31, 2005, 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

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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 March 31, 2005 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.

Part II — OTHER INFORMATION

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

     Common Stock. On April 17, 2002, our Board of Directors authorized a repurchase program which provides for the repurchase of up to 5,000,000 shares of our common stock. On February 9, 2005 our Board of Directors authorized the repurchase of up to an additional 3,000,000 shares under the stock repurchase program. No time limit was placed on the duration of the repurchase program, nor is there any dollar limit on the program. Repurchased shares will become treasury shares and will be used for stock-based employee benefit plans and for other general corporate purposes.

     The following table shows information relating to the repurchase of shares of our common stock during the three months ended March 31, 2005:

Item 6. Exhibits

Exhibits.

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SIGNATURES

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

	RENAISSANCE LEARNING, INC. (Registrant)
May 10, 2005	/s/ John R. Hickey
Date	John R. Hickey
	President and Chief Executive Officer (Principal Executive Officer)
May 10, 2005	/s/ Mary T. Minch
Date	Mary T. Minch
	Vice President-Finance, Chief Financial Officer, and Secretary (Principal Financial and Accounting Officer)

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Index to Exhibits