##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549




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FORM 10-Q



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x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 30, 2003.o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM........... TO...........


Commission file number: 0-22187

RENAISSANCE LEARNING, INC.

(Exact name of Registrant as Specified in its Charter)


Wisconsin
    
    39-1559474(State or other
jurisdiction of incorporation)
    
    (IRS Employer
Identification No.)


2911 Peach Street
PO Box 8036
Wisconsin Rapids, Wisconsin
(Address of principal executive offices)

54495-8036
(Zip Code)

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

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

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

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

Outstanding atClass
    
    October 31, 2003Common Stock, $0.01 par value
    
    
    30,860,020






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TABLE OF CONTENTS



|                                                 |                                                                                               |                                                      |  |  |  |  |  | 
|------------------------------------------------ | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|INDEX TO FORM 10-Q                              
|PART I  FINANCIAL INFORMATION                  
|                                                 | Item 1. Financial Statements                                                                 
|                                                 |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                                                 |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF INCOME         
|                                                 |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                                 |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                                                 | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                 | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                                 | Item 4. Controls and Procedures                                                              
|Part II  OTHER INFORMATION                     
|                                                 | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                      
|Index to Exhibits                               
|EX-31.1 Section 302 Certification-John Hickey   
|EX-31.2 Section 302 Certification-Steven Schmidt
|EX-32.1 Section 906 Certification-John Hickey   
|EX-32.2 Section 906 Certification-Steven Schmidt



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##### Table of Contents



RENAISSANCE LEARNING, INC.







INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003

PART I  OTHER INFORMATIONPageItem 1. Financial StatementsCondensed Consolidated Balance Sheets at September 30, 2003
and December 31, 2002
    
    
    1Condensed Consolidated Statements of Income for the
Three Months and Nine Months Ended
September 30, 2003 and 2002
    
    
    2Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2003 and 2002
    
    
    3Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    8Item 3. Quantitative and Qualitative Disclosures About
Market Risk
    
    
    12Item 4. Controls and Procedures
    
    
    13PART II  OTHER INFORMATIONItem 6. Exhibits and Reports on Form 8-K
    
    
    14




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##### Table of Contents









PART I  FINANCIAL INFORMATION







Item 1. Financial Statements







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

September 30,
    
    December 31,2003
    
    2002(In Thousands, Except Share andPer Share Amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    41,060
    
    
    $
    18,220Investment securities
    
    
    49,105
    
    
    
    60,269Accounts receivable, less allowance of
$1,520 and $1,654, respectively
    
    
    13,616
    
    
    
    12,619Inventories
    
    
    2,054
    
    
    
    1,724Prepaid expenses
    
    
    643
    
    
    
    1,411Deferred tax asset
    
    
    3,945
    
    
    
    3,710Other current assets
    
    
    1,083
    
    
    
    1,331Total current assets
    
    
    111,506
    
    
    
    99,284Investment securities
    
    
    12,657
    
    
    
    21,347Property, plant and equipment, net
    
    
    20,894
    
    
    
    21,085Deferred tax asset
    
    
    1,953
    
    
    
    1,942Goodwill
    
    
    2,642
    
    
    
    2,313Other intangibles, net
    
    
    552
    
    
    
    874Capitalized software, net
    
    
    558
    
    
    
    659Other non-current assets
    
    
    
    
    
    
    107Total assets
    
    $
    150,762
    
    
    $
    147,611LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,790
    
    
    $
    3,643Deferred revenue
    
    
    10,094
    
    
    
    10,397Payroll and employee benefits
    
    
    3,635
    
    
    
    4,263Income taxes payable
    
    
    2,279
    
    
    
    2,372Other current liabilities
    
    
    5,034
    
    
    
    4,605Total current liabilities
    
    
    24,832
    
    
    
    25,280Deferred revenue
    
    
    925
    
    
    
    930Total liabilities
    
    
    25,757
    
    
    
    26,210Minority interest
    
    
    169
    
    
    
    165Shareholders equity
    
    
    347
    
    
    
    347Common stock, $.01 par; shares authorized: 150,000,000;
issued: 34,736,647 shares at Sept. 30, 2003 and Dec. 31, 2002
    
    
    347
    
    
    
    347Additional paid-in capital
    
    
    54,149
    
    
    
    54,423Retained earnings
    
    
    140,968
    
    
    
    116,055Treasury stock, at cost 3,888,776 shares Sept. 30, 2003;
2,737,672 shares Dec. 31, 2002
    
    
    (70,343
    )
    
    
    (49,480
    )Accumulated other comprehensive loss
    
    
    (285
    )
    
    
    (109
    )Total shareholders equity
    
    
    124,836
    
    
    
    121,236Total liabilities and shareholders equity
    
    $
    150,762
    
    
    $
    147,611


See accompanying notes to condensed consolidated financial statements.

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(In thousands, except per share amounts)

Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2003
    
    2002
    
    2003
    
    2002(In Thousands, Except Per Share Amounts)Net sales:Products
    
    $
    25,640
    
    
    $
    26,201
    
    
    $
    81,528
    
    
    $
    84,132Services
    
    
    5,675
    
    
    
    6,227
    
    
    
    17,629
    
    
    
    16,206Total net sales
    
    
    31,315
    
    
    
    32,428
    
    
    
    99,157
    
    
    
    100,338Cost of sales:Products
    
    
    2,581
    
    
    
    3,108
    
    
    
    8,605
    
    
    
    8,936Services
    
    
    2,510
    
    
    
    2,411
    
    
    
    7,911
    
    
    
    7,446Total cost of sales
    
    
    5,091
    
    
    
    5,519
    
    
    
    16,516
    
    
    
    16,382Gross profit
    
    
    26,224
    
    
    
    26,909
    
    
    
    82,641
    
    
    
    83,956Operating expenses:Product development
    
    
    4,262
    
    
    
    4,234
    
    
    
    12,926
    
    
    
    12,861Selling and marketing
    
    
    7,866
    
    
    
    7,740
    
    
    
    22,718
    
    
    
    23,713General and administrative
    
    
    3,172
    
    
    
    3,286
    
    
    
    10,577
    
    
    
    10,721Total operating expenses
    
    
    15,300
    
    
    
    15,260
    
    
    
    46,221
    
    
    
    47,295Operating income
    
    
    10,924
    
    
    
    11,649
    
    
    
    36,420
    
    
    
    36,661Other income:Interest income
    
    
    434
    
    
    
    807
    
    
    
    1,472
    
    
    
    2,549Other, net
    
    
    107
    
    
    
    87
    
    
    
    513
    
    
    
    391Income before taxes
    
    
    11,465
    
    
    
    12,543
    
    
    
    38,405
    
    
    
    39,601Income tax provision
    
    
    3,187
    
    
    
    4,829
    
    
    
    13,492
    
    
    
    15,329Net income
    
    $
    8,278
    
    
    $
    7,714
    
    
    $
    24,913
    
    
    $
    24,272Earnings per share:Basic
    
    $
    0.27
    
    
    $
    0.23
    
    
    $
    0.80
    
    
    $
    0.71Diluted
    
    $
    0.27
    
    
    $
    0.23
    
    
    $
    0.80
    
    
    $
    0.70


See accompanying notes to condensed consolidated financial statements.

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

Nine Months Ended September 30,2003
    
    2002(In thousands)Reconciliation of net income to net cash provided by operating activities:Net income
    
    $
    24,913
    
    
    $
    24,272Noncash (income) expenses included in net income -Depreciation and amortization
    
    
    2,997
    
    
    
    3,505Amortization of investment discounts/premiums
    
    
    1,324
    
    
    
    1,625Deferred income taxes
    
    
    (246
    )
    
    
    12Change in assets and liabilities -Accounts receivable
    
    
    (997
    )
    
    
    (2,683
    )Inventories
    
    
    (330
    )
    
    
    (140
    )Prepaid expenses
    
    
    768
    
    
    
    301Accounts payable and other current liabilities
    
    
    160
    
    
    
    1,516Deferred revenue
    
    
    (308
    )
    
    
    1,545Other current assets
    
    
    248
    
    
    
    (215
    )Other
    
    
    76
    
    
    
    343Net cash provided by operating activities
    
    
    28,605
    
    
    
    30,081Cash flows from investing activities:Purchase of property, plant and equipment
    
    
    (2,069
    )
    
    
    (1,481
    )Purchase of investment securities
    
    
    (40,560
    )
    
    
    (51,719
    )Maturities/sales of investment securities
    
    
    59,090
    
    
    
    39,265Capitalized software development costs
    
    
    (263
    )
    
    
    (659
    )Acquisitions
    
    
    (521
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    15,677
    
    
    
    (14,594
    )Cash flows provided by financing activities:Proceeds from issuance of stock
    
    
    1,046
    
    
    
    1,066Proceeds from exercise of stock options
    
    
    1,239
    
    
    
    1,271Purchase of treasury stock
    
    
    (23,727
    )
    
    
    (33,040
    )Net cash used in financing activities
    
    
    (21,442
    )
    
    
    (30,703
    )Net increase (decrease) in cash
    
    
    22,840
    
    
    
    (15,216
    )Cash and cash equivalents, beginning of period
    
    
    18,220
    
    
    
    35,904Cash and cash equivalents, end of period
    
    $
    41,060
    
    
    $
    20,688


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 nine month periods ended
September 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 September 30, 2003, we repurchased
1.3 million shares at a cost of $23.7 million under the current repurchase
program. Through September 30, 2003, the cumulative repurchases under the
current program were 4.0 million shares at a cost of $72.9 million.

The weighted average shares outstanding are as follows:

Three Months Ended September 30
    
    Nine Months Ended September 302003
    
    2002
    
    2003
    
    2002Basic weighted average shares outstanding
    
    
    30,826,913
    
    
    
    33,713,607
    
    
    
    31,163,711
    
    
    
    34,342,561Dilutive effect of outstanding stock options
    
    
    239,303
    
    
    
    108,609
    
    
    
    171,583
    
    
    
    214,039Diluted weighted average shares outstanding
    
    
    31,066,216
    
    
    
    33,822,216
    
    
    
    31,335,294
    
    
    
    34,556,600


For the three months ended September 30, 2003 and 2002, 744,768 and
1,009,228 shares attributable to outstanding stock options were excluded from
the calculation of diluted earnings per share because the effect was
antidilutive. For the nine months ended September 30, 2003 and 2002, 872,323
and 736,757 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.

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4. Comprehensive Income

Total comprehensive income was $24,737,000 and $23,987,000 in the first
nine months of 2003 and 2002, respectively. For the quarters ended September
30, 2003 and 2002, comprehensive income was $8,259,000 and $7,681,000
respectively. Our comprehensive income includes net income and 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.

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 September 30, 2003, and 2002, we recognized
amortization expense on other intangibles of $74,000 and $134,000,
respectively. For the nine months ended September 30, 2003 and 2002, we
recognized amortization expense of $322,000 and $538,000 respectively.

During
August 2003 we purchased a start-up enterprise for the purpose of
acquiring a potential new product concept. This transaction was
accounted for using the purchase method of accounting, which resulted
in recorded goodwill of $329,000 and the recognition of $146,000 of
in-process research and development expense. The transaction had no
material effect on our consolidated financial statements.

Other intangibles consisted of the following (in thousands):

September 30, 2003
    
    December 31, 2002Gross
    
    
    
    
    
    Other
    
    Gross
    
    
    
    
    
    OtherCarrying
    
    Accumulated
    
    Intangibles
    
    Carrying
    
    Accumulated
    
    IntangiblesAmount
    
    Amortization
    
    Net
    
    Amount
    
    Amortization
    
    NetAlgorithms and software code
    
    $
    2,124
    
    
    $
    2,039
    
    
    $
    85
    
    
    $
    2,124
    
    
    $
    1,882
    
    
    $
    242Non-compete agreement
    
    
    1,100
    
    
    
    633
    
    
    
    467
    
    
    
    1,100
    
    
    
    468
    
    
    
    632Other intangibles
    
    $
    3,224
    
    
    $
    2,672
    
    
    $
    552
    
    
    $
    3,224
    
    
    $
    2,350
    
    
    $
    874


Other intangibles are scheduled to be fully amortized by the fourth
quarter of 2005 with corresponding amortization estimated to be $74,000,
$286,000, and $192,000, for the remainder of 2003 and the years ended December
31, 2004, and 2005, respectively.

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6. Stock Option Plan

We have established the 1997 Stock Incentive Plan for our officers, key
employees, non-employee directors and consultants. 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, our net income
and earnings per share would have been adjusted to the pro forma amounts
indicated below:

Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2003
    
    2002
    
    2003
    
    2002(In thousands, except per share amounts)Net Income, as reported
    
    $
    8,278
    
    
    $
    7,714
    
    
    $
    24,913
    
    
    $
    24,272Deduct: Total stock-based compensation
expense determined under fair-value based
method for all awards, net of tax
    
    
    1,040
    
    
    
    1,107
    
    
    
    2,827
    
    
    
    3,322Pro forma net income
    
    $
    7,238
    
    
    $
    6,607
    
    
    $
    22,086
    
    
    $
    20,950Earnings per share:Basic as reported
    
    $
    0.27
    
    
    $
    0.23
    
    
    $
    0.80
    
    
    $
    0.71Basic pro forma
    
    $
    0.23
    
    
    $
    0.20
    
    
    $
    0.71
    
    
    $
    0.61Diluted as reported
    
    $
    0.27
    
    
    $
    0.23
    
    
    $
    0.80
    
    
    $
    0.70Diluted pro forma
    
    $
    0.23
    
    
    $
    0.20
    
    
    $
    0.70
    
    
    $
    0.61


The fair value of options granted in the third quarter of 2003 and 2002 and the first nine months of
2003 and 2002 were estimated on the date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions:

Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2003
    
    2002
    
    2003
    
    2002Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    65.00
    %
    
    
    79.55
    %
    
    
    75.20
    %
    
    
    80.28
    %Risk-free interest rate
    
    
    3.64
    %
    
    
    3.51
    %
    
    
    3.09
    %
    
    
    3.91
    %Expected life (in years)
    
    
    6
    
    
    
    6
    
    
    
    6
    
    
    
    6


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7. Segment Reporting

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

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

Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002(In thousands)Revenues:Software
    
    $
    27,262
    
    
    $
    27,500
    
    
    $
    85,921
    
    
    $
    87,059Training
    
    
    4,053
    
    
    
    4,928
    
    
    
    13,236
    
    
    
    13,279Total revenues
    
    $
    31,315
    
    
    $
    32,428
    
    
    $
    99,157
    
    
    $
    100,338Operating income (loss):Software
    
    $
    11,026
    
    
    $
    11,624
    
    
    $
    36,716
    
    
    $
    38,277Training
    
    
    (102
    )
    
    
    25
    
    
    
    (296
    )
    
    
    (1,616
    )Total operating income
    
    $
    10,924
    
    
    $
    11,649
    
    
    $
    36,420
    
    
    $
    36,661


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

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

Results of Operations

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

Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2003
    
    2002
    
    2003
    
    2002Net Sales:Products
    
    
    81.9
    %
    
    
    80.8
    %
    
    
    82.2
    %
    
    
    83.8
    %Services
    
    
    18.1
    
    
    
    19.2
    
    
    
    17.8
    
    
    
    16.2Total net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales:Products
    
    
    10.1
    %
    
    
    11.9
    %
    
    
    10.6
    %
    
    
    10.6
    %Services
    
    
    44.2
    
    
    
    38.7
    
    
    
    44.9
    
    
    
    45.9Total cost of sales
    
    
    16.3
    
    
    
    17.0
    
    
    
    16.7
    
    
    
    16.3Gross profit:Products
    
    
    89.9
    
    
    
    88.1
    
    
    
    89.4
    
    
    
    89.4Services
    
    
    55.8
    
    
    
    61.3
    
    
    
    55.1
    
    
    
    54.1Total gross profit
    
    
    83.7
    
    
    
    83.0
    
    
    
    83.3
    
    
    
    83.7Operating expenses:Product development
    
    
    13.6
    
    
    
    13.1
    
    
    
    13.0
    
    
    
    12.8Selling and marketing
    
    
    25.1
    
    
    
    23.9
    
    
    
    22.9
    
    
    
    23.6General and administrative
    
    
    10.1
    
    
    
    10.1
    
    
    
    10.7
    
    
    
    10.7Total operating expenses
    
    
    48.8
    
    
    
    47.1
    
    
    
    46.6
    
    
    
    47.1Operating income
    
    
    34.9
    
    
    
    35.9
    
    
    
    36.7
    
    
    
    36.6Other income:Interest income
    
    
    1.4
    
    
    
    2.5
    
    
    
    1.5
    
    
    
    2.5Other, net
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.5
    
    
    
    0.4Total other income
    
    
    1.7
    
    
    
    2.8
    
    
    
    2.0
    
    
    
    2.9Income before taxes
    
    
    36.6
    
    
    
    38.7
    
    
    
    38.7
    
    
    
    39.5Income tax provision
    
    
    10.2
    
    
    
    14.9
    
    
    
    13.6
    
    
    
    15.3Net income
    
    
    26.4
    %
    
    
    23.8
    %
    
    
    25.1
    %
    
    
    24.2
    %


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Three Months Ended September 30, 2003 and 2002

Net Sales. Our net sales decreased by $1.1 million, or 3.4%, to $31.3
million in the third quarter of 2003 from $32.4 million in the third quarter of
2002. This decrease is primarily due to difficult market conditions and the
timing of district business we expect to realize in the fourth quarter.
Product sales decreased by $561,000, or 2.1%, to $25.6 million in the third
quarter of 2003 from $26.2 million in the third quarter of 2002. Sales
declined for most of our core learning information system products. Sales of
our six new products, introduced last year, improved somewhat in the third
quarter of 2003 over the third quarter of 2002. We successfully introduced our
latest new product, Accelerated Grammar and Spelling,during the third quarter
of 2003.

Service revenue, which consists primarily of revenue from sales of
training sessions, implementation consulting services, technical consulting
services and software support agreements, decreased by $552,000, or 8.9%, to
$5.7 million in the third quarter of 2003 from $6.2 million in the third
quarter of 2002. Our professional development services, which are becoming
more dependent on district-wide implementations, declined by 14.9% compared to
the third quarter 2002 level. Software support service revenues increased by
2.2% over the previous year third quarter. Year-over-year service revenue
comparisons are expected to improve somewhat in the fourth quarter, from the
8.9% decline in the third quarter, due to greater contributions from the
district sales channel.

While we believe the funding environment for K-12 schools will continue to
be tight for the balance of this school year, we expect to achieve revenue
growth in the fourth quarter of 2003 compared to the prior year through greater
contributions from our expanded field sales force along with new product
introductions. In the fourth quarter, StandardsMasterand our STAR products
will be available in the web-enabled enterprise version we have named
Renaissance Place. In 2004, Accelerated Reader, Accelerated Mathand our other
products will be offered in Renaissance Placeversions. Renaissance Placewill
allow schools and districts to more easily implement Renaissance programs and
significantly improve information accessibility for teachers, librarians,
principals, parents, and district personnel, while providing many cost benefits
to our customers.

Cost of Sales. The cost of sales of products decreased by $527,000, or
17.0%, to $2.6 million in the third quarter of 2003 from $3.1 million in the
third quarter of 2002. As a percentage of product sales, the cost of sales of
products decreased to 10.1% in the third quarter of 2003 from 11.9% in the
third quarter of 2002. The decrease in the product cost of sales percentage is
due to improved performance in our publisher assessment products division as
well as fewer scanners in the sales mix in the third quarter of 2003 compared
to the third quarter of 2002.

The cost of sales of services increased by $99,000, or 4.1%, to $2.5
million in the third quarter of 2003 from $2.4 million in the third quarter of
2002. As a percentage of sales of services, the cost of sales of services
increased to 44.2% in the third quarter of 2003 from 38.7% in the third quarter
of 2002. This increased cost of sales of services as a percentage of sales is
due to higher costs of providing improved phone support to our customers during
the busy back-to-school period and from the lower volume of professional
development service revenue.

Our overall gross profit margin increased to 83.7% in the third quarter of
2003 from 83.0% in the third quarter of 2002. The increase is primarily due to
the improvement in product gross profit margins.

Product Development. Product development expenses of $4.3 million were
flat in the third quarter of 2003 compared to the third quarter of 2002. As a
percentage of net sales, product development costs increased to 13.6% in the
third quarter of 2003 from 13.1% in the third quarter of 2002. We continue to
expect no significant change in product development costs in the near term.

Selling and Marketing. Selling and marketing expenses increased by
$126,000, or 1.6%, to $7.9 million in the third quarter of 2003 from $7.7
million in the third quarter of 2002. These expenses increased primarily due
to our expanding field sales force. As a percentage of net sales, selling and
marketing expenses increased to 25.1% in the third quarter of 2003 from 23.9%
in the third quarter of 2002. Quarterly selling and marketing expenses are
expected to exceed the comparable prior year period due to the field sales
force expansion.



---

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

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General and Administrative. General and administrative expenses decreased
by $114,000, or 3.5%, to $3.2 million in the third quarter of 2003 from $3.3
million in the third quarter of 2002. As a percentage of net sales, general
and administrative costs were 10.1% in the third quarter of 2003, the same as
in the third quarter of 2002.

Operating Income. Operating income decreased by $725,000 to $10.9 million
in the third quarter of 2003 from $11.6 million in the third quarter of 2002.
As a percentage of net sales, operating income decreased to 34.9% in the third
quarter of 2003 from 35.9% in the third quarter of 2002.

Income Tax Expense. Income tax expense of $3.2 million was recorded in
the third quarter of 2003 at an effective income tax rate of 27.8% of pre-tax
income compared to $4.8 million, or 38.5% of pre-tax income in the third
quarter of 2002. The third quarter 2003 tax expense included a tax benefit of
$1.1 million related to tax credits for research activities in excess of
previously estimated amounts. Excluding the benefit of these tax credits for
research activities from earlier periods, our effective tax rate for the third
quarter would have been 37.7%. We expect to maintain our effective tax rate at
or below 38% through 2004.

Nine Months Ended September 30, 2003 and 2002

Net Sales. Our net sales decreased by $1.1 million, or 1.2%, to $99.2
million in the nine months ended September 30, 2003 from $100.3 million in the
first nine months of 2002. Product sales decreased by $2.6 million, or 3.1%,
to $81.5 million in the first nine months of 2003 from $84.1 million in the
same period of 2002. In total, sales of our established products declined
while our new products sales improved in the nine months ended September 30,
2003 versus the nine months ended September 30, 2002.

Service revenue increased by $1.4 million, or 8.8%, to $17.6 million in
the first nine months of 2003 from $16.2 million in the same period in 2002.
Sales from our training segment, which includes implementation consulting
services, our National Conference, and traditional classroom training sessions,
increased by 7.8% in the first nine months of 2003 verses the first nine months
of 2002. Revenues from technical consulting and software support agreements
recognized during the first nine months of 2003 increased 10.5% over the same
period in 2002.

Cost of Sales. The cost of sales of products decreased by $331,000, or
3.7%, to $8.6 million in the first nine months of 2003 from $8.9 million in the
first nine months of 2002. As a percentage of product sales, the cost of sales
of products was 10.6% in the first nine months of 2003, the same as in the
first nine months of 2002.

The cost of sales of services increased by $465,000, or 6.2%, to $7.9
million in the first nine months of 2003 from $7.4 million in the same period
in 2002. As a percentage of service sales, the cost of sales of services
decreased to 44.9% in the first nine months of 2003 from 45.9% in the first
nine months of 2002. This decrease is primarily due to 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 declined to 83.3% in the first nine months
of 2003 from 83.7% in the first nine months of 2002. The decrease is primarily
due to services making up a slightly larger portion of the total revenue in the
first nine months of 2003 as compared to the same period in 2002.

Product Development. Product development expenses were unchanged at $12.9
million in the nine months ended September 30, 2003 and 2002. As a percentage
of net sales, product development costs increased to 13.0% in the first nine
months of 2003 from 12.8% in the first nine months of 2002. We continue to
expect no significant change in product development costs in the near term.

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Selling and Marketing. Selling and marketing expenses decreased by $1.0
million, or 4.2%, to $22.7 million in the first nine months of 2003 from $23.7
million in the first nine months of 2002. The reduction in selling and
marketing expenses resulted from 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 22.9%
in the first nine months of 2003 from 23.6% in the first nine months of 2002.
Quarterly selling and marketing expenses are expected to exceed the amount
incurred in the comparable prior year period due to the field sales force
expansion.

General and Administrative. General and administrative expenses decreased
by $144,000, or 1.3%, to $10.6
million in the nine months ended September 30, 2003 from $10.7 million in the
same period in 2002. As a percentage of net sales, general and administrative
costs were 10.7% in the first nine months of 2003, the same as in the first
nine months of 2002.

Operating Income. Operating income was $36.4 million in the first nine
months of 2003, down by $241,000 from $36.7 million in the same period in 2002.
As a percentage of net sales, operating income increased to 36.7% in the first
nine months of 2002 from 36.6% in the first nine months of 2002.

Income Tax Expense. Income tax expense of $13.5 million was recorded in
the first nine months of 2003 at an effective income tax rate of 35.1% of
pre-tax income compared to $15.3 million, or 38.7% of pre-tax income in the
first nine months of 2002. The third quarter 2003 tax expense includes a tax
benefit of $1.1 million related to tax credits for research activities in
excess of previously estimated amounts. Excluding the benefit of these tax
credits for research activities from earlier periods, our effective rate for
the first nine months of 2003 would have been 37.7%. We expect to maintain our
effective tax rate at or below 38% through 2004.

Liquidity and Capital Resources

As of September 30, 2003, our cash, cash equivalents and investment
securities were $102.8 million, up $3.0 million from the December 31, 2002
total of $99.8 million. The change is primarily due to $28.6 million in cash
provided by operating activities offset by cash paid for stock repurchases of
$23.7 million and $2.1 million invested in property, plant and equipment during
the first nine months 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 September 30, 2003, 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, which is
available until April 30, 2004. The line of credit bears interest based on the
prime rate less 1.0%. As of September 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
September 30, 2003 we repurchased 1.3 million shares at a cost of $23.7
million. In total, we have repurchased 4.0 million shares at a cost of $72.9
million under this repurchase program. Depending on our stock valuation, we
may repurchase additional shares as a beneficial use of our cash to enhance
shareholder value.

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 judgements, 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.

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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.







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
its minimum credit rating. As of September 30, 2003 our investment securities
had a market value of approximately $62.0 million and a carrying value of $61.8
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, our foreign operations are not material.

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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 September 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 September 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 6. Exhibits and Reports on Form 8-K



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

Exhibit No.
    
    Description31.1
    
    Section 302 certification by John R. Hickey31.2
    
    Section 302 certification by Steven A. Schmidt32.1
    
    Section 906 certification by John R. Hickey32.2
    
    Section 906 certification by Steven A. Schmidt




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



| | 1. |  | Form 8-K dated July 16, 2003 (filed with respect to Items 5 and
7 and furnished with respect to Items 7 and 9 on July 23,
2003)
Press release relating to management changes.
Press release regarding financial results for the second quarter of
2003.
Transcript of Investor Conference Call on July 16, 2003.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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)November 6, 2003
    
    /s/ John R. HickeyDate
    
    John R. Hickey
President and Chief Executive Officer
(Principal Executive Officer)November 6, 2003
    
    /s/ Steven A. SchmidtDate
    
    Steven A. Schmidt
Executive Vice President, and Chief Financial Officer
(Principal Financial and Accounting Officer)






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##### Table of Contents









Index to Exhibits

Exhibit No.
    
    Description31.1
    
    Section 302 certification by John R. Hickey31.2
    
    Section 302 certification by Steven A. Schmidt32.1
    
    Section 906 certification by John R. Hickey32.2
    
    Section 906 certification by Steven A. Schmidt