Table of Contents





UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington,
D.C. 20549


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FORM 10-Q


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|   |                                                                                                                                                       
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------
|þ  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,
 2009.          
|   |                                                                                                                                                       
|OR
|   |                                                                                                                                                       
|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

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| |  | 
| |  | 

|                                                      
|------------------------------------------------------
|RENAISSANCE
 LEARNING, INC.                           
|(Exact name of Registrant as specified in its charter)

| |                                                |                                      | 
| | ---------------------------------------------- | ------------------------------------ | 
| | Wisconsin                                      | 39-1559474                           | 
| | (State or other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) | 

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

54495-8036(Zip Code)

(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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
Registrant was required to submit and post such files). Yes o  No o

Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the Exchange Act. (Check One): Large accelerated
filer o
Accelerated filer þ
Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company
o

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

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

| |                               |       |            |  |                                 | 
| | ----------------------------- | ----- | ---------- |  | ------------------------------- | 
| |                               | Class |            |  | Outstanding
 atOctober 30, 2009 | 
| | Common Stock, $0.01 par value |       | 29,272,754 | 





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Table of Contents

RENAISSANCE
LEARNING, INC.

INDEX
TO FORM 10-Q

FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009

|                                |                                                                                                                       |  |      | 
|------------------------------- | --------------------------------------------------------------------------------------------------------------------- |  | ---- | 
|                                |                                                                                                                       |  | Page
|PART I - FINANCIAL
 INFORMATION |                                                                                                                       |  |     
|                                |                                                                                                                       |  |      | 
|Item 1.                         | Financial Statements                                                                                                  |  |      | 
|                                |                                                                                                                       |  |      | 
|                                | Condensed Consolidated Balance Sheets at
 September 30, 2009 and 
 December 31, 2008                                  |  | 1    | 
|                                |                                                                                                                       |  |      | 
|                                | Condensed Consolidated Statements of Income
 for the Three Months 
 and Nine Months Ended September 30, 2009 and 2008 |  | 2    | 
|                                |                                                                                                                       |  |      | 
|                                | Condensed Consolidated Statements of Cash
 Flows for the Nine Months 
 Ended September 30, 2009 and 2008              |  | 3    | 
|                                |                                                                                                                       |  |      | 
|                                | Notes to Condensed Consolidated Financial
 Statements                                                                 |  | 4    | 
|                                |                                                                                                                       |  |      | 
|Item 2.                         | Managements Discussion and Analysis of
 Financial 
 Condition and Results of Operations                              |  | 8    | 
|                                |                                                                                                                       |  |      | 
|Item 3.                         | Quantitative and Qualitative Disclosures
 About 
 Market Risk                                                         |  | 13   | 
|                                |                                                                                                                       |  |      | 
|Item 4.                         | Controls and Procedures                                                                                               |  | 14   | 
|                                |                                                                                                                       |  |      | 
|PART II - OTHER
 INFORMATION    |                                                                                                                       |  |     
|                                |                                                                                                                       |  |      | 
|Item 1A.                        | Risk Factors                                                                                                          |  | 14   | 
|                                |                                                                                                                       |  |      | 
|Item 2.                         | Unregistered Sales of
 Equity Securities and Use of Proceeds                                                          |  | 14   | 
|                                |                                                                                                                       |  |      | 
|Item 6.                         | Exhibits                                                                                                              |  | 16   | 

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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,
 2009                                 |         | December 31,
 2008 |  
|                                                                                                                                  |  | (In Thousands, Except Share and
 Per Share Amounts) |        
|ASSETS                                                                                                                            |  |                                                     |         |                    |   |         |  
|Current assets:                                                                                                                   |  |                                                     |         |                    |   |         |  
|Cash and cash equivalents                                                                                                         |  | $                                                   | 28,481  |                    | $ | 9,509   |  
|Investment securities                                                                                                             |  |                                                     | 3,120   |                    |   | 4,894   |  
|Accounts receivable, less allowance of $1,067 and $1,090, respectively                                                            |  |                                                     | 19,839  |                    |   | 8,083   |  
|Inventories                                                                                                                       |  |                                                     | 4,680   |                    |   | 5,504   |  
|Prepaid expenses                                                                                                                  |  |                                                     | 1,778   |                    |   | 1,999   |  
|Income taxes receivable                                                                                                           |  |                                                     | 5,118   |                    |   | 3,301   |  
|Deferred tax asset                                                                                                                |  |                                                     | 4,184   |                    |   | 4,183   |  
|Other current assets                                                                                                              |  |                                                     | 213     |                    |   | 144     |  
|Total current assets                                                                                                              |  |                                                     | 67,413  |                    |   | 37,617  |  
|Investment securities                                                                                                             |  |                                                     | 2,165   |                    |   | 3,383   |  
|Property, plant and equipment, net                                                                                                |  |                                                     | 6,857   |                    |   | 8,621   |  
|Deferred tax asset                                                                                                                |  |                                                     | 2,758   |                    |   | 2,742   |  
|Goodwill                                                                                                                          |  |                                                     | 2,809   |                    |   | 2,750   |  
|Other intangibles, net                                                                                                            |  |                                                     | 967     |                    |   | 1,178   |  
|Capitalized software, net                                                                                                         |  |                                                     | 44      |                    |   | 174     |  
|Other non-current assets                                                                                                          |  |                                                     | 968     |                    |   | 461     |  
|Total assets                                                                                                                      |  | $                                                   | 83,981  |                    | $ | 56,926  |  
|                                                                                                                                  |  |                                                     |         |                    |   |         |  
|LIABILITIES
 AND SHAREHOLDERS EQUITY                                                                                             |  |                                                     |         |                    |   |         |  
|Current liabilities:                                                                                                              |  |                                                     |         |                    |   |         |  
|Accounts payable                                                                                                                  |  | $                                                   | 2,536   |                    | $ | 1,712   |  
|Deferred revenue                                                                                                                  |  |                                                     | 56,887  |                    |   | 43,975  |  
|Payroll and employee benefits                                                                                                     |  |                                                     | 5,964   |                    |   | 3,981   |  
|Other current liabilities                                                                                                         |  |                                                     | 3,246   |                    |   | 3,284   |  
|Total current liabilities                                                                                                         |  |                                                     | 68,633  |                    |   | 52,952  |  
|Deferred
 revenue                                                                                                                 |  |                                                     | 5,565   |                    |   | 2,950   |  
|Deferred compensation and other employee benefits                                                                                 |  |                                                     | 1,711   |                    |   | 1,342   |  
|Income taxes payable                                                                                                              |  |                                                     | 4,868   |                    |   | 4,868   |  
|Other noncurrent
 liabilities                                                                                                     |  |                                                     | 213     |                    |   | 133     |  
|Total liabilities                                                                                                                 |  |                                                     | 80,990  |                    |   | 62,245  |  
|Shareholders equity:                                                                                                             |  |                                                     |         |                    |   |         |  
|Common stock, $.01 par; shares authorized: 150,000,000; issued:
 34,736,647 shares at September 30, 2009 and at December 31, 2008 |  |                                                     | 347     |                    |   | 347     |  
|Additional paid-in capital                                                                                                        |  |                                                     | 51,600  |                    |   | 51,735  |  
|Retained earnings                                                                                                                 |  |                                                     | 45,617  |                    |   | 38,492  |  
|Treasury stock, at cost: 5,503,567 shares at September 30, 2009;
 5,557,679 shares at December 31, 2008                           |  |                                                     | (94,388 | )                  |   | (95,568 | )
|Accumulated other comprehensive loss                                                                                              |  |                                                     | (185    | )                  |   | (325    | )
|Total shareholders equity                                                                                                        |  |                                                     | 2,991   |                    |   | (5,319  | )
|Total liabilities and shareholders equity                                                                                        |  | $                                                   | 83,981  |                    | $ | 56,926  |  

See accompanying notes to condensed
consolidated financial statements.

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Table of Contents

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

|                                      |  |                                          |        |                                   |   |        |  |      |        |  |   |        | 
|------------------------------------- |  | ---------------------------------------- | ------ | --------------------------------- | - | ------ |  | ---- | ------ |  | - | ------ | 
|                                      |  | Three
 Months
 Ended September 30,       |        | Nine
 Months
 Ended September 30, |  
|                                      |  | 2009                                     |        | 2008                              |   | 2009   |  | 2008 |       
|                                      |  |                                          |       
|                                      |  | (In Thousands, Except Per Share Amounts) |       
|                                      |  |                                          |       
|Net sales:                            |  |                                          |        |                                   |   |        |  |      |        |  |   |        | 
|Products                              |  | $                                        | 21,941 |                                   | $ | 19,439 |  | $    | 63,811 |  | $ | 63,532 | 
|Services                              |  |                                          | 9,813  |                                   |   | 8,761  |  |      | 25,278 |  |   | 22,100 | 
|Total net sales                       |  |                                          | 31,754 |                                   |   | 28,200 |  |      | 89,089 |  |   | 85,632 | 
|Cost of sales:                        |  |                                          |        |                                   |   |        |  |      |        |  |   |        | 
|Products                              |  |                                          | 3,693  |                                   |   | 3,176  |  |      | 10,603 |  |   | 11,175 | 
|Services                              |  |                                          | 3,419  |                                   |   | 3,664  |  |      | 8,771  |  |   | 9,993  | 
|Total cost of sales                   |  |                                          | 7,112  |                                   |   | 6,840  |  |      | 19,374 |  |   | 21,168 | 
|Gross profit                          |  |                                          | 24,642 |                                   |   | 21,360 |  |      | 69,715 |  |   | 64,464 | 
|Operating expenses:                   |  |                                          |        |                                   |   |        |  |      |        |  |   |        | 
|Product development                   |  |                                          | 4,110  |                                   |   | 4,521  |  |      | 12,488 |  |   | 12,822 | 
|Selling and marketing                 |  |                                          | 9,558  |                                   |   | 8,953  |  |      | 26,882 |  |   | 27,230 | 
|General and administrative            |  |                                          | 3,397  |                                   |   | 4,226  |  |      | 10,030 |  |   | 11,783 | 
|Total operating expenses              |  |                                          | 17,065 |                                   |   | 17,700 |  |      | 49,400 |  |   | 51,835 | 
|Operating income                      |  |                                          | 7,577  |                                   |   | 3,660  |  |      | 20,315 |  |   | 12,629 | 
|Other income, net                     |  |                                          | 218    |                                   |   | 275    |  |      | 401    |  |   | 616    | 
|Income before taxes                   |  |                                          | 7,795  |                                   |   | 3,935  |  |      | 20,716 |  |   | 13,245 | 
|Income taxes                          |  |                                          | 2,590  |                                   |   | 1,365  |  |      | 7,474  |  |   | 4,722  | 
|Net income                            |  | $                                        | 5,205  |                                   | $ | 2,570  |  | $    | 13,242 |  | $ | 8,523  | 
|                                      |  |                                          |        |                                   |   |        |  |      |        |  |   |        | 
|Basic and Diluted earnings
 per share |  | $                                        | 0.18   |                                   | $ | 0.09   |  | $    | 0.45   |  | $ | 0.29   | 
|                                      |  |                                          |        |                                   |   |        |  |      |        |  |   |        | 
|Cash dividends declared per
 share    |  | $                                        | 0.07   |                                   | $ | 0.07   |  | $    | 0.21   |  | $ | 0.21   | 

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

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

|                                                                                           |  |                                          |         |      |   |        |  
|------------------------------------------------------------------------------------------ |  | ---------------------------------------- | ------- | ---- | - | ------ | -
|                                                                                           |  | For the Nine Months Ended
 September 30, |        
|                                                                                           |  | 2009                                     |         | 2008 |  
|                                                                                           |  | (In Thousands)                           |        
|                                                                                           |  |                                          |         |      |   |        |  
|Reconciliation of net income to net cash provided by operating
 activities:                |  |                                          |         |      |   |        |  
|Net income                                                                                 |  | $                                        | 13,242  |      | $ | 8,523  |  
|Adjustments to arrive at cash provided by operating activities:                            |  |                                          |         |      |   |        |  
|Depreciation and amortization                                                              |  |                                          | 1,989   |      |   | 2,861  |  
|Amortization of investment discounts/premiums                                              |  |                                          | 36      |      |   | 84     |  
|Share-based compensation expense                                                           |  |                                          | 1,199   |      |   | 1,053  |  
|Deferred income taxes                                                                      |  |                                          | (16     | )    |   | 127    |  
|Excess tax benefits from share based payment arrangements                                  |  |                                          | (27     | )    |   | (36    | )
|Gain on sale of property                                                                   |  |                                          | (152    | )    |   |       |  
|Change in assets and liabilities, excluding the effects of
 acquisitions and divestitures: |  |                                          |         |      |   |        |  
|Accounts receivable                                                                        |  |                                          | (11,756 | )    |   | (7,757 | )
|Inventories                                                                                |  |                                          | 825     |      |   | 627    |  
|Prepaid expenses                                                                           |  |                                          | 221     |      |   | (205   | )
|Income taxes                                                                               |  |                                          | (1,790  | )    |   | (1,858 | )
|Accounts payable and other liabilities                                                     |  |                                          | 2,849   |      |   | 1,497  |  
|Deferred revenue                                                                           |  |                                          | 15,527  |      |   | 13,119 |  
|Other                                                                                      |  |                                          | (432    | )    |   | (304   | )
|Net cash provided by operating activities                                                  |  |                                          | 21,715  |      |   | 17,731 |  
|                                                                                           |  |                                          |         |      |   |        |  
|Cash flows from investing activities:                                                      |  |                                          |         |      |   |        |  
|Purchase of property, plant and equipment                                                  |  |                                          | (613    | )    |   | (914   | )
|Maturities/sales of investment securities                                                  |  |                                          | 3,240   |      |   | 5,680  |  
|Capitalized software development costs                                                     |  |                                          |        |      |   | (143   | )
|Net proceeds from sale of property                                                         |  |                                          | 902     |      |   | 113    |  
|Net cash provided by investing activities                                                  |  |                                          | 3,529   |      |   | 4,736  |  
|                                                                                           |  |                                          |         |      |   |        |  
|Cash flows from financing activities:                                                      |  |                                          |         |      |   |        |  
|Proceeds from exercise of stock options                                                    |  |                                          |        |      |   | 348    |  
|Excess tax benefits from share-based payment arrangements                                  |  |                                          | 27      |      |   | 36     |  
|Dividends paid                                                                             |  |                                          | (6,117  | )    |   | (6,096 | )
|Purchase of treasury stock                                                                 |  |                                          | (182    | )    |   | (153   | )
|Net cash used by financing activities                                                      |  |                                          | (6,272  | )    |   | (5,865 | )
|Net increase in cash and cash equivalents                                                  |  |                                          | 18,972  |      |   | 16,602 |  
|Cash and cash equivalents, beginning of period                                             |  |                                          | 9,509   |      |   | 7,337  |  
|Cash and cash equivalents, end of period                                                   |  | $                                        | 28,481  |      | $ | 23,939 |  

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

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. and our subsidiaries.

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, 2008 (2008 Annual Report), which is on file with
the U.S. Securities and Exchange Commission (the SEC). The results of
operations for the three and nine month periods ended September 30, 2009 and
2008 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 and participating securities outstanding during
the period. Participating securities include unvested restricted shares and restricted share units that have a
nonforfeitable right to dividends or dividend equivalents. Common shares
and participating securities issued or reacquired during the period are
weighted for only the portion of the period during which they were outstanding.

Diluted
earnings per common share has been computed based on the weighted average
number of common shares and other participating securities outstanding,
increased by the number of additional common shares that would have been outstanding
if the potentially dilutive stock option shares and non-participating
restricted shares and restricted share units had been issued.

The
weighted average shares outstanding are as follows:

|                                                        |  |                                   |            |                                  |  |            |  |      |            |  |  |            | 
|------------------------------------------------------- |  | --------------------------------- | ---------- | -------------------------------- |  | ---------- |  | ---- | ---------- |  |  | ---------- | 
|                                                        |  | Three
 Months Ended September 30, |            | Nine
 Months Ended September 30, | 
|                                                        |  | 2009                              |            | 2008                             |  | 2009       |  | 2008 |           
|Basic weighted average
 shares outstanding              |  |                                   | 29,224,309 |                                  |  | 29,118,309 |  |      | 29,208,957 |  |  | 29,082,067 | 
|Dilutive effect of
 outstanding stock options           |  |                                   |           |                                  |  | 2,461      |  |      |           |  |  | 3,166      | 
|Dilutive effect of
 non-participating restricted shares |  |                                   | 67         |                                  |  | 170        |  |      | 28         |  |  | 296        | 
|Diluted weighted average
 shares outstanding            |  |                                   | 29,224,376 |                                  |  | 29,120,940 |  |      | 29,208,985 |  |  | 29,085,529 | 

For
the three months ended September 30, 2009 and 2008, there were 658,556 and
769,781 shares subject to outstanding stock options, respectively, excluded
from the calculation of diluted earnings per share because their effect was
antidilutive. For the nine months ended September 30, 2009 and 2008, there were
658,556 and 769,266 shares subject to outstanding stock options, respectively,
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

For
the quarters ended September 30, 2009 and 2008, comprehensive income was $5.2
million and $2.4 million, respectively. Total comprehensive income was $13.4
million and $8.3 million in the first nine months of 2009 and 2008,
respectively. Our comprehensive income includes net income and foreign currency
translation adjustments.

5. Goodwill and Other Intangible Assets

Under
Generally Accepted Accounting Principles in the United States (U.S. GAAP),
goodwill is not amortized and we are required to assess goodwill at least
annually for impairment by applying a fair value-based test. Other intangibles
consist of customer relationships acquired in connection with the purchase of
AlphaSmart, Inc. (AlphaSmart). The customer relationships intangible is
amortized over its useful life of ten years, on the declining balance method.

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Table of Contents

For
the three months ended September 30, 2009 and 2008, we recognized amortization
expense of $70,000 and $102,000, respectively. For the nine months ended
September 30, 2009 and 2008, we recognized amortization expense of $211,000 and
$349,000, respectively. Other intangibles consisted of the following:

|                       |  |                    |       |                   |   |       |  |      |     |              |   |       |  |   |       |  |   |       | 
|---------------------- |  | ------------------ | ----- | ----------------- | - | ----- |  | ---- | --- | ------------ | - | ----- |  | - | ----- |  | - | ----- | 
|                       |  | September 30, 2009 |       | December 31, 2008 |  
|                       |  |                    |       | Accumulated       |   |       |  |      |     | Accumulated  |   |       | 
|                       |  | Cost               |       | Amortization      |   | Net   |  | Cost |     | Amortization |   | Net   | 
|                       |  | (In Thousands)     |      
|Customer relationships |  | $                  | 3,200 |                   | $ | 2,233 |  | $    | 967 |              | $ | 3,200 |  | $ | 2,022 |  | $ | 1,178 | 

6. Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (FASB)
issued an amendment to its previously released guidance on business
combinations, which became effective for us at the beginning of our 2009 fiscal
year. The statement retains the purchase method of accounting for acquisitions,
but requires a number of changes, including changes in the way assets and
liabilities are recognized in purchase accounting. It also changes the
recognition of assets acquired and liabilities assumed arising from
contingencies, requires the capitalization of in-process research and
development at fair value, and requires the expensing of acquisition-related
costs as incurred. Adoption of this amendment did not affect our consolidated
financial statements.

In December 2007, the FASB issued an amendment to its previously
released guidance on noncontrolling interests in consolidated financial
statements,which became effective for us at the beginning of our 2009 fiscal
year. This will change the accounting and reporting for minority interests,
which will be recharacterized as noncontrolling interests and classified as a
component of equity. This new consolidation method will significantly change
the accounting for transactions with minority interest holders. Adoption of
this amendment did not affect our consolidated financial statements.

In April 2008, the FASB issued an amendment to its previously released
guidance on determination of the useful life of intangible assets,which
became effective for us at the beginning of our 2009 fiscal year.
The new guidance
generally requires the use of a consistent useful life for an intangible asset
when computing amortization, for the period of expected cash flows used to
estimate the fair value of the asset, and for other accounting purposes.
Adoption of this amendment did not affect our consolidated financial
statements.

In June 2008 the FASB issued an amendment to its previously released
guidance on determining whether instruments granted in share-based
payment transactions are participating securities,which became effective for
us at the beginning of our 2009 fiscal year. The new guidance requires that unvested share-based payment awards that
contain nonforfeitable rights to dividends or dividend equivalents (whether paid
or unpaid) are participating securities and shall be included in the
computation of basic earnings per share. This also requires retroactive
restatement of earnings per share for all prior periods presented in the
financial statements and footnotes. Adoption of this amendment did not have a
material impact on our basic or diluted earnings per share.

In October 2009 the FASB issued an amendment to its previously released
guidance on revenue arrangements with multiple deliverables. The amendment
becomes effective at the beginning of our 2011 fiscal year; however, early
adoption is permitted. The pronouncement addresses how to determine whether an
arrangement involving multiple deliverables contains more than one unit of
accounting and how the arrangement consideration should be allocated among the
separate units of accounting. The pronouncement may be applied retrospectively
or prospectively for new or materially modified arrangements. The company is
currently assessing the impact the adoption of this guidance will have on the
companys consolidated financial statements.

In October 2009 the FASB issued an amendment to its previously released
guidance on revenue arrangements for tangible products that
include software elements. The amendment becomes effective at the
beginning of our 2011 fiscal year; however, early adoption is permitted. The
pronouncement removes tangible products from the scope of the software revenue
guidance if the products contain both software and non-software components that
function together to deliver a products essential functionality and provides
guidance on determining whether software deliverables in an arrangement that
includes a tangible product are within the scope of the software revenue
guidance. The pronouncement may be applied retrospectively or prospectively for
new or materially modified arrangements. The company is currently assessing the
impact the adoption of this guidance will have on the companys consolidated
financial statements.

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Table of Contents

7. Share-Based Compensation

There
were no options to purchase our common stock granted during the nine months
ended September 30, 2009 and September 30, 2008. The exercise prices for all
options are equal to the fair market value of our common stock on the date the
options were granted.

Restricted
stock awards, consisting of restricted shares and restricted share units, are
granted to certain employees and our non-employee directors. For employees,
restricted stock awards generally vest over a period of four years and for
non-employee directors, upon termination of the individuals tenure on our
board. Restricted stock awards to employees are expensed over the vesting
period, and those made to our non-employee directors are expensed when granted.
We granted restricted stock awards for 85,139 shares during the nine months
ended September 30, 2009, and granted restricted stock awards for 93,179 during
the nine months ended September 30, 2008. We value restricted stock awards at
the closing market price of our common stock on the date of grant.

A
summary of restricted stock award activity for the nine months ended September
30, 2009 is as follows:

|                               |  |                                          |      |                                   |   |                            |  |   |       | 
|------------------------------ |  | ---------------------------------------- | ---- | --------------------------------- | - | -------------------------- |  | - | ----- | 
|                               |  | Shares                                   |      | Weighted Average
 Value Per Share |   | Aggregate
 Intrinsic Value | 
|                               |  | (In Thousands, Except Per Share Amounts) |     
|                               |  |                                          |      |                                   |   |                            |  |   |       | 
|Balance at
 January 1, 2009    |  |                                          | 329  |                                   | $ | 13.57                      |  | $ | 2,960 | 
|Granted                        |  |                                          | 85   |                                   |   | 8.59                       |  |   |       | 
|Vested                         |  |                                          | (117 | )                                 |   | 11.37                      |  |   |       | 
|Forfeitures                    |  |                                          | (11  | )                                 |   | 12.39                      |  |   |       | 
|Balance at
 September 30, 2009 |  |                                          | 286  |                                   | $ | 13.03                      |  | $ | 2,841 | 

As
of September 30, 2009, the total unearned compensation related to share-based
compensation awards, net of estimated forfeitures, was $1.8 million, which will
be amortized as expense over the weighted average remaining period of 2.4
years. Total share-based compensation was $1.2 million for the nine months
ended September 30, 2009.

8. Fair Value Measurements

Certain
of our assets and liabilities are reported at fair value in our consolidated
financial statements. U.S. GAAP establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value. As
presented in the tables below, this hierarchy consists of three broad levels
with level 1 inputs having the highest priority, followed by level 2 and
lastly, level 3. Level 1 inputs consist of quoted prices in active markets for
identical assets and liabilities. Level 2 inputs are other observable evidence
of fair value, such as: quoted prices for similar assets and liabilities or
other market corroborated evidence of fair value. Level 3 inputs are
unobservable evidence of fair market value, such as: a discounted cash flows
model or other pricing model.

The
tables below provide fair value measurement information for these assets and
liabilities as of September 30, 2009 and 2008. The carrying values of cash and
cash equivalents, accounts receivable, and accounts payable (including income
taxes payable and accrued expenses), approximated fair value at September 30,
2009 and 2008 and accordingly those assets and liabilities are not presented in
the following tables.

|                                   |  |                  |       |                    |   |                                |  |                 |       |                 |   |     |  |   |   | 
|---------------------------------- |  | ---------------- | ----- | ------------------ | - | ------------------------------ |  | --------------- | ----- | --------------- | - | --- |  | - | - | 
|                                   |  | 2009             |      
|                                   |  |                  |       |                    |   | Fair
 Value Measurements Using | 
|(In Thousands)                     |  | Carrying
 Amount |       | Total
 Fair
 Value |   | Level 1
 Inputs                |  | Level 2
 Inputs |       | Level 3
 Inputs |  
|Current
 investment securities     |  | $                | 3,120 |                    | $ | 3,138                          |  | $               | 3,138 |                 | $ |    |  | $ |  | 
|Non-current
 investment securities |  |                  | 415   |                    |   | 415                            |  |                 |      |                 |   | 415 |  |   |  | 
|Assets held
 related to SERP plan  |  |                  | 1,750 |                    |   | 1,750                          |  |                 | 1,750 |                 |   |    |  |   |  | 

|                                   |  |                  |       |                    |   |                                |  |                 |       |                 |   |     |  |   |   | 
|---------------------------------- |  | ---------------- | ----- | ------------------ | - | ------------------------------ |  | --------------- | ----- | --------------- | - | --- |  | - | - | 
|                                   |  | 2008             |      
|                                   |  |                  |       |                    |   | Fair
 Value Measurements Using | 
|(In Thousands)                     |  | Carrying
 Amount |       | Total
 Fair
 Value |   | Level 1
 Inputs                |  | Level 2
 Inputs |       | Level 3
 Inputs |  
|Current
 investment securities     |  | $                | 5,767 |                    | $ | 5,785                          |  | $               | 5,785 |                 | $ |    |  | $ |  | 
|Non-current
 investment securities |  |                  | 3,656 |                    |   | 3,688                          |  |                 | 3,188 |                 |   | 500 |  |   |  | 
|Assets held
 related to SERP plan  |  |                  | 1,541 |                    |   | 1,541                          |  |                 | 1,541 |                 |   |    |  |   |  | 

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Table of Contents

9. Dividends

On
July 22, 2009, our Board of Directors declared a quarterly cash dividend of
$0.07 per share, payable September 1, 2009 to shareholders of record as of
August 7, 2009.

10. Subsequent Event

On
October 21, 2009, our Board of Directors declared a quarterly cash dividend of
$0.07 per share, payable December 1, 2009 to shareholders of record as of
November 6, 2009.

The
company has evaluated all subsequent events that occurred up to the time of the
companys issuance of its financial statements on November 9, 2009.

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Table of Contents

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, state and federal government budgetary decisions, and the
length and complexity of the sales cycle for school districts. National trends,
federal and state legislation, Department of Education administrative policies,
and the way the foregoing align with our products and services can also impact
our business.

We
monitor several important issues which are significant to the evaluation of our
financial condition, operating results, business challenges and strategic
opportunities. Among the more important of these issues are:

| |                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) Our
 success and trends in maintaining and expanding our customer base,
 particularly with respect to the Accelerated
 Readerproduct which accounts for approximately 38% of our sales;
| | (ii) The
 general state of K-12 educational funding in the United States; and                                                                                                              
| | (iii) The
 state of K-12 funding in certain large states, particularly California, Texas
 and Florida, which together make up about one-third of our total orders.                         

A
key part of our business strategy for maintaining and expanding our customer
base (and the related revenues) is to transition our traditional
perpetual-license-based customers to our newer subscription-based software
products. Our subscription-based products offer enhanced features which provide
greater value to our customers, thereby contributing to increased customer satisfaction.
Our most popular subscription-based products, the Enterprise versions, include much greater access to product
content. The subscription-based products are offered with a hosting option
which makes implementation of our software much easier and greatly reduces the
costs both to our customers to implement and to us to develop and support the
software. Customers who transition to our Accelerated
Reader Enterprise
subscription-based product from our perpetual-license products have increased
their average spending on average by more than $1,000 per year, per school.
Although this amount of incremental revenue could change due to customer mix
and other factors including additional purchases of products and services, we
expect that we will continue to see incremental revenue as our
perpetual-license customers transition to Accelerated
Reader Enterprise. We have also experienced an annual per customer
revenue increase for our other subscription-based products, but the increase
has been most significant with our Accelerated
Reader Enterprise
product.

We
believe the percentage of customers using the subscription-based Enterprise versions of our reading and
math products is an important indicator of the progress of this strategic
growth initiative and the magnitude of the growth opportunities still existing
with regard to this strategy. The percentage of customers using reading
products is more critical since the Accelerated
Reader is our most significant product and because we have
experienced a greater increase in per customer revenues from Accelerated Reader Enterprise compared to our other
subscription-based products. As of the end of the third quarter of 2009,
approximately 40% of our active reading product customers were using the Enterprise version as compared to
approximately 30% at the end of the third quarter of 2008. Worldwide, we
currently have approximately 55,000 active Accelerated
Reader customers, 18,000 active Accelerated
Math customers and 47,000 active Star
Reading and Star Math customers.

Our
strategic transition to subscription-based software products has affected, and
will continue to affect, our results of operations. We believe that this
strategy has the potential to generate more lifetime revenue per customer than
selling software under a perpetual-license model. Revenues from
subscription-based software sales are not completely incremental to our
results, as customers who make the transition no longer purchase annual support
plans for our perpetual-license products, and those who purchase our most
popular subscription-based product, the Enterprise
version, also no longer purchase add-on content. Revenues under the
subscription-based model are composed of both software and services. The gross
profit margins from subscription-based software products are slightly higher
than our historical gross profit margins on sales of perpetual-license
software. The subscription-based software business tends to generate a sales
mix somewhat more heavily weighted towards services. In addition, the services
we sell with our subscription-based software products tend to have a somewhat
higher gross profit margin than those sold with our perpetual-license software
products.

The
transition to subscription-based products has increased the seasonality of
customer ordering patterns. Compared to orders for non-subscription-based
offerings, customer orders of our subscription-based offerings tend to more
closely follow school budgeting cycles, resulting in a more seasonal order
pattern weighted to the second and, even more so, third calendar quarters.
Currently about 20% of our subscriptions have renewal dates in the second
quarter and about 60% of our subscriptions have renewal dates in the third
quarter. Also, after customers convert to the Enterprise
version, they no longer order reading quizzes and math libraries, since access
to this content is included in their subscription. The combined effect is that
a much greater proportion of a years orders are expected in the second quarter
and to an even greater extent in the third quarter. Historically, our customers
have ordered more of this content in the first and fourth quarters. Currently
approximately 40-50% of our orders occur in the third quarter.

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Transitioning
our customer base to subscription-based software can adversely impact orders
for add-on reading quizzes and math libraries by causing customers who own our
software under perpetual-license agreements to delay purchases of add-on content
if they are contemplating converting to our Enterprise
version subscription-based products. Additionally, our subscription-based
products are often sold at the school district level. District level sales tend
to be more complex, have a longer sales cycle, and are typically for a larger
dollar amount than sales made to individual schools. Orders from district sales
are more uneven and more difficult to accurately predict than individual
school-level sales and, therefore, the timing of large district sales can
significantly impact quarterly order levels.

However,
as the transition to subscription-based products has progressed, we have built
substantial balances of deferred subscription revenue. Since this deferred
revenue is recognized ratably over the subscription period (generally twelve
months) it reduces the volatility of our reported revenue. This means that
revenues in a given period are not necessarily indicative of the orders placed
by our customers for our products and services during a given period.

Customer
orders for our products increased by approximately $13.4 million or 34%, in the
third quarter of 2009 compared to the third quarter of 2008. In addition to the
above factors, we believe that our third quarter 2009 orders were positively
affected by educational funds provided by the American Recovery and
Reinvestment Act which generally first became available to schools during the
third quarter 2009. A recent survey by the Center on Budget and Policy
Priorities indicates that nearly all states are still facing significant
shortfalls in their fiscal year 2010 budget, and the majority of states already
anticipate a deficit for fiscal year 2011. Therefore, it appears likely that
once the federal stimulus funds are used up, many states may face budget
challenges which could affect funding for education.

We
have implemented several cost savings initiatives this year including a general
hiring freeze, reducing product development expenses related to some of our
lower-performing product lines and implementing other general non-payroll cost
constraints. There was minimal impact from these initiatives in the first
quarter of 2009 because the savings were offset by one-time severance and other
charges. Savings from these initiatives were approximately $0.8 million and
$0.9 million in the second and third quarters of 2009, respectively.

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 Ended
 September 30, |       | Nine Months Ended
 September 30, | 
|                           |  | 2009                              |       | 2008                             |  | 2009  |   | 2008 |      
|Net Sales:                 |  |                                   |       |                                  |  |       |   |      |       |   |  |       |  
|Products                   |  |                                   | 69.1  | %                                |  | 68.9  | % |      | 71.6  | % |  | 74.2  | %
|Services                   |  |                                   | 30.9  | %                                |  | 31.1  | % |      | 28.4  | % |  | 25.8  | %
|Total net sales            |  |                                   | 100.0 | %                                |  | 100.0 | % |      | 100.0 | % |  | 100.0 | %
|Cost of sales:             |  |                                   |       |                                  |  |       |   |      |       |   |  |       |  
|Products                   |  |                                   | 16.8  | %                                |  | 16.3  | % |      | 16.6  | % |  | 17.6  | %
|Services                   |  |                                   | 34.8  | %                                |  | 41.8  | % |      | 34.7  | % |  | 45.2  | %
|Total cost of sales        |  |                                   | 22.4  | %                                |  | 24.3  | % |      | 21.7  | % |  | 24.7  | %
|Gross profit:              |  |                                   |       |                                  |  |       |   |      |       |   |  |       |  
|Products                   |  |                                   | 83.2  | %                                |  | 83.7  | % |      | 83.4  | % |  | 82.4  | %
|Services                   |  |                                   | 65.2  | %                                |  | 58.2  | % |      | 65.3  | % |  | 54.8  | %
|Total gross profit         |  |                                   | 77.6  | %                                |  | 75.7  | % |      | 78.3  | % |  | 75.3  | %
|Operating expenses:        |  |                                   |       |                                  |  |       |   |      |       |   |  |       |  
|Product development        |  |                                   | 12.9  | %                                |  | 16.0  | % |      | 14.0  | % |  | 15.0  | %
|Selling and marketing      |  |                                   | 30.1  | %                                |  | 31.8  | % |      | 30.2  | % |  | 31.8  | %
|General and administrative |  |                                   | 10.7  | %                                |  | 15.0  | % |      | 11.3  | % |  | 13.8  | %
|Total operating expenses   |  |                                   | 53.7  | %                                |  | 62.8  | % |      | 55.5  | % |  | 60.6  | %
|                          
|Operating income           |  |                                   | 23.9  | %                                |  | 12.9  | % |      | 22.8  | % |  | 14.7  | %
|Other, net                 |  |                                   | 0.7   | %                                |  | 1.0   | % |      | 0.5   | % |  | 0.8   | %
|Income before taxes        |  |                                   | 24.6  | %                                |  | 13.9  | % |      | 23.3  | % |  | 15.5  | %
|Income taxes               |  |                                   | 8.2   | %                                |  | 4.8   | % |      | 8.4   | % |  | 5.5   | %
|Net Income                 |  |                                   | 16.4  | %                                |  | 9.1   | % |      | 14.9  | % |  | 10.0  | %

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Three Months Ended September 30, 2009 and
2008

Net
Sales. Our net sales increased by $3.6 million, or
12.6%, to $31.8 million in the third quarter of 2009 from $28.2 million in the
third quarter of 2008. Orders were $13.4 million higher in the third quarter
2009 than in the third quarter 2008; however, higher orders were offset by a
$9.4 million increase in the net amount of revenue deferred as compared to the
same quarter last year.

Product
revenue increased by $2.5 million, or 12.9%, to $21.9 million in the third
quarter of 2009 from $19.4 million in the third quarter of 2008 due to
increases in revenue across all product lines. The product revenue increase is
the result of both strong orders in the period and from revenue recognized from
prior periods subscription orders.

Service
revenue increased by $1.0 million, or 12.0%, to $9.8 million in the third
quarter of 2009 from $8.8 million in the third quarter of 2008. About half of
the service revenue increase is a result of increased hosting revenue which is
recognized ratably over the subscription period and is a direct result of the
increasing number of customers who are utilizing our hosting services. The
remainder of the increase is related to increased revenue for technical
consulting services that we provide to help our customers to implement and get
started using our products. These increases were somewhat offset by decreases
in onsite professional development revenue.

Cost
of Sales. Costs of sales of products increased by $0.5
million, or 16.3%, to $3.7 million in the third quarter of 2009 from $3.2
million in the third quarter of 2008. As a percentage of product sales, the
cost of sales of products was relatively unchanged at 16.8% in the third
quarter of 2009, compared to 16.3% for the third quarter of 2008. The cost of
sales of services decreased to $3.4 million in the third quarter of 2009 from
$3.7 million in the third quarter of 2008, a decrease of 6.7%. As a percentage
of sales of services, the cost of sales of services decreased to 34.8% in the
third quarter of 2009 from 41.8% in the third quarter of 2008. The improvement
is due to growth of our higher margin services such as hosting and technical
services, for which the cost of sales of services is relatively fixed.

Product
Development. Product development expenses decreased by
$0.4 million, or 9.1%, to $4.1 million in the third quarter of 2009 from $4.5
million in the third quarter of 2008. The decrease in product development
expenses is primarily due to the restructuring and cost savings effort
implemented earlier in the year. As a percentage of net sales, product
development expenses decreased to 12.9% in the third quarter of 2009 from 16.0%
in the third quarter of 2008.

Selling
and Marketing. Selling and marketing expenses
increased by $0.6 million, or 6.7%, to $9.6 million in the third quarter of
2009 from $9.0 million in the third quarter of 2008. Selling expenses increased
primarily due to higher commissions associated with higher order levels this
year. Marketing expenses were unchanged from the previous year. As a percentage
of net sales, selling and marketing expenses decreased to 30.1% in the third
quarter of 2009 from 31.8% in the third quarter of 2008.

General
and Administrative. General and administrative
expenses decreased by $0.8 million, or 19.6%, to $3.4 million in the third
quarter of 2009 from $4.2 million in the third quarter of 2008. A $0.6 million
charge taken in the prior year for a 2004 lawsuit settlement regarding defective
parts from a supplier is the primary reason for the lower expense this year.
The remainder of the decrease is attributable to staff reductions and other
non-payroll cost constraints implemented earlier in 2009 as part of our cost
reduction efforts. As a percentage of net sales, general and administrative
expenses decreased to 10.7% in the third quarter of 2009 from 15.0% in the
third quarter of 2008.

Operating
Income. Operating income increased by $3.9 million, or
107.0%, to $7.6 million in the third quarter of 2009 from $3.7 million in the
third quarter of 2008. The increase was due to the higher revenue, gross profit
margin improvement, and decreased operating expenses as explained in more
detail above. As a percentage of net sales, operating income increased to 23.9%
in the third quarter of 2009 from 12.9% in the third quarter of 2008.

Income
Tax.Income tax expense of $2.6 million was recorded
in the third quarter of 2009 at an effective income tax rate of 38.0% of
pre-tax income, less a tax benefit of $0.4 million relating to the lapse of the
statue of limitations on various tax positions. This compares to $1.4 million
that was recorded in the third quarter of 2008 at an effective income tax rate
of 38.0% of pre-tax income, less a tax benefit of $0.1 million relating to the
lapse of the statue of limitations on various tax positions.

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Table of Contents

Nine Months Ended September 30, 2009 and 2008

Net
Sales. Our net sales increased by $3.5 million, or
4.0%, to $89.1 million in the first nine months of 2009 from $85.6 million in
the first nine months of 2008. Orders were $5.5 million higher in the first
nine months of 2009 than in the first nine months of 2008; however, higher
orders were offset by a $2.4 million increase in the amount of revenue deferred
as compared to the same quarter last year.

Product
revenue increased by $0.3 million, or 0.4%, to $63.8 million in the first nine
months of 2009 from $63.5 million in the same period in 2008. The product
revenue increase is the result of both the increase in orders in the first nine
months of 2009 and from revenue recognized from the prior years subscription
orders.

Service
revenue increased by $3.2 million, or 14.4%, to $25.3 million in the first nine
months of 2009 from $22.1 million in the first nine months of 2008. Nearly all
categories of service revenue were up except for onsite professional
development. The most significant increases were in hosting and other technical
services which increased by $1.9 million and $1.2 million, respectively.

Cost
of Sales. Cost of sales of products decreased by $0.6
million, or 5.1%, to $10.6 million in the first nine months of 2009 from $11.2
million in the first nine months in 2008. As a percentage of product sales, the
cost of sales of products was 16.6% in the first nine months of 2009, compared
to 17.6% in the first nine months of 2008. Product cost of sales improvement
was due to the higher proportion of software in the 2009 sales mix as compared
to 2008, as our margins are higher on software than on hardware, and to lower
production costs for our responders and scanners. The cost of sales of services
decreased by $1.2 million, or 12.2%, to $8.8 million in the first nine months
of 2009 from $10.0 million in the first nine months of 2008. About 70% of the
dollar decrease was due to savings from not holding a National Conference in
2009, with the remainder of the dollar decrease attributable to cost
efficiencies in our other services, the cost of which is relatively fixed,
especially with respect to our technical services and software support. As a
percentage of sales of services, the cost of sales of services decreased to
34.7% in the first nine months of 2009 from 45.2% in the first nine months of
2008.

Product
development.Product development expenses decreased by
$0.3 million, or 2.6%, to $12.5 million in the first nine months of 2009,
compared to $12.8 million for the first nine months of 2008. As a percentage of
net sales, product development expenses decreased to 14.0% in the first nine
months of 2009, from 15.0% for the first nine months of 2008. The change in
product development expenses was primarily due to savings of approximately $0.6
million in the second and third quarters of 2009 from our restructuring, offset
by $0.1 million less capitalized development expense in 2009 and the remainder
mostly attributable to the additional costs we incurred in the first quarter of
2009 to effect the restructuring.

Selling
and Marketing.Selling and marketing expenses
decreased by $0.3 million, or 1.3%, to $26.9 million in the first nine months
of 2009, compared to $27.2 million for the first nine months of 2008. Selling
expenses were flat and marketing expenses decreased due to cost efficiencies in
our advertising programs. As a percentage of net sales, selling and marketing
expenses decreased to 30.2% in the first nine months of 2009 from 31.8% in the
first nine months of 2008.

General
and Administrative.General and administrative
expenses decreased by $1.8 million, or 14.9%, to $10.0 million in the first
nine months of 2009 from $11.8 million in the first nine months of 2008. The
decrease is due to a $0.6 million charge taken in the prior year for a 2004
lawsuit settlement regarding defective parts from a supplier, and $0.4 million
of fees incurred in the prior year to cancel certain future professional
development events. The remaining $1.0 million of the decrease is primarily
attributable to staff reductions and other non-payroll cost constraints
implemented earlier in 2009 as part of our cost reduction efforts. As a
percentage of net sales, general and administrative expenses decreased to 11.3%
in the first nine months of 2009 from 13.8% in the first nine months of 2008.

Operating
Income.Operating income increased by $7.7 million, or
60.9%, to $20.3 million in the first nine months of 2009 from $12.6 million in
the same period in 2008. As a percentage of net sales, operating income
increased to 22.8% in the first nine months of 2009 from 14.7% in the first
nine months of 2008. The increase was due to the higher revenues, gross profit
margin improvement, and decreased operating expenses as explained in more
detail above.

Income
Tax Expense.Income tax expense of $7.5 million was
recorded in the first nine months of 2009 at an effective income tax rate of
38.0% of pre-tax income, less a tax benefit of $0.4 million relating to the
lapse of the statue of limitations on various tax positions. This compares to
income tax expense of $4.7 million that was recorded in the first nine months
of 2008 at an effective income tax rate of 38.0% of pre-tax income, less a tax
benefit of $0.3 million relating to the settlement of various state audit
issues and to the lapse of the statue of limitations on various tax positions.

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Liquidity and Capital Resources

As
of September 30, 2009, our cash, cash equivalents and investment securities
were $33.8 million, up $16.0 million from $17.8 million at December 31, 2008.
The increase was primarily due to $21.7 million of cash flow provided by
operations offset by $6.1 million used to pay dividends.

As
of September 30, 2009, we have a $15.0 million secured revolving line of credit
with a bank which is available until July 1, 2010. The line of credit bears
interest at either a floating rate or a fixed rate for a period of up to 90
days based on LIBOR plus 1.5%. 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, 2010, which bears interest at the
prime rate. As of September 30, 2009, 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 an additional 3,000,000 shares; and on
February 6, 2008, our Board of Directors authorized the repurchase of an
additional 1,000,000 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. We repurchase shares on the open market as well as from
employees who elect to surrender shares to pay their payroll withholding taxes
associated with stock-based compensation. Repurchased shares become treasury
shares and may be used for stock-based employee benefit plans, equity
compensation plans and, for other general corporate purposes. From January 1,
2009 through September 30, 2009, we repurchased approximately 20,000 shares at
a cost of $182,000. Since the original authorization of the repurchase program
in 2002, we have repurchased approximately 7.8 million shares at a cost of
$135.1 million. 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.

In
each of the first three quarters of 2009 we paid a cash dividend of $0.07 per
share. We paid quarterly cash dividends of $0.07 per share in each of the four
quarters of 2008 along with a special dividend of $0.75 per share in the fourth
quarter of 2008. On October 21, 2009, our Board of Directors declared a
quarterly cash dividend of $0.07 per share, payable December 1, 2009 to
shareholders of record as of November 6, 2009.

We
intend to continue to pay quarterly cash dividends, subject to capital
availability and a determination that cash dividends continue to be in the best
interests of the company and our shareholders. Our Board of Directors also
considers several additional factors when declaring dividends, including: (1)
the companys financial statements as of the most recent practicable date; (2)
the expected cash costs to deliver the products and services sold and recorded
as deferred revenue; (3) the companys ability to provide the products and
services underlying the amounts recorded as deferred revenue; (4) the
likelihood of recognizing amounts recorded as deferred revenue as net sales
based on the companys historical experience and most recent projections; (5)
the short time period over which such recognition has historically occurred and
is expected to occur; (6) seasonal cash flow; (7) general economic outlook; and
(8) other information, opinions, reports and statements prepared and presented
by the companys officers and employees about the companys business,
operations and financial condition.

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

Off-Balance Sheet Arrangements and Aggregate
Contractual Obligations

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

Operating
Leases. We enter into operating leases, primarily for
facilities that we occupy in order to carry out our business operations. We
utilize operating leases for some of our facilities to gain flexibility as
compared to purchasing facilities outright and to limit our exposure to many of
the risks of owning commercial property, particularly with regard to
international operations. These agreements are generally for terms of one to
five years. Some of the leases have early termination clauses, but they
generally cannot be terminated by either the lessor or us for reasons other
than breach of the lease agreement. We do not anticipate the early termination
of any significant lease agreement.

Purchase
Obligations. We enter into commitments with certain
suppliers to purchase our hardware products, such asNeo laptops, AccelScan
scanners and the 2Know! response
system. The majority of these
obligations will be satisfied within one year.

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Tax
Audit Settlements and Deposits. Currently we do not
anticipate making any significant cash payments related to the settlement of
tax audits or deposits for unsettled audit issues. Estimation of the amounts
and timing of payments in periods after 2009 are highly uncertain and therefore
are not included in the table.

As
of September 30, 2009, our approximate contractual obligations for operating
leases, tax audit payments and purchase obligations (by period due) were as
follows:

|                            |  |       |       |                   |                        |            |  |            |       |                    |   |       |  |   |     | 
|--------------------------- |  | ----- | ----- | ----------------- | ---------------------- | ---------- |  | ---------- | ----- | ------------------ | - | ----- |  | - | --- | 
|Contractual
 Obligations    |  |       |       |                   | Payments Due by Period |           
|(In
 Thousands)             |  | Total |       | Less than
 1 year |                        | 1-3
 years |  | 3-5
 years |       | More than
 5 years |  
|Operating lease obligations |  | $     | 3,783 |                   | $                      | 395        |  | $          | 2,080 |                    | $ | 1,157 |  | $ | 151 | 
|Purchase obligations        |  |       | 3,766 |                   |                        | 3,753      |  |            | 13    |                    |   |      |  |   |    | 
|Total                       |  | $     | 7,549 |                   | $                      | 4,148      |  | $          | 2,093 |                    | $ | 1,157 |  | $ | 151 | 

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 2008 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 and
the following Quantitative and Qualitative Disclosures About Market Risk may
contain certain forward-looking statements regarding strategic growth
initiatives, growth opportunities and managements expectations regarding
orders and financial results for 2009 and future periods. These forward-looking
statements are based on current expectations and current assumptions which
management believes are reasonable. However, these statements involve risks and
uncertainties that could cause actual results to differ materially from any
future results encompassed within the forward-looking statements. Factors which
may cause such a difference to occur include: (i) the failure of Accelerated Reader Enterprise, Accelerated Math Enterprise and laptop
orders to achieve expected growth targets, (ii) a decline in reading quiz and
math library sales that exceeds expectations, (iii) risks associated with our
strategic growth initiative involving our transition to subscription-based
products, (iv) dependence on educational institutions and government funding
and (v) other risks affecting our business as described in our filings with the
Securities and Exchange Commission, including our 2008 Annual Report,
subsequently filed quarterly reports on Form 10-Q and current reports on Form
8-K, which factors are incorporated herein by reference. We expressly disclaim
a duty to provide updates to forward-looking statements, whether as a result of
new information, future events or other occurrences.

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 the
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 creditworthiness of the securities issuer, upgrades or
downgrades in the creditworthiness of the insurer of the securities, and from
changes in general market conditions.

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We
seek to manage our 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 diversification and (iv) maximization of yields in
relationship to the guidelines, risk, market conditions and tax considerations.

Our
investment policy permits investments in obligations of the U.S. Treasury
department and its agencies, money market funds and, high quality investment-grade
corporate and municipal interest-bearing obligations. The policy requires
diversification to prevent excess concentration of issuer risk and requires the
maintenance of minimum liquidity levels. The policy precludes investment in
equity securities except for the specific purpose of funding the obligations
related to our Supplemental Executive Retirement Plan. As of September 30,
2009, our investment securities had a market value of approximately $5.3
million and a carrying value of $5.3 million. Due to the type and duration of
our investments, we do not expect to realize any material gains or losses
related to market risk.

Foreign
Currency Exchange Rate Risk. The financial position
and results of operations of our foreign subsidiaries are measured using local
currency. Revenues and expenses of such subsidiaries have been translated into
U.S. dollars using average exchange rates prevailing during the period. Assets
and liabilities have been translated at the rates of exchange on the balance
sheet date. We use the historical exchange rates published by the OANDA
Corporation for these translations. 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 British pound, Canadian dollar and the Euro. At this
time, foreign exchange rate risk is not significant due to the relative size of
our foreign operations and revenues derived from sales in foreign currencies.

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 of 1934, as amended (the Exchange Act), is recorded, processed,
summarized and reported within the time periods specified in the rules and
forms of the SEC, 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 our 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 September 30, 2009, 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 Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the rules and forms of the SEC.

There
has been no change in our internal control over financial reporting that has
occurred during the quarter ended September 30, 2009 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.

Part II - OTHER INFORMATION

Item 1A. Risk Factors

There
have been no material changes from risk factors previously disclosed in our
2008 Annual Report in response to Item 1A to Part I of Form 10-K.

Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds

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 an
additional 3,000,000 shares under the stock repurchase program. On February 6,
2008, our Board of Directors authorized the repurchase of an additional
1,000,000 shares under the stock repurchase program.

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No
time limit was placed on the duration of the repurchase program, nor is there
any dollar limit on the program. We repurchase shares on the open market as
well as from employees who elect to surrender shares at the time of vesting to
pay their payroll withholding taxes. Repurchased shares will become treasury
shares and may be used for equity compensation plans, 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 September 30, 2009:

|               |  |                                    |       |                               |   |                                                                                      |  |                                                                                   |       |  |  |           | 
|-------------- |  | ---------------------------------- | ----- | ----------------------------- | - | ------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------- | ----- |  |  | --------- | 
|Period         |  | Total Number
 of Shares
 Purchased |       | Average Price
 Paid per Share |   | Total Number of
 Shares Purchased as
 Part of Publicly
 Announced Plans or
 Programs |  | Maximum Number of
 Shares that May Yet Be
 Purchased Under the Plans
 or Programs |      
|July 1-31      |  |                                    | 6,004 |                               | $ | 9.54                                                                                 |  |                                                                                   | 6,004 |  |  | 1,216,463 | 
|August 1-31    |  |                                    | 1,376 |                               |   | 9.81                                                                                 |  |                                                                                   | 1,376 |  |  | 1,215,087 | 
|September 1-30 |  |                                    |      |                               |   |                                                                                     |  |                                                                                   |      |  |  | 1,215,087 | 
|Total          |  |                                    | 7,380 |                               | $ | 9.59                                                                                 |  |                                                                                   | 7,380 |  |  |           | 

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Item 6. Exhibits

Exhibits.

|             |      |             |                                                | 
|------------ | ---- | ----------- | ---------------------------------------------- | 
|Exhibit
 No. |      | Description |                                               
|             |      |             |                                               
|             | 31.1 |             | Section 302
 certification by Terrance D. Paul
|             |      |             |                                               
|             | 31.2 |             | Section 302
 certification by Mary T. Minch   
|             |      |             |                                               
|             | 32.1 |             | Section 906
 certification by Terrance D. Paul
|             |      |             |                                               
|             | 32.2 |             | Section 906
 certification by Mary T. Minch   
|             |      |             |                                               

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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
 9, 2009 |  | /s/ Terrance D. Paul                                        | 
| | Date              |  | Terrance D. Paul                                           
| |                   |  | Chief Executive Officer
 and a Director                    
| |                   |  | (Principal Executive
 Officer)                             
| |                   |  |                                                            
| | November
 9, 2009 |  | /s/ Mary T. Minch                                           | 
| | Date              |  | Mary T. Minch                                              
| |                   |  | Senior Vice
 President-Finance, Chief Financial Officer and
| |                   |  | Secretary (Principal
 Financial and Accounting Officer)    

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Table of Contents

Index to Exhibits

|             |      |             |                                                | 
|------------ | ---- | ----------- | ---------------------------------------------- | 
|Exhibit
 No. |      | Description |                                               
|             |      |             |                                               
|             | 31.1 |             | Section 302 certification
 by Terrance D. Paul
|             |      |             |                                               
|             | 31.2 |             | Section 302 certification
 by Mary T. Minch   
|             |      |             |                                               
|             | 32.1 |             | Section 906 certification
 by Terrance D. Paul
|             |      |             |                                               
|             | 32.2 |             | Section 906 certification
 by Mary T. Minch   

| |  | 
| |  | 
| |  | 

---