UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

OR

Commission file number: 0-22187

RENAISSANCE LEARNING, INC.

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

54495-8036
(Zip Code)

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

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

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

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

RENAISSANCE LEARNING, INC.

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004

PART I — FINANCIAL INFORMATION

- Index -

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

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

See accompanying notes to condensed consolidated financial statements.

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

See accompanying notes to condensed consolidated financial statements.

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

See accompanying notes to condensed consolidated financial statements.

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

1. Consolidation

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

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, 2003, which is on file with the U.S. Securities and Exchange Commission (“2003 Annual Report”).

     The results of operations for the three-month periods ended March 31, 2004 and 2003 are not necessarily indicative of the results to be expected for the full year.

3. Earnings Per Common Share

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

     On April 17, 2002, our Board of Directors authorized a repurchase program which provides for the repurchase of up to 5,000,000 shares of our common stock. No time limit was placed on the duration of the repurchase program, nor is there any dollar limit on the program. Repurchased shares will become treasury shares and will be used for stock-based employee benefit plans and for other general corporate purposes. During the quarter ending March 31, 2004, we did not repurchase any shares under this program. The cumulative shares repurchased under this program remain at 4.0 million with an associated cost of $72.9 million.

     The weighted average shares outstanding are as follows:

     For the three months ended March 31, 2004 and 2003, 667,500 and 979,872 shares attributable to outstanding stock options were excluded from the calculation of diluted earnings per share because the effect was antidilutive. These options could be dilutive in the future.

4. Comprehensive Income

     Total comprehensive income was $6.0 million and $7.6 million in the first quarter of 2004 and 2003, respectively. Our comprehensive income includes foreign currency translation adjustments.

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5. Goodwill and Other Intangible Assets

     In accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”, goodwill is not amortized but is tested at least annually for impairment. Our other intangible assets have finite lives and are amortized over their estimated useful lives of four years for algorithms and purchased software code, and five years for the non-compete agreement. Other intangibles with finite lives are scheduled to be fully amortized in 2005 with corresponding amortization estimated to be $212,000, for the remainder of 2004, and $192,000 for 2005.

     For the three months ended March 31, 2004 and 2003, we recognized amortization expense on other intangibles of $74,000 and $134,000, respectively. No goodwill or other intangibles were acquired or impaired during the first quarter of 2004 or 2003. Other intangibles consisted of the following (in thousands):

6. Stock Option Plan

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

     The fair value of options granted in the first quarter of 2004 and 2003 were estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

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7. Segment Reporting

     Beginning in 2004, our results are presented as one operating segment. We had previously reported two operating segments: (i) software and (ii) training. We are no longer organized by these segments and we now manage our operations as one business. These changes were made to better support our customers’ needs through offerings of bundled solutions which consist of software, professional development, implementation assistance, technical consulting, and ongoing maintenance and support plans. Accordingly, we do not produce discrete financial information or make resource allocation decisions for separately reportable segments as defined by SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”. Foreign market operations are not significant at this time.

8. Dividends

     On March 1, 2004, we paid a special cash dividend of $2.15 per share and our first quarterly dividend of $.04 per share totaling $67.9 million.

     On April 21, 2004, our Board of Directors declared a quarterly cash dividend of $.04 per share, payable June 1, 2004 to shareholders of record as of May 14, 2004.

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

Results of Operations

     Our results of operations can be affected by general economic factors and their related impact on state and federal budgetary decisions. The difficult funding environment existing in the 2003-2004 school year continued to impact the first quarter of 2004 including reduced attendance at our National Conference. Another contributing factor was the delay in customer order decisions as they evaluate our new Renaissance Place product line.

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

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Three Months Ended March 31, 2004 and 2003

     Net Sales. Our net sales decreased by $2.7 million, or 7.9%, to $31.5 million in the first quarter of 2004 from $34.2 million in the first quarter of 2003. Product sales declined by $2.1 million, or 7.7%, to $25.1 million in the first quarter of 2004 from $27.2 million in the first quarter of 2003. Lower product sales were due to the continuing difficult state spending environment and our customers delaying their purchase decisions to consider the new Renaissance Place versions of Accelerated Reader and Accelerated Math, which are expected to ship during the second quarter. Sales of our six new products, which were introduced in 2002 or 2003, were improved over the first quarter of 2003 but continued at similar levels to the past couple quarters.

     Service revenue for the first quarter of 2004 was $6.4 million, a decline of $588,000 from the first quarter 2003 revenues of $7.0 million. Lower attendance at the 2004 National Conference resulted in about $700,000 less revenue in the first quarter of 2004 as compared to 2003. Excluding the National Conference, we would have achieved modest revenue growth in services for the quarter, partly due to the delivery of professional development and implementation services under the district contracts signed in the fourth quarter.

     We expect our second quarter sales to be below the second quarter of 2003 but the year over year percentage decline is expected to be improved from the first quarter decline we experienced. For the full year 2004, we continue to expect growth in sales and earnings in the low- to mid- single digit percentage range. These expectations assume modest improvement in the school funding environment in the second half of the year, improved contributions from our expanded field sales force, and market acceptance of our Renaissance Place products and new solution offerings.

     Cost of Sales. The cost of sales of products decreased by $1.4 million, or 43.5%, to $1.8 million in the first quarter of 2004 from $3.2 million in the first quarter of 2003. As a percentage of product sales, the cost of sales of products decreased to 7.1% in the first quarter of 2004 from 11.7% in the first quarter of 2003. This decrease is due, in part, to the sales mix this year compared to last with proportionally lower sales of scanners and custom assessment products in 2004, both of which are lower gross profit margin products than our core software products. Lower amortization of capitalized development costs, and lower scanner warranty and shipping costs, also contributed to the lower product costs.

     The cost of sales of services increased by $390,000, or 11.6%, to $3.7 million in the first quarter of 2004 from $3.4 million in the first quarter of 2003. As a percentage of sales of services, the cost of sales of services increased to 58.1% in the first quarter of 2004 from 47.7% in the first quarter of 2003. This increase is mainly attributable to lower attendance at our annual National Renaissance Conference. Since most of the costs to host the conference are relatively fixed, the lower revenue directly affects profitability. Cost of sales for support plans and professional development (excluding the National Renaissance Conference) were similar to the prior year.

     Product Development. Product development expenses were $4.2 million in the first quarter of 2004, which was down by $260,000 from $4.5 million the first quarter of 2003. As a percentage of net sales, product development costs increased to 13.3% in the first quarter of 2004 from 13.0% in the first quarter of 2003 primarily due to the decline in sales. We capitalized product development expenses of $119,000 this quarter compared to $69,000 in the first quarter of 2003. We expect product development costs to continue in the range of approximately $4.0 million to $4.5 million per quarter for 2004 and expect to be toward the lower end of this range for second quarter, as we expect to capitalize additional costs as Renaissance Place is completed for Accelerated Reader and Accelerated Math.

     Selling and Marketing. Selling and marketing expenses of $9.3 million in the first quarter of 2004 were up by $1.2 million, or 15.4%, from $8.1 million in the first quarter of 2003. As a percentage of net sales, selling and marketing expenses increased to 29.7% in the first quarter of 2004 from 23.7% in the first quarter of 2003. The increase in selling and marketing expenses is primarily due to the field sales force expansion with some increase in marketing costs. The first quarter is traditionally our heaviest period for advertising in advance of school purchasing decisions and budgetary allocations for the upcoming school year. We expect selling and marketing costs to continue to exceed the amount incurred in the comparable prior year period due to the expansion of our field sales force.

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     General and Administrative. General and administrative expenses were $3.4 million for the first quarter of 2004, essentially the same as in the first quarter of 2003. As a percentage of net sales, general and administrative expenses increased to 10.8% from 10.1% due to the decline in sales.

     Operating Income. Operating income was $9.0 million, or 28.7% of net sales in the first quarter of 2004, compared to $11.7 million, or 34.1% of net sales in the first quarter of 2003.

     Income Tax Expense. Income tax expense of $3.5 million was recorded in the first quarter of 2004 at an effective income tax rate of 37.0% of pre-tax income, compared to $4.7 million, or 38.3% of pre-tax income in the first quarter of 2003. We expect to maintain our effective tax rate somewhat below 37.5% for the balance of 2004.

Liquidity and Capital Resources

     As of March 31, 2004, our cash, cash equivalents and investment securities were $54.0 million, down $57.8 million from the December 31, 2003 total of $111.8 million. The decrease is primarily due to $8.4 million in net cash provided by operating activities offset by a special cash dividend of $66.7 million and our first quarterly cash dividend of $1.2 million during the first quarter of 2004. Even with the payment of cash dividends during the quarter, we continue to maintain a strong cash position, which we believe, when coupled with cash flow from operations, will be sufficient to meet both our short-term and long-term working capital requirements.

     At March 31, 2004, we had a $15.0 million unsecured revolving line of credit with a bank that is available until May 31, 2005. The line of credit bears interest at either a floating rate based on the prime rate less 1.0%, or a fixed rate for a period of up to 90 days based on LIBOR plus 1.25%. The rate is at our option and is determined at the time of borrowing. We also have a $2.0 million unsecured revolving line of credit with a bank available until April 30, 2005. The line of credit bears interest based on the prime rate less 1.0%. As of March 31, 2004, the lines of credit had not been used.

     On April 17, 2002, our Board of Directors authorized the repurchase of up to 5,000,000 shares of our common stock. No time limit was placed on the duration of the repurchase program, nor is there any dollar l