UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
		ENDED MARCH 31, 2008.

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

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 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		Smaller reporting company o
				(Do not check if a smaller reporting company)

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 at April 30, 2008
Common Stock, $0.01 par value		29,095,703

 

 

RENAISSANCE LEARNING, INC.

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008

		Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2008 and December 31, 2007			1
Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2008 and 2007			2
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2008 and 2007			3
Notes to Condensed Consolidated Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			5
Item 3. Quantitative and Qualitative Disclosures About Market Risk			9
Item 4. Controls and Procedures			9
PART II — OTHER INFORMATION
Item 1A. Risk Factors			10
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			10
Item 6. Exhibits			11
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

-Index-

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

RENAISSANCE LEARNING, INC. AND SUBSIDIARIES

		March 31,				December 31,
		2008				2007
		(In Thousands, Except Share and Per Share Amounts)
ASSETS
Current assets:
Cash and cash equivalents		$	7,975			$	7,337
Investment securities			7,786				8,136
Accounts receivable, less allowance of $1,100			9,477				8,791
Inventories			5,981				6,273
Prepaid expenses			1,976				2,197
Income taxes receivable			137				1,450
Deferred tax asset			4,432				4,406
Other current assets			268				300
Total current assets			38,032				38,890
Investment securities			6,955				8,982
Property, plant and equipment, net			10,186				10,578
Deferred tax asset			1,551				1,587
Goodwill			47,241				47,065
Other intangibles, net			5,456				5,579
Capitalized software, net			612				452
Other non-current assets			189				167
Total assets		$	110,222			$	113,300
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	3,193			$	2,011
Deferred revenue			30,682				35,675
Payroll and employee benefits			4,424				4,184
Other current liabilities			3,693				3,563
Total current liabilities			41,992				45,433
Deferred revenue			2,723				2,707
Deferred compensation and other employee benefits			1,543				1,933
Income taxes payable			4,721				5,104
Other noncurrent liabilities			100				136
Total liabilities			51,079				55,313
Shareholders’ equity:
Common stock, $.01 par value; shares authorized: 150,000,000; issued: 34,736,647 shares at March 31, 2008 and December 31, 2007			347				347
Additional paid-in capital			52,747				52,683
Retained earnings			103,475				102,887
Treasury stock, at cost: 5,673,141 shares at March 31, 2008; 5,703,450 shares at December 31, 2007			(97,598	)			(98,123	)
Accumulated other comprehensive income			172				193
Total shareholders’ equity			59,143				57,987
Total liabilities and shareholders’ equity		$	110,222			$	113,300

See accompanying notes to condensed consolidated financial statements.

RENAISSANCE LEARNING, INC. AND SUBSIDIARIES

		Three Months
		Ended March 31,
		2008				2007
		(In Thousands, Except Per Share Amounts)
Net sales:
Products		$	22,205			$	21,701
Services			7,181				4,987
Total net sales			29,386				26,688
Cost of sales:
Products			4,035				3,703
Services			3,762				2,867
Total cost of sales			7,797				6,570
Gross profit			21,589				20,118
Operating expenses:
Product development			4,032				5,065
Selling and marketing			9,373				9,406
General and administrative			4,129				3,842
Total operating expenses			17,534				18,313
Operating income			4,055				1,805
Other income, net			168				302
Income before taxes			4,223				2,107
Income taxes			1,605				790
Net income		$	2,618			$	1,317
Earnings per share:
Basic		$	0.09			$	0.05
Diluted		$	0.09			$	0.05
Cash dividends declared per share		$	0.07			$	0.05

See accompanying notes to condensed consolidated financial statements.

RENAISSANCE LEARNING, INC. AND SUBSIDIARIES

		For the Three Months Ended
		March 31,
		2008				2007
		(In Thousands)
Reconciliation of net income to net cash provided by operating activities:
Net income		$	2,618			$	1,317
Adjustments to arrive at cash provided by operating activities:
Depreciation and amortization			964				957
Amortization of investment discounts/premiums			29				2
Share-based compensation expense			383				330
Deferred income taxes			9				(3	)
Loss on sale of property			—				5
Excess tax benefits from share based payment arrangements			(13	)			—
Change in assets and liabilities, excluding the effects of acquisitions and divestitures:
Accounts receivable			(687	)			(859	)
Inventories			291				(1,287	)
Prepaid expenses			251				36
Income taxes			943				788
Accounts payable and other liabilities			1,517				620
Deferred revenue			(4,977	)			452
Other current assets			32				(43	)
Other			(365	)			268
Net cash provided by operating activities			995				2,583
Cash flows from investing activities:
Purchase of property, plant and equipment			(345	)			(416	)
Purchase of investment securities			—				(11,367	)
Maturities/sales of investment securities			2,000				16,625
Capitalized software development costs			(267	)			—
Net cash provided by investing activities			1,388				4,842
Cash flows from financing activities:
Proceeds from exercise of stock options			293				—
Excess tax benefits from share based payment arrangements			13				—
Dividends paid			(2,030	)			(1,451	)
Purchase of treasury stock			(21	)			(204	)
Net cash used by financing activities			(1,745	)			(1,655	)
Net increase in cash and cash equivalents			638				5,770
Cash and cash equivalents, beginning of period			7,337				5,953
Cash and cash equivalents, end of period		$	7,975			$	11,723

See accompanying notes to condensed consolidated financial statements.

RENAISSANCE LEARNING, INC. AND SUBSIDIARIES

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, 2007 (“2007 Annual Report”), which is on file with the U.S. Securities and Exchange Commission (the “SEC”). The results of operations for the three-month periods ended March 31, 2008 and 2007 are not necessarily indicative of the results to be expected for the full year.

3. Earnings Per Common Share

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

The weighted average shares outstanding are as follows:

		Three Months Ended March 31,
		2008				2007
Basic weighted average shares outstanding			28,759,046				28,858,799
Dilutive effect of outstanding stock options			3,624				6,004
Dilutive effect of restricted shares			80,261				16,473
Diluted weighted average shares outstanding			28,842,931				28,881,276

For the three months ended March 31, 2008 and 2007, there were 782,201 and 830,108 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

Total comprehensive income was $2.6 million and $1.3 million in the first quarter of 2008 and 2007, respectively. Our comprehensive income includes net income and foreign currency translation adjustments.

5. Goodwill and Other Intangible Assets

In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” 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 and tradename, which were acquired in connection with the purchase of AlphaSmart, Inc. (“AlphaSmart”). The tradename has an indefinite life and therefore is not amortized. The customer relationships intangible is amortized over its useful life of ten years, on the declining balance method.

For the three months ended March 31, 2008 and 2007, we recognized amortization expense of $123,000 and $149,000, respectively. Other intangibles consisted of the following:

		March 31, 2008												December 31, 2007
		Gross				Accumulated								Gross				Accumulated
		Amount				Amortization				Net				Amount				Amortization				Net
		(In Thousands)
Tradename		$	3,000			$	—			$	3,000			$	3,000			$	—			$	3,000
Customer relationships			4,150				1,694				2,456				4,150				1,571				2,579
		$	7,150			$	1,694			$	5,456			$	7,150			$	1,571			$	5,579

6. Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157 Fair Value Measurements (“SFAS 157”), to establish a consistent framework for measuring fair value and expand disclosures on fair value measurements. We adopted the provisions of SFAS 157, related to financial assets and financial liabilities on January 1, 2008. All financial assets and financial liabilities are valued using level 1 inputs. Thus, the adoption had no impact on our consolidated financial statements.

7. Share Based Compensation

There were no options to purchase our common stock granted during the three months ended March 31, 2008. Options to purchase 5,291 shares of our common stock were granted in the three months ended March 31, 2007. 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 14,713 shares during the three months ended March 31, 2008, and granted restricted stock awards for 43,700 shares during the three months ended March 31, 2007. 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 three months ended March 31, 2008 is as follows:

						Weighted Average				Aggregate
		Shares				Value Per Share				Intrinsic Value
		(In Thousands, Except Per Share Amounts)
Balance at January 1, 2008			250			$	14.16			$	3,498
Granted			15				13.05
Vested			(8	)			14.27
Balance at March 31, 2008			257			$	13.76			$	3,597

As of March 31, 2008, the total unearned compensation related to share-based compensation awards, net of estimated forfeitures, was $1.9 million, which will be amortized as expense over the weighted average remaining period of 2.7 years. Total share-based compensation was $0.4 million for the three months ended March 31, 2008 and $0.3 million for the three months ended March 31, 2007.

8. Dividends

On February 6, 2008, our Board of Directors declared a quarterly cash dividend of $0.07 per share, payable March 10, 2008 to shareholders of record as of February 22, 2008.

On April 16, 2008, our Board of Directors declared a quarterly cash dividend of $0.07 per share, payable June 2, 2008 to shareholders of record as of May 9, 2008.

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 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.

An important component of our software product strategy is a transition to a subscription-based software sales model. We believe that a business model based on subscription-based software offers long-term advantages over traditional perpetual licensing, including: (i) improved product utilization leading to higher levels of customer satisfaction, (ii) product adoption by more schools, (iii) more lifetime revenue per customer and (iv) a more predictable and reliable revenue stream. This transition can significantly impact reported financial results and customer ordering patterns. During periods when high levels of customer orders are attributable to our subscription-based product and service offerings a significant portion of a period’s sales orders will be deferred and recognized as revenue in future periods over the subscription term, generally 12 months. Likewise, in periods when customer order levels for subscription-based products and services are seasonally lower, reported revenue will be higher than orders.

The transition to subscription-based products also affects 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 patterns resulting in a more seasonal order pattern weighted to the second and third calendar quarters. Also, after customers transition to our subscription-based enterprise products, they no longer order reading quizzes and math libraries since access to this content is included in their subscription. Historically, our customers have ordered more of this content in the first and fourth quarters. The combined effect is that a much greater proportion of a year’s orders are expected in the second quarter and even more so in the third quarter than we have experienced historically. Transitioning to subscription-based software can also adversely impact orders for add-on reading quizzes and math libraries by customers who own our software under perpetual license agreements, as they may delay purchases of expansions, reading quizzes and math libraries while they are contemplating a transition to subscription-based versions of our products. We believe these factors impacted order levels in the first quarter of 2008, while also causing reported revenue to be higher than order levels due to the current recognition of revenue from orders we received last year.

We believe the percentage of customers using the subscription-based Enterprise version of our reading and math products is an important indicator of: (i) the progress of this strategic growth initiative, (ii) the magnitude of the growth opportunities still existing with regard to this strategy and (iii) the impact of the new seasonal patterns on our business. As of the end of the first quarter 2008, approximately 20% of our active reading product customers were using the Enterprise version. Worldwide, we currently have over 58,000 active Accelerated Reader customers, 19,000 active Accelerated Math customers and 41,000 active STAR Reading and STAR Math customers.

Operating expenses for the first quarter 2007 and 2008 were both impacted by one-time expenses. In the first quarter of 2007, we recorded a $0.5 million charge (pre-tax) for restructuring costs related to a partial reorganization of our product development resources which resulted in a reduction in staff and assets related to the laptop line. In the first quarter of 2008, we recorded a $0.3 million charge to general and administrative expense for costs incurred to terminate contracts for future professional development events where we have altered the timing and location of those events.

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 March 31,
		2008								2007								Change
										(Dollars In Thousands)
Net Sales:
Products		$	22,205				75.6	%		$	21,701				81.3	%		$	504				2.3	%
Services			7,181				24.4	%			4,987				18.7	%			2,194				44.0	%
Total net sales			29,386				100.0	%			26,688				100.0	%			2,698				10.1	%
Cost of sales:
Products			4,035				18.2	%			3,703				17.1	%			332				9.0	%
Services			3,762				52.4	%			2,867				57.5	%			895				31.2	%
Total cost of sales			7,797				26.5	%			6,570				24.6	%			1,227				18.7	%
Gross profit:
Products			18,170				81.8	%			17,998				82.9	%			172				1.0	%
Services			3,419				47.6	%			2,120				42.5	%			1,299				61.3	%
Total gross profit			21,589				73.5	%			20,118				75.4	%			1,471				7.3	%
Operating expenses:
Product development			4,032				13.7	%			5,065				19.0	%			(1,033	)			-20.4	%
Selling and marketing			9,373				31.9	%			9,406				35.2	%			(33	)			-0.4	%
General and administrative			4,129				14.1	%			3,842				14.4	%			287				7.5	%
Total operating expenses			17,534				59.7	%			18,313				68.6	%			(779	)			-4.3	%
Operating income			4,055				13.8	%			1,805				6.8	%			2,250				124.7	%
Other, net			168				0.6	%			302				1.1	%			(134	)			-44.4	%
Income before taxes			4,223				14.4	%			2,107				7.9	%			2,116				100.4	%
Income taxes			1,605				5.5	%			790				3.0	%			815				103.2	%
Net Income		$	2,618				8.9	%		$	1,317				4.9	%		$	1,301				98.8	%

Three Months Ended March 31, 2008 and 2007

Net Sales. Our net sales increased by $2.7 million, or 10.1%, to $29.4 million in the first quarter of 2008 from $26.7 million in the first quarter of 2007. Product revenues increased by $0.5 million, or 2.3%, to $22.2 million in the first quarter of 2008 from $21.7 million in the first quarter of 2007. Product revenue increased primarily due to improved hardware sales, particularly laptops and due to recognition of subscription revenue from orders received in 2007. Deferred revenue decreased by $5.0 million in the first quarter of 2008 versus a $0.5 million increase in the prior year’s first quarter primarily due to lower software orders caused in part by the anticipated seasonal impact of our transition to the Enterprise subscription model.

Service revenue increased by $2.2 million, or 44.0%, to $7.2 million in the first quarter of 2008 from $5.0 million in the first quarter of 2007. Nearly all service categories achieved growth, with the largest increases in our remote technical services, primarily hosting and installations. Service revenues also increased because we held a National Conference in the first quarter of 2008, but did not have a National Conference in 2007.

Cost of Sales. The cost of sales of products increased by $0.3 million, or 9.0%, to $4.0 million in the first quarter of 2008 from $3.7 million in the first quarter of 2007. As a percentage of product sales, the cost of sales of products increased to 18.2% in the first quarter of 2008 from 17.1% in the first quarter of 2007 primarily due to a higher proportion of sales attributable to hardware in 2008.

The cost of sales of services increased by $0.9 million, or 31.2%, to $3.8 million in the first quarter of 2008 from $2.9 million in the first quarter of 2007. As a percentage of sales of services, the cost of sales of services decreased to 52.4% in the first quarter of 2008 from 57.5% in the first quarter of 2007. The improvement resulted from better utilization of our fixed costs and growth of our more profitable technical service offerings such as hosting during the first quarter of 2008.

Product Development. Product development expenses decreased to $4.0 million, or 13.7% of sales in the first quarter of 2008, from $5.1 million or 19.0% in the first quarter of 2007. The reduction in product development expenses is primarily due to three components: capitalization of $0.3 million of software development costs in 2008 compared to no costs capitalized in the first quarter of 2007; a restructuring charge related to our laptop line of $0.5 million taken in the first quarter of 2007; and ongoing savings from the restructuring and further consolidation of the product development group.

Selling and Marketing. Selling and marketing expenses were unchanged at $9.4 million in the first quarter of 2008 and in the first quarter of 2007. As a percentage of net sales, selling and marketing expenses decreased to 31.9% in the first quarter of 2008 from 35.2% in the first quarter of 2007.

General and Administrative. General and administrative expenses increased by $0.3 million, or 7.5%, to $4.1 million in the first quarter of 2008 from $3.8 million in the first quarter of 2007. General and administrative expenses increased due to one-time charges incurred to terminate contracts for future professional development events where we have altered the timing and location of those events. As a percentage of net sales, general and administrative expenses decreased to 14.1% in the first quarter of 2008 from 14.4% in the first quarter of 2007.

Operating Income. Operating income increased by $2.3 million, or 124.7%, to $4.1 million in the first quarter of 2008 from $1.8 million in the first quarter of 2007. The increase was due to the revenue improvements and decreased operating expenses as explained in more detail above.

Income Tax Expense. Income tax expense of $1.6 million was recorded in the first quarter of 2008 at an effective income tax rate of 38.0% of pre-tax income, compared to $0.8 million, or 37.5% of pre-tax income in the first quarter of 2007. The increase in the effective rate of tax is due to the expiration of the federal research and experimental tax credit.

Liquidity and Capital Resources

As of March 31, 2008, our cash, cash equivalents and investment securities were $22.7 million, down $1.8 million from the December 31, 2007 total of $24.5 million. The decrease was primarily due to the use of $2.0 million for the payment of dividends and $0.6 million in capital additions, offset by cash flow from operations of $1.0 million.

We have a $15.0 million secured revolving line of credit with a bank which is available until May 31, 2009. 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, 2009. The line of credit bears interest based on the prime rate less 1.0%. As of March 31, 2008, the lines of credit had not been used.

Our Board of Directors has approved a stock repurchase program under which we may purchase up to an aggregate total of 9 million shares of our common stock. During the quarter ended March 31, 2008, we repurchased approximately 1,500 shares at a cost of approximately $21,000. As of March 31, 2008, the cumulative number of shares repurchased under this program was 7.8 million at an aggregate cost of $134.8 million. Depending on our stock valuation, cash availability and other factors, we may repurchase additional shares under this program.

On April 16, 2008, our Board of Directors declared a quarterly cash dividend of $0.07 per share, payable June 2, 2008 to shareholders of record as of May 9, 2008. We believe our strong levels of cash, cash equivalents and investment securities coupled with cash flow from operations will be sufficient to meet both our near-term and long-term working capital requirements for the foreseeable future.

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 and cannot be terminated by either the lessor or us for reasons other than breach of the lease agreement. We do not anticipate early termination of any of these agreements.

Purchase Obligations. We enter into commitments with certain suppliers to purchase components for our hardware products, such as AlphaSmart computing devices, AccelScan scanners and the 2Know! Response System. The majority of these obligations will be satisfied within one year.

Tax audit settlements and deposits. We anticipate making cash payments related to the settlement of tax audits or deposits for unsettled audit issues in the range of $0.8 to $1.6 million during the next twelve months. The mid-point of this range is included in the table below. Estimation of the amounts and timing of payments for the following twelve months are highly uncertain and therefore are not included in the table.

As of March 31, 2008, 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
						Less than 1												More than
(In Thousands)		Total				year				1-3 years				3-5 years				5 years
Operating lease obligations		$	5,980			$	1,693			$	2,597			$	1,286			$	404
Tax audit related payments			1,200				1,200				—				—				—
Purchase obligations			2,560				2,560				—				—				—
Total		$	9,740			$	5,453			$	2,597			$	1,286			$	404

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 2007 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 2008 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 and Accelerated Math Enterprise and laptop orders to achieve expected growth targets, (ii) a decline in reading quiz and math library sales that exceeds our forecast, (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 2007 Annual Report and later 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 value of our investment security portfolio if market interest rates increase or decrease, respectively. We anticipate that we will have sufficient liquidity to hold our investments to maturity; therefore, we do not expect to recognize any material losses or gains related to an increase or decrease in market interest rates.

Market Risk. Our exposure to market risk relates to the quality of the holdings in our investment security portfolio. The fair market value of our investments is subject to increases or decreases in value resulting from the performance of the securities issuer, from upgrades or downgrades in the credit worthiness of the securities issuer and from changes in general market conditions.

We seek to manage exposure to market risk by investing in accordance with our corporate investment policy as established by our Board of Directors. The goals of the policy are: (i) preservation of capital, (ii) provision of adequate liquidity to meet projected cash requirements, (iii) minimization of risk of principal loss through diversified short and medium term investments and (iv) 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 March 31, 2008, our investment securities had a market value of approximately $14.9 million and a carrying value of $14.7 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 at the balance sheet date. Translation gains or losses are deferred as a separate component of shareholders’ equity. Aggregate foreign currency transaction gains and losses are included in determining net income. As such, our operating results are affected by fluctuations in the value of the U.S. dollar compared to the British pound, Canadian dollar, Euro and Indian rupee. 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 countries.

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 March 31, 2008, 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 March 31, 2008, that has materially affected, or is reasonably likely to materially affect, such 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 2007 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 the repurchase of up to 5 million shares of our common stock under our stock repurchase program. The repurchase of up to an additional 3 million shares was authorized by our Board of Directors on February 9, 2005. On February 6, 2008, our Board of Directors authorized the purchase of an additional 1 million shares under the stock repurchase program. No time limit was placed on the duration of the stock repurchase program, nor is there any dollar limit on the program. Repurchased shares become treasury shares and will be used for stock-based employee benefit plans, acquisitions and for other general corporate purposes.

The following table shows information relating to the repurchase of shares of our common stock during the three months ended March 31, 2008:

										Total Number of
										Shares Purchased as				Maximum Number of
		Total Number				Average Price				Part of Publicly				Shares that May Yet Be
		of Shares				Paid per				Announced Plans				Purchased Under the Plans
Period		Purchased				Share				or Programs				or Programs
January 1-31, 2008			1,376			$	14.51				1,376				245,355
February 1-29, 2008			95				13.47				95				1,245,260	*
March 1-31, 2008			0				0				0				1,245,260
Total			1,471			$	14.44				1,471

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

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.

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