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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                   FORM 10-K
                            ------------------------

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
    OF 1934: FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                                        OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
    ACT OF 1934

                          COMMISSION FILE NO. 0-22187

                        ADVANTAGE LEARNING SYSTEMS, INC.
             (Exact name of Registrant as specified in its charter)

<TABLE>
<S>                                            <C>
                  WISCONSIN                                     39-1559474
       (State or other jurisdiction of             (I.R.S. Employer Identification No.)
       incorporation or organization)

              2911 PEACH STREET                                 54495-8036
                P.O. BOX 8036                                   (Zip Code)
         WISCONSIN RAPIDS, WISCONSIN
  (Address of principal executive offices)
</TABLE>

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

               Securities registered pursuant to Section 12(b) of the Act: NONE

               Securities registered pursuant to Section 12(g) of the Act:

                          COMMON STOCK, $.01 PAR VALUE
                                (Title of class)

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

     The aggregate market value of the voting stock held by nonaffiliates of the
Registrant was approximately $294,061,000 as of February 28, 2001. As of
February 28, 2001, there were 34,465,587 of the Registrant's shares of common
stock outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Part III is incorporated by reference from the Proxy Statement for the
Annual Meeting of Shareholders to be held on April 18, 2001.
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                                     PART I

ITEM 1. BUSINESS

     In September 2000, we announced plans to change our corporate name from
Advantage Learning Systems, Inc. to Renaissance Learning, Inc. While we
immediately commenced doing business as Renaissance Learning, Inc., the formal
legal name change is subject to shareholder approval at our 2001 annual meeting
in April.

                                    OVERVIEW

     Advantage Learning Systems, Inc. is a leading provider of learning
information systems to kindergarten through senior high ("K-12") schools in the
United States and Canada. Our learning information systems consist of computer
software and related training designed to improve student academic performance
by increasing the quality, quantity, and timeliness of performance data
available to educators and by facilitating increased student practice of
essential skills. Learning information systems provide to educators benefits
similar to those management information systems provide to business managers. As
of December 31, 2000, we had sold our products to approximately 54,500, or over
40%, of the K-12 schools in the United States and Canada.

     Our flagship product, Accelerated Reader,* is software for motivating and
monitoring increased literature-based reading practice. We believe that
Accelerated Reader has achieved a leading market position as a result of its
demonstrated effectiveness in improving student reading levels and overall
academic performance. Our other primary learning information system products
include STAR Reading,* Accelerated Math,* STAR Math,* and Perfect Copy.* In
2000, we introduced Surpass* test preparation software which began shipment in
late 2000. We also announced STAR Early Literacy* diagnostic-assessment for
pre-kindergarten through second grade with an expected release in mid-2001; and
eSchoolOffice,* a Web-based school administration software product. In addition,
we provide professional development training for educators through our Reading
Renaissance,* Math Renaissance,* and School Renaissance* programs, electronic
assessment software and services to educational publishers, and Total Knowledge
Management* ("TKM"*) enterprise software for training and management throughout
organizations.

     Advantage Learning Systems, Inc. was founded in 1986 and is incorporated
under the laws of the State of Wisconsin. Our common stock trades on The Nasdaq
Stock Market(R) under the symbol "ALSI." After shareholder approval of our new
name, we expect to change our stock trading symbol to "RLRN." Our principal
executive offices are located at 2911 Peach Street, P.O. Box 8036, Wisconsin
Rapids, Wisconsin 54495-8036 (telephone: (715) 424-3636).

                                    PRODUCTS

SOFTWARE AND SUPPORT SERVICES

     We offer software products for use in the K-12 marketplace, as well as
support services to the users of our software products. These software products
improve student academic performance by intensifying skills practice and
increasing the quality, quantity, and timeliness of information available to
educators. We also sell training and knowledge management software to corporate
customers. Our software and support services accounted for approximately 85%,
86%, and 86% of our net sales in 2000, 1999, and 1998, respectively.

-------------------------
* Accelerated Reader(R), STAR Reading(R), Accelerated Math(R), STAR Math(R),
  Reading Renaissance(R) and Math Renaissance(R) are registered trademarks of
  the company. Perfect Copy(TM), Surpass(TM), STAR Early Literacy(TM),
  eSchoolOffice(TM), School Renaissance(TM), Total Knowledge Management(TM), and
   TKM(TM) are common law trademarks of the company.
<PAGE>   3

  ACCELERATED READER

     Accelerated Reader is a learning information system for motivating and
monitoring increased literature-based reading practice. Accelerated Reader is
designed to be very easy to use by students and educators alike. A student
selects a book at an appropriate reading level from a list of books for which
the school has an Accelerated Reader quiz and reads the book. The student then
takes a multiple choice quiz on a computer. The questions contained in the
quizzes are carefully drafted to ensure that a student who has thoroughly read a
book at the appropriate level will pass. For each book read, Accelerated Reader
tracks the amount of reading practice achieved by calculating points based on
the length and difficulty of the book and the student's performance on the quiz.
The information generated from this process -- titles read, percent of
comprehension and amount of reading done -- creates a database of student
reading achievement. From this database, Accelerated Reader generates more than
30 different reports from which educators can monitor the amount and quality of
reading practice for each of their students and easily identify individual
students who may require special attention. The most recent version of
Accelerated Reader includes built-in Spanish-English capabilities and supports
Literacy Skills quizzes. Literacy Skills quizzes allow teachers using
Accelerated Reader to assess students' proficiency on 24 specific skills found
in state and district language arts standards and many standardized tests. We
developed quizzes on over 10,000 book titles in 2000 and currently have a
library of computerized book quizzes on more than 39,000 titles. Titles on disk
are organized by reading level and subject matter. Continued usage of
Accelerated Reader creates demand for additional quizzes, STAR Reading, Reading
Renaissance training, and related products.

  STAR READING

     STAR Reading is a computer-adaptive reading test that we believe is the
first software to provide to classroom teachers reading scores statistically
correlated to national norms in ten minutes or less at the computer. STAR
Reading adapts itself to each student's reading level by applying a proprietary
branching logic that evaluates the pattern of the student's answers to determine
the level of difficulty required for subsequent questions. The results from this
test provide educators with a database of statistically accurate reading level
information on their students from which they can generate useful reports and
adjust instructional strategies accordingly. STAR Reading is easy to use and can
be administered several times per year. The most recent version of STAR Reading
includes a 70-percent-larger item bank of test questions and a new, two-stage
test to help educators pinpoint students' reading levels faster and more
accurately.

  ACCELERATED MATH

     Accelerated Math is a task-level learning information system that helps
students to meet math objectives, first grade through calculus. It employs
algorithm technology to automatically align assignments to academic objectives
and tracks mastery of each objective. Like Accelerated Reader, Accelerated Math
encourages and monitors student practice of foundational skills, while providing
immediate feedback on performance to students and teachers. An optical-mark card
scanner is included with the sale of Accelerated Math site licenses to
efficiently handle all scoring and record-keeping chores, minimizing teacher
effort and paperwork. Many additional scanners are sold separately. In 2001, we
expect to release math learning cards, instructional supplements for assisting
with teaching math objectives aligned to Accelerated Math libraries.

  STAR MATH

     STAR Math is a computer-adaptive math test and database that provides the
same benefits as STAR Reading. STAR Math reports provide objective information
to help educators instantly place new students, monitor progress, and match
instruction to individual student levels. Quick, accurate, and easy to
administer, STAR Math provides math scores for third grade through high school
in approximately 15 minutes. Like STAR Reading, it can be administered
throughout the school year to track math development.

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  PERFECT COPY

     Perfect Copy is software that helps educators improve students' core
writing skills. It uses in-context editing to cover the rules of grammar,
punctuation, and word usage. In 2000, we introduced Perfect Copy High School,
our first product aimed specifically at the secondary education market. We
expect to develop other language arts products in the future.

  SURPASS

     Surpass test-preparation software generates practice tests that mirror
state standardized tests in content, format, and the test-taking experience.
Surpass reports enable educators to immediately diagnose problems, focus on each
student's strengths and weaknesses, and develop effective intervention
strategies to raise test scores. Currently, versions of Surpass are available
for the TAAS, SAT 9, and California standardized tests. We intend to develop
test-preparation software libraries for additional standardized tests in 2001.

  TOTAL KNOWLEDGE MANAGEMENT

     The TKM system is integrated, enterprise-wide training and knowledge
management software. The system creates, launches, and manages training in all
media including intranet, internet, CD-ROM, print, and instructor-led training.
In 2000, we announced and completed significant new versions of TKM, including
employee access to knowledge data bases via wireless technology. We intend to
sell the system to businesses and government agencies and also use it in
professional development training for teachers and large school districts.

  EXPERT SUPPORT PLANS

     We offer Expert Support Plans ("ESPs") that provide users of our products
access to telephone support and other benefits such as free or reduced-cost
upgrades. Packaged with kits and also sold as add-ons, ESPs entitle educators to
expert help resolving questions regarding technical problems with our products,
networks, and other software interacting with our products.

PROFESSIONAL DEVELOPMENT

     We offer professional development programs and products that train
educators to effectively use our software products. Revenues from professional
development accounted for approximately 15%, 14%, and 14% of our net sales in
2000, 1999, and 1998, respectively.

  READING RENAISSANCE

     The Reading Renaissance program provides educators with professional
development training to most effectively use the Accelerated Reader, STAR
Reading, and the learning information they generate. This training combines
technology and classroom techniques to increase in-school accountable reading
practice. We offer a variety of Reading Renaissance seminars and workshops,
including one- and two-day training programs, which are conducted throughout the
year at various hotel locations in the United States, and on-site training
programs pursuant to which our training staff visits an individual school,
school district or region to conduct a seminar or workshop. Since its inception
in late 1993 through December 31, 2000, we have trained over 279,000 educators,
of whom approximately 90,000 were trained in 2000.

     To encourage educators who have completed Reading Renaissance training to
fully implement the methodology, we initiated the "Model Classroom"
certification program in 1995. This program recognizes educators who meet
certain objective implementation standards related to the amount of accountable
reading among students, regular diagnosis and intervention with at-risk
students, and other key variables. As of February 1, 2001, the program has
certified over 8,000 "Model Classroom" teachers, and 273 "Model Schools" in
which the majority of classrooms have "Model Classroom" teachers.

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  MATH RENAISSANCE

     Offered both on-site and at hotel sites throughout the United States,
one-day Math Renaissance seminars instruct educators in techniques to enhance
their math curriculum and instruction methods. We expect Math Renaissance to
grow along with utilization of our STAR Math and Accelerated Math software.

  RENAISSANCE SCHOOLWIDE

     Renaissance Schoolwide, sometimes referred to as School Renaissance, is a
comprehensive multi-year school and district-wide improvement program.
Renaissance Schoolwide combines implementation of our major software products,
professional development training, and consulting services over a period of
several years to entire schools and districts.

  OTHER PROFESSIONAL DEVELOPMENT

     We also produce videotapes and manuals to be used in conjunction with our
training programs. Further, we conduct research on best practices, perform field
validation of techniques, publish internally generated as well as third-party
research and gather information to guide the development of our learning
information systems.

                              PRODUCT DEVELOPMENT

     We believe that continued substantial investment in product development is
required to remain competitive and grow in the K-12 marketplace. We invest
continuously in the development of new products, enhancement of existing
products, and development of tools to increase the efficiency of product
development. For the years ended December 31, 2000, 1999, and 1998, we expended
approximately $15.4 million, $8.9 million, and $5.2 million, respectively, on
product development (including amounts capitalized).

     We generate new software product concepts that we believe will help
educators improve student academic performance, based on our understanding of
learning information theory and the need for practice of essential academic
skills. These product concepts are then refined based on feedback from our
customers, which we continuously solicit and incorporate throughout the new
product development process. Based on the refined product concepts, product
proposals are then formulated by the marketing and software engineering groups
and reviewed by management to determine which should be developed into
prototypes. These prototypes are then tested in customer schools. Before
beginning production, management makes a final evaluation of each new product to
determine that it is both desired by educators and effective in meeting their
needs.

     The professional development training programs were originally developed,
and are continually refined, through field experience with our products and
research by our staff. We conduct research into effective education techniques
related to our products and services. This research provides the staff with a
standard against which to develop and refine training programs to help educators
accelerate learning.

                             SELLING AND MARKETING

     We market our products primarily to individual educators in the K-12
market, including teachers, school librarians, and principals. We also market
our products to entire schools and school districts, as well as internationally
through our subsidiaries in the United Kingdom and Australia. Our training and
knowledge management software is currently sold primarily to corporate
customers. Our sales and marketing strategy consists primarily of direct
marketing to potential and existing customers, and through sales staff in the
field. We use a variety of lead generating techniques, including trade shows,
advertisements in educational publications, direct mail, Web sites, and
referrals. Once product literature has been forwarded to a current or potential
customer, one of our in-house staff of telephone sales representatives contacts
the customer to answer questions and, ultimately, direct the customer to a
purchase. For potential district sales, a sales

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meeting is arranged with a field representative to discuss purchase and
implementation of our software products, professional development training and
consulting services on a district-wide, multi-year basis.

     In addition, we have resale arrangements with various book dealers and book
publishers that are authorized to sell our products to their customers. These
firms are particularly receptive to such alliances because use of our products
in schools encourages, rather than competing with, the sale of books and other
products sold by these firms. Sales to one of the distributors, Perma-Bound, a
division of Hertzberg-New Method, Inc. ("Perma-Bound"), accounted for 8.5%,
11.5%, and 13.9% of our net sales in 2000, 1999, and 1998, respectively.

     In late 2000 and early 2001, we announced new alliances with several
leading educational publishers including Scott Foresman, Houghton Mifflin
Company's School Division, and Harcourt School Publishers, to develop
Accelerated Reader quizzes aligned to the publishers' reading selections to help
teachers assess student comprehension and monitor students' reading growth.
Similar alliances were formed with Houghton Mifflin Company's School Division
and with Glencoe/McGraw-Hill to offer math management software aligned with
their school textbook programs. Customized math content libraries for our
Accelerated Math software will mirror the objectives, problem types, and
presentations in their textbooks. We intend to seek additional strategic
alliances with book distributors and publishers and to use alliances to expand
our base of strategic partners to sell our products. Furthermore, we plan to
continue to develop other cross-marketing arrangements with third-party firms
selling non-competing products into the education market.

     We presented our first National School Renaissance Conference in February
2000 in Nashville, Tennessee. The conference provided the opportunity for almost
6,000 educators to learn more, to network and inspire others with their success
stories, and to see all the latest products and services that support our
Renaissance professional development training. The 2001 conference will be held
in Las Vegas in late March.

                                   PRODUCTION

     Currently, most of our software products are distributed on CD-ROM or
diskettes. The CD-ROM disks are produced by a third-party contractor. The
diskettes are duplicated and packaged at our headquarters. Other related
products, including videotapes, books, graphics, and motivational items, are
produced by third-party vendors. Our on-line ordering and delivery system
introduced in 1999 has been highly successful in selling Accelerated Reader
quizzes over the Internet.

                                  COMPETITION

     The K-12 educational technology and professional development markets in
which we operate are very competitive. We compete primarily against more
traditional methods of education, training, and testing, including pencil and
paper testing. In addition, we compete with other companies offering educational
software products to schools. Our reading products also compete more directly
with products such as Scholastic's Reading Counts. Many other companies,
including Microsoft Corp. and Walt Disney Co., provide educational software
products which we believe are not marketed primarily to schools. Our existing
competitors may continue to broaden their product lines, and potential
competitors, including large hardware manufacturers, software developers, and
educational publishers, may enter or increase their focus on the school market,
resulting in greater competition for us. Success in selling our products,
particularly our reading products, may cause competitors to focus on our
products in their marketing efforts thereby increasing direct competition. There
can be no assurance that we will continue to be able to market our products
successfully or compete effectively in the educational products marketplace.

                             INTELLECTUAL PROPERTY

     We regard certain of our technologies as proprietary and rely primarily on
a combination of patent, copyright, trademark and trade secret laws and employee
non-disclosure agreements to establish and protect our proprietary rights. There
can be no assurance that the steps taken by us to protect our rights will be

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adequate to prevent or deter misappropriation. In addition, while we do not
believe that our products, trademarks or other proprietary rights infringe upon
the proprietary rights of third parties, there can be no assurance that a third
party will not make a contrary assertion. The cost of responding to such an
assertion may be material, whether or not the assertion is validated. The
software market has traditionally experienced widespread unauthorized
reproduction of products in violation of intellectual property rights. Such
activity is difficult to detect and legal proceedings to enforce intellectual
property rights are often burdensome and involve a high degree of uncertainty
and costs. There can be no assurance that our software products will not
experience unauthorized reproduction, which would have a material adverse effect
on our business, financial condition, and results of operations.

                                   EMPLOYEES

     As of February 1, 2001, we had 999 full and part-time employees. We believe
our relations with employees are good. None of our employees is represented by a
union or subject to collective bargaining agreements.

                                    BACKLOG

     As of December 31, 2000 and 1999, we had backlogs that aggregated
approximately $7.8 million and $5.3 million, respectively. The backlog at
December 31, 2000 is primarily for training seminars and programs not yet
conducted and for registrations for our National School Renaissance Conference
in March 2001. All of the backlog is expected to be realized during 2001. The
backlog at December 31, 1999 was primarily related to registrations for our
National School Renaissance Conference presented in February 2000 and for
training seminars and programs not yet conducted.

                           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 following information
contains or may contain forward-looking statements: (1) information included or
incorporated by reference in this Annual Report on Form 10-K, including, without
limitation, statements made under Item 1, Business and Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations,
including, without limitation, statements with respect to growth plans,
projected sales, revenues, earnings and costs, and product development schedules
and plans, (2) information included or incorporated by reference in our future
filings with the Securities and Exchange Commission including, without
limitation, statements with respect to growth plans, projected sales, revenues,
earnings and costs, and product development schedules and plans and (3)
information contained in written material, releases and oral statements issued
by us, or on behalf of us, including, without limitation, statements with
respect to growth plans, projected sales, revenues, earnings and costs, and
product development schedules and plans. Our actual results may differ
materially from those contained in the forward-looking statements identified
above. Factors which may cause such a difference to occur include, but are not
limited to, the following:

     Reliance on Single Product Line and Significant Distributor. Our
Accelerated Reader software and supplemental Accelerated Reader quiz disks
accounted for approximately 34%, 40%, and 48% of our net sales in 2000, 1999,
and 1998, respectively. Sales of our products through one book distributor
accounted for 8.5%, 11.5%, and 13.9% of net sales in 2000, 1999, and 1998,
respectively. An overall decline in sales of Accelerated Reader and supplemental
quiz disks, including sales through book distributors, would have a material
adverse effect on our business, financial condition, and results of operations.

     Dependence on Continued Product Development. The K-12 educational
technology and professional development markets in which we compete are
characterized by evolving industry standards, frequent product introductions,
and sudden technological change. Our future success will depend, to a
significant extent, on a
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number of factors, including our ability to enhance our existing products and
develop and successfully introduce new products, including new products designed
for use in other areas of the curriculum, our ability to ship new products in a
timely fashion and our ability to respond quickly and in a cost efficient manner
to technological change, including shifts in operating systems, languages,
alternative delivery systems and other environments. There can be no assurance
that products designed for use in other areas of the curriculum besides reading
will be as well received as our reading products, particularly since such other
products may require technology and/or resources not generally available in all
schools. We attempt to maintain high standards for the demonstrated academic
effectiveness of our products. Our adherence to these standards could delay or
inhibit the introduction of new products. Moreover, there can be no assurance
that our products will not be rendered obsolete or that we will have sufficient
resources to make the necessary investments or be able to develop and market the
products required to maintain our competitive position.

     Management of Growth. We have experienced rapid growth. If such growth
continues, it may place a strain on our financial, management, systems, and
other resources. Our ability to manage our growth effectively will require us to
attract, train, motivate, manage, and retain key employees and to improve our
operational, financial, and management information systems. If we are unable to
maintain and manage growth effectively, our business, financial condition, and
results of operations would be adversely affected.

     Risks of New Products and Services for New Markets. Our business strategy
includes the introduction of new products and services directed at new markets.
Specifically, through our Generation21 Learning Systems subsidiary, we intend to
sell enterprise software for training development and management to businesses
and government organizations. We have historically focused on the education
market and have little, if any, experience in developing and marketing products
and services to business or government customers. There can be no assurance that
we will be successful in offering new products and services and entering new
markets as planned or that any such products or services, if introduced, will
achieve acceptance in the marketplace.

     Risks of International Expansion. A key component of our growth strategy is
to continue to expand our operations into international markets. Doing business
in international markets is subject to a number of risks, including, among
others: acceptance by foreign educational systems of our approach to educational
products; lack of existing customer base; unexpected changes in regulatory
requirements; potentially adverse tax consequences; tariffs and other trade
barriers; difficulties in staffing and managing foreign operations; changing
economic conditions; exposure to different legal standards (particularly with
respect to intellectual property); burdens of complying with a variety of
foreign laws; and fluctuations in currency exchange rates. If any of these risks
were to materialize, our business, financial condition, and results of
operations could be adversely affected.

     Opposing Educational Philosophies. We focus on developing and marketing
educational products and services that demonstrate effectiveness through
measurable results. This approach, however, is not accepted by all academics and
educators, some of whom formulate opinions about the desirability of a
particular educational product or service based on philosophical or other
concerns rather than the effectiveness of the product. Certain academics and
educators are opposed to the principles and methodologies underlying and
associated with our products, such as the use of objective standards,
standardized testing, computers and motivational techniques, among others. Some
of these philosophical opponents of our products and services have the capacity
to influence the market for our products, and such influence could have a
material adverse impact on demand for our products and, thus, our business,
financial condition, and results of operations.

     Dependence on Educational Institutions and Government
Funding. Substantially all of our revenue is derived from sales to educational
institutions, individual educators, and suppliers thereto. There can be no
assurance that educational institutions and/or individual educators will
continue to invest in technology-based products and professional development for
reading and other curricula or continue to respond favorably to our marketing.
Our inability to increase the number of products sold or number of schools
served would adversely affect our business, financial condition, and results of
operations. Because of our dependence on educational institutions, the funding
of which is largely dependent on government support, a substantial decrease in
government budgets or funding for educational software or technology would have
a material adverse effect on our business, financial condition, and results of
operations. In addition, certain aspects of government

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sponsored education initiatives may not endorse, or be complementary to, the
principles and methodologies underlying and associated with our products, which
could adversely affect our business, financial condition, and results of
operations.

     Geographic Concentration of Sales. A substantial portion of our sales is
concentrated in several states, including California, Texas, Florida, Georgia,
and North Carolina, which accounted for approximately $12.5 million, $11.0
million, $5.6 million, $4.9 million, and $4.6 million, respectively, of our net
sales in 2000. If large numbers of schools or a district or districts
controlling a large number of schools in such states were to discontinue
purchasing our products, our business, financial condition, and results of
operations would be materially adversely affected.

     Highly Competitive Industry. The K-12 educational technology and
professional development markets in which we operate are very competitive. We
compete primarily against more traditional methods of education, training and
testing, including pencil and paper testing. In addition, we compete with other
companies offering educational software products to schools. Our reading
products also compete more directly with products such as Scholastic's Reading
Counts. Many other companies, including Microsoft Corp. and Walt Disney Co.,
provide educational software products which we believe are not marketed
primarily to schools. Our existing competitors may continue to broaden their
product lines, and potential competitors, including large hardware
manufacturers, software developers and educational publishers, may enter or
increase their focus on the school market, resulting in greater competition for
us. Success in selling our products, particularly our reading products, may
cause competitors to focus on our products in their marketing efforts thereby
increasing direct competition. There can be no assurance that we will continue
to be able to market our products successfully or compete effectively in the
educational products marketplace.

     Dependence on Key Personnel. Our success depends to a significant extent
upon the continued active participation of certain key members of management,
including Judith Paul and Terrance Paul, our Chairman and Vice Chairman,
respectively. In addition to serving as Chairman, Ms. Paul acts as our
spokesperson and coordinates our public relations and customer communications
policies. Mr. Paul is primarily responsible for our long-term strategic planning
and new product development strategy. We do not have employment agreements with
either of these persons and have no current intention of entering into any such
employment agreements. The loss of services of either of these persons would
have a material adverse effect on our business, financial condition, and results
of operations.

     Ability to Attract and Retain Qualified Personnel. Our future success will
depend, in part, upon our continuing ability to retain the employees, including
senior management personnel, who have assisted in the development and marketing
of our products and to attract and retain qualified additional employees trained
in computer technology, marketing, and finance to enhance our product offerings
and broaden our operations. There can be no assurance that we will continue to
be able to attract and retain such personnel. The failure to attract or retain
the necessary personnel would have a material adverse effect on our business,
financial condition, and results of operations.

     Fluctuations in Quarterly Performance. We generally ship products as orders
are received, and therefore, we have historically operated without significant
backlog. Thus, revenues in any quarter are substantially dependent on the
quantity of product orders received in that quarter. The quantity of product
orders in any quarter can be affected by a variety of factors, including the
following:

     - delays in the development and/or shipment of new products can adversely
       affect our revenue in one or more quarters;

     - the shipment of new products for which orders have been building for some
       period of time can cause the revenues in the quarter in which shipment
       occurs to be higher than revenues in preceding or subsequent quarters;
       and

     - seasonal variations due to, among other things, the budget and
       school-year cycles of our school customers.

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     In addition to fluctuations in product orders, our quarterly results can
also be affected by the following:

     - charges related to acquisitions, including acquisition expenses, the
       write-off of in-process research and development, the amortization of
       goodwill, and similar items;

     - charges related to obsolete or impaired assets; and

     - expenses related to product development and marketing initiatives.

     Our overall gross margins also fluctuate based upon the mix of product
sales and service sales. We realize significantly higher margins on our product
sales. Service revenues tend to be more seasonal than product revenues,
resulting in seasonal variations in margins. Quarterly service revenues are
typically highest in the third quarter.

     Share Price Volatility. Numerous factors, many of which are beyond our
control, may cause the market price of our common stock to fluctuate
significantly. These factors include announcements of technological innovations
and/or new products by us and our competitors, earnings releases and earnings
warnings by us and our competitors, expectations regarding government funding
levels for education, market conditions in the industry, and the general state
of the securities markets. The market price of our common stock may decline
significantly if we fail to meet the published earnings estimates of analysts
and others. In addition, quarterly fluctuations of our results of operations as
described above may cause a significant variation in the market price of our
common stock.

     Limited Protection of Intellectual Property and Proprietary Rights. We
regard certain of our technologies as proprietary and rely primarily on a
combination of patent, copyright, trademark and trade secret laws and employee
non-disclosure agreements to establish and protect our proprietary rights. There
can be no assurance that the steps taken by us to protect our rights will be
adequate to prevent or deter misappropriation. In addition, while we do not
believe that our products, trademarks or other proprietary rights infringe upon
the proprietary rights of third parties, there can be no assurance that a third
party will not make a contrary assertion. The cost of responding to such an
assertion may be material, whether or not the assertion is validated. The
software market has traditionally experienced widespread unauthorized
reproduction of products in violation of intellectual property rights. Such
activity is difficult to detect and legal proceedings to enforce intellectual
property rights are often burdensome and involve a high degree of uncertainty
and costs. There can be no assurance that our software products will not
experience unauthorized reproduction, which would have a material adverse effect
on our business, financial condition, and results of operations.

     Concentration of Share Ownership; Control by Principal
Shareholders/Management. As of March 1, 2001, our principal shareholders, Judith
and Terrance Paul, who are also our Chairman and Vice Chairman, respectively,
beneficially owned approximately 70.9% of our outstanding common stock. As a
result, these principal shareholders have the ability to control and direct our
business and affairs.

     Shares Eligible for Future Sale. Sales of a substantial number of shares of
our common stock in the public market could adversely affect the market price
for the common stock. As of March 1, 2001, approximately 24.5 million shares of
our common stock were held by "affiliates" and may be publicly sold only if
registered under the Securities Act of 1933 or sold in accordance with an
applicable exemption from registration, such as Rule 144. In addition, we have
filed registration statements under the Securities Act of 1933 to register an
aggregate of 3,000,000 shares of common stock reserved for issuance under our
1997 Stock Incentive Plan and an aggregate of 500,000 shares of common stock
reserved for issuance under our Employee Stock Purchase Plan, which will, when
issued in accordance with such plans, be eligible for immediate sale in the
public market, subject to the Rule 144 resale limitations for affiliates.

     Our principal shareholders, Judith and Terrance Paul, have adopted a
securities trading plan with respect to a portion of their Advantage Learning
Systems, Inc. common stock. The plan provides for the sale of approximately 2%
of the Paul's current holdings of common stock on an annual basis. The plan
provides for monthly sales, subject to various legal and contractual
limitations.

     No Payment of Cash Dividends. We do not anticipate paying any cash
dividends in the foreseeable future.
                                        9
<PAGE>   11

     Possible Antitakeover Effects of Certain Articles and By-Law Provisions and
Provisions of Wisconsin Law. Our Amended and Restated Articles of Incorporation
and Amended and Restated By-Laws, along with Wisconsin statutory law, contain
provisions that could discourage potential acquisition proposals and might delay
or prevent a change in control of Advantage Learning Systems, Inc. Such
provisions could result in our being less attractive to a potential acquirer and
could result in the shareholders receiving less for their common stock than
otherwise might be available in the event of a takeover attempt.

ITEM 2. PROPERTIES

     Our corporate headquarters are located in Wisconsin Rapids, Wisconsin, in a
125,000 square foot facility owned by us. Our training operations are located in
a 74,000 square foot facility in Madison, Wisconsin owned by Athena Holdings LLC
("Athena"). We own 70% of Athena and our training subsidiary leases 42,769
square feet of the facility from Athena. We also lease other office space to
accommodate subsidiaries and other operations.

ITEM 3. LEGAL PROCEEDINGS

     We are not currently involved in any material pending legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     There was no matter submitted during the fourth quarter of fiscal 2000 to a
vote of our security holders.

                                        10
<PAGE>   12

                      EXECUTIVE OFFICERS OF THE REGISTRANT

<TABLE>
<CAPTION>
    NAME AND AGE OF OFFICER                                   OFFICE
    -----------------------                                   ------
<S>                                <C>
Judith Ames Paul...............    Ms. Paul is the co-founder of the company and has been
  Age 54                           chairman of the board of directors since 1986. Ms. Paul acts
                                   as our spokesperson and coordinates our public relations and
                                   customer communication policies. Ms. Paul is a leading
                                   teacher advocate, an education activist and the Executive
                                   Editor of Horizons and Math Advantage, which are newsletters
                                   published by the School Renaissance Institute, Inc., one of
                                   our wholly-owned subsidiaries. Ms. Paul holds a bachelors
                                   degree in elementary education from the University of
                                   Illinois.
Terrance D. Paul...............    Mr. Paul is the co-founder of the company and has been vice
  Age 54                           chairman of the board of directors since July 1996. Mr. Paul
                                   is primarily responsible for our long-term strategic
                                   planning and new product development strategy. He
                                   conceptualized and led the development of Accelerated
                                   Math(TM), STAR Reading(TM), STAR Math(TM) and
                                   Renaissance(TM)professional development. Mr. Paul
                                   coordinates the research activities conducted by the School
                                   Renaissance Institute, and supervises the research
                                   activities of Generation21 Learning Systems, LLC, which is
                                   one of our wholly-owned subsidiaries. From November 1995
                                   until July 1996, Mr. Paul served as our chief executive
                                   officer. From January 1992 until August 1993 and again from
                                   September 1994 until November 1995, Mr. Paul served as our
                                   president. For the 12 years prior to 1992, Mr. Paul was
                                   president of Best Power Technology, a manufacturer of
                                   uninterruptible power systems. Mr. Paul has authored
                                   numerous research reports, including Patterns of Reading
                                   Practice (1996) and Theoretical Foundations of Learning
                                   Information Systems (1997). Mr. Paul holds a law degree from
                                   the University of Illinois and an MBA from Bradley
                                   University. Terrance Paul is Judith Paul's husband.
Michael H. Baum................    Mr. Baum has been our chief executive officer since July
  Age 53                           1996 and a director since September 1994. Mr. Baum served as
                                   our president between November 1995 and June 1996. From
                                   September 1994 until November 1995, Mr. Baum served as the
                                   managing director of the School Renaissance Institute and
                                   from June 1994 until September 1994, he served as the
                                   director of educational consulting for the School
                                   Renaissance Institute. From 1984 until June 1994, Mr. Baum
                                   held a variety of positions with Francorp, Inc., an
                                   international management consulting firm based in Chicago,
                                   his last position being that of executive vice president,
                                   which he held from September 1991 until June 1994. Mr. Baum
                                   holds a bachelors degree and a masters degree in teaching
                                   from Yale University and an MBA from Northwestern
                                   University.
</TABLE>

                                        11
<PAGE>   13

<TABLE>
<CAPTION>
    NAME AND AGE OF OFFICER                                   OFFICE
    -----------------------                                   ------
<S>                                <C>
John R. Hickey.................    Mr. Hickey has been our president since July 1996 and a
  Age 45                           director since October 1996. From January 1996 until June
                                   1996, Mr. Hickey served as executive vice president of R.F.
                                   Technologies, Inc., a manufacturer of protection devices,
                                   and from September 1995 until December 1995, he served as
                                   executive vice president of Liebert Corporation (a
                                   subsidiary of Emerson Electric), a manufacturer of
                                   uninterruptible power supplies. From January 1989 until June
                                   1995, Mr. Hickey held various senior management positions
                                   with Best Power Technology, including executive vice
                                   president of operations, senior vice president of sales and
                                   marketing and vice president-international. In addition, Mr.
                                   Hickey spent approximately ten years with Briggs and
                                   Stratton, a manufacturer of air-cooled gasoline engines for
                                   outdoor power equipment, headquartered in Milwaukee,
                                   Wisconsin. While at Briggs and Stratton, Mr. Hickey served
                                   in various management positions, eventually rising to the
                                   position of the director of international sales and finance
                                   administration, a position he held from October 1985 until
                                   January 1989. Mr. Hickey holds a bachelors degree in
                                   international business from the University of Wisconsin.
Steven A. Schmidt..............    Mr. Schmidt joined the company in August 1999 as vice
  Age 46                           president, chief financial officer and secretary. From
                                   January 1998 until December 1998, he served as corporate
                                   controller for Wausau-Mosinee Paper Corporation, a specialty
                                   paper manufacturer. From June 1993 until December 1997, Mr.
                                   Schmidt was vice president finance, secretary and treasurer
                                   for Wausau Paper Mills Company, a publicly traded specialty
                                   paper manufacturer headquartered in Wausau, Wisconsin, after
                                   having served the company since August 1992 as corporate
                                   controller. From March 1990 until August 1992, Mr. Schmidt
                                   was employed by Georgia Pacific Corporation as controller,
                                   Wisconsin operations in Port Edwards, Wisconsin. From June
                                   1980 until March 1990, he worked for Nekoosa Papers, Inc., a
                                   division of Great Northern Nekoosa Corp., in Port Edwards,
                                   Wisconsin, in various financial management positions before
                                   the company was acquired by Georgia Pacific Corporation. Mr.
                                   Schmidt holds a bachelors degree in accountancy from the
                                   University of Wisconsin-LaCrosse, and is a Certified Public
                                   Accountant.
</TABLE>

     The term of office of each executive officer is from one annual meeting of
the board of directors until the next annual meeting of the board of directors
or until a successor for each is selected.

     There are no arrangements or understandings between any of our executive
officers and any other person (not an officer or director of the company acting
as such) pursuant to which any of the executive officers were selected as an
officer of the company.

                                        12
<PAGE>   14

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

     The common stock is traded under the symbol "ALSI" on The Nasdaq Stock
Market(R), and quotations are supplied by the National Association of Securities
Dealers, Inc. The table below sets forth the reported high and low closing sale
prices for shares of our common stock on The Nasdaq Stock Market(R) during the
indicated quarters.

<TABLE>
<CAPTION>
                                                                HIGH        LOW
                                                                ----        ---
<S>                                                            <C>        <C>
Fiscal year ended December 31, 2000
  First Quarter............................................    $18.688    $11.688
  Second Quarter...........................................     16.250     12.750
  Third Quarter............................................     37.375     15.500
  Fourth Quarter...........................................     36.125     20.313
Fiscal year ended December 31, 1999
  First Quarter............................................    $41.500    $28.531
  Second Quarter...........................................     31.625     16.875
  Third Quarter............................................     33.000     16.563
  Fourth Quarter...........................................     29.438     10.500
</TABLE>

HOLDERS

     As of February 9, 2001, there were 630 record holders of the common stock.

HISTORICAL DIVIDENDS

     For the years ended December 31, 2000 and 1999, no dividends or other
distributions were paid to shareholders. We intend to retain all of our future
earnings to fund growth and the operation of our business and therefore do not
anticipate paying any cash dividends in the foreseeable future. Future cash
dividends, if any, will be at the discretion of our board of directors and will
depend upon, among other things, our future operations and earnings, capital
requirements and surplus, general financial condition, contractual restrictions,
and such other factors as the board of directors may deem relevant.

RECENT SALES OF UNREGISTERED SECURITIES

     There were no sales of unregistered securities during the year ended
December 31, 2000.

                                        13
<PAGE>   15

ITEM 6. SELECTED FINANCIAL DATA

                SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                  ----------------------------------------------------
                                                    2000       1999       1998       1997       1996
                                                    ----       ----       ----       ----       ----
<S>                                               <C>         <C>        <C>        <C>        <C>
CONSOLIDATED INCOME STATEMENT DATA(1)
Net sales:
  Products....................................    $ 87,004    $67,608    $44,064    $29,350    $18,930
  Services....................................      19,987     15,980     11,084      6,964      3,451
                                                  --------    -------    -------    -------    -------
          Total net sales.....................     106,991     83,588     55,148     36,314     22,381
                                                  --------    -------    -------    -------    -------
Cost of sales:
  Products....................................      11,621      7,768      4,375      3,788      2,329
  Services....................................      10,300      7,557      4,496      3,013      1,898
                                                  --------    -------    -------    -------    -------
          Total cost of sales.................      21,921     15,325      8,871      6,801      4,227
                                                  --------    -------    -------    -------    -------
          Gross profit........................      85,070     68,263     46,277     29,513     18,154
Operating expenses:
  Product development.........................      14,922      8,500      5,140      3,496      1,555
  Selling and marketing.......................      24,166     21,546     13,712      9,709      6,639
  General and administrative..................      11,833     10,115      7,529      5,817      3,547
  Purchased research and development..........          --      1,080        475         --      3,400
  Phantom stock plan termination..............          --         --         --      1,617         --
                                                  --------    -------    -------    -------    -------
          Total operating expenses............      50,921     41,241     26,856     20,639     15,141
                                                  --------    -------    -------    -------    -------
          Operating income....................      34,149     27,022     19,421      8,874      3,013
Other income (expense), net...................       3,385      2,067      1,615        (81)      (155)
                                                  --------    -------    -------    -------    -------
Income before taxes...........................      37,534     29,089     21,036      8,793      2,858
Income tax provision (benefit)................      14,601     11,943      8,844       (673)    (1,602)
                                                  --------    -------    -------    -------    -------
  Net income..................................    $ 22,933    $17,146    $12,192    $ 9,466    $ 4,460
                                                  ========    =======    =======    =======    =======
Basic earnings per share(2)...................    $   0.67    $  0.50    $  0.36    $  0.33    $  0.16
Diluted earnings per share(2).................        0.67       0.50       0.36       0.32       0.16
CONSOLIDATED BALANCE SHEET DATA
Working capital...............................    $ 68,841    $46,923    $34,193    $28,452    $   566
Total assets..................................     118,221     88,419     68,280     51,177     19,855
Notes payable and long-term debt..............          --         --         --         --     10,450
Shareholders' equity..........................      99,670     74,935     55,059     42,803      3,774
</TABLE>

-------------------------

(1) In July 1999, we acquired Generation21 Learning Systems, LLC in a
    transaction accounted for as a pooling-of-interests. Accordingly, financial
    information for all periods presented has been restated to include the
    results of Generation21.

(2) Per share data have been restated to reflect a 2-for-1 stock split in the
    form of a dividend effective February 26, 1999.

                                        14
<PAGE>   16

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

                                    OVERVIEW

     Advantage Learning Systems, Inc., doing business as Renaissance Learning,
Inc., is a leading provider of learning information systems to kindergarten
through senior high ("K-12") schools in the United States and Canada. Our
learning information systems consist of computer software and related training
designed to improve student academic performance by increasing the quality,
quantity, and timeliness of performance data available to educators and by
facilitating increased student practice of essential skills. Our flagship
product, Accelerated Reader, is software for motivating and monitoring increased
literature-based reading practice. Our software products also include STAR
Reading, a computer-adaptive reading test and database; Accelerated Math and
STAR Math, software products that apply to math the principles that have made
the reading software effective in improving academic performance; and Perfect
Copy, writing skills development software.

     Our learning information system products also include the Reading
Renaissance, Math Renaissance and other programs through which we provide
professional development training for educators. Our School Renaissance program
is a comprehensive package of software, professional development training, and
consulting services aimed at accelerating learning and improving test scores in
reading, math, writing, and overall academic performance throughout schools and
school districts. In 2000, we introduced Surpass test-preparation software which
began shipment in late 2000. We also announced STAR Early Literacy diagnostic
assessment for grades kindergarten through second scheduled for mid-2001
release; new versions of Generation21's Total Knowledge Management enterprise
training software; and eSchoolOffice, a Web-based school administration software
product. In addition, we provide electronic assessment products and services to
educational publishers and we sell enterprise software for organization-wide
training and knowledge management.

     Our sales are derived primarily from the sale of software products,
software support agreements, and training seminars and programs. Revenues are
recorded net of an allowance for estimated returns. Allowances for bad debts are
also recorded at the time of the sale. Product revenue is derived primarily from
the sale of software products. We recognize revenue from sales of our
off-the-shelf software products at the time of shipment to customers. We
recognize revenue from the sale of custom software products on the
percentage-of-completion method of accounting. Service revenue is derived from
(i) training seminars, (ii) consulting services, and (iii) software support
agreements whereby we provide ongoing customer support and product upgrades.
Revenue from training seminars is recognized when the seminar is performed.
Revenue from consulting services is recognized as the service is performed or on
a straight-line basis over the contractual period. Revenue from software support
agreements with a duration of twelve months or less that are bundled with a
software product sale is recognized at the time the software is shipped, and the
related costs of providing these support services are accrued. Revenue from
separately sold software support agreements is recognized on a straight-line
basis over the term of the agreement which begins after the expiration of any
support bundled with the software product sale. Deferred revenue includes (i)
payments received for products not yet delivered, (ii) advance payments on
contract revenues, (iii) payments received for seminars not yet held, and (iv)
that portion of separately sold software support agreements that has not yet
been recognized as revenue.

     Because software products are generally shipped as orders are received, we
have historically operated without significant backlog. However, it is our
practice to announce new products prior to the time at which such products will
be ready for shipment to allow customers sufficient lead time for budgeting and
curriculum purposes. This practice can result in a significant backlog for
orders of new products. These orders are generally filled within a relatively
short period of time after the product is ready for shipment. The shipment of
backlogged new products in certain periods can cause those periods to have
somewhat higher sales and higher sales growth rates than other periods.

     Cost of sales consists of expenses associated with sales of software
products, support agreements, and training seminars and programs. These costs
include: (i) personnel-related costs, (ii) costs associated with the manufacture
and assembly of our products, including the cost of purchased optical-mark card
scanners,
                                        15
<PAGE>   17

(iii) shipping and freight costs, (iv) amortization of capitalized development
costs and (v) other overhead costs. We recognize significantly higher gross
margins on our product sales than on our service sales. Product sales as a
percentage of total sales have remained relatively constant. Gross profit
margins on products have decreased primarily due to mix associated with the
hardware component of our math products. An optical-mark card scanner is
included with the sale of all Accelerated Math site licenses and many additional
scanners are sold separately. The gross profit margin on hardware is not as high
as the gross profit margin on software. We began shipment of math products late
in 1998.

     Gross profit margins on service sales have decreased in 2000 primarily due
to increased costs of providing technical support related to software support
agreements. The higher costs are due, in part, to supporting our broader product
lines and the introduction of new versions of existing products in 2000.

     We expense all development costs associated with a software product until
technological feasibility is established, after which time such costs are
capitalized until the product is available for general release to customers.
Capitalized product development costs are amortized into cost of sales generally
using the straight-line method over 24 months.

     In November 2000, our subsidiary, Renaissance Corporate Services, Inc.,
acquired the assets and business of Engineering Software Associates, Inc.
("ESA"), Minneapolis, Minnesota, a provider of test generation and tutorial
software to college textbook publishers. Post-secondary textbook publishers have
commissioned ESA software to support textbooks on a wide variety of subjects.
Instructors using the texts can administer tests to students on paper, via
networks or over the Internet. The acquisition is not expected to have a
material impact on our overall results of operations in the near term.

                                        16
<PAGE>   18

                             RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                             FOR THE YEARS ENDED
                                                                DECEMBER 31,
                                                        -----------------------------
                                                        2000        1999        1998
                                                        ----        ----        ----
<S>                                                     <C>         <C>         <C>
Net Sales:
  Products..........................................     81.3%       80.9%       79.9%
  Services..........................................     18.7        19.1        20.1
                                                        -----       -----       -----
       Total net sales..............................    100.0%      100.0%      100.0%
                                                        =====       =====       =====
Cost of sales:
  Products..........................................     13.4%       11.5%        9.9%
  Services..........................................     51.5        47.3        40.6
       Total cost of sales..........................     20.5        18.3        16.1
Gross profit:
  Products..........................................     86.6        88.5        90.1
  Services..........................................     48.5        52.7        59.4
       Total gross profit...........................     79.5        81.7        83.9
Operating expenses:
  Product development...............................     13.9        10.2         9.3
  Selling and marketing.............................     22.6        25.8        24.9
  General and administrative........................     11.1        12.1        13.6
  Purchased research and development................       --         1.3         0.9
                                                        -----       -----       -----
Operating income....................................     31.9        32.3        35.2
Other income, net...................................      3.2         2.5         2.9
                                                        -----       -----       -----
Income before taxes.................................     35.1        34.8        38.1
Income tax provision................................     13.7        14.3        16.0
                                                        -----       -----       -----
Net income..........................................     21.4%       20.5%       22.1%
                                                        =====       =====       =====
</TABLE>

                     YEARS ENDED DECEMBER 31, 2000 AND 1999

     Net Sales. Our net sales increased by $23.4 million, or 28.0%, to $107.0
million in 2000 from $83.6 million in 1999. Product sales increased by $19.4
million, or 28.7%, to $87.0 million in 2000 from $67.6 million in 1999. The
increase in product sales is primarily attributable to (i) increased sales of
math products, including follow-on sales of subject libraries and optical-mark
card scanners and (ii) increased sales of Accelerated Reader title disks, with
over 39,000 available book titles, to a larger base of Accelerated Reader
schools.

     Service revenue, which consists of revenue from sales of training sessions
and software support agreements, increased by $4.0 million, or 25.1%, to $20.0
million in 2000 from $16.0 million in 1999. Approximately $2.0 million of this
increase is attributable to our first annual National School Renaissance
Conference presented in February 2000 and the balance of the increase is
primarily due to increased revenue from Renaissance training sessions. We
trained over 89,000 educators in our Renaissance training programs in 2000.

     Revenue growth rates slowed in 2000 due in part to the late fall 1999
shipment of our new version of Accelerated Reader. We missed the prime fall
buying season for schools, which slowed follow-on purchases of Accelerated
Reader quizzes as well as adoptions by new schools in late 1999 and early 2000.
Sales of follow-on quizzes improved in late 2000 as schools had installed the
new Accelerated Reader software and returned to their normal buying patterns.
Sales of Accelerated Math increased significantly in 2000 with a growing
                                        17
<PAGE>   19

customer base adopting Accelerated Math for their school, and existing customers
purchasing additional subject libraries and scanners to expand utilization
throughout their schools.

     We anticipate that several new alliances announced in late 2000 and early
2001 will positively impact continued growth over the long term in the sale of
our reading and math software products. Alliances were formed with several
leading educational publishers including Scott Foresman, Houghton Mifflin
Company's School Division, and Harcourt School Publishers, to develop
Accelerated Reader quizzes aligned to the publishers' reading selections to help
teachers assess student comprehension and monitor students' reading growth.
Similar alliances were formed with Houghton Mifflin Company's School Division
and with Glencoe/ McGraw-Hill to offer math management software aligned with
their school textbook programs. Customized math content libraries for our
Accelerated Math software will mirror the objectives, problem types and
presentations in their textbooks. We anticipate that the products associated
with these alliances will be available in time for the 2001-2002 school year.

     Other expected contributors to growth in 2001 include STAR Early Literacy
computer-adaptive diagnostic test; new content libraries and math learning cards
for Accelerated Math; additional district sales of the School Renaissance
comprehensive school improvement programs; additional libraries for Surpass
test-preparation software; and the initial version of eSchoolOffice Web-based
school administration software. We expect that math should continue to be a
prime growth driver, with increasing numbers of new schools as well as follow-on
sales of libraries, scanners, math learning cards, and training to our enlarging
installed customer base. We expect that we can maintain our 2000 revenue growth
rate, with some improvements possible based on the success of new-product
rollouts.

     Cost of Sales. The cost of sales of products increased by $3.9 million, or
49.6%, to $11.6 million in 2000 from $7.8 million in 1999. As a percentage of
product sales, the cost of sales of products increased to 13.4% in 2000 compared
to 11.5% in 1999 primarily due to increased sales of optical-mark card scanners.
A scanner is included with the sale of all Accelerated Math site licenses and
many additional scanners are sold separately. The gross profit margin on
hardware is not as high as the gross profit margin on software.

     The cost of sales of services increased by $2.7 million, or 36.3%, to $10.3
million in 2000 from $7.6 million in 1999. This increase is primarily the result
of costs associated with (i) our first annual National School Renaissance
Conference presented in early 2000, (ii) increased technical support costs due
to broader product lines and the introduction of new versions of existing
products and (iii) increased costs of delivering training sessions. As a
percentage of sales of services, the cost of sales of services increased to
51.5% in 2000 from 47.3% in 1999 due to the higher costs of providing technical
support for our broader product lines and new versions of existing products.

     Our overall gross profit margin decreased 2.2% to 79.5% in 2000 from 81.7%
in 1999 due to decreased gross profit margins on both products and services.

     Product Development. Product development expenses increased by $6.4
million, or 75.5%, to $14.9 million in 2000 from $8.5 million in 1999. These
expenses increased primarily due to increased staff and consulting costs
associated with new product development including several new products announced
in 2000: eSchoolOffice Web-based school administration software, new versions of
Generation21's Total Knowledge Management enterprise training software, and STAR
Early Literacy diagnostic assessment for grades K-2, all of which are expected
to be available in 2001. Increased product development expenses are also
attributed to the development of localized versions of our products for
international markets; the completion of new Accelerated Reader quizzes; Surpass
test-preparation software released for sale in Texas in late 2000; creation of
additional Surpass test-preparation libraries; continued development of a suite
of Web-based versions of our existing core products; and a number of new
products at various stages of development which we expect to announce in the
future. As a percentage of net sales, product development costs increased to
13.9% in 2000 from 10.2% in 1999. We anticipate that product development costs
will continue to increase with our continued emphasis on product development and
new business initiatives as a key to achieving future growth.

                                        18
<PAGE>   20

     Selling and Marketing. Selling and marketing expenses increased by $2.6
million, or 12.2%, to $24.2 million in 2000 from $21.5 million in 1999. These
expenses increased primarily due to (i) salary and recruiting costs associated
with hiring additional personnel to market and promote a broader product line,
(ii) costs of marketing the new Generation21 enterprise-wide training and
knowledge management software, (iii) expenses related to our first National
School Renaissance Conference and (iv) international marketing efforts. As a
percentage of net sales, selling and marketing expenses decreased to 22.6% in
2000 from 25.8% in 1999. Management anticipates that selling and marketing
expenses will generally continue to rise as we aggressively market our existing
products and promote our new product lines in 2001.

     General and Administrative. General and administrative expenses increased
by $1.7 million, or 17.0%, to $11.8 million in 2000 from $10.1 million in 1999.
The higher expenses for 2000 are largely due to increased costs associated with
the hiring of additional personnel, including wages and related benefits, to
support a larger base of business including new initiatives such as Generation21
and the expansion internationally. As a percentage of net sales, general and
administrative costs decreased to 11.1% in 2000 from 12.1% in 1999. Management
anticipates that general and administrative expenses will generally continue to
rise to support our growth and new business initiatives.

     Purchased Research and Development. In connection with the acquisitions of
computerActive, Inc. and the assets of Humanities, Incorporated in 1999,
$1,080,000 of the purchase price was allocated to purchased research and
development which was expensed in 1999.

     Operating Income. Operating income increased by $7.1 million, or 26.4%, to
$34.1 million in 2000 from $27.0 million in 1999. As a percentage of net sales,
operating income decreased to 31.9% in 2000 from 32.3% in 1999. Excluding the
effects of the purchased research and development expense in 1999, operating
income would have increased by $6.0 million, or 21.5%, in 2000 from 1999, or
31.9% of net sales in 2000 compared to 33.6% of net sales in 1999. Management
expects that we can maintain our 2000 margins in 2001 overall. However, first
quarter 2001 operating margins may be somewhat lower than operating margins in
the fourth quarter of 2000 due to expected higher spending on sales and
marketing initiatives, and the second annual National School Renaissance
Conference to be held in late March.

     Income Taxes. Income tax expense of $14.6 million was recorded in 2000 at
an effective income tax rate of 38.9% compared to $11.9 million and 41.1%
effective income tax rate in 1999. We expect to maintain our effective tax rate
at or below 39% in 2001.

                     YEARS ENDED DECEMBER 31, 1999 AND 1998

     Net Sales. Our net sales increased by $28.4 million, or 51.6%, to $83.6
million in 1999 from $55.1 million in 1998. Product sales increased by $23.5
million, or 53.4%, to $67.6 million in 1999 from $44.1 million in 1998. The
increase in product sales is primarily attributable to (i) sales of our new math
products, which we began shipping in late 1998 and (ii) increased sales of
Accelerated Reader title disks to a larger base of Accelerated Reader schools.

     Service revenue, which consists of revenue from sales of training sessions
and software support agreements, increased by $4.9 million, or 44.2%, to $16.0
million in 1999 from $11.1 million in 1998. This increase is primarily
attributable to an increased number of Renaissance training sessions and to an
increase in revenue from one-year software support agreements associated with
new product sales.

     While revenue growth was more than 70% over 1998 levels for both products
and services in the first half of 1999, growth rates over the previous year were
considerably lower in the third and fourth quarters of 1999. Because our new
version of Accelerated Reader shipped in late September and October, we missed
the prime fall buying season for schools, which slowed follow-on purchases of
Accelerated Reader title disks as well as adoptions by new schools in late 1999.
This delay in shipment continued to have some impact into early 2000, as schools
took time to install the new Accelerated Reader software before returning to
their normal buying patterns.

                                        19
<PAGE>   21

     In June 1999, we announced that our reading and language arts software
products won approval in California's state adoption of curriculum materials.
Gaining approval means that schools that want to purchase our reading and
writing skills software can pay for them using certain state curriculum
materials funds. Other key events during the year included the first
district-wide sale of School Renaissance, our comprehensive school improvement
program; shipment of our improved version of Accelerated Reader and STAR Reading
software; the introduction of Web-based on-line ordering and delivery of
Accelerated Reader quizzes; and an alliance with the McGraw-Hill School Division
to provide educators and students with access to hundreds of interactive
computer quizzes aligned to the McGraw-Hill elementary school reading series.

     Cost of Sales. The cost of sales of products increased by $3.4 million, or
77.5%, to $7.8 million in 1999 from $4.4 million in 1998. As a percentage of
product sales, the cost of sales of products increased to 11.5% in 1999 compared
to 9.9% in 1998 due primarily to mix associated with the hardware component of
our new math products. An optical-mark card scanner is included with the sale of
all Accelerated Math site licenses and in many cases, additional scanners are
sold. Although scanners are profitable, the gross profit margin on hardware is
not as high as the gross profit margin on software.

     The cost of sales of services increased by $3.1 million, or 68.1%, to $7.6
million in 1999 from $4.5 million in 1998 primarily due to increased costs of
delivering more training sessions in 1999 and of providing technical support
related to software support agreements. As a percentage of sales of services,
the cost of sales of services increased to 47.3% in 1999 compared to 40.6% in
1998. While we trained over 78,000 educators in our Renaissance training
programs in 1999, an increase of 51.5% over educators trained in 1998, increased
numbers of seminars in smaller markets resulted in lower average attendance at
seminars for which costs are relatively fixed, resulting in an increase in costs
as a percentage of sales for training. Additionally, costs of providing software
technical support increased as we broadened our product lines and introduced new
versions of existing products.

     Our overall gross profit margin decreased 2.2% to 81.7% in 1999 from 83.9%
in 1998 due to decreased gross profit margins on both products and services.

     Product Development. Product development expenses increased by $3.4
million, or 65.4%, to $8.5 million in 1999 from $5.1 million in 1998. These
expenses increased primarily due to increased staff and consulting costs
associated with developing new products and seminars including new versions of
our Accelerated Reader and STAR Reading software, additional Accelerated Reader
quizzes, the new School Renaissance district-wide improvement program, and
several products not yet released. As a percentage of net sales, product
development costs increased to 10.2% in 1999 from 9.3% in 1998.

     Selling and Marketing. Selling and marketing expenses increased by $7.8
million, or 57.1%, to $21.5 million in 1999 from $13.7 million in 1998. These
expenses increased due to (i) direct mailings to an increased customer and
prospect base, (ii) an increase in special promotions and (iii) increased wage
and benefit costs associated with the hiring of additional personnel. As a
percentage of net sales, selling and marketing expenses increased to 25.8% in
1999 from 24.9% in 1998.

     General and Administrative. General and administrative expenses increased
by $2.6 million, or 34.3%, to $10.1 million in 1999 from $7.5 million in 1998.
The higher expenses for 1999 are largely due to increased costs associated with
the hiring of additional personnel, including wages and related benefits. As a
percentage of net sales, general and administrative costs decreased to 12.1% in
1999 from 13.6% in 1998.

     Purchased Research and Development. In connection with the acquisitions of
computerActive, Inc. and the assets of Humanities Software, Incorporated in
1999, $900,000 and $180,000, respectively, of the purchase price was allocated
to purchased research and development which was expensed in 1999. In connection
with the acquisition of Logicus, Incorporated in 1998, $475,000 of the purchase
price was allocated to purchased research and development which was expensed in
1998.

     Operating Income. Operating income increased by $7.6 million, or 39.1%, to
$27.0 million in 1999 from $19.4 million in 1998. As a percentage of net sales,
operating income decreased to 32.3% in 1999 from 35.2% in 1998. Excluding the
effects of the purchased research and development expense in 1999 and 1998,
operating

                                        20
<PAGE>   22

income would have increased by $8.2 million, or 41.2%, to $28.1 million in 1999
from $19.9 million in 1998, or 33.6% of net sales compared to 36.1% of net sales
in 1998.

     Other Income. Other income increased by $422,000 to $379,000 in 1999
primarily due to an increase in rental income at our new office facility in
Madison, Wisconsin, offset by a non-recurring charge of $365,000 for transaction
costs associated with the acquisition of Generation21 Learning Systems, LLC in
1999.

     Income Taxes. Income tax expense of $11.9 million was recorded in 1999 at
an effective income tax rate of 41.0% compared to $8.8 million and 42.0%
effective income tax rate in 1998.

                        LIQUIDITY AND CAPITAL RESOURCES

     As of December 31, 2000, our cash, cash equivalents and investment
securities increased $27.8 million to $68.8 million from the December 31, 1999
total of $41.0 million. The net increase is due primarily to $33.7 million in
net cash provided by operating activities offset by (i) $3.7 million used in the
purchase of property, plant and equipment for facility expansion necessary to
accommodate our growth in operations and (ii) $3.0 million used for an
acquisition. We believe cash flow from operations and our current cash position
will be sufficient to meet our working capital requirements for the foreseeable
future.

     At December 31, 2000, we had a $10.0 million unsecured revolving line of
credit with a bank which is available until March 31, 2002. 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 $1.0
million unsecured revolving line of credit with a bank which is available until
April 30, 2001, and which is expected to be extended for an additional year. The
line of credit bears interest at a fixed rate of 7.5%. As of December 31, 2000,
the lines of credit had not been used.

     On January 3, 2000 our Board of Directors authorized the repurchase of up
to 1,000,000 shares of our common stock. No time limit was placed on the
duration of the repurchase program. Repurchased shares will become treasury
shares and will be used for stock-based employee benefit plans and for other
general corporate purposes. As of December 31, 2000, we had repurchased 25,100
shares.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     At December 31, 2000 and 1999, we had no material market risk exposures
(e.g., interest rate risk, foreign currency exchange rate risk or commodity
price risk).

                                        21
<PAGE>   23

ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
ADVANTAGE LEARNING SYSTEMS, INC. AND SUBSIDIARIES:

     We have audited the accompanying consolidated balance sheets of Advantage
Learning Systems, Inc. (a Wisconsin corporation) and subsidiaries as of December
31, 2000 and 1999, and the related consolidated statements of income, equity and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Advantage
Learning Systems, Inc. and subsidiaries as of December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States.

                                          /s/ Arthur Andersen LLP

                                          ARTHUR ANDERSEN LLP

Milwaukee, Wisconsin
January 19, 2001

                                        22
<PAGE>   24

               ADVANTAGE LEARNING SYSTEMS, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 2000 AND 1999

<TABLE>
<CAPTION>
                                                                    2000         1999
                                                                    ----         ----
                                                                  (IN THOUSANDS, EXCEPT
                                                                   SHARE AND PER SHARE
                                                                        AMOUNTS)
<S>                                                               <C>           <C>
                           ASSETS
Current assets:
  Cash and cash equivalents.................................      $ 24,963      $23,016
  Investment securities.....................................        43,880       18,012
  Accounts receivable, less allowance of $985 in 2000 and
     $1,200 in 1999.........................................        11,335       11,796
  Inventories...............................................         1,523        1,707
  Prepaid expenses..........................................         1,204        1,287
  Prepaid income taxes......................................            --          292
  Deferred tax asset........................................         2,922        2,559
                                                                  --------      -------
          Total current assets..............................        85,827       58,669
Property, plant and equipment, net..........................        24,501       24,256
Deferred tax asset..........................................         2,127        2,297
Intangibles and goodwill, net...............................         5,002        2,702
Capitalized software, net...................................           581          495
Other non-current assets....................................           183           --
                                                                  --------      -------
          Total assets......................................      $118,221      $88,419
                                                                  ========      =======
            LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................      $  2,166      $ 2,521
  Deferred revenue..........................................         5,484        4,852
  Payroll and employee benefits.............................         2,813        1,981
  Income taxes payable......................................         2,419           --
  Other current liabilities.................................         4,104        2,392
                                                                  --------      -------
          Total current liabilities.........................        16,986       11,746
  Deferred revenue..........................................         1,380        1,485
                                                                  --------      -------
          Total liabilities.................................        18,366       13,231
Minority interest...........................................           185          253
Shareholders' equity:
  Common stock, $.01 par; shares authorized: 150,000,000;
     issued: 34,328,558 -- 2000
             34,182,841 -- 1999.............................           343          342
     Additional paid in capital.............................        45,769       43,621
     Retained earnings......................................        53,948       31,015
     Accumulated other comprehensive income.................           (65)         (43)
     Treasury stock, at cost (25,100 shares)................          (325)          --
                                                                  --------      -------
          Total shareholders' equity........................        99,670       74,935
                                                                  --------      -------
          Total liabilities and shareholders' equity........      $118,221      $88,419
                                                                  ========      =======
</TABLE>

The accompanying notes to the financial statements are an integral part of these
                                balance sheets.

                                        23
<PAGE>   25

               ADVANTAGE LEARNING SYSTEMS, INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF INCOME
              FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

<TABLE>
<CAPTION>
                                                               2000      1999      1998
                                                               ----      ----      ----
                                                                     (IN THOUSANDS
                                                               EXCEPT PER SHARE AMOUNTS)
<S>                                                           <C>       <C>       <C>
Net Sales:
  Products..................................................  $87,004   $67,608   $44,064
  Services..................................................   19,987    15,980    11,084
                                                              -------   -------   -------
       Total net sales......................................  106,991    83,588    55,148
                                                              -------   -------   -------
Cost of sales:
  Products..................................................   11,621     7,768     4,375
  Services..................................................   10,300     7,557     4,496
                                                              -------   -------   -------
       Total cost of sales..................................   21,921    15,325     8,871
                                                              -------   -------   -------
       Gross profit.........................................   85,070    68,263    46,277
Operating expenses:
  Product development.......................................   14,922     8,500     5,140
  Selling and marketing.....................................   24,166    21,546    13,712
  General and administrative................................   11,833    10,115     7,529
  Purchased research and development........................       --     1,080       475
                                                              -------   -------   -------
       Total operating expenses.............................   50,921    41,241    26,856
                                                              -------   -------   -------
       Operating income.....................................   34,149    27,022    19,421
Other income (expense):
  Interest income...........................................    3,046     1,733     1,709
  Interest expense..........................................       --       (45)      (51)
  Other, net................................................      339       379       (43)
                                                              -------   -------   -------
Income before taxes.........................................   37,534    29,089    21,036
Income tax provision........................................   14,601    11,943     8,844
                                                              -------   -------   -------
Net income..................................................  $22,933   $17,146   $12,192
                                                              =======   =======   =======
Earnings per share:
  Basic.....................................................  $  0.67   $  0.50   $  0.36
  Diluted...................................................     0.67      0.50      0.36
</TABLE>

The accompanying notes to the financial statements are an integral part of these
                                  statements.

                                        24
<PAGE>   26

               ADVANTAGE LEARNING SYSTEMS, INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000

<TABLE>
<CAPTION>
                                                                                               ACCUMULATED
                                       COMMON STOCK (1)    ADDITIONAL                             OTHER
                                      ------------------    PAID IN     RETAINED   TREASURY   COMPREHENSIVE    TOTAL
                                      SHARES      AMOUNT    CAPITAL     EARNINGS    STOCK        INCOME       EQUITY
                                      ------      ------   ----------   --------   --------   -------------   ------
                                                                      (IN THOUSANDS)
<S>                                   <C>         <C>      <C>          <C>        <C>        <C>             <C>
Balance, December 31, 1997.........   33,971       $340     $40,786     $ 1,677     $  --         $ --        $42,803
  Net income.......................       --         --          --      12,192        --           --         12,192
  Foreign currency translation.....       --         --          --          --        --          (22)           (22)
                                                                                                              -------
    Comprehensive income...........       --         --          --          --        --           --         12,170
  Distribution to shareholders.....       --         --        (302)         --        --           --           (302)
  Tax benefit on stock options.....       --         --         133          --        --           --            133
  Exercise of stock options........       31         --         246          --        --           --            246
  Stock option grants..............       --         --           9          --        --           --              9
                                      ------       ----     -------     -------     -----         ----        -------
Balance, December 31, 1998.........   34,002        340      40,872      13,869        --          (22)        55,059
  Net income.......................       --         --          --      17,146        --           --         17,146
  Foreign currency translation.....       --         --          --          --        --            3              3
  Unrealized loss on securities....       --         --          --          --        --          (24)           (24)
                                                                                                              -------
    Comprehensive income...........       --         --          --          --        --           --         17,125
  Shares issued to acquire
    business(2)....................       59          1       1,012          --        --           --          1,013
  Employee stock purchase plan.....       19         --         222          --        --           --            222
  Tax benefit on stock options.....       --         --         581          --        --           --            581
  Exercise of stock options........      103          1         922          --        --           --            923
  Stock option grants..............       --         --          12          --        --           --             12
                                      ------       ----     -------     -------     -----         ----        -------
Balance, December 31, 1999.........   34,183        342      43,621      31,015        --          (43)        74,935
  Net income.......................       --         --          --      22,933        --           --         22,933
  Foreign currency translation.....       --         --          --          --        --          (26)           (26)
  Unrealized gain on securities....       --         --          --          --        --            4              4
                                                                                                              -------
    Comprehensive income...........       --         --          --          --        --           --         22,911
  Stock repurchased for treasury...      (25)        --          --          --      (325)          --           (325)
  Employee stock purchase plan.....       51         --         490          --        --           --            490
  Tax benefit on stock options.....       --         --         461          --        --           --            461
  Exercise of stock options........       94          1       1,191          --        --           --          1,192
  Stock option grants..............       --         --           6          --        --           --              6
                                      ------       ----     -------     -------     -----         ----        -------
Balance, December 31, 2000.........   34,303       $343     $45,769     $53,948     $(325)        $(65)       $99,670
                                      ======       ====     =======     =======     =====         ====        =======
</TABLE>

-------------------------
(1) Common Stock, $0.01 par value, 150,000,000 shares authorized.

(2) See Note 3 of Notes to Financial Statements.

The accompanying notes to the financial statements are an integral part of these
                                  statements.

                                        25
<PAGE>   27

               ADVANTAGE LEARNING SYSTEMS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                  2000       1999        1998
                                                                  ----       ----        ----
                                                                        (IN THOUSANDS)
<S>                                                             <C>         <C>        <C>
Reconciliation of net income to net cash provided by
  operating activities:
  Net income................................................    $ 22,933    $17,146    $ 12,192
  Noncash (income) expenses included in net income --
     Depreciation and amortization..........................       4,769      3,245       2,129
     Purchased research and development.....................          --      1,080         475
     Deferred income taxes..................................        (194)      (967)       (397)
  Change in assets and liabilities --
     Accounts receivable....................................       1,009     (2,733)     (5,424)
     Inventory..............................................         225       (909)       (421)
     Prepaid expenses.......................................         378       (856)         69
     Accounts payable and other current liabilities.........       4,294     (1,389)      4,283
     Deferred revenue.......................................         475      1,496         688
  Other.....................................................        (179)       (63)        (38)
                                                                --------    -------    --------
       Net cash provided by operating activities............      33,710     16,050      13,556
                                                                --------    -------    --------
Cash flows from investing activities:
  Purchase of property, plant and equipment.................      (3,720)    (7,267)     (8,494)
  (Purchase) sale of investment securities, net.............     (25,868)       856     (12,004)
  Capitalized software development costs....................        (477)      (432)       (194)
  Acquisitions..............................................      (2,995)    (1,600)       (634)
                                                                --------    -------    --------
       Net cash used in investing activities................     (33,060)    (8,443)    (21,326)
                                                                --------    -------    --------
Cash flows from financing activities:
  Proceeds from issuance of stock...........................         490        222          --
  Proceeds from exercise of stock options...................       1,192        923         246
  Equity contribution from (return to) minority partner.....         (60)        --         300
  Purchase of treasury stock................................        (325)        --          --
  Distributions to shareholders.............................          --         --        (857)
                                                                --------    -------    --------
       Net cash provided by (used in) financing
          activities........................................       1,297      1,145        (311)
                                                                --------    -------    --------
Net increase (decrease) in cash.............................       1,947      8,752      (8,081)
Cash and cash equivalents, beginning of period..............      23,016     14,264      22,345
                                                                --------    -------    --------
Cash and cash equivalents, end of period....................    $ 24,963    $23,016    $ 14,264
                                                                ========    =======    ========
</TABLE>

The accompanying notes to the financial statements are an integral part of these
                                  statements.

                                        26
<PAGE>   28

               ADVANTAGE LEARNING SYSTEMS, INC. AND SUBSIDIARIES
                         NOTES TO FINANCIAL STATEMENTS

(1) CONSOLIDATION

     The consolidated financial statements include the financial results of
Advantage Learning Systems, Inc. ("ALS") and its consolidated subsidiaries
(collectively, the "Company"). The Company's significant subsidiaries include
the School Renaissance Institute, Inc. ("Institute"), formerly known as the
Institute for Academic Excellence, Inc., Renaissance Corporate Services, Inc.,
formerly known as IPS Publishing, Inc, and Generation21 Learning Systems, LLC
("Generation21"). The Company also owns 70% of Athena Holdings LLC which was
formed for the purpose of constructing a facility in Madison, Wisconsin. All
significant intercompany transactions have been eliminated in the consolidated
financial statements.

     In September 2000, the Company announced plans to change its corporate name
to Renaissance Learning, Inc. While the Company immediately commenced doing
business as Renaissance Learning, Inc., the formal legal name change is subject
to shareholder approval at the Company's 2001 annual meeting in April. After
shareholder approval of the new name, the Company expects to change its stock
trading symbol on The Nasdaq Stock Market to "RLRN".

(2) NATURE OF OPERATIONS

     ALS is a provider of learning information systems to K-12 schools in the
United States and Canada. ALS's flagship product is the Accelerated Reader, a
learning information system for motivating and monitoring increased
literature-based reading practice. The Company's software products also include
STAR Reading, a computer-adaptive reading test and database; Accelerated Math
and STAR Math, software products that apply to math the principles that have
made the reading software effective in improving academic performance; Perfect
Copy writing skills software; and Surpass test preparation software.

     The Institute develops and conducts Renaissance training programs, which
provide educators with professional development training to most effectively use
ALS products and the learning information they generate. The firm provides
teacher training through its Reading Renaissance, Math Renaissance, and other
seminars. The Institute's School Renaissance program is a comprehensive package
of software, professional development training, and consulting services aimed at
accelerating learning and improving test scores in reading, math, writing, and
overall academic performance throughout schools and school districts.

     Renaissance Corporate Services, Inc. provides customized test-generation
software to educational publishers for assessment and skills practice in math,
science, and other subjects and also develops content for math products
distributed by the Company.

     Generation21 sells enterprise software for organization-wide training and
knowledge management to corporate customers. The Company also has subsidiaries
in Canada, India, Australia, and the United Kingdom.

(3) ACQUISITIONS

     Effective November 17, 2000, the Company acquired the business and assets
of Engineering Software Associates, Inc. ("ESA"), Minneapolis, Minnesota, a
provider of test generation and tutorial software to college textbook
publishers. The transaction was accounted for using the purchase method of
accounting, with a total purchase price of $3.8 million including the assumption
of less than $100,000 of certain liabilities. The purchase price is subject to
certain post-closing adjustments. The purchase price was allocated based on the
fair values of the assets acquired and liabilities assumed and included an
allocation to intangibles and goodwill (see Note 5). The operating results of
ESA are included in the consolidated financial statements of the Company since
the date of acquisition.

     Effective December 29, 1999, the Company acquired computerActive, Inc.
("computerActive"), an Ottawa, Canada-based software development firm
specializing in Web-based applications. The transaction

                                        27
<PAGE>   29
               ADVANTAGE LEARNING SYSTEMS, INC. AND SUBSIDIARIES
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

was accounted for using the purchase method of accounting, with a total purchase
price of $1.3 million, representing $680,000 of cash, $346,000 of the Company's
common stock and the assumption of certain liabilities. The operating results of
computerActive are included in the consolidated financial statements of the
Company since the date of acquisition. The allocated purchase price includes
valuation of certain acquired in-process research and development costs which
resulted in a pre-tax charge of $900,000 in the fourth quarter of 1999.

     Effective July 1, 1999, the Company acquired Generation21 Learning Systems,
LLC ("Generation21"), a training and knowledge management enterprise software
firm in Golden, Colorado. The transaction was accounted for as a
pooling-of-interests. Accordingly, the Company's financial information for all
periods presented has been restated to include the results of Generation21 since
its inception in July 1997. The Company issued 166,443 shares of common stock
with a market value of $4.0 million to effect the transaction. Third quarter
1999 results include a non-recurring pre-tax charge of $365,000 for transaction
costs associated with the acquisition.

     Effective June 9, 1999, the Company acquired the assets of Humanities
Software, Incorporated ("Humanities"), an Oregon-based firm specializing in
writing software. The transaction was accounted for using the purchase method of
accounting with a total purchase price of $1.7 million, representing $920,000 of
cash, $666,000 of the Company's common stock and the assumption of certain
liabilities. The operating results of Humanities are included in the
consolidated financial statements of the Company since the date of acquisition.
The allocated purchase price includes valuation of certain acquired in-process
research and development costs which resulted in a pre-tax charge of $180,000 in
the second quarter of 1999.

     Effective June 30, 1998, the Company acquired 100% of the stock of Logicus
Incorporated ("Logicus"), an Ontario, Canada-based firm specializing in writing
skills development software. The transaction was accounted for using the
purchase method of accounting, and the results of operations of Logicus have
been included in the Company's consolidated financial statements since the date
of acquisition. The purchase price included the acquisition of certain
in-process research and development costs which resulted in a pre-tax charge of
$475,000 in the second quarter of 1998.

     Pro forma data is not provided relating to the above acquisitions because
it would not differ significantly from historical results.

(4) SIGNIFICANT ACCOUNTING POLICIES

(a) Use of estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

(b) Revenue recognition

     The Company recognizes revenue in accordance with Statement of Position No.
97-2 "Software Revenue Recognition" issued by the Accounting Standards Executive
Committee of the AICPA. Revenues are recorded net of an allowance for estimated
returns. Allowances for bad debts are also recorded at the time of the sale.

     Product revenue is derived primarily from the sale of software products.
The Company recognizes revenue from sales of its off-the-shelf software products
at the time of shipment to customers. The Company recognizes revenue from the
sale of custom software products on the percentage-of-completion method of

                                        28
<PAGE>   30
               ADVANTAGE LEARNING SYSTEMS, INC. AND SUBSIDIARIES
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

accounting. Accordingly, revenue is deferred for advance payments from customers
that are in excess of revenues earned on custom software sales. Included in
accounts receivable at December 31, 2000 and 1999 is $442,000 and $370,000,
respectively, of amounts earned which are not yet billed to the customer for
custom software products.

     Service revenue is derived from (i) training seminars, (ii) consulting
services, and (iii) software support agreements whereby the Company provides
ongoing customer support and product upgrades. Revenue from training seminars is
recognized when the seminar is performed. Revenue from consulting services is
recognized as the service is performed or on a straight-line basis over the
contractual period. Revenue from software support agreements with a duration of
twelve months or less that are bundled with a software product sale is
recognized at the time the software is shipped, and the related costs of
providing these support services are accrued. Revenue from separately sold
software support agreements are initially recorded as deferred revenue and
recognized as revenue on a straight-line basis over the term of the agreement
which begins after the expiration of any support bundled with the software
product sale.

     Deferred revenue includes (i) payments received for products not yet
delivered, (ii) advance payments on contract revenues, (iii) payments received
for seminars not yet held, and (iv) that portion of separately sold software
support agreements that has not yet been recognized as revenue.

(c) Cash and cash equivalents

     The Company considers cash amounts on deposit at banks and highly liquid
debt instruments purchased with a maturity date of three months or less to be
cash equivalents. Debt instruments are carried at cost plus accrued interest,
which approximates market value. Cash and cash equivalents consisted of the
following at December 31:

<TABLE>
<CAPTION>
                                                                2000       1999
                                                                ----       ----
                                                                 (IN THOUSANDS)
<S>                                                            <C>        <C>
Cash and time deposits.....................................    $ 6,011    $ 7,009
Municipal obligations......................................     18,002     12,012
Commercial paper...........................................         --      2,990
Corporate notes............................................        950      1,005
                                                               -------    -------
                                                               $24,963    $23,016
                                                               =======    =======
</TABLE>

(d) Supplemental disclosure of cash flow information

<TABLE>
<CAPTION>
                                                         2000       1999       1998
                                                         ----       ----       ----
                                                               (IN THOUSANDS)
<S>                                                     <C>        <C>        <C>
Cash paid for:
  Interest..........................................    $     0    $    84    $   20
  Income Taxes......................................    $11,641    $14,757    $6,606
</TABLE>

(e) Investment securities

     Investment securities have an original maturity of more than three months
and a remaining maturity of less than eighteen months. As of December 31, 2000
and 1999, investment securities consisted entirely of commercial paper and
corporate notes. These securities are considered to be available for sale in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities". Accordingly,
these investments are stated at fair value plus accrued interest, with the
unrealized gains and losses, net of tax, included in accumulated other
comprehensive income in the Company's consolidated statements of equity.

                                        29
<PAGE>   31
               ADVANTAGE LEARNING SYSTEMS, INC. AND SUBSIDIARIES
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(f) Inventories

     Inventories are carried at the lower of first-in, first-out (FIFO) cost or
market. Inventories primarily consist of purchased materials which include
optical-mark card scanners, educational products, training materials, manuals
and motivational items.

(g) Catalog and advertising costs

     Costs related to direct response advertising, primarily catalogs, are
capitalized and amortized over their expected period of future benefits,
generally three to six months. At December 31, 2000 and 1999, capitalized
catalog costs of approximately $190,000 and $404,000, respectively, are included
in prepaid expenses. All other advertising costs are expensed the first time the
advertising takes place. Advertising expenses for 2000, 1999 and 1998 were
approximately $8,015,000, $9,206,000 and $6,232,000, respectively.

(h) Property, plant and equipment

     Property, plant and equipment are recorded at cost and are depreciated over
the estimated useful lives of the assets using principally the straight-line
method for financial reporting purposes. Maintenance and repair costs are
charged to expense as incurred, and renewals and improvements that extend the
useful life of the assets are added to the plant and equipment accounts.
Depreciation expense was approximately $3,568,000, $2,468,000 and $1,423,000 for
2000, 1999 and 1998, respectively.

     The estimated useful lives for property, plant and equipment are as
follows: buildings -- 25 to 40 years; furniture, fixtures and office
equipment -- 5 to 8 years; computer and production equipment -- 3 to 5 years;
vehicles -- 5 years; and leasehold improvements -- the lease term.

     Net property, plant and equipment consisted of the following at December
31:

<TABLE>
<CAPTION>
                                                                2000       1999
                                                                ----       ----
                                                                 (IN THOUSANDS)
<S>                                                            <C>        <C>
Land and improvements......................................    $ 3,361    $ 3,361
Buildings..................................................     15,526     15,330
Furniture, fixtures and office equipment...................      5,109      4,245
Computer and production equipment..........................      8,613      5,957
Vehicles...................................................        135        165
Leasehold improvements.....................................        153         69
Construction in progress...................................        128        382
                                                               -------    -------
     Total property, plant and equipment...................     33,025     29,509
Less -- accumulated depreciation...........................      8,524      5,253
                                                               -------    -------
Property, plant and equipment, net.........................    $24,501    $24,256
                                                               =======    =======
</TABLE>

(i) Software development costs

     The Company capitalizes certain software development costs incurred after
technological feasibility is achieved. Capitalized costs are reported at the
lower of amortized cost or net realizable value. Capitalized software
development costs are amortized on a product-by-product basis based on the
greater of the amount computed using (a) the ratio that current gross revenues
for a product bear to the total of current and anticipated future gross revenues
for that product or (b) the straight-line method over the estimated economic
life of the products which is generally estimated to be 24 months. Amortization
begins when the products are available for general release to customers. All
other research and development expenditures are charged to product development
expense in the period incurred. When capitalized software is fully amortized,
the balance

                                        30
<PAGE>   32
               ADVANTAGE LEARNING SYSTEMS, INC. AND SUBSIDIARIES
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

is removed from capitalized software and accumulated amortization of capitalized
software. Amounts capitalized were approximately $477,000, $432,000 and $194,000
in 2000, 1999 and 1998, respectively. Amortization expense of approximately
$391,000, $194,000 and $183,000 for 2000, 1999 and 1998, respectively, is
included in cost of sales-products in the consolidated statements of income. At
December 31, 2000 and 1999, accumulated amortization of capitalized software
development costs was $543,000 and $958,000, respectively.

(j) Sales and concentration of credit risks

     For the years ended December 31, 2000, 1999 and 1998, one customer (a book
distributor) contributed 8.5%, 11.5% and 13.9% of total revenues, respectively.
No other customer represented more than 10% of total revenues. On December 31,
2000 and 1999, this customer had a receivable balance of 5.2% and 6.2% of total
trade receivables, respectively.

     The Company grants credit to customers in the ordinary course of business.
The majority of the Company's customers are schools. Concentrations of credit
risk with respect to trade receivables are limited due to the significant number
of customers and their geographic dispersion.

(k) Stock-based compensation

     The Company elected, as permitted by SFAS No. 123 "Accounting for Stock
Based Compensation," to follow the intrinsic value based method of accounting
for stock options consistent with Accounting Principles Board Opinion No. 25
("APB 25") "Accounting for Stock Issued to Employees" and to provide the pro
forma disclosures of net income and earnings per share as if the fair value
based method had been applied. Under the intrinsic method, compensation cost for
stock options is measured by the excess, if any, of the quoted price of the
Company's stock at the measurement date over the exercise price. The
Black-Scholes option-pricing model was used to compute the fair value of each
option granted for purposes of the pro forma disclosures required by SFAS 123.

(l) Earnings per common share

     Basic earnings per common share ("Basic EPS") has been computed based on
the weighted average number of common shares outstanding. Diluted earnings per
common share ("Diluted EPS") 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 dilutive potential common
shares had been issued. All share and per share data has been adjusted to
reflect a 2-for-1 stock split in the form of a stock dividend effective February
26, 1999 (see Note 12).

     The weighted average shares outstanding for 2000, 1999 and 1998 are as
follows:

<TABLE>
<CAPTION>
                                                            2000             1999             1998
                                                            ----             ----             ----
<S>                                                      <C>              <C>              <C>
Basic weighted average shares outstanding............    34,236,609       34,074,617       33,978,505
Dilutive effect of stock options.....................       191,528          302,456          163,998
                                                         ----------       ----------       ----------
Diluted weighted average shares outstanding..........    34,428,137       34,377,073       34,142,503
                                                         ==========       ==========       ==========
</TABLE>

(m) Income taxes

     The Company accounts for income taxes according to the provisions of SFAS
No. 109, "Accounting for Income Taxes". SFAS 109 requires an asset and liability
based approach to accounting for income taxes. Deferred income tax assets and
liabilities are recorded to reflect the tax consequences on future years of
temporary differences between financial and tax accounting of revenue and
expense items. Valuation

                                        31
<PAGE>   33
               ADVANTAGE LEARNING SYSTEMS, INC. AND SUBSIDIARIES
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

allowances are provided when it is anticipated that some or all of a deferred
tax asset is not likely to be realized.

(n) Derivative financial instruments

     In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". This
standard, as amended, requires that entities recognize derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. The Company is required to adopt this standard on January 1, 2001. The
adoption of this statement is not expected to have a material impact on the
consolidated financial statements as the Company has not historically utilized
derivative instruments.

(o) Comprehensive income

     The Company's comprehensive income includes foreign currency translation
adjustments and unrealized gains and losses on available-for-sale securities,
which are included in accumulated other comprehensive income in the Company's
consolidated statements of equity.

(p) Reclassifications

     Certain previously reported amounts have been reclassified to conform with
the 2000 presentation.

(5) INTANGIBLE ASSETS

     Intangible assets, including goodwill, are amortized on the straight-line
basis over their estimated useful lives. Intangible assets consisted of the
following at December 31:

<TABLE>
<CAPTION>
                                                        2000      1999     USEFUL LIFE
                                                        ----      ----     -----------
                                                        (IN THOUSANDS)
<S>                                                    <C>       <C>       <C>
Algorithms and software code.......................    $2,124    $1,824     2-5 years
Tradename..........................................       210       210      10 years
Assembled workforce................................       620       220       7 years
Non-compete agreement..............................     1,100        --       5 years
Goodwill...........................................     3,203     1,894       7 years
                                                       ------    ------
Total intangibles..................................     7,257     4,148
Less -- accumulated amortization...................     2,255     1,446
                                                       ------    ------
Net intangibles....................................    $5,002    $2,702
                                                       ======    ======
</TABLE>

     Management periodically reviews the carrying value of its intangible
assets, including goodwill, for potential impairment. To date, no impairment of
these assets exists.

                                        32
<PAGE>   34
               ADVANTAGE LEARNING SYSTEMS, INC. AND SUBSIDIARIES
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(6) INCOME TAXES

     The provision for income taxes consisted of:

<TABLE>
<CAPTION>
                                                       2000       1999       1998
                                                       ----       ----       ----
                                                             (IN THOUSANDS)
<S>                                                   <C>        <C>        <C>
Current tax provision:
  U.S. federal....................................    $12,537    $10,317    $7,428
  State and local.................................      2,258      2,593     1,813
                                                      -------    -------    ------
Total current tax provision.......................     14,795     12,910     9,241
                                                      -------    -------    ------
Deferred tax (benefit):
  U.S. federal....................................       (162)      (943)     (329)
  State and local.................................        (32)       (24)      (68)
                                                      -------    -------    ------
Total deferred tax (benefit)......................       (194)      (967)     (397)
                                                      -------    -------    ------
Provision for income taxes........................    $14,601    $11,943    $8,844
                                                      =======    =======    ======
</TABLE>

     Effective rate reconciliation:

<TABLE>
<CAPTION>
                                                         2000       1999       1998
                                                         ----       ----       ----
                                                               (IN THOUSANDS)
<S>                                                     <C>        <C>        <C>
U.S. statutory rate.................................        35%        35%       35%
                                                        -------    -------    ------
Income tax provision at statutory tax rate..........    $13,137    $10,181    $7,363
State and local taxes, net of federal tax benefit...      1,424      1,669     1,134
Other...............................................         40         93       347
                                                        -------    -------    ------
Provision for income taxes..........................    $14,601    $11,943    $8,844
                                                        =======    =======    ======
</TABLE>

     Deferred tax assets (liabilities) consisted of the following at December
31:

<TABLE>
<CAPTION>
                                                                 2000      1999
                                                                 ----      ----
                                                                 (IN THOUSANDS)
<S>                                                             <C>       <C>
Current deferred tax assets:
  Deferred revenue..........................................    $1,319    $1,321
  Expenses not currently deductible.........................     1,603     1,238
                                                                ------    ------
Net current deferred tax assets.............................     2,922     2,559
                                                                ------    ------
Noncurrent deferred tax assets (liabilities):
  Deferred revenue..........................................       329       470
  Operating losses..........................................        27       201
  Depreciation and amortization.............................        81       (39)
  Intangibles...............................................     1,597     1,569
  Other.....................................................        93        96
                                                                ------    ------
Net noncurrent deferred tax assets..........................     2,127     2,297
                                                                ------    ------
Total deferred tax assets...................................    $5,049    $4,856
                                                                ======    ======
</TABLE>

     No valuation allowance has been recorded as the net deferred tax asset
related to the operating losses is assumed to be realizable through the future
profitable operations of subsidiaries. The tax operating loss carryforwards
expire between 2011 and 2016.

                                        33
<PAGE>   35
               ADVANTAGE LEARNING SYSTEMS, INC. AND SUBSIDIARIES
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(7) LINES OF CREDIT

     The Company has a $10.0 million unsecured revolving line of credit with a
bank which is available until March 31, 2002. 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 the option
of the Company and is determined at the time of borrowing. The Company also has
a $1.0 million unsecured revolving line of credit with a bank which is available
until April 30, 2001, and which is expected to be extended for an additional
year. The line of credit bears interest at a fixed rate of 7.5%. As of December
31, 2000, the lines of credit had not been used.

(8) LEASE COMMITMENTS

     The Company is party to various operating leases for equipment and for
office facilities at some of its subsidiaries. Rent expense for 2000, 1999 and
1998 was approximately $840,000, $468,000 and $439,000, respectively.

     Future approximate minimum rental payments (including estimated operating
costs) required under the operating leases as of December 31, 2000 are as
follows:

<TABLE>
<CAPTION>
                                                              (IN THOUSANDS)
<S>                                                           <C>
2001........................................................       $955
2002........................................................        755
2003........................................................        428
2004........................................................        429
2005........................................................        349
</TABLE>

(9) DEFINED CONTRIBUTION BENEFIT PLAN

     The Company has a defined contribution 401(k) benefit plan covering all of
its full-time employees meeting certain service requirements. The plan provides
for matching employer contributions based on 66% of employees' elective
contributions up to 6% of compensation. The plan allows employee contributions
of up to 15% of compensation. Discretionary employer contributions may also be
made to the plan. There were no discretionary contributions made in 2000, 1999
or 1998. Expense under the plan totaled approximately $814,000 in 2000, $564,000
in 1999 and $370,000 in 1998.

(10) STOCK OPTION PLAN

     The Company has established the 1997 Stock Incentive Plan for its officers,
key employees, non-employee directors and consultants. A combined maximum of
3,000,000 options, SARs and share awards may be granted under the plan. Of this
amount, not more than 1,500,000 shares may be subject to incentive stock
options. The exercise price of the stock options is the market value of the
common stock at the date of grant. Generally, the options vest and become
exercisable ratably over a four-year period, commencing one year after the grant
date. The options expire 10 years from the grant date.

     Had compensation cost been determined for the Company's stock option
portion of the plan based on the fair value at the grant dates for awards
consistent with the alternative method set forth under SFAS 123, the

                                        34
<PAGE>   36
               ADVANTAGE LEARNING SYSTEMS, INC. AND SUBSIDIARIES
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Company's net income and earnings per share would have been adjusted to the pro
forma amounts indicated below:

<TABLE>
<CAPTION>
                                                      2000       1999       1998
                                                      ----       ----       ----
                                                         (IN THOUSANDS EXCEPT
                                                          PER SHARE AMOUNTS)
<S>                                                  <C>        <C>        <C>
Net income
  As reported....................................    $22,933    $17,146    $12,192
  Pro forma......................................     18,776     14,558     11,237
Diluted net income per common share
  As reported....................................    $  0.67    $  0.50    $  0.36
  Pro forma......................................       0.55       0.42       0.33
The weighted average fair value of options
  granted under the Plan during the year is:.....    $ 23.57    $ 16.94    $ 10.91
</TABLE>

     The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions for 2000, 1999 and 1998, respectively: dividend yield of 0%,
expected volatility of 88.12%, 76.73% and 58.94%, risk-free interest rates of
6.21%, 6.23% and 5.14%, and expected lives of 10 years for the options.

     As of December 31, 2000 no SARs or share awards have been granted under the
plan. A summary of stock option activity under the plan for 2000, 1999 and 1998
is as follows:

<TABLE>
<CAPTION>
                                                 2000                     1999                    1998
                                         ---------------------    ---------------------    -------------------
                                                      WEIGHTED                 WEIGHTED               WEIGHTED
                                                      AVERAGE                  AVERAGE                AVERAGE
                                                      EXERCISE                 EXERCISE               EXERCISE
                                          SHARES       PRICE       SHARES       PRICE      SHARES      PRICE
                                          ------      --------     ------      --------    ------     --------
<S>                                      <C>          <C>         <C>          <C>         <C>        <C>
Outstanding at beginning of year.....    1,271,268     $16.24       779,476     $11.66     479,910     $ 8.22
Granted..............................      235,382      26.79       642,488      20.77     422,952      14.88
Exercised............................      (94,215)     12.65      (102,902)      8.95     (30,814)      8.00
Cancelled............................      (64,283)     17.61       (47,794)     18.19     (92,572)      9.70
                                         ---------     ------     ---------     ------     -------     ------
Outstanding at end of year...........    1,348,152      18.27     1,271,268      16.24     779,476      11.66
                                         =========     ======     =========     ======     =======     ======
Options exercisable at end of year...      421,889      14.56       252,157      11.05      95,135       8.24
                                         =========     ======     =========     ======     =======     ======
</TABLE>

(11) EMPLOYEE STOCK PURCHASE PLAN

     Effective July 1, 1998, the Company adopted an Employee Stock Purchase Plan
which allows employees to purchase shares of common stock through payroll
deductions, up to 10% of eligible compensation. The purchase price is equal to
85% of the fair market value of the common stock on either the first or last day
of the subscription period, whichever is lower. A total of 500,000 shares are
available for purchase under the plan. The Company has elected to apply
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees", as amended by FASB Interpretation No. 44, in accounting for its
stock-based plans. Accordingly, the Company will not recognize compensation
expense for employee stock purchases. The Company issued approximately 82,000
and 51,500 shares of common stock in January 2001 for fiscal 2000 and January
2000 for fiscal 1999 with respect to the plan, at a per share price,
representing 85% of the fair market value as described above, of $9.93 and
$9.51, respectively.

                                        35
<PAGE>   37
               ADVANTAGE LEARNING SYSTEMS, INC. AND SUBSIDIARIES
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(12) SHAREHOLDERS' EQUITY

     On January 3, 2000, the Company's Board of Directors authorized the
repurchase of up to 1,000,000 shares of the Company's common stock. No time
limit was placed on the duration of the repurchase program. Repurchased shares
will become treasury shares and will be used for stock-based employee benefit
plans and for other general corporate purposes. As of December 31, 2000, the
Company had repurchased 25,100 shares.

     On April 14, 1999, the Company's shareholders approved an amendment to the
Company's Amended and Restated Articles of Incorporation to increase the
authorized common stock of the Company from 50,000,000 shares to 150,000,000
shares with a $.01 par value per share. The Company's Amended and Restated
Articles of Incorporation also includes authorization to issue up to 5,000,000
shares of preferred stock with a $.01 par value per share. No preferred stock
has been issued.

     On January 18, 1999, the Board of Directors of the Company authorized a
2-for-1 split of common stock in the form of a stock dividend payable on
February 26, 1999 to shareholders of record on February 11, 1999. Accordingly,
all share and per share data presented herein have been restated to reflect this
split.

(13) SEGMENT REPORTING

     The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. The Company has
two reportable segments: software and training.

     The software segment produces learning information system software for the
K-12 school market in the United States, Canada, the United Kingdom and
Australia. The software assists educators in assessing and monitoring student
development by increasing the quantity, quality and timeliness of student
performance data in the areas of reading, math and writing. The software segment
also includes training and knowledge management enterprise software, which is
currently sold primarily to corporate customers. Revenue from the software
segment includes product revenue from the sale of software and service revenue
from the sale of software support agreements.

     The training segment provides professional development training seminars.
Its programs train educators on how to accelerate learning in the classroom
through use of the information that the Company's learning information systems
provide. Revenue from the training segment includes service revenue from a
variety of seminars presented in hotels and schools across the country, and
product revenue from training materials.

     The accounting policies of the reportable segments are the same as those
described in Note 4 of Notes to Financial Statements. The Company evaluates the
performance of its operating segments based on operating income before
nonrecurring items. Intersegment sales and transfers and revenue derived outside
of the United States are not significant.

                                        36
<PAGE>   38
               ADVANTAGE LEARNING SYSTEMS, INC. AND SUBSIDIARIES
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     Summarized financial information concerning the Company's reportable
segments is shown in the following table:

<TABLE>
<CAPTION>
                                                                SOFTWARE    TRAINING     TOTAL
                                                                --------    --------     -----
                                                                         (IN THOUSANDS)
<S>                                                             <C>         <C>         <C>
2000
  Revenues..................................................    $ 91,319    $15,672     $106,991
  Operating income (loss)...................................      34,616       (467)      34,149
  Total assets..............................................     106,575     11,646      118,221
  Capital expenditures......................................       2,909        811        3,720
  Depreciation and amortization.............................       3,882        887        4,769
1999
  Revenues..................................................    $ 72,169    $11,419     $ 83,588
  Operating income (loss) (1)...............................      29,966     (1,864)      28,102
  Total assets..............................................      75,665     12,754       88,419
  Capital expenditures......................................       5,528      1,739        7,267
  Depreciation and amortization.............................       2,548        697        3,245
1998
  Revenues..................................................    $ 47,243    $ 7,905     $ 55,148
  Operating income (loss) (1)...............................      20,170       (274)      19,896
  Total assets..............................................      56,764     11,516       68,280
  Capital expenditures......................................       1,098      7,396        8,494
  Depreciation and amortization.............................       1,917        212        2,129
</TABLE>

-------------------------
(1) Operating income Total differs from Operating income in the Consolidated
    Statements of Income due to nonrecurring items not included above:
    $1,080,000 and $475,000 purchased research and development in 1999 and 1998,
    respectively.

     The reported measures are consistent with those used in measuring amounts
in the consolidated financial statements. Such measurements are generally along
legal entity lines as aggregated. Effective January 1, 2000, the Company
re-evaluated and changed certain cost allocations between the software and
training segments. The result of the re-evaluation on previously reported
segment disclosures is not material.

     It is management's opinion, however, that because many flows of value
between the segments cannot be precisely quantified, this information provides
an incomplete measure of the training segment profit or loss, and should not be
viewed in isolation. Management evaluates the performance of the training
segment based on many factors not captured by the financial accounting system
and often evaluates the Company's financial performance on a total entity basis.

(14) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

     The following table sets forth unaudited consolidated income statement data
for each quarter of the Company's last two fiscal years. The unaudited quarterly
financial information has been prepared on the same basis as the annual
information presented in the financial statements and, in management's opinion,
reflects all

                                        37
<PAGE>   39
               ADVANTAGE LEARNING SYSTEMS, INC. AND SUBSIDIARIES
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

adjustments (consisting of normal recurring entries) necessary for a fair
presentation of the information provided. The operating results for any quarter
are not necessarily indicative of results for any future period.

<TABLE>
<CAPTION>
                                                                  QUARTER ENDED
                                                                  -------------
                                               MARCH 31    JUNE 30    SEPTEMBER 30     DECEMBER 31
                                               --------    -------    ------------     -----------
                                                     (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S>                                            <C>         <C>        <C>              <C>
2000:
  Net sales................................    $24,070     $26,422       $29,057         $27,442
  Gross profit.............................     18,504      21,374        23,277          21,915
  Operating income.........................      5,868       8,377        10,821           9,083
  Income tax provision.....................      2,591       3,623         4,492           3,894
  Net income...............................      3,998       5,537         7,179           6,219
  Basic and diluted earnings per share.....       0.12        0.16          0.21            0.18
  Common stock price per share:
     High..................................     18.688      16.250        37.375          36.125
     Low...................................     11.688      12.750        15.500          20.313
1999:
  Net sales................................    $18,589     $20,551       $22,989         $21,459
  Gross profit.............................     15,281      17,153        18,747          17,082
  Operating income.........................      6,687       7,264         8,899           4,172
  Income tax provision.....................      3,001       3,343         3,674           1,925
  Net income...............................      4,256       4,588         5,436           2,866
  Basic earnings per share.................       0.13        0.13          0.16            0.08
  Diluted earnings per share...............       0.12        0.13          0.16            0.08
  Common stock price per share:
     High..................................     41.500      31.625        33.000          29.438
     Low...................................     28.531      16.875        16.563          10.500
</TABLE>

-------------------------
     - In connection with the acquisition of computerActive, $900,000 of the
       purchase price was allocated to purchased research and development which
       was expensed in December 1999 (see Note 3).

     - In connection with the acquisition of Humanities, $180,000 of the
       purchase price was allocated to purchased research and development which
       was expensed in June 1999 (see Note 3).

     - In July 1999, in connection with the acquisition of Generation21, the
       Company incurred acquisition charges of $365,000 before tax. The
       acquisition was accounted for as a pooling-of-interests and accordingly,
       results for the first two quarters of 1999 have been restated to include
       the results of Generation21 (see Note 3).

     - Per share data have been restated to reflect a 2-for-1 stock split in the
       form of a dividend effective February 26, 1999 (see Note 12).

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

     None.

                                        38
<PAGE>   40

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     (a) Executive Officers. Reference is made to "Executive Officers of the
Registrant" in Part I hereof.

     (b) Directors. The information required by this Item is set forth in our
Proxy Statement for the Annual Meeting of Shareholders to be held on April 18,
2001 under the caption "Election of Directors," which information is
incorporated by reference herein.

     (c) Section 16 Compliance. The information required by this Item is set
forth in our Proxy Statement for the Annual Meeting of Shareholders to be held
on April 18, 2001 under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance," which information is incorporated by reference herein.

ITEM 11. EXECUTIVE COMPENSATION

     The information required by this Item is set forth in our Proxy Statement
for the Annual Meeting of Shareholders to be held on April 18, 2001 under the
captions "Executive Compensation," "Non-Employee Director Compensation,"
"Compensation Committee Report," and "Performance Graph," which information is
incorporated by reference herein.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this Item is set forth in our Proxy Statement
for the Annual Meeting of Shareholders to be held on April 18, 2001 under the
caption "Security Ownership of Management and Certain Beneficial Owners," which
information is incorporated by reference herein.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Not applicable.

                                        39
<PAGE>   41

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(A)(1) FINANCIAL STATEMENTS.

        Consolidated Financial Statements

        Report of Independent Public Accountants

        Consolidated Balance Sheets as of December 31, 2000 and 1999

        Consolidated Statements of Income for the years ended December 31, 2000,
        1999 and 1998

        Consolidated Statements of Equity for the years ended December 31, 2000,
        1999 and 1998

        Consolidated Statements of Cash Flows for the years ended December 31,
        2000, 1999 and 1998

        Notes to Financial Statements

(A)(2) FINANCIAL STATEMENT SCHEDULES.

     See the Exhibit Index, which is incorporated by reference herein.

(A)(3) EXHIBITS.

     See (c) below.

(B) REPORTS ON FORM 8-K.

     There were no reports on Form 8-K filed for the three months ended December
31, 2000.

(C) EXHIBITS.

     See the Exhibit Index, which is incorporated by reference herein.

(D) FINANCIAL STATEMENTS EXCLUDED FROM ANNUAL REPORT TO SHAREHOLDERS.

     Not applicable.

                                        40
<PAGE>   42

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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.

                                          ADVANTAGE LEARNING SYSTEMS, INC.

                                          By:      /s/ MICHAEL H. BAUM
                                            ------------------------------------
                                                      Michael H. Baum
                                                  Chief Executive Officer

                                          Date: March 2, 2001

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
                          NAME                                           TITLE                 DATE
                          ----                                           -----                 ----
<C>  <C>                                                       <S>                         <C>
                  /s/ MICHAEL H. BAUM                          Chief Executive Officer
--------------------------------------------------------       and a Director (Principal
                    Michael H. Baum                            Executive Officer)          March 2, 2001

                 /s/ STEVEN A. SCHMIDT                         Secretary, Vice President
--------------------------------------------------------       and Chief Financial
                   Steven A. Schmidt                           Officer (Principal          March 2, 2001
                                                               Financial and Accounting
                                                               Officer)

 Directors: Judith A. Paul, Terrance D. Paul, John R. Hickey, Timothy P. Welch, Perry S. Akins, John H.
                              Grunewald, Gordon H. Gunnlaugsson and Harold E. Jordan

By:                  /s/ MICHAEL H. BAUM                                                   March 2, 2001
       -----------------------------------------------
                       Michael H. Baum
                      Attorney-In-Fact*
</TABLE>

-------------------------
*Pursuant to authority granted by powers of attorney, copies of which are filed
herewith.

                                        41
<PAGE>   43
                                  EXHIBIT INDEX


Exhibit
Number        Exhibit

3.1           Amended and Restated Articles of Incorporation of Advantage
              Learning Systems, Inc., as amended.(8)

3.2           Amended and Restated By-laws of Advantage Learning Systems, Inc.,
              as amended.(7)

4.1           Form of Stock Certificate.(2)

10.1          Asset Purchase Agreement dated as of August 1, 1996 by and among
              IPS Acquisition, Inc., IPS Publishing, Inc. and Timothy P. Welch,
              individually and as sole Trustee of the Timothy P. Welch Revocable
              Trust.(1)

10.2          Supplement to Asset Purchase Agreement dated as of February 25,
              1997, by and among IPS Publishing, Inc. (f/k/a IPS Acquisition,
              Inc.), Welch Publishing, Inc. (f/k/a IPS Publishing, Inc.) and
              Timothy P. Welch, individually and as sole Trustee of the Timothy
              P. Welch Revocable Trust.(1)

10.3          1997 Stock Incentive Plan (as amended and restated).(3)*

10.4          Accelerated Reader Resale Agreement dated May 1, 1994, between
              Advantage Learning Systems, Inc. and Perma-Bound, a division of
              Hertzberg-New Method, Inc.(1)

10.5(a)       Credit Agreement dated as of December 31, 1997, by and between
              Norwest Bank Wisconsin, National Association and Advantage
              Learning Systems, Inc.(4)

10.5(b)       First Amendment to Credit Agreement dated as of December 31, 1997,
              by and between Norwest Bank Wisconsin, National Association and
              Advantage Learning Systems, Inc.(7)

10.5(c)       Second Amendment to Credit Agreement dated as of December 31,
              1997, by and between Norwest Bank Wisconsin, National Association
              and Advantage Learning Systems, Inc.(7)

10.5(d)       Third Amendment to Credit Agreement dated as of December 31, 1997,
              by and between Wells Fargo Bank Wisconsin, National Association
              (formerly known as Norwest Bank Wisconsin, National Association)
              and Advantage Learning Systems, Inc.

<PAGE>   44

10.6          Tax Indemnification Agreement between Terrance Paul, Judith Paul,
              Mark J. Bradley, as Trustee of the Terrance and Judith Paul
              Descendants' Trust, and Advantage Learning Systems, Inc.(2)

10.7          Tax Indemnification Agreement between Terrance Paul, Judith Paul,
              Mark J. Bradley, as Trustee of the Terrance and Judith Paul
              Descendants' Trust, and the Institute for Academic Excellence,
              Inc.(2)

10.8          Amended and Restated Advantage Learning Systems, Inc. Employee
              Stock Purchase Plan.*

10.9          Office Lease dated as of December 17, 1998 by and between Athena
              Holdings LLC and Institute for Academic Excellence, Inc.(5)

10.10         Real Estate Mortgage dated December 17, 1998 between Athena
              Holdings LLC and Advantage Learning Systems, Inc.(5)

10.11         Expense Allocation Agreement dated October 19, 1999 between
              Advantage Learning Systems, Inc., Judith A. Paul and Terrance D.
              Paul. (6)

21.1          Subsidiaries of Advantage Learning Systems, Inc.

23.1          Consent of Arthur Andersen LLP.

24.1          Directors' Powers of Attorney.

99.1          Schedule II - Valuation and Qualifying Accounts.

----------

(1)  Incorporated by reference to the Company's Registration Statement on Form
     S-1 (Registration No. 333-22519).

(2)  Incorporated by reference to the Company's Form 10-Q for the quarter ended
     September 30, 1997 (SEC File No. 0-22187).

(3)  Incorporated by reference to the Company's Form S-8 filed on October 28,
     1997 (Registration No. 333-38867).

(4)  Incorporated by reference to the Company's Form 10-K for the fiscal year
     ended December 31, 1997 (SEC File No. 0-22187).

(5)  Incorporated by reference to the Company's Form 10-K for the fiscal year
     ended December 31, 1998 (SEC File No. 0-22187).

(6)  Incorporated by reference to the Company's Form 10-K for the fiscal year
     ended December 31, 1999 (SEC File No. 0-22187).

(7)  Incorporated by reference to the Company's Form 10-Q for the quarter ended
     March 31, 2000 (SEC File No. 0-22187).

(8)  Incorporated by reference to the Company's Form 10-Q for the quarter
     ended March 31, 1999 (SEC File No. 0-22187).

*    Management contracts or compensatory plans or arrangements.


                                       2