ADVANTAGE LEARNING SYSTEMS INC, 424A, 1997-08-28

ADVANTAGE LEARNING SYSTEMS INC
424A, 1997-08-28
PREPACKAGED SOFTWARE

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<PAGE>

Filed Pursuant to Rule 424(a)
Registration No. 333-22519

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to completion, dated August 26, 1997

Prospectus
dated , 1997

2,800,000 Shares

LOGO

Common Stock

All of the 2,800,000 shares of Common Stock offered hereby are being issued and
sold by Advantage Learning Systems, Inc. (the "Company"). A significant portion
of the estimated net proceeds of the offering will be used by the Company to
satisfy obligations to its principal shareholders. See "Use of Proceeds." An
aggregate of up to 185,000 shares of the Common Stock offered hereby will be
reserved for sale at the initial public offering price to persons designated by
the Company.

Prior to this offering (the "Offering"), there has been no public market for
the Common Stock of the Company. It is currently estimated that the initial
public offering price of the Common Stock offered hereby will be between $12.00
and $14.00 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The Common Stock
has been approved for listing on the Nasdaq National Market under the symbol
"ALSI."

SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

- --------------------------------------------------------------------------------
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<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public Discount(1) Company(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
- --------------------------------------------------------------------------------
Total (3).................................. $ $ $
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</TABLE>
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $750,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of 420,000 additional shares of Common Stock solely to cover
over-allotments, if any, at the per share Price to Public less the
Underwriting Discount. If the Underwriters exercise this option in full,
the total Price to Public, Underwriting Discount and Proceeds to Company
will be $ , $ and $ , respectively. See "Underwriting."

The shares of Common Stock are offered by the several Underwriters subject to
prior sale when, as and if delivered to and accepted by the Underwriters and
subject to their right to reject orders in whole or in part. It is expected
that delivery of the certificates representing shares of Common Stock will be
made at the offices of Piper Jaffray Inc. in Minneapolis, Minnesota on or about
, 1997.

Piper Jaffray inc. Montgomery Securities
<PAGE>
[PICTURES, GRAPHICAL INFORMATION]

THE ACCELERATED READER(R) AND READING RENAISSANCE(R) ARE REGISTERED TRADEMARKS
OF THE COMPANY. IN ADDITION, STANDARDIZED TEST FOR ASSESSMENT OF READING
(S.T.A.R.)(TM), AR BOOKGUIDE(TM), OBJECTIVE TRACKER(TM), AND MATHCHECK(TM) ARE
COMMON LAW TRADEMARKS OF THE COMPANY. ALL OTHER TRADEMARKS, SERVICE MARKS AND
TRADE NAMES REFERRED TO IN THIS PROSPECTUS ARE THE PROPERTY OF THEIR
RESPECTIVE OWNERS.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF THE
COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS
IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, DURING AND AFTER THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

2
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and the Financial Statements
and Notes thereto appearing elsewhere in this Prospectus. Unless the context
otherwise requires, the term "Company" includes Advantage Learning Systems,
Inc. ("ALS") and its wholly-owned subsidiaries, IPS Publishing, Inc. ("IPS")
and the Institute for Academic Excellence, Inc. (the "Institute"), including
their operations while owned by affiliates of the Company. The historical
financial information presented herein represents the combined results of these
three entities prior to January 2, 1997, at which time IPS and the Institute
became wholly-owned subsidiaries of ALS. See "Certain Transactions." For
periods subsequent to January 2, 1997, the historical financial information
represents the consolidated results of ALS and its subsidiaries. In addition,
unless otherwise indicated, all information in this Prospectus (i) assumes no
exercise of the Underwriters' over-allotment option, (ii) has been adjusted to
reflect the filing of the Company's Amended and Restated Articles of
Incorporation, and (iii) has been adjusted to reflect a 133.31 for 1 stock
split in the form of two stock dividends.

THE COMPANY

The Company is a leading provider of learning information systems to
kindergarten through senior high
("K-12") schools in the United States and Canada. The Company's 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. The Company's flagship product,
the Accelerated Reader, is software for motivating and monitoring increased
literature-based reading practice. As of June 30, 1997, the Accelerated Reader
had been sold to approximately 29,700, or 24%, of the K-12 schools in the
United States and Canada. In a survey by Quality Education Data, Inc., the
Accelerated Reader was the software product that educators most frequently
cited as being used to improve the quality of education in K-12 schools. The
Company believes that the Accelerated Reader has achieved this leading market
position as a result of its demonstrated effectiveness in improving student
reading levels and overall academic performance. The Company's learning
information system products also include the Standardized Test for Assessment
of Reading (S.T.A.R.), a computer-adaptive reading test and database, and the
Reading Renaissance program, through which the Company provides professional
development training for educators.

Originally introduced in 1986, the Accelerated Reader administers computer-
based multiple choice tests on books popular among students in grades K-12 and
provides educators with more than 20 reports from which to monitor the amount
and quality of each student's reading practice. Through June 30, 1997, the
Company had developed tests on approximately 12,000 books and expects to
develop approximately 1,500 additional tests in the second half of 1997. In
1994, the Company began offering Reading Renaissance training seminars to
provide educators with professional development training to most effectively
use the Accelerated Reader and the information it generates. As of June 30,
1997, approximately 39,500 educators have attended Reading Renaissance training
seminars. In 1996, the Company released S.T.A.R. which enables educators to
quickly obtain student reading scores statistically correlated to national
norms. The results from S.T.A.R. 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. To expand its learning information system offerings into
additional academic areas, in August 1996 the Company acquired IPS, a provider
of algorithm-based software for assessment and skills practice in math and
science.

3
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The Accelerated Reader, coupled with S.T.A.R. and the techniques taught in
the Reading Renaissance training program, improves student academic performance
by providing educators with an effective system to motivate students to
practice reading. The Company's products also provide educators with objective,
timely and accurate information to manage the learning process. Unlike many
technology-based solutions which compete with the educators' role, the
Company's products support educators and complement their existing curricula
and instructional methodologies. In addition, the Company's products utilize a
school's existing computers and books commonly found in most K-12 school
libraries, while the cost of the Company's products generally enables schools
to purchase such products within their normal budgets.

The Company seeks to establish its products as the de facto standard for
facilitating growth in reading ability, and ultimately in other essential
academic skill areas in grades K-12. The key elements of this strategy consist
of adding new customer schools, intensifying and expanding the use of the
Company's products in existing customer schools, offering new products in other
areas of the curriculum, expanding the Company's international marketing and
sales, and expanding the Company's strategic marketing alliances.

The Company was founded in 1986 and is incorporated under the laws of the
State of Wisconsin. The Company's principal executive offices are located at
2911 Peach Street, Wisconsin Rapids, Wisconsin 54495-8036 and its telephone
number is (715) 424-3636. The Company's World Wide Website is located at
http:\\www.advlearn.com. Information contained in this Website is not deemed to
be a part of this Prospectus.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the 2,800,000 shares
Company...........................
Common Stock to be outstanding 16,489,594 shares(1)
after the Offering................
Use of Proceeds.................... For payment of undistributed S corporation
earnings, repayment of construction-related
indebtedness, repayment of acquisition-re-
lated indebtedness to principal sharehold-
ers, payment to Company employees pursuant
to certain employee benefit plans and gen-
eral corporate purposes, including working
capital and new product development. See
"Use of Proceeds."
Nasdaq National Market symbol...... ALSI
</TABLE>
- --------
(1) Includes 38,461 shares to be issued upon closing of the Offering in
connection with the Company's acquisition of IPS (assuming an initial
public offering price of $13.00 per share). Excludes 1,500,000 shares of
Common Stock reserved for issuance pursuant to the Company's 1997 Stock
Incentive Plan, of which 277,846 shares were subject to options outstanding
immediately prior to the Offering (assuming an initial public offering
price of $13.00 per share). See "Certain Transactions" and "Management--
Executive Compensation--1997 Stock Incentive Plan."

4
<PAGE>

SUMMARY HISTORICAL AND PRO FORMA COMBINED AND CONSOLIDATED FINANCIAL
INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA)

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------- ---------------
PRO
FORMA
1992 1993 1994 1995 1996 1996(1) 1996 1997
------ ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $3,171 $ 5,288 $ 8,251 $12,605 $22,381 $23,062 $ 9,474 $16,545
Gross profit............ 2,742 4,718 7,148 10,542 18,154 18,928 7,875 13,565
Purchased research and
development(2)......... -- -- -- -- 3,400 3,400 -- --
Operating income........ 1,276 2,047 2,999 3,449 3,013 2,784 2,938 5,117
Income before taxes..... 1,298 2,070 3,022 3,462 2,858 2,419 2,955 4,752
Net income(2)........... 1,298 2,070 3,022 3,462 4,460 4,199 2,955 3,151
PRO FORMA DATA:
Income before taxes..... $ 2,419 $ 5,121
Net income(3)........... 1,440 3,047
Net income per share(4). $ 0.11 $ 0.22
Weighted average shares
outstanding(4)......... 13,651 13,651
OTHER OPERATING DATA(5):
Number of Accelerated
Reader customer
schools................ 7,000 10,400 14,500 19,500 26,000 23,500 29,700
Number of Accelerated
Reader book test
titles................. 1,700 2,800 5,000 7,500 10,000 8,200 12,000
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1997
------------------
AS
ACTUAL ADJUSTED(6)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................ $ 1,343 $15,269
Total assets............................................... 20,319 34,794
Notes payable and long-term debt, including current
portion................................................... 11,550 --
Shareholders' equity....................................... 2,370 28,873
</TABLE>
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(1) Reflects the acquisition of IPS as if it occurred on January 1, 1996.
Adjustments consist of (i) IPS results for the seven months ended July 31,
1996, (ii) the exclusion of revenues ($744,000) and related costs
($180,000) associated with an IPS contract not acquired in the acquisition,
(iii) additional amortization of intangibles ($143,000), (iv) additional
interest expense ($268,000) and (v) the income tax effect related to such
adjustments ($178,000).
(2) In connection with the acquisition of IPS, $3.4 million of the purchase
price was allocated to purchased research and development which was
expensed in August 1996. See Note 3 of Notes to the Company's Financial
Statements. As a result, net income exceeds income before taxes in 1996
due to the tax benefit recorded by IPS which is primarily related to the
expensed purchased research and development. Effective January 1, 1997,
IPS elected S corporation status. As a result, the 1997 tax provision
represents the write-off of the deferred tax asset associated with IPS
when it was a C corporation. The previously recognized deferred tax asset
will be reinstated upon the completion of the Offering.
(3) Pro forma net income has been computed as if the Company had been a C
corporation rather than an S corporation for income tax purposes, based
upon an assumed effective federal and state tax rate of 40.5%. See "S
Corporation Distribution."
(4) Pro forma net income per share and weighted average shares outstanding
reflect (i) the shares outstanding as of January 2, 1997, reflecting the
issuance of shares by ALS to acquire IPS and the Institute and (ii) the
133.31 for 1 stock split.
(5) Represents the cumulative number of schools to which the Accelerated
Reader has been sold at year end and the cumulative number of book test
titles available at year end, as indicated.
(6) As adjusted to reflect the sale of 2,800,000 shares of Common Stock
offered hereby, at an assumed initial public offering price of $13.00 per
share and the application of the estimated net proceeds therefrom. See
"Use of Proceeds."

5
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RISK FACTORS

An investment in the Common Stock offered hereby involves a high degree of
risk. In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the following risk factors in
evaluating an investment in the Common Stock.

RELIANCE ON SINGLE PRODUCT LINE AND SIGNIFICANT DISTRIBUTOR

The Company's Accelerated Reader software and supplemental Accelerated
Reader test disks accounted for approximately 91.9%, 89.8%, 69.4% and 56.2% of
the Company's net sales in 1994, 1995, 1996 and the first half of 1997,
respectively. Sales of the Accelerated Reader software and supplemental test
disks through one book distributor accounted for 2.6%, 12.5%, 15.2% and 13.6%
of such net sales in 1994, 1995, 1996 and the first half of 1997,
respectively. An overall decline in sales of the Accelerated Reader and
supplemental test disks, including sales through book distributors, would have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Sales, Marketing and
Distribution."

DEPENDENCE ON CONTINUED PRODUCT DEVELOPMENT

The K-12 educational technology and professional development markets in
which the Company competes are characterized by evolving industry standards,
frequent product introductions and, to a lesser extent, technological change.
The Company's future success will depend, to a significant extent, on a number
of factors, including the Company's ability to enhance its existing products
and develop and successfully introduce new products, including new products
designed for use in other areas of the curriculum. The Company attempts to
maintain high standards for the demonstrated academic effectiveness of its
products. The Company's adherence to these standards could delay or inhibit
the introduction of new products. Moreover, there can be no assurance that the
Company's products will not be rendered obsolete or that the Company will have
sufficient resources to make the necessary investments or be able to develop
and market the products required to maintain its competitive position. See
"Business--Product Development."

MANAGEMENT OF GROWTH

The Company has recently experienced rapid growth. If such growth continues,
it may place a strain on the Company's financial, management and other
resources. The Company's ability to manage its growth effectively will require
it to attract, train, motivate, manage and retain key employees and to improve
its operational, financial and management information systems. If the Company
is unable to maintain and manage growth effectively, the Company's business,
financial condition and results of operations would be adversely affected.

OPPOSING EDUCATIONAL PHILOSOPHIES

The Company focuses 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 the Company's
products, such as the use of objective standards, standardized testing,
computers, and motivational techniques, among others. Some of these
philosophical opponents of the Company's products and services have the
capacity to influence the market for the Company's products, and such
influence could have a material adverse impact on demand for the Company's
products and, thus, the Company's business, financial condition and results of
operations.

DEPENDENCE ON EDUCATIONAL INSTITUTIONS AND GOVERNMENT FUNDING

Substantially all of the Company's 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

6
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continue to invest in technology-based products and professional development
for reading and other curricula or continue to respond favorably to the
Company's marketing. The inability of the Company to increase the number of
products sold or number of schools served would adversely affect the Company's
business, financial condition and results of operations. Because of the
Company's 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 the Company's business, financial condition and
results of operations. In addition, certain aspects of government sponsored
education initiatives may not endorse, or be complementary to, the principles
and methodologies underlying and associated with the Company's products, which
could adversely affect the Company's business, financial condition and results
of operations.

GEOGRAPHIC CONCENTRATION OF SALES

A substantial portion of the Company's sales are concentrated in several
states, including Texas, Florida, Georgia and North Carolina, which accounted
for approximately $2.6 million, $925,000, $766,000 and $657,000 of the
Company's net software product sales (excluding IPS software sales) in the
first half of 1997. If large numbers of schools or a district controlling a
large number of schools in such states were to discontinue purchasing the
Company's products, the Company's business, financial condition and results of
operations would be materially adversely affected.

HIGHLY COMPETITIVE INDUSTRY

DEPENDENCE ON KEY PERSONNEL

The Company's success depends to a significant extent upon the continued
active participation of certain key members of management, including Judith
Paul and Terrance Paul, the Chairman and Vice Chairman of the Company,
respectively. In addition to serving as Chairman of the Company, Ms. Paul is a
spokesperson for the Company and coordinates the Company's public relations
and customer communication policies. Mr. Paul is primarily responsible for the
Company's long-term strategic planning and new product development strategy.
Mr. Paul also coordinates the research activities conducted by the Institute.
The Company does not have employment agreements with either of these persons
and has no current intention of entering into any such employment agreements.
Furthermore, the Company has key person life insurance on Mr. Paul. The loss
of services of either of these persons would have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Management--Directors and Executive Officers."

ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL

The Company's future success will depend, in part, upon its continuing
ability to retain the employees, including senior management personnel, who
have assisted in the development and marketing of the Company's products and
to attract and retain qualified additional employees trained in computer
technology, marketing and finance to enhance the Company's product offerings
and broaden its operations. There can be no assurance that the Company 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 the Company's business, financial condition and results of operations.

7
<PAGE>

SEASONALITY; LIMITED BACKLOG; FLUCTUATIONS IN QUARTERLY PERFORMANCE

The Company's business may experience a certain degree of seasonality due to
the budget cycles of the Company's school customers. Further, because products
are generally shipped as orders are received, the Company has historically
operated with virtually no backlog. Thus, revenues in any quarter are
substantially dependent on the quantity of product orders received in that
quarter. Seasonal variations in demand may cause significant variations in the
Company's results of operations. The Company's overall gross margins fluctuate
based upon the mix of product sales and service sales. The Company realizes
significantly higher margins on its product sales. The Company's operating
margins also fluctuate based upon a number of other factors including, but not
limited to, the amount of product development expenditures, the timing of the
capitalization of product development expenditures and the timing of certain
marketing activities. In addition, during the second half of 1997, the Company
will incur a $1.3 million one-time compensation expense (assuming an initial
public offering price of $13.00 per share) related to the termination of
certain employee benefit plans. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

The Company regards certain of its technologies as proprietary and relies
primarily on a combination of copyright, trademark and trade secret laws and
employee non-disclosure agreements to establish and protect its proprietary
rights. Although the Company has filed a patent application which covers the
technology developed by IPS to automatically generate and format examinations
that include math expressions, the Company does not currently possess any
patents or other registered intellectual property rights with respect to its
software. There can be no assurance that the steps taken by the Company to
protect its rights will be adequate to prevent or deter misappropriation. In
addition, while the Company does not believe that its 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 the Company's software products will not experience
unauthorized reproduction, which would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Intellectual Property."

S CORPORATION DISTRIBUTION; REPAYMENT OF DEBT TO PRINCIPAL SHAREHOLDERS; USE
OF PROCEEDS

Approximately $10.0 million of the net proceeds to the Company from the
Offering will be used to fund a dividend to the Company's shareholders of
undistributed S corporation earnings. Approximately $5.0 million of the net
proceeds will be used to retire the principal and accrued interest on
acquisition-related debt owed to the Company's principal shareholders.
Accordingly, approximately $15.0 million (45.3%) of the net proceeds from the
Offering will be paid to the Company's shareholders. The Company's management
will have broad discretion with respect to the application of approximately
$9.8 million (29.6%) of the remaining net proceeds of the Offering. See "S
Corporation Distribution," "Certain Transactions" and "Use of Proceeds."

CONCENTRATION OF SHARE OWNERSHIP; CONTROL BY PRINCIPAL SHAREHOLDERS/MANAGEMENT

Upon completion of the Offering, the principal shareholders of the Company,
Judith Paul and Terrance Paul, who are also the Chairman and Vice Chairman of
the Company, respectively, will beneficially own approximately 77.0% of the
outstanding Common Stock. As a result, such principal shareholders will
continue to have the ability to control the Company and direct its business
and affairs. See "Principal Shareholders."

NO PRIOR MARKET; SHARE PRICE VOLATILITY; DETERMINATION OF OFFERING PRICE

Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurance that a regular trading market will develop after
the Offering or that the market price of the Common Stock will not decline
below the initial public offering price. The initial public offering price of
the Common Stock will be determined through negotiations between the Company
and the Representatives of the Underwriters. See

8
<PAGE>

"Underwriting." Numerous factors, many of which are beyond the control of the
Company, may cause the market price of the Common Stock to fluctuate
significantly. These factors include announcements of technological
innovations, customer orders of new products by the Company and its
competitors, earnings releases by the Company and its competitors, market
conditions in the industry and the general state of the securities markets. In
addition, the timing of orders by the Company's customers may cause quarterly
fluctuations of the Company's results of operations which may, in turn, affect
the market price of the Common Stock.

SHARES ELIGIBLE FOR FUTURE SALE

Sales of a substantial number of shares of Common Stock in the public market
following the Offering could adversely affect the market price for the Common
Stock. Upon completion of the Offering, the Company will have 16,489,594
shares of Common Stock outstanding, of which the 2,800,000 shares sold in the
Offering (3,220,000 shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"), unless purchased by "affiliates" of the Company (as such term as
defined under the Securities Act), in which case such shares will be subject
to the resale limitations (but not the holding period requirements) of Rule
144 under the Securities Act. The Company and its principal shareholders, who
hold in the aggregate 13,685,983 shares of Common Stock, have agreed that they
will not, for a period of 180 days from the date of this Prospectus, offer,
sell, contract to sell or otherwise dispose of any of their shares of Common
Stock without the prior written consent of Piper Jaffray Inc. The Company
believes that, following the expiration of such 180-day period, 13,651,133 of
these shares will be eligible for immediate sale in the public market, subject
to the Rule 144 resale limitations. In addition, the Company intends to file a
registration statement under the Securities Act to register an aggregate of
1,500,000 shares of Common Stock reserved for issuance under the Company's
1997 Stock Incentive Plan, which will, when issued in accordance with such
plan, be eligible for immediate sale in the public market, subject to the Rule
144 resale limitations. See "Shares Eligible for Future Sale" and
"Management--Executive Compensation--1997 Stock Incentive Plan."

NO PAYMENT OF CASH DIVIDENDS

The Company does not anticipate paying any cash dividends in the foreseeable
future. See "Dividend Policy."

DILUTION TO NEW INVESTORS

Purchasers of the Common Stock offered hereby will experience an immediate
and substantial dilution of $11.51 in the consolidated net tangible book value
per share from the assumed initial public offering price of $13.00 per share.
See "Dilution."

POSSIBLE ANTITAKEOVER EFFECTS OF CERTAIN ARTICLES AND BY-LAW PROVISIONS AND
PROVISIONS OF WISCONSIN LAW

The Company's Articles of Incorporation and 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 the Company. Such
provisions could result in the Company being less attractive to a potential
acquiror and could result in the shareholders receiving less for their Common
Stock than otherwise might be available in the event of a takeover attempt.
See "Description of Capital Stock--Certain Statutory and Other Provisions."

9
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,800,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$13.00 per share are estimated to be approximately $33.1 million, after
deducting the underwriting discount and estimated offering expenses.

The Company intends to use the net proceeds from the Offering as follows:
(i) approximately $10.0 million will be used to fund a dividend to the
Company's shareholders of undistributed S corporation earnings, (ii)
approximately $7.0 million will be used to retire the construction financing
on the Company's Wisconsin Rapids headquarters (of which $0.2 million is
included in current liabilities), the long-term portion of which bears
interest at a floating rate equal to LIBOR plus 1.25% and matures on March 1,
2002, (iii) approximately $5.0 million will be used to repay the principal and
accrued interest on two loans from the Company's principal shareholders, which
loans funded the acquisition of IPS and which each bear interest at the rate
of 6.5% per annum and mature on January 2, 1998, and (iv) approximately $1.3
million will be used to make a one-time payment to Company employees pursuant
to certain employee benefit plans (assuming an initial public offering price
of $13.00 per share). Such payment will give rise to a compensation charge of
$1.3 million in the Company's second half of 1997. The balance of the
proceeds, estimated to be approximately $9.8 million, will be used for general
corporate purposes, including working capital and new product development.
Accordingly, approximately $15.0 million (45.3%) of the net proceeds from the
Offering will be paid to the Company's shareholders. See "S Corporation
Distribution," "Certain Transactions" and "Management--Executive
Compensation--Phantom Stock Plans."

Pending use of the net proceeds from the Offering as described above, the
Company intends to invest such proceeds in short-term investment grade
securities.

S CORPORATION DISTRIBUTION

Prior to completion of the Offering, ALS, the Institute and IPS were
corporations subject to taxation under Subchapter S of the Internal Revenue
Code of 1986, as amended (an "S corporation"). As a result, substantially all
of the net income of these companies has been attributed, for income tax
purposes, directly to their respective shareholders rather than to the
applicable company. See Note 7 of Notes to the Company's Financial Statements.
The S corporation status of ALS, the Institute and IPS will terminate in
connection with the Offering, and the Company will make a final distribution
to its existing shareholders of undistributed S corporation earnings.

Prior to the consummation of the Offering, the Company will declare a
dividend to its existing shareholders in an aggregate amount representing all
undistributed earnings taxable to its shareholders through the closing of the
Offering (the "S Corporation Dividend"). The S Corporation Dividend is
estimated to be approximately $10.0 million as of the date of this Prospectus
and will be paid by the Company with a portion of the net proceeds received
from the Offering. Purchasers of Common Stock in the Offering will not receive
any portion of the S Corporation Dividend. See "Use of Proceeds."

DIVIDEND POLICY

The Company intends to retain all of its future earnings to fund growth and
the operation of its business and therefore does not anticipate paying any
cash dividends in the foreseeable future. Future cash dividends, if any, will
be at the discretion of the Company's Board of Directors and will depend upon,
among other things, the Company's 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. For the years ended December 31, 1995 and 1996, and the six months
ended June 30, 1997, the Company made S corporation distributions to its
shareholders of $3.9 million, $3.5 million and $4.6 million, respectively. In
addition, the Company expects to make an S corporation distribution to its
shareholders on or before September 15, 1997 of approximately $3.0 million.

10
<PAGE>

CAPITALIZATION

The following table sets forth the actual and as adjusted short-term debt
and capitalization of the Company at June 30, 1997. The as adjusted short-term
debt and capitalization reflect the sale of 2,800,000 shares of Common Stock
offered hereby, at an assumed initial public offering price of $13.00 per
share, and the application of the estimated net proceeds therefrom. See "Use
of Proceeds." This table should be read in conjunction with the Company's
Financial Statements and Notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Short-term debt, including current amounts due under
construction contract..................................... $ 548 $ 350
======= =======
Notes payable and long-term debt, including current portion
.......................................................... $11,550 $ --
Shareholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized, no shares issued and outstanding............ -- --
Common stock, $0.01 par value, 50,000,000 shares
authorized, 13,651,133 actual shares issued and
outstanding, and 16,489,594(1) shares issued and
outstanding, as adjusted................................ 137 165
Additional paid in capital(1)............................ 217 28,708
Retained earnings........................................ 2,016 --
------- -------
Total shareholders' equity............................. 2,370 28,873
------- -------
Total capitalization................................... $13,920 $28,873
======= =======
</TABLE>
- --------
(1) Includes 38,461 shares to be issued upon closing of the Offering in
connection with the Company's acquisition of IPS (assuming an initial
public offering price of $13.00 per share). Excludes 1,500,000 shares of
Common Stock reserved for issuance pursuant to the Company's 1997 Stock
Incentive Plan, of which 277,846 shares were subject to options
outstanding immediately prior to the Offering (assuming an initial public
offering price of $13.00 per share). See "Certain Transactions" and
"Management--Executive Compensation--1997 Stock Incentive Plan."

11
<PAGE>

DILUTION

The consolidated net tangible book value of the Company as of June 30, 1997
was $764,000, or $0.06 per share of Common Stock. "Consolidated net tangible
book value per common share" represents the amount of (i) the book value of
the Company's total consolidated tangible assets, less total consolidated
liabilities, divided by (ii) the number of shares of Common Stock outstanding
on such date. Without taking into account any changes in consolidated net
tangible book value after June 30, 1997, other than to give effect to the sale
of the Common Stock offered hereby, after deducting the underwriting discount
and estimated expenses of the Offering, and the application of the estimated
net proceeds therefrom, the pro forma consolidated net tangible book value of
the Company as of June 30, 1997 would have been $24.6 million, or $1.49 per
share of Common Stock. This represents an immediate increase in consolidated
net tangible book value of $1.43 per share of Common Stock to existing
shareholders and immediate dilution of consolidated net tangible book value of
$11.51 per share of Common Stock to new investors purchasing Common Stock in
the Offering. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $13.00
Consolidated net tangible book value per share at June 30,
1997........................................................ $0.06
Increase per share attributable to new investors............. 1.43
-----
Pro forma consolidated net tangible book value per share after the
Offering............................................................ 1.49
------
Dilution per share to new investors.................................. $11.51
======
</TABLE>

The following table summarizes on a pro forma basis as of June 30, 1997 the
differences in the total cash consideration paid and the average price per
share paid by the existing shareholders and the new investors (assuming an
initial public offering price of $13.00 per share) with respect to the
2,800,000 shares of Common Stock to be issued by the Company in this Offering:

<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1)....... 13,689,594 83.0% $ 255,000 0.7% $ 0.02
New investors.................. 2,800,000 17.0 36,400,000 99.3 13.00
---------- ----- ----------- -----
Total...................... 16,489,594 100.0% $36,655,000 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) Includes 38,461 shares to be issued upon closing of the Offering in
connection with the Company's acquisition of IPS (assuming an initial
public offering price of $13.00 per share). Excludes 1,500,000 shares of
Common Stock reserved for issuance pursuant to the Company's 1997 Stock
Incentive Plan, of which 277,846 shares were subject to options
outstanding immediately prior to the Offering (assuming an initial public
offering price of $13.00 per share). See "Certain Transactions" and
"Management--Executive Compensation--1997 Stock Incentive Plan."

12
<PAGE>

SELECTED HISTORICAL AND PRO FORMA COMBINED AND CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA)

The following table sets forth certain historical combined financial and
other operating data for the Company as of and for each of the five years
ended December 31, 1996 and certain pro forma combined financial data as of
and for the year ended December 31, 1996. Also presented are certain
historical consolidated financial and other operating data for the Company as
of June 30, 1997 and for the six months ended June 30, 1996 and 1997, and
certain pro forma consolidated financial data for the six months ended June
30, 1997. The historical combined financial data for the three years ended
December 31, 1996 and as of December 31, 1995 and 1996 were derived from the
Financial Statements of the Company included elsewhere in this Prospectus and
have been audited by Arthur Andersen LLP, independent auditors, as indicated
in its report included elsewhere herein. The historical combined financial
data for the two years ended December 31, 1993 and as of December 31, 1992,
1993 and 1994, and the historical consolidated financial data for the six
months ended June 30, 1996 and 1997 and as of June 30, 1997, were derived from
the accounting records of the Company and have not been audited. In the
opinion of management, the historical combined financial data for the two
years ended December 31, 1993 and as of December 31, 1992, 1993 and 1994, and
the historical consolidated financial data for the six months ended June 30,
1996 and 1997 and as of June 30, 1997, include all adjusting entries
(consisting only of normal recurring adjustments) necessary to present fairly
the information set forth therein. The historical combined and historical
consolidated financial data presented herein are not necessarily indicative of
the results of operations for any future period. The pro forma combined and
pro forma consolidated financial data are not necessarily indicative of the
results of operations or financial position of the Company had the
transactions reflected therein actually been consummated on the dates assumed
and are not necessarily indicative of the results of operations for any future
period. The financial and other operating data set forth below should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Financial Statements
and Notes thereto appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------ ---------------
PRO FORMA
1992 1993 1994 1995 1996 1996(1) 1996 1997
------ ------ ------ ------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales:
Products............... $3,171 $5,288 $8,088 $11,602 $18,930 $19,611 $ 8,140 $13,744
Services............... -- -- 163 1,003 3,451 3,451 1,334 2,801
------ ------ ------ ------- ------- ------- ------- -------
Total net sales...... 3,171 5,288 8,251 12,605 22,381 23,062 9,474 16,545
Cost of sales:
Products............... 429 570 937 1,468 2,329 2,236 966 1,675
Services............... -- -- 166 595 1,898 1,898 633 1,305
------ ------ ------ ------- ------- ------- ------- -------
Total cost of sales.. 429 570 1,103 2,063 4,227 4,134 1,599 2,980
Gross profit:
Products............... 2,742 4,718 7,151 10,134 16,601 17,375 7,174 12,068
Services............... -- -- (3) 408 1,553 1,553 701 1,497
------ ------ ------ ------- ------- ------- ------- -------
Total gross profit... 2,742 4,718 7,148 10,542 18,154 18,928 7,875 13,565
Operating expenses:
Product development.... 223 465 358 802 1,555 1,998 494 1,375
Selling and marketing.. 836 1,595 2,551 4,201 6,639 6,892 3,059 4,452
General and
administrative........ 407 611 1,240 2,090 3,547 3,854 1,384 2,621
Purchased research and
development(2)........ -- -- -- -- 3,400 3,400 -- --
------ ------ ------ ------- ------- ------- ------- -------
Total operating
expenses............ 1,466 2,671 4,149 7,093 15,141 16,144 4,937 8,448
Operating income........ 1,276 2,047 2,999 3,449 3,013 2,784 2,938 5,117
Other income (expense),
net.................... 22 23 23 13 (155) (365) 17 (364)
Income tax benefit
(provision)............ -- -- -- -- 1,602 1,780 -- (1,602)
------ ------ ------ ------- ------- ------- ------- -------
Net income.............. $1,298 $2,070 $3,022 $ 3,462 $ 4,460 $ 4,199 $ 2,955 $ 3,151
====== ====== ====== ======= ======= ======= ======= =======
PRO FORMA DATA:
Income before taxes..... $ 2,419 $ 5,121
Net income(3)........... 1,440 3,047
Net income per share(4). $ 0.11 $ 0.22
Weighted average shares
outstanding(4)......... 13,651 13,651
OTHER OPERATING DATA(5):
Number of Accelerated
Reader customer
schools................ 7,000 10,400 14,500 19,500 26,000 23,500 29,700
Number of Accelerated
Reader book test
titles................. 1,700 2,800 5,000 7,500 10,000 8,200 12,000
BALANCE SHEET DATA:
Working capital......... $1,263 $2,098 $2,213 $1,105 $ 566 $ 1,343
Total assets............ 1,792 3,063 4,070 4,761 19,855 20,319
Notes payable and long-
term debt, including
current portion........ -- -- -- -- 10,450 11,550
Total equity............ 1,621 2,782 3,065 2,613 3,773 2,370
</TABLE>

13
<PAGE>

- --------
(1) Reflects the acquisition of IPS as if it occurred on January 1, 1996.
Adjustments consist of (i) IPS results for the seven months ended July 31,
1996, (ii) the exclusion of revenues ($744,000) and related costs
($180,000) associated with an IPS contract not acquired in the
acquisition, (iii) additional amortization of intangibles ($143,000), (iv)
additional interest expense ($268,000) and (v) the income tax effect
related to such adjustments ($178,000).
(2) In connection with the acquisition of IPS, $3.4 million of the purchase
price was allocated to purchased research and development which was
expensed in August 1996. See Note 3 of Notes to the Company's Financial
Statements. As a result, net income exceeds income before taxes in 1996
due to the tax benefit recorded by IPS which is primarily related to the
expensed purchased research and development. Effective January 1, 1997,
IPS elected S corporation status. As a result, the 1997 tax provision
represents the write-off of the deferred tax asset associated with IPS
when it was a C corporation. The previously recognized deferred tax asset
will be reinstated upon the completion of the Offering.
(3) Pro forma net income has been computed as if the Company had been a C
corporation rather than an S corporation for income tax purposes, based
upon an assumed effective federal and state tax rate of 40.5%. See "S
Corporation Distribution."
(4) Pro forma net income per share and weighted average shares outstanding
reflect (i) the shares outstanding as of January 2, 1997, reflecting the
issuance of shares by ALS to acquire IPS and the Institute and (ii) the
133.31 for 1 stock split.
(5) Represents the cumulative number of schools to which the Accelerated
Reader has been sold at year end and the cumulative number of book test
titles available at year end, as indicated.

14
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the
information set forth under "Selected Historical and Pro Forma Combined and
Consolidated Financial Data" and the financial statements of the Company and
IPS and the accompanying notes thereto included elsewhere in this Prospectus.

OVERVIEW

The Company's sales are derived primarily from the sale of software
products, software support agreements and training seminars and programs. The
Company recognizes revenue from sales of its off-the-shelf software products
at the time of shipment to customers. Because software products are generally
shipped as orders are received, the Company has historically operated with
virtually no backlog. The Company also develops custom software products
through its subsidiary, IPS. The Company recognizes revenue from the sale of
custom software on the percentage of completion method. The Company records
the estimated cost of returns at the time of sale. Service revenue includes
both revenue relating to the Reading Renaissance professional development
training and revenue from software support agreements for ongoing customer
support and product upgrades. The Company recognizes revenue from sales of its
training seminars and programs primarily at the time the seminar or training
program is conducted. Revenue from software support agreements is reflected as
deferred revenue and is amortized ratably over the 24 month term of the
maintenance period, which begins after the expiration of the six months of
free support included with the purchase of the software. The Company's
deferred revenue represents payments received from customers for services
still to be rendered.

Cost of sales consists of expenses associated with sales of software
products and training seminars and programs. These costs include (i)
personnel-related costs, (ii) costs associated with the manufacture and
assembly of the Company's products, (iii) amortization of capitalized software
development costs and (iv) an allocation of facilities costs. The Company
recognizes significantly higher gross margins on its product sales than on its
service sales. As a result, the Company's total gross margin has declined
since 1994 as service sales have increased as a percent of net sales.

The Company expenses all product development costs associated with a 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 two years.

In August 1996, an affiliate of the Company acquired substantially all of
the assets of IPS for $5.0 million plus the assumption of certain liabilities
and the obligation to make certain contingent payments which will be satisfied
in connection with the Offering. Effective January 2, 1997, all of the
outstanding capital stock of IPS was contributed to the Company in return for
shares of capital stock of ALS. The acquisition was accounted for using the
purchase method of accounting. Accordingly, the results of operations of IPS
are included in the combined results of operations of the Company effective as
of August 1, 1996. Under the purchase method of accounting, the excess of the
purchase price over the fair value of the net assets acquired is considered
goodwill. The Company is amortizing the goodwill associated with the
acquisition on a straight line basis over seven years. As part of the
acquisition, $3.4 million of the purchase price was allocated to purchased
research and development which was expensed in August 1996. See "Certain
Transactions" and Notes 3 and 5 of Notes to the Company's Financial
Statements.

15
<PAGE>

Immediately prior to completion of the Offering, the Company will terminate
certain employee benefit plans and institute the 1997 Stock Incentive Plan.
Termination of the plans will result in a one-time additional compensation
expense of approximately $1.3 million (assuming an initial public offering
price of $13.00 per share) in the second half of 1997. See "Management--
Executive Compensation."

Upon completion of the Offering, ALS, the Institute and IPS will become C
corporations for tax purposes. See "S Corporation Distribution" and Note 7 of
Notes to the Company's Financial Statements.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE
DECEMBER 31, 30,
------------------- ------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales:
Products................................... 98.0% 92.0% 84.6% 85.9% 83.1%
Services................................... 2.0 8.0 15.4 14.1 16.9
----- ----- ----- ----- -----
Total net sales.......................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
Cost of sales:
Products................................... 11.6% 12.6% 12.3% 11.9% 12.2%
Services................................... 101.9 59.3 55.0 47.4 46.6
Total cost of sales...................... 13.4 16.4 18.9 16.9 18.0
Gross profit:
Products................................... 88.4 87.4 87.7 88.1 87.8
Services................................... (1.9) 40.7 45.0 52.6 53.4
Total gross profit....................... 86.6 83.6 81.1 83.1 82.0
Operating expenses:
Product development........................ 4.3 6.4 6.9 5.2 8.3
Selling and marketing...................... 30.9 33.3 29.7 32.3 26.9
General and administrative................. 15.1 16.5 15.8 14.6 15.8
Purchased research and development......... -- -- 15.2 -- --
----- ----- ----- ----- -----
Operating income............................. 36.3 27.4 13.5 31.0 31.0
Other income (expense), net.................. 0.3 0.1 (0.7) 0.2 (2.2)
----- ----- ----- ----- -----
Income before taxes.......................... 36.6 27.5 12.8 31.2 28.8
Income tax benefit (provision)............... -- -- 7.1 -- (9.7)
----- ----- ----- ----- -----
Net income................................... 36.6% 27.5% 19.9% 31.2% 19.1%
===== ===== ===== ===== =====
</TABLE>

SIX MONTHS ENDED JUNE 30, 1997 AND 1996

Net Sales. The Company's net sales increased by $7.0 million, or 74.6%, to
$16.5 million in the first half of 1997 from $9.5 million in the first half of
1996. Product sales increased by $5.6 million, or 68.9%, to $13.7 million in
the first half of 1997 from $8.1 million in the first half of 1996. The
increase in product sales is primarily attributable to (i) the sale of the
Accelerated Reader to approximately 3,700 new customer schools, (ii) increased
sales of Accelerated Reader test disks to a larger base of Accelerated Reader
schools, including the introduction of approximately 3,800 new book titles on
Accelerated Reader test disks since June 30, 1996, (iii) revenues from
S.T.A.R. for which shipments and recognition of revenue began subsequent to
June 30, 1996, and (iv) inclusion of IPS sales commencing August 1, 1996.
Sales of Accelerated Reader software and supplemental Accelerated Reader test
disks accounted for approximately 69.4% and 56.2% of net sales in the first
half of 1996 and 1997, respectively.

Service revenue, which consists of revenue from sales of training seminars
and programs and software support agreements, increased by $1.5 million, or
109.9%, to $2.8 million in the first half of 1997 from $1.3 million in the

16
<PAGE>

first half of 1996. This increase is primarily attributable to an increased
number of Reading Renaissance training sessions, and, to a lesser extent,
additional revenue from software support agreements principally associated
with increased new product sales.

Cost of Sales. The cost of sales of products increased by $710,000, or
73.5%, to $1.7 million in the first half of 1997 from $966,000 in the first
half of 1996. As a percentage of product sales, the cost of sales of products
remained relatively constant at 12.2% in the first half of 1997 compared to
11.9% in the first half of 1996. The cost of sales of services increased by
$672,000, or 106.1%, to $1.3 million in the first half of 1997 from $633,000
in the first half of 1996. As a percentage of sales of services, the cost of
sales of services declined to 46.6% in the first half of 1997 compared to
47.4% in the first half of 1996, primarily as a result of decreased costs of
delivering training sessions. The Company's overall gross profit margin
declined to 82.0% in the first half of 1997 from 83.1% in the first half of
1996 due primarily to increased sales of services, particularly Reading
Renaissance training sessions, which have a lower gross margin than the
Company's products.

Product Development. Product development expenses increased by $880,000, or
178.0%, to $1.4 million in the first half of 1997 from $494,000 in the first
half of 1996. These expenses increased primarily due to: (i) increased
development staff and consulting costs associated with new products, and (ii)
the inclusion of IPS's product development costs in the first half of 1997. As
a percentage of net sales, product development costs increased to 8.3% in the
first half of 1997 from 5.2% in the first half of 1996. The Company
anticipates that the total dollar amount of product development costs will
increase significantly as the Company extends its product offerings into other
areas of the K-12 curriculum.

Selling and Marketing. Selling and marketing expenses increased by $1.4
million, or 45.5%, to $4.5 million in the first half of 1997 from $3.1 million
in the first half of 1996. These expenses increased due to an increase in
marketing personnel, participation in more trade shows, the publication of
additional catalogs, and increased advertising in publications. However, as a
percentage of net sales, selling and marketing expenses decreased to 26.9% in
the first half of 1997 from 32.3% in the first half of 1996. This decrease is
primarily due to economies of scale associated with significantly increased
product sales and service sales.

General and Administrative. General and administrative expenses increased by
$1.2 million, or 89.4%, to $2.6 million in the first half of 1997 from $1.4
million in the first half of 1996. The higher expenses for the first half of
1997 are largely due to increased costs associated with the hiring of
additional personnel, including wages and related benefits, and increased
costs associated with the Company's new headquarters building. As a percentage
of net sales, general and administrative costs increased to 15.8% in the first
half of 1997 from 14.6% in the first half of 1996. The Company anticipates
that general and administrative expenses will generally decline as a
percentage of sales in future periods, excluding the effect of non-recurring
charges such as the approximately $1.3 million one-time compensation expense
which will be incurred in the second half of 1997.

Operating Income. Operating income increased by $2.2 million, or 74.2%, to
$5.1 million in the first half of 1997 from $2.9 million in the first half of
1996. As a percentage of net sales, operating income remained constant at
31.0% in the first half of 1997 compared to 31.0% in the first half of 1996.

Interest Expense. In the first half of 1997, interest expense of $369,000
was incurred primarily in connection with loans to finance the acquisition of
IPS and the construction of the Company's new corporate headquarters building.

Income Tax Expense. Income tax expense of $1.6 million was recorded in the
first half of 1997. The expense was incurred as a result of IPS electing S
corporation status for income tax purposes. The expense represents the write
off of the previously recorded deferred tax asset. Immediately after the
Offering, ALS, the Institute and IPS will be taxed as C corporations and,
consequently, deferred taxes will be reinstated on the Company's financial
statements. See Note 7 of the Company's Financial Statements.

YEARS ENDED DECEMBER 31, 1996 AND 1995

Net Sales. The Company's net sales increased by $9.8 million, or 77.6%, to
$22.4 million in 1996 from $12.6 million in 1995. Product sales increased by
$7.3 million, or 63.2%, to $18.9 million in 1996 from $11.6 million in

17
<PAGE>

1995. The increase in product sales is primarily attributable to (i) the sale
of the Accelerated Reader to approximately 6,500 new customer schools, (ii)
increased sales of Accelerated Reader test disks to Accelerated Reader
schools, including the introduction of Accelerated Reader test disks covering
approximately 2,500 new book titles, and (iii) the introduction of S.T.A.R.,
which was announced in April 1996 and which the Company began shipping in
September 1996. Sales of Accelerated Reader software and supplemental
Accelerated Reader test disks accounted for approximately 89.8% and 69.4% of
net sales in 1995 and 1996, respectively. Sales of the Company's products
through one book distributor contributed significantly to product sales growth
in 1996. Sales through this book distributor, as a percentage of net sales,
increased from 12.5% in 1995 to 15.2% in 1996. The Company believes this
growth represented the maturation of this book distributor's field sales
efforts. The Company does not anticipate that sales to schools through this
book distributor will significantly increase as a percentage of net sales.

Service revenue increased by $2.4 million, or 244.0%, to $3.5 million in
1996 from $1.0 million in 1995. This increase is primarily attributable to an
increased number of Reading Renaissance training sessions, and, to a lesser
extent, additional revenue from software support agreements principally
associated with increased new product sales.

Cost of Sales. The cost of sales of products increased by $862,000, or
58.7%, to $2.3 million in 1996 from $1.5 million in 1995. As a percentage of
product sales, the cost of sales of products remained relatively constant at
12.3% in 1996 compared to 12.6% in 1995. The cost of sales of services
increased by $1.3 million, or 219.0%, to $1.9 million in 1996 from $595,000 in
1995. As a percentage of sales of services, however, the cost of sales of
services decreased to 55.0% in 1996 from 59.3% in 1995, primarily as a result
of greater efficiencies in conducting seminars. The Company's overall gross
profit margin declined to 81.1% in 1996 from 83.6% in 1995 due primarily to
increased sales of services, particularly sales of Reading Renaissance
training sessions, which have a lower gross margin than the Company's
products.

Product Development. Product development expenses increased by $753,000, or
93.9%, to $1.6 million in 1996 from $802,000 in 1995. These expenses increased
primarily due to the increased development staff and consulting costs
associated with new products. As a percentage of net sales, product
development costs increased to 6.9% in 1996 from 6.4% in 1995. The Company
anticipates that product development costs will increase significantly as the
Company expands its product offerings into other areas of the K-12 curriculum.

Selling and Marketing. Selling and marketing expenses increased by $2.4
million, or 58.0%, to $6.6 million in 1996 from $4.2 million in 1995. These
expenses increased due to an increase in the number of marketing personnel,
participation in more trade shows, the publication of additional catalogs, and
the introduction of the "Model Classroom" program. However, as a percentage of
net sales, selling and marketing expenses decreased to 29.7% in 1996 from
33.3% in 1995. This decrease is due primarily to economies of scale associated
with significantly increased product sales.

General and Administrative. General and administrative expenses increased by
$1.5 million, or 69.6%, to $3.5 million in 1996 from $2.1 million in 1995. The
higher expenses for 1996 are largely due to increased costs associated with
the hiring of additional personnel, including wages and related benefits, and
the write-down of the net book value of the Company's former headquarters. As
a percentage of net sales, however, general and administrative expenses
decreased to 15.8% in 1996 from 16.5% in 1995. This decline is primarily due
to economies of scale associated with significantly increased product sales.

Purchased Research and Development. In connection with the acquisition of
IPS, $3.4 million of the purchase price was allocated to purchased research
and development which was expensed in August 1996.

Operating Income. Operating income decreased by $436,000, or 12.6%, to $3.0
million in 1996 from $3.4 million in 1995, primarily due to the $3.4 million
of purchased research and development expense resulting from the acquisition
of IPS. As a percentage of net sales, operating income decreased to 13.5% in
1996 from 27.4% in 1995. Excluding the purchased research and development
expense, operating income would have increased by $3.0 million, or 86.0%, to
$6.4 million in 1996, or 28.7% of net sales compared to 27.4% of net sales in
1995.

Interest Expense. In 1996, interest expense of $206,000 was incurred
primarily in connection with loans to finance the acquisition of IPS.

18
<PAGE>

Income Tax Benefit. A tax benefit of $1.6 million was recorded in 1996
relating primarily to the expensing of $3.4 million of purchased research and
development. See Note 7 of Notes to the Company's Financial Statements.

YEARS ENDED DECEMBER 31, 1995 AND 1994

Net Sales. The Company's net sales increased by $4.4 million, or 52.8%, to
$12.6 million in 1995 from $8.3 million in 1994. Product sales increased by
$3.5 million, or 43.4%, to $11.6 million in 1995 from $8.1 million in 1994.
The increase in product sales is primarily attributable to (i) the sale of the
Accelerated Reader to approximately 5,000 new customer schools, and (ii)
increased sales of Accelerated Reader test disks to Accelerated Reader
schools, including the introduction of approximately 2,500 new book titles on
Accelerated Reader test disks. The increase in new Accelerated Reader customer
schools was largely due to the Company's strategic decision to lower the price
of the Accelerated Reader starter kits to accelerate the growth of the
installed base and drive demand for supplemental test disks. The growth in new
customer sales was also due to increased sales through book distributors.
Sales through one book distributor increased to 12.5% of net sales in 1995
from 2.6% of net sales in 1994. Sales of Accelerated Reader software and
supplemental Accelerated Reader test disks accounted for approximately 91.9%
and 89.8% of net sales in 1994 and 1995, respectively.

Service revenue increased by $841,000 to $1.0 million in 1995 from $163,000
in 1994, primarily due to the introduction in 1995 of new seminars and
expanded training programs for Reading Renaissance. In 1994, the Institute was
in a start-up phase. In addition, service revenue for software support
agreements began to be recognized in late 1994, which contributed to the
increase in service revenue.

Cost of Sales. The cost of sales of products increased by $530,000, or
56.6%, to $1.5 million in 1995 from $937,000 in 1994. As a percentage of
product sales, the cost of sales of products increased to 12.6% in 1995 from
11.6% in 1994, primarily because of the Company's new pricing policy for
Accelerated Reader starter and economy kits and the lower gross margin
associated with sales through book distributors. The cost of sales of services
increased by $430,000, or 259.0%, to $595,000 in 1995 from $166,000 in 1994.
As a percentage of sales of services, however, the cost of sales of services
decreased to 59.3% in 1995 from 101.9% in 1994. The Institute was in the
start-up phase in 1994 and, as a result, sales of services were not yet
profitable. The Company's overall gross profit margin decreased to 83.6% in
1995 from 86.6% in 1994 primarily due to the larger percentage of sales
generated by sales of services, particularly sales by the Institute, which
have a lower gross margin than the Company's products.

Product Development. Product development expenses increased by $444,000, or
123.9%, to $802,000 in 1995 from $358,000 in 1994. As a percentage of net
sales, product development costs increased to 6.4% in 1995 from 4.3% in 1994.
Product development expenses increased in 1995 due to the expansion of in-
house product development staff and the costs associated with the development
of S.T.A.R.

Selling and Marketing. Selling and marketing expenses increased by $1.6
million, or 64.7%, to $4.2 million in 1995 from $2.6 million in 1994. As a
percentage of net sales, selling and marketing expenses increased to 33.3% in
1995 from 30.9% in 1994. The increase in selling and marketing expenses is due
to start-up expenses associated with the Institute, an increase in the number
of telemarketing personnel selling the Company's products, increased
investment in lead generation to build prospect lists, and the publication of
additional quantities of catalogs and newsletters.

General and Administrative. General and administrative expenses increased by
$852,000, or 68.7%, to $2.1 million in 1995 from $1.2 million in 1994. As a
percentage of net sales, these costs increased to 16.5% in 1995 from 15.1% in
1994. The higher costs for 1995 compared with 1994 are largely due to
increased personnel and occupancy costs as well as start-up expenses
associated with the Institute.

Operating Income. Operating income increased $450,000, or 15.0%, to $3.4
million in 1995 from $3.0 million in 1994. As a percentage of net sales,
operating income decreased to 27.4% in 1995 from 36.3% in 1994, primarily due
to product development expenses associated with the development of S.T.A.R.
and start-up expenses associated with the Institute.

19
<PAGE>

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth unaudited combined and consolidated income
statement data for each quarter of the Company's last two fiscal years and two
most recent fiscal quarters. The unaudited quarterly financial information has
been prepared on the same basis as the annual information presented elsewhere
in this Prospectus and, in management's opinion, reflects all 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
-------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1995 1996 1996 1996(1) 1996 1997 1997
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales:
Products............... $2,524 $2,851 $2,781 $3,446 $3,818 $4,322 $4,949 $5,841 $6,444 $7,299
Services............... 121 129 258 495 607 728 1,003 1,113 1,369 1,433
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total net sales...... 2,645 2,980 3,039 3,941 4,425 5,050 5,952 6,954 7,813 8,732
Cost of sales:
Products............... 283 335 341 509 456 510 595 768 780 895
Services............... 80 110 164 241 345 288 522 743 719 587
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total cost of sales.. 363 445 505 750 801 798 1,117 1,511 1,499 1,482
Gross profit............ 2,282 2,535 2,534 3,191 3,624 4,252 4,835 5,443 6,314 7,250
Operating expenses:
Product development.... 167 235 251 149 227 267 409 652 679 696
Selling and marketing.. 727 928 1,072 1,474 1,567 1,492 1,500 2,080 2,161 2,291
General and
administrative........ 389 483 522 696 638 746 950 1,213 1,164 1,457
Purchased research and
development(2)........ -- -- -- -- -- -- 3,400 -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses............ 1,283 1,646 1,845 2,319 2,432 2,505 6,259 3,945 4,004 4,444
Operating income........ 999 889 689 872 1,192 1,747 (1,424) 1,498 2,310 2,806
Other income (expense),
net.................... (4) 7 8 2 9 9 (66) (107) (167) (197)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before
taxes.................. 995 896 697 874 1,201 1,756 (1,490) 1,391 2,143 2,609
Income tax benefit
(provision)(3)......... -- -- -- -- -- -- 1,467 135 (1,602) --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)....... $ 995 $ 896 $ 697 $ 874 $1,201 $1,756 $ (23) $1,526 $ 541 $2,609
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- --------
(1) The Company acquired IPS in August 1996.
(2) In connection with the acquisition of IPS, $3.4 million of the purchase
price was allocated to purchased research and development which was
expensed in August 1996.
(3) Income tax benefits recorded in 1996 relate to IPS net operating losses
while IPS was a C corporation. Effective January 1, 1997, IPS elected S
corporation status and wrote off the deferred tax asset associated with
the IPS net operating losses.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 1997, the Company had cash and cash equivalents of
approximately $2.6 million. Historically, the Company has used cash generated
from operations to fund acquisitions of capital equipment, software
development and distributions to shareholders. The Company's operating
activities provided cash of approximately $3.3 million, $4.1 million, $9.2
million and $4.9 million in 1994, 1995, 1996 and the first half of 1997,
respectively. The Company financed the construction of its new facility in
Wisconsin Rapids, Wisconsin with bank and contractor financing of
approximately $6.9 million. The Company financed the purchase of IPS with
loans of approximately $4.7 million and capital contributions of $200,000 from
the Company's principal shareholders. Both the financing for the construction
of the Wisconsin Rapids facility and the principal and accrued interest on the
IPS loans will be repaid from a portion of the estimated net proceeds of the
Offering. See "Use of Proceeds."

The Company has no material commitments with respect to any acquisitions of
other businesses, leases or capital expenditures except as described in the
Notes to the Company's Financial Statements. The Company believes that its
existing sources of liquidity, proceeds from this Offering and anticipated
funds from operations will satisfy the Company's projected working capital and
capital expenditure requirements for the foreseeable future.

20
<PAGE>

BUSINESS

COMPANY OVERVIEW

The Company's flagship product, the Accelerated Reader, is software for
motivating and monitoring increased literature-based reading practice. As of
June 30, 1997, the Accelerated Reader had been sold to approximately 29,700,
or 24%, of the K-12 schools in the United States and Canada. In a survey by
Quality Education Data, Inc. ("QED"), the Accelerated Reader was the software
product that educators most frequently cited as being used to improve the
quality of education in K-12 schools. The Accelerated Reader was also the
reading software product most frequently named by educators as used in support
of reading and language arts curricula in kindergarten through sixth grade,
according to a survey by Education Market Research ("EMR"). Likewise, in a
survey by Cahners Research ("Cahners") of schools/librarians that use
computerized reading programs, 70% of the respondents cited the Accelerated
Reader as the program they used. The Company believes that the Accelerated
Reader has achieved this leading market position as a result of its
demonstrated effectiveness in improving student reading levels and overall
academic performance. The Company's learning information system products also
include the Standardized Test for Assessment of Reading (S.T.A.R.), a
computer-adaptive reading test and database, and the Reading Renaissance
program through which the Company provides professional development training
for educators.

Originally introduced in 1986, the Accelerated Reader administers computer-
based multiple choice tests on books popular among students in grades K-12 and
provides educators with more than 20 reports from which to monitor the amount
and quality of each student's reading practice. Through June 30, 1997, the
Company had developed tests on approximately 12,000 books and expects to
develop approximately 1,500 additional tests in the second half of 1997. In
1994, the Company began offering Reading Renaissance training seminars to
provide educators with professional development training to most effectively
use the Accelerated Reader and the information it generates. As of June 30,
1997, approximately 39,500 educators have attended Reading Renaissance
training seminars. In 1996, the Company released S.T.A.R. which enables
educators to quickly obtain student reading scores statistically correlated to
national norms. The results from S.T.A.R. 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. The Company began marketing S.T.A.R. in the spring of 1996, and
by the end of the second quarter of 1997, had sold S.T.A.R. to approximately
4,900 schools. To expand its learning information system product offerings
into additional academic areas, in August 1996 the Company acquired IPS, a
provider of algorithm-based software for assessment and skills practice in
math and science.

INDUSTRY BACKGROUND

Educators, parents and opinion leaders in the United States are increasingly
focusing on improving essential academic skills of students, and, in
particular, their reading and math proficiency. President Clinton's emphasis
on education in his State of the Union address earlier this year, the
Department of Education's Goals 2000 program, the Learning to Read, Reading to
Learn campaign, an increase in Title I funding, and the activities of the
Education Commission of the States are indicative of this growing focus. While
certain aspects of these initiatives may not endorse, or be complementary to,
the Company's products, this focus and the resulting initiatives have
generally contributed to an increased demand for more effective methods to
improve academic performance. The Company believes that the general impact of
the Goals 2000 program and programs similar to it is to pressure schools and
educators to take action to improve the academic performance of students.
Schools have responded to these demands by investing in computers, software
and other educational technology, testing and other assessment programs to
measure students' progress, and professional development training to help
enhance educators' effectiveness in the classroom.

21
<PAGE>

Based on 1996 data from QED, the K-12 marketplace in the United States
consists of approximately 107,500 public and private schools. According to the
National Center for Education Statistics, the number of students enrolled in
these schools was approximately 51.7 million in 1996 and is expected to
increase to 54.6 million by the year 2006. According to QED, K-12 public
schools in the United States invested $4.1 billion on educational technologies
in 1996. Of this amount, industry sources estimate that approximately $630
million was invested in educational software, which amount is expected to
increase to $1.1 billion by the year 2000, representing a 15% compound annual
increase. Moreover, according to data obtained from the Software Publishers
Association, the installed base of computers in K-12 schools in the United
States will grow from approximately 5.5 million units in 1995 to 10.0 million
units by the year 2000, a 13% compound annual increase.

In addition to this increased spending on educational technologies, the
Company believes that there is a growing trend towards requiring better
assessment of student performance and increased accountability of educators
and school systems. At present, 41 states use some form of norm-referenced
assessment tool to measure student performance in core curriculum areas. The
Company also believes there is a growing trend towards requiring more and
better professional development training for educators, as highlighted in the
Department of Education's Goals 2000 program.

The increased public concern over the effectiveness of K-12 schools in
teaching essential academic skills and the rapidly growing role of technology
in the K-12 marketplace have created an increased demand for technology-based
solutions which measure and improve student academic performance and for
professional development training which enables educators to effectively
implement these solutions. However, few providers of educational technology
products have developed tools with demonstrated effectiveness in improving
student academic performance because most products (i) provide inadequate
feedback useful to educators in tailoring instruction to individual students,
(ii) seek to replace educators by attempting to teach skills rather than
support their efforts by encouraging extensive practice on those skills, (iii)
compete with existing curricula and instructional methodologies, (iv) fail to
maintain student interest and (v) require more advanced technology and/or
larger numbers of computers than are typically available in schools. The
Company believes there is a growing market demand for technology-based
learning information systems that motivate students and achieve measurable
results.

THE ADVANTAGE LEARNING SYSTEMS SOLUTION

The Company develops, markets and supports learning information systems
which improve student academic performance by intensifying literature-based
reading practice and increasing the quality, quantity and timeliness of
information available to educators. Until recently, the Company's products
have focused exclusively on improving reading because reading is fundamental
to a student's overall academic performance. The Company's flagship product,
the Accelerated Reader, administers computer-based multiple choice tests on
approximately 12,000 books popular among students in grades K-12. Each test
verifies that the student has read and comprehended a book. For each book
read, the Accelerated Reader tracks the amount of reading practice by
calculating points based on the length and difficulty of the book and the
student's performance on the test, and makes these data available to educators
through a variety of reports. S.T.A.R., the Company's computer-adaptive
reading test and database, supplies educators with norm-referenced reading
scores for each of their students typically in 10 minutes or less by selecting
test questions based on a student's pattern of previous responses. Because
S.T.A.R. can be administered several times per year, it provides educators
with a database of reading level information that enables tracking of
students' progress through the school year. The Company's Reading Renaissance
professional development training combines the Company's learning information
systems technology and classroom techniques to improve reading performance by
increasing in-school accountable reading practice.

The Company believes the combination of the Accelerated Reader, S.T.A.R. and
Reading Renaissance offers the following key benefits:

Improved Student Academic Performance. The Company is committed to
developing and releasing only those products which have demonstrated
effectiveness in improving student academic performance. The Accelerated
Reader, coupled with the techniques taught in the Reading Renaissance training
program, improves student academic performance by providing educators with an
effective system to motivate students to practice reading and encourage
students to select longer, more challenging books. Independent studies on the
effectiveness of the Accelerated Reader

22
<PAGE>

have demonstrated that use of the Accelerated Reader improves standardized
test performance in reading. A recent study conducted by the Institute based
on publicly available quantitative data confirms this result and indicates
that use of the Accelerated Reader improves standardized test performance in
other academic subject areas as well, including math, science, social studies
and writing.

Ability to Assess Student Progress. The Accelerated Reader and S.T.A.R.
provide educators with timely, accurate information to manage the learning
process within their existing curricula. The objective measurement data
derived from the Company's products enable teachers to continually monitor
students' academic progress and easily identify individual students who may
require special attention.

Suitability for K-12 School Environment. The Accelerated Reader and S.T.A.R.
are easy to use by both students and educators and are capable of running on
substantially all of the computers and hardware platforms currently found in
K-12 schools. Even schools with a limited number of computers can use the
Company's products since these products emphasize literature reading by the
student and do not require extensive individual time on the computer. In
addition, the Accelerated Reader is used in conjunction with books already
commonly found in most K-12 school libraries.

Supportive of Educators. Rather than attempting to teach skills, thereby
replacing educators, the Company's products and services provide educators
with tools to encourage increased skills practice and to track student
academic performance. Due to this focus on practice and measurement, the
Company's products complement, rather than compete with, existing curricula
and instructional methodologies. As a result, educators remain in control of
the learning process.

Cost-Effective Solution. The cost of the Company's products generally
enables schools to purchase such products within their normal budgets. In
addition, schools may purchase the Company's products for use in a single
classroom, and have the flexibility to acquire additional products for more
classrooms as usage increases.

GROWTH STRATEGY

Add New Customer Schools. The Company intends to increase its market
penetration by continuing to add new customer schools. As of June 30, 1997,
the Accelerated Reader has been sold to approximately 29,700 K-12 schools,
which represents approximately 24% of the total number of schools in the
United States and Canada and an approximately 29% increase in the number of
schools using the Accelerated Reader over the same period in the prior year.
In addition, as of June 30, 1997, S.T.A.R. has been sold to approximately
4,900 K-12 schools. The Company plans to add new customer schools by
increasing its direct marketing efforts and extending its strategic alliances.

Intensify and Expand Use of Products by Existing Customer Schools. The
Company intends to intensify and expand the use of its products by existing
customers. Although the Accelerated Reader has been sold to approximately 24%
of the K-12 schools in the United States and Canada, most schools begin using
the product as a supplementary or voluntary program in a small percentage of
classrooms, thereby creating the opportunity for the Company to intensify
usage in these classrooms and expand usage to other classrooms and other grade
levels. The Company's experience has been that increased use of the
Accelerated Reader leads to increased sales of supplemental test disks,
S.T.A.R. and Reading Renaissance professional development training. To
increase the use of its products, the Company continuously develops new book
tests, publishes newsletters, catalogs and research relating to the
effectiveness of its products, sponsors seminars and maintains communication
with customers through its telephone sales force. The Company expects to
develop approximately 1,500 additional tests in the second half of 1997.

Offer New Products in Other Curriculum Areas. The Company intends to develop
groups of products similar to its reading products for other areas of the K-12
curriculum. Through its acquisition of IPS, a leading developer of algorithm-
based software for assessment and skills practice in math and science, the
Company has begun to develop math products similar to the Accelerated Reader
and S.T.A.R.

Expand International Marketing and Sales. The Company intends to expand its
international marketing and sales. To date, the Company has marketed and sold
the Accelerated Reader in Canada and to several schools in the

23
<PAGE>

United Kingdom, which have begun using it on a pilot basis. In addition, IPS
markets and sells Spanish bilingual versions of its math products in the
United States and neighboring Spanish-speaking countries. As the Company
develops new products, it plans to expand its marketing and sales efforts into
other foreign countries.

Expand Market Presence Through Strategic Alliances. In order to penetrate
the K-12 marketplace more rapidly, the Company has established strategic
alliances with educational book distributors and publishers. These firms are
particularly receptive to such alliances because use of the Company's products
in schools encourages, rather than competing with, the sale of books and other
products sold by these firms. The Company believes that such firms are under
increasing pressure from many customers to offer products supported by the
Accelerated Reader. In addition, the Company intends to seek strategic
alliances with other firms with an interest in education and literacy.

PRODUCTS

OVERVIEW

The Company offers three core products for use in the K-12 marketplace: the
Accelerated Reader, S.T.A.R. and Reading Renaissance. Together, these learning
information system products improve student academic performance by
intensifying literature-based reading practice and increasing the quality,
quantity and timeliness of information available to educators. The Company's
products historically have concentrated on reading. The Company is expanding
its product offerings into math with the Company's acquisition of IPS in
August 1996.

The following table summarizes the Company's primary product offerings and
price ranges as of August 25, 1997:

<TABLE>
<CAPTION>
PRODUCT DESCRIPTION PRICE RANGE

<C> <S> <C>
Accelerated Reader Reading practice management software; $399-$2,999
available in Starter Kits (150-200 book
tests), Economy Kits (includes 850-1,000
book tests, Enhanced Support Plan for the
Accelerated Reader and a voucher to attend a
one-day Reading Renaissance training
seminar) or Super Kits (includes the
Accelerated Reader Economy Kit, S.T.A.R.
schoolwide kit and Enhanced Support Plan for
S.T.A.R.)
- ------------------------------------------------------------------------------------------
Accelerated Reader Computer disks containing supplemental tests $52-$76
supplemental test on additional books to expand Starter,
disks Economy or Super Kits (approximately 50
tests per disk); currently 12,000 tests
available
- ------------------------------------------------------------------------------------------
S.T.A.R. Computer-adaptive reading test and database $399-$1,499
- ------------------------------------------------------------------------------------------
Enhanced Support Two-year contracts for telephone support of $149-$249 initial
Plans ("ESP") software (available for the Accelerated (also included in
Reader and S.T.A.R.) certain Accelerated
Reader kits); $149-
$199 renewal
- ------------------------------------------------------------------------------------------
Reading Renais- Professional development training for Scheduled seminars,
sance educators; delivered through scheduled $109-$545 per attend-
seminars and school sponsored events ee; sponsored events,
$1,500-$20,000 per
event
- ------------------------------------------------------------------------------------------
Math and Science Off-the-shelf and custom math and science $295 for off-the-
Products test and worksheet generators, and student shelf
objective and achievement databases products; $5,000-
$40,000 per project
for custom products
- ------------------------------------------------------------------------------------------
Other Related Video and printed training materials, Varies
Products graphics and motivational items
</TABLE>

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

24
<PAGE>

THE ACCELERATED READER

The Accelerated Reader is a learning information system for motivating and
monitoring increased literature-based reading practice. As of June 30, 1997,
the Accelerated Reader has been sold to approximately 29,700 K-12 schools in
the United States and Canada and, according to a survey published by EMR in
the fall of 1995, is the reading software product most frequently named by
educators as used in support of reading and language arts curricula in
kindergarten through sixth grade. EMR is an independent research organization
that conducts research and publishes studies on education. The EMR survey was
not commissioned by the Company and was obtained from EMR for $495. In
addition, according to a survey published by QED in December 1994, the
Accelerated Reader is one of the products that educators most frequently cite
as being used to improve the quality of education in K-12 schools. QED is an
independent company which collects and maintains information on educators. The
QED survey was not commissioned by the Company and was obtained free of charge
from QED. Likewise, in a survey sponsored by the School Library Journal and
conducted by Cahners in March 1997, of schools/librarians that use
computerized reading programs, 70% of the respondents cited the Accelerated
Reader as the program they used. The School Library Journal is a publication
of the American Association of School Librarians and Cahners is a publishing
and market research firm. Neither the School Library Journal nor Cahners is
affiliated with the Company. The Cahners study was not commissioned by the
Company and the information contained therein was published in the School
Library Journal and acquired free of charge by the Company. The Accelerated
Reader has received numerous awards and recognition, including the Association
for Supervision and Curriculum Development's "Only the Best" designation.

The Accelerated Reader is designed to be very easy to use by students and
educators alike. A student selects a book from a list of books for which the
school has an Accelerated Reader test at an appropriate reading level and
reads the book. The student then takes a multiple choice test on a computer.
The questions contained in the tests are carefully drafted to ensure that a
student who has thoroughly read a book at the appropriate level will pass. For
each book read, the 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 test. 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, the
Accelerated Reader generates more than 20 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 Company currently has a library of more than 12,000
computerized book tests. The Company developed approximately 2,500 tests in
1996 and expects to develop approximately 1,500 additional tests in the second
half of 1997. Titles on disk are organized by reading level and subject
matter. Continued usage of the Accelerated Reader creates demand for
additional tests, S.T.A.R., Reading Renaissance training and related products.
In addition, the Company has begun to develop a Spanish/English version of the
Accelerated Reader for bilingual students. The Company is also completing
development of AR BookGuide, a database listing of all books covered by
Accelerated Reader tests, in a format allowing searches by author, reading
level, topic and other variables to facilitate creation of custom book lists
for students and for ordering additional tests.

STANDARDIZED TEST FOR ASSESSMENT OF READING (S.T.A.R.)

S.T.A.R. is a computer-adaptive reading test which the Company believes is
the first software to provide reading scores statistically correlated to
national norms in ten minutes or less at the computer. S.T.A.R. administers a
series of multiple choice questions for which students choose the best word to
complete each sentence. S.T.A.R. adapts itself to each student's reading level
by applying a proprietary branching logic which 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. S.T.A.R. is easy to use and can be administered several times per
year. The Company announced S.T.A.R. in the spring of 1996 and started
shipping it to customers in the fall of 1996. As of June 30, 1997, S.T.A.R.
has been sold to approximately 4,900 schools. In 1997, Media & Methods
magazine, a professional journal for instructional technology educators,
selected S.T.A.R. as an Awards Portfolio Winner in its annual competition to
determine the best education equipment, resources and system products. Because
of its repeated successes in this competition, the Company has been inducted
into Media & Methods' "Hall of Fame," in recognition of the Company's status
as "a consistent provider of superior quality educational products."

25
<PAGE>

ENHANCED SUPPORT PLANS

The Company offers Enhanced Support Plans which provide users of the
Accelerated Reader and S.T.A.R. access to telephone support beyond the six-
month period of support included with the purchase of the software, and other
benefits such as free or reduced-cost upgrades. Packaged with some kits and
also sold as add-ons, ESPs entitle educators to expert help resolving
questions regarding technical problems with Company products, networks, and
other software interacting with Company products.

READING RENAISSANCE

The Reading Renaissance program provides educators with professional
development training to most effectively use the Accelerated Reader, S.T.A.R.
and the learning information they generate. This training combines technology
and classroom techniques to increase in-school accountable reading practice.
Through the Institute, the Company offers a variety of Reading Renaissance
seminars and workshops, including one- to three-day scheduled training
programs, which are conducted throughout the year at various hotel locations
in the United States, and on-site training programs pursuant to which the
Institute's training staff visit an individual school, school district or
region to conduct a seminar or workshop. The Institute's training staff
consists of 36 presenters, most of whom are K-12 educators who use the Reading
Renaissance techniques in their own classrooms. Since its inception in late
1993, the Institute has trained approximately 39,500 educators, of whom
approximately 22,000 were trained in 1996.

To encourage educators who have completed Reading Renaissance training to
implement the methodology fully, the Institute in 1995 initiated the "Model
Classroom" certification program. 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 August 25, 1997, the program
has received approximately 2,800 applications and certified 982 "Model
Classroom" teachers, and 36 "Model Schools" in which the majority of
classrooms have "Model Classroom" teachers.

The Company also produces videotapes and manuals to be used in conjunction
with its training programs. Further, through the Institute, the Company
conducts research on best practices, performs field validation of techniques,
and gathers information to guide the development of the Company's learning
information systems.

MATH AND SCIENCE PRODUCTS

Through its subsidiary, IPS, the Company develops algorithm-based software
for assessment and skills practice in math and science. IPS has a proprietary
library of more than 20,000 algorithms, each capable of generating virtually
unlimited variations of specific math and science problems. These algorithms
are incorporated into off-the-shelf software for sale to educators and custom
software developed primarily for educational textbook publishers and school
districts. Current products include Objective Tracker and MathCheck. Objective
Tracker is a test and worksheet generator which allows educators, schools and
school districts to specify precise academic objectives and track the
attainment of those objectives for each student. Objective Tracker is
available in both off-the-shelf and custom forms. The Company has begun to use
IPS products as a basis for developing math products similar to the
Accelerated Reader and S.T.A.R.

OTHER RELATED PRODUCTS

The Company sells other products to support its primary products, including
video and printed training materials, graphics and motivational items.

PRODUCT DEVELOPMENT

The Company believes that continued investment in product development is
required to remain competitive in the K-12 marketplace. The Company invests
continuously in the development of new products, enhancement of

26
<PAGE>

existing products and development of tools to increase the efficiency of
product development. For the years ended December 31, 1994, 1995 and 1996, and
for the six months ended June 30, 1997, the Company expended approximately
$598,000, $919,000, $1.9 million and $1.3 million, respectively, on product
development (including amounts capitalized).

As of June 30, 1997, the Company employed 34 persons dedicated to product
development and software design. The Company expects this number to increase
in the next year. The Company's product development staff has a high level of
expertise in learning information theory, test writing, interface design,
software engineering, quality assurance and technical writing.

The Company generates new product concepts which it believes will help
educators improve student academic performance, based on the Company's
understanding of learning information theory and the need for practice of
essential academic skills. These product concepts are then refined based on
feedback from its customers, which the Company continuously solicits and
incorporates throughout the new product development process. Based on the
refined product concepts, product proposals are then formulated by the product
development group and reviewed by management to determine which should be
developed into prototypes. The product development and software design groups
collaborate to create the prototypes, which are then tested in customer
schools. From this market testing, the Company creates product specifications.
However, 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 Company also continuously expands its
library of book tests by creating supplemental Accelerated Reader test disks
and creates new algorithms and algorithm libraries for MathCheck and Objective
Tracker.

The Reading Renaissance professional development training program was
originally developed, and is continually refined, through field experience
with the Accelerated Reader and research by the Institute staff. Through the
Institute, the Company conducts research into effective education techniques
related to the Company's products and services. This research provides the
staff with a standard against which to develop and refine training programs to
help educators accelerate learning.

SALES, MARKETING AND DISTRIBUTION

The Company markets its products primarily to individual educators in the K-
12 market, including teachers, school librarians and principals. The Company
is also beginning to market its products to entire schools and school
districts. The Company's sales and marketing strategy consists primarily of
direct marketing to potential and existing customers. The Company uses 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 the Company's in-house staff of 31 telephone sales representatives contacts
the customer to answer questions and, ultimately, direct the customer to a
purchase. Having an in-house sales force affords the Company better control
over its marketing efforts.

In addition, the Company currently has resale arrangements with five U.S.
and two Canadian book distributors which are authorized to sell the
Accelerated Reader to their customers. Sales to Perma-Bound, a division of
Hertzberg-New Method, Inc. ("Perma-Bound"), accounted for 2.6%, 12.5%, 15.2%
and 13.6% of the Company's net sales in 1994, 1995, 1996 and the first half of
1997, respectively. The Company believes this growth represented maturation of
Perma-Bound's field sales efforts and anticipates that, as a percentage of net
sales, sales to schools through Perma-Bound will not significantly increase.
Under these resale arrangements, distributors take orders which are then
filled by the Company. This control over product shipment ensures premium
customer service and retention of customer contacts for future marketing and
sales opportunities.

In addition to the book distributors which resell the Company's products,
approximately 14 other book distributors and publishers promote the sale of
the Accelerated Reader by publishing special catalogs that advertise book sets
assembled specifically for Accelerated Reader test disks. Further, 31
distributors and publishers have engaged the Company to create test disks to
support their product lines. The Company retains the proprietary rights to all
tests created. The Company intends to seek additional strategic alliances with
book distributors and publishers and

27
<PAGE>

to use alliances formed by IPS to expand its base of strategic partners to
sell its products. Furthermore, the Company plans to continue to develop other
cross-marketing arrangements with third-party firms selling non-competing
products into the education market.

The Company believes it maintains a very high level of customer
satisfaction. Historically, the Company has experienced less than a 2% rate of
return for its products.

CUSTOMER SERVICE AND TECHNICAL SUPPORT

Most of the Company's customers have low levels of computer knowledge and do
not have any technical support on-site to assist them. The Company therefore
provides a variety of customer and technical support services to purchasers of
its software products. In order to provide the level of customer service that
results in a consistently high level of customer satisfaction, the Company
employs an experienced staff of technical service representatives who are
capable of answering technical questions relating to the Company's software
products, regardless of platform, as well as questions regarding hardware and
networks. Two full-time computer programmers support the telephone service
representatives by helping to answer customer questions by recreating the
customer's problem in the Company's simulation laboratory.

PRODUCTION

Currently, all of the Company's software products are distributed on
diskettes, except for AR BookGuide which will be distributed on CD-ROM. The
Accelerated Reader and S.T.A.R. disks are duplicated and packaged at Company
headquarters, with the exception of Apple II disks which are produced by a
third-party contractor. Other related products, including videotapes, books,
graphics and motivational items, are purchased from third-party vendors. IPS's
math and science custom software products are produced at its offices in
Vancouver, Washington and provided to customers in master form which allows
the customer to duplicate the software. IPS's off-the-shelf products such as
MathCheck are also produced by in-house staff, but duplicated by a third-party
contractor.

COMPETITION

The K-12 educational technology and professional development markets in
which the Company operates are very competitive. The Company competes
primarily against more traditional methods of education, training and testing,
including pencil and paper testing. In addition, the Company competes with
other companies offering educational software products to schools, including
larger companies with greater resources than the Company, such as
International Business Machines Corporation, Apple Computer, Inc., Broderbund
Software, Inc., and The Learning Company, Inc. The Company also competes with
certain other companies, including The Electronic Bookshelf Inc. and
Booksharp, which offer software products which are more directly competitive
with the products offered by the Company. Many other companies, including
Microsoft Corp. and Walt Disney Co., provide educational software products
which the Company believes are not marketed primarily to schools. While the
Company's existing competitors may 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, the Company believes it is well positioned to continue to compete
favorably in the markets in which it participates.

INTELLECTUAL PROPERTY

28
<PAGE>

While the Company believes that its products, trademarks and other
proprietary rights do not infringe upon the proprietary rights of third
parties, as the number of software products in the educational technology
industry increases and the functionality of these products begins to overlap,
software developers may become increasingly subject to infringement claims.
There can be no assurance that third parties will not assert infringement
claims against the Company in the future with respect to current or future
products, trademarks or other Company works or that any such assertion may not
require the Company to enter into royalty arrangements or result in costly
litigation.

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. While the Company electronically codes its software products to
protect against unauthorized copying and use, there can be no assurance that
the Company's software products will not experience unauthorized reproduction.

EMPLOYEES

As of June 30, 1997, the Company had 274 full and part-time employees. The
Company believes its relations with employees are good. None of the Company's
employees is represented by a union or subject to collective bargaining
agreements.

PROPERTIES

The Company owns a 125,000 square foot facility in Wisconsin Rapids,
Wisconsin which was completed in December 1996. Approximately one-third of the
Wisconsin Rapids facility is currently occupied. The Company leases its former
office facility in Wisconsin Rapids, Wisconsin under a two year lease which
expires in June 1999, and which provides the tenant with an option to purchase
the property. The Institute leases 10,000 square feet of office space in
Madison, Wisconsin, which lease expires in April 2000. IPS leases 3,000 square
feet of office space in Vancouver, Washington, which lease expires in January
1999. While the Company believes its facilities are adequate for its current
operations, the Company anticipates leasing additional office space in Madison
and Vancouver during the next 12 to 18 months.

BACKLOG

Because ALS generally ships products as orders are received, it has
historically operated with very little or no backlog. The Institute and IPS,
however, operate in the normal course of business with backlogs. As of June
30, 1997, the Institute and IPS had backlogs which aggregated approximately
$1,383,000 and $446,000, respectively. With respect to the Institute,
approximately $1,334,000 of this backlog is expected to be eliminated by the
end of 1997, with the remaining amount eliminated by the end of February 1998.
With respect to IPS, all of the backlog that existed as of June 30, 1997 is
expected to be eliminated by the end of 1997.

LEGAL PROCEEDINGS

The Company is involved from time to time in litigation incidental to its
business. The Company is not currently a party to any litigation.

29
<PAGE>

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company as of August 25, 1997
are:

<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------ --- --------------------------------------------------------
<S> <C> <C>
Judith A. Paul.... 50 Chairman of the Board
Terrance D. Paul.. 50 Vice Chairman of the Board
Michael H. Baum... 50 Chief Executive Officer and Director
John R. Hickey.... 41 President and Director
Timothy P. Welch.. 55 Director
Richard W. Fickey. 57 Secretary and Vice President, Finance and Administration
</TABLE>

Judith A. Paul is the co-founder of the Company and has been Chairman of the
Board of Directors since 1986. In addition to her continuing and active
involvement in the daily operations of the Company, including serving as the
Company spokesperson and coordinating the Company's public relations and
customer communication policies, Ms. Paul has published 101 Ways to Motivate
Students to Read (1995), The Family Reading Night Kit (1996) and The Literacy
Partnership Kit (1997). Ms. Paul holds a bachelors degree in elementary
education from the University of Illinois.

Terrance D. Paul is the co-founder of the Company and has been Vice Chairman
of the Board of Directors since July 1996. Mr. Paul is primarily responsible
for the Company's long-term strategic planning and new product development
strategy. Mr. Paul also coordinates the research activities conducted by the
Institute. From November 1995 until July 1996, Mr. Paul served as the
Company's Chief Executive Officer. From January 1992 until August 1993 and
again from September 1994 until November 1995, Mr. Paul served as President of
the Company. For the 12 years prior to 1992, Mr. Paul was President of Best
Power Technology, a manufacturer of uninterruptible power supplies. Mr. Paul
is the author of several publications, including How to Create World-Champion
Readers (1993), Patterns of Reading Practice (1996) and The New Technology of
Learning Information Systems (1997). He is also the general editor of
Fundamentals of Reading Renaissance (1994-1996), the textbook used in seminars
on reading improvement by the Institute. 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 has been Chief Executive Officer of the Company since July
1996. Mr. Baum served as President of the Company between November 1995 and
June 1996. From September 1994 until November 1995, Mr. Baum served as the
Managing Director of the Institute and from June 1994 until September 1994, he
served as the Director of Educational Consulting for the 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.

John R. Hickey has been President of the Company since July 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.

Timothy P. Welch is the founder of the predecessor to IPS. Since June 1997,
Mr. Welch has served as a consultant to IPS. From August 1996 until June 1997,
Mr. Welch served as the Chief Executive Officer of IPS, and

30
<PAGE>

for the 15 years prior thereto, he served as the President of its predecessor.
Mr. Welch is also the founder and Chief Executive Officer of Curriculum
Technologies, Inc., a firm specializing in multi-media compact disc
development for the adult literacy and English as a second language markets.
Mr. Welch holds a bachelors degree in journalism from the University of
Wisconsin.

Richard W. Fickey joined the Company as Secretary and Vice President of
Finance and Administration in January 1997. Prior to that, Mr. Fickey was
employed by Rapid Signs, a sign company which he founded in 1991, and
Independent Systems Consultants, a partnership that provides management and
information systems consulting services, which he co-founded in 1992. For the
24 years prior thereto, Mr. Fickey was employed by Great Northern Nekoosa, a
paper manufacturer, in various positions including, most recently, Treasurer
and Vice President of Administration of the Nekoosa Papers division. Mr.
Fickey holds a bachelors degree in industrial engineering from Iowa State
University and an MBA from the University of Wisconsin.

The Company will add two independent directors to its Board of Directors
(the "Independent Directors") concurrently with the completion of the
Offering. Information concerning these directors, Messrs. Akins and Grunewald,
is set forth below.

Perry S. Akins will be joining the Board of Directors concurrently with the
completion of the Offering. From 1966 to the present, Mr. Akins has been
employed by ELS Educational Services, Inc. ("ELS") (formerly known as
Washington Educational Research Associates, Inc.) in various capacities. He is
currently the President of ELS and has served in that position since 1977. ELS
teaches English as a second language to students and professionals at its
various ELS Language Centers in the United States and abroad. ELS also
publishes and distributes English as a second language materials worldwide.
Mr. Akins holds a bachelors degree in Russian language and history and a
masters degree in education with a minor in Russian language from Southern
Illinois University.

John H. Grunewald will be joining the Board of Directors concurrently with
the completion of the Offering. From September 1993 to January 1997, Mr.
Grunewald served as the Executive Vice President, Chief Financial Officer and
Secretary of Polaris Industries Inc., a manufacturer of snowmobiles, all-
terrain vehicles and personal watercraft. From June 1977 until June 1993, Mr.
Grunewald served as the Vice President of Finance, Chief Financial Officer and
Secretary of Pentair, Inc., a diversified manufacturing company. Mr. Grunewald
currently serves as a director of the Nash Finch Company, a wholesale food
distributor, Braun Engineering, an environmental engineering company, and
Hydrobikes, Inc., a manufacturer of recreational water bikes. Mr. Grunewald
also serves as the Chairman of the Board of Rise, Inc., a charitable
institution providing occupations for handicapped and disabled children, and
as a member of the Board of Governors of the Bethel College Foundation. Mr.
Grunewald holds a bachelors degree in business from St. Cloud State University
and an MBA in business finance from the University of Minnesota.

Directors of the Company are elected at the annual shareholders' meeting to
serve until the next annual meeting of shareholders or until their respective
successors are elected and qualified. Officers of the Company serve at the
discretion of the Board of Directors. Terrance and Judith Paul are husband and
wife. There are no other family relationships among any of the directors or
officers of the Company. Pursuant to his employment agreement with IPS,
Timothy Welch has agreed to serve on the Board of Directors of both IPS and
ALS, subject to shareholder approval, for the term of the agreement. See "--
Management Employment Agreement."

After the Offering, the Board of Directors will establish two standing
committees: the Audit Committee and the Compensation Committee. The Audit
Committee will recommend the appointment of auditors and oversee the
accounting and audit functions of the Company. The Compensation Committee will
determine executive officers' compensation and will administer the Company's
executive compensation plans, including the 1997 Stock Incentive Plan. Messrs.
Akins and Grunewald will comprise both the Audit Committee and the
Compensation Committee.

Each director of the Company who is not an employee of the Company will
receive $1,000 for each meeting of the Board of Directors attended and $500
for each committee meeting attended, plus out-of-pocket expenses incurred in
connection with attendance at such meeting. In addition, concurrently with the
completion of the Offering, each

31
<PAGE>

non-employee director will receive options to purchase a total of 5,000 shares
of Common Stock at the initial public price per share, which options will vest
50% after one year and 50% after two years. The Company will grant an
additional 3,000 shares to each such director at the conclusion of each of the
first and second years of service with the Company (i.e., 6,000 shares total
per director), both of which grants will have two year vesting schedules.
These options will be granted pursuant to the 1997 Stock Incentive Plan. See
"--1997 Stock Incentive Plan."

The Company currently maintains key person life insurance on Messrs. Paul,
Baum and Hickey in the amount of $5.0 million, $1.0 million and $500,000,
respectively.

EXECUTIVE COMPENSATION

Summary Compensation Information. The following table sets forth all cash
compensation paid or accrued for services rendered to the Company for the year
ended December 31, 1996 to the Company's Chief Executive Officer and the other
executive officers whose salary and bonus exceeded $100,000 (collectively, the
"named executives"):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION COMPENSATION
------------ ------------
PAYOUTS
------------
NAME AND LTIP ALL OTHER
PRNCIPAL POSITIONI SALARY PAYOUTS COMPENSATION(1)
- ------------------ ------------ ------- ---------------
<S> <C> <C> <C>
Judith A. Paul
Chairman of the Board............... $156,184 -- $5,230
Terrance D. Paul
Vice Chairman of the Board.......... 156,184 -- 5,969
Michael H. Baum
Chief Executive Officer............. 141,080 $1,849 5,587
</TABLE>
- --------
(1) Reflects 401(k) plan matching amount paid by the Company.

Compensation Committee Interlocks and Insider Participation. For the year
ended December 31, 1996, the Company did not have a compensation committee.
However, Judith Paul, Terrance Paul and Michael Baum participated in
deliberations concerning executive officer compensation.

Management Employment Agreement. On August 1, 1996, IPS entered into an
Employment Agreement (the "Employment Agreement") with Timothy Welch in
connection with the Company's acquisition of substantially all of the assets
of the IPS business. See "Certain Transactions." Pursuant to such agreement,
Mr. Welch agreed to serve as IPS's Chief Executive Officer and to serve as a
member of the Board of Directors of both IPS and ALS, subject to shareholder
approval, for the term of his Employment Agreement. The Employment Agreement
has a term of two years and provides for an annual salary of $125,000, which
may be increased but not decreased during the term of the agreement. Effective
June 1, 1997, Mr. Welch resigned as Chief Executive Officer of IPS; however,
the Employment Agreement has not been terminated and Mr. Welch remains as a
director of the Company. Mr. Ric Rocca, who previously served as the Sales and
Marketing Manager of IPS, succeeded Mr. Welch as Chief Executive Officer of
IPS. Mr. Welch is also entitled to receive such other benefits generally
available to executive employees of IPS. Mr. Welch is also entitled to receive
deferred compensation under certain employee benefit plans adopted by ALS and
the Institute and to participate in such stock-based incentive plans as the
Company may adopt, including the 1997 Stock Incentive Plan. As of June 30,
1997, Mr. Welch has been awarded an aggregate of 100 shares of phantom stock
under the terms of the phantom stock plans adopted by ALS and the Institute,
for which he will receive a cash payment from the Company following the
Offering of approximately $110,000 (assuming an initial public offering price
of $13.00 per share). See "--Phantom Stock Plans." In addition, pursuant to
the Employment Agreement, Mr. Welch has agreed not to compete with ALS, IPS or
the Institute during his employment and for a period of two years following
termination of his employment and has agreed to maintain as confidential the
Company's proprietary information and trade secrets. IPS and Mr. Welch may
each unilaterally terminate the Employment Agreement under certain
circumstances upon 30 days written notice to the other party.

32
<PAGE>

1997 Stock Incentive Plan. The Board of Directors of the Company has adopted
the 1997 Stock Incentive Plan (the "Stock Incentive Plan") to provide officers
and other key employees of the Company and its subsidiaries, as well as
Independent Directors, with additional incentives by increasing their
proprietary interest in the Company. An aggregate of 1,500,000 shares of
Common Stock is subject to the Stock Incentive Plan, of which a maximum of
750,000 are subject to incentive stock options. In addition, no one person may
receive options or rights over more than 750,000 shares during the term of the
Stock Incentive Plan.

The Stock Incentive Plan permits the Company to grant awards in the form of
stock options (including both incentive stock options that meet the
requirements of Section 422 of the Internal Revenue Code of 1986, as amended,
and non-qualified stock options), stock appreciation rights and restricted
shares of Common Stock (individually, an "Award" and collectively, "Awards").
All stock options awarded under the Stock Incentive Plan will be granted at an
exercise price of no less than fair market value of the Common Stock on the
date of grant. No Award may be granted under the Stock Incentive Plan after
March 28, 2007.

The Stock Incentive Plan will be administered by the Compensation Committee
of the Board, which will have exclusive authority to grant Awards under the
Stock Incentive Plan and to make all interpretations and determinations
affecting the Stock Incentive Plan. The Compensation Committee will have the
discretion to determine the individuals to whom Awards are granted, the amount
of such Award, any applicable vesting schedule and other terms of any Award.
In the event of any changes in the capital structure of the Company, the
Compensation Committee will make equitable adjustments to outstanding Awards
so that the net value of the Award is not changed. Any unvested Awards will
vest upon the occurrence of a Change in Control of the Company (as defined in
the Stock Incentive Plan).

The Company anticipates that prior to the Offering, it will have outstanding
options to purchase a total of approximately 277,846 shares of Common Stock
(assuming an initial public offering price of $13.00 per share) exercisable at
the initial public offering price. The vesting schedule for employees is 25%
per year with each option being fully exercisable four years from the date of
grant. The Company has not granted any other Awards under the Stock Incentive
Plan as of the date hereof.

Phantom Stock Plans. Prior to this Offering, ALS and the Institute each had
in place a phantom stock plan (the "ALS Plan" and the "Institute Plan,"
respectively) for the benefit of certain employees. In 1996, Mr. Baum received
an award of 50 shares of phantom stock under the plans. Under each plan, each
share of phantom stock granted entitles the owner of such share to an annual
payment equal to 0.001% of the respective company's net profits before taxes.
Upon the occurrence of certain "triggering events," including the
effectiveness of a registration statement filed in connection with an initial
public offering of common stock, each share of phantom stock granted to
employees of the affected company is entitled to payment equal to 0.001% of
the difference between the fair market value and the book value per share of
such company as of the end of the month preceding the triggering event.
Although the effectiveness of the registration statement relating to the
Offering is a triggering event under the ALS Plan, it is not a triggering
event under the Institute Plan. Nevertheless, pursuant to authority granted to
it under the terms of each plan, the Board of Directors of the Company
determined that it would be in the best interests of employees to terminate
the Institute Plan concurrently with the ALS Plan, and amend the ALS Plan to
provide for payments based on the fair market value of the Company. In
connection with such determination, the Company will make appropriate payments
to all covered employees and institute the 1997 Stock Incentive Plan. As a
result, approximately $1.3 million will be paid out under the plans, and, of
this amount, Messrs. Baum, Hickey, Welch, and Fickey will receive
approximately $264,000, $176,000, $110,000 and $22,000, respectively (assuming
an initial public offering price of $13.00 per share). See "Use of Proceeds."

33
<PAGE>

CERTAIN TRANSACTIONS

Pursuant to an Asset Purchase Agreement dated as of August 1, 1996, as
subsequently amended as of February 25, 1997 (the "Asset Purchase Agreement"),
by and among Welch Publishing, Inc. (formerly known as IPS Publishing, Inc.
("Welch Publishing")), IPS and Timothy P. Welch, individually and as sole
trustee of the Timothy Peter Welch Revocable Trust (the "Welch Trust"), IPS
purchased substantially all of the assets of Welch Publishing for $5.0 million
plus the assumption of certain of its liabilities and the obligation to make
certain future contingent payments in the event of a closing of an initial
public offering by the Company (the "Contingent Payments"). IPS's obligations
under the Asset Purchase Agreement have since been assumed by the Company. Of
the total purchase price, $3.1 million was paid to the Welch Trust at closing,
$1.5 million was deposited pursuant to an Escrow Agreement, which amount will
be paid to the Welch Trust at the closing of the Offering, and the remaining
$350,000 was paid on August 1, 1997. In addition, upon the closing of the
Offering, the Welch Trust and two current employees of IPS will receive an
aggregate of approximately 38,461 shares of Common Stock (assuming an initial
public offering price of $13.00 per share) from the Company in satisfaction of
the Company's obligations with respect to the Contingent Payments. The Welch
Trust, of which Mr. Welch is the trustee and sole beneficiary, will receive
approximately 34,850 of these shares of Common Stock. Mr. Welch also has an
understanding with the Company that he will be able to purchase up to an
aggregate of $500,000 of Common Stock in the Offering. See "Underwriting." In
connection with the Asset Purchase Agreement, Mr. Welch entered into an
Employment Agreement with IPS. See "Management--Management Employment
Agreement."

In order to facilitate the purchase of the assets of the IPS business and to
provide working capital to IPS after the acquisition, Judith Paul and Terrance
Paul, the Company's principal shareholders, each (i) made a capital
contribution of $100,000 to IPS, and (ii) loaned IPS $2.35 million. In
connection with the loans to IPS, IPS issued each of the Pauls a promissory
note in the principal amount of $2.35 million and bearing interest at an
annual rate of 6.5%. The entire balance of principal and accrued interest for
each note is due and payable on January 2, 1998. The notes may be prepaid
without penalty. A portion of the proceeds from the Offering will be used to
prepay the notes. See "Use of Proceeds."

Effective January 2, 1997, Judith Paul and Terrance Paul contributed all of
the outstanding stock of IPS and the Institute to ALS in return for an
aggregate of 319,948 shares of Common Stock.

In August 1997, the Company and its shareholders, including Judith and
Terrance Paul and Mark J. Bradley, as trustee of the Terrance and Judith Paul
Descendants' Trust (collectively, the "Shareholders"), entered into an
agreement whereby the Company has agreed to indemnify the Shareholders for the
taxes attributable to any increase in taxable income allocable to them in the
event of any audit of, or other adjustment to, the Company's tax returns. The
Shareholders have entered into a similar, separate agreement with the
Institute for the years during which the Institute filed an S corporation tax
return.

34
<PAGE>

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information known to the Company
concerning the beneficial ownership of the Company's Common Stock immediately
prior to the Offering by (i) each person known to the Company to be the
beneficial owner of more than 5% of the Company's outstanding Common Stock,
(ii) each director, (iii) each named executive, and (iv) all executive
officers and directors as a group. Except as otherwise indicated, the address
of each shareholder listed below is 2911 Peach Street, Wisconsin Rapids,
Wisconsin 54495-8036.

<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY OWNED COMMON STOCK
PRIOR TO BENEFICIALLY OWNED
OFFERING(1) AFTER OFFERING(1)(2)
------------------ ------------------
NAME NUMBER PERCENT NUMBER PERCENT
- ---- ---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Judith A. Paul......................... 6,343,645 46.3% 6,343,645 38.5%
Terrance D. Paul....................... 6,343,645 46.3 6,343,645 38.5
Mark J. Bradley, as Trustee of the
Terrance
and Judith Paul Descendants' Trust(3). 963,843 7.0 963,843 5.8
Michael H. Baum........................ 0 0 0 0
John R. Hickey......................... 0 0 0 0
Timothy P. Welch(4).................... 34,850 * 34,850 *
All executive officers and directors as
a group (6 persons)................... 13,685,983 99.9 13,685,983 82.9
</TABLE>
- --------
* Less than 1% of the outstanding Common Stock.
(1) Except as otherwise noted, the persons named in this table have sole
voting and investment power with respect to all shares of Common Stock
listed.
(2) Does not reflect shares of Common Stock which may be purchased in the
Offering.
(3) The address of the Trustee of the Terrance and Judith Paul Descendants'
Trust is 500 Third Street, Suite 700, Wausau, Wisconsin 54403.
(4) Reflects shares of Common Stock to be issued upon the closing of this
Offering to the Welch Trust, of which Mr. Welch is the beneficial owner,
in connection with the Company's acquisition of IPS (assuming an initial
public offering price of $13.00 per share). See "Certain Transactions."

35
<PAGE>

DESCRIPTION OF CAPITAL STOCK

The following description is a summary only and is qualified in its entirety
by reference to the Company's Amended and Restated Articles of Incorporation
(the "Articles of Incorporation") and Amended and Restated By-Laws (the "By-
Laws") and the Wisconsin Business Corporation Law (the "WBCL").

GENERAL

The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, par value $0.01 per share, and 5,000,000 shares of preferred
stock, par value $0.01 per share (the "Preferred Shares"). Immediately prior
to completion of the Offering, there will be 13,689,594 shares of Common Stock
issued and outstanding (including 38,461 shares to be issued upon closing of
the Offering at an assumed initial public offering price of $13.00 per share
in connection with the Company's acquisition of IPS) and no Preferred Shares
issued and outstanding. Following the Offering, there will be 16,489,594
shares of Common Stock outstanding. At August 25, 1997, there were three
record holders of the Common Stock.

COMMON STOCK

Holders of the Common Stock are entitled to one vote per share on all
matters to be voted on by shareholders. Voting rights are not cumulative, and,
therefore, holders of a majority of the Common Stock are able to elect all of
the Company's directors. Holders of Common Stock are entitled to receive
dividends when, as and if declared by the Board of Directors in its discretion
out of funds legally available therefor. Subject to the rights of any holders
of outstanding Preferred Shares, upon liquidation or dissolution of the
Company, the holders of Common Stock will be entitled to receive on a pro rata
basis all assets remaining for distribution to shareholders. The Common Stock
does not have preemptive or other subscription rights, conversion rights or
sinking fund provisions. All shares of Common Stock currently outstanding are,
and the Common Stock to be issued in the Offering will, upon issuance be,
fully paid and non-assessable except to the extent provided in Section
180.0622(2)(b) of the WBCL. Under Section 180.0622(2)(b), holders of Common
Stock are liable up to the amount equal to the par value of the Common Stock
owned by such holders for all debt owing to Company employees for services
performed for the Company, but not exceeding six months' service in any one
case. Certain Wisconsin courts have interpreted "par value" to mean the full
amount paid upon the purchase of the Common Stock.

PREFERRED SHARES

The Board of Directors of the Company is authorized, without further
shareholder action, to issue Preferred Shares in one or more series and to fix
and determine the relative rights and preferences thereof, including voting
rights, dividend rights, liquidation rights, redemption provisions, sinking
fund provisions and/or conversion rights. Although there is no current
intention to do so, the Board of Directors may issue such Preferred Shares
with voting, dividend, liquidation and/or other rights that could adversely
affect the holders of Common Stock and that could have the effect of delaying,
deferring or preventing a change in control of the Company.

CERTAIN STATUTORY AND OTHER PROVISIONS

The provisions of the Company's Articles of Incorporation and By-Laws and
the WBCL described in this section may delay or make more difficult
acquisitions or changes of control of the Company not approved by the
Company's Board of Directors. Such provisions have been implemented to enable
the Company, particularly (but not exclusively) in the initial years of its
existence as a publicly-traded company, to develop its business in a manner
which will foster its long-term growth without disruption caused by the threat
of a takeover not deemed by its Board of Directors to be in the best interests
of the Company and its shareholders. Such provisions could have the effect of
discouraging third parties from making proposals involving an acquisition or
change of control of the Company, although such proposals, if made, might be
considered desirable by a majority of the Company's shareholders. Such
provisions may also have the effect of making it more difficult for third
parties to cause the replacement of the current management of the Company
without the concurrence of the Board of Directors.

36
<PAGE>

Number of Directors; Removal; Vacancies. The Articles of Incorporation
provide that the number of directors shall be determined from time to time by
vote of a majority of the directors then in office, provided that in no case
shall the authorized number of directors be less than one or more than 15. The
Articles of Incorporation also provide that the Company's Board of Directors
shall have the exclusive right to fill vacancies on the Board of Directors,
including vacancies created by expansion of the Board or removal of a
director, and that any director elected to fill a vacancy shall serve until
the next annual meeting of shareholders. The Articles of Incorporation further
provide that directors may be removed by the shareholders but only for cause
and only by the affirmative vote of the holders of at least a majority of the
votes then entitled to be cast in an election of directors. This provision, in
conjunction with the provisions of the Articles of Incorporation authorizing
the Board to fill vacant directorships, could prevent shareholders from
removing incumbent directors without cause and fill the resulting vacancies
with their own nominees.

Shareholder Action by Written Consent; Special Meetings. The By-Laws do not
allow shareholders to act without a meeting of shareholders by less than
unanimous written consent. The By-Laws provide that special meetings of
shareholders may be called by either the Company's Chairman of the Board, Vice
Chairman of the Board, President, Chief Executive Officer or a majority of the
Board of Directors, and shall be called, if and as required by the WBCL, upon
written demand by holders of Common Stock with at least 10% of the votes
entitled to be cast at such a meeting.

Advance Notice for Raising Business or Making Nominations at Annual
Meetings. The Company's By-Laws establish an advance notice procedure for
shareholder proposals to be brought before an annual meeting of shareholders
of the Company and for nominations by shareholders of candidates for election
as directors at an annual meeting or a special meeting at which directors are
to be elected. Subject to any other applicable requirements, only such
business may be conducted at an annual meeting of shareholders as has been
brought before the meeting by, or at the direction of, the Company's Board of
Directors, or by a shareholder who has provided the Company timely written
notice of the shareholder's intention to bring such business before the
meeting. Only persons who are nominated by, or at the direction of, the
Company's Board of Directors, or who are nominated at the meeting by a
shareholder who has given timely written notice to the Company prior to the
meeting at which directors are to be elected, will be eligible for election as
directors of the Company.

To be timely, notice of nominations or other business to be brought before
an annual meeting must be received by the Company not later than 120 days
prior to the anniversary date of the annual meeting of shareholders in the
immediately preceding year. All such notices shall include: (i) a
representation that the person sending the notice is a shareholder of record
and will remain such through the record date for the meeting, (ii) the name
and address, as they appear on the Company's books, of such shareholder, (iii)
the class and number of the Company's shares which are owned beneficially and
of record by such shareholders and (iv) a representation that such shareholder
intends to appear in person or by proxy at such meeting to make the nomination
or move for the consideration of other business set forth in the notice.
Notice as to proposals with respect to any business to be brought before the
meeting other than the election of directors shall also set forth the text of
the proposal and may set forth any statement in support thereof that the
shareholder wishes to bring to the attention of the Company, and shall specify
any material interests of such shareholder in such business. Notice as to
nominations of a director shall set forth the name(s) of the nominee(s),
address(es) of each, a description of all arrangements or understandings
between the shareholder and each nominee and any person or persons (naming
such person or persons) pursuant to which the nomination or nominations are to
be made by the shareholder, the written consent of each nominee to serve as a
director if so elected and such other information as would be required to be
included in a proxy statement soliciting proxies for the election of the
nominee(s) of such shareholder.

Amendments to the Articles of Incorporation. The WBCL provides authority to
the Company to amend its Articles of Incorporation at any time to add or
change a provision that is required or permitted to be included in the
Articles of Incorporation or to delete a provision that is not required to be
included in the Articles of Incorporation. The Company's Board of Directors
may propose one or more amendments to the Company's Articles of Incorporation
for submission to shareholders and may condition its submission of the
proposed amendment on any basis if the Board of Directors notifies each
shareholder, whether or not entitled to vote, of the shareholders' meeting at
which the proposed amendment shall be voted upon. The meeting notice shall
state that the purpose, or one of the

37
<PAGE>

purposes, of the meeting is to consider and to act upon a proposed amendment
to the Articles of Incorporation. Any such notice shall contain or be
accompanied by a copy of summary of the amendment.

Amendments to By-Laws. The Articles of Incorporation and By-Laws both
provide that the holders of at least two-thirds of all of the Company's Common
Stock then outstanding and entitled to vote thereon shall have the power to
adopt, amend, alter, change or repeal the Company's By-Laws. The By-Laws
further provide that the Company's Board of Directors may amend or repeal the
existing By-Laws and adopt new By-Laws by the vote of at least a majority of
the directors present at a meeting at which a quorum is present, provided
that: (i) no By-Law adopted by shareholders shall be amended, repealed or
readopted by the Board of Directors if the By-Law so adopted so provides and
(ii) a By-Law adopted or amended by the shareholders that fixes a greater or
lower quorum requirement or a greater voting requirement for the Board of
Directors than otherwise provided in the WBCL may not be amended or repealed
by the Board of Directors unless the By-Law expressly provides that it may be
amended or repealed by a specified vote of the Board of Directors. Action by
the Board of Directors to adopt or amend a By-Law that changes the quorum or
voting requirement for the Board of Directors must meet the same quorum
requirement and be adopted by the same vote required to take action under the
quorum and voting requirement then in effect, unless a different voting
requirement is specified as provided by the preceding sentence. A By-Law that
fixes a greater or lower quorum requirement or a greater voting requirement
for shareholders or voting groups of shareholders than otherwise is provided
in the WBCL may not be adopted, amended or repealed by the Board of Directors.

Constituency or Stakeholder Provision. Under Section 180.0827 of the WBCL
(the "Wisconsin Stakeholder Provision"), in discharging his or her duties to
the Company and in determining what he or she believes to be in the best
interests of the Company, a director or officer may, in addition to
considering the effects of any action on shareholders, consider the effects of
the action on employees, suppliers, customers, the communities in which the
Company operates and any other factors that the director or officer considers
pertinent.

Wisconsin Antitakeover Statutes. Sections 180.1140 to 180.1144 of the WBCL
(the "Wisconsin Business Combination Statutes") regulate a broad range of
"business combinations" between a "resident domestic corporation" (which the
Company is) and an "interested stockholder." The Wisconsin Business
Combination Statutes define a "business combination" to include a merger or
share exchange, or a sale, lease, exchange, mortgage, pledge, transfer, or
other disposition of assets equal to at least 5% of the market value of the
stock or assets of the corporation or 10% of its earning power, or the
issuance of stock or rights to purchase stock with a market value equal to at
least 5% of the outstanding stock, the adoption of a plan of liquidation or
dissolution, and certain other transactions involving an "interested
stockholder." An "interested stockholder" is defined as a person who
beneficially owns 10% of the voting power of the outstanding voting stock of
the corporation or who is an affiliate or associate of the corporation and
beneficially owned 10% of the voting power of the then outstanding voting
stock within the last three years. Section 180.1141 of the Wisconsin Business
Combination Statute prohibits a corporation from engaging in a business
combination (other than a business combination of a type specifically excluded
from the coverage of the statute) with an interested stockholder for a period
of three years following the date such person becomes an interested
stockholder, unless the board of directors approved the business combination
or the acquisition of the stock that resulted in a person becoming an
interested stockholder before such acquisition. Accordingly, the Wisconsin
Business Combination Statutes' prohibition on business combinations cannot be
avoided during the three-year period by subsequent action of the board of
directors or shareholders. Business combinations after the three-year period
following the stock acquisition date are permitted only if (i) the board of
directors approved the acquisition of the stock by the interested stockholder
prior to the acquisition date, (ii) the business combination is approved by a
majority of the outstanding voting stock not beneficially owned by the
interested stockholder, (iii) the consideration to be received by shareholders
meets certain requirements of the statute with respect to form and amount or
(iv) the business combination is excluded from the business combination
restrictions of this section.

In addition, the WBCL provides, in Sections 180.1130 to 180.1133, that
business combinations involving a "significant shareholder" and an "issuing
public corporation" (each as defined below) are subject to a supermajority
vote of shareholders (the "Wisconsin Fair Price Statute"), in addition to any
approval otherwise required. A "significant shareholder," with respect to an
issuing public corporation, is defined as a person who beneficially owns,
directly or indirectly, 10% or more of the voting stock of the corporation, or
an affiliate of the corporation which

38
<PAGE>

beneficially owned, directly or indirectly, 10% or more of the voting stock of
the corporation within the last two years. An "issuing public corporation" is
defined as a Wisconsin corporation that has (i) total assets exceeding $1
million and a class of equity securities held of record by 500 or more persons
and (ii) at least 100 shareholders of record who have unlimited voting rights
and who are residents of Wisconsin. It is anticipated that after completion of
the Offering, the Company will be considered an "issuing public corporation."
Under the WBCL, the business combinations described above must be approved by
80% of the voting power of the corporation's stock and at least two-thirds of
the voting power of the corporation's stock not beneficially held by the
significant shareholder who is party to the relevant transaction or any of its
affiliates or associates, in each case voting together as a single group,
unless the following fair price standards have been met: (i) the aggregate
value of the per share consideration is equal to the higher of (a) the highest
price paid for any common stock of the corporation by the significant
shareholder in the transaction in which it became a significant shareholder or
within two years before the date of the business combination, (b) the market
value of the corporation's shares on the date of commencement of any tender
offer by the significant shareholder, the date on which the person became a
significant shareholder or the date of the first public announcement of the
proposed business combination, whichever is highest, or (c) the highest
liquidation or dissolution distribution to which holders of the shares would
be entitled, and (ii) either cash, or the form of consideration used by the
significant shareholder to acquire the largest number of shares, is offered.

Under Section 180.1150 (the "Wisconsin Control Share Statute") of the WBCL,
the voting power of shares, including shares issuable upon the exercise of
options, of an issuing public corporation held by any person or persons acting
as a group, in excess of 20% of the voting power in the election of directors,
is limited (in voting on any matter) to 10% of the full voting power of those
excess shares. This restriction does not apply to shares acquired
directly from the issuing public corporation, in certain specified
transactions, or in a transaction with respect to which the corporation's
shareholders have voted to approve restoration of the full voting power of
otherwise restricted shares.

Section 180.1134 (the "Wisconsin Defensive Action Restrictions") of the WBCL
provides that, in addition to the vote otherwise required by law or the
articles of incorporation of an issuing public corporation, the approval of
the holders of a majority of the shares entitled to vote is required before
such corporation can take certain action while a takeover offer is being made
or after a takeover offer has been publicly announced and before it is
concluded. Under the Wisconsin Defensive Action Restrictions, shareholder
approval is required for the corporation to (i) acquire more than 5% of the
outstanding voting shares at a price above the market price from any
individual who or organization which owns more than 3% of the outstanding
voting shares and has held such shares for less than two years, unless a
similar offer is made to acquire all voting shares, or (ii) sell or option
assets of the corporation which amount to at least 10% of the market value of
the corporation, unless the corporation has at least three independent
directors (directors who are not officers or employees) and a majority of the
independent directors vote not to have this provision apply to the
corporation. The restrictions described in clause (i) above may have the
effect of deterring a shareholder from acquiring shares of the Company's
Common Stock with the goal of seeking to have the Company repurchase such
shares at a premium over the market price.

Certain Antitakeover Effects. Certain provisions of the Company's Articles
of Incorporation and By-Laws may have significant antitakeover effects,
including the inability of the shareholders to remove directors without cause,
the ability of the remaining directors to fill vacancies, and the ability of
the Board of Directors to issue "blank check" preferred stock which, in turn,
allows the directors to adopt a so-called "rights plan" which would entitle
shareholders (other than a hostile bidder) to acquire stock of the Company at
a discount.

The explicit grant in the Wisconsin Stakeholder Provision of discretion to
directors to consider nonshareholder constituencies could, in the context of
an active "auction" of the Company, have antitakeover effects in situations
where the interests of stakeholders of the Company, including employees,
suppliers, customers and communities in which the Company does business,
conflict with the short-term maximization of shareholder value.

The Wisconsin Control Share Statute may deter any shareholder from acquiring
in excess of 20% of the outstanding voting stock of the Company and the
Wisconsin Fair Price Statute may discourage any attempt by a shareholder to
squeeze out other shareholders without offering an appropriate premium
purchase price. In addition, the Wisconsin Defensive Action Restrictions may
have the effect of deterring a shareholder from acquiring the Company's Common
Stock with the goal of seeking to have the Company repurchase the Common Stock
at a

39
<PAGE>

premium. The WBCL statutory provisions and the Company's Articles of
Incorporation and By-Law provisions referenced above are intended to encourage
persons seeking to acquire control of the Company to initiate such an
acquisition through arms-length negotiations with the Company's Board of
Directors, and to ensure that sufficient time for consideration of such a
proposal, and any alternatives, is available. Such measures are also designed
to discourage investors from attempting to accumulate a significant minority
position in the Company and then use the threat of a proxy contest as a means
to pressure the Company to repurchase shares of Common Stock at a premium over
the market value. To the extent that such measures make it more difficult for,
or discourage, a proxy contest or the assumption of control by a holder of a
substantial block of the Company's Common Stock, they could increase the
likelihood that incumbent directors will retain their positions, and may also
have the effect of discouraging a tender offer or other attempt to obtain
control of the Company, even though such attempt might be beneficial to the
Company and its shareholders.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Company is Firstar Trust Company.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have 16,489,594 shares of
Common Stock outstanding, excluding shares of Common Stock issuable pursuant
to the 1997 Stock Incentive Plan (assuming an initial public offering price of
$13.00 per share). See "Management -- Executive Compensation." Of these
shares, the 2,800,000 shares of Common Stock sold in the Offering will be
freely tradable without restriction under the Securities Act except for shares
of Common Stock purchased by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act, which shares will be subject to
the resale limitations (but not the holding period requirements) of Rule 144.
The remaining 13,689,594 shares will be "restricted securities" under the
Securities Act.

The Company and its principal shareholders have agreed not to offer, sell,
contract to sell or otherwise dispose of any of their shares of Common Stock
in the public market for a period of 180 days after the date of this
Prospectus without the prior written consent of Piper Jaffray Inc. Upon
expiration of the 180-day lock-up period, 13,651,133 shares of Common Stock
will be eligible for immediate sale in the public market, subject to
compliance with the volume and other limitations of Rule 144 described below.

In general, under Rule 144 as in effect on and after April 29, 1997, an
affiliate of the Company, or any other person (or persons whose Common Stock
is aggregated) who has beneficially owned restricted securities for at least
one year but less than two years, will be entitled to sell in any three-month
period a number of shares of Common Stock that does not exceed the greater of
(i) 1% of the outstanding Common Stock (approximately 165,000 shares after
completion of the Offering), or (ii) the average weekly trading volume during
the four calendar weeks immediately preceding the date on which notice of the
sale is filed with the Securities and Exchange Commission (the "SEC"). Sales
pursuant to Rule 144 are subject to certain requirements relating to manner of
sale, notice and availability of current public information about the Company.
A person (or persons whose Common Stock is aggregated) who is not deemed to
have been an affiliate of the Company at any time during the 90 days
immediately preceding the sale and who has beneficially owned the shares of
Common Stock for at least two years is entitled to sell such shares pursuant
to Rule 144(k) without regard to certain limitations described above.

The Company intends to file a registration statement under the Securities
Act to register the 1,500,000 shares of Common Stock issuable pursuant to the
1997 Stock Incentive Plan. Shares of Common Stock covered by this registration
statement will, when issued in accordance with the 1997 Stock Incentive Plan,
be eligible for sale in the public market (subject to the Rule 144 limitations
discussed above for "affiliates" of the Company).

Since there has been no public market for the Common Stock prior to this
Offering, no predictions can be made as to the effect, if any, that market
sales of Common Stock or the availability of such Common Stock for sale will
have on the market price of the Common Stock prevailing from time to time.
Nevertheless, sales of substantial amounts of Common Stock in the public
market could adversely affect the market price of such shares.

40
<PAGE>

UNDERWRITING

The Company has entered into a Purchase Agreement (the "Purchase Agreement")
with the underwriters listed in the table below (the "Underwriters"), for whom
Piper Jaffray Inc. and Montgomery Securities are acting as representatives
(the "Representatives"). Subject to the terms and conditions set forth in the
Purchase Agreement, the Company has agreed to sell to each Underwriter, and
the Underwriters have severally agreed to purchase, the number of shares of
Common Stock set forth opposite each Underwriter's name in the table below:

<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Piper Jaffray Inc........................................
Montgomery Securities....................................
---------
Total................................................ 2,800,000
=========
</TABLE>

Subject to the terms and conditions of the Purchase Agreement, the
Underwriters have agreed to purchase all of the Common Stock being sold
pursuant to the Purchase Agreement, if any is purchased (excluding Common
Stock covered by the over-allotment option granted to the Underwriters). In
the event of a default by any Underwriter, the Purchase Agreement provides
that, in certain circumstances, purchase commitments of nondefaulting
Underwriters may be increased or the Purchase Agreement may be terminated.

The Representatives have advised the Company that the Underwriters propose
to offer the Common Stock directly to the public initially at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such public offering price less a concession not in excess of
$ per share. Additionally, the Underwriters may allow, and such dealers
may reallow, a concession not in excess of $ per share to certain other
dealers. After the Offering, the public offering price and other selling terms
may be changed by the Underwriters.

Of the 2,800,000 shares of Common Stock offered hereby by the Company, up to
185,000 of such shares will be reserved for sale at the initial public
offering price to persons designated by the Company. Of these shares, Timothy
P. Welch, a Director of the Company, has an understanding with the Company
that he will be entitled to purchase up to an aggregate of $500,000 of Common
Stock (approximately 38,461 shares, assuming an initial public offering price
of $13.00 per share). There can be no assurance that such shares will be
purchased by these persons. Any such reserved shares of Common Stock not so
purchased will be reoffered immediately by the Underwriters to the public at
the initial public offering price.

The Company has granted to the Underwriters an option, exercisable by the
Representatives within 30 days after the date of this Prospectus, to purchase
up to an additional 420,000 shares of Common Stock at the same price per share
to be paid by the Underwriters for the other shares offered hereby. The
Underwriters may exercise such

41
<PAGE>

option solely for the purpose of covering over-allotments incurred in the sale
of shares of Common Stock offered hereby. To the extent such option to
purchase is exercised, each Underwriter will become committed to purchase such
additional shares of Common Stock in approximately the same proportion as set
forth in the above table.

The Representatives have informed the Company that neither they nor any
member of the National Association of Securities Dealers, Inc. participating
in the distribution of the Common Stock will make sales of the Common Stock
offered hereby to accounts over which they exercise discretionary authority
without the prior specific written approval of the customer.

The Offering of the shares of Common Stock is made for delivery when, as and
if accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the Offering without notice. The Underwriters
reserve the right to reject an order for the purchase of shares in whole or in
part.

The Company and its principal shareholders (holding in the aggregate of
13,685,983 shares of Common Stock upon completion of the Offering) have agreed
not to offer, sell, contract to sell or otherwise dispose of any of their
shares of Common Stock for the 180-day period after the date of this
Prospectus without the prior written consent of Piper Jaffray Inc.

Prior to the Offering, there has been no market for the Common Stock.
Consequently, the initial public offering price of the Common Stock will be
determined through negotiations among the Company and the Representatives.
Among the factors considered in such determination will be prevailing market
and economic conditions, the Company's revenue and earnings, estimates of the
business potential and prospects of the Company, the present state of the
Company's business operations, an assessment of the Company's management and
the consideration of the above factors in relation to the market valuations of
companies in similar businesses. The initial public offering price for the
Common Stock should not be considered an indication of the actual value of the
Common Stock offered hereby. In addition, there can be no assurance that an
active or orderly trading market will develop for the Common Stock or that the
Common Stock will trade in the public market subsequent to this Offering at or
above the initial public offering price.

During and after the Offering, the Underwriters may purchase and sell Common
Stock in the open market. These transactions may include overallotment,
stabilizing transactions and purchases to cover syndicate short positions
created in connection with the Offering. The Underwriters also may impose a
penalty bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the Common Stock sold in the Offering for their
account may be reclaimed by the syndicate if such securities are repurchased
by the syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Common Stock,
which may be higher than the price that might otherwise prevail in the open
market. These transactions may be effected on the Nasdaq National Market, in
the over-the-counter market or otherwise, and these activities, if commenced,
may be discontinued at any time.

The Common Stock has been approved for listing on the Nasdaq National Market
under the symbol "ALSI."

The Company and, under certain circumstances, Terrence Paul have jointly and
severally agreed to indemnify the Underwriters and their controlling persons
against certain liabilities, including liabilities under the Securities Act,
or to contribute to payments the Underwriters may be required to make in
respect thereof.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Godfrey & Kahn, S.C., Milwaukee, Wisconsin. Certain legal matters
in connection with the Offering will be passed upon for the Underwriters by
Sachnoff & Weaver, Ltd., Chicago, Illinois.

42
<PAGE>

EXPERTS

The combined financial statements of ALS, the Institute and IPS as of
December 31, 1995 and 1996 and for each of the three years in the period ended
December 31, 1996 and the statements of income, changes in shareholders'
equity and cash flows of IPS for the year ended December 31, 1995 and the
seven months ended July 31, 1996 included in this Prospectus and the
Registration Statement of which this Prospectus is a part have been audited by
Arthur Andersen LLP, independent auditors, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of
such firm as experts in giving such reports.

ADDITIONAL INFORMATION

The Company has filed with the SEC a Registration Statement on Form S-1
under the Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which constitutes part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits thereto. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to the Registration Statement
and the exhibits thereto. Statements contained in this Prospectus as to the
contents of any contract, agreement or any other document referred to are not
necessarily complete, and in certain circumstances reference is made to the
copy of such contract agreement or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. The Registration Statement and the exhibits thereto may be
inspected and copied at the public reference facilities maintained by the SEC
located at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 as well
as the regional offices of the SEC located at Citicorp Center, 14th Floor, 500
West Madison Street, Chicago, Illinois, 60661 and Seven World Trade Center,
13th Floor, New York, New York 10048. Copies of such material can also be
obtained at prescribed rates by writing to the SEC's Public Reference Section
at 450 Fifth Street, N.W., Washington, D.C., 20549. Such information may also
be accessed electronically by means of the SEC's Website on the Internet at
http://www.sec.gov.

As a result of the Offering, the Company will be subject to the requirements
of the Securities Exchange Act of 1934, as amended, and, in accordance
therewith, will file reports, proxy statements and other information with the
SEC on a periodic basis. Such reports, proxy statements and other information
filed by the Company with the SEC can be inspected and copied at the offices
of the SEC, at the Website listed above, and at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.

The Company intends to furnish its shareholders with annual reports
containing audited financial statements examined by its independent
accountants and quarterly reports containing unaudited financial information
for each of the first three fiscal quarters of each fiscal year.

43
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants................................ F-1
Combined Balance Sheets as of December 31, 1995 and 1996, Consolidated
Balance Sheet as of June 30, 1997 (unaudited) and Pro Forma
Consolidated Balance Sheet as of June 30, 1997 (unaudited)............. F-2
Combined Statements of Income for the Years Ended December 31, 1994,
1995 and 1996 and the Six Months Ended June 30, 1996 (unaudited) and
Consolidated Statement of Income for the Six Months Ended June 30, 1997
(unaudited)............................................................ F-3
Statements of Combined Equity for the Years Ended December 31, 1994,
1995 and 1996 and Statement of Consolidated Equity for the Six Months
Ended June 30, 1997 (unaudited)........................................ F-4
Combined Statements of Cash Flows for the Years Ended December 31, 1994,
1995 and 1996 and the Six Months Ended June 30, 1996 (unaudited) and
Consolidated Statement of Cash Flows for the Six Months Ended June 30,
1997 (unaudited)....................................................... F-5
Notes to Financial Statements........................................... F-6
IPS PUBLISHING, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants................................ F-14
Statements of Income for the Year Ended December 31, 1995 and the Seven
Months Ended July 31, 1996............................................. F-15
Statements of Changes in Shareholders' Equity for the Year Ended
December 31, 1995 and the Seven Months Ended July 31, 1996............. F-16
Statements of Cash Flows for the Year Ended December 31, 1995 and the
Seven Months Ended July 31, 1996....................................... F-17
Notes to Financial Statements........................................... F-18
</TABLE>

44
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
Advantage Learning Systems, Inc. and Affiliates:

We have audited the accompanying combined balance sheets of Advantage
Learning Systems, Inc. (a Wisconsin corporation) and Affiliates, referred to
as the "Companies" (see Note 1), as of December 31, 1995 and 1996, and the
related combined statements of income, equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Companies' management. Our responsibility is to
express an opinion of these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Advantage
Learning Systems, Inc. and Affiliates as of December 31, 1995, and 1996, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.

/s/ Arthur Andersen LLP

Milwaukee, Wisconsin,
April 8, 1997 (except
for the matter discussed
in Note 14(d) as to
which the date is August
21, 1997).

F-1
<PAGE>

ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES

COMBINED AND CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997 (UNAUDITED)

<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
ASSETS 1995 1996 1997 1997
------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents............. $ 275,762 $ 1,755,866 $ 2,564,407 $ 2,564,407
Accounts receivable, less
allowance of $48,000,
$161,000 and $323,000,
respectively............ 1,688,352 2,523,388 3,393,554 3,393,554
Inventories.............. 232,848 543,902 450,819 450,819
Prepaid expenses......... 325,512 265,026 803,805 803,805
Deferred income taxes.... -- -- -- 974,291
---------- ----------- ----------- -----------
Total current assets... 2,522,474 5,088,182 7,212,585 8,186,876
---------- ----------- ----------- -----------
Property, plant and
equipment:
Land and improvements.... 98,248 744,720 744,720 744,720
Buildings................ 893,488 7,977,735 7,963,118 7,963,118
Furniture, fixtures and
office equipment........ 623,613 1,071,002 1,162,908 1,162,908
Computer and production
equipment............... 805,974 1,531,231 2,071,254 2,071,254
---------- ----------- ----------- -----------
Total property, plant
and equipment......... 2,421,323 11,324,688 11,942,000 11,942,000
---------- ----------- ----------- -----------
Less--Accumulated
depreciation............ (419,574) (746,979) (1,188,798) (1,188,798)
---------- ----------- ----------- -----------
Net property, plant and
equipment............. 2,001,749 10,577,709 10,753,202 10,753,202
Other assets:
Building held for sale... -- 747,392 747,392 747,392
Deferred tax asset....... -- 1,601,708 -- 1,726,986
Intangibles, net......... -- 1,445,798 1,323,155 1,323,155
Capitalized software,
net..................... 237,007 393,956 282,855 282,855
---------- ----------- ----------- -----------
Total other assets..... 237,007 4,188,854 2,353,402 4,080,388
---------- ----------- ----------- -----------
Total assets........... $4,761,230 $19,854,745 $20,319,189 $23,020,466
========== =========== =========== ===========
<CAPTION>
LIABILITIES AND EQUITY
----------------------
<S> <C> <C> <C> <C>
Current liabilities:
Current portion long-term
debt.................... $ -- $ -- $ 700,000 $ 700,000
Accounts payable......... 236,993 332,689 694,451 694,451
Current portion of
deferred revenue........ 725,894 1,442,356 1,814,798 1,814,798
Payroll and employee
benefits................ 334,645 577,613 865,885 865,885
Retainage and amounts due
under construction
contract................ -- 1,151,157 198,382 198,382
Other current
liabilities............. 119,482 668,421 1,246,130 1,246,130
Due to former owner of
IPS..................... -- 350,000 350,000 350,000
Distribution payable to
shareholders............ -- -- -- 8,000,000
Amounts due under phantom
stock plan.............. -- -- -- 1,300,000
---------- ----------- ----------- -----------
Total current
liabilities........... 1,417,014 4,522,236 5,869,646 15,169,646
---------- ----------- ----------- -----------
Long-term debt............. -- 5,750,000 6,150,000 6,150,000
Notes payable to
shareholders.............. -- 4,700,000 4,700,000 4,700,000
Deferred revenue........... 731,198 1,109,519 1,229,990 1,229,990
Total equity............... 2,613,018 3,772,990 2,369,553 (4,229,170)
---------- ----------- ----------- -----------
Total liabilities and
equity................ $4,761,230 $19,854,745 $20,319,189 $23,020,466
========== =========== =========== ===========
</TABLE>

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

F-2
<PAGE>

ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES

COMBINED AND CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 (UNAUDITED)

<TABLE>
<CAPTION>
TWELVE MONTHS SIX MONTHS
------------------------------------ ----------------------
1994 1995 1996 1996 1997
---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Net sales:
Products.............. $8,088,132 $11,601,971 $18,930,334 $8,139,483 $13,743,474
Services.............. 162,726 1,003,417 3,450,758 1,334,389 2,801,307
---------- ----------- ----------- ---------- -----------
Total net sales..... 8,250,858 12,605,388 22,381,092 9,473,872 16,544,781
Cost of sales:
Products.............. 937,393 1,467,559 2,329,171 965,929 1,675,460
Services.............. 165,826 595,362 1,898,175 632,926 1,304,740
---------- ----------- ----------- ---------- -----------
Total cost of sales. 1,103,219 2,062,921 4,227,346 1,598,855 2,980,200
---------- ----------- ----------- ---------- -----------
Gross profit........ 7,147,639 10,542,467 18,153,746 7,875,017 13,564,581
Operating expenses:
Product development... 358,360 802,331 1,555,411 494,410 1,374,651
Selling and marketing. 2,551,070 4,200,701 6,638,822 3,058,705 4,451,930
General and
administrative....... 1,239,039 2,090,560 3,546,144 1,384,263 2,621,425
Purchased research and
development.......... -- -- 3,400,000 -- --
---------- ----------- ----------- ---------- -----------
Total operating
expenses........... 4,148,469 7,093,592 15,140,377 4,937,378 8,448,006
---------- ----------- ----------- ---------- -----------
Operating income.... 2,999,170 3,448,875 3,013,369 2,937,639 5,116,575
Other income (expense):
Interest income....... 24,170 17,068 34,752 8,752 48,916
Interest expense...... (177) -- (205,755) -- (368,920)
Other, net............ (1,159) (3,728) 15,898 9,079 (44,300)
---------- ----------- ----------- ---------- -----------
Income before taxes..... 3,022,004 3,462,215 2,858,264 2,955,470 4,752,271
---------- ----------- ----------- ---------- -----------
Income tax benefit
(expense).............. -- -- 1,601,708 -- (1,601,708)
---------- ----------- ----------- ---------- -----------
Net income.............. $3,022,004 $ 3,462,215 $ 4,459,972 $2,955,470 $ 3,150,563
========== =========== =========== ========== ===========
Pro Forma information
(note 4) (Unaudited)
Income before taxes... $ 2,858,264 $ 4,752,271
Income taxes.......... 1,157,597 1,924,670
----------- -----------
Net income............ $ 1,700,667 $ 2,827,601
=========== ===========
Net income per share.. $ 0.12 $ .20
Weighted average
shares outstanding... 14,266,518 14,266,518
=========== ===========
</TABLE>

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

F-3
<PAGE>

ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES
STATEMENTS OF COMBINED AND CONSOLIDATED EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)

<TABLE>
<CAPTION>
PREFERRED
COMMON STOCK(1) STOCK(2) ADDITIONAL
------------------- ------------- PAID IN RETAINED TOTAL
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
---------- -------- ------ ------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1993................... -- $ -- -- $ -- $ -- $ -- $2,866,150
Net income............ -- -- -- -- -- -- 3,022,004
Distributions to
shareholders......... -- -- -- -- -- -- (2,823,021)
---------- -------- --- ------ -------- ---------- ----------
Balance, December 31,
1994................... -- -- -- -- -- -- 3,065,133
Net income............ -- -- -- -- -- -- 3,462,215
Distributions to
shareholders......... -- -- -- -- -- -- (3,914,330)
---------- -------- --- ------ -------- ---------- ----------
Balance, December 31,
1995................... -- -- -- -- -- -- 2,613,018
Net income............ -- -- -- -- -- -- 4,459,972
Distributions to
shareholders......... -- -- -- -- -- -- (3,500,000)
Contribution from
shareholders......... -- -- -- -- -- -- 200,000
---------- -------- --- ------ -------- ---------- ----------
Balance, December 31,
1996................... -- -- -- -- -- -- 3,772,990
Recapitalization...... 13,651,133 136,511 -- -- 217,489 3,418,990 --
Net income............ -- -- -- -- -- 3,150,563 3,150,563
Distributions to
shareholders......... -- -- -- -- -- (4,554,000) (4,554,000)
---------- -------- --- ------ -------- ---------- ----------
Balance, June 30, 1997.. 13,651,133 $136,511 -- $ -- $217,489 $2,015,553 $2,369,553
========== ======== === ====== ======== ========== ==========
</TABLE>
- --------
(1) Common Stock, $0.01 par value, 50,000,000 shares authorized.
(2) Preferred Stock, $0.01 par value, 5,000,000 shares authorized.

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

F-4
<PAGE>

ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES

COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 (UNAUDITED)

<TABLE>
<CAPTION>
TWELVE MONTHS SIX MONTHS
------------------------------------- ----------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Reconciliation of net
income to net cash
provided by operating
activities:
Net income............ $ 3,022,004 $ 3,462,215 $ 4,459,972 $2,955,470 $3,150,563
Noncash (income)
expenses included in
net income--
Depreciation and
amortization........ 115,181 325,817 711,135 208,578 681,750
(Gain) Loss on
disposal of assets.. -- 24,925 (239) -- --
Loss on building held
for sale............ -- -- 200,000 -- --
Purchased research
and development..... -- -- 3,400,000 -- --
Deferred income
taxes............... -- -- (1,601,708) -- 1,601,708
Change in assets and
liabilities--
(Increase) decrease
in--
Accounts
receivable........ (509,974) (476,453) (755,765) (432,253) (870,165)
Inventory.......... (12,631) (161,052) (311,054) (192,798) 93,085
Prepaid expenses... (30,325) (204,779) 60,486 (65,938) (538,779)
Increase (decrease)
in--
Accounts payable
and other current
liabilities....... 172,544 352,780 858,332 980,192 1,227,743
Retainage and
amounts due under
construction
contract.......... -- -- 1,151,157 -- (952,775)
Deferred revenue... 586,090 790,517 1,030,783 391,101 492,910
----------- ----------- ----------- ---------- ----------
Net cash provided
by operating
activities....... 3,342,889 4,113,970 9,203,099 3,844,352 4,886,040
----------- ----------- ----------- ---------- ----------
Cash flows from
investing activities:
Purchase of property,
plant and equipment.. (363,866) (1,224,844) (9,897,551) (2,859,233) (619,712)
Capitalized software
development costs.... (240,485) (117,432) (365,444) (210,914) (3,787)
Acquisition of IPS.... -- -- (4,610,000) -- --
----------- ----------- ----------- ---------- ----------
Net cash used in
investing
activities....... (604,351) (1,342,276) (14,872,995) (3,070,147) (623,499)
----------- ----------- ----------- ---------- ----------
Cash flows from
financing activities:
Proceeds from
issuances of stock... -- -- 200,000 -- --
Proceeds from long-
term debt and notes
payable to
shareholders -- -- 10,600,000 914,478 1,100,000
Payments on debt...... -- -- (150,000) -- --
Distributions to
shareholders......... (2,823,021) (3,914,330) (3,500,000) (1,600,000) (4,554,000)
----------- ----------- ----------- ---------- ----------
Net cash provided
by (used in)
financing
activities....... (2,823,021) (3,914,330) 7,150,000 (685,522) (3,454,000)
----------- ----------- ----------- ---------- ----------
Net increase (decrease)
in cash............... (84,483) (1,142,636) 1,480,104 88,683 808,541
Cash and cash
equivalents, beginning
of period............. 1,502,881 1,418,398 275,762 275,762 1,755,866
----------- ----------- ----------- ---------- ----------
Cash and cash
equivalents, end of
period................ $ 1,418,398 $ 275,672 $ 1,755,866 $ 364,445 $2,564,407
=========== =========== =========== ========== ==========
</TABLE>

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

F-5
<PAGE>

ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES

NOTES TO FINANCIAL STATEMENTS

(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND 1997 IS UNAUDITED)

(1) COMBINATION

The combined financial statements include the financial results of Advantage
Learning Systems, Inc. ("ALS"), the Institute for Academic Excellence, Inc.
("Institute") and, since its date of acquisition (see Note 3), IPS Publishing,
Inc. ("IPS"), collectively the "Companies." The Companies are all under common
ownership. The Companies conduct their business within one industry segment.
Combined equity represents the combination of the common stock, paid-in
capital and retained earnings of each of the Companies. Effective January 2,
1997, the Institute and IPS became wholly-owned subsidiaries of ALS (see Note
14). As a result, subsequent periods are presented on a consolidated basis.
All significant intercompany transactions have been eliminated in the combined
and consolidated financial statements.

(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. ALS has also developed S.T.A.R., a
computer-adaptive reading test and database which provides reading scores
correlated to national norms in ten minutes or less at the computer.

The Institute develops and delivers the Reading Renaissance program, which
provides educators with professional development training to most effectively
use the Accelerated Reader, S.T.A.R. and the learning information they
generate.

IPS provides algorithm-based software for assessment and skills practice in
math and science, including MathCheck and Objective Tracker.

(3) ACQUISITION

Effective August 1, 1996, IPS Acquisition, Inc. ("Acquisition") acquired
substantially all of the assets of IPS. Acquisition was formed by the
shareholders of ALS for the sole purpose of acquiring certain assets of IPS.
Acquisition was capitalized with $200,000 of equity and $4.7 million of loans
from shareholders. Subsequent to the transaction, Acquisition changed its name
to IPS Publishing, Inc.

The acquisition was accounted for under the purchase method of accounting.
The purchase price ($4,610,000 in cash and $350,000 due in 1997) was allocated
based on fair values as follows:

<TABLE>
<S> <C>
Current assets................................................ $ 101,000
Plant & equipment............................................. 26,000
Intangibles................................................... 4,948,000
Current liabilities........................................... (115,000)
----------
Purchase price............................................ $4,960,000
==========
</TABLE>

A certain portion of the purchase price (approximately $1.5 million) was
placed in escrow. At the discretion of the seller, such amounts can remain in
escrow or be withdrawn. If not withdrawn, the seller will receive additional
consideration as a return on the amount which was placed in escrow. In
addition, the purchaser is allowed to borrow funds in the escrow up to
$400,000. No such borrowings have taken place. The contingent consideration is
equal to the greater of the amount in escrow times (i) 10% or (ii) the
percentage of appreciation of ALS stock between the IPO price and closing
price on December 31, 1997, if ALS completes an IPO prior to December 1, 1997
(see Note 14).

The purchase included the acquisition of certain in process research and
development included in intangibles above, which resulted in a charge to
income of $3,400,000 for the year ended December 31, 1996. The amount
allocated to the in process research and development was determined by
appraisal. The projects in process require resolution of high-risk development
and testing issues in order to reach technological feasibility. At the date of
acquisition, the purchased technology had no alternative uses.

F-6
<PAGE>

ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Unaudited pro forma results of operations assuming the acquisition of IPS as
of January 1, 1995 and the $3,400,000 write-off of purchased research and
development in 1996 would be as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1995 1996
----------- -----------
<S> <C> <C>
Net sales......................................... $13,733,000 $23,062,000
Net income........................................ 2,972,000 4,199,000
</TABLE>

(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 amounts 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

Revenue from product sales is recognized when the products are shipped, net
of estimated allowances for bad debts and for product returns and exchanges.
Insignificant post-contract support obligations, primarily telephone support
provided by ALS, are also accrued for at the time of the sale.

Revenue from IPS's custom products (see Note 2) is recognized on the
percentage of completion method. IPS defers revenue for advance payments from
customers that are in excess of revenues earned. Included in receivables at
December 31, 1996 and June 30, 1997 is $37,000 and $95,000, respectively, of
amounts earned on contracts which are not yet billable.

The Institute generates service revenue both from (i) conducting seminars
and (ii) contracts with schools and school districts to provide training
programs and consulting services. The Institute recognizes revenue from the
seminars at the time the seminar actually takes place. For school and school
district contracts, revenue is generally recognized when the training session
is performed, while certain support services are recognized on a straight-line
basis over the life of the contract. The Institute includes as deferred
revenue (i) prepayments on contract revenues and (ii) payments received for
seminars not yet held.

Service revenues also include separate maintenance fees whereby ALS provides
ongoing customer support and product upgrades. Such contracts are reflected as
deferred revenue and are amortized ratably over the 24 month term of the
maintenance period which begins after the expiration of the six months (twelve
months for contracts sold prior to May 1996) of free support included with the
purchase of the software.

For purposes of the Statements of Cash Flows, the Companies consider all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents. Cash and cash equivalents are carried at cost,
which approximates fair market value.

(d) Supplemental disclosure of cash flow information

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31 SIX MONTHS ENDED JUNE 30
----------------- ------------------------
1994 1995 1996 1996 1997
---- ---- ------- ---- --------------
<S> <C> <C> <C> <C> <C>
Cash paid for:
Interest.................... -- -- $94,000 -- $ 213,000
Income taxes................ -- -- -- -- --
</TABLE>

F-7
<PAGE>

ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(e) Inventories

Inventories are valued at the lower of first-in, first-out (FIFO) cost or
market. Inventories primarily consist of purchased materials which include
manuals, diskettes and motivational items.

(f) 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, 1995 and 1996, and June 30,
1997, capitalized catalog costs of approximately $183,000, $29,000 and
$105,000, respectively, are included in prepaid expenses. All other
advertising costs are expensed the first time the advertising takes place.
Advertising expenses for 1994, 1995 and 1996 were approximately $1,235,000,
$1,854,000 and $2,999,000, respectively. Advertising expenses for the six
months ended June 30, 1996 and 1997 were $1,414,000 and $1,967,000,
respectively.

(g) 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. The estimated useful lives of the
assets are as follows: building--25 to 40 years; furniture, fixtures and
office equipment--5 to 8 years; and computer and production equipment--3 to 5
years. Accelerated depreciation methods are used for income tax 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.

(h) Software development costs

In accordance with Statement of Financial Accounting Standards ("SFAS") No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," the Companies capitalize certain software development
costs incurred after technological feasibility is achieved. Capitalized costs
are reported at the lower of unamortized 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. Amounts capitalized were approximately $240,000, $117,000 and
$365,000 in 1994, 1995 and 1996, respectively. Amounts capitalized in the six
months ended June 30, 1996 and 1997 were $211,000 and $4,000, respectively.
Amortization expense of approximately $0, $120,000 and $208,000 for the years
ended December 31, 1994, 1995 and 1996, respectively, and $66,000 and $115,000
for the six months ended June 30, 1996 and 1997, respectively, is included in
cost of sales--products in the statements of income. Accumulated amortization
of capitalized software development costs was $120,000, $328,000 and $443,000
as of December 31, 1995 and 1996, and June 30, 1997, respectively.

(i) Sales and concentration of credit risks

For the years ended December 31, 1994, 1995 and 1996, one customer (a book
distributor) contributed 2.6%, 12.5% and 15.2% of total combined revenues,
respectively. For the six months ended June 30, 1996 and 1997, this customer
contributed 16.0% and 13.6%, respectively. No other customer represented more
than 10% of combined revenues. At December 31, 1995 and 1996, and June 30,
1997, this customer had a receivable balance of 17.3%, 12.9% and 16.0% of
combined trade receivables, respectively.

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

F-8
<PAGE>

ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(j) Pro forma information (unaudited)

In connection with the initial public offering, ALS, the Institute and IPS
will no longer be treated as S corporations for tax purposes.

Pro forma income taxes reflect the application of statutory corporate income
tax rates to the net income as if the termination of the S corporation status
of the Companies had occurred on January 1, 1996. The effective derived income
tax rate is 40.5%.

Pro forma net income per share and weighted average shares outstanding
reflects (i) the shares outstanding as of January 2, 1997 reflecting the
issuance of shares by ALS to acquire IPS and the Institute, (ii) the stock
dividend, and (iii) the issuance of 615,385 shares (assuming an offering price
of $13 per share) to pay the estimated $8,000,000 S Corporation Distribution.
Historical earnings per share of the Companies have not been presented because
such amounts are not meaningful.

The pro forma balance sheet as of June 30, 1997 reflects the recognition of
a liability for the S corporation distribution, a $1.3 million liability for
payments to be made for the phantom stock plan, both of which will be paid
from the proceeds of the Offering, and the estimated deferred taxes as if the
Companies were C corporations at June 30, 1997. A corresponding reduction in
combined equity is reflected as a result of these liabilities.

(k) Interim Financial Statements

The results of operations for the six months ended June 30, 1996 and 1997
are not necessarily indicative of the results to be expected for the full
fiscal year. All information as of June 30, 1997 and for the six months ended
June 30, 1996 and 1997 is unaudited, but, in the opinion of management,
contains all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the combined and consolidated financial position,
results of operations and cash flows of the companies.

(5) INTANGIBLE ASSETS

Intangible assets (acquired in the IPS acquisition) are amortized on the
straight line basis over their estimated useful lives and are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1997 USEFUL LIFE
----------------- ------------- -----------
<S> <C> <C> <C>
Algorithms.................... $ 510,000 $ 510,000 5 years
Tradename..................... 210,000 210,000 10 years
Assembled workforce........... 90,000 90,000 7 years
Goodwill...................... 738,000 738,000 7 years
---------- ----------
1,548,000 1,548,000
Accumulated amortization...... (102,202) (224,845)
---------- ----------
Net intangibles............... $1,445,798 $1,323,155
========== ==========
</TABLE>

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

(6) BUILDING HELD FOR SALE

In December, 1996, ALS completed construction of its new building. The
building previously occupied by ALS is being offered for sale. In 1996, a
reserve of $200,000 was recorded as a component of general and administrative
expense in the combined statements of income to reflect the write-down of the
net book value of the building to its estimated fair value.

F-9
<PAGE>

ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(7) INCOME TAXES

The shareholders of ALS and the Institute have elected to have these
companies treated as "S corporations" under the Internal Revenue Code. As an S
corporation, a company's taxable income or loss is includable in the
individual tax returns of its shareholders for Federal and state income tax
purposes. Accordingly, the accompanying financial statements do not include
any provision or liability for current or deferred Federal or state income
taxes related to ALS or the Institute.

IPS was taxed as a C corporation under the provisions of the Internal
Revenue Code and similar state tax laws from the time of its acquisition on
August 1, 1996 through December 31, 1996. Therefore, included in the 1996
combined financial statements are income tax provisions and related deferred
income taxes for IPS from the date of its acquisition until the end of 1996.
Subsequently, the shareholders of IPS elected to be taxed as an S corporation
effective January 1, 1997. Consequently, the deferred tax asset recognized in
1996 was written off in 1997.

Upon completion of the Offering, ALS, the Institute and IPS will become
subject to federal and state income taxes and will recognize deferred taxes in
accordance with Statement of Financial Accounting Standards No. 109 ("SFAS
109") "Accounting for Income Taxes."

The provision for income taxes consists of:

<TABLE>
<CAPTION>
12 MONTHS ENDED
DECEMBER 31,
1996
---------------
<S> <C>
Current--
Federal................................................. $ --
State................................................... --
----------
Total current......................................... --
Deferred.................................................. 1,601,708
----------
Total income tax benefit.............................. $1,601,708
==========
</TABLE>

The following is a reconciliation of IPS's effective income tax rate to the
statutory Federal tax rate:

<TABLE>
<S> <C>
Statutory Federal rate.............................................. 35.0%
State taxes net of Federal benefit.................................. 5.5
----
40.5%
====
</TABLE>

Temporary differences which give rise to the net deferred tax asset are as
follows:

<TABLE>
<S> <C>
Accruals not deductible....................................... $ 2,210
Intangibles................................................... 1,362,727
Net tax operating loss carryforward........................... 236,771
----------
Net deferred tax asset.................................... $1,601,708
==========
</TABLE>

No valuation allowance has been recorded as the net deferred tax assets are
assumed to be realizable through future profitable operations of IPS. The tax
operating loss carryforward expires in 2011.

Upon completion of the Offering, IPS will be subject to federal and state
taxes as a C corporation. Accordingly, the previously recognized deferred tax
asset will be reinstated.

F-10
<PAGE>

ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(8) LINE OF CREDIT

The Companies have a bank line of credit through November 1997, which
provides for borrowings of up to $225,000. The line of credit bears interest
at the prime rate (8.25% at December 31, 1996), plus 4.9%. Amounts borrowed,
approximately $2,400 as of December 31, 1995, are included in accounts
payable. The line of credit was not utilized during 1996 or the first half of
1997.

(9) NOTES PAYABLE TO SHAREHOLDERS

Notes payable to shareholders consist of notes payable that financed the
acquisition of IPS. The notes accrue interest at an annual rate of 6.5%. The
entire balance of principal and interest is due on January 2, 1998. Interest
expense for the five month period ended December 31, 1996 and the six month
period ended June 30, 1997 was approximately $127,000 and $153,000,
respectively.

(10) LONG-TERM DEBT

Long-term debt consisted of the following at December 31, 1996 and June 30,
1997:

<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Note payable to Woodlands Building Center, due
December 31, 1998, noninterest bearing.............. $ 50,000 $ 50,000
Note payable to bank, payable in annual installments
of $700,000 beginning March 1, 1998 through March 1,
2002 at which time the note is due in full, interest
at the 30-day LIBOR rate (5.53% at December 31,
1996) plus 1.25%, with a maximum interest rate of
8.5%, payable monthly (a)........................... 5,700,000 6,800,000
---------- ----------
Total................................................ 5,750,000 6,850,000
Less--Current maturities............................. -- (700,000)
---------- ----------
Long-term debt....................................... $5,750,000 $6,150,000
========== ==========
</TABLE>
- --------
(a) Borrowings are secured by substantially all assets. The note payable to
bank contains certain covenants, which, among other things, require
maintenance of a minimum tangible net worth and leverage ratio. In 1996,
ALS violated the leverage ratio covenant which has been subsequently
waived by the Bank through December 31, 1997.

Aggregate maturities of long-term debt outstanding at December 31, 1996 and
June 30, 1997, are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------
<S> <C> <C>
1997.................................................... $ -- $ --
1998.................................................... 750,000 750,000
1999.................................................... 700,000 700,000
2000.................................................... 700,000 700,000
2001.................................................... 700,000 700,000
Thereafter.............................................. 2,900,000 4,000,000
---------- ----------
$5,750,000 $6,850,000
========== ==========
</TABLE>

The fair value of debt, based on current market rates offered on notes with
similar terms and maturities, approximates carrying value.

F-11
<PAGE>

ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(11) LEASE COMMITMENTS

The Institute leases its offices under an operating lease agreement
effective May 1, 1995, with a five year term and a renewal option. The lease
calls for a monthly base rent of approximately $7,900 per month plus a pro
rata share of real estate taxes, utilities and insurance, with an annual
escalation rate based on the Consumer Price Index up to 3.5% annually. IPS is
also party to various operating leases for facilities and equipment which
expire at various dates through 1999.

Rent expense for 1994, 1995 and 1996 was approximately $21,000, $116,000 and
$159,000, respectively for the Companies. Rent expense for the six months
ended June 30, 1996 and 1997 was approximately $74,000 and $103,000,
respectively.

Future approximate minimum rental payments (including estimated operating
costs) required under the operating leases as of December 31, 1996, and June
30, 1997, are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
<S> <C> <C>
1997...................................................... $190,000 $ 96,000
1998...................................................... 179,000 184,000
1999...................................................... 145,000 153,000
2000...................................................... 47,000 51,000
Thereafter................................................ -- --
</TABLE>

(12) DEFINED CONTRIBUTION BENEFIT PLAN

The Companies have a defined contribution benefit plan covering all of its
full-time employees meeting certain service requirements. The plan provides
for matching employer contributions based on 67% of employees' elective
contributions up to 6% of compensation. The plan allows employee contributions
up to 15% of compensation. Discretionary employer contributions may also be
made to the plan. There were no discretionary contributions made in 1994,
1995, 1996 or the six months ended June 30, 1997. Expense under the plan
totaled approximately $42,000 in 1994, $93,000 in 1995 and $192,000 in 1996.
Expense for the six months ended June 30, 1996 and 1997 was $72,000 and
$131,000, respectively.

(13) PHANTOM STOCK PLAN

As an incentive for certain key employees, ALS and the Institute each have a
phantom stock plan. A total of 415 and 585 phantom shares have been issued as
of December 31, 1996 and June 30, 1997, respectively.

The terms of each plan include an annual per share payment in an amount
equal to .001% (.00001) of each of the entities net profit before tax. Expense
under the plans was approximately $4,000, $6,000, $21,000, $10,000 and $25,000
for the years ended December 31, 1994, 1995 and 1996, and the six months ended
June 30, 1996 and 1997, respectively. In addition, the plans call for payments
if a "Triggering Event" occurs which is generally defined as the sale of
substantially all the assets, a change in control or filing of a registration
statement that becomes effective. If such a Triggering Event occurs, each
phantom share will generally be paid an amount equal to .001% of the product
of the fair market value per share less the book value per share multiplied by
the total shares outstanding.

(14) EVENTS SUBSEQUENT TO DECEMBER 31, 1996

(a) Effective January 2, 1997, the shareholders of IPS and the Institute
contributed their shares of IPS and the Institute to ALS in return for shares
of ALS. As a result, IPS and the Institute became wholly owned subsidiaries of
the Company. As of January 2, 1997, there were 15.9 million shares authorized
and 13.7 million shares of ALS stock issued and outstanding. Because the
Companies were under common control, there was no change in the net asset
value of the Institute or IPS as a result of the exchange of shares.

F-12
<PAGE>

ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(b) The filing of a Registration Statement that becomes effective is a
Triggering Event pursuant to the ALS phantom stock plan. Based on preliminary
estimates, the Company believes approximately $1.3 million will be paid and
expensed in the second half of 1997.

(c) In February 1997, the IPS purchase agreement was amended providing for
the release of the $1.5 million held in escrow and the issuance of $500,000 in
Common Stock in settlement of the contingent consideration, upon closing of
the Offering.

(d) In 1997, the Company executed a 133.31 for 1 stock split in the form of
two stock dividends. All share and per share information has been
retroactively adjusted.

(e) In March 1997, IPS filed an S Corporation election effective January 1,
1997. The provisions of SFAS 109 require that deferred tax assets and
liabilities should be eliminated at the date an enterprise ceases to be a
taxable entity. Accordingly, the previously recorded deferred tax asset of
$1.6 million was charged to income during the first quarter of 1997. The
deferred tax asset will be reinstated upon the completion of the Offering.

As discussed in Note 7, effective with the Offering, the Companies will no
longer be treated as S corporations for tax purposes. The Companies will be
subject to federal and state income taxes and will recognize deferred taxes in
accordance with SFAS 109. The impact of the change in taxpayer status upon
completion of the Offering is reflected in the pro forma balance sheet.

F-13
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholder of IPS Publishing, Inc.:

We have audited the accompanying statements of income, changes in
shareholder's equity and cash flows of IPS Publishing, Inc. (a Washington
corporation) for the year ended December 31, 1995 and the seven months ended
July 31, 1996. 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.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of IPS
Publishing, Inc. for the year ended December 31, 1995 and the seven months
ended July 31, 1996, in conformity with generally accepted accounting
principles.

/s/ Arthur Andersen LLP

Milwaukee, Wisconsin,
January 10, 1997.

F-14
<PAGE>

IPS PUBLISHING, INC.

STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
AND THE SEVEN MONTHS ENDED JULY 31, 1996

<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Net sales................................................ $1,670,934 $1,425,639
Operating expenses:
Production............................................. 203,296 86,660
Product development.................................... 441,151 442,951
Selling and marketing.................................. 338,214 252,989
General and administrative............................. 394,187 164,734
---------- ----------
1,376,848 947,334
---------- ----------
Income from operations................................... 294,086 478,305
Other income............................................. 9,302 58,113
---------- ----------
Net income............................................... $ 303,388 $ 536,418
========== ==========
</TABLE>

The accompanying footnotes are an integral part of these statements.

F-15
<PAGE>

IPS PUBLISHING, INC.

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995
AND THE SEVEN MONTHS ENDED JULY 31, 1996

<TABLE>
<CAPTION>
UNREALIZED
TREASURY UNDISTRIBUTED GAINS ON
STOCK EARNINGS INVESTMENTS TOTAL
--------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994...... $(165,000) $ 365,240 $ 21,168 $ 221,408
Net income.................... -- 303,388 -- 303,388
Unrealized gains.............. -- -- 27,752 27,752
--------- --------- -------- ---------
BALANCE, December 31, 1995...... (165,000) 668,628 48,920 552,548
Net income.................... -- 536,418 -- 536,418
Distribution.................. -- (430,000) -- (430,000)
Sale of investments........... -- -- (48,920) (48,920)
--------- --------- -------- ---------
BALANCE, July 31, 1996.......... $(165,000) $ 775,046 $ -- $ 610,046
========= ========= ======== =========
</TABLE>

The accompanying footnotes are an integral part of these statements.

F-16
<PAGE>

IPS PUBLISHING, INC.

STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
AND THE SEVEN MONTHS ENDED JULY 31, 1996

<TABLE>
<CAPTION>
1995 1996
-------- ---------
<S> <C> <C>
Cash provided by operations:
Net income................ $303,388 $ 536,418
Depreciation.............. 14,660 8,081
Gain on sale of
investments.............. -- (60,081)
Changes in current assets
and liabilities--
Accounts receivable...... (48,412) (562,166)
Accounts payable......... 6,185 12,720
Accrued liabilities...... (37,541) 338,540
Deferred revenue......... 165,878 (242,710)
Other.................... 1,377 (11,001)
-------- ---------
Net cash provided by
operations............. 405,535 19,801
Cash provided by (used for)
investment activities:
Proceeds from sale of
investments.............. -- 210,237
Purchases of property..... (18,053) (3,000)
Dividends reinvested...... (6,287) --
-------- ---------
Net cash provided by
(used for) investment
activities............. (24,340) 207,237
Cash (used for) financing
activities:
Shareholder distribution.. -- (430,000)
-------- ---------
Net increase (decrease) in
cash....................... 381,195 (202,962)
Cash, beginning of year..... 186,944 568,139
-------- ---------
Cash, end of year........... $568,139 $ 365,177
======== =========
</TABLE>

The accompanying footnotes are an integral part of these statements.

F-17
<PAGE>

IPS PUBLISHING, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1995 AND JULY 31, 1996

(1) BUSINESS DESCRIPTION

IPS Publishing, Inc. ("IPS") develops, produces and markets software that
uses proprietary algorithms to generate test questions for the education
industry. IPS has two major sources of revenue: off-the-shelf software and
custom software.

Off-the-Shelf Software--Off-the-shelf software consists of proven products
which are copyrighted such as Exam in a Can, MathCheck and ScienceCheck (to be
released). Exam in a Can consists of algorithm generated questions relating to
standard mathematic concepts (e.g. algebra, calculus, etc.) using the DOS and
Macintosh platforms. MathCheck and ScienceCheck use the Windows platform to
run the software. The off-the-shelf products are purchased primarily by
teachers and distributors of education products.

Custom Software--Custom software consists of customized software development
and production performed primarily for various publishers of educational
textbooks and school districts. IPS is contracted to develop and manufacture
the software that will be used to test concepts within the publisher's or
school district's textbooks. This software uses algorithms to enable the users
of the textbooks to customize tests.

(2) USE OF ESTIMATES

(3) ACQUISITION

Effective August 1, 1996, IPS Acquisition, Inc. ("Acquisition") acquired
substantially all of the assets of IPS. Acquisition was formed by the
shareholders of Advantage Learning Systems, Inc. ("ALS") for the sole purpose
of acquiring certain assets of IPS. Acquisition was capitalized with $200,000
of equity and $4.7 million of loans from shareholders. Subsequent to the
transaction, Acquisition changed its name to IPS Publishing, Inc.

Excluded from the transaction described above was a custom contract on which
IPS recognized revenues of $542,000 and $744,000 in the accompanying financial
statements for the year ended December 31, 1995 and the seven months ending
July 31, 1996, respectively.

(4) REVENUE RECOGNITION

Revenue from sales of IPS's off-the-shelf products is recognized upon
shipment. Revenue from IPS's custom products is recognized on the percentage
of completion method. IPS defers revenue for advance payments from customers
that are in excess of revenues earned. Receivables include amounts billed as
well as amounts earned on contracts which are not yet billable.

(5) INVENTORIES

IPS expenses as incurred various materials (diskettes) and supplies used to
produce, package and ship its products.

(6) PLANT AND EQUIPMENT

Plant and equipment, which consists primarily of office and computer
equipment, is stated at cost and is depreciated over the estimated useful
lives of the assets (five years) using the double declining method.

F-18
<PAGE>

IPS PUBLISHING, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(7) SOFTWARE DEVELOPMENT COSTS

IPS expenses all research and development costs associated with establishing
technological feasibility as incurred. From the time a software product is
technically feasible until the product is released, all research and
development costs are capitalized as computer software development costs.
During 1995 and 1996, there were no research and development costs
capitalized. In addition, there was no amortization of capitalized software.

(8) COMMITMENTS

IPS is party to various operating leases for facilities and equipment. Rent
expenses were $37,423 for the year ended December 31, 1995 and $17,390 for the
seven months ended July 31, 1996.

(9) CAPITAL STOCK

IPS has 100,000 shares of no par common stock authorized of which 5,555
shares are issued and 3,056 shares are outstanding.

(10) BENEFIT PLANS

IPS had a profit sharing plan under which discretionary amounts could be
paid to eligible employees. $90,000 and $67,350 was expensed under this plan
in the year ended December 31, 1995 and the seven months ended July 31, 1996,
respectively.

(11) INVESTMENTS

Investments consist of marketable equity securities and mutual funds.

Investments are accounted for according to the requirements of Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." IPS's investments are classified
as available-for-sale and are adjusted to their fair market value, with any
unrealized gains or losses being recorded as a separate component of
stockholders equity. Prior to the sale to Acquisition, all investments were
liquidated with all realized gains being recognized in the statement of
income.

(12) ROYALTIES

IPS was party to various royalty agreements which have since expired. Under
the terms of these contracts, $22,050 and $22,101 in royalty costs were
incurred for the year ended December 31, 1995 and the seven months ending July
31, 1996, respectively.

(13) INCOME TAXES

Under provisions of the Internal Revenue Code and similar state tax laws,
the shareholders have elected to treat IPS as an S Corporation for both
Federal and state income taxes. In lieu of corporate income taxes, the
shareholders of an S Corporation are taxed on their proportionate share of
IPS's taxable income. Therefore, no provision or liability for income taxes
has been included in the accompanying financial statements. Cash payments to
shareholders are treated as distributions and are made primarily to fund the
shareholders' estimated tax liabilities that result from reporting this
income.

F-19
<PAGE>

[PICTURES, GRAPHICAL INFORMATION]

<PAGE>

NO DEALER, SALES PERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHO-
RIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITA-
TION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION
IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OF-
FER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
OF THIS PROSPECTUS.

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

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 10
S Corporation Distribution................................................ 10
Dividend Policy........................................................... 10
Capitalization............................................................ 11
Dilution.................................................................. 12
Selected Historical and Pro Forma Combined and Consolidated Financial
Data..................................................................... 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 15
Business.................................................................. 21
Management................................................................ 30
Certain Transactions...................................................... 34
Principal Shareholders.................................................... 35
Description of Capital Stock.............................................. 36
Shares Eligible for Future Sale........................................... 40
Underwriting.............................................................. 41
Legal Matters............................................................. 42
Experts................................................................... 43
Additional Information.................................................... 43
Index to Financial Statements............................................. 44
</TABLE>

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

UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

2,800,000 Shares

LOGO

Common Stock

----------------
PROSPECTUS

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

Piper Jaffray inc.

Montgomery Securities

, 1997

<PAGE>

Page 2 of the Prospectus contains the following graphical material:
------------------------------------------------------------------

1. A picture of a man and a child looking at a computer and using the
Accelerated Reader.

2. A picture of a report generated by the Accelerated Reader.

3. The Company's logo and the Accelerated Reader's logo.

4. The statement "A leader in learning information systems."

The inside back cover of the Prospectus contains the following graphical
------------------------------------------------------------------------
material:
- --------

1. A picture of a woman and a child reading a book.

2. A picture of a report generated by S.T.A.R.

3. The Company's mission statement.

4. The Company's logo and its product logos.

5. A graphic showing the results of a survey involving the Accelerated
Reader.