##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549-0001




---

FORM 10-KSB

(MARK ONE)



|    |                                                                                  
|--- | ---------------------------------------------------------------------------------
|[X] | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES 
	 EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1999



|      |                                                                                       
|----- | --------------------------------------------------------------------------------------
|[   ] | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
	
	 EXCHANGE ACT OF 1934

For the transition period from
          to

Commission File Number 0-13741

ITC LEARNING CORPORATION

(Name of small business issuer in its charter)


|                                                                                               |  |                                                   
|---------------------------------------------------------------------------------------------- |  | --------------------------------------------------
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Maryland(State or other jurisdiction of
	incorporation or organization)                        |  | 52-1078263(I.R.S. Employer
	Identification Number)
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|13515 Dulles Technology Drive
	Herndon, Virginia 20171(Address of principal executive offices) |  | 20171(Zip Code)                                   

(703) 713-3335

Issuers telephone number


Securities registered under Section 12(b) of the Exchange
Act:

|                      |  |                                             
|--------------------- |  | --------------------------------------------
|                     
|                     
|                     
|                     
|None                  |  | None                                        
|(Title of each Class) |  | (Name of each exchange
	on which registered)

Securities registered under Section 12(g) of the Exchange
Act:

COMMON STOCK, $0.10 PAR VALUE

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

Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained in this form,
and no disclosure will be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this
Form 10-KSB.  [  ]

Issuers revenues for the year ended December 31, 1999
were $16,675,565. Aggregate market value of voting stock held by
non-affiliates and outstanding at February 29, 2000 was
$11,733,670. Amount was computed using the average bid and ask
price as of February 29, 2000, which was $2.96. As of
February 29, 2000, 3,964,078 shares of common stock were
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The information called for by Part III is incorporated by
reference to the Companys Definitive Proxy Statement for
its 2000 Annual Meeting of Stockholders.

Transitional Small Business Disclosure Format (check
one):  [  ]  Yes  [X]  No









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TABLE OF CONTENTS



|                                                                                                                        |  |  |  |  |  |  |  | 
|----------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|PART I                                                                                                                 
|Item 1. Description of Business                                                                                        
|Item 2. Description of Properties                                                                                      
|Item 3. Legal Proceedings                                                                                              
|Item 4. Submission of Matters to a Vote of Security Holders                                                            
|PART II                                                                                                                
|Item 5. Market for Common Equity and Related Stockholder Matters                                                       
|Item 6. Managements Discussion and Analysis of Financial Condition and Results of Operations                          
|Item 7. Financial Statements                                                                                           
|Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                           
|PART III                                                                                                               
|Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act
|Item 10. Executive Compensation                                                                                        
|Item 11. Security Ownership of Certain Beneficial Owners and Management                                                
|Item 12. Certain Relationships and Related Transactions                                                                
|Item 13. Exhibits and Reports on Form 8-K                                                                              
|SIGNATURES                                                                                                             



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ITC LEARNING CORPORATION

FORM 10-KSB

INDEX

|          |  |                                                                                                                  |  |      |    | 
|--------- |  | ---------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|          |  |                                                                                                                  |  | Page
|          |  |                                                                                                                  |  |     
|          |  | Part I                                                                                                           |  |      |    | 
|         
|         
|         
|         
|Item  1.  |  | Description of Business                                                                                          |  |      | 1  | 
|         
|         
|         
|         
|Item  2.  |  | Description of Properties                                                                                        |  |      | 4  | 
|         
|         
|         
|         
|Item  3.  |  | Legal Proceedings                                                                                                |  |      | 4  | 
|         
|         
|         
|         
|Item  4.  |  | Submission of Matters to a Vote of Security Holders                                                              |  |      | 4  | 
|          |  | Part II                                                                                                          |  |      |    | 
|         
|         
|         
|         
|Item  5.  |  | Market for Common Equity and Related Stockholder Matters                                                         |  |      | 4  | 
|         
|         
|         
|         
|Item  6.  |  | Managements Discussion and Analysis of Financial Condition
	and Results of Operations                           |  |      | 5  | 
|         
|         
|         
|         
|Item  7.  |  | Financial Statements                                                                                             |  |      | 10 | 
|         
|         
|         
|         
|Item  8.  |  | Changes in and Disagreements with Accountants on Accounting and
	Financial Disclosure                            |  |      | 32 | 
|          |  | Part III                                                                                                         |  |      |    | 
|         
|         
|         
|         
|Item  9.  |  | Directors, Executive Officers, Promoters and Control Persons;
	Compliance with Section 16(a) of the Exchange Act |  |      | 32 | 
|         
|         
|         
|         
|Item  10. |  | Executive Compensation                                                                                           |  |      | 34 | 
|         
|         
|         
|         
|Item  11. |  | Security Ownership of Certain Beneficial Owners and Management                                                   |  |      | 34 | 
|         
|         
|         
|         
|Item  12. |  | Certain Relationships and Related Transactions                                                                   |  |      | 34 | 
|         
|         
|         
|         
|Item  13. |  | Exhibits and Reports on Form 8-K                                                                                 |  |      | 35 | 



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##### Table of Contents






PART I




Item 1.  Description of Business

Overview

ITC Learning Corporation (ITC or the
Company) is a worldwide provider of education and
training software to professionals in business, education and
government organizations. Incorporated under the laws of the
state of Maryland in 1977 the Company develops, markets and
delivers specific libraries of interactive multimedia
computer-based training (CBT) courses designed for
CD-ROM, intranet and Internet delivery, thus enabling
organizations to effectively and efficiently deliver training to
improve individual and organizational performance.

During 1998, the Company began to offer its customers a skill
assessment service through its AdminSTAR learning
management system (LMS) product. AdminSTAR is a
 software package that identifies the skills necessary to perform
 individual job functions within any organization, and provides
an organized approach for companies to assess the proficiency of
their staff to perform required job functions and manage
learning. Furthermore, AdminSTAR identifies areas where
individual job proficiency is lacking and creates individualized
development plans that specify the necessary training, consisting
 of ITC and third-party products, required to bridge the gaps.

During 1998, the Company expanded its CBT product library by
acquiring the assets of Mentor Networks, Inc.
(Mentor) and its wholly owned subsidiary, High
Performance Group (Canada) Inc. The assets included facilities,
equipment, software products developed or owned by Mentor, and
the assignment of all trade names, copyrights, patents and other
intellectual property of Mentor. Additionally, the Company
acquired Mentors workforce, consisting of product
development and administrative personnel, which further enhanced
ITCs product development resources. CBT products lines
acquired consisted of Mentors Call Center and Desktop Coach
 (PC Skills).

The Company is currently seeking to position itself for the
paradigm shift in the education and training industry by
embracing the Internet and the concept of e-Learning. E-Learning
companies are defined as training providers that leverage the
Internet and Web technologies to create, enable, deliver and/or
facilitate life-long learning. The industry is currently
categorizing e-Learning companies into four segments: Content
Providers (develop, aggregate and distribute content); Learning
Delivery Agents (provide core technology infrastructure,
software, systems and hardware); Portals (provide training
gateways on the Internet that aggregate information, services,
content and applications); and Full Service Training Providers
(providing all segments).

The Company operates in four reportable business segments: United
 States, Canada, Australia and the United Kingdom. These business
 segments are managed separately due to different operating
environments, customer bases, and technological capacities. The
Companys stock is traded on the NASDAQ Stock Market, Inc.,
National Market System, under the symbol ITCC.

ITCs Value Proposition

In todays competitive marketplace, knowledge and skills
fuel business innovation and success. The ability to improve
organizational performance is directly tied to the successful
integration of people, process, and technology. Through the
dynamic interaction of technology, content, process, services,
and people, ITC helps its customers facilitate learning, increase
 skills, maximize performance and achieve personal, professional
and organizational goals. ITC fashions itself as a full-service training providerthat leverages technology with
 a human touch.

Over its 23-year history, the Company has endeavored to provide
the highest quality training curriculum, complemented by the
highest level of customer service and support. With a worldwide
customer base of approximately 5,000 organizations using
ITCs products and services, ITC is currently positioned to
leverage its existing customer relationships within its targeted
vertical markets.

1



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##### Table of Contents



ITCs learning management systems coupled with an e-Learning
 framework enables the Company to provide Learning Portalstailored to its customers industry and organization.
ITC Learning Portals are delivered inside a company or in a
hosted Application Service Provider (ASP) model, and
can reach an entire enterprise to manage, administer, deliver and
 track training and skills development activities. Offered as one
 integrated solution, ITCs customers can interact with
their employees online, monitor their training development,
unlock knowledge stores, streamline training activities and
improve productivity, by delivering the right information at the
right time.

ITCs Strategy

The Company is focused on four critical success factors: content,
 technology, process and distribution. ITC is seeking to position
 itself to address the paradigm shift from technology-based
learning to e-Learning, and aggressively grow its existing
penetration within its core vertical markets. The Companys
objective is to strengthen its position as one of the leading
providers of training solutions within its core vertical markets.
 To achieve this goal, the Company employs the following
strategies, focused on continuing to leverage its existing
customer base by providing innovative and flexible training
solutions and strategically expanding its existing portfolio of
CBT products, within established vertical markets.

Courseware Development

Throughout its 23-year history, ITC has continually invested in
its courseware, as changes in delivery technologies have impacted
 its customers and its industry. ITC intends to continue
investing in its content portfolio utilizing the latest and most
efficient development strategies.

Based on current trends in the introduction and evolution of
technologies, the Company also intends to continue converting its
 existing courseware libraries to a web-based format to further
meet its customers expanding delivery requirements.

Flexible Training Solutions

The Company intends to continue its strategy of providing
training solutions when, where and in a manner desired by the
customer. In addition to delivering interactive CBT courseware,
ITC will continue providing consulting and support services to
help organizations improve employee productivity and skills.

Build Customer Relationships

The Company will continue its strategy of building continuing
customer relationships within its core vertical markets. The
Company also seeks to further expand its relationships with
existing customers by integrating new product and service
offerings into these accounts.

Integrated Sales and Marketing Programs

The Company will continue to expand its marketing efforts using
both direct mail marketing and the Internet in an effort to
further build brand name recognition within its core vertical
markets. Distribution of the Companys products and services
 will incorporate a regionalized sales force supplemented by a
telemarketing sales force. Additionally, the Company will
continue to utilize its indirect sales channels, composed of
finders, agents, and resellers to increase market coverage and
bring additional industry knowledgeable resources to increase
sales.

Leverage International Operations

The Company maintains offices in three countries outside of the
United States. In 1999, international revenues represented 29% of
 the Companys total revenues. The Company intends to seek
alternatives to expand its international operations, and expects
that revenues derived from sources outside the United States will
 continue to account for a significant portion of the
Companys total revenue.

2



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##### Table of Contents



ITCs Product Portfolio

The Company provides the following libraries of interactive
multimedia courseware fundamental to the learning needs of
industrial-based organizations worldwide. This library, which can
 be delivered anywhere and any time, covers multiple subject
areas including:



| |   |                                  
| | - | ---------------------------------
| |  | Personal Computer Skills;        
|
| |  | Business and Professional Skills;
|
| |  | Information Technology;          
|
| |  | Safety and Regulatory Compliance;
|
| |  | Industrial Technical Skills; and 
|
| |  | Basic Literacy Skills.           

ITCs portfolio of CBT products combined with learning
management systems and support services provides a highly
effective and efficient approach to training and skills
development.

Competition

The education and training market is highly fragmented, with no
single institution or company holding a dominant share. These
companies include providers of traditional instructor-led
training, multimedia courseware developers and sellers, textbook
publishers and others. Currently, there are several developers of
 interactive multimedia training products, and management
believes the number of these companies will continue to increase.
 Some of these are larger and have greater resources than ITC,
while others offer only specialized training materials.

The Company believes its expanded portfolio of products,
increased delivery capabilities, and market experience, combined
with its ability to effectively manage and administer an
education and training environment, has positioned the Company to
 successfully compete in the growing education and training
market. This is a forward-looking statement. See
Forward-looking Statements and Risk Factors for Further
Discussion.

Employees

At December 31, 1999, the Company and its subsidiaries
employed a total of 85 people. This represents a decrease of 53
employees since December 31, 1998, due primarily to a
reduction in the Companys product development and
administrative resources which occurred in 1999. The Company
utilizes free-lance and temporary personnel who are familiar with
 ITCs development and production process to support
increased personnel requirements that arise from time to time.
The Company is not a party to any collective bargaining
agreements, and believes that relations with its employees are
good.

3



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##### Table of Contents






Item 2.  Description of Properties

The Company leases all its facilities. The table below sets forth
 certain information regarding these facilities as of
December 31, 1999.

|                                        |  |                |        | 
|--------------------------------------- |  | -------------- | ------ | 
|                                        |  | Approximate   
|Location                                |  | Square Footage
|                                       
|                                       
|Virginia (1)                            |  |                | 26,225 | 
|                                       
|                                       
|                                       
|                                       
|Georgia                                 |  |                | 3,405  | 
|                                       
|                                       
|                                       
|                                       
|Michigan                                |  |                | 1,400  | 
|                                       
|                                       
|                                       
|                                       
|Halifax, Nova Scotia                    |  |                | 19,356 | 
|                                       
|                                       
|                                       
|                                       
|Toronto, Ontario                        |  |                | 1,800  | 
|                                       
|                                       
|                                       
|                                       
|Bedford, England                        |  |                | 3,935  | 
|                                       
|                                       
|                                       
|                                       
|Melbourne, Australia                    |  |                | 675    | 
|                                       
|                                       
|                                       
|                                       
|Sydney, Australia                       |  |                | 1,152  | 
|                                       
|(1) Corporate headquarters/and support. |  |                |        | 

The Company believes its facilities are suitable, adequate and
well utilized. The Companys leased premises consist of
commercial office space, warehouse, and production facilities.




Item 3.  Legal Proceedings

The Company is not a party to, nor is any of its property the
subject of, any material pending legal proceedings.




Item 4.  Submission of Matters to a Vote of
Security Holders

The Company has not submitted any matters to a vote of security
holders since the May 1999 Annual Meeting of Stockholders.




PART II




Item 5.  Market for Common Equity and Related
Stockholder Matters

Market Information

The Companys common stock is traded on the NASDAQ Stock
Market, Inc., National Market System (NMS), under the symbol
ITCC.

The following table states the high and low quotation information
 by quarter for the Companys common stock based on actual
trading, as reported by NASDAQ/ NMS.

|      |                |      |   |      |  |  |   |      | 
|----- | -------------- | ---- | - | ---- |  |  | - | ---- | 
|      |                | High |   | Low 
|      |                |      |   |     
|1998: |                |      |   |      |  |  |   |     
|      |                |      |   |      |  |  |   |     
|      | First Quarter  |      | $ | 5.30 |  |  | $ | 3.63 | 
|     
|     
|     
|     
|      | Second Quarter |      |   | 8.25 |  |  |   | 4.75 | 
|     
|     
|     
|     
|      | Third Quarter  |      |   | 7.50 |  |  |   | 2.50 | 
|     
|     
|     
|     
|      | Fourth Quarter |      |   | 4.63 |  |  |   | 2.75 | 

|      |                |  |   |      |  |  |   |      | 
|----- | -------------- |  | - | ---- |  |  | - | ---- | 
|     
|     
|     
|     
|1999: |                |  |   |      |  |  |   |     
|      |                |  |   |      |  |  |   |     
|      | First Quarter  |  | $ | 6.00 |  |  | $ | 3.50 | 
|     
|     
|     
|     
|      | Second Quarter |  |   | 5.13 |  |  |   | 3.25 | 
|     
|     
|     
|     
|      | Third Quarter  |  |   | 5.94 |  |  |   | 3.25 | 
|     
|     
|     
|     
|      | Fourth Quarter |  |   | 5.13 |  |  |   | 1.25 | 

4



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##### Table of Contents



Holders

As of December 31, 1999, there were 965 holders of record of
 the Companys common stock, the Companys only class
of stock.

Dividends

Stockholders of the Companys common stock are entitled to
receive ratably such dividends as may be declared by the Board of
 Directors out of funds legally available. There has been no
declaration of dividends since 1984.

Sales of Unregistered Securities

On November 1, 1999, the Company issued a 5.5% $1,000,000
convertible subordinated secured debenture initially due on
October 31, 2000 to New River Capital Partners, L.P. The
payment date on this debenture has been extended to April 2,
 2001. The principal due under this debenture is convertible at
$2.00 per share. In conjunction with this debenture, the Company
issued 291,500 warrants to New River Capital Partners exercisable
 at $2.00 per share. The initial expiration date of these
warrants of October 31, 2000 has been extended to
April 2, 2001.

On December 30, 1999, the Company issued a 9.5% $1,200,000
convertible subordinated secured debenture initially due on
January 1, 2000 to New River Capital Partners. The payment
date on this debenture has been extended to April 2, 2001.
The principal due under this debenture is convertible at the
lower of $2.50 per share or the net book value per share as of
December 31, 1999 unless the NASD, under the rules
applicable to the Nasdaq Stock Market, approves its issuance or
the Companys shareholders consent to the issuance, in which
 case the conversion price will reduce to $1.75 per share. Upon
conversion, the interest rate shall be retroactively reduced to
5.5% per annum. In conjunction with this debenture, the Company
issued to New River Capital Partners 349,800 warrants. The
exercise price of these warrants is the same as the conversion
price under the debenture issued with these warrants. The number
of warrants triple to 1,049,400 if NASD approval or shareholder
consent to the issuance of the warrants is not obtained by
May 15, 2000. The Company intends to seek an amendment to
this requirement by extending the May 15 date to
June 30, 2000. The initial expiration dates of these
warrants of January 1, 2001 has been extended to
April 2, 2002.

The Company relied upon Section 4(2) of the Securities Act
of 1933, as amended, to exempt the issuance of the debentures and
 warrants to New River Capital Partners from the registration
requirements under this act.






|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|Item 6. | Managements Discussion and Analysis of Financial
	Condition and Results of Operations

RESULTS OF OPERATIONS

1999 Compared to 1998

Revenues

During 1999, total revenues were $16,676,000 as compared to
$18,426,000 in 1998, representing a decrease of $1,750,000 or 9%.
 Courseware revenues, which include sales of off-the-shelf CBT
products, custom CBT products, consulting services, fees,
royalties and videotape training products, totaled $15,678,000,
as compared to $14,134,000 in 1998, representing an increase of
$1,544,000 or 11%. Revenues from the sale of hardware systems
totaled $997,000 in 1999 as compared to $4,293,000 in 1998,
representing a decrease of $3,296,000.

The decrease in total revenues in 1999 as compared to 1998 was
primarily attributable to decreased hardware sales. The decrease
in hardware sales was the result of decreased demand for the
hardware component of the Companys training solution. As a
result of decreasing margins on hardware sales and the increasing
 availability of computer manufacturer direct purchasing, the
Company does not anticipate a significant increase in hardware
sales over 1999 levels. However, the Company will continue to
offer hardware

5



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##### Table of Contents



See Forward-looking Statements and
Risk Factors for Further Discussion.


The increase in courseware revenues in 1999 as compared to 1998
was primarily attributable to increased sales associated with the
 Companys learning management system 
AdminSTAR, offset by decreased sales of the Companys
core CBT product lines. The Company believes the decline in CBT
product sales in 1999 to be the result, in part, of
companies reduced spending on new software and hardware
while working to overcome Y2K problems. Furthermore, the working
capital constraints faced by the Company during 1999 limited its
ability to actively market the Companys products and
services, and hindered its efforts to build, maintain and expand
its sales organization. See Cash Flow, Liquidity and Capital
Resources section. The Company believes recent capital infusion
and its increased focus on its core CBT markets, will positively
affect CBT product revenues in 2000. These are forward-looking
statements. See Forward-looking Statements and Risk Factors
for Further Discussion.

Cost of Sales and Gross Margin

Cost of sales consists of the amortized costs of developing new
course titles and updating the Companys existing libraries,
 product material costs, fulfillment costs, reseller discount
fees, sales commissions, third party product royalties and
hardware costs. Cost of sales for 1999 totaled $9,341,000
resulting in a gross margin of $7,335,000 or 44% of total
revenues, as compared to cost of sales of $11,133,000 and gross
margin of $7,293,000 or 40% of total revenues in 1998. The
decrease in cost of sales of $1,792,000 in 1999 as compared to
1998 was the result of decreased total revenues and resulting
cost of sales, offset by higher product development cost
amortization of $797,000 in 1999. The increase in product
development cost amortization was primarily attributable to
products acquired as a result of the Company acquiring the assets
 of Mentor Networks, Inc. in September of 1998. The increase in
gross margin of $42,000 and gross margin percentage of 4% was
primarily attributable to a decrease in lower-margin hardware
sales in 1999 as compared to 1998. Additionally, the Company
recognized $741,000 in royalty expense, without recognizing
corresponding revenues in 1999, as a result of a 1999 minimum
royalty commitment with a third party courseware content
provider. The Company will have access to the related third party
 inventory during 2000, as the obligation is paid.

Selling, General and Administrative
Expenses

Selling, general and administrative expenses totaled $11,913,000
in 1999 as compared to $11,509,000 in 1998, representing an
increase of $404,000 or 4%.

Selling expenses consist primarily of salaries of sales
personnel, travel, advertising, marketing and promotional
expenses. Selling expenses in 1999 totaled $5,835,000, as
compared to $6,299,000 in 1998. The $464,000 decrease in selling
expenses was the result of decreased corporate marketing
expenditures offset by slightly higher sales costs from each of
the Companys foreign subsidiaries. As a result of working
capital constraints faced by the Company during 1999, it was
unable to sustain its sales and marketing growth plan, resulting
in an overall decrease in 1999 sales and marketing expenditures.
The Company adjusts its sales and marketing activities to
correspond with its growth goals and working capital resources.
Accordingly, the Company reduced its sales and marketing
expenditures in the second half of 1999. Selling expenses as a
percentage of revenue in 1999 were 35% as compared to 34% in
1998. The Company anticipates gradual increases in telemarketing
and field staff during 2000 as its level of working capital
increases. These are forward-looking statements. See
Forward-looking Statements and Risk Factors for Further
Discussion.

General and administrative expenses consist of the costs of
developing new products and the costs of the Companys
executive management and support functions such as customer
assurance, product fulfillment, human resources, and finance and
administration. General and administrative expenses for 1999 were
 $6,078,000 as compared to $5,210,000 in 1998. The increase in
general and administrative expenses of $868,000 or 17% was due to
 an increase in costs associated with the Companys Canadian
 subsidiary, which was acquired in September of 1998, resulting
in twelve months of activity in 1999 versus three months in 1998.
 General and administrative expenses as a percentage of revenue
in 1999 increased to 36% from 28% in 1998,

6



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##### Table of Contents



. See Forward-looking Statements and Risk Factors
for Further Discussion.


Loss Before Income Taxes and Net Loss

During 1999, the Company experienced a loss before income taxes
and a net loss of $4,714,000 or $1.21 per share. This compares to
 a loss before income taxes of $4,026,000 and a net loss of
$3,793,000 or $0.99 per share in 1998. The higher pretax and net
loss in 1999 was the result of an overall decrease in revenues
and an increase in general and administrative expenses as
compared to 1998.

CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents increased to $535,000 at
December 31, 1999 from $267,000 at December 31, 1998.
The change in the cash position of the Company in 1999 primarily
reflects the cash provided by operations and cash used for
product development and fixed asset expenditures.

Working capital deficit at December 31, 1999 was $307,000 as
 compared to a surplus of $1,799,000 at December 31, 1998, a
 decrease of $2,106,000. The decrease was primarily due to the
net loss realized during 1999, the Companys investment in
courseware development and fixed assets and an increase in
short-term operating liabilities, given the Companys
current cash constraints.

Net cash provided by operating activities totaled $1,596,000
during 1999, as compared to cash used for operating activities of
 $63,000 in 1998, representing an increase of $1,659,000. The
increase was primarily due to an increase in profitability before
 depreciation and amortization and the collection of accounts
receivable. Additionally, the Company incurred $1,134,000 in
higher non-cash depreciation and amortization expenses during
1999 as compared to 1998. The increase in non-cash charges was
primarily attributable to the acquisition of the assets of Mentor
 Networks, Inc. in September of 1998.

Net cash used for investing activities during 1999 totaled
$2,856,000 as compared to net cash used for investing activities
of $4,883,000 in 1998. The decrease in expenditures of $2,027,000
 in 1999 was due to the absence of acquisition activity,
partially offset by an increase in product development costs of
$1,393,000 in 1999 as compared to 1998. During 2000, the Company
expects to adjust its product development and fixed asset
expenditures to correspond with its working capital resources.
This is a forward-looking statement. See Forward-looking
Statements and Risk Factors for Further Discussion.

Net cash provided by financing activities totaled $1,528,000 in
1999 as compared to $327,000 during 1998. The increase of
$1,201,000 is principally due to proceeds generated from debt
issuances totaling $2,125,000, which occurred in the fourth
quarter of 1999. Additionally, the absence of a stock repurchase
transaction, which occurred in 1998 in the amount of $536,000,
contributed to the increase in cash flows from financing
activities in 1999 as compared to 1998.

On October 15, 1999, in response to its third quarter 1999
operating loss and its then current cash position, the Company
accelerated plans to reduce its product development workforce, as
 the Company endeavored to make the strategic transition from
merely developing its own content, to aggregating and
distributing proprietary and non-proprietary content. The
workforce reduction consisted of approximately 70 employees, the
majority which took place in the Companys Canadian
subsidiary  ITC Canada Limited (ITCC).

On October 29, 1999, the Company signed a Forbearance
Agreement with its principal lender to avoid the declaration of
default with respect to certain covenants and conditions in its
August 11, 1999 line of credit agreement, including maximum
debt to tangible net worth and minimum tangible net worth
requirements. The Forbearance Agreement increased the
Companys interest rate to prime plus 3% and reduced the
Companys borrowing capacity. On January 7, 2000, the
Company signed an amended Forbearance

7



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##### Table of Contents





On January 21, 2000, the Company satisfied its outstanding
debt, and all associated fees and expenses under its line of
credit agreement.

On November 1, 1999, the Company raised $1,000,000 through
the issuance of a 5.5% convertible subordinated debenture due
April 2, 2001. The note is secured by the assets of the
Company and is subordinated to existing and future indebtedness
of the Company. Interest and principal are due in full at
maturity. The note may be converted into shares of common stock
of the Company at any time after February 28, 2000 up to
maturity date at a price of $2.00 per share. The note was issued
with warrants which grant the holders the right to acquire
291,500 shares of the Companys common stock at a per share
price of $2.00. The warrants expire on April 2, 2001.

On December 30, 1999, the Company raised $1,200,000 through
the issuance of a 9.5% convertible subordinated debenture due
April 2, 2001. Proceeds of $1,125,000 were received in 1999
and $75,000 was received in January 2000. The note is secured by
the assets of the Company and is subordinated to existing and
future indebtedness of the Company. Interest and principal are
due in full at maturity. The note may be converted into shares of
 common stock of the Company at any time up to maturity date at a
 price no lower than $1.75 per share. The note was issued with
warrants which grant the holders the right to acquire 349,800
shares of the Companys common stock at a price no lower
than $1.75 per share. The warrants expire on April 1, 2002.
The number of warrants can increase to 1,049,400, if certain
conditions are not met.

The Companys financial statements have been presented on a
going concern basis, which contemplates the realization of assets
 and settlement of liabilities and commitments in the normal
course of business. The Company experienced a net loss in 1999
and 1998. Although the Company expects operating results to
improve, there can be no assurances that the Company will not
experience adverse results of operation in the future. The
Company believes that its existing cash, the anticipated cash
flows from 2000 operations, and additional planned capital fund
raising activities should provide sufficient resources to fund
its activities in 2000. Anticipated cash flows from 2000
operations are largely dependent upon the Companys ability
to achieve its sales and gross profit objectives for its
currently existing products and new products to be launched in
2000. Achievement of these objectives is subject to various risk
factors related to, among other things: incremental sales
resulting from expansion of distribution capabilities; the
Companys ability to deploy its courseware over the Internet
 and corporate intranets; the Companys ability to control
costs in relation to future revenues and the Companys
ability to raise capital. If the Company is unable to meet these
objectives, it will consider expansion of existing or development
 of alternative sources of bank financing; the curtailment of
certain capital expenditures and discretionary expenditures (such
 as travel, consulting and salaries); and various other courses
of action.

YEAR 2000 COMPLIANCE

The Company completed the transition to the year 2000 with all
hardware, software and current courseware products year 2000
compliant. This transition took place without incident. There
have been no material reported problems with any equipment or
software, nor have any disruptions with suppliers or vendors
occurred. The Company will continue to monitor its systems and
products in 2000 to ensure any remaining issues with year 2000
are identified and addressed.

CANADIAN OPERATIONS

On October 15, 1999, in response to its third quarter 1999
operating loss and its then current cash position, the Company
accelerated plans to reduce its product development workforce as
the Company endeavored to make the strategic transition from
merely developing its own content, to aggregating and
distributing proprietary and non-proprietary content. The
workforce reduction consisted of approximately 70 employees, the
majority which took place in the Companys Canadian
subsidiary  ITC Canada Limited (ITCC).

8



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Under Provincial employment regulations, if 10 or more employees
are affected by a workforce reduction, the Company is required to
 provide 8 weeks notice to all affected employees. Accordingly,
ITCC extended the required notice, while continuing to keep the
affected employees on payroll. During the notice period, all
aspects of ITCCs business operations were negatively
impacted, and consequently sales performance during that time
period decreased. Although the Company sought to reestablish
working relationships with unaffected personnel, it was difficult
 and ultimately there were voluntary terminations of certain
unaffected employees, which further hindered ITCCs ability
to stabilize business operations.

Additionally, the Toronto sales and marketing office has been
closed in order to centralize ITCC business operations in the
Halifax, Nova Scotia facility.

As of March 27, 2000, the Company has made significant
progress in stabilizing ITCCs business operations and
employee base, and maintains a workforce of 20 full-time
employees, the majority of whom are involved in sales and product
 development activities. Although historically, the primary focus
 of the Canadian operations was product development, the Company
intends to augment its worldwide sales force by expanding its
existing sales and marketing organization within its Canadian
subsidiary, while maintaining product development resources
sufficient to meet planned courseware production requirements.
These are forward-looking statements.See Forward-Looking
Statements and Risk Factors for Further Discussion.

MANAGEMENT CHANGES

On November 22, 1999, the Company announced the resignation
of Carl D. Stevens, President and Chief Executive Officer,
and Director. Mr. Stevens had served as ITCs President
 and Chief Executive Officer since January 1998.

On November 22, 1999, the Companys Board of Directors
appointed Christopher E. Mack President of ITC.
Mr. Macks appointment as President was originally on
an interim basis, however his appointment has been made
permanent. Prior to being appointed President, Mr. Mack was
serving as the Companys Chief Financial Officer and
Treasurer.

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

Forward-looking Statements

Certain statements made by the Companys management may be
considered to be forward-looking statements within
the meaning of the Private Securities Litigation Act of 1995.
Forward-looking statements are based on various factors and
assumptions that include known and unknown risks and
uncertainties. The words believe, expect,
 anticipate and project, and similar
expressions identify forward-looking statements, which speak only
 as of the date the statement was made. Such statements may
include, but not be limited to, projections of revenues, income
or loss, expenses, plans, as well as assumptions relating to the
foregoing. Forward-looking statements are inherently subject to
risks and uncertainties, some of which cannot be predicted or
quantified. Future results could differ materially from those
described in forward-looking statements as a result of the risks
set forth in the following discussion, among others.

Risk Factors

The Companys financial statements have been presented on a
going concern basis, which contemplates the realization of assets
 and settlement of liabilities and commitments in the normal
course of business. The Company experienced a net loss in 1999
and 1998. Although the Company expects operating results to
improve, there can be no assurances that the Company will not
experience adverse results of operation in the future. The
Company believes that its existing cash, the anticipated cash
flows from 2000 operations, and additional planned capital fund
raising activities should provide sufficient resources to fund
its activities in 2000. Anticipated cash flows from 2000
operations are largely dependent upon the Companys ability
to achieve its sales and gross profit objectives for its
currently existing products and new products to be launched in
2000. Achievement of these objectives is subject to various risk
factors related to, among other things: incremental sales
resulting from expansion of distribution capabilities; the
Companys ability to deploy its

9



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A number of factors could also contribute to significant
fluctuations in operating results, which may result in volatility
 in the price of the Companys common stock. These include
the size and timing of orders and shipments, the mix of
ITC-developed products and third party products, the mix of sales
 from the Companys direct and indirect distribution
channels, the introduction and acceptance of new products, and
the degree to which the market understands and accepts the
Companys role as a provider of training solutions.

In addition, the Company faces certain general business risks
which could materially and adversely impact future operating
results. These include, but are not limited to, changes in
economic conditions, the cost of labor and raw materials, changes
 in technology and general competitive factors.




Item 7.  Financial Statements

|                                                                                                |  |      |       | 
|----------------------------------------------------------------------------------------------- |  | ---- | ----- | 
|Index                                                                                           |  | Page
|                                                                                                |  |     
|Report of Independent Auditors                                                                  |  |      | 11    | 
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Consolidated Statements of Operations for the Years Ended
	December 31, 1999 and 1998           |  |      | 12    | 
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Consolidated Balance Sheets as of December 31, 1999 and 1998                                    |  |      | 13-14 | 
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Consolidated Statements of Stockholders Equity for the
	Years Ended December 31, 1999 and 1998 |  |      | 15    | 
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Consolidated Statements of Cash Flows for the Years Ended
	December 31, 1999 and 1998           |  |      | 16    | 
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Notes to Consolidated Financial Statements                                                      |  |      | 17-31 | 

10



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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders 
 ITC Learning Corporation

We have audited the accompanying consolidated balance sheets of
ITC Learning Corporation as of December 31, 1999 and 1998,
and the related consolidated statements of operations,
stockholders equity, and cash flows for the years then
ended. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of ITC Learning Corporation at
December 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the
United States.



|                 |                  
|---------------- | -----------------
|McLean, Virginia | Ernst & Young LLP



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ITC LEARNING CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended December 31, 1999 and 1998


|                                                      |                                              |                          |            |            |            |   |            |            |            | 
|----------------------------------------------------- | -------------------------------------------- | ------------------------ | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | 
|                                                      |                                              | 1999                     |            | 1998      
|                                                      |                                              |                          |            |           
|Revenues, net:                                        |                                              |                          |            |            |            |   |            |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Courseware                                   |                          | $          | 15,678,478 |            |   | $          | 14,133,634 |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Hardware                                     |                          |            | 997,087    |            |   |            | 4,292,517  |           
|                                                      |                                              |                          |            |            |            |   |            |           
|                                                      |                                              | Total revenues, net      |            |            | 16,675,565 |   |            |            | 18,426,151 | 
|                                                     
|                                                     
|                                                     
|                                                     
|Costs and expenses:                                   |                                              |                          |            |            |            |   |            |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Cost of sales                                |                          |            | 9,341,351  |            |   |            | 11,132,801 |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Selling, general and administrative expenses |                          |            | 11,912,916 |            |   |            | 11,509,268 |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Equity in earnings of affiliates             |                          |            | (170,289   | )          |   |            | (208,031   | )         
|                                                      |                                              |                          |            |            |            |   |            |           
|                                                      |                                              | Total costs and expenses |            |            | 21,083,978 |   |            |            | 22,434,038 | 
|                                                      |                                              |                          |            |            |            |   |            |           
|Loss before interest and income tax benefit           |                                              |                          | (4,408,413 | )          |            |   | (4,007,887 | )         
|                                                     
|                                                     
|                                                     
|                                                     
|Interest income                                       |                                              |                          | 89,190     |            |            |   | 280,045    |           
|                                                     
|                                                     
|                                                     
|                                                     
|Interest expense                                      |                                              |                          | (394,861   | )          |            |   | (297,863   | )         
|                                                      |                                              |                          |            |            |            |   |            |           
|Loss before income tax benefit                        |                                              |                          | (4,714,084 | )          |            |   | (4,025,705 | )         
|                                                     
|                                                     
|                                                     
|                                                     
|Income tax benefit (note 8)                           |                                              |                          |           |            |            |   | 232,663    |           
|                                                      |                                              |                          |            |            |            |   |            |           
|Net loss                                              |                                              | $                        | (4,714,084 | )          |            | $ | (3,793,042 | )         
|                                                      |                                              |                          |            |            |            |   |            |           
|Net loss per common share, basic and diluted (note 1) |                                              | $                        | (1.21      | )          |            | $ | (0.99      | )         
|                                                      |                                              |                          |            |            |            |   |            |           
|Weighted average number of shares outstanding         |                                              |                          | 3,896,761  |            |            |   | 3,845,333  |           
|                                                      |                                              |                          |            |            |            |   |            |           

See accompanying notes to consolidated financial statements.

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ITC LEARNING CORPORATION

CONSOLIDATED BALANCE SHEETS

December 31, 1999 and 1998


ASSETS

|                                                                                                                                                  |                                                                                                            |                            |           |            |            |  |           |            |            | 
|------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | -------------------------- | --------- | ---------- | ---------- |  | --------- | ---------- | ---------- | 
|                                                                                                                                                  |                                                                                                            | 1999                       |           | 1998      
|                                                                                                                                                  |                                                                                                            |                            |           |           
|Current Assets:                                                                                                                                   |                                                                                                            |                            |           |            |            |  |           |           
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                  | Cash and cash equivalents                                                                                  |                            | $         | 535,178    |            |  | $         | 267,045    |           
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                  | Accounts receivable, net (notes 2, 5 and 6)                                                                |                            |           | 4,482,511  |            |  |           | 5,992,902  |           
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                  | Due from affiliates (note 4)                                                                               |                            |           | 175,533    |            |  |           | 117,023    |           
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                  | Inventories, net of reserve of $22,500 and $0 at
	December 31, 1999 and 1998, respectively (notes 5 and 6) |                            |           | 338,900    |            |  |           | 588,971    |           
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                  | Prepaid expenses                                                                                           |                            |           | 153,724    |            |  |           | 136,730    |           
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                  | Income taxes receivable (note 8)                                                                           |                            |           | 70,258     |            |  |           | 279,747    |           
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                  | Deferred financing costs, net                                                                              |                            |           | 65,000     |            |  |           |           |           
|                                                                                                                                                  |                                                                                                            |                            |           |            |            |  |           |           
|                                                                                                                                                  |                                                                                                            | Total current assets       |           |            | 5,821,104  |  |           |            | 7,382,418  | 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|Note receivable (note 3)                                                                                                                          |                                                                                                            |                            | 537,628   |            |            |  | 753,420   |           
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|Property and equipment (note 6):                                                                                                                  |                                                                                                            |                            |           |            |            |  |           |           
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                  | Video and computer equipment                                                                               |                            |           | 2,666,316  |            |  |           | 2,162,078  |           
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                  | Furniture and fixtures                                                                                     |                            |           | 210,994    |            |  |           | 206,313    |           
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                  | Leasehold improvements                                                                                     |                            |           | 61,340     |            |  |           | 35,092     |           
|                                                                                                                                                  |                                                                                                            |                            |           |            |            |  |           |           
|                                                                                                                                                  |                                                                                                            |                            | 2,938,650 |            |            |  | 2,403,483 |           
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                  | Less accumulated depreciation and amortization                                                             |                            |           | (2,020,237 | )          |  |           | (1,354,854 | )         
|                                                                                                                                                  |                                                                                                            |                            |           |            |            |  |           |           
|                                                                                                                                                  |                                                                                                            | Net property and equipment |           |            | 918,413    |  |           |            | 1,048,629  | 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|Capitalized program development costs, net of accumulated
	amortization of $6,282,102 and $3,666,097 at December 31,
	1999 and 1998, respectively |                                                                                                            |                            | 5,097,679 |            |            |  | 5,393,182 |           
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|Intangible assets, net of accumulated amortization of $1,617,499
	and $1,061,993 at December 31, 1999 and 1998, respectively
	(note 9)            |                                                                                                            |                            | 3,504,645 |            |            |  | 4,060,150 |           
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|Other                                                                                                                                             |                                                                                                            |                            | 10,927    |            |            |  | 8,966     |           
|                                                                                                                                                  |                                                                                                            |                            |           |            |            |  |           |           
|                                                                                                                                                  |                                                                                                            | Total assets               |           | $          | 15,890,396 |  |           | $          | 18,646,765 | 
|                                                                                                                                                  |                                                                                                            |                            |           |            |            |  |           |           

See accompanying notes to consolidated financial statements.

13



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ITC LEARNING CORPORATION

CONSOLIDATED BALANCE SHEETS

December 31, 1999 and 1998


LIABILITIES AND STOCKHOLDERS EQUITY

|                                              |                                                                                                                                                      |                            |            |            |           |   |            |            |            | 
|--------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ---------- | ---------- | --------- | - | ---------- | ---------- | ---------- | 
|                                              |                                                                                                                                                      | 1999                       |            | 1998      
|                                              |                                                                                                                                                      |                            |            |           
|Current Liabilities:                          |                                                                                                                                                      |                            |            |            |           |   |            |           
|                                             
|                                             
|                                             
|                                             
|                                              | Line of credit (note 5)                                                                                                                              |                            | $          | 663,838    |           |   | $          | 647,000    |           
|                                             
|                                             
|                                             
|                                             
|                                              | Current installments of long-term debt (note 6)                                                                                                      |                            |            | 277,160    |           |   |            | 287,283    |           
|                                             
|                                             
|                                             
|                                             
|                                              | Accounts payable                                                                                                                                     |                            |            | 2,193,676  |           |   |            | 1,973,004  |           
|                                             
|                                             
|                                             
|                                             
|                                              | Due to affiliates (note 4)                                                                                                                           |                            |            | 187,070    |           |   |            | 314,247    |           
|                                             
|                                             
|                                             
|                                             
|                                              | Accrued compensation and benefits                                                                                                                    |                            |            | 167,218    |           |   |            | 281,234    |           
|                                             
|                                             
|                                             
|                                             
|                                              | Deferred revenues                                                                                                                                    |                            |            | 373,144    |           |   |            | 420,005    |           
|                                             
|                                             
|                                             
|                                             
|                                              | Other accrued expenses                                                                                                                               |                            |            | 2,260,240  |           |   |            | 1,650,980  |           
|                                             
|                                             
|                                             
|                                             
|                                              | Income taxes payable (note 8)                                                                                                                        |                            |            | 6,128      |           |   |            | 10,161     |           
|                                              |                                                                                                                                                      |                            |            |            |           |   |            |           
|                                              |                                                                                                                                                      | Total current liabilities  |            |            | 6,128,474 |   |            |            | 5,583,914  | 
|                                             
|                                             
|                                             
|                                             
|Deferred lease obligations                    |                                                                                                                                                      |                            | 12,119     |            |           |   | 25,511     |           
|                                             
|                                             
|                                             
|                                             
|Long-term debt (note 6)                       |                                                                                                                                                      |                            | 2,313,604  |            |           |   | 1,439,216  |           
|                                              |                                                                                                                                                      |                            |            |            |           |   |            |           
|                                              |                                                                                                                                                      | Total liabilities          |            |            | 8,454,197 |   |            |            | 7,048,641  | 
|                                             
|                                             
|                                             
|                                             
|Stockholders equity (notes 6, 7, 9, and 11): |                                                                                                                                                      |                            |            |            |           |   |            |           
|                                             
|                                             
|                                             
|                                             
|                                              | Common stock, $0.10 par value, 12,000,000 shares authorized;
	3,964,078 and 3,958,245 shares issued and outstanding in 1999 and
	 1998, respectively |                            |            | 396,408    |           |   |            | 395,826    |           
|                                             
|                                             
|                                             
|                                             
|                                              | Additional capital                                                                                                                                   |                            |            | 16,975,959 |           |   |            | 16,502,127 |           
|                                             
|                                             
|                                             
|                                             
|                                              | Note receivable from ESOP                                                                                                                            |                            |            | (359,377   | )         |   |            | (439,677   | )         
|                                             
|                                             
|                                             
|                                             
|                                              | Retained deficit                                                                                                                                     |                            |            | (9,563,709 | )         |   |            | (4,849,625 | )         
|                                             
|                                             
|                                             
|                                             
|                                              | Accumulated other comprehensive loss (note 14)                                                                                                       |                            |            | (13,082    | )         |   |            | (10,527    | )         
|                                              |                                                                                                                                                      |                            |            |            |           |   |            |           
|                                              |                                                                                                                                                      | Total stockholders equity |            |            | 7,436,199 |   |            |            | 11,598,124 | 
|                                              |                                                                                                                                                      |                            |            |            |           |   |            |           
|Total liabilities and stockholders equity    |                                                                                                                                                      | $                          | 15,890,396 |            |           | $ | 18,646,765 |           
|                                              |                                                                                                                                                      |                            |            |            |           |   |            |           

See accompanying notes to consolidated financial statements.

14



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##### Table of Contents



ITC LEARNING CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

Years ended December 31, 1999 and 1998


|                                                             |                                                     |              |           |         |  |            |         |            |  |          |            |               |  |               |          |   |  |   |            |   |  |   |         |   |  |   |            |         | 
|------------------------------------------------------------ | --------------------------------------------------- | ------------ | --------- | ------- |  | ---------- | ------- | ---------- |  | -------- | ---------- | ------------- |  | ------------- | -------- | - |  | - | ---------- | - |  | - | ------- | - |  | - | ---------- | ------- | 
|                                                             |                                                     |              |           |         |  |            |         |            |  |          |            |              
|                                                             |                                                     | Common Stock |           |         |  |            |         |            |  |          |            |              
|                                                             |                                                     |              |           |         |  | Note       |         |            |  | Other    |            | Total        
|                                                             |                                                     |              |           | Par     |  | Additional |         | Receivable |  | Retained |            | Comprehensive |  | Stockholders
|                                                             |                                                     | Shares       |           | Value   |  | Capital    |         | From ESOP  |  | Deficit  |            | Loss          |  | Equity       
|                                                             |                                                     |              |           |         |  |            |         |            |  |          |            |               |  |              
|Balance at December 1, 1998                                  |                                                     |              | 3,897,074 |         |  | $          | 389,708 |            |  | $        | 16,090,816 |               |  | $             | (541,677 | ) |  | $ | (1,056,583 | ) |  | $ | 32,689  |   |  | $ | 14,914,953 |        
|                                                            
|                                                            
|                                                            
|                                                            
|Note payments                                                |                                                     |              |          |         |  |            |        |            |  |          | 4,119      |               |  |               | 102,000  |   |  |   |           |   |  |   |        |   |  |   | 106,119    |        
|                                                            
|                                                            
|                                                            
|                                                            
|Shares repurchased                                           |                                                     |              | (132,165  | )       |  |            | (13,217 | )          |  |          | (522,631   | )             |  |               |         |   |  |   |           |   |  |   |        |   |  |   | (535,848   | )      
|                                                            
|                                                            
|                                                            
|                                                            
|Stock options issued below market                            |                                                     |              |          |         |  |            |        |            |  |          | 211,250    |               |  |               |         |   |  |   |           |   |  |   |        |   |  |   | 211,250    |        
|                                                            
|                                                            
|                                                            
|                                                            
|New shares issued:                                           |                                                     |              |           |         |  |            |         |            |  |          |            |               |  |               |          |   |  |   |            |   |  |   |         |   |  |   |            |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Common stock issued through the exercise of options |              |           | 32,400  |  |            |         | 3,240      |  |          |            | 169,440       |  |               |          |  |  |   |            |   |  |   |         |   |  |   |            |         | 
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Common stock issued in acquisitions                 |              |           | 146,364 |  |            |         | 14,636     |  |          |            | 499,669       |  |               |          |  |  |   |            |  |  |   |         |  |  |   |            | 514,305 | 
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Common stock issued on warrant exercise             |              |           | 14,572  |  |            |         | 1,459      |  |          |            | 49,464        |  |               |          |  |  |   |            |  |  |   |         |  |  |   |            | 50,923  | 
|                                                            
|                                                            
|                                                            
|                                                            
|Net loss                                                     |                                                     |              |          |         |  |            |        |            |  |          |           |               |  |               |         |   |  |   | (3,793,042 | ) |  |   |        |   |  |   | (3,793,042 | )      
|                                                            
|                                                            
|                                                            
|                                                            
|Cumulative effect of foreign currency translation adjustment |                                                     |              |          |         |  |            |        |            |  |          |           |               |  |               |         |   |  |   |           |   |  |   | (43,216 | ) |  |   | (43,216    | )      
|                                                             |                                                     |              |           |         |  |            |         |            |  |          |            |               |  |               |          |   |  |   |            |   |  |   |         |   |  |   |            |        
|Comprehensive loss                                           |                                                     |              |          |         |  |            |        |            |  |          |           |               |  |               |         |   |  |   |           |   |  |   |        |   |  |   | (3,836,258 | )      
|                                                             |                                                     |              |           |         |  |            |         |            |  |          |            |               |  |               |          |   |  |   |            |   |  |   |         |   |  |   |            |        
|Balance at December 31, 1998                                 |                                                     |              | 3,958,245 |         |  |            | 395,826 |            |  |          | 16,502,127 |               |  |               | (439,677 | ) |  |   | (4,849,625 | ) |  |   | (10,527 | ) |  |   | 11,598,124 |        
|                                                             |                                                     |              |           |         |  |            |         |            |  |          |            |               |  |               |          |   |  |   |            |   |  |   |         |   |  |   |            |        
|Note payments                                                |                                                     |              |          |         |  |            |        |            |  |          |           |               |  |               | 80,300   |   |  |   |           |   |  |   |        |   |  |   | 80,300     |        
|                                                            
|                                                            
|                                                            
|                                                            
|Stock options forfeited                                      |                                                     |              |          |         |  |            |        |            |  |          | (211,250   | )             |  |               |         |   |  |   |           |   |  |   |        |   |  |   | (211,250   | )      
|                                                            
|                                                            
|                                                            
|                                                            
|Issuance of warrants                                         |                                                     |              |          |         |  |            |        |            |  |          | 661,500    |               |  |               |         |   |  |   |           |   |  |   |        |   |  |   | 661,500    |        
|                                                            
|                                                            
|                                                            
|                                                            
|Common stock issued through exercise of options              |                                                     |              | 5,833     |         |  |            | 582     |            |  |          | 23,582     |               |  |               |         |   |  |   |           |   |  |   |        |   |  |   | 24,164     |        
|                                                            
|                                                            
|                                                            
|                                                            
|Net loss                                                     |                                                     |              |          |         |  |            |        |            |  |          |           |               |  |               |         |   |  |   | (4,714,084 | ) |  |   |        |   |  |   | (4,714,084 | )      
|                                                            
|                                                            
|                                                            
|                                                            
|Cumulative effect of foreign currency translation adjustment |                                                     |              |          |         |  |            |        |            |  |          |           |               |  |               |         |   |  |   |           |   |  |   | (2,555  | ) |  |   | (2,555     | )      
|                                                             |                                                     |              |           |         |  |            |         |            |  |          |            |               |  |               |          |   |  |   |            |   |  |   |         |   |  |   |            |        
|Comprehensive loss                                           |                                                     |              |          |         |  |            |        |            |  |          |           |               |  |               |         |   |  |   |           |   |  |   |        |   |  |   | (4,716,639 | )      
|                                                             |                                                     |              |           |         |  |            |         |            |  |          |            |               |  |               |          |   |  |   |            |   |  |   |         |   |  |   |            |        
|Balance at December 31, 1999                                 |                                                     |              | 3,964,078 |         |  | $          | 396,408 |            |  | $        | 16,975,959 |               |  | $             | (359,377 | ) |  | $ | (9,563,709 | ) |  | $ | (13,082 | ) |  | $ | 7,436,199  |        
|                                                             |                                                     |              |           |         |  |            |         |            |  |          |            |               |  |               |          |   |  |   |            |   |  |   |         |   |  |   |            |        

See accompanying notes to consolidated financial statements.

15



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##### Table of Contents



ITC LEARNING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 1999 and 1998


|                                                     |                                                      |                                                         |            |             |           |   |            |            |           |  
|---------------------------------------------------- | ---------------------------------------------------- | ------------------------------------------------------- | ---------- | ----------- | --------- | - | ---------- | ---------- | --------- | -
|                                                     |                                                      | 1999                                                    |            | 1998       
|                                                     |                                                      |                                                         |            |            
|Cash flows from operating activities:                |                                                      |                                                         |            |             |           |   |            |           
|                                                    
|                                                    
|                                                    
|                                                    
|Net loss                                             |                                                      | $                                                       | (4,714,084 | )           |           | $ | (3,793,042 | )         
|                                                    
|                                                    
|                                                    
|                                                    
|Reconciling items:                                   |                                                      |                                                         |            |             |           |   |            |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Provision for doubtful accounts                      |                                                         |            | 502,644     |           |   |            | (144,439   | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Depreciation and amortization                        |                                                         |            | 3,890,728   |           |   |            | 2,756,363  |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Compensation expense                                 |                                                         |            | (211,250    | )         |   |            | 211,250    |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Common stock issued to employees                     |                                                         |            |            |           |   |            | 4,119      |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Foreign currency translation adjustment              |                                                         |            | (2,555      | )         |   |            | (43,216    | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Changes in operating assets and liabilities:         |                                                         |            |             |           |   |            |            |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                      | Decrease in accounts receivable                         |            |             | 1,013,539 |   |            |            | 1,182,512 |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                      | Decrease (increase) in inventories                      |            |             | 250,071   |   |            |            | (231,597  | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                      | Decrease in income tax receivable                       |            |             | 209,489   |   |            |            |          |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                      | Increase in prepaid expenses                            |            |             | (16,994   | ) |            |            | (13,688   | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                      | Increase in due from affiliates, net                    |            |             | (185,687  | ) |            |            | (63,245   | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                      | (Increase) decrease in other assets                     |            |             | (1,961    | ) |            |            | 184,806   |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                      | Increase in accounts payable                            |            |             | 220,672   |   |            |            | 1,189,587 |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                      | Increase (decrease) in accrued expenses                 |            |             | 705,243   |   |            |            | (626,571  | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                      | Decrease in deferred revenues                           |            |             | (46,861   | ) |            |            | (2,782    | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                      | Decrease in deferred lease obligations                  |            |             | (13,392   | ) |            |            | (34,785   | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                      | Decrease in income tax payable                          |            |             | (4,033    | ) |            |            | (431,482  | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                      | Net effect of acquired operating assets and liabilities |            |             |          |   |            |            | (206,533  | )
|                                                     |                                                      |                                                         |            |             |           |   |            |           
|Net cash provided by (used for) operating activities |                                                      |                                                         | 1,595,569  |             |           |   | (62,743    | )         
|                                                    
|                                                    
|                                                    
|                                                    
|Cash flows from investing activities:                |                                                      |                                                         |            |             |           |   |            |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Capitalized program development costs                |                                                         |            | (2,320,502  | )         |   |            | (927,650   | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Capital expenditures                                 |                                                         |            | (535,167    | )         |   |            | (651,383   | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Acquisitions, net of cash acquired and notes payable |                                                         |            |            |           |   |            | (3,304,154 | )        
|                                                     |                                                      |                                                         |            |             |           |   |            |           
|Net cash used for investing activities               |                                                      |                                                         | (2,855,669 | )           |           |   | (4,883,187 | )         
|                                                    
|                                                    
|                                                    
|                                                    
|Cash flows from financing activities:                |                                                      |                                                         |            |             |           |   |            |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Borrowings under line of credit                      |                                                         |            | 10,130,550  |           |   |            | 7,544,935  |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Repayments under line of credit                      |                                                         |            | (10,113,712 | )         |   |            | (6,922,935 | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from long-term debt                         |                                                         |            | 2,125,000   |           |   |            |           |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Principal payments on long term debt                 |                                                         |            | (548,569    | )         |   |            | (84,452    | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Repurchase of common stock                           |                                                         |            |            |           |   |            | (535,848   | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Issuance of common stock                             |                                                         |            | 24,164      |           |   |            | 223,603    |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Payment of financing costs                           |                                                         |            | (169,500    | )         |   |            |           |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Employee stock ownership plan note collections       |                                                         |            | 80,300      |           |   |            | 102,000    |          
|                                                     |                                                      |                                                         |            |             |           |   |            |           
|                                                     |                                                      | Net cash provided by financing activities               |            |             | 1,528,233 |   |            |            | 327,303   |  
|                                                     |                                                      |                                                         |            |             |           |   |            |           
|Net increase (decrease) in cash                      |                                                      |                                                         | 268,133    |             |           |   | (4,618,627 | )         
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents, beginning of year         |                                                      |                                                         | 267,045    |             |           |   | 4,885,672  |           
|                                                     |                                                      |                                                         |            |             |           |   |            |           
|Cash and cash equivalents, end of year               |                                                      | $                                                       | 535,178    |             |           | $ | 267,045    |           
|                                                     |                                                      |                                                         |            |             |           |   |            |           
|Supplemental Information:                            |                                                      |                                                         |            |             |           |   |            |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Interest paid during the year                        |                                                         | $          | 275,983     |           |   | $          | 152,632    |          
|                                                     |                                                      |                                                         |            |             |           |   |            |           

See accompanying notes to consolidated financial statements.

16



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##### Table of Contents



ITC LEARNING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1999 and 1998


Note 1.  Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements of ITC Learning Corporation
 (ITC or the Company) include the
accounts of its wholly owned subsidiaries Activ Training, Ltd.
(Activ), ITC Australasia Pty. Ltd.
(ITCA), Turn-Key Training Technologies, Inc.
(Turn-Key), ITC Canada Limited, and ComSkill Learning
 Centers, Inc. (ComSkill). Significant intercompany
accounts and transactions have been eliminated in consolidation.

The Company is a full-service training company specializing in
the development, production, marketing and sale of multimedia and
 technology-delivered training solutions designed to improve
employee skills in business, industry, education and government.
The Company operates in four reportable segments: United States,
Canada, Australia and the United Kingdom.

The Companys financial statements have been presented on a
going concern basis, which contemplates the realization of assets
 and settlement of liabilities and commitments in the normal
course of business. The Company experienced a net loss in 1999
and 1998. Although the Company expects operating results to
improve, there can be no assurances that the Company will not
experience adverse results of operation in the future. The
Company believes that its existing cash, the anticipated cash
flows from 2000 operations, and additional planned capital fund
raising activities should provide sufficient resources to fund
its activities in 2000. Anticipated cash flows from 2000
operations are largely dependent upon the Companys ability
to achieve its sales and gross profit objectives for its
currently existing products and new products to be launched in
2000. Achievement of these objectives is subject to various risk
factors related to, among other things: incremental sales
resulting from expansion of distribution capabilities; the
Companys ability to deploy its courseware over the Internet
 and corporate intranets; the Companys ability to control
costs in relation to future revenues and the Companys
ability to raise capital. If the Company is unable to meet these
objectives, it will consider expansion of existing or development
 of alternative sources of bank financing; the curtailment of
certain capital expenditures and discretionary expenditures (such
 as travel, consulting and salaries); and various other courses
of action.

Revenues and Costs

Revenues include both off-the-shelf and custom courseware sales,
courseware licenses, consulting service revenues and hardware
revenues. The Company recognizes revenues from off-the-shelf
product and hardware sales as units are shipped. The Company
permits the customer the right to return the courseware within
30 days of purchase. In the event that sales returns are
material, the Company adjusts revenue accordingly. Revenues from
sales of custom training programs that are developed and produced
 under specific contracts with customers, including contracts
with affiliated joint ventures and limited partnerships, are
recognized on a percentage of completion basis as related costs
are incurred during the production period. Gross revenues from
sales of affiliated joint venture and limited partnership
copyrighted courseware are included in the Companys
financial statements, as are related production, selling and
distribution costs. Amounts due to co-owners of the affiliated
venture/partnerships related to such courseware sales are
reflected as royalties and included in cost of sales in the
financial statements. Revenues from courseware licenses are
recognized upon the delivery of the initial copy of each product
licensed, and related duplication costs are accrued based on
estimates. Revenues from consulting services are recognized as
services are performed.

Capitalized Program Development Costs

Certain costs of developing and producing off-the-shelf
courseware have been capitalized. Capitalized costs include
direct labor, materials, product masters, subcontractors,
consultants, and applicable overhead.

17



---



##### Table of Contents



ITC LEARNING CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)



Note 1.  Summary of Significant Accounting
Policies  (Continued)


These capitalized costs are amortized on a straight-line basis
over the estimated useful lives of the related programs which
range from three to five years. The related amortization expense
is included in the cost of sales and amounts to approximately
$2,616,000 and $1,819,000 in 1999 and 1998, respectively.
Periodically, the Company assesses the net realizable value of
program development costs by reviewing past sales performances,
current and planned future marketing activities, specific sales
promotions and strategic distribution arrangements. Based on this
 assessment, the Company determines each products prospects
 for future sales, and, if necessary, adjusts asset values to net
 realizable value.

Cash and Cash Equivalents

Cash and cash equivalents include cash and other highly liquid
investments having original maturities of less than three months.

Inventories

Inventories consist primarily of multimedia courseware and
related computer hardware, and are stated at the lower of cost or
 market. Cost is determined using the average cost method.

Deferred Financing Costs

Deferred financing costs include fees incurred to obtain debt
financings and are amortized on straight-line basis, which
approximates the effective interest method, over a period not to
exceed the term of the related debt.

Property and Equipment

Property, equipment and leasehold improvements are stated at
cost. Depreciation on property and equipment is computed on a
straight-line basis over estimated useful lives of three to five
years. Leasehold improvements are amortized on a straight-line
basis over the shorter of the lease term or estimated useful
lives of the related assets. Depreciation and leasehold
amortization expense amounted to approximately $665,000 and
$552,000 in 1999 and 1998, respectively.

Investments in Affiliates

Investments in affiliated joint ventures and limited partnerships
 are accounted for using the equity method and, accordingly, the
initial cost of the investments are adjusted for the
Companys proportionate share of joint venture and
partnership undistributed earnings or losses.

Income Taxes

The Company provides for income taxes using the liability method
in accordance with Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income Taxes. Deferred income taxes result primarily from differences
between financial statement and income tax treatment of program
development costs, revenue recognition and net operating loss
carry forwards.

Net Loss Per Common Share

Basic earnings per common share are computed based upon the
weighted average number of common shares outstanding during the
year. Diluted earnings per common share is computed based on
common shares outstanding plus the effect of dilutive stock
options and other potentially dilutive common stock equivalents.
The dilutive effect of stock options and other potentially
dilutive common stock equivalents is determined

18



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##### Table of Contents



ITC LEARNING CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)



Note 1.  Summary of Significant Accounting
Policies  (Continued)


using the treasury stock method based on the Companys
average stock price. The effect on weighted average shares
outstanding of securities that could potentially dilute basic
earnings per share that were not included in the computation of
diluted earnings per share, because to do so would have been
antidilutive for the periods presented, were 65,630 and 56,127 of
 stock options and warrants for 1999 and 1998, respectively.

Intangible Assets

Intangible assets include allocations of the purchase price of
acquisitions to workforce investments, leasehold premises, and
goodwill. These assets are being amortized using the
straight-line method over estimated useful lives of two to
fifteen years. Amortization expense for 1999 and 1998 amounted to
 approximately $556,000 and $386,000, respectively. As part of
its ongoing review, management takes into consideration any
events and circumstances which might indicate an impairment to
the carrying amount of intangible assets. Factors that management
 uses to evaluate continuing value include sales from acquired
product lines, employee turnover, and development of related
customer and distribution networks that were in place at the date
 of the acquisition.

Research and Development

Research and development costs consist of software-related
expenditures incurred during the course of planned research and
investigation aimed at developing new products or processes. The
Company expenses all research and development costs as they are
incurred. Research and development costs of $510,000 and $549,000
 were incurred during 1999 and 1998, respectively, and are
included in selling, general and administrative expenses.

Foreign Currency Translation

The Company owns international subsidiaries in Canada, the United
 Kingdom and Australia. Each of these subsidiaries perform sales
and marketing activities for ITCs portfolio of products.
The Canadian subsidiary is also involved in product development
activities. Under Statement of Financial Accounting Standards
No. 52, Foreign Currency Translation, the
subsidiaries financial statements are translated from their
 local currencies using the corresponding foreign currency
exchange rate with the resulting difference recorded as a
component of consolidated stockholders equity. Translation
gains and losses incurred during 1999 were not material. The
Company believes its exposure to foreign currency risk is not
material.

Stock Option Plans

The Company has elected to follow Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25) and related interpretations in accounting
for its employee stock options rather than the alternative fair
value accounting method provided for under SFAS 123,
Accounting for Stock Based Compensation. Under APB
25, because the exercise price of the Companys employee
stock options generally equals the market price of the underlying
 stock on the date of grant, no compensation cost is recognized.

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 at the date of the financial statements
 and the associated amounts of revenues and expenses during the
reporting period. Actual results could differ from the estimates.

19



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##### Table of Contents



ITC LEARNING CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)



Note 1.  Summary of Significant Accounting
Policies  (Continued)


Comprehensive Income

Effective January 1, 1998, the Company adopted Statement
130, Reporting Comprehensive Income. Statement 130
requires foreign currency translation adjustments to be included
in other comprehensive income (loss).

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board
issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Company expects to
adopt the new Statement effective January 1, 2000. The
Company does not anticipate that the adoption of this Statement
will have a significant effect on its results of operations or
financial position.

Note 2.  Accounts Receivable

Accounts receivable include the following at December 31:

|                                     |                                |      |           |           |  |   |           |           | 
|------------------------------------ | ------------------------------ | ---- | --------- | --------- |  | - | --------- | --------- | 
|                                     |                                | 1999 |           | 1998     
|                                     |                                |      |           |          
|Trade accounts receivable            |                                | $    | 4,717,097 |           |  | $ | 6,014,595 |          
|                                    
|                                    
|                                    
|                                    
|Unbilled contract receivables        |                                |      | 200,000   |           |  |   | 37,728    |          
|                                    
|                                    
|                                    
|                                    
|Less allowance for doubtful accounts |                                |      | (502,644  | )         |  |   | (89,421   | )        
|                                     |                                |      |           |           |  |   |           |          
|                                     | Trade accounts receivable, net |      |           | 4,414,453 |  |   |           | 5,962,902 | 
|                                    
|                                    
|                                    
|                                    
|Other receivables                    |                                |      | 68,058    |           |  |   | 30,000    |          
|                                     |                                |      |           |           |  |   |           |          
|                                     |                                | $    | 4,482,511 |           |  | $ | 5,992,902 |          
|                                     |                                |      |           |           |  |   |           |          

Note 3.  Note Receivable

On November 20, 1997, the Company entered into a stock
purchase agreement with Anderson Holdings Inc., to sell all of
the Companys stock in its wholly owned subsidiary Anderson
Soft-Teach (AST). Pursuant to the transaction, ITC
accepted an 8% promissory note in the amount of $950,000. Under
the terms of the note, interest payments are due quarterly, with
the remaining principal balance due in 2001.

Under the terms of the stock purchase agreement, ITC and AST
entered into a reciprocal agreement to sell each others
products. Royalties earned by AST for sales of their products
under this agreement will be applied to the principal value of
the note.

Note 4.  Investments in and Due to Affiliates

The Company is a participant in five separate limited
partnerships with Industrial Training Partners, Ltd. (the ITP
partnerships) and a joint venture with DynCorp. In all of the ITP
 partnerships, the Company is a 5% general partner and in certain
 partnerships the Company has acquired a limited partnership
interest as well. In the joint venture with DynCorp, the Company
has a 50% ownership interest. The ITP partnerships and the
DynCorp joint venture were formed to develop and produce various
series of training programs. Under the contracts to market the
programs for the partnerships and joint venture, ITC receives
50%-70% of the sales price for the costs of reproducing and
marketing the training materials. In the case of the joint
venture agreement, the Company also receives an additional 25%
for its share of the joint venture profits. Sales of programs
related to these affiliates were approximately $1,034,000 and
$1,359,000 in 1999 and 1998, respectively.

20



---



##### Table of Contents



ITC LEARNING CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Note 5.  Line of Credit

On August 11, 1999, the Company entered into a new line of
credit agreement with its principal lender for a two-year term.
The new agreement provided the Company with $4,000,000 of
borrowing capacity. The Company collateralized the credit
facility by granting the bank a security interest in the assets
of the Company. The agreement required maintenance of certain
financial ratios (minimum working capital and tangible net worth)
 and contained certain restrictive covenants, which limited
borrowings and the ability to merge or dispose of assets.

On October 29, 1999, the Company signed a Forbearance
Agreement with its principal lender to avoid the declaration of
default with respect to certain covenants and conditions in its
August 11, 1999 line of credit agreement, including maximum
debt to tangible net worth and minimum tangible net worth
requirements. The Forbearance Agreement increased the
Companys interest rate to prime plus 3% and reduced the
Companys borrowing capacity. On January 7, 2000, the
Company signed an amended Forbearance Agreement with its
principal lender to avoid declaration of default with respect to
certain covenants and conditions in its October 29, 1999
Forbearance Agreement, specifically maximum borrowing capacity
requirements.

At December 31, 1999 and December 31, 1998, the
balances outstanding on the line of credit were $664,000 and
$647,000, respectively.

On January 21, 2000, the Company satisfied its outstanding
debt, and all associated fees and expenses under its line of
credit agreement.

Note 6.  Long-Term Debt

Long-term debt at December 31, 1999 and 1998 consists of the
 following:

|                                                                  |  |              |           |              |  |   |           |  
|----------------------------------------------------------------- |  | ------------ | --------- | ------------ |  | - | --------- | -
|                                                                  |  | December 31, |           | December 31,
|                                                                  |  | 1999         |           | 1998        
|                                                                  |  |              |           |             
|8.5% senior note due 2002                                         |  | $            |          |              |  | $ | 415,549   |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|8.0% senior note due 2003                                         |  |              | 1,177,930 |              |  |   | 1,310,950 |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|5.5% note due 2001, net of unamortized discount of $204,166       |  |              | 795,834   |              |  |   |          |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|9.5% note due 2001, net of unamortized discount of $508,000       |  |              | 617,000   |              |  |   |          |  
|                                                                  |  |              |           |              |  |   |           |  
|                                                                  |  |              | 2,590,764 |              |  |   | 1,726,499 |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Less current maturities                                           |  |              | (277,160  | )            |  |   | (287,283  | )
|                                                                  |  |              |           |              |  |   |           |  
|Long-term debt, net                                               |  | $            | 2,313,604 |              |  | $ | 1,439,216 |  
|                                                                  |  |              |           |              |  |   |           |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Maturities of long-term debt at December 31, 1999 are as follows:
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|2000                                                              |  | $            | 277,160   |              |  |   |           |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|2001                                                              |  |              | 2,402,160 |              |  |   |           |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|2002                                                              |  |              | 277,160   |              |  |   |           |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|2003                                                              |  |              | 277,160   |              |  |   |           |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|2004                                                              |  |              | 69,290    |              |  |   |           |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Thereafter                                                        |  |              |          |              |  |   |           |  
|                                                                  |  |              |           |              |  |   |           |  
|                                                                  |  | $            | 3,302,930 |              |  |   |           |  
|                                                                  |  |              |           |              |  |   |           |  

The 8.5% note payable to the Companys principal lender was
due in monthly principal and interest installments of $10,258
through December 2002 and was collateralized by the
assignment of interest in the shares of the Companys common
 stock held by its Employee Stock Ownership Plan, accounts
receivable, inventory and property and equipment. Per the
Companys line of credit agreement dated August 11,
1999, the

21



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##### Table of Contents



ITC LEARNING CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Note 6.  Long-Term Debt  (Continued)

Line of Credit


The 8.0% note payable to Nova Scotia Business Development
Corporation (NSBDC) is due in monthly interest
installments (beginning October 31, 1998) and quarterly
principal installments (beginning March 31, 1999), and
matures in January 2004. The NSBDC has a subordinated
interest position to the Companys principal lender, in the
receivables and inventory of ITC Canada Limited. Additionally,
the NSBDCs interest in the fixed assets and intellectual
property of ITC Canada Limited ranks pari passu with the
Companys principal lender.

On November 1, 1999, the Company raised $1,000,000 through
the issuance of a 5.5% convertible subordinated debenture due
April 2, 2001. The note is secured by the assets of the
Company and is subordinated to existing and future indebtedness
of the Company. Interest and principal are due in full at
maturity. The note may be converted into shares of common stock
of the Company at any time after February 28, 2000 up to
maturity date at a price of $2.00 per share. The note was issued
with warrants which grant the holders the right to acquire
291,500 shares of the Companys common stock at a per share
price of $2.00. The warrants expire on April 2, 2001. The
warrants were determined to have a value of $245,000, which was
recorded as additional capital. The resulting debt discount is
being amortized over the holding period of the debenture.

On December 30, 1999, the Company raised $1,200,000 through
the issuance of a 9.5% convertible subordinated debenture due
April 2, 2001. Proceeds of $1,125,000 were received in 1999
and $75,000 was received in January 2000. The note is
secured by the assets of the Company and is subordinated to
existing and future indebtedness of the Company. Interest and
principal are due in full at maturity. The note may be converted
into shares of common stock of the Company at any time up to
maturity date at a price no lower than $1.75 per share. The note
was issued with warrants which grant the holders the right to
acquire 349,800 shares of the Companys common stock at a
price no lower than $1.75 per share. The warrants expire on
April 1, 2002. The warrants were determined to have a value
of $508,000, which was recorded as additional capital. The
resulting debt discount is being amortized over the holding
period of the debenture. The number of warrants can increase to
1,049,400 if certain conditions are not met.

Note 7.  Stock Incentive Plans and Stock Warrants

At December 31, 1999, the Company had outstanding options to
 purchase common stock under three separate incentive stock
option plans: the 1992 Directors Incentive Stock Option
Plan, the 1992 Key Employee Incentive Stock Option Plan and the
1998 Incentive Stock Plan. Options granted under the 1992
Directors Incentive Stock Option Plan may be qualified or
non-qualified. From time to time, the Company has granted other
non-qualified options to certain individuals.

On November 30, 1999, the Company repriced 255,000 of its
outstanding stock options. The revised option price was $2.00 per
 share and was above the closing market price on the date of the
repricing.

During 1998, the Company recorded a one-time non-cash charge of
$211,000 relating to a stock option grant to its then-President
and Chief Executive Officer. Upon resignation in 1999, the
options were forfeited and compensation expense was reduced.

22



---



##### Table of Contents



ITC LEARNING CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)



Note 7.  Stock Incentive Plans and Stock
Warrants  (Continued)


The Company, at December 31, 1999, had the following
stock-based incentive plans in effect, as outlined in the
following table:

|                           |  |                        |  |              |         |              |  |            |         |  |  |  |         | 
|-------------------------- |  | ---------------------- |  | ------------ | ------- | ------------ |  | ---------- | ------- |  |  |  | ------- | 
|                           |  |                        |  |              |         |              |  | Plan      
|                           |  | Type of                |  | Total Shares |         | Total Shares |  | Expiration
|Description                |  | Options                |  | Available    |         | Remaining    |  | Date      
|                           |  |                        |  |              |         |              |  |           
|1992 Directors ISO Plan    |  | Qualified/Nonqualified |  |              | 135,000 |              |  |            | 105,000 |  |  |  | 4/30/02 | 
|                          
|                          
|                          
|                          
|1992 Key Employee ISO Plan |  | Qualified/Nonqualified |  |              | 315,000 |              |  |            | 66,034  |  |  |  | 4/30/02 | 
|                          
|                          
|                          
|                          
|1998 Incentive Stock Plan  |  | Qualified/Nonqualified |  |              | 200,000 |              |  |            | 18,750  |  |  |  | 1/07/08 | 
|                          
|                          
|                          
|                          
|Non-Plan Options           |  | Nonqualified           |  |              | 62,500  |              |  |            |        |  |  |  | N/A     | 
|                           |  |                        |  |              |         |              |  |            |         |  |  |  |         | 
|                           |  |                        |  |              | 712,500 |              |  |            | 189,784 |  |  |  |         | 
|                           |  |                        |  |              |         |              |  |            |         |  |  |  |         | 

These plans are intended to further the interests of the Company
by encouraging and providing for the acquisition of an equity
interest in the Company by non-employee directors, officers, and
key employees through the grant of awards with respect to shares
of common stock. The option exercise price of incentive stock
options generally is not less than the fair market value of the
common stock on the date of grant.

The following table summarizes option activity for the years
ended December 31, 1999 and 1998:

|                                 |  |                 |          |              |  |                |          |   |  |   |      | 
|-------------------------------- |  | --------------- | -------- | ------------ |  | -------------- | -------- | - |  | - | ---- | 
|                                 |  | Qualified       |          | Nonqualified |  | Weighted      
|                                 |  | Incentive Stock |          | Stock        |  | Average       
|                                 |  | Options         |          | Options      |  | Exercise Price
|                                 |  |                 |          |              |  |               
|Outstanding at December 31, 1997 |  |                 | 142,384  |              |  |                | 142,616  |   |  | $ | 5.14 | 
|                                
|                                
|                                
|                                
|Options granted                  |  |                 | 324,490  |              |  |                | 120,510  |   |  |   | 4.34 | 
|                                
|                                
|                                
|                                
|Options exercised                |  |                 | (31,600  | )            |  |                |         |   |  |   | 5.46 | 
|                                
|                                
|                                
|                                
|Options cancelled                |  |                 | (61,734  | )            |  |                | (80,000  | ) |  |   | 5.18 | 
|                                 |  |                 |          |              |  |                |          |   |  |   |      | 
|Outstanding at December 31, 1998 |  |                 | 373,540  |              |  |                | 183,126  |   |  | $ | 4.52 | 
|                                 |  |                 |          |              |  |                |          |   |  |   |      | 
|Options granted                  |  |                 | 376,041  |              |  |                | 106,459  |   |  |   | 2.08 | 
|                                
|                                
|                                
|                                
|Options exercised                |  |                 | (5,833   | )            |  |                |         |   |  |   | 4.14 | 
|                                
|                                
|                                
|                                
|Options cancelled                |  |                 | (344,991 | )            |  |                | (165,626 | ) |  |   | 4.50 | 
|                                 |  |                 |          |              |  |                |          |   |  |   |      | 
|Outstanding at December 31, 1999 |  |                 | 398,757  |              |  |                | 123,959  |   |  | $ | 2.29 | 
|                                 |  |                 |          |              |  |                |          |   |  |   |      | 

Incentive stock options and nonqualified stock options
exercisable were 81,465 and 56,457 at December 31, 1999 and
57,298 and 25,999 at December 31, 1998. The weighted average
 exercise price of exercisable incentive stock options and
nonqualified stock options was $2.79 and $3.02 at
December 31, 1999 and $4.74 and $4.88 at December 31,
1998.

The following table summarizes information about options
outstanding at December 31, 1999:

|                           |  |                     |         |                  |  |                     |           |             |  |             |      |  |  |  |         |  |  |   |      | 
|-------------------------- |  | ------------------- | ------- | ---------------- |  | ------------------- | --------- | ----------- |  | ----------- | ---- |  |  |  | ------- |  |  | - | ---- | 
|                           |  |                     |         |                  |  |                    
|                           |  | Options Outstanding |         |                  |  | Options Exercisable
|                           |  |                     |         |                  |  |                    
|                           |  |                     |         | Weighted         |  | Weighted            |           |             |  | Weighted   
|                           |  |                     |         | Average          |  | Average             |           |             |  | Average    
|                           |  | Number              |         | Remaining        |  | Exercise            |           | Number      |  | Exercisable
|                           |  | Outstanding         |         | Contractual Life |  | Price               |           | Exercisable |  | Price      
|                           |  |                     |         |                  |  |                     |           |             |  |            
|Incentive Stock Options    |  |                     | 398,757 |                  |  |                     | 4.8 years |             |  | $           | 2.16 |  |  |  | 81,465  |  |  | $ | 2.79 | 
|                          
|                          
|                          
|                          
|Nonqualified Stock Options |  |                     | 123,959 |                  |  |                     | 4.3 years |             |  | $           | 2.70 |  |  |  | 56,457  |  |  | $ | 3.02 | 
|                           |  |                     |         |                  |  |                     |           |             |  |             |      |  |  |  |         |  |  |   |      | 
|                           |  |                     | 522,716 |                  |  |                     |           |             |  |             |      |  |  |  | 137,922 |  |  |   |      | 
|                           |  |                     |         |                  |  |                     |           |             |  |             |      |  |  |  |         |  |  |   |      | 

23



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##### Table of Contents



ITC LEARNING CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)



Note 7.  Stock Incentive Plans and Stock
Warrants  (Continued)


The Company applies APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in
accounting for its plans. Accordingly, no compensation expense
has been recognized other than discussed above for its stock
option plans because stock options are generally granted with an
exercise price equal to the fair value of the stock on the grant
date. Had compensation cost for the Companys stock option
plans been determined based upon the fair value of the options at
 the grant date for awards under these plans consistent with the
methodology prescribed under Statement 123, the Companys
1999 net income and earnings per share would not have been
materially affected. The fair value of the options granted was
determined using the Black-Scholes option pricing model with the
following assumptions: dividend yield of 0%, volatility of 89%,
risk-free interest rate of 6.25% and an expected life of three
years.

On December 31, 1999, the Company had outstanding 641,300
warrants to purchase common stock. The following schedule
summarizes the exercise price and expiration date of the
warrants:

|      |            |             |  |          |         |            |  |             |  |  |            | 
|----- | ---------- | ----------- |  | -------- | ------- | ---------- |  | ----------- |  |  | ---------- | 
|Issue |            | Warrants    |  | Exercise |         | Expiration
|Date  |            | Outstanding |  | Price    |         | Date      
|      |            |             |  |          |         |           
|      | 11/01/1999 |             |  |          | 291,500 |            |  | $2.00/share |  |  | 04/02/2001 | 
|     
|     
|     
|     
|      | 12/30/1999 |             |  |          | 349,800 |            |  | $1.75/share |  |  | 04/01/2002 | 

The Company has reserved 1,827,014 shares of its common stock for
 future issuance relating to its convertible subordinated
debentures and warrants.

Note 8.  Income Taxes

The components of income tax expense (benefit) are as
follows:

|          |         |      |   |      |  |   |          |          |  
|--------- | ------- | ---- | - | ---- |  | - | -------- | -------- | -
|          |         | 1999 |   | 1998
|          |         |      |   |     
|Current:  |         |      |   |      |  |   |          |         
|         
|         
|         
|         
|          | Federal |      | $ |     |  |   | $        |         |  
|         
|         
|         
|         
|          | State   |      |   |     |  |   |          |         |  
|         
|         
|         
|         
|          | Foreign |      |   |     |  |   |          | (232,663 | )
|          |         |      |   |      |  |   |          |         
|          |         |      |   |      |  |   | (232,663 | )       
|         
|         
|         
|         
|Deferred: |         |      |   |      |  |   |          |         
|         
|         
|         
|         
|          | Federal |      | $ |     |  |   | $        |         |  
|         
|         
|         
|         
|          | State   |      |   |     |  |   |          |         |  
|          |         |      |   |      |  |   |          |         
|          |         |      |  |      |  |   |         |         
|          |         |      |   |      |  |   |          |         
|          |         | $    |  |      |  | $ | (232,663 | )       
|          |         |      |   |      |  |   |          |         

24



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##### Table of Contents



ITC LEARNING CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Note 8.  Income Taxes  (Continued)

The difference between income tax expense (benefit) and the
amount determined by applying the federal statutory rate is as
follows:

|                                                                 |  |      |            |      |  |   |            |  
|---------------------------------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|                                                                 |  | 1999 |            | 1998
|                                                                 |  |      |            |     
|Federal statutory rate                                           |  | $    | (1,602,789 | )    |  | $ | (1,368,740 | )
|                                                                
|                                                                
|                                                                
|                                                                
|State income taxes, net of federal benefit                       |  |      | (188,563   | )    |  |   | (161,000   | )
|                                                                
|                                                                
|                                                                
|                                                                
|Amortization of intangibles                                      |  |      | 82,281     |      |  |   | 84,440     |  
|                                                                
|                                                                
|                                                                
|                                                                
|Alternative Minimum Tax credit, NOL limitation and foreign taxes |  |      | 1,779,796  |      |  |   | 1,131,837  |  
|                                                                
|                                                                
|                                                                
|                                                                
|Tax effect of incentive stock options                            |  |      | (80,275    | )    |  |   | 63,300     |  
|                                                                
|                                                                
|                                                                
|                                                                
|Other                                                            |  |      | 9,550      |      |  |   | 17,500     |  
|                                                                 |  |      |            |      |  |   |            |  
|                                                                 |  | $    |           |      |  | $ | (232,663   | )
|                                                                 |  |      |            |      |  |   |            |  

The following temporary differences give rise to the provision
for deferred taxes (benefit) at December 31:

|                                                                  |  |      |          |      |  |   |          |  
|----------------------------------------------------------------- |  | ---- | -------- | ---- |  | - | -------- | -
|                                                                  |  | 1999 |          | 1998
|                                                                  |  |      |          |     
|Amortization of goodwill                                          |  | $    | (37,900  | )    |  | $ | (22,800  | )
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Deferred lease obligation                                         |  |      | 5,100    |      |  |   | 13,300   |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Capitalized program development costs                             |  |      | (125,975 | )    |  |   | (294,425 | )
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Deferred revenues and accruals                                    |  |      | 114,000  |      |  |   | 190,000  |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Allowance for doubtful accounts                                   |  |      | (155,000 | )    |  |   | 60,000   |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Inventory reserves                                                |  |      | (8,550   | )    |  |   | 76,000   |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Net operating loss/capital loss and tax credit carryforwards, net |  |      | 180,150  |      |  |   | (302,900 | )
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Accrued compensation                                              |  |      | 28,175   |      |  |   | 280,825  |  
|                                                                  |  |      |          |      |  |   |          |  
|                                                                  |  | $    |         |      |  | $ |         |  
|                                                                  |  |      |          |      |  |   |          |  

25



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##### Table of Contents



ITC LEARNING CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Note 8.  Income Taxes  (Continued)

The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, are presented below.

|                          |                                              |                                      |   |            |            |   |   |            |            |  
|------------------------- | -------------------------------------------- | ------------------------------------ | - | ---------- | ---------- | - | - | ---------- | ---------- | -
|                          |                                              | 1999                                 |   | 1998      
|                          |                                              |                                      |   |           
|Deferred tax assets:      |                                              |                                      |   |            |            |   |   |           
|                         
|                         
|                         
|                         
|                          | Deferred revenues and accruals               |                                      | $ |           |            |   | $ | 114,000    |           
|                         
|                         
|                         
|                         
|                          | Allowance for doubtful accounts              |                                      |   | 191,000    |            |   |   | 36,000     |           
|                         
|                         
|                         
|                         
|                          | Accrued compensation                         |                                      |   | 28,000     |            |   |   | 56,175     |           
|                         
|                         
|                         
|                         
|                          | Inventory reserves                           |                                      |   | 8,550      |            |   |   |           |           
|                         
|                         
|                         
|                         
|                          | Net operating and capital loss carryforwards |                                      |   | 5,624,800  |            |   |   | 3,684,600  |           
|                         
|                         
|                         
|                         
|                          | Deferred lease obligation                    |                                      |   | 4,600      |            |   |   | 9,700      |           
|                         
|                         
|                         
|                         
|                          | Difference in depreciation                   |                                      |   | 97,000     |            |   |   | 97,000     |           
|                         
|                         
|                         
|                         
|                          | Amortization of goodwill                     |                                      |   | 60,700     |            |   |   | 22,800     |           
|                          |                                              |                                      |   |            |            |   |   |           
|                          |                                              | Total deferred tax assets            |   |            | 6,014,650  |   |   |            | 4,020,275  |  
|                         
|                         
|                         
|                         
|                          | Less valuation allowance                     |                                      |   | (4,969,650 | )          |   |   | (2,848,700 | )         
|                          |                                              |                                      |   |            |            |   |   |           
|                          |                                              | Net deferred tax assets              |   |            | 1,045,000  |   |   |            | 1,171,575  |  
|                          |                                              |                                      |   |            |            |   |   |           
|Deferred tax liabilities: |                                              |                                      |   |            |            |   |   |           
|                         
|                         
|                         
|                         
|                          | Capitalized product development costs        |                                      |   | (1,045,000 | )          |   |   | (1,171,575 | )         
|                          |                                              |                                      |   |            |            |   |   |           
|                          |                                              | Total gross deferred tax liabilities |   |            | (1,045,000 | ) |   |            | (1,171,575 | )
|                          |                                              |                                      |   |            |            |   |   |           
|                          | Net deferred tax assets                      |                                      | $ |           |            |   | $ |           |           
|                          |                                              |                                      |   |            |            |   |   |           

At December 31, 1999, the Company had $8,700,000 in U.S. net
 operating loss carryforwards available for income tax purposes
of which $1,700,000 expire in 2012, $4,700,000 expire in 2018,
and $2,300,000 expire in 2019. The Company also has a capital
loss carryforward available for income tax purposes in the amount
 of $2,506,000 that expires in 2002. As there is no assurance of
future earnings, a valuation allowance reducing the amount of net
 deferred tax assets to equal deferred tax liabilities has been
recorded.

As a result of an acquisition, the Company has available
approximately $1,125,000 of additional net operating loss
carryforwards that expire at varying dates through 2007. Pursuant
 to Section 382 of the Internal Revenue Code, the
utilization of the net operating loss is limited to approximately
 $245,000 per year. Due to the limitation on uses and other
uncertainties relating to the utilization of the remaining tax
benefit of these deductions, a valuation allowance has been
recorded to substantially offset the net deferred tax asset
related to the acquisition. Similarly, the Company has fully
reserved the benefit of the tax loss carryforwards of Turn-Key
and ITC Canada in the amounts of $30,000 and $2,300,000,
respectively.

The Company paid no federal and state income taxes in 1999 and
1998. The Company also received refunds of federal and state
income taxes of approximately $95,000 and $23,000 in 1999 and
1998, respectively.

Note 9.  Acquisitions

On January 30, 1998, the Company invested $1,000,000 in the
stock of Mentor Networks Inc. (Mentor). For its
investment, ITC acquired 8% of the outstanding stock of Mentor
with an option to acquire an additional 12%. The Company had
previously acquired the rights to distribute Mentors
products exclusively in the United States. During the second
quarter of 1998, ITC restructured the terms of its distribution
agreement with Mentor. Certain terms of the agreement were
revised, including the revenue sharing arrangement and extension
of the agreement through June of 2001.

26



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##### Table of Contents



ITC LEARNING CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)



Note 9.  Acquisitions  (Continued)


On September 25, 1998, ITC, through its wholly owned
subsidiary, ITC Canada Limited, acquired certain assets of Mentor
 and its wholly owned subsidiary, High Performance Group (Canada)
 Inc. (HPG). The assets included furniture, fixtures
and computer equipment, software products developed or owned by
Mentor and HPG, assignment of the leased premises in Halifax,
Nova Scotia, the assignment of certain contractual commitments,
and the assignment of all trade names, copyrights, patents and
other intellectual property of both Mentor and HPG. The purchase
price totaled $1,981,000 and consisted of a cash payment of
$661,000 and a five year promissory note bearing 8% interest
payable to the NSBDC in the amount of $1,320,000. Additionally,
the Company agreed to pay the NSBDC up to $1,058,000 in certain
future royalty payments based on the ongoing performance of the
Mentor assets. As a result of the acquisition and its earlier
investment, the Company recorded approximately $2,827,000 of
intangible assets primarily consisting of workforce investment,
leasehold premises and capitalized program development costs. The
 intangible assets are being amortized over a period of three
years. The amounts presented above represent the U.S. equivalent
based on the relevant exchange rates at the time of acquisition.

On March 25, 1998, the Company acquired Turn-Key Training
Technologies, Inc. (Turn-Key), a developer and
distributor of performance-based administrative software.
Pursuant to the acquisition agreement, ITC purchased all of the
outstanding stock of Turn-Key for $700,000 in cash. Additionally,
 ITC paid $600,000 and issued 100,000 shares of its common stock
valued at $312,000 to Philip L. Camillo, Turn-Keys founder
and president, in connection with a long-term non-competition
agreement. As a result of the acquisition, the Company recorded
intangible assets of approximately $1,795,000, consisting of the
non-competition agreement and goodwill. These assets are being
amortized over periods of seven years and ten years,
respectively.

On June 18, 1998, the Company acquired certain assets of
iNEX Corporation (iNEX) for cash of $211,000 and
shares of stock valued at $202,000. In exchange for its
investment, ITC acquired iNEXs technology-based delivery
platforms, intellectual property rights, content, certain other
assets and ten employees. As a result of the acquisition, the
Company recorded goodwill of $374,000. These assets are being
amortized over a period of ten years.

The following table sets forth proforma results of operations of
the Company for 1998 and 1997, as if Mentor had been acquired
January 1, 1997. The other 1998 acquisitions were not
material to require proforma disclosure.

|             |                           |      |            |            |   |   |            |           |  
|------------ | ------------------------- | ---- | ---------- | ---------- | - | - | ---------- | --------- | -
|             |                           | 1998 |            | 1997      
|             |                           |      |            |           
|Net revenues |                           | $    | 19,188,517 |            |   | $ | 26,017,182 |          
|             |                           |      |            |            |   |   |            |          
|             | Net loss                  |      |            | (5,647,589 | ) |   |            | 5,953,490 |  
|             |                           |      |            |            |   |   |            |          
|             | Net loss per common share |      | $          | (1.47      | ) |   | $          | (1.53     | )
|             |                           |      |            |            |   |   |            |          

Note 10.  Commitments and Contingencies

Lease Commitments

The Company leases substantially all of its facilities and its
transportation equipment under operating lease agreements. The
majority of the operating leases contain renewal options that can
 be exercised after the initial lease term. Renewal options are
generally for periods of one to three years. All operating leases
 will expire over the next five years, and management expects
that leases will be renewed or replaced by other leases in the
normal course of business. There are no material restrictions
imposed by the lease agreements.

27



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##### Table of Contents



ITC LEARNING CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)



Note 10.  Commitments and Contingencies 
(Continued)


Future minimum rental payments required under operating leases
that have initial or remaining non-cancelable lease terms in
excess of one year as of December 31, 1999 are as follows:

|     |  |   |           | 
|---- |  | - | --------- | 
|    
|    
|    
|    
|2000 |  | $ | 991,000   | 
|    
|    
|    
|    
|2001 |  |   | 913,000   | 
|    
|    
|    
|    
|2002 |  |   | 459,000   | 
|    
|    
|    
|    
|2003 |  |   | 37,000    | 
|    
|    
|    
|    
|2004 |  |   | 22,000    | 
|     |  |   |           | 
|     |  | $ | 2,422,000 | 
|     |  |   |           | 

Rent expense under these operating lease agreements was
approximately $913,000 and $671,000 for 1999 and 1998,
respectively.

Note 11.  Stockholders Equity

The Company instituted an Employee Stock Ownership Plan and Trust
 (ESOP) for the benefit of substantially all
employees effective January 1, 1992. To fund the plan, ITC
had entered into a loan agreement with a bank to borrow funds for
 the purchase of shares for the plan. See Note 6  Long Term Debt.

For the years ended December 31, 1999 and 1998, the Company
recognized compensation expense of approximately $80,000 and
$102,000, respectively, based on fair market value when the
shares were allocated to employees and interest expense
associated with the Companys ESOP loan. The Companys
Board of Directors has approved an annual allocation of 20,000
shares of common stock to be allocated to participant accounts
based on each employees relative annual compensation.
Contributions to the ESOP were approximately $338,000 in 1999,
including approximately $22,000 of interest. Contributions to the
 ESOP were approximately $123,000 in 1998, including
approximately $39,000 of interest. Unallocated shares of 63,322
and 83,322 at December 31, 1999 and 1998 are not considered
outstanding in earnings per share calculations. The fair value of
 the 63,332 unallocated shares at December 31, 1999 was
approximately $190,000.

Note 12.  Employee 401(K) Plan

On January 1, 1991, the Company established a 401(k) Plan
for the benefit of substantially all of its employees. Employees
can contribute from 1% to 15% of their salary to the Plan subject
 to statutory limitations. At the discretion of the Board of
Directors, the Company can elect to make a contribution to the
Plan. The Company did not make contributions to the 401(k) Plan
in either 1999 or 1998.

Note 13.  Segment Information

Factors management used to identify
reportable segments

The Companys reportable segments are business units located
 in distinct geographic regions. The reportable segments are
managed separately due to differences in operating environments,
customer base and technological capacity.

Measurement of segment profit or loss and
segment assets

The Company evaluates performance and allocates resources based
on profit or loss before taxes from operations of each segment.
The accounting policies of each reportable segment are the same
as those described in the summary of significant accounting
policies. Intersegment sales and transfers are eliminated during
consolidation and for segment reporting purposes.

28



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##### Table of Contents



ITC LEARNING CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Note 13.  Segment Information 
(Continued)

Description of the types of products and services from which
each reportable segment derives its revenues

The Company has four reportable segments: United States, Canada,
United Kingdom and Australia. The Company is primarily engaged in
 developing, marketing and selling computer-based training
software applications. Revenues for each reportable segment are
derived from sales of ITCs product portfolio, custom
implementation services and hardware.

The following tables show revenues, profit or loss and assets by
reportable segment for the years ended December 31, 1999 and
 1998 (amounts in thousands):

|                                      |  |                              |        |        |  |         |        |           |  |       |       |   |  |   |       |   |  |   |        |  
|------------------------------------- |  | ---------------------------- | ------ | ------ |  | ------- | ------ | --------- |  | ----- | ----- | - |  | - | ----- | - |  | - | ------ | -
|                                      |  |                             
|                                      |  | Year ended December 31, 1999
|                                      |  |                             
|                                      |  | United                       |        |        |  | United  |        |          
|                                      |  | States                       |        | Canada |  | Kingdom |        | Australia |  | Total
|                                      |  |                              |        |        |  |         |        |           |  |      
|Revenues from external customers      |  | $                            | 11,850 |        |  | $       | 1,278  |           |  | $     | 2,392 |   |  | $ | 1,156 |   |  | $ | 16,676 |  
|                                     
|                                     
|                                     
|                                     
|Intersegment revenues                 |  |                              | 1,756  |        |  |         | 431    |           |  |       |      |   |  |   |      |   |  |   | 2,187  |  
|                                     
|                                     
|                                     
|                                     
|Interest expense                      |  |                              | 297    |        |  |         | 98     |           |  |       |      |   |  |   |      |   |  |   | 395    |  
|                                     
|                                     
|                                     
|                                     
|Depreciation and amortization expense |  |                              | 2,416  |        |  |         | 1,396  |           |  |       | 6     |   |  |   | 19    |   |  |   | 3,837  |  
|                                     
|                                     
|                                     
|                                     
|Segment loss before taxes             |  |                              | (2,722 | )      |  |         | (1,647 | )         |  |       | (344  | ) |  |   | (1    | ) |  |   | (4,714 | )
|                                     
|                                     
|                                     
|                                     
|Segment assets                        |  |                              | 10,659 |        |  |         | 3,676  |           |  |       | 872   |   |  |   | 683   |   |  |   | 15,890 |  

|                                      |  |                              |        |        |  |         |       |           |  |       |       |   |  |   |       |   |  |   |        |  
|------------------------------------- |  | ---------------------------- | ------ | ------ |  | ------- | ----- | --------- |  | ----- | ----- | - |  | - | ----- | - |  | - | ------ | -
|                                      |  |                             
|                                      |  | Year ended December 31, 1998
|                                      |  |                             
|                                      |  | United                       |        |        |  | United  |       |          
|                                      |  | States                       |        | Canada |  | Kingdom |       | Australia |  | Total
|                                      |  |                              |        |        |  |         |       |           |  |      
|Revenues from external customers      |  | $                            | 13,011 |        |  | $       | 739   |           |  | $     | 3,224 |   |  | $ | 1,452 |   |  | $ | 18,426 |  
|                                     
|                                     
|                                     
|                                     
|Intersegment revenues                 |  |                              | 2,187  |        |  |         | 111   |           |  |       |      |   |  |   |      |   |  |   | 2,298  |  
|                                     
|                                     
|                                     
|                                     
|Interest expense                      |  |                              | 232    |        |  |         | 66    |           |  |       |      |   |  |   |      |   |  |   | 298    |  
|                                     
|                                     
|                                     
|                                     
|Depreciation and amortization expense |  |                              | 2,405  |        |  |         | 310   |           |  |       | 25    |   |  |   | 16    |   |  |   | 2,756  |  
|                                     
|                                     
|                                     
|                                     
|Segment loss before taxes             |  |                              | (3,761 | )      |  |         | (136  | )         |  |       | (7    | ) |  |   | (122  | ) |  |   | (4,026 | )
|                                     
|                                     
|                                     
|                                     
|Segment assets                        |  |                              | 12,087 |        |  |         | 3,838 |           |  |       | 2,051 |   |  |   | 671   |   |  |   | 18,647 |  

29



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##### Table of Contents



ITC LEARNING CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)



Note 13.  Segment Information 
(Continued)


Product and Services Information

The following tables show revenues by product and service group
for each reportable segment for the years ended December 31,
 1999 and 1998:

|               |                 |                              |        |        |  |         |       |           |  |       |       |       |  |   |       |     |  |   |        |       | 
|-------------- | --------------- | ---------------------------- | ------ | ------ |  | ------- | ----- | --------- |  | ----- | ----- | ----- |  | - | ----- | --- |  | - | ------ | ----- | 
|               |                 |                             
|               |                 | Year ended December 31, 1999
|               |                 |                             
|               |                 | United                       |        |        |  | United  |       |          
|Product Groups |                 | States                       |        | Canada |  | Kingdom |       | Australia |  | Total
|               |                 |                              |        |        |  |         |       |           |  |      
|Software       |                 |                              |        |        |  |         |       |           |  |       |       |       |  |   |       |     |  |   |        |      
|              
|              
|              
|              
|               | PC Skills       |                              | $      | 2,905  |  |         | $     | 483       |  |       | $     | 1,632 |  |   | $     | 774 |  |   | $      | 5,794 | 
|              
|              
|              
|              
|               | Basic Skills    |                              |        | 430    |  |         |       | 10        |  |       |       | 25    |  |   |       |    |  |   |        | 465   | 
|              
|              
|              
|              
|               | Regulatory      |                              |        | 400    |  |         |       | 5         |  |       |       | 10    |  |   |       |    |  |   |        | 415   | 
|              
|              
|              
|              
|               | Technical       |                              |        | 1,266  |  |         |       | 114       |  |       |       | 188   |  |   |       |    |  |   |        | 1,568 | 
|              
|              
|              
|              
|               | Instrumentation |                              |        | 478    |  |         |       | 56        |  |       |       | 15    |  |   |       |    |  |   |        | 549   | 
|              
|              
|              
|              
|               | AdminSTAR       |                              |        | 2,481  |  |         |       |          |  |       |       |      |  |   |       |    |  |   |        | 2,481 | 
|              
|              
|              
|              
|               | Soft Skills     |                              |        | 536    |  |         |       | 525       |  |       |       | 162   |  |   |       |    |  |   |        | 1,223 | 
|              
|              
|              
|              
|               | Other           |                              |        | 1,491  |  |         |       | 68        |  |       |       | 292   |  |   |       | 382 |  |   |        | 2,233 | 
|              
|              
|              
|              
|Hardware       |                 |                              | 912    |        |  |         | 17    |           |  |       | 68    |       |  |   |      |     |  |   | 997    |      
|              
|              
|              
|              
|Services       |                 |                              | 951    |        |  |         |      |           |  |       |      |       |  |   |      |     |  |   | 951    |      
|               |                 |                              |        |        |  |         |       |           |  |       |       |       |  |   |       |     |  |   |        |      
|               |                 | $                            | 11,850 |        |  | $       | 1,278 |           |  | $     | 2,392 |       |  | $ | 1,156 |     |  | $ | 16,676 |      
|               |                 |                              |        |        |  |         |       |           |  |       |       |       |  |   |       |     |  |   |        |      

|               |                 |                              |        |        |  |         |     |           |  |       |       |       |  |   |       |       |  |   |        |       | 
|-------------- | --------------- | ---------------------------- | ------ | ------ |  | ------- | --- | --------- |  | ----- | ----- | ----- |  | - | ----- | ----- |  | - | ------ | ----- | 
|               |                 |                             
|               |                 | Year ended December 31, 1998
|               |                 |                             
|               |                 | United                       |        |        |  | United  |     |          
|Product Groups |                 | States                       |        | Canada |  | Kingdom |     | Australia |  | Total
|               |                 |                              |        |        |  |         |     |           |  |      
|Software       |                 |                              |        |        |  |         |     |           |  |       |       |       |  |   |       |       |  |   |        |      
|              
|              
|              
|              
|               | PC Skills       |                              | $      | 3,319  |  |         | $   | 104       |  |       | $     | 2,527 |  |   | $     | 1,452 |  |   | $      | 7,402 | 
|              
|              
|              
|              
|               | Basic Skills    |                              |        | 308    |  |         |     |          |  |       |       | 4     |  |   |       |      |  |   |        | 312   | 
|              
|              
|              
|              
|               | Regulatory      |                              |        | 891    |  |         |     |          |  |       |       | 6     |  |   |       |      |  |   |        | 897   | 
|              
|              
|              
|              
|               | Technical       |                              |        | 1,891  |  |         |     | 120       |  |       |       | 321   |  |   |       |      |  |   |        | 2,332 | 
|              
|              
|              
|              
|               | Instrumentation |                              |        | 528    |  |         |     |          |  |       |       |      |  |   |       |      |  |   |        | 528   | 
|              
|              
|              
|              
|               | AdminSTAR       |                              |        | 428    |  |         |     |          |  |       |       |      |  |   |       |      |  |   |        | 428   | 
|              
|              
|              
|              
|               | Soft Skills     |                              |        | 613    |  |         |     | 515       |  |       |       |      |  |   |       |      |  |   |        | 1,128 | 
|              
|              
|              
|              
|               | Other           |                              |        | 448    |  |         |     |          |  |       |       | 190   |  |   |       |      |  |   |        | 638   | 
|              
|              
|              
|              
|Hardware       |                 |                              | 4,185  |        |  |         |    |           |  |       | 108   |       |  |   |      |       |  |   | 4,293  |      
|              
|              
|              
|              
|Services       |                 |                              | 400    |        |  |         |    |           |  |       | 68    |       |  |   |      |       |  |   | 468    |      
|               |                 |                              |        |        |  |         |     |           |  |       |       |       |  |   |       |       |  |   |        |      
|               |                 | $                            | 13,011 |        |  | $       | 739 |           |  | $     | 3,224 |       |  | $ | 1,452 |       |  | $ | 18,426 |      
|               |                 |                              |        |        |  |         |     |           |  |       |       |       |  |   |       |       |  |   |        |      

Note 14.  Comprehensive Loss

The components of comprehensive loss, net of related tax, for
1999 and 1998 are as follows:

|                                        |  |              |            |              |  |   |            |  
|--------------------------------------- |  | ------------ | ---------- | ------------ |  | - | ---------- | -
|                                        |  | December 31, |            | December 31,
|                                        |  | 1999         |            | 1998        
|                                        |  |              |            |             
|Net loss                                |  | $            | (4,714,084 | )            |  | $ | (3,793,042 | )
|                                       
|                                       
|                                       
|                                       
|Foreign currency translation adjustment |  |              | (2,555     | )            |  |   | (43,216    | )
|                                        |  |              |            |              |  |   |            |  
|Comprehensive net loss                  |  | $            | (4,716,639 | )            |  | $ | (3,836,258 | )
|                                        |  |              |            |              |  |   |            |  

30



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ITC LEARNING CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)



Note 14.  Comprehensive Loss  (Continued)


The components of accumulated other comprehensive loss, net of
related tax, at December 31, 1999 and December 31, 1998
 are as follows:

|                                                   |  |   |         |   |  |   |         |  
|-------------------------------------------------- |  | - | ------- | - |  | - | ------- | -
|                                                   |  |   |         |  
|                                                  
|                                                  
|                                                  
|                                                  
|Cumulative foreign currency translation adjustment |  | $ | (13,082 | ) |  | $ | (10,527 | )
|                                                   |  |   |         |   |  |   |         |  

Note 15.  Quarterly Financial Data (Unaudited)

Financial data for the interim periods of 1999 and 1998 were as
follows (amounts in thousands except per share amounts):

|                                             |  |           |       |          |  |               |       |              |  |   |        |   |  |   |        |  
|-------------------------------------------- |  | --------- | ----- | -------- |  | ------------- | ----- | ------------ |  | - | ------ | - |  | - | ------ | -
|                                             |  | March 31, |       | June 30, |  | September 30, |       | December 31,
|                                             |  | 1999      |       | 1999     |  | 1999          |       | 1999        
|                                             |  |           |       |          |  |               |       |             
|Net revenues                                 |  | $         | 5,702 |          |  | $             | 5,469 |              |  | $ | 3,102  |   |  | $ | 2,403  |  
|                                            
|                                            
|                                            
|                                            
|Net income (loss)                            |  |           | 277   |          |  |               | 374   |              |  |   | (2,267 | ) |  |   | (3,098 | )
|                                            
|                                            
|                                            
|                                            
|Earnings (loss) per share: Basic and diluted |  |           | 0.07  |          |  |               | 0.10  |              |  |   | (0.58  | ) |  |   | (0.80  | )

|                                             |  |           |       |          |  |               |        |              |  |   |        |   |  |   |       | 
|-------------------------------------------- |  | --------- | ----- | -------- |  | ------------- | ------ | ------------ |  | - | ------ | - |  | - | ----- | 
|                                             |  | March 31, |       | June 30, |  | September 30, |        | December 31,
|                                             |  | 1998      |       | 1998     |  | 1998          |        | 1998        
|                                             |  |           |       |          |  |               |        |             
|Net revenues                                 |  | $         | 2,835 |          |  | $             | 4,040  |              |  | $ | 4,054  |   |  | $ | 7,497 | 
|                                            
|                                            
|                                            
|                                            
|Net income (loss)                            |  |           | (753  | )        |  |               | (1,265 | )            |  |   | (1,896 | ) |  |   | 121   | 
|                                            
|                                            
|                                            
|                                            
|Earnings (loss) per share: Basic and diluted |  |           | (0.19 | )        |  |               | (0.33  | )            |  |   | (0.48  | ) |  |   | 0.01  | 

31



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##### Table of Contents








|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|Item 8. | Changes in and Disagreements with Accountants on Accounting
	 and Financial Disclosure

None.




PART III






|        |                                                                                                                 
|------- | ----------------------------------------------------------------------------------------------------------------
|Item 9. | Directors, Executive Officers, Promoters and Control
	Persons; Compliance with Section 16(a) of the Exchange Act

The following sets forth information concerning the
Companys Executive Officers, Key Employees and Directors:

|                        |  |     |    |          |  |                                                        
|----------------------- |  | --- | -- | -------- |  | -------------------------------------------------------
|Name                    |  | Age |    | Position
|                        |  |     |    |         
|Daniel R. Bannister     |  |     | 69 |          |  | Director                                               
|                       
|                       
|                       
|                       
|Thomas C. Byrne         |  |     | 37 |          |  | Director                                               
|                       
|                       
|                       
|                       
|Peter J. Li             |  |     | 61 |          |  | Director                                               
|                       
|                       
|                       
|                       
|Christopher E. Mack     |  |     | 34 |          |  | President, Chief Financial Officer, Treasurer, Director
|                       
|                       
|                       
|                       
|John D. Sanders         |  |     | 61 |          |  | Chairman of the Board of Directors                     
|                       
|                       
|                       
|                       
|Robert R. Spillane      |  |     | 64 |          |  | Director                                               
|                       
|                       
|                       
|                       
|Richard E. Thomas       |  |     | 73 |          |  | Director                                               
|                       
|                       
|                       
|                       
|Christopher C. Connolly |  |     | 39 |          |  | Vice President, Operations and Services                
|                       
|                       
|                       
|                       
|Jennifer L. Condro      |  |     | 28 |          |  | Vice President, Technology and Development             
|                       
|                       
|                       
|                       
|Mark Fenna-Roberts      |  |     | 41 |          |  | President, ITC Australasia Pty. Limited                
|                       
|                       
|                       
|                       
|Philip Jones            |  |     | 39 |          |  | President, Activ Training Limited                      
|                       
|                       
|                       
|                       
|Gloria J. MacCorkindale |  |     | 51 |          |  | Vice President, Chief Learning Officer                 
|                       
|                       
|                       
|                       
|Michael Morrison        |  |     | 28 |          |  | Vice President, Chief Technology Officer               
|                       
|                       
|                       
|                       
|Matthew C. Sysak        |  |     | 32 |          |  | Vice President, Finance and Administration, Secretary  

Daniel R. Bannister, a Director since 1988, is Chairman of
 the Board of DynCorp, a leading technology services firm.
Previously, he served as President and Chief Executive Officer of
 DynCorp, from 1985 until 1997. Mr. Bannister serves on the
boards of several technology service companies. He is also
Chairman of the Board of the American Management Association, a
director of the George Mason University Foundation, the Board of
Visitors of Marymount University, and Chairman of the Board of
the Employee Owners Foundation.

Thomas C. Byrne was appointed to the ITC Board of
Directors in January 2000. Mr. Byrne is co-founder and
President of New River Capital Partners, a private equity venture
 capital fund. Prior to founding New River, Mr. Byrne served
 as Vice-Chairman of Blockbuster Entertainment Group, a division
of Viacom, Inc. In this capacity, Mr. Byrne was responsible
for business development, international operations, technology
and online operations, and worldwide acquisition programs.
Mr. Byrne is a Certified Public Accountant and prior to
joining Blockbuster, was with KMPG Peat Marwick.

Peter J. Li, a Director since July of 1998, is the
Publisher and Chief Executive Officer of the Peter Li Education
Group, a leading publisher of educational publications for
administrators, teachers, and students from pre-school through
college. Mr. Li has served on the Boards of Directors and
committees of several companies and associations in the education
 industry, including The Education Press of America, Global
Village Schools, National Catholic Educational Exhibitors, The
National School Supply and Equipment Association, Software
Information Industry Association, The School of Education at The
University of Dayton (OH), University of St. Thomas
(MN) Publishing Board, and the Advisory Board for Target
Stores.

Christopher E. Mack, is President, Chief Financial
Officer, Treasurer and Director. Prior to being named President
in November 1999, Mr. Mack held several positions at
ITC, including Chief Operating Officer, Vice President of Finance
 and Administration, and Corporate Controller. Before joining ITC
 in December 1993,

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John D. Sanders is Chairman of the Board of Directors and
serves as a business consultant to emerging technology companies.
 He was Chairman and Chief Executive Officer of TechNews, Inc.,
publishers of Washington Technology, from 1988 to 1996,
prior to its sale to The Washington Post Company. Since 1968, he
has been a Registered Representative of Wachtel & Co., Inc.,
a Washington, DC based investment banking firm. He received the
B.E.E. from University of Louisville in 1961 and the M.S. and
Ph.D. degrees in electrical engineering from Carnegie-Mellon
University in 1962 and 1965 respectively. Dr. Sanders also serves
 as a Director of Comtex News Network, Inc., Hadron, Inc., and
SenSyTech, Inc.

Robert R. Spillane, Ph.D., has served as Regional
Education Officer for Europe, U.S. Department of State Office of
Overseas Schools since 1997. From 1985 to 1997 he was
Superintendent of Schools for Fairfax County Virginia Public
Schools, the twelfth largest school system in the United States
with 150,000 students. He has also served as Superintendent of
Schools of Boston, Massachusetts, New Rochelle, New York,
Roosevelt, New York, and Glassboro, New Jersey, and as New York
State Deputy Commissioner of Education for Elementary, Secondary
and Continuing Education. Dr. Spillane was both a teacher
and a principal in elementary and secondary schools in
Connecticut after receiving a B.S. from Eastern Connecticut State
 College and M.A. and Ph.D. from the University of Connecticut.
He attended the Advanced Administrative Institute at Harvard
University, and has served as advisor to numerous regional and
national education organizations.

Richard E. Thomas, a Director since 1982, currently
retired. President of COMSAT RSI from 1994 until 1997. Prior to
that, he was Chairman of the Board, President and Chief Executive
 Officer of Radiation Systems, Inc. (RSI), a communications
systems manufacturing company, from 1978 until 1994, at which
time the company was acquired by COMSAT Corporation.
Mr. Thomas was originally employed by RSI as Vice President
of Manufacturing Operations in 1965. From 1954 until 1965
Mr. Thomas was employed by Washington Aluminum Company
located in Baltimore, Maryland, as Vice President and General
Manager of the Technical Products Division.

Christopher C. Connolly is Vice President of Operations
and Services for ITC. Mr. Connolly joined ITC in 1997 after
serving as Federal Business Development Manager, Educational
Services, with Hewlett-Packard Company. Prior to Hewlett-Packard
he was with Unisys Corporation for approximately 10 years.
While at Unisys, he directed the Federal Customer Education
organization, and held management positions in marketing,
business development, sales and internal performance consulting.
Primary customer sales were to federal, state and local
government agencies, both direct and through business partners.
Mr. Connolly has a BS degree in Physics and Mathematics from
Fairfield University, and has served as a high school teacher of
physics, computer science, programming, data communications and
software applications.

Jennifer L. Condro is Vice President of Technology and
Development for ITC. Prior to being named Vice President,
Ms. Condro served as Director of Product Development
Operations since June 1998. She has extensive experience
with development, applications, and technology related to
delivering e-business and e-Learning solutions. Ms. Condro
joined ITC in 1998 as part of ITCs acquisition of the
Internet-based training company iNEX, where she was Director of
Operations. Prior to joining iNEX, she spent four years at
BoozAllen & Hamilton and Cap Gemini America in a
variety of management consulting roles, including leading
development and implementation projects for large association
clients. Ms. Condro is a graduate of Virginia Tech, and
holds a B.S. in Management Science.

Mark Fenna-Roberts is President of ITC Australasia, a
wholly-owned subsidiary of ITC responsible for operations in
Australia, New Zealand and the Asia Pacific rim.
Mr. Fenna-Roberts has held this position since
August 1996 when ITC established its Asia Pacific
headquarters in Sydney, Australia. Prior to this,
Mr. Fenna-Roberts spent three years as General Manager at
Acumen People & Productivity, an Australian developer and
distributor of multimedia training products and services. Before
joining Acumen in 1993 he spent eight years with NETg in London
in a number of sales, marketing and management positions. Prior
to these marketing and management roles,
Mr. Fenna-Roberts background was in Finance and IT
systems development.

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Philip Jones is President of Activ Training Limited, a
wholly owned subsidiary of ITC based in the United Kingdom and is
 responsible for International Sales in Europe, the Middle East
and Africa. Mr. Jones has been with ITC since
October 1995, when he took on responsibility for building
ITCs international operations. Prior to joining ITC and
from September 1986, Mr. Jones ran SSVC, one of the leading
multimedia dealers in the United Kingdom. Before that he was the
Head of European Product Marketing for Texas Instruments based in
 France and England. Mr. Jones received his education from
Nottingham University, England, graduating with a Bachelor of
Science degree in Electrical and Electronic Engineering.

Gloria J. MacCorkindale is Vice President, Chief Learning
Officer, for ITC, with a primary focus on the development and
design of performance learning solutions, instructional design,
development, and evaluation of educational and training
technologies, and curriculum management. Ms. MacCorkindale
joined ITC after 23 years with IBM and has experience in the
 computer industry supporting IBM Canada and IBM Greater China.
Specific areas of expertise include project management, workflow
management, office systems and computer technology in education.
Ms. MacCorkindale has an Masters of Science in Education
from Syracuse University, and is currently a Ph.D. candidate in
the School of Computer and Information Sciences at Nova
Southeastern University in Fort Lauderdale, Florida, specializing
 in Computer Technology in Education. Industry experience
includes: Education, Health, Aerospace, Distribution and Software
 Development.

Michael Morrison is Vice-President and Chief Technology
Officer for ITC. Prior to being named CTO, Mr. Morrison
joined ITC as part of its acquisition of iNEX in 1998 and served
as Vice President of Development where he was responsible for all
 development and technology related activities for ITC. He was
founder, President and CEO of iNEX, an Internet-based training
company specializing in the delivery of online training via the
Internet and corporate intranets. In 1994, Mr. Morrison also
 was founder, President and CEO of Internext Corporation, a tier
II Internet services and technology company. He has extensive
experience managing and developing Internet, software
development, and communications businesses. Mr. Morrison
conducted his undergraduate studies in Economics at the
University of Tulsa from 1989 to 1993 and attended graduate
school in the Ph.D. program of Economics at George Mason
University from 1993 to 1994.

Matthew C. Sysak is Vice President of Finance and
Administration, and Corporate Secretary for ITC. Mr. Sysak
joined ITC in 1998 as the Director of Finance and Corporate
Controller. Mr. Sysak has over 9 years of experience in
 both public and corporate accounting and finance. Prior to
joining ITC, he held the position of Corporate Accounting Manager
 at Computer Learning Centers, Inc. (NASDAQ: CLCX), an
organization specializing in post-secondary IT education and
training. Mr. Sysak holds a BS degree in Accounting from
Indiana University of Pennsylvania, is pursuing a Masters in
Business Administration degree from The George Washington
University, and is a Certified Public Accountant.




Item 10.  Executive Compensation

The information required by Item 10 concerning compensation
of the Companys officers and directors is incorporated
herein by reference to the Companys definitive Proxy
Statement for its 2000 Annual Meeting of Stockholders which will
be filed pursuant to Regulation 14A within 120 days
after the end of the Companys last fiscal year.




Item 11.  Security Ownership of Certain
Beneficial Owners and Management

The information required by this Item 11 concerning the
stock ownership of management and five percent beneficial owners
is incorporated herein by reference to the Companys
definitive Proxy Statement for its 2000 Annual Meeting of
Stockholders which will be filed pursuant to Regulation 14A
within 120 days after the end of the Companys last
fiscal year.




Item 12.  Certain Relationships and Related
Transactions

The information required by Item 12 concerning certain
relationships and related transactions is incorporated herein by
reference to the Companys definitive Proxy Statement for
its 2000 Annual Meeting of

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Item 13.  Exhibits and Reports on Form 8-K

The following documents are filed as part of this
Form 10-KSB:

A.  Financial Statements for the years ending
December 31, 1999, and 1998: See Part II, Item 7

B.  Exhibits

|        |      |             |  |                                                                                                                                                                                                                                                                                              
|------- | ---- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|No.     |      | Description
|        |      |            
|        | 2.1  |             |  | Assignment of Rights Under Offer from ITC Learning Corporation to
	 ITC Canada Limited dated September 1, 1998, incorporated by
	 reference to the Companys Form 8-K filed
	October 13, 1998 with the Securities and Exchange Commission
	 (SEC) (Commission File No. 0-13741)            
|        | 2.2  |             |  | Receivers Bill of Sale from Grant Thornton Limited to ITC
	Canada Limited dated September 16, 1998, incorporated by
	reference to the Companys Form 8-K filed
	October 13, 1998 with the SEC (Commission File
	No. 0-13741)                                                                
|        | 2.3  |             |  | Assignment of Lease from Grant Thornton Limited to ITC Canada
	Limited dated September 16, 1998, incorporated by reference
	to the Companys Form 8-K filed October 13, 1998
	with the SEC (Commission File No. 0-13741)                                                                     
|        | 2.4  |             |  | Assignments of Courseware from Grant Thornton Limited to ITC
	Canada Limited dated September 16, 1998, incorporated by
	reference to the Companys Form 8-K filed
	October 13, 1998 with the SEC (Commission File
	No. 0-13741)                                                              
|        | 2.5  |             |  | Assignments of Intellectual Property Rights from Grant Thornton
	Limited to ITC Canada Limited dated September 16, 1998,
	incorporated by reference to the Companys Form 8-K
	filed October 13, 1998 with the SEC (Commission File No
	0-13741)                                             
|        | 2.6  |             |  | Assignment of Trademarks from Grant Thornton Limited to ITC
	Canada Limited dated September 23, 1998, incorporated by
	reference to the Companys Form 8-K filed
	October 13, 1998 with the SEC (Commission File
	No. 0-13741)                                                               
|        | 2.7  |             |  | Principal Agreement between ITC Canada Limited and Nova Scotia
	Business Development Corporation dated September 16, 1998,
	incorporated by reference to the Companys Form 8-K
	filed October 13, 1998 with the SEC (Commission File No
	0-13741)                                           
|        | 2.8  |             |  | Promissory Note in the Amount of Cdn. $2,000,000 Executed by ITC
	Canada Limited dated September 16, 1998, incorporated by
	reference to the Companys Form 8-K filed
	October 13, 1998 with the SEC (Commission File
	No. 0-13741)                                                          
|        | 2.9  |             |  | Demand Debenture between ITC Canada Limited and Nova Scotia
	Business Development Corporation dated September 18, 1998,
	incorporated by reference to the Companys Form 8-K
	filed October 13, 1998 with the SEC (Commission File No
	0-13741)                                              
|        | 2.10 |             |  | Debenture Pledge Agreement in the Amount of Cdn. $3,600,000
	between ITC Canada Limited and Nova Scotia Business Development
	Corporation dated September 18, 1998, incorporated by
	reference to the Companys Form 8-K filed
	October 13, 1998 with the SEC (Commission File No. 
	0-13741)
|        | 2.11 |             |  | General Security Agreement between ITC Canada Limited and Nova
	Scotia Business Development Corporation dated September 18, 1998,
	 incorporated by reference to the Companys Form  8-K
	filed October 13, 1998 with the SEC (Commission File No
	0-13741)                                  
|        | 2.12 |             |  | Guarantee of Obligation by ITC Learning Corporation dated
	September 22, 1998, incorporated by reference to the
	Companys Form 8-K filed October 13, 1998 with the
	 SEC (Commission File No. 0-13741)                                                                                      
|        | 2.13 |             |  | Agreement between ITC Learning Corporation and Nova Scotia
	Business Development Corporation dated September 22, 1998,
	incorporated by reference to the Companys Form 8-K
	filed October 13, 1998 with the SEC (Commission File
	No.  0-13741)                                             
|        | 2.14 |             |  | Royalty Agreement among ITC Canada Limited, ITC Learning
	Corporation and Grant Thornton Limited dated September 18,
	1998, incorporated by reference to the Companys
	Form 8-K filed October 13, 1998 with the SEC
	(Commission File No 0-13741)                                           

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|        |      |             |  |                                                                                                                                                                                                                                                                           
|------- | ---- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|No.     |      | Description
|        |      |            
|        | 2.15 |             |  | Inter-Lender Agreement among ITC Canada Limited, Nova Scotia
	Business Development Corporation and Wachovia Bank, N.A. dated
	September 23, 1998, incorporated by reference to the
	Companys Form 8-K filed October 13, 1998 with the
	 SEC (Commission File No. 0-13741)
|        | 3.1  |             |  | Amended Articles of Incorporation of the Company, incorporated by
	 reference to the Companys Form 10-QSB for the quarter
	 ended June 30, 1996 filed with the Securities and Exchange
	Commission (Commission File No. 0-13741)                                         
|        | 3.2  |             |  | Amended By-Laws of the Company, incorporated by reference to the
	Companys Form 10-KSB for the fiscal year ended
	December 31, 1997, filed March 13, 1998 with the SEC
	(Commission File No. 0-13741)                                                                    
|        | 4.1  |             |  | Specimen Certificate for ITC Common Stock, incorporated by
	reference to the Companys 10-QSB for the quarter ended
	March 31, 1998, filed May 1, 1998 with the SEC
	(Commission File No. 0-13741)                                                                        
|        | 4.2  |             |  | 5.5% $1,000,000 convertible subordinated secured debenture issued
	 to New River Capital Partners, L.P. dated November  1,
	1999.                                                                                                                                         
|        | 4.3  |             |  | Warrant agreement to purchase 291,500 shares of common stock
	 of ITC Learning Corporation by New River Capital Partners, L.P.
	dated November 1, 1999.                                                                                                                   
|        | 4.4  |             |  | 9.5% $1,200,000 convertible subordinated secured debenture issued
	 to New River Capital Partners, L.P. dated December  30,
	1999.                                                                                                                                        
|        | 4.5  |             |  | Warrant agreement to purchase 349,800 shares of common stock of
	ITC Learning Corporation by New River Capital Partners, L.P.
	dated December 30, 1999.                                                                                                                   
|        | 10.1 |             |  | Stock Purchase Agreement dated November 20, 1997 by and
	between ITC Learning Corporation and Anderson Holdings, Inc.,
	incorporated by reference to the Companys 8-K filed
	December 8, 1997 with the SEC (Commission File No. 0-13741)                                 
|        | 10.2 |             |  | 1992 Director Incentive Stock Option Plan, as amended,
	incorporated by reference to the Companys 10-KSB for the
	year ended December 31, 1996 filed March 14, 1997 with
	the SEC (Commission File No. 0-13741)                                                          
|        | 10.3 |             |  | 1992 Key Employee Incentive Stock Option Plan, as amended,
	incorporated by reference to the Companys 10-KSB for the
	year ended December 31, 1996 filed March 14, 1997 with
	the SEC (Commission File No. 0-13741)                                                      
|        | 10.4 |             |  | Amended and restated ITC Learning Corporation Employee Stock
	Ownership Plan and Trust Agreement dated December 2, 1997
	(filed herewith)                                                                                                                                 
|        | 10.5 |             |  | 1998 Incentive Stock Plan dated May 8, 1998, incorporated by
	 reference to the Companys Registration Statement on Form
	S-8 filed May 8, 1998 with the SEC (Commission File No
	0-13741)                                                                                
|        | 10.6 |             |  | Form of stock option agreement dated May 8, 1998,
	incorporated by reference to the Companys Registration
	Statement on Form S-8 filed May 8, 1998 with the SEC
	(Commission File No. 0-13741)                                                                           
|        | 10.7 |             |  | Employment Agreements with Management                                                                                                                                                                                                                                     
|        |      |             |  | (a) Christopher E. Mack, incorporated by reference to the
	Companys 10-KSB for the year ended December 31, 1996
	filed March 14, 1997 with the SEC (Commission File
	No. 0-13741)                                                                                        
|        |      |             |  | (b) Michael Morrison, incorporated by reference to the
	Companys 10-QSB for the quarter ended June 30, 1998
	filed August 13, 1998 with the SEC (Commission File
	No. 0-13741)                                                                                           
|        | 10.8 |             |  | Lease dated October 21, 1993 for commercial office space in
	Herndon, VA, as amended, incorporated by reference to the
	Companys Form 10-KSB for the fiscal year ended
	December  31, 1995 filed March 15, 1996 with the SEC
	(Commission File No 0-13741)               
|        | 10.9 |             |  | Lease dated November 30, 1995 for commercial office space in
	 Atlanta, GA, incorporated by reference to the Companys
	Form 10-KSB for the fiscal year ended December 31, 1995
	 filed March 15, 1996 with the SEC (Commission File
	No.  0-13741)                       
|        | 21.1 |             |  | Subsidiaries of the Reg istrant (filed herewith)                                                                                                                                                                                                                          
|        | 23.1 |             |  | Consent of Ernst & Young LLP, independent auditors (filed
	herewith)                                                                                                                                                                                                      
|        | 27.1 |             |  | Financial Data Schedule (filed herewith)                                                                                                                                                                                                                                  

36



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The Company will undertake to furnish, upon written request,
copies of all exhibits filed with this form 10-KSB, for a fee of
$10.

C.  Reports on Form 8-K:

None.

37



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.



| |                         
| | ------------------------
| | ITC LEARNING CORPORATION
| | (Registrant)            

|                                           |  |                                                             |  |               
|------------------------------------------ |  | ----------------------------------------------------------- |  | --------------
|Signature                                  |  | Title                                                       |  | Date          
|                                           |  |                                                             |  |               
|/s/ CHRISTOPHER E. MACKChristopher E. Mack |  | President, Treasurer, Chief Financial Officer, and Director |  | March 30, 2000
|/s/ MATTHEW C. SYSAKMatthew C. Sysak       |  | Vice President of Finance & Administration, and Secretary   |  | March 30, 2000

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

|                                           |  |                                    |  |               
|------------------------------------------ |  | ---------------------------------- |  | --------------
|Signature                                  |  | Title                              |  | Date          
|                                           |  |                                    |  |               
|/s/ DANIEL R. BANNISTERDaniel R. Bannister |  | Director                           |  | March 30, 2000
|/s/ THOMAS C. BYRNEThomas C. Byrne         |  | Director                           |  | March 30, 2000
|/s/ PETER J. LIPeter J. Li                 |  | Director                           |  | March 30, 2000
|/s/ JOHN D. SANDERSJohn D. Sanders         |  | Chairman of the Board of Directors |  | March 30, 2000
|/s/ ROBERT R. SPILLANERobert R. Spillane   |  | Director                           |  | March 30, 2000
|/s/ RICHARD E. THOMASRichard E. Thomas     |  | Director                           |  | March 30, 2000

38



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Corporate Headquarters


U. S. Offices 
 Baltimore, MD 
 (301) 441-9155

Chicago, IL 
 (815) 439-1121

Grand Rapids, MI 
 (616) 857-7200

San Francisco, CA 
 (415) 332-5604

Washington, DC 
 (703) 713-3335

International Offices 
 Halifax, Nova Scotia 
 (902) 421-5100

London, England 
 44 1234 34-0880

Melbourne, Australia 
 (613)9593-9955

Sydney, Australia 
 (612) 9438-2500

Toronto, Ontario 
 (416) 755-2989

Stock Registrar and Transfer Agent


Stock Listing 
 The NASDAQ Stock Market, Inc. 
 National Market System 
 NASDAQ/NMS Trading Symbol: ITCC

Market-Makers 
 Koonce Securities, Inc. 
 Ferris, Baker Watts, Incorporated

Annual Meeting 
 The Annual Meeting of shareholders will be held on June 28,
 2000 at 3:00 pm at the Corporate Offices located at 13515 Dulles
 Technology Drive, Herndon, Virginia 20171.

Shareholder Inquiries 
 Communications concerning transfer requirements, lost
certificates, and changes in address should be directed to the
Stock Registrar and Transfer Agent. Other inquiries may be
directed to Christopher E. Mack, President and CFO.

General Counsels 
 Kirkpatrick & Lockhart LLP 
 Washington, D.C.

Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, P.C. 
 Reston, VA

Independent Auditors 
 Ernst & Young LLP 
 McLean, VA

39