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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****WASHINGTON, D.C. 20549**

**FORM10-Q**

**(Mark One)**

| ý                                           | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                             |                                                                                          |   |
| **For the quarterly period ended June 30, 2001** |
|                                             |                                                                                          |   |
| **or**                                           |
|                                             |                                                                                          |   |
| o                                                | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commission File Number 000-24289**

 

**CLICK2LEARN, INC.**(Exact nameof registrant as specified in its charter)

 

| **Delaware**                                                    | **91-1276003**                       |
|-----------------------------------------------------------------|--------------------------------------|
| (State or  other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
|                                                            |                                 |
| **110-110th Avenue NE, Bellevue, Washington**                   | **98004**                            |
| (Address of principal executive offices)                        | (Zip Code)                           |

 

| **(425) 462-0501**                                        |
|-----------------------------------------------------------|
| (Registrant’s telephone number, including area code) |

 

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

The number of shares outstanding of the issuer’sCommon Stock, par value $0.01, as of June 30, 2001 was 19,937,471 shares.

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**CLICK2LEARN, INC.**

**FORM 10 –Q**

**For the Quarter Ended June 30,2001**

**TABLE OF CONTENTS**

 

| **PART  I – FINANCIAL INFORMATION** |   |                                                                                                        |
|------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------|
|                                     |   |                                                                                                        |
| Item  1.                                 |   | Financial  Statements                                                                                       |   |
|                                     |   |                                                                                                        |   |   |
|                                     |   | Condensed  Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000                            |   |
|                                     |   |                                                                                                        |   |
|                                     |   | Condensed  Consolidated Statements of Operations for the three and six months Ended June  30, 2001 and 2000 |   |
|                                     |   |                                                                                                        |   |
|                                     |   | Condensed  Consolidated Statements of Cash Flows for the six months Ended June 30, 2001  and 2000           |   |
|                                     |   |                                                                                                        |   |
|                                     |   | Notes  to Condensed Consolidated Financial Statements                                                       |   |
|                                     |   |                                                                                                        |   |
| Item  2.                                 |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                 |   |
|                                     |   |                                                                                                        |   |
| Item  3.                                 |   | Quantitative  and Qualitative Disclosures About Market Risk                                                 |   |
|                                     |   |                                                                                                        |   |   |
| **PART  II – OTHER INFORMATION**    |   |
|                                     |   |
| Item 1.                                  |   | Legal Proceedings                                                                                           |   |
|                                     |   |                                                                                                        |   |
| Item  2.                                 |   | Changes  in Securities and Use of Proceeds                                                                  |   |
|                                     |   |                                                                                                        |   |
| Item 3.                                  |   | Defaults  upon Senior Securities                                                                            |   |
|                                     |   |                                                                                                        |   |
| Item  4.                                 |   | Submission  of Matters to a Vote of Securities Holders                                                      |   |
|                                     |   |                                                                                                        |   |
| Item 5.                                  |   | Other Information                                                                                           |   |
|                                     |   |                                                                                                        |   |
| Item 6.                                  |   | Exhibits  and Reports on Form 8-K                                                                           |   |
|                                     |   |                                                                                                        |   |
| **SIGNATURES**                           |   |
|                                          |        |                                                                                                             |  |  |  |  |  |

**CLICK2LEARN, INC.CONDENSED CONSOLIDATED BALANCESHEETS(In thousands)**

|                                          |                                                                                                             |                                            | June 30,  2001 |     | December 31,  2000 |   |
|-----------------------------------------------|------------------------------------------------------------------------------------------------------------------|-------------------------------------------------|----------------|----------|--------------------|--------|
|                                          |                                                                                                             |                                            |           |     |
|                                          |                                                                                                             |                                            |                |     |                    |   |
|                                          |                                                                                                             |                                            |           |     |               |   |
| **Assets**                                    |                                                                                                             |                                            |           |     |
|                                          |                                                                                                             |                                            |           |     |               |   |
| Current assets:                               |                                                                                                             |                                            |           |     |
|                                          | Cash and cash  equivalents                                                                                       | $                                               | 5,016          |     | $                  | 15,321 |   |
|                                          | Accounts receivable, net of allowance for returns  and doubtful accounts of $1,087 in 2001 and $962 in 2000 | 17,962                                          |           | 14,969   |               |
|                                          |
|                                          | Inventories                                                                                                      | 132                                             |           | 192      |               |
|                                          | Prepaid royalties and licenses                                                                                   | 132                                             |           | 237      |               |
|                                          | Receivables from related companies                                                                               | 12                                              |           | 11       |               |
|                                          | Other                                                                                                            | 1,460                                           |           | 894      |               |
|                                          |                                                                                                             |                                                 |           |          |               |
|                                          |                                                                                                             | Total current assets                            | 24,714         |     | 31,624             |   |
| Property and equipment, net                   | 2,725                                                                                                            |                                            | 2,695          |     |
| Goodwill and other intangible assets, net     | 13,892                                                                                                           |                                            | 10,006         |     |
| Other                                         | 998                                                                                                              |                                            | 555            |     |
|                                          |                                                                                                                  |                                            |                |     |
|                                          |                                                                                                             | Total assets                                    | $              | 42,329   |               | $      | 44,880 |   |
|                                          |                                                                                                             |                                            |                |     |                    |   |
|                                          |                                                                                                             |                                            |           |     |               |   |
| **Liabilities and Stockholders’ Equity** |                                                                                                             |                                            |           |     |
|                                          |                                                                                                             |                                            |           |     |               |   |
| Current liabilities:                          |                                                                                                             |                                            |           |     |
|                                          | Accounts payable                                                                                                 | $                                               | 3,036          |     | $                  | 2,978  |   |
|                                          | Accrued compensation and benefits                                                                                | 3,257                                           |           | 3,810    |               |
|                                          | Deferred revenue                                                                                                 | 2,446                                           |           | 1,680    |               |
|                                          | Customer prepayments                                                                                             | 195                                             |           | 428      |               |
|                                          | Other                                                                                                            | 952                                             |           | 927      |               |
|                                          |                                                                                                             |                                                 |           |          |               |
|                                          |                                                                                                             | Total current liabilities                       | 9,886          |     | 9,823              |   |
| Other noncurrent liabilities                  | **-**                                                                                                            |                                            | 4              |     |
|                                          |                                                                                                                  |                                            |                |     |
|                                          |                                                                                                             | Total liabilities                               | 9,986          |     | 9,827              |   |
|                                          |                                                                                                             |                                            |                |     |                    |   |
|                                          |                                                                                                             |                                            |           |     |               |   |
| Stockholders’ equity:                    |                                                                                                             |                                            |           |     |
|                                          | Preferred stock                                                                                                  | -                                               |           | -        |               |
|                                          | Common stock                                                                                                     | 200                                             |           | 180      |               |
|                                          | Additional paid-in capital                                                                                       | 232,845                                         |           | 227,766  |               |
|                                          | Accumulated deficit                                                                                              | (199,996                                        | )              | (192,313 | )                  |
|                                          | Deferred stock compensation                                                                                      | (40                                             | )              | (72      | )                  |
|                                          | Accumulated other comprehensive loss                                                                             | (566                                            | )              | (508     | )                  |
|                                          |                                                                                                             |                                                 |           |          |               |
|                                          |                                                                                                             | Total stockholders’ equity                 | 32,443         |     | 35,053             |   |
|                                          |                                                                                                             |                                            |                |     |                    |   |
|                                          |                                                                                                             | Total liabilities and stockholders’ equity | $              | 42,329   |               | $      | 44,880 |   |
|                                          |                                                                                                             |                                            |                |     |                    |   |

Seeaccompanying notes to Condensed Consolidated Financial Statements

**CLICK2LEARN,INC.CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS(In thousands)**

|                                                          |                       |                     | Three months endedJune 30, |   | Six months endedJune 30, |   |
|---------------------------------------------------------------|----------------------------|--------------------------|----------------------------|--------|--------------------------|--------|
|                                                          |                       |                     |                            |   |                          |   |  |   |
|                                                          |                       |                     | 2001                       |   | 2000                     |   | 2001 |   | 2000 |   |
|                                                          |                       |                     |                            |   |                          |   |  |   |  |   |
| Revenue:                                                      |                       |                     |                       |   |                     |   |   |   |
|                                                          | Tools                      | $                        | 1,805                      |   | $                        | 2,152  |   | $ | 3,826 |   | $ | 4,725 |   |
|                                                          | Content services           | 5,267                    |                       | 5,800  |                     | 10,895 |   | 10,017 |   |
|                                                          | Platforms                  | 4,624                    |                       | 2,461  |                     | 7,629  |   | 5,554 |   |
|                                                          |                       |                          |                       |        |                     |        |   |  |   |
|                                                          |                       | Total revenue            | 11,696                     |   | 10,413                   |   | 22,350 |   | 20,296 |   |
|                                                          |                       |                     |                            |   |                          |   |  |   |  |   |
|                                                          |                       |                     |                       |   |                     |   |   |   |   |   |
| Cost of revenue:                                              |                       |                     |                       |   |                     |   |   |   |
|                                                          | Tools                      | 450                      |                       | 425    |                     | 936    |   | 982 |   |
|                                                          | Content services           | 4,657                    |                       | 4,284  |                     | 9,787  |   | 8,103 |   |
|                                                          | Platforms                  | 784                      |                       | 459    |                     | 1,439  |   | 920 |   |
|                                                          |                       |                          |                       |        |                     |        |   |  |   |
|                                                          |                       | Total cost of revenue    | 5,891                      |   | 5,168                    |   | 12,162 |   | 10,005 |   |
|                                                          |                       |                     |                            |   |                          |   |  |   |  |   |
|                                                          |                       |                     |                       |   |                     |   |   |   |   |   |
| Gross margin                                                  | 5,805                      |                     | 5,245                      |   | 10,188                   |   | 10,291 |   |
|                                                          |                       |                     |                            |   |                          |   |  |   |  |   |
|                                                          |                       |                     |                       |   |                     |   |   |   |   |   |
| Operating expenses:                                           |                       |                     |                       |   |                     |   |   |   |
|                                                          | Research and development   | 2,142                    |                       | 2,322  |                     | 4,483  |   | 4,773 |   |
|                                                          | Sales and marketing        | 5,003                    |                       | 4,450  |                     | 9,658  |   | 8,987 |   |
|                                                          | General and administrative | 1,597                    |                       | 1,575  |                     | 3,234  |   | 3,023 |   |
|                                                          | Amortization of goodwill   | 312                      |                       | 235    |                     | 551    |   | 471 |   |
|                                                          |                       |                          |                       |        |                     |        |   |  |   |
|                                                          |                       | Total operating expenses | 9,054                      |   | 8,582                    |   | 17,926 |   | 17,254 |   |
|                                                          |                       |                     |                            |   |                          |   |  |   |  |   |
| Loss from operations                                          | (3,249                     | )                        | (3,337                     | )      | (7,738                   | )      | (6,963 | ) |
| Other income, net                                             | 83                         |                     | 268                        |   | 255                      |   | 545 |   |
| Equity in losses of affiliate                                 | (100                       | )                        | (170                       | )      | (200                     | )      | (170 | ) |
|                                                          |                            |                     |                            |   |                          |   |  |   |
| Net loss                                                      | $                          | (3,266                   | )                          | $      | (3,239                   | )      | $ | (7,683 | ) | $ | (6,588 | ) |
|                                                          |                            |                     |                            |   |                          |   |  |   |
|                                                          |                       |                     |                       |   |                     |   |   |   |   |   |
| Net loss per share, basic and diluted                         | $                          | (.17                     | )                          | $      | (.19                     | )      | $ | (.42 | ) | $ | (.40 | ) |
|                                                          |                            |                     |                            |   |                          |   |  |   |
| Weighted average common shares outstanding, basic and diluted | 18,762                     |                     | 16,754                     |   | 18,403                   |   | 16,586 |   |
|                                                          |                            |                     |                            |   |                          |   |  |   |

See accompanying notes to CondensedConsolidated Financial Statements
**CLICK2LEARN,INC.CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS (In thousands)**
            Six Months Ended June 30,          2001 2000               Cash flows from operating activities:     Net loss$(7,683)$(6,588) Adjustments to reconcile net loss to net cash used in operating  activities:      Depreciation and amortization1,539 1,229   Write-off property and equipment- 1   Stock compensation expense96 37   Loss on affiliate200 170   Changes in assets and liabilities:       Accounts receivable(2,899)(914)   Inventories60 1    Prepaid royalties and licenses105 (61)   Receivables from related companies- (61)   Other current assets(566)453    Accounts payable(605)(551)   Accrued liabilities(552)862    Deferred revenue766 (263)   Other current liabilities(208)(340)         Net cash used in operating activities(9,747)(6,025)               Cash flows from investing activities:      Purchase of property and equipment(581)(567)  Payments related to acquisitions, net of cash acquired112 -   Investment in Click2learn Japan KK(639)(740)  Sale (purchase) of other assets(4)133         Net cash used in investing activities(1,112)(1,174)               Cash flows from financing activities:      Borrowings under (repayment) of notes payable(4)48   Proceeds from exercise of stock options46 2,960   Proceeds from sale of common stock571 -         Net cash provided by financing activities613 3,008         Effect of foreign exchange rate changes(59)(141)        Net decrease in cash and cash equivalents(10,305)(4,332) Cash and cash equivalents at beginning of period15,321 19,481      Cash and cash equivalents at end of period$5,016 $15,149       
Seeaccompanying notes to Condensed Consolidated Financial Statements
**CLICK2LEARN,INC.NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2001 AND 2000**

**UnauditedInterim Financial Information**

             Theaccompanying unaudited condensed consolidated financial statements ofClick2learn, Inc. (“Click2learn”) include the accounts of Click2learn and itswholly-owned subsidiaries.  Allsignificant intercompany transactions have been eliminated in consolidation.These statements reflect all normal recurring adjustments which are, in theopinion of management, necessary for a fair presentation of the financialposition and results of operations for the periods presented.  These condensed consolidated financial statementsand notes should be read in conjunction with Click2learn’s audited consolidatedfinancial statements included in Click2learn’s Annual Report on Form 10-K forthe fiscal year ended December 31, 2000. Certain information and footnotedisclosures normally included in financial statements prepared in conformitywith generally accepted accounting principles have been condensed or omittedpursuant to the rules and regulations of the Securities and ExchangeCommission. Interim results of operations for the three and six months endedJune 30, 2001 are not necessarily indicative of the operating results for thefull fiscal year.  Factors that mayaffect such operating results, include, but are not limited to, those discussedin **“Factors That May Affect Future Results ofOperations”**.

**Net Loss Per Share**

             Basicnet loss per share is computed by dividing the net loss by the weighted averagenumber of common shares outstanding during the period.  Diluted earnings per share is computed bydividing the net loss by the weighted average number of common and dilutiveshares outstanding during the period. As Click2learn had a net loss in each ofthe periods presented, basic and diluted net loss per share are the same.

             Excludedfrom the computation of diluted earnings per share for the three and six monthsended June 30, 2001 are options to acquire approximately 5,469,500 shares ofcommon stock with a weighted average exercise price of $7.53 and warrants topurchase 1,797,829 shares of common stock with a weighted average exerciseprice of $8.45 because their effects would be anti-dilutive. Options to acquireapproximately 4,883,282 shares of common stock with a weighted average exerciseprice of $7.59 and warrants to purchase 1,426,313 shares of common stock with aweighted exercise share price of $8.61 have been excluded from the computationof diluted earnings per share for the three and six months ended June 30, 2000because their effects would be anti-dilutive.

**Revenue Recognition**

             Click2learnrecognizes revenue in accordance with Statement of Position 97-2 (“SOP 97-2”), *Software Revenue Recognition*, issued bythe American Institute of Certified Public Accountants, which, as modified,stipulates that revenue recognized from software arrangements is to beallocated to each element of the arrangement based upon the relative fairvalues of the elements, such as software products, upgrades, enhancements,post-contract customer support, installation or training, using evidence whichis specific to the vendor.  If suchevidence of fair value for each element does not exist, all revenue from thearrangement is deferred until such time that fair value does exist or until allelements are delivered.  Revenue fromsoftware licenses is recognized upon shipment provided no significantobligations remain outstanding and collection of the resulting receivable isprobable.  An allowance for returns isprovided at the time of the sale. Revenue from support agreements is recognized over the life of thecontract.

             Professionalservices revenue is recognized from fixed price contracts as services areprovided or by using the percentage-of-completion method of accounting, basedon the ratio of costs incurred to the total estimated project cost, forindividual fixed-price contracts. Provisions for any estimated losses on uncompleted contracts are made inthe period in which such losses become evident.
             Revenuefrom the e-Learning Network includes site fees, hosting, royalties, and contentsales. The revenues are determined by individual contracts, one to three yearsin length, which specify functionality of the site and the commerce conductedon the site. The e-Learning Network fees are recognized ratably over the lifeof the contract.  Royalty revenue isrecognized as earned. Content revenue is either recognized evenly over the lifeof the contract for course usage on bundled curriculum courses or recognized atthe time of the purchase of individual e-Learning courses.   Revenues from tangible goods, includingbooks, videotapes and CD-ROMs are recognized at the time of shipment.

**Comprehensive Loss**

             Thefollowing table sets forth the components of comprehensive loss for the periodspresented below:
 **Three  Months Ended  June 30,** **Six  Months Ended  June 30,**  **** ****  **2001** **2000** **2001** **2000**** ** **** **** **** **** Net loss$(3,266)$(3,239)$(7,683)$(6,588)Foreign currency  translation adjustment83 (74)(57)(141)     Total comprehensive  loss$(3,183)$(3,313)$(7,740)$(6,729)     
**Derivative FinancialInstruments**

             Effective January 1, 2001, Click2learnadopted Statement of Financial Accounting Standards No. 133, “Accounting forDerivative Instruments and Hedging Activities” (“SFAS 133”).  The adoption of SFAS 133 did not impactClick2learn’s consolidated financial statements as of January 1, 2001.

             SFAS 133, as amended, requires thatall derivative instruments be recorded on the balance sheet at fair value.  Changes in the fair value of derivatives arerecorded each period in current results of operations or other comprehensiveincome (loss) depending on whether a derivative is designated as part of ahedge transaction, and if so, the type of risk being hedged.

             For a derivative designated as afair value hedge, the gain or loss of the derivative in the period of changeand the offsetting loss or gain of the hedged item attributed to the hedgedrisk are recognized in results of operations. For a derivative designated as a cash flow hedge, the effective portionof the derivative’s gain or loss is initially reported as a component of othercomprehensive income (loss) and subsequently reclassified into results ofoperations when the hedged exposure affects results of operations.  The ineffective portion of the gain or lossof a cash flow hedge is recognized immediately in results of operations.  For a derivative not designated as a hedginginstrument, the gain or loss is recognized in results of operations in theperiod of change.

             Click2learn had no derivativefinancial instruments outstanding at June 30, 2001.

**Recent Accounting Pronouncements**

             In July 2001, the FinancialAccounting Standards Board issues Statement No. 141 "BusinessCombinations" and Statement No. 142 "Goodwill and Other IntangibleAssets." Statement No. 141 requires business combinations initiated afterJune 30, 2001 to be accounted for using the purchase method of accounting, andspecifies criteria for recognizing intangible assets acquired in a businesscombination. Statement No. 142 requires that goodwill and intangible assetswith indefinite useful lives no longer be amortized, but instead be tested forimpairment at least annually. Intangible assets with definite useful lives willcontinue to be amortized over their respective estimated useful lives.Click2learn plans to adopt the provisions of Statement No. 141 and 142effective January 1, 2002. Because of the extensive effort needed to complywith adopting Statements 141 and 142, it is not practicable to reasonablyestimate the impact of adopting these Statements on Click2learn's financialstatements at the date of this report, including whether any transitionalimpairment losses will be required to be recognized as the cumulative effect ofa change in accounting principle.

**Acquisition of Intelliprep Technologies, Inc.**

             In June 2001, the Click2learncompleted its acquisition of IntelliPrep Technologies, Inc.("Intelliprep"), a provider of technology for personalized learningfor 1,812,497 shares of common stock and 450,000 options to acquire its commonstock valued at $4,419,688. In connection with the acquisition, the Companyincurred approximately $600,000 in acquisition-related expenditures of which$367,000 was unpaid as of June 30, 2001. The acquisition was accounted forunder the purchase method of accounting and accordingly, the results ofIntelliprep's operations are included in Click2learn's consolidated financialstatements since the date of acquisition. Goodwill and other identifiableintangible assets of $4,710,061 was recorded in connection with the transactionand will be amortized using the straight-line method over estimated usefullives of to five years up to the date that Click2learn is required to adoptStatement 142.

**Segment Information**

             Duringmost of 2000, Click2learn had two reportable segments, enterprise andelectronic commerce.  The enterprisesegment included revenues and cost of revenues from software licenses andprofessional services which include consulting, custom development ofe-Learning courses, implementation, training and technical support for Ingeniumand ToolBook II product lines.  Theelectronic commerce segment included revenues and cost of revenues from oure-Learning Network: professional services, royalties, and hosting.

             During the fourth quarter of 2000,Click2learn reorganized its internal reporting along similar products andservices and now includes three reportable segments:  Tools, Content Services and Platforms.  Tools include software licenses and technical support andtraining for the ToolBook II product line and other products.  Content Services includes custom developmentof e-Learning courses, consulting, licensing and fees for the Rapid e-LearningDevelopment System, and royalties. Platforms includes software licenses, subscription and hosting fees,implementation, and training and support for the Ingenium product line and thee-Learning Network.  Amounts presentedfor the three and six months ended June 30, 2000 have been restated to conformto current presentation.
             Click2learn’s operating committee,which includes its Chief Executive Officer and Chief Financial Officer, hasbeen identified as the Chief Operating Decision Maker (“CODM”) as it assessesthe performance of the business units and decides how to allocate resources tothe business units.  Segment income isthe measure of profit and loss that the CODM uses to assess performance andmake decisions.  Segment incomerepresents revenues less cost of revenues incurred within the operatingsegments as presented in Click2learn’s consolidated statements of operations.  Click2learn does not allocate operatingexpenses including research and development, sales and marketing, general andadministrative, or amortization of goodwill to its operating segments.  In addition, other income (expense) are alsonot allocated to operating segments.

             Thereare no intersegment revenues.  Click2learn’sCODM does not review total assets or depreciation and amortization by operatingsegment.  The accounting policies forreported segments are the same as for Click2learn as a whole.

**Geographic Information**
  **For the Three****Months  Ended****June 30,** **For the Six****Months  Ended  June 30,**   **** ****   **2001** **2000** **2001** **2000**   **** **** **** **** Revenue:                   Domestic$10,759 $10,053 $20,364 $19,008  International  – primarily Europe936 360 1,986 1,288         $11,696 $10,413 $22,350 $20,296       
Revenuesare attributed to geographic areas based on the location of the customers.
  **June 30,** **December 31,**  **** ****  **2001** **2000**  **** ****Long-lived assets         Domestic$15,215 $10,979 International  – primarily Europe303 300      $15,518 $11,279   
Long-livedassets represents property, plant and equipment and goodwill, net ofaccumulated depreciation and amortization.****Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

*             The following discussion of thefinancial condition and results of operations of Click2learn should be read inconjunction with Click2learn’s Condensed Consolidated Financial Statements andrelated Notes thereto included elsewhere in this Report. This Report containsforward-looking statements that involve risks and uncertainties. Click2learn’sactual results may differ significantly from the results discussed in theforward-looking statements. Factors that may cause such a difference include,but are not limited to, those discussed in “Factors that May Affect FutureResults of Operations.”*

**Overview**

             The e-Learning market is made up ofthree distinct categories: content, services and delivery.  Content represents off-the-shelf titles thatprovide training on a variety of general topics and customer specific contentthat must be custom developed.  Servicesrepresent the outsourcing of e-Learning content development, implementation orconsulting to third parties and delivery refers to the technology to host,deploy, manage and track e-Learning users and content.

             Click2learn has developed leadingtechnology that addresses the delivery, management and the creation ofe-Learning content.  Complementing thistechnology is our service organization dedicated to consulting with clients one-Learning solutions, the development of client-specific e-Learning content aswell as the implementation of delivery and content creation systems. Combined,we sell and market these offerings as solutions that enable organizations totake advantage of the many benefits of e-Learning.

             Our e-Learning solutions focus onthe needs of two primary markets: organizations seeking to increase theireffectiveness and gain a competitive advantage by providing relevant andup-to-date knowledge when and where it is needed throughout the extendedenterprise, and organizations seeking to use e-Learning to develop new lines ofbusiness or sources of revenue by leveraging existing intellectual capital orproduct lines.  Our solutions areavailable on a hosted basis for delivery using the Internet or for installationon a customer’s internal information systems, depending on the needs andpreferences of the particular customer.

             We group related revenues aroundthe primary components of our solutions: Platforms, Content Services and Tools.

             Platforms include softwarelicenses, subscription and hosting fees, implementation, customization,training and support related to our Ingenium learning management system ande-Learning Network.  Ingenium is ahighly scalable skills and competency based system that manages traditionalinstructor lead training as well as e-Learning courses and can be installed ona customer's information systems or hosted by Click2learn.  The e-Learning Network is a robustInternet-based system that manages the delivery of courses and e-commerceassociated with commercial e-Learning implementations through an ASPenvironment.

             Content Services revenues arederived from the creation of custom e-Learning courses, consulting, licensesand hosting fees for the Rapid e-Learning Development System (“ReDS”) and salesof third party off-the-shelf content. ReDS is our advanced content developmenttechnology designed for use by teams of content developers to create learningobjects, large e-Learning courses and curricula in a collaborative environmentwith our customers.

             Tools revenues include softwarelicenses, technical support and training related to our award winning ToolBookII line of products as well as software license revenues from discontinuedproducts sold before 2000.

             We recognize revenues for softwarelicenses upon shipment; for technical support, subscription and hosting evenlyover the life of the contract; and for services such as content development andimplementation based on the percentage of completion method or on a time andmaterials basis.

             Costs related to revenues consistof media, manuals, royalties, packaging and distribution for software licensesand primarily salaries and overhead for service related offerings.  Costs of revenues for the Platforms andTools category are similar due to a relatively high mix of software licensesversus services with cost averaging between 20% to 25% of related revenue.Contrasting the mix for Platforms and Tools, Content Services consist primarilyof relatively high personnel costs associated with providing professionalservices compared to the lower materials, packaging and other costs ofsoftware.
             In May 2001 we announced our newAspen Enterprise Learning Platform, which we expect to ship in the thirdquarter of 2001.  The Aspen EnterpriseLearning Platform consists of three primary components:  Aspen Learning Management Server, which isthe successor to our Ingenium learning management system; Aspen ContentDevelopment Server, which is the successor to ReDS; and Aspen LearningExperience Server, which enables personalized learning experiences.   Customers may license any combination ofthese three components.  Revenue fromsoftware licenses, subscription and hosting fees, implementation,customization, training and support related to all components of our AspenEnterprise Learning Platform will be reported under Platforms.

             InJune 2001, the Click2learn completed its acquisition of IntelliPrepTechnologies, Inc. ("Intelliprep"), a provider of technology forpersonalized learning for 1,812,497 shares of common stock and 450,000 optionsto acquire its common stock valued at $4,419,688. In connection with theacquisition, the Company incurred approximately $600,000 in acquisition-relatedexpenditures of which $345,000 was unpaid as of June 30, 2001. The acquisitionwas accounted for under the purchase method of accounting and accordingly, theresults of Intelliprep's operations are included in Click2learn's consolidatedfinancial statements since the date of acquisition. Goodwill and otheridentifiable intangible assets of $4,710,061 was recorded in connection withthe transaction and will be amortized using the straight-line method overestimated useful lives of to five years up to the date that Click2learn isrequired to adopt Statement 142, discussed in recent accounting developments.

**Three and Six Months Ended June 30, 2001 Compared to Threeand Six Months Ended June 30, 2000**

             *Revenue*.   Our total revenue increased 12% from $10.4million in the three months ended June 30, 2000 to $11.7 million in the threemonths ended June 30, 2001.  For the sixmonths ended June 30, revenue grew 10% from $20.3 million in 2000 to $22.4million in 2001.  Revenue growth wasattributable to an 88% increase in Platforms revenues from $2.5 million for thethree months ended June 30, 2000 to $4.6 million for the three months endedJune 30, 2001.  For the six months endedJune 30, Platform revenue increased 37% from $5.6 million in 2000 to $7.6million in 2001.   Platform growth isattributable to increased size and scope of projects currently being performed.Offsetting this growth was a decline in the Tools revenue category of 16% from$2.2 million in the three months ended June 30, 2000 versus $1.8 million in thethree months ended June 30, 2001.  Forthe six months ended June 30, Tools revenues declined 19% from $4.7 million in2000 to $3.8 million in 2001.  The Toolscategory decline was anticipated due to the overall decline in the market forauthoring tools.  Revenues from ContentServices declined 9% from $5.8 million in the three months ended June 30, 2000compared to $5.3 million in the three months ended June 30, 2001.  For the six months ended June 30, ContentServices grew 9% from $10.0 in 2000 to $10.9 million in 2001.

*             Cost of Revenue.* Total cost of revenues increased 14% from $5.2 million in the threemonths ended June 30, 2000 to $5.9 million in the three months ended June 30,2001.  This increase is attributed tohigher overall revenue results and utilization of services personnel. For the six months ended June 30, total cost of revenue increased 22%from $10.0 million in 2000 to $12.2 million in 2001.  As a percentage of related revenue costs of Platforms revenuesdeclined from 19% in the three months ended June 30, 2000 to 17% in the threemonths ended June 30, 2001.  For the sixmonths ended June 30, Platform costs as a percentage of revenue increased from17% in 2000 to 19% in 2001.  Thefluctuations are due to the mix of higher margin license revenues and lowermargin services such as hosting in the relevant periods.   Costs of Content Services as a percent ofrelated revenue increases from 74% in the three months ended June 30, 2000 to88% in comparable period 2001.  For thesix months ended June 30, costs as a percent of related revenue increased from81% in 2000 to 90% in 2001.  Theincrease is related to lower utilization of service personnel.   Costs of Tools revenues as a percent ofrelated revenues increased from 20% in the three months ended June 30, 2000 to25% for the three months ended June 30, 2001. For the six months costs as a percent of related revenue increased from21% in 2000 to 24% in 2001.  Theincrease is attributed to a lower overall Tools revenue level as compared to2000.

**OperatingExpenses**

*             Research and Development.*  Research and development expenses include expenses associated with thedevelopment of new products and new product versions and consist primarily ofsalaries, depreciation of development equipment, supplies and overheadallocations.  Research and developmentexpenses decreased 8% from $2.3 million in the three months ended June 30, 2000to $2.1 million the three months ended June 30, 2001. For the six months ended June30 costs declined 6% from $4.8 million in 2000 to $4.5 million in 2001. Thedecrease is related to completion of the initial development efforts for thee-Learning Network.

*             Sales and Marketing.* Sales and marketing expenses consist primarily of sales and marketingpersonnel costs, including sales commissions, travel, advertising, publicrelations, seminars, trade shows and other marketing literature and overheadallocations.  Sales and marketingexpenses increased 12% from $4.5 million in the three months ended June 30,2000 to $5.0 million in the three months ended June 30, 2001.  For the six months ended June 30, costsincreased 7% from $9.0 million in 2000 to $9.7 million in 2001.  The increase was related to an increase inthe size of our sales organization. We expect that sales and marketing expenseswill grow in absolute dollars and decrease as a percent of revenue if ourrevenues increase.

*             Generaland Administrative. * General andadministrative expenses consist primarily of salaries and other personnel-relatedexpenses for administrative, executive and finance personnel as well as outsideadvisors.  For the three-month periodended June 30, general and administrative expense was unchanged at $1.6 millionin 2000 and 2001.  For the six-monthsended June 30, general and administrative expenses increased 7% from $3.0million in 2000 to $3.2 million in 2001. This increase was to support highertotal headcount and our expanded operations group in Europe.  We expect that general and administrativeexpenses will increase as our overall headcount increases and that they willdecrease as a percent of revenue if our revenues increase.
*             Amortization of Goodwill.*** **Amortization expense relates to theamortization of excess purchase price over the fair value of identifiabletangible and intangible assets acquired in acquisitions recorded using thepurchase method of accounting. Amortization of goodwill expense increased 33% from $235,000 in theperiod ended June 30, 2000 to $312,000 during the period ended June 30,2001.  The increase is attributed toadditional amortization resulting from goodwill created by the acquisition ofIntelliPrep.  For the six months endedJune 30, amortization of expense increased 17% from $471,000 in 2000 to$551,000 in 2001.

*             Other Income.*** **Interest income on cash and cashequivalents in the three months ended June 30, 2000 was $268,000 as compared to$83,000 in the three months ended June 30, 2001 due primarily to higherinterest rates and  cash balances in2000 .  In April 2000, we established ajoint venture with SOFTBANK Corporation subsidiaries creating Click2learn JapanK.K.  We account for our portion of thejoint venture’s operating results under the equity method, and in the quarter endedJune 30, 2001, we recorded $100,000 related to our equity share of netlosses.  For the six months ended June30, 2001 our portion of the net losses of the joint venture were $200,000.

**Recent Accounting Pronouncements**

             In July 2001, the FinancialAccounting Standards Board issues Statement No. 141 "BusinessCombinations" and Statement No. 142 "Goodwill and Other IntangibleAssets." Statement No. 141 requires business combinations initiated afterJune 30, 2001 to be accounted for using the purchase method of accounting, andspecifies criteria for recognizing intangible assets acquired in a businesscombination. Statement No. 142 requires that goodwill and intangible assetswith indefinite useful lives no longer be amortized, but instead be tested forimpairment at least annually. Intangible assets with definite useful lives willcontinue to be amortized over their respective estimated useful lives.Click2Learn plans to adopt the provisions of Statement No. 141 and 142effective January 1, 2002. Because of the extensive effort needed to comply withadopting these Statements 141 and 142, it is not practicable to reasonablyestimate the impact of adopting these Statements on Click2Learn's financialstatements at the date of this report, including whether any transitionalimpairment losses will be required to be recognized as the cumulative effect ofa change in accounting principle.

**Liquidityand Capital Resources**

             At June 30, 2001 we had cash andcash equivalents totaling $5.0 million, a decrease of $10.3 million fromDecember 31, 2000.  The decrease in cashwas due to uses of cash for operating expenses, payments to Go2Net of $750,000related to a co-marketing agreement terminated in the third quarter of 2000 aswell as investments of approximately $700,000 in Click2learn Japan KK.  Cash flows from financing activities areprimarily related to our employee stock purchase plan.  Accounts receivable increased as compared toDecember 31, 2000 due to a large contract with one customer.  The revenue is recognized on thepercentage-of-completion method and the billings occur when contractrequirements are met.  At June 30, 2001,our principal source of liquidity was $14.8 million of working capital.  We have also secured a commitment for a $5million credit facility from Silicon Valley Bank to provide additionaloperating capital.

             Weanticipate that our cash and cash equivalents and our credit facility will besufficient to meet our working capital needs and capital expenditures for atleast the next 12 months.  Our long-termliquidity will be affected by numerous factors, including acquisitions ofbusinesses or technologies, demand for our e-Learning solutions, the extent towhich our e-Learning solutions achieve market acceptance, the timing and extentto which we invest in new technology, the expenses of sales and marketing andnew product development, the extent to which competitors are successful indeveloping their own products and services and increasing their own marketshare, the level and timing of revenues and other factors.  To the extent that resources areinsufficient to fund our activities, we may need to raise additionalfunds.  Such additional funding, ifneeded, may not be available on attractive terms or at all.  If adequate funds are not available onacceptable terms, we may be unable to expand our business, develop or enhanceour products and services, take advantage of future opportunities or respond tocompetitive pressures, any of which could have a material adverse effect on ourbusiness.

**Factors That May Affect FutureResults of Operations**

*             We have alimited operating history in our current markets, which makes it difficult topredict our future performance. *Our limited operating history in our currentmarkets makes it difficult to predict our future performance and does notprovide investors with a meaningful basis for evaluating an investment in ourcommon stock.  From our inception untilearly 1995, we were engaged in various research and development activities andin developing and marketing multimedia authoring products, database andInternet tools, web publishing products and other ancillary products, most ofwhich we do not currently sell.  In1995, we began to focus our development and marketing efforts on products andservices for the enterprise learning market. We began offering our Ingenium learning management system in 1998, oure-Learning Network in 1999 and our ReDS system in 2000. Accordingly, we have alimited operating history on which to evaluate our current business and futureprospects.

*             Ourquarterly operating results are uncertain and may fluctuate significantly,which could negatively affect the value of your investment. *Our operating results have varied significantlyfrom quarter to quarter and are likely to continue to fluctuate as a result ofa variety of factors, many of which we cannot control.  Factors that may adversely affect ourquarterly operating results include:
•the  size and timing of product orders and the timing and execution of  professional services engagements;•the  mix of revenue from products and services;•the  mix of products sold;•the  ability to meet client project milestones;•the  market acceptance of our products and services;•our  ability to develop and market new or enhanced products and services in a  timely manner and the market acceptance of these products and services;•the  timing of revenues and expenses;•recognition  of impairment of existing assets; and•the  timing of revenue recognition.
 

             Our future revenues are difficultto predict and we may not be able to adjust spending in response to revenueshortfalls.  Our limited operatinghistory with our current e-Learning solutions, possible acquisitions and theemerging nature of the market, make prediction of future revenue and expensesdifficult.  Expense levels are based, inpart, on expectations as to future revenue and largely are fixed in the shortterm.  If we are unable to predictfuture revenue accurately, we may be unable to adjust spending in a timelymanner to compensate for any unexpected revenue shortfall.

*             Ourbusiness currently does not generate the cash needed to finance our operations,and for that and other reasons, we may need additional financing in the future,which we may be unable to obtain. *Our business currently does not generate the cashneeded to finance our operations.  As aresult, we may need additional funds to finance our operations, as well as toenhance our products and services, fund our expansion, respond to competitivepressures or acquire complementary businesses or technologies.  In addition, poor financial results,unanticipated expenses or unanticipated opportunities that require capitalcommitments could give rise to additional financing requirements sooner than weexpect.  We may be unable to obtainfinancing on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptableterms, we may be unable to enhance our services, fund our expansion, respond tocompetitive pressures or take advantage of business opportunities and we mayneed to significantly restrict our operations. If we raise additional funds through the issuance of additional equityor convertible debt securities, the percentage ownership of our existingshareholders will be reduced, and the newly issued securities may have rights,preferences or privileges senior to those of our common stock.

*             We have ahistory of losses and anticipate continued losses in the future.* We incurrednet losses of approximately $16.8 million and $7.7 million in the year endedDecember 31, 2000 and for the six months ended June 30, 2001,respectively.  As of December 31, 2000,our accumulated deficit was $192.2 million. We have not achieved profitability and expect to continue to incuroperating losses at least through the year ending December 31, 2001.  Even if we do achieve profitability, we maybe unable to sustain or increase profitability on a quarterly or annual basis.

*             We facerisks encountered by early-stage companies in emerging markets and may beunsuccessful in addressing these risks. *Weface risks frequently encountered by early-stage companies in new and rapidlyevolving markets.  Specific risks weface relate to the demand for and market acceptance of our  e-Learning solutions.  We may fail to adequately address theserisks, and therefore our business may suffer. To address these risks, we must:
•effectively  market our e-Learning solutions to new and existing customers;•continue  to enhance the technology upon which our e-Learning solutions are based;•successfully  implement our e-Learning solutions for our customers and generate continuing  revenues from those customers; and•address  and establish new technologies and technology standards.
*             The marketfor e-Learning solutions is in the early stages of development and may not growto a sufficient size or at sufficient rate to sustain our business. *The e-Learning market is in the early stages ofdevelopment, and may not grow to a sufficient size or at sufficient rate forour business to succeed.  Corporatetraining and education historically have been conducted primarily throughclassroom instruction and traditionally have been performed by a company’sinternal personnel.  Althoughtechnology-based training applications have been available for several years,they currently account for only a small portion of the overall trainingmarket.  Accordingly, our success willdepend on the extent to which companies migrate from traditional trainingmethods to technology-based solutions and use the Internet in connection withtheir training activities.  In addition,our success will depend upon the extent to which companies utilize the productsor services of third-party providers and whether companies adopt hostede-Learning solutions delivered over the Internet.
             Manycompanies that have already invested substantial resources in traditionaltraining methods may be reluctant to adopt a new strategy that may limit orcompete with their existing investments. Even if companies implement technology-based training or e-Learningsolutions, they may still choose to design, develop, deliver or manage all or apart of their education and training internally.  If technology-based learning and the use of the Internet forlearning do not become widespread, or if companies do not use the products andservices of third parties to develop, deliver or manage their training needs,then our e-Learning solutions may not be commercially successful.

*             Ourpricing, expense and revenue model is unproven, and may not yield resultssufficient for our business to succeed.  *Thepricing, expense and revenue models for our e-Learning solutions have not beenbroadly tested in the marketplace and may not yield results sufficient for ourbusiness to succeed.  If the pricing,expense and revenue models are not acceptable to users, customers, or contentproviders, our e-Learning solutions may not be commercially successful.

*             We faceintense competition from other e-Learning providers and may be unable tocompete successfully. *The e-Learning market is highly fragmented andcompetitive, with no single firm accounting for a dominant market share.  Our competitors vary in size, scope and thebreadth of products and services offered. We face competition from:
•other  developers of learning management systems, such as Saba and Docent, as well  as publishers of e-Learning courses that sell management systems with their  titles•other  companies focused on web-based learning and education content such as  SmartForce and DigitalThink, as well as developers or resellers of training  content who make their content available over the Internet; many small,  regional e-Learning and technology-based training services businesses;•many  small, regional e-Learning and technology-based training services businesses;•large  professional consulting firms and in-house training departments; and•developers  of web authoring tools.
             Many of our existing and potentialcompetitors have longer operating histories and significantly greaterfinancial, technical, marketing and other resources and therefore may be ableto respond more quickly to new or changing opportunities, technologies,standards and customer requirements. Many of these competitors also have broader and more establisheddistribution channels that may be used to establish strategic alliances or delivercompeting products or services directly to customers.  If these competitors were to bundle competing products orservices with the products and services of their strategic partners, the demandfor our products and services might be substantially reduced and our ability tomarket and sell products and services successfully may be substantiallydiminished.  In addition, the existenceor announcement of strategic relationships involving our competitors could adverselyaffect our ability to attract and retain customers.

             Because of the lack of significantbarriers to entry in the e-Learning market, new competitors are likely to enterthis market in the future.  Increasedcompetition is likely to result in price reductions, reduced gross margins andloss of market share.  We may not beable to contend effectively with such increased competition.

*             Adeterioration of general economic conditions may materially and adverselyaffect our business.* Our revenues are subject to fluctuation as aresult of general economic conditions. A significant portion of our revenues are derived from the sale ofproducts and services to Fortune 1000 companies or government agencies, whichhistorically have reduced their expenditures for education and training duringeconomic downturns.  Should the economyweaken in any future period, these organizations may reduce their expenditureson education and training, which could adversely affect our business.

*             Oursoftware may contain defects or otherwise perform improperly.* Software productsfrequently contain errors or failures, especially when first introduced or whennew versions are released.  In the past,we have discovered errors in our products after their initial release.  Because our e-Learning products are complexsoftware packages targeted at enterprise customers in an emerging market,customers and potential customers may have a greater sensitivity to productdefects or product integration than the market for software productsgenerally.  Product defects could resultin loss of revenue or delay in market acceptance, diversion of developmentresources, damage to our reputation, or increased service and warranty costs.
*             We dependon third-party technology, the loss of which could materially harm ourbusiness. *We use licensed third-party technology and contentin our e-Learning solutions.  Futurelicenses to this technology and content may not be available to us oncommercially reasonable terms, or at all. The loss of or inability to obtain or maintain any of these technology orcontent licenses could result in delays in the introduction of new products orcould force us to discontinue offering portions of our e-Learning solutionsuntil equivalent technology or content, if available, is identified, licensedand integrated.  Furthermore, we maybecome subjected to legal claims related to licensed technology or contentbased on defamation, negligence, product liability, infringement ofintellectual property or other legal theories.

*             Ourintellectual property may become subject to legal challenges, unauthorized useor infringement, any of which could diminish the value of our products andservices.* Our success depends in large part on ourproprietary technology.  If we fail tosuccessfully enforce our intellectual property rights, the value of theserights, and consequently the value of our products and services to ourcustomers, could diminish substantially. It may be possible for third parties to copy or otherwise obtain and useour intellectual property or trade secrets without our authorization, and itmay be possible for third parties to independently develop substantiallyequivalent intellectual property.

             Litigation may be necessary in thefuture to enforce our intellectual property rights, to protect trade secrets orto determine the validity and scope of the proprietary rights of others.  From time to time we have received, and mayin the future receive, notice of claims of infringement of other parties’proprietary rights.  Such claims couldresult in costly litigation and could divert management and technicalresources.  They could also delayproduct shipment or require us to develop non-infringing technology or enterinto royalty or licensing agreements, which agreements may not be available onreasonable terms, or at all.

             *Securityand privacy breaches could subject us to litigation and liability and deterconsumers from using our hosted e-Learning solutions*.  Our hosted e-Learning solutions aredelivered using the Internet.  TheInternet is a public network and data is sent over this network from manysources.  Although we take reasonablesteps to ensure the security of our hosted solutions, computer viruses could beintroduced into our systems or those of our customers or content providers,which could disrupt our hosted e-Learning solutions or make them inaccessibleto users.  In addition, well-publicizedInternet security breaches could deter customers from using the Internet toconduct transactions that involve the transmission of confidentialinformation.  We cannot predict theextent to which transactions over the Internet will be, or will be perceived tobe, secure against breaches by third parties. As a result, we cannot be certain the Internet ultimately will becomewidely accepted for commerce and communications.

             Wecould become subject to litigation and liability if third parties penetratesecurity for our hosted e-Learning solutions or otherwise misappropriate ourusers’ confidential information. Advances in computer capabilities, new discoveries in the field ofcryptography or other technological events or developments could result incompromises or breaches of our security systems.  Anyone who circumvents our security measures could misappropriateproprietary information or cause interruptions in our services oroperations.  We may be required toexpend significant capital and other resources to protect against the threat ofsecurity breaches or to alleviate problems caused by breaches.  Furthermore, to the extent that ourcommercial activities may involve the storage and transmission of proprietaryinformation, such as personal information or credit card numbers, securitybreaches could expose us to a risk of loss or litigation and possibleliability.

*             Anincrease in traffic may strain our systems, and our systems are vulnerable toother technical malfunction. *The systems that support our hosted e-Learningsolutions may be unable to accommodate an increased volume of traffic.  Internet sites and service providers havebeen subject to denial of service attacks, in which unauthorized personsintentionally overload systems with a heavy volume of traffic.  Consequently, our systems may experienceslower response times or other problems. In addition, we depend on Internet service providers andtelecommunications companies and the efficient operation of their computernetworks and other computer equipment for the operation and delivery of ourhosted e-Learning solutions.  Each ofthese has experienced significant outages in the past and could experienceoutages, delays and other difficulties due to system failures unrelated to oursystems.  Any delays in response time orperformance problems could cause users to perceive our systems as notfunctioning properly and therefore not use our hosted e-Learning solutions fortheir training needs.
*             We may notbe able to adapt to the rapidly changing technology and evolving industrystandards.* The e-Learning market is characterized byrapidly changing technologies, frequent new product and service introductions,short development cycles and evolving industry standards.  The introduction of new products andservices embodying new technologies and the emergence of new industry standardsmay render our products and services obsolete. Our success depends on our ability to adapt to a rapidly changinglandscape and to offer new products and services to address our customers’changing demands.  We may experiencedifficulties that delay or prevent the successful design, development,introduction or marketing of our products and services.  To the extent we in fact experience suchdelays, we may experience difficulty in attracting new customers and may loseexisting customers.

*             We facethe risk of liability for failures to meet unique customer requirements, andthe risk of cost overruns on fixed-price projects. *Thefailure or inability to meet a customer’s unique expectations or requirementsin the performance of services could impair our reputation or result in a claimfor damages, regardless of our responsibility for the failure.  Although generally we attempt to limitcontractually our liability for damages arising from product defects and othermistakes in rendering professional services, these contractual protections arenot always obtained and may not be enforced or otherwise may not protect usfrom liability.  Our insurance may notbe sufficient to cover any of these claims.

*             Acquisitionsor investments may drain capital and equity resources, divert management’sattention or otherwise harm our business.* In thefuture we may acquire or make investments in other businesses, products ortechnologies.  Such acquisitions orinvestments may require that we pay significant cash, issue stock or incursubstantial debt.  In addition, suchacquisitions or investments may require significant managerial attention, whichmay be diverted from our other operations. These capital, equity and managerial commitments may impair theoperation of our business.  Furthermore,acquired businesses may not be effectively integrated, may be unable tomaintain key pre-acquisition business relationships, may contribute toincreased fixed costs and may expose us to unanticipated liabilities.

*             Internationalexpansion may impose substantial burdens on our resources, divert management’sattention or otherwise harm our business. *Ourcurrent and planned expansion into international markets will require extensivemanagement attention and resources.  Inaddition, we will need to rely extensively on third parties in foreigncountries to help conduct our international operations and conduct sales andmarketing efforts.  Our success ininternational markets consequently will depend to a large degree on the successof these third parties, over which we have little control.  If they are unwilling or unable to dedicatesufficient resources to our relationships, our international operations willsuffer.  Furthermore, our efforts abroadare subject to a number of additional risks inherent in internationaloperations, including:
•difficulties  and costs of staffing and managing foreign offices;•different  learning styles and cultures;•numerous  and potentially conflicting regulatory requirements;•export  controls, import tariffs and other barriers to trade;•reduced  protection of intellectual property rights;•regional  political and economic instability; and•fluctuations  in currency exchange rates.
*             The lossof the services of our senior executives and key personnel would likely causeour business to suffer.* Our success depends to a significant degreeon the performance of the senior management team and other key employees.  The loss of any of these individuals couldharm our business.  We do not haveemployment agreements with most of our executives or other key employees, andwe do not maintain key person life insurance for any officers or key employees.

             Our success also depends on ourability to attract, integrate, motivate and retain additional highly skilledtechnical, sales and marketing, and professional services personnel.  Competition for qualified personnel in theInternet and technology industries is intense. To the extent we are unable to attract and retain a sufficient number ofadditional skilled personnel, our business will suffer.

**Item 3. Quantitative andQualitative Disclosures about Market Risk**

*             Market Rate Risk. *The following discussion about our market rate risk involvesforward-looking statements.  Actualresults could differ materially from those projected in the forward-lookingstatements.  We are exposed to marketrisk related to changes in interest rates and foreign currency exchangerates.  We do not use derivativefinancial instruments for speculative or trading purposes.
*             Interest Rate Risk.* We hold our assets primarily in cash and cash equivalents, such asshort-term marketable debt securities, money market funds and other cashequivalents.   We minimize risk byinvesting in financial instruments with a maturity of three months orless.  Therefore, if market interestrates were to increase immediately and uniformly by 10% from levels at December31, 2000, the fair values of cash and cash equivalents would not change by amaterial amount.

*             ForeignCurrency Exchange Risk.* We have foreign currency risk because offoreign subsidiary activities.  For thethree months ended June 30, 2001, revenues from foreign subsidiaries accountedfor approximately 10% of total revenues. International sales are made mostly from foreign subsidiaries and aretypically denominated in the local currency of each country.   All foreign subsidiaries use the localcurrency as their functional currency.

             Our exposure to foreign exchangerate fluctuations arises in part from intercompany accounts in which costsincurred in the United States are charged to the foreign subsidiaries.  These intercompany accounts are typically denominatedin the functional currency of the foreign subsidiary in order to centralizeforeign exchange risk with the parent company in the United States.  We are also exposed to foreign exchange ratefluctuations as the financial results of foreign subsidiaries are translated inU.S. dollars in consolidation.  Asexchanges rates vary, these results, when translated, may vary fromexpectations and adversely impact overall expected profitability.  The effect of foreign exchange ratefluctuations for the three and six months ended June 30, 2001 was notsignificant.  Due to the substantialvolatility of currency exchange rates, among other factors, we cannot predictthe effect of exchange rate fluctuations on our future operating results.
**PARTII—OTHER INFORMATION**

**Item 1. Legal Proceedings**

             Not applicable.

**Item 2.  Changes In Securities and Use of Proceeds**

             OnMay 29, 2001, we issued 1,812,497 shares of our common stock in exchange forall of the issued and outstanding capital stock of IntelliPrep Technologies,Inc. (“IntelliPrep”).  Of the sharesissued in the transaction, 311,845 are being held in escrow to secure certainobligations IntelliPrep and certain of its stockholders.  We also assumed all options outstandingunder IntelliPrep’s 2001 Stock Option Plan, which were converted into optionsto purchase 450,000 shares of Click2learn common stock.  The issuance of common stock in thetransaction was exempt pursuant to Section 4(2) of the Securities Act of 1933,and such shares of common stock are “restricted securities” within the meaningof Rule 144 under the Securities Act of 1933. The shares of common stock reserved for issuance upon the exercise ofassumed options have been registered with the Securities and ExchangeCommission pursuant to a Registration Statement on Form S-8.

**Item 3.  Defaults UponSenior Securities**

             Notapplicable.

**Item 4.****Submissionof Matters to a Vote of Securities Holders**

              The 2001 Annual Meetingof the Stockholders of Click2learn was held on May 30, 2001 at 110 – 110thAvenue NE, Bellevue, Washington.  Themeeting was held pursuant to a Notice of Annual Meeting of Stockholders mailedto the stockholders on or about May 2, 2001. Five proposals were submitted to the stockholders and approved at theannual meeting, as follows:

             *Proposal 1:*Election of Bert Kolde and Edward Harris as ClassIII directors to serve until the annual meeting of the stockholders to be heldin 2004. The number of votes cast for or withheld from each nominee,both in person and by proxy, was as follows:
 **Bert  Kolde** **Edward  Harris** **** ****Votes For15,964,316 15,966,382Votes Withheld432,005 429,939
             *Proposal 2:*Anamendment of our 1998 Equity Incentive Plan to increase the number of shares ofcommon stock reserved for issuance from 4,000,000 shares to 6,000,000 shares. Thenumber of votes cast for, cast against or abstaining from Proposal 2, both inperson and by proxy, and broker non-votes was as follows:
Votes For7,880,666Votes Against5,106,128Abstaining33,656Broker Non-votes3,375,871
             *Proposal 3:*Anamendment of our 1998 Directors Stock Option Plan to increase the number ofshares of common stock reserved for issuance from 187,500 shares to 487,500shares. The number of votes castfor, cast against or abstaining from Proposal 3, both in person and by proxy,and broker non-votes was as follows:
Votes For9,186,720Votes Against3,793,329Abstaining40,401Broker Non-votes3,375,871
 

             *Proposal 4:*Anamendment of our Certificate of Incorporation to change our name from“Click2learn.com, Inc.” to “Click2learn, Inc.” The number of votes castfor, cast against or abstaining from Proposal 4, both in person and by proxywas as follows:
Votes For16,368,559Votes Against17,191Abstaining10,571
             *Proposal 5: *Ratification of the appointment of KPMG LLP asour independent accountants to perform the audit of our financial statementsfor 2001. The number of votes cast for, cast against or abstaining fromProposal 5, both in person and by proxy, was as follows:
Votes For16,355,542Votes Against14,531Abstaining26,248
**Item 5.  OtherInformation.**

*             Management Changes. *Inconnection with the acquisition of IntelliPrep on May 29, 2001, Sudheer Koneru,IntelliPrep’s President and CEO, was appointed as Executive Vice President ofProduct Development and Strategy and Srinivasan Chandrasekar, IntelliPrep’sChief Technology Officer, was appointed Senior Vice President ofTechnology.   On July 10, 2001, our Board of Directors elected toincrease the size of the Board to nine members by adding a third Class IIIdirector and appointing Vijay Vashee as the third Class III director.  Although the terms of Class III directorsexpire at the 2004 annual meeting of the stockholders, the appointment of Mr.Vashee will be submitted to the stockholders for ratification at the 2002annual meeting.   Effective July 31,2001, Steven Martino, our former Chief Operating Officer, left the company topursue other opportunities.

**Item 6.  Exhibits andReports on Form 8-K**
(a) Exhibits.   2.1 Agreement  and Plan of Merger dated as of April 17, 2001 by and among  Click2learn, Inc., Click2learn Software Corp., certain stockholders of  IntelliPrep Technologies, Incorporated and IntelliPrep Technologies,  Incorporated (the “Merger Agreement”).   Incorporated by reference to the Form 8-K dated April 17, 2001.   10.1 Employment  Agreement dated as of April 17, 2001 by and between Click2learn and Sudheer  Koneru.   10.2 Employment  Agreement dated as of April 17, 2001 by and between Click2learn and  Srinivasan Chandrasekar.   (b) Reports  on Form 8-K.     Click2learn  filed a report on Form 8-K dated April 17, 2001 disclosing that it had  entered into the Merger Agreement.
 

**SIGNATURES**

             Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
  **CLICK2LEARN, INC.**   August 14, 2001 /s/ John D. Atherly Date John D. Atherly  Vice President, Finance and Administration  and Chief Financial Officer(Duly Authorized Officer and  Chief Accounting Officer)
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