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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K

(MARK ONE)

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
       SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended December 31, 1997

                                       OR

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

   For the transition period from                     to

                         Commission file number 0-21421

                              UOL PUBLISHING, INC.
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                            <C>
                   DELAWARE                                      54-1290319
       (STATE OR OTHER JURISDICTION OF                        (I.R.S. EMPLOYER
        INCORPORATION OR ORGANIZATION)                      IDENTIFICATION NO.)

            8251 GREENSBORO DRIVE                                  22102
                  SUITE 500                                      (ZIP CODE)
               MCLEAN, VIRGINIA
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>

        REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 703-893-7800

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) of the Act:
                                      None

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

                    Common Stock ($0.01 par value per share)

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


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

     The aggregate market value of the voting stock held by non-affiliates of
the registrant based upon the closing price of the Common Stock on March 25,
1998, on the NASDAQ National Market System was approximately $22,726,728 as of
such date. Shares of Common Stock held by each executive officer and director
and by each person who owns 10% or more of the outstanding Common Stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status may not be conclusive for other purposes.

     As of March 25, 1998, the registrant had outstanding 3,819,467 shares of
Common Stock.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Company's Proxy Statement for the 1998 Annual Meeting of
Stockholders are incorporated herein by reference into Part III.
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     Statements in this Annual Report on Form 10-K that are not descriptions of
historical facts are forward-looking statements that are subject to risks and
uncertainties. Actual events or results could differ materially from those
currently anticipated due to a number of factors, including those set forth
herein and in the Company's other SEC filings, and including, in particular:
limited operating history in targeted markets and losses and negative operating
cash flows; future capital needs and uncertainty of additional funding;
difficulties in managing rapid growth; risks associated with acquisitions and
integration of acquired operations; competition; developing market, rapid
technological changes and new products; dependence on online distribution;
substantial dependence on courseware and third party courseware providers;
substantial dependence on third party technology; and limited marketing
experience and substantial dependence on third party distribution. All
references to the "Company" herein shall mean UOL Publishing, Inc. and its
subsidiaries: Cognitive Training Associates, Inc., a Texas corporation ("CTA");
Ivy Software, Inc., a Virginia corporation ("Ivy"); Cooper & Associates, Inc.,
an Illinois corporation, d/b/a Teletutor ("Teletutor"); HTR, Inc., a Delaware
corporation ("HTR"); and UOL Leasing, Inc., a Delaware corporation.

                                     PART I

ITEM 1.  BUSINESS.

     UOL Publishing, Inc. (the "Company") believes that it is a leading
publisher of high quality, interactive and on-demand courseware for the
corporate training and education market. The Company offers its online
courseware primarily through its proprietary virtual campus product, or VCampus,
an online courseware delivery system and environment that facilitates
development, management and administration of training and education over the
Internet and intranets. Through its HTR, Teletutor and Ivy subsidiaries, the
Company also offers courseware through more traditional media, including on-site
and classroom training, and diskette, CD-ROM and printed formats. The Company
introduced its first Web-based demonstration course in November 1995, and its
first revenue-generating Web-based course in Spring 1996. The Company intends to
leverage the courseware and the customer base of its subsidiaries, as well as
the courseware and customers provided by future partnerships and acquisitions,
to facilitate the development of its online training and education business.

     The corporate training marketplace is rapidly evolving to meet the
increasing demand for worker training and retraining in a cost-effective and
convenient manner. Online delivery technology significantly reduces training
costs, including those associated with students' time away from work, and
permits resources to be concentrated directly on the educational process. The
Company is initially targeting customers in the telecommunications, healthcare,
utilities, information technology and financial services industries, as well as
academic institutions, all of which the Company believes have relatively large
training and education budgets, significant training needs and receptiveness to
new technology. The Company believes it is the only Web-based training company
currently serving multiple industries and offering courseware covering multiple
disciplines. The Company's existing courseware library includes approximately
900 courses, approximately 450 of which are currently available online, in
subject matter areas including business, management, finance, accounting,
technology, and basic technical and development skills. The Company converts
courseware that it believes are proven and popular in diverse subject matter
areas to the Company's interactive online format. Since November 1996, the
Company has more than tripled the number of courses in its library.

     The Company's objectives are to be the leading publisher of online
courseware for the corporate training and education market, and to make its
VCampus the global standard for online delivery of corporate training and
education courseware. See "-- Products and Services -- VCampus." The Company's
strategy to achieve these objectives includes publishing high-quality courseware
(including courseware certified by independent academic institutions), expanding
its customers which capitalize on the Company's Web-based solution, upgrading
its existing technologies to maintain its position as a leader in
technology-based corporate training and developing brand recognition for its
products and services. The Company intends to continue providing products and
services through delivery methods other than online delivery in order to provide
a more complete training solution to customers requiring varying delivery
methods, and in order to expand its customer base and courseware library for
online delivery. For the years ended December 31, 1996 and 1997, approximately

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99% and 77%, respectively, of the Company's pro forma revenues, which give
effect to the HTR, Ivy and Teletutor acquisitions as if they occurred at January
1, 1997, were derived from delivery methods other than online delivery, and 1%
and 23%, respectively, were derived from online delivery.

INDUSTRY BACKGROUND

     Corporate training is a rapidly growing segment of the training and
education market, primarily as a result of the demand for increasing skills
required by employers. As the United States economy continues to shift from a
focus on industry to one focused on information and knowledge, employers seeking
to compete successfully in the marketplace find it necessary to invest more in
the training and education of their employees. During 1997, approximately
145,000 organizations in the United States with more than 100 employees spent
approximately $60 billion to provide training and education to approximately 59
million of their employees. According to an International Foundation of Employee
Benefits survey, more than 90% of companies surveyed currently offer continuing
education as an employee benefit and 97% plan to offer this benefit by the year
2000. Travel costs associated with corporate training average approximately 25%
of overall training budgets.

  Use Of Technology In Training and Education

     Historically, corporations, training organizations and academic
institutions have provided education through the traditional classroom and
distance learning methods (satellite-based delivery, mail exchanges, voice mail,
CD-ROMs, diskettes). These entities may face fiscal constraints that prevent
them from expanding their facilities to meet the demands created by rising
enrollments. Time and space constraints inherent in traditional classroom
methods make classroom education inconvenient and inefficient. Distance learning
addresses space limitations by allowing students to take courses at remote
locations. Due to its scalability, web-based delivery enables corporations,
training organizations and academic institutions to extend their reach more
cost-effectively than other distance learning methods. In addition, web-based
delivery offers the ability to rapidly and cost-effectively update course
materials and can provide students a significant degree of time and place
independence.

     The Company's courseware benefits from the structural changes in the way
content can be managed, delivered and consumed that were caused by the advent of
the World Wide Web (the "Web") and online technologies. The use of such
technologies can lower publishing costs and could significantly increase demand.
Online technology makes it possible to combine the best elements of online
connectivity between students and teachers and the interactivity of a CD-ROM.
The use of new technology is so pervasive that nearly 25% of all educational
institutions (15% of public institutions and 33% of private institutions) plan
to use the Internet for instruction. The Company believes that its online
delivery of courseware combines convenience, affordability, self-pacing,
standardized curricula, individualized tailoring of courses, immediate
performance measurement and a high degree of student-teacher interaction.

  Online Technologies And The World Wide Web

     Since the advent of the Web portion of the Internet and graphical Web
browsers in the early 1990's, the popularity of the Internet has increased
dramatically. Web-based intranet usage is predicted to overtake Internet usage
before the year 2000. Intranets, which run on open transmission control
protocol/internet protocol ("TCP/IP") networks, enable companies to utilize
servers and browsers designed to be used for the Web in their own applications
distributed over an internal network. International Data Corporation ("IDC") has
estimated that approximately 175 million people worldwide will have access to
the Internet by the end of 2001, up from approximately 28 million at the end of
1996. Growth in the number of Internet users has been fueled by a number of
factors, including: the existing and increasing numbers of personal computers
("PC's") in the workplace and at home; improvements in the performance and speed
of PC's and modems; improvements in network infrastructure; enhanced ease of
access to the Internet provided by Internet service providers; consumer-oriented
online services and long distance telephone companies; emergence of standards
for Internet navigation and information access; declining costs of Internet
service due to increased competition among access providers; and increased
awareness of the Internet among businesses and consumers. Further,

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the Company believes that the emergence of online technologies, such as those
embodied in the Internet and the Web, are economical and effective methods of
distribution of digital information and that such methods present a significant
opportunity to publishers of educational and training content. The Company
believes that over the next several years, the speed and commercial use of the
Internet will increase with the development of higher bandwidth communication
and online access through affordable devices in addition to PC's, such as online
access terminals, cable modems, televisions, video phones and personal digital
assistants. The Company expects that it will offer its courseware through these
online technologies to the extent that they evolve and gain popular acceptance
for the delivery of education and training to working adults and other part-time
students.

     The use of the Company's products and services will depend in large part
upon the development of an infrastructure for providing online access and
services. Because global commerce and online exchange of information on the
Internet and other similar open wide area networks are new and evolving, it is
difficult to predict with any assurance whether such networks will prove to be
viable commercial marketplaces. In particular, such networks are an unproven
medium for education. In the event such networks fail to become a viable
education medium, there can be no assurance the Company will be able to overcome
the costs and difficulties associated with adapting to alternative media, if and
when they become available. If such networks do not become viable commercial
marketplaces or do not develop as a viable medium for education, the Company
would be materially adversely affected. Additionally, such networks have
experienced, and are expected to continue to experience, significant growth in
the number of users and amount of traffic. There can be no assurance that the
infrastructures of such networks will continue to be able to support the demands
placed on them by this continued growth. In addition, such networks could lose
their viability due to delays in the development or adoption of new standards
and protocols (for example, the next-generation Internet Protocol) to handle
increased levels of activity, increased governmental regulation or other
factors. There can be no assurance that the infrastructure or complementary
services necessary to make such networks viable commercial marketplaces will be
developed, or that if developed, such networks will become viable commercial
marketplaces for products and services such as those offered by the Company.

COMPANY STRATEGY

     The Company's objectives are to be the leading publisher of online
courseware for the corporate training and education market, and to make its
VCampus the global standard for online delivery of corporate training and
education courseware. The Company's strategy to achieve these objectives
includes publishing high-quality courseware (including courseware certified by
independent academic institutions), expanding its customer base, particularly
those who capitalize on the Company's Web-based solution, upgrading its existing
technologies to maintain its position as a leader in technology-based corporate
training and developing brand recognition for its products and services. The
Company intends to implement these strategies through internal growth and
acquisitions of complementary businesses, products, services and technologies.
See "-- Acquisitions."

     - Publish High Quality, High Demand Courseware.  The Company intends to
       continue to expand its courseware library through acquisitions,
       relationships with customers and internal development of high quality
       courseware in subject areas that are expected to be in high demand by
       customers in the corporate training and education market. The Company's
       strategy involves publishing market-tested, high quality products focused
       on subject areas in high demand such as business, management, finance,
       accounting, technology, and basic technical and developmental skills. The
       Company intends to continue to provide courseware certified by
       independent academic institutions. See "-- Products and Services."

     - Expand Customer Base.  The Company intends to continue to develop
       relationships with its existing and new business and academic institution
       customers to increase the number of enrollments and accelerate awareness
       and acceptance of its online content. The Company believes that
       development of VCampuses for customers provides it with cross-marketing
       opportunities. The Company's own, and certain of its customer's, VCampus
       promotes its own and certain other courses. In addition, many of such
       VCampuses are linked, enabling a student enrolled in one of the Company's
       online courses to access

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       certain courses offered through other customers. In addition, the
       Company believes there are significant opportunities to cross-market its
       web-based courseware to customers who have historically utilized
       traditional learning formats. See "-- Customers" and "-- Sales and
       Marketing."

     - Develop Proprietary Technology.  The Company intends to maintain its
       position as a leader in online courseware delivery technology by
       continuing to develop and enhance the features and functionality of its
       proprietary technology. Current technology development efforts include
       completion of its proprietary Curriculum Management System, which is
       designed to assign groups of students to appropriate groups of courses
       within a VCampus. See "-- Products and Services -- VCampus."

     - Develop Brand Recognition.  The Company believes that establishing and
       maintaining brand recognition is critical to its strategy of becoming the
       leading publisher for online training and education. The Company plans to
       achieve brand recognition through marketing efforts and the creation of a
       proprietary user interface, which incorporates audio, animation, graphics
       and text as appropriate to create a stimulating learning experience. The
       Company also intends to enter into arrangements with content providers to
       adopt the Company's VCampus as their standard for online courseware
       delivery. See "-- Products and Services -- VCampus."

     The Company intends to continue providing products and services through
delivery methods other than online delivery in order to expand its customer base
and courseware library for online delivery, and in order to provide a more
complete training solution to customers requiring varying delivery methods. See
"-- Products and Services."

ACQUISITIONS

     The Company intends to continue its acquisition activity as one means of
expanding the depth and breadth of its courseware library, its customer base and
its technology. The Company believes that because it is a publicly-traded
company with online technology that can enable broader distribution of
courseware and a philosophy of decentralized management, it may be an attractive
acquirer of training companies that are seeking to expand their access to
capital, their customer base and/or their technological capabilities. The
Company believes that the corporate training and education market is highly
fragmented. The Company intends to target training companies that it believes
have high quality, high-demand corporate training and/or education courseware
that can be adapted to an online format, customer bases that would be interested
in the online delivery system offered by the Company, or technology that would
complement or enhance the Company's technology.

     Since 1994, the Company has completed five acquisitions -- HTR, Teletutor,
Ivy, CTA and the CYBIS Division of Control Data Corporation. The Company does
not currently have an agreement, commitment or understanding with any other
potential acquisition candidates.

     HTR.  In October 1997, the Company acquired HTR, whose strategy is to
deliver a total solution for corporate information technology ("IT")
requirements through its suite of products and services, which includes
traditional and on-site training, and courseware. This acquisition provided the
Company with additional content that can be adapted to the Company's online
format and with customers in the IT training market, for which IDC forecasts a
compound annual growth rate of 13.6% through the year 2000. HTR's revenues for
its fiscal year ended June 30, 1997 were $12,063,000. The Company acquired HTR
in exchange for 585,940 shares of its Common Stock, options and warrants to
purchase an additional 34,020 shares of its Common Stock, the assumption of
approximately $3,500,000 of debt and cash and notes payable aggregating
approximately $600,000.

     Teletutor.  In April 1997, the Company acquired Teletutor, which develops,
distributes and supports computer-based training courses for the data and
telecommunications industry. This acquisition provided the Company with
additional content that can be adapted to the Company's online format, as well
as access to Teletutor's over 2,000 customers. As of March 25, 1998, the Company
has converted 15 Teletutor courses into its online format. Teletutor's revenues
for the year ended December 31, 1996 were $2,918,000. The consideration paid by
the Company for the acquisition of Teletutor consisted of a $3,000,000 cash
payment at

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closing and $2,000,000 to be paid in cash ratably on the first, second and third
anniversary dates of the acquisition.

     Ivy.  In March 1997, the Company acquired Ivy, which develops and
distributes business and accounting software for the academic education market.
This acquisition provided the Company with additional content that can be
adapted to the Company's online format, as well as access to Ivy's approximately
200 customers in the academic marketplace, ranging from community colleges to
large universities. As of March 25, 1998, the Company has converted six Ivy
courses into its online format. Ivy's revenues for its fiscal year ended
December 31, 1996 were $615,000. The Company acquired Ivy in exchange for
$314,000 in cash and potential future payments not to exceed approximately
$862,000, which are based upon integration of operations, conversion of software
and operating results.

     CTA.  In August 1996, the Company acquired CTA, which engages in the
development and distribution of technology-based applications online via
distributed networks for educational institutions, corporations and government
agencies. CTA customers can access these applications from remote locations
using the Internet or their organization's intranets. This acquisition provided
the Company an established customer base and additional content, particularly in
the electrical, medical and scientific equipment subject areas. CTA's revenues
for the year ended December 31, 1995 were $770,000. The Company acquired CTA in
exchange for 42,487 shares of the Company's Common Stock.

     CYBIS.  In 1994, the Company acquired the CYBIS division of Control Data,
together with a perpetual nonexclusive license for the CYBIS courseware (which
consisted primarily of courses in language arts, mathematics, social studies,
science, business and a variety of technical subjects). The Company's ability to
distribute a portion of the CYBIS courseware is limited by the terms of its
license. The Company is responsible for the CYBIS computer-based education and
training portion of certain CYBIS contracts to which Control Data is a party, as
well as support and other services under such contracts. The Company believes
that Web-based courseware developed from the CYBIS courseware, to the extent not
restricted by the terms of its license, may contribute to revenues in the
future. CYBIS' revenues for the year ended December 31, 1993 were $795,948. The
Company acquired CYBIS in exchange for $150,000 in cash and $544,000 in notes.

     Any acquisition is accompanied by such risks as, among other things, the
difficulties in assimilating the operations and personnel of acquired companies,
potential disruption to the Company's ongoing business, difficulties of
incorporating acquired technology into the Company's products and additional
expense associated with amortization of acquired intangible assets. Particular
acquisitions may not ultimately provide the benefits originally anticipated by
the Company's management. For example, the assimilation of HTR, which employs
more than 105 employees in its headquarters and six branch offices, offers
products and services not previously offered by UOL, and which would more than
double the Company's revenue on a pro forma basis for the year ended December
31, 1996 and the year ended December 31, 1997, is expected to be particularly
challenging to the Company's management because the Company has never acquired
an organization as large as HTR in terms of employees and historical revenue.
Moreover, despite HTR's generation of such revenues, it incurred both operating
and net losses for the years ended June 30, 1997 and 1996.

     As consideration for future acquisitions, the Company intends to use
various combinations of Common Stock, cash and notes. The Company may also use
Preferred Stock as all or part of the consideration for one or more potential
acquisitions. Paying for any future acquisitions with equity securities or cash
could result in potential dilution to the value of the Company's Common Stock,
could require the Company to raise additional financing, which may not be
available on terms favorable to the Company and/or could have an adverse effect
on the Company's liquidity. The Company may use a line of credit or incur other
indebtedness, if available, to help fund acquisitions. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." In pursuing this strategy, there
can be no assurance that the Company will be able to identify attractive targets
and make successful acquisitions in the future on commercially reasonable terms,
or that it will be successful in overcoming these risks or any other problems
encountered in connection with acquisitions.

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PRODUCTS AND SERVICES

     The Company offers its online courseware primarily through its proprietary
virtual campus product, or VCampus, an online courseware delivery system and
environment that facilitates development, management and administration of
training and education over the Internet and corporate intranets. Through its
HTR, Teletutor and Ivy subsidiaries, the Company also offers courseware through
more traditional media, including on-site and classroom training, and diskette,
CD-ROM and printed formats.

  VCampus

     The Company's VCampus is a platform-independent delivery system capable of
operating on virtually any PC. Generally, a student enrolls in the Company's
courses online through a VCampus, but students can also enroll through
traditional in-person, telephone or mail enrollment. The enrolled student can
then access the courseware online, typically through a PC connected to the
Internet or a corporate intranet. Once the student has completed the course, he
or she will receive credit or certification, if appropriate. Through December
31, 1997, the Company had licensed over 50 VCampuses to customers, such as:
All-Phase Electric; Autodesk, Inc.; California State University, Long Beach;
Graybar Electric Company; Lucent Technologies; Park College; and the United
States Department of Agriculture.

     The VCampus environment is customizable, and designed for ease of
administration and access to students, instructors and training administrators.
In addition, by using any combination of courses from the Company's library and
their own internal training libraries, customers can offer a variety of distance
learning options. The VCampus includes the following components:

          Registrar:  In the Registrar "building," students can sign up for
     available courses and modify their student profile, and administrators can
     add new courses, admit students into their registered courses, and modify
     the courses.

          Classrooms:  In the Classrooms "building," students can enter their
     registered courses or check their grades for any course for which they are
     registered.

          Faculty:  In the Faculty "building," instructors can build customized
     courses and tests for distribution on the VCampus.

          Information:  In the Information "building," administrators can post
     news, announcements, answers to frequently asked questions, and more to
     keep students informed about their training options.

          Commons:  In the optional Commons "building," students can access
     games and socialize with other students.

     The VCampus supports a wide variety of tools and utilities supplied by
third parties, such as Netscape's or Microsoft's Web browser, Macromedia's
Shockwave or Apple Computer's Quicktime viewer. In addition, the Company has
designed the following proprietary software tools that facilitate the
functionality of the VCampus:

          Lesson Management System.  To allow electronic guidance, monitoring
     and management of students through the courseware, the Company has
     developed the Lesson Management System, which pre-tests students on
     learning objectives defined by the course author or instructor, and then
     creates a personalized study plan based on the level and breadth of the
     student's knowledge. The Lesson Management System, intended primarily for
     use by students, tracks each student's progress through a course's assigned
     lessons, measures mastery of the learning objectives through the Test
     Architect System, and, if necessary, offers alternative paths and methods
     of instruction. The initial commercial version of the Lesson Management
     System was completed and launched in December 1996. Version 2.0 was
     released in August 1997.

          Class Management System.  To allow the system to handle courseware
     written by any party under an open architecture standard, the Company has
     developed a database manager which allows instructors to give
     administrative direction to students in the online classroom. The Class
     Manager, compliant with

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     open database connectivity (ODBC) standards (a nonproprietary industry
     protocol), handles remote enrollment and payment processing, test creation
     and administration, and automatic course progress tracking and reporting (a
     gradebook). The initial commercial version of the Class Management System
     was completed and launched in December 1996.

          Courseware Construction Set.  To allow instructors to create a
     customized online course, the Company developed a visual building block
     facility to produce courses from small, individual lessons or "courselets."
     Using a natural language pattern-matching and semantic processing
     technology, the Courseware Construction Set allows instructors to search
     the Company's library of courselets, retrieve the appropriate instructional
     materials, and then build a customized course through a familiar drag and
     drop interface. Courselets are authored as discrete units of instruction
     and are presented through a series of proprietary, format-specific
     templates called PointPages. PointPages can range from text screens to
     digital videos and from plain graphical images to complex software
     simulations, all within the same course. PointPages are designed to allow
     instructors with no knowledge of programming to construct multimedia-rich
     interactive Web-based courses. The Company released the initial commercial
     version of the Courseware Construction Set in July 1997.

          Curriculum Management System.  To facilitate the grouping of students
     with similar education needs and abilities, the Company is developing the
     Curriculum Management System. This system is designed to assign groups of
     students to appropriate groups of courses within a VCampus, which could
     improve overall system efficiency and facilitate interaction by students
     with similar educational needs and abilities. The Curriculum Management
     System is currently in beta testing with certain of the Company's key
     customers.

  Traditional Delivery

     The Company intends to continue providing products and services through
delivery methods other than online delivery in order to expand its customer base
and courseware library for online delivery, and in order to provide a more
complete training solution to customers requiring varying delivery methods.
Through its HTR, Teletutor and Ivy subsidiaries, the Company also offers
courseware through more traditional media, including on-site and classroom
training, and diskette, CD-ROM and printed formats. In addition, HTR offers IT
training and consulting services.

     HTR's strategy is to deliver a total solution for corporate IT requirements
through its suite of products and services, which includes traditional and
on-site training, and courseware. HTR seeks to provide a "Knowledge Transfer" to
its customers through: flexible, instructor-based training; customizable
courseware titles for client/server systems; on-site traditional consulting
services for just-in-time implementation of systems and applications; and
consulting expertise customized to fulfill individual customers' longer-term,
specific project requirements. IT training is delivered by instructors at HTR's
seven offices located in the U.S., as well as at customer locations. Instruction
consists of courses and class materials for IT and is provided through both
pre-scheduled, open enrollment classes and on-demand corporate training
sessions. HTR also provides customized training to meet a customer's specific
needs by tailoring existing titles for developing an entirely new course.
Furthermore, HTR converts certain content into other products (e.g., end-user
books, videos) to extend its product line and to reach additional market
segments with minimal additional investment in content development.

     KnowledgeWorks(TM), a division of HTR, offers outsourcing services to
software vendors covering the entire process of design, development,
localization and global distribution of technical training materials.
KnowledgeWorks' courseware is developed by a professional team of project
managers; technical writers, editors and instructional designers;
industry-recognized subject matter experts; and linguistic experts.
KnowledgeWorks seeks partnerships with an independent software vendor ("ISV"),
such as those it has with Microsoft, Lotus and Corell, to rapidly penetrate the
market and become recognized as the ISV's authorized courseware. This courseware
will then be sold to the ISV for its internal use and use as part of its
customer training program.

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     Teletutor's strategy is to focus its products and services primarily on the
data and telecommunications industry. Teletutor develops, distributes and
supports courseware, primarily in computer-based training formats, for and to
its over 2,000 customers in that industry. As of March 25, 1998, the Company has
converted 15 Teletutor courses into its online format.

     Ivy's strategy is to focus its products and services primarily on the
academic education market for business and accounting software. Ivy develops and
distributes its business and accounting courseware, primarily in CD-ROM and
diskette formats, for and to its approximately 200 customers in the academic
marketplace. As of March 25, 1998, the Company has converted six Ivy courses
into its online format.

  Existing Courseware Library

     The Company's existing courseware library includes approximately 900
courses, approximately 450 of which are currently available online, in what it
believes to be high-demand subject matter areas such as business, management,
finance, accounting, technology, and basic technical and development skills.
Although the Company does not provide accreditation or certification itself, a
number of its current courses provide either accreditation or certification
through its content providers. The current library was built from a combination
of acquisitions and relationships with business and academic institution
customers. Conversion of courseware into the Company's online format typically
takes approximately 90 days, although conversion time varies depending on any
number of factors, including the size and format of the original courseware
content.

                                        9
<PAGE>   10

     A listing, by curriculum category, of the Company's existing courseware, as
of March 25, 1998, is provided below.

<TABLE>
<CAPTION>
                                              NUMBER OF
                                               COURSES
                                              AVAILABLE
         CURRICULUM (TOTAL COURSES)            ONLINE:              PRIMARY CONTENT PROVIDER(S)
         --------------------------           ----------            ---------------------------
<S>                                           <C>           <C>
Technical and Development Skills (227
  courses)*.................................     226*       Graybar Electric Company
Business, Management, Marketing and
  Economics (73 courses)....................      36        Park College, University of California at
                                                            Berkley, San Jose University, Intellipro,
                                                            Inc., Georgetown University, Human Resource
                                                            Development (HRD) Press, Vital Learning
                                                            Corporation
Software and Computer Applications (94
  courses)..................................      31        UOL, InfoSource, Inc., Street Technologies
Information Technology (50 courses).........       0        HTR
Electrical and Utilities Technical Training
  (14 courses)..............................       3        CYBIS, Delmar Publishers
Data and Telecommunications (50 courses)....      18        Teletutor, Applied Learning Systems, Inc.,
                                                            Park College
Other (54 courses)..........................      23        Park College, California State University,
                                                            Practical Memory Institute
Core Workplace Skills (35 courses)..........      30        Crisp Publications, Inc., American Media
                                                            Publishing
Computer Aided Design and Manufacturing (30
  courses)..................................      22        Autodesk, Inc.
Human Resources, Compliance and OSHA (92
  courses)..................................       9        Park University, HRD Press, Inc., Eastern
                                                            Michigan University, Illustructions, Inc.
Legal Issues (54 courses)...................      10        TRT, Inc., Park College
Science, Social Science and Statistics (13
  courses)..................................       9        George Mason University, Park College,
                                                            American Chemical Society, University of
                                                            Toledo
Healthcare and Nursing (24 courses).........       8        HealthExec, Inc., Wichita State University
Engineering (5 courses).....................       1        University of Texas at Austin, Action
                                                            Systems
Customer-Specific (131 courses).............      46        Wescott Communications, Square D Company,
                                                            Dun & Bradstreet Corporation, Thomas & Betts
                                                            Corporation
</TABLE>

---------------
* Available for distribution to Graybar Electric Company and its designees only.

CUSTOMERS

     The Company's primary target market is the corporate training and education
market. The Company focuses its sales and marketing efforts on Fortune 1000
companies and is initially targeting customers in the telecommunications,
healthcare, utilities, IT and financial services industries, as well as academic
institutions, all of which the Company believes have relatively large training
and education budgets, significant training needs and receptiveness to new
technology.

     In 1996, two of the Company's customers accounted for more than 10% of its
revenues: Fort Levinworth, a user of CYBIS courseware, 28.7%, and InternetU,
Inc., 26.5%. In 1997, no customer accounted for more than 10% of the Company's
revenues. Although a significant portion of the Company's revenues between 1994
and 1996 were generated through the licensing of CYBIS courseware, the Company
believes that CYBIS revenues will not be substantial compared to the Company's
expected future revenues (although there can be no assurance that the Company
will be successful in generating significant revenues from other sources). The
Company currently anticipates that future revenues may continue to be derived
from sales to a limited number

                                       10
<PAGE>   11

of customers. Accordingly, the cancellation or deferral of a small number of
contracts or license agreements would have a material adverse effect on the
Company.

  Business Customers

     As of March 25, 1998, the Company had approximately 80 business customers,
approximately 50 of which are online, including: All-Phase Electric; Autodesk,
Inc.; Bell Atlantic; Coopers & Lybrand, LLP; Dearborn Press; Digital Equipment
Corporation; Dun & Bradstreet, Inc.; Global One, the international joint venture
of Deutsche Telekom, France Telecom and Sprint; Graybar Electric Company; Lucent
Technologies; Thomas & Betts Corporation; the United States Department of
Agriculture; and the Executive Education Network division of Westcott
Communications. The Company plans to establish relationships with additional
business customers, in particular those that offer access to large numbers of
users (including the prospective customer's employees or end-users), vendors and
resellers, as well as significant amounts of courseware content. The Company's
business customers generally agree to market and promote the Company's products
and services and to share with the Company the net revenues generated from
access and other fees charged to such customer's end-users.

  Academic Institution Customers

     As of March 25, 1998, the Company had approximately 20 academic institution
customers, approximately 15 of which are online, including: the California State
University system; Eastern Michigan University; George Mason University; The
George Washington University; Georgetown University; Park College; San Jose
State University; University of California, Berkeley; University of Texas,
Austin; University of Toledo; and Wichita State University. The Company plans to
establish relationships with additional academic institution customers, in
particular those that have significant enrollments, offer broad curricula and
provide the Company an opportunity to publish online courseware developed by
such institutions. The Company's agreements with these academic institutions
generally provide the Company exclusive rights to, or limit the institution's
right to, for itself or in conjunction with others, develop and/or distribute
the online courseware subject to the agreements. The academic institutions
market these courses in the same manner as their existing, traditional course
offerings, including through direct mail, course catalogs, print advertising and
through web-sites.

SALES AND MARKETING

     The Company's primary marketing goals are to create a strong brand identity
as a leading training and educational courseware publisher for corporations and
academic institutions, and to establish its core technology, the VCampus, as the
global standard for corporate training and education needs.

     As of December 31, 1997, the Company had 51 full-time employees and one
part-time employee in sales and marketing, as compared to eight full-time and
one part-time employee as of December 31, 1996. Provided the Company raises
sufficient capital during 1998, the Company expects to hire additional sales and
marketing personnel through the end of 1998. Marketing personnel divide
responsibility by industry. A national sales manager supervises geographically
focused business sales representatives and academic sales representatives. A
significant portion of each sales representative's total compensation may be
earned based upon performance. HTR sales and marketing personnel focus on
traditional delivery products and services.

     In addition to its direct sales efforts, the Company markets its products
and services through a variety of means, including the Internet, public
relations, trade shows, direct mail, trade publications, customers, resellers
and other arrangements. The Company cross-markets through customers' VCampuses
to promote its products and services and to recruit students. The Company
believes that continuing to form strategic marketing alliances with partners who
will sell, promote and market the Company's products and services will be
important for rapid market penetration. The Company also utilizes a firm that
specializes in providing leads to the Company for potential customers.

     The Company changed its business focus in 1993, and therefore has limited
marketing experience in its current industry. The Company's direct marketing and
sales staff does not have significant experience

                                       11
<PAGE>   12

marketing in the sales of education products using Web-based delivery systems.
There can be no assurance that the Company will be able to attract resellers or
customers that will be able to market the Company's products effectively and
will be qualified to provide timely and cost-effective customer and end-user
support and service. In addition, certain of UOL's resellers and customers may
compete with one another and the Company, and the Company may also be required
to manage conflicts among its resellers and customers. For example, certain of
UOL's content providers have required UOL to refrain from linking its products
with competing products. The Company may be adversely affected by pricing
pressure or other adverse consequences of competition or conflict among or with
its resellers and customers, or should any reseller or customer fail to
adequately penetrate its market segment. The inability to recruit, manage or
retain important resellers or customers, or their inability to penetrate their
respective market segments, would materially adversely affect the Company.

COMPETITION

     The market for educational and training products and services is highly
competitive and the Company expects that competition will continue to intensify.
Although the Company believes that it was the first to offer Web-based,
interactive, on-demand courseware, there are no substantial barriers to entry in
the online education and training market. A number of companies, including
Microsoft Corporation, CBT Systems Ltd., Gartner Group, Inc., Oracle Corporation
and Centra Software, Inc., have entered this market during recent months, and
the Company expects this trend to continue to accelerate. The Company's
competition also includes the many institutions and businesses that provide
training or education that is taught on a part-time basis. In addition to
traditional classroom and distance learning providers, other institutions such
as Apollo Group, Inc. (through University of Phoenix) and Jones Intercable Inc.
(through Mind Extension University) offer their own accredited courses online or
in an email-based format. They, and many other education providers, use some of
the Company's methods, including email, bulletin boards, electronic conferencing
and CD-ROMs, as well as other methods, such as satellite communications and
audio and video tapes. The Company, particularly HTR, has experienced price
competition in the traditional courseware delivery media market in which it
competes. The Company also expects to encounter significant competition in
connection with its efforts to establish its VCampus as the standard learning
environment and format in its industry.

     The Company believes that competition in the developing market for online
training and education will be based upon various factors, including: quality,
breadth and depth of courseware; marketing and third party relationships;
quality, flexibility and reliability of delivery system; and, to a lesser
degree, pricing. In addition, the Company believes that its products and tools
render the Company's courseware affordable, convenient, easy to use and
administer, and provide the Company with a competitive edge in attracting
additional customers. Many of the Company's existing competitors, as well as a
number of potential new competitors (including the Company's customers and
partners), have significantly greater financial, technical and marketing
resources than the Company. The Company will require financing to compete
effectively in this rapidly evolving market. In addition, any of these
competitors may be able to respond more quickly to new or emerging technologies,
and to devote greater resources to the development, promotion and sale of their
services than the Company. A number of the Company's current customers and
partners have also established relationships with certain of the Company's
competitors, and future customers and partners may establish similar
relationships. In addition, the Company's partners could use information
obtained from the Company to gain an additional competitive advantage over the
Company. There can be no assurance that the Company's competitors will not
develop products and services that are superior to those of the Company or that
achieve greater market acceptance than the Company's products and services.
Moreover, there can be no assurance that the Company will be able to compete
successfully against its current or future competitors or that competition will
not have a material adverse effect on the Company.

GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES

     The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access to or commerce
on online networks. Due to the increasing popularity and use of online

                                       12
<PAGE>   13

networks, it is possible that a number of laws and regulations may be adopted
with respect to online networks, covering issues such as user privacy, pricing,
taxation and/or the characteristics and quality of products and services. The
adoption of any such laws or regulations may decrease the growth of online
networks, which could in turn decrease the demand for the Company's products and
increase the Company's cost of doing business or otherwise have an adverse
effect on the Company. Moreover, the applicability to online networks of
existing laws governing issues such as property ownership, sales taxes, libel
and personal privacy is uncertain. Furthermore, as a publisher of educational
materials, the Company could be subject to accreditation or other governmental
regulations. Any new legislation or regulation applicable to online networks,
the Company or its products or services could have a material adverse effect on
the Company.

     Because materials may be downloaded by the online or Internet services
operated or facilitated by the Company or the Internet access providers with
which it has a relationship and be subsequently distributed to others, there is
a potential that claims will be made against the Company for copyright or
trademark infringement or other legal theories. Such claims have been brought
against online services in the past. Although the Company carries general
liability insurance, the Company's insurance may not cover claims of this type,
or may not be adequate to cover all liability that may be imposed. Any
imposition of liability that is not covered by insurance or is in excess of
insurance coverage could have a material adverse effect on the Company.

TRADEMARKS AND PROPRIETARY RIGHTS

     The Company regards its copyrights, trademarks, trade dress, trade secrets
and similar intellectual property as critical to its success, and the Company
relies upon common law copyright and trademark law, trade secret protection and
confidentiality and/or license agreements with its employees, customers,
partners and others to protect its proprietary rights. The Company's policy is
to rely upon the protections afforded under common law principles, rather than
formal copyright registration, with respect to its copyrights, which protections
are premised upon creation of the copyrightable works. The Company owns
registered trademarks in the United States for UOL, the UOL logo, Teletutor, The
Chalkboard, Virtual Workforce and "What you think ... is our business."
Additionally, the Company has applied for registration in the United States for
certain of its other trademarks, including UOL Publishing, Knowledgeworks,
VCampus, VCampus.com, Test Wizard, Web Course Builder, PointPage, Courseware
Construction Set, Course Architect, Registrar Architect, Test Architect,
H+World, Experience and "Take It Online". The Company has had certain trademark
applications denied, and may have more denied in the future. The Company will
continue to evaluate the registration of additional marks as appropriate.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of the Company's products or services or to
obtain and use information that the Company regards as proprietary. In addition,
the laws of some foreign countries do not protect proprietary rights to as great
an extent as do the laws of the United States. Litigation may be necessary to
protect the Company's proprietary technology. Any such litigation may be
time-consuming and costly (even if successful), cause product release delays,
require the Company to redesign its products or services or require the Company
to enter into royalty or licensing agreements, any of which could have a
material adverse effect upon the Company. Such royalty or licensing agreements,
if required, may not be available on terms acceptable to the Company or at all.
There can be no assurance that the Company's means of protecting its proprietary
rights will be adequate or that the Company's competitors will not independently
develop similar technology or duplicate the Company's products or services or
design around intellectual property rights of the Company. In addition,
distributing the Company's products through online networks makes the Company's
software more susceptible than other software to unauthorized copying and use.
For example, online delivery of the Company's courseware makes it difficult to
ensure compliance by the Company with contractual restrictions, if any, as to
the parties who may access such courseware. The Company allows users to download
electronically certain of its courseware content, which could adversely affect
the Company's ability to collect payment from users that obtain copies from the
Company's existing or past customers. If, as a result of changing legal
interpretations of liability for unauthorized use of the Company's software or
otherwise, users were to become less sensitive to avoiding copyright
infringement, the Company would be materially adversely affected.

                                       13
<PAGE>   14

EMPLOYEES

     As of December 31, 1997, the Company had 243 employees, including 157
full-time employees and one part-time employee primarily involved in product
development activities, 51 full-time and one part-time in sales and marketing,
and 32 full-time and one part-time in finance and administration. The Company
believes that its employee relations are good.

     The Company has experienced rapid growth and expansion which has placed a
significant strain on its administrative, operational and financial resources.
The Company's performance is substantially dependent on the performance of its
executive officers and key employees, some of whom have worked together for only
a short period of time. The loss of the services of any of its executive
officers or other key employees could have a material adverse effect on the
Company. The Company maintains "key man" life insurance in the amount of
$1,000,000 each on Narasimhan P. Kannan, Chairman of the Board of Directors and
Chief Executive Officer, Carl N. Tyson, President and Chief Operating Officer,
and Kamyar Kaviani and Farzin Arsanjani, both Executive Vice Presidents, and has
employment agreements with certain of its executive officers. However, neither
such insurance nor such agreements necessarily fully compensate the Company for,
or preclude, the loss of the services of the relevant personnel. The Company
anticipates that future growth, if any, will require it to identify, recruit,
hire, compensate train and retain a substantial number of new trainers,
technical, managerial, sales and marketing personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will be
able to attract, assimilate and retain such personnel. The loss of the services
of key personnel, or the inability to attract and retain additional qualified
personnel, could have a material adverse effect on the Company.

ITEM 2.  PROPERTIES.

     A current summary showing the operating properties of the Company, all of
which are leased, is shown below:

<TABLE>
<CAPTION>
                                                                           LEASE
                                                          AREA          EXPIRATION     MONTHLY
     LOCATION                 PRINCIPAL USE           (SQUARE FEET)        DATE         RENT
     --------                 -------------           -------------   ---------------  -------
<S>                  <C>                              <C>             <C>              <C>
McLean, VA.........  Executive offices and principal      7,150       March 2000       $12,400
                     administration, technical
                     marketing and sales                  4,500       November 2002     10,000
                     operations                           1,000       February 1999      1,800
Burnsville, MN.....  Offices                              2,600       August 1998        2,600
                     Warehouse                            1,300       August 1998
Waxahachie, TX.....  CTA offices                         11,000       July 2001          5,000
Charlottesville,     Offices                              1,200       March 1999           800
  VA...............
Rockville, MD......  HTR executive offices               17,000       December          24,799
                                                                      1997(1)
Atlanta, GA........  HTR Branch Office                    7,800       February 2001     15,588
Culver City, CA....  HTR Branch Office                    4,300       July 1998          6,979
Waltham, MA........  HTR Branch Office                    3,300       May 1998           6,373
Washington, DC.....  HTR Branch Office                    2,200       July 1998          4,974
McLean, VA.........  HTR Branch Office                    3,200       April 1999         4,803
Baltimore, MD......  HTR Branch Office                    2,800       July 1998          3,822
</TABLE>

---------------
(1) Following expiration of this lease in December 1997, the Company entered
    into and operates under a month-to-month lease with respect to this
    property.

     The Company believes that it will need to secure additional office space in
or around its McLean facility to accommodate its anticipated expansion needs
during 1998. The Company believes suitable additional space will be available to
accommodate such expansion, and other expansion needs should it become
necessary, on commercially reasonable terms. Aside from such expansion plans at
the McLean facility, the Company believes that its current facilities are
adequate for its needs for the foreseeable future.

                                       14
<PAGE>   15

ITEM 3.  LEGAL PROCEEDINGS.

     Although the Company is not currently involved in any material pending
legal proceedings, the Company could be subject to legal proceedings and claims
in the ordinary course of its business or otherwise, including claims relating
to license agreements, royalties or claims of alleged infringement of the
trademarks and other intellectual property rights of third parties by the
Company and its licensees.

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

     No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1997.

                                       15
<PAGE>   16

                               EXECUTIVE OFFICERS

     As of March 1, 1998, the executive officers of the Company were as follows:

<TABLE>
<CAPTION>
            NAME              AGE                               POSITIONS
            ----              ---                               ---------
<S>                           <C>    <C>
Narasimhan P. Kannan........  49     Chairman of the Board of Directors and Chief Executive Officer
Carl N. Tyson...............  49     President and Chief Operating Officer
Michael W. Anderson.........  43     Vice President of Technology and Operations
Farzin Arsanjani............  34     Executive Vice President
Daniel J. Callahan, IV......  41     Executive Vice President
James R. Cooper.............  50     Executive Vice President
Diana S. Farrell............  34     Vice President of Sales and Marketing
Barry R. Fetterolf..........  56     Vice President of Publishing
Joanne O'Rourke Hindman.....  44     Vice President, Chief Financial Officer, Secretary and Treasurer
Kamyar Kaviani..............  36     Executive Vice President
Scott M. Kline..............  34     Executive Vice President
</TABLE>

     Narasimhan P. "Nat" Kannan has served as Chief Executive Officer and
Chairman of the Board of Directors of the Company since he founded the Company
in 1984. Prior to founding the Company, he co-founded Ganesa Group, Inc., a
developer of interactive graphics and modeling software, in 1981. Prior thereto,
he served as a consultant to Booz Allen and Hamilton, Inc., the MITRE
Corporation, The Ministry of Industry of the French Government, the Brookhaven
and Lawrence Livermore National Laboratories, the White House Domestic Policy
Committee on Energy, and Control Data Corporation. He holds a B.S. in
Engineering from the Indian Institute of Technology in Madras, India, and he
performed advanced graduate work in business and engineering at Dartmouth
College.

     Carl N. Tyson joined the Company as President and Chief Operating Officer
in November 1995. From 1992 to 1995, Mr. Tyson served as President, College
Publishers, at Harcourt General Corporation. From 1988 to 1992 he was employed
by McGraw-Hill Inc., most recently as President, College Division. Mr. Tyson
holds a B.A. and M.A. in history from Wichita State University and a Ph.D. in
history from Oklahoma State University.

     Michael W. Anderson joined the Company as Vice President of Technology and
Operations in March 1996. From 1994 to 1996, Mr. Anderson was a marketing
research consultant at O'Donnell & Associates, Inc. From 1990 to 1994 he served
as Vice President and Director of Marketing Operations at HarperCollins College
Publishers. From 1977 to 1990 he was employed by Scott, Foresman & Company, most
recently as Vice President of Marketing Operations. Mr. Anderson holds a B.A. in
English and Mathematics from the University of Texas.

     Farzin Arsanjani joined the Company as an Executive Vice President upon the
Company's acquisition of HTR in October 1997. Prior to such acquisition, Mr.
Arsanjani co-founded HTR in 1987 and has served as its Vice Chairman and
President since that time. Mr. Arsanjani holds a B.S. in Electrical Engineering
from the University of Maryland.

     Daniel J. Callahan, IV joined the Company as an Executive Vice President
upon the Company's acquisition of HTR in October 1997. Prior to such
acquisition, Mr. Callahan served as Chief Operating Officer of HTR from 1996
until October 1997. He also served as the Vice President, Corporate Development
of Troy Systems, Inc., an information technologies company, from 1995 to 1997
and as Chief Executive Officer of Industrial Flexible Materials, Inc., a
publicly-held company, of which he also has served as a director since 1993,
from 1990 to 1995. Mr. Callahan holds a B.S. in Mass Communications from the
University of Utah.

     James R. Cooper joined the Company as Executive Vice President upon the
Company's acquisition of Teletutor in April 1997. Prior to then he served as
President of Teletutor since 1985. Mr. Cooper holds a B.A. in Sociology from the
University of Massachusetts at Amherst.

                                       16
<PAGE>   17

     Diana S. Farrell joined the Company as Vice President of Sales and
Marketing in June 1996. From December 1992 to June 1996, Ms. Farrell was
employed by Harcourt Brace College Publishers, a division of Harcourt General
Corporation, most recently as Senior Vice President of Marketing. From September
1990 to December 1992, she served as a Senior Editor at Prentice Hall College
Publishing Group, a division of Paramount Communications, Inc. Ms. Farrell holds
a B.A. in Communications Arts/Marketing from Long Island University.

     Barry R. Fetterolf joined the Company as Vice President of Publishing in
August 1996. From June 1993 to August 1996, Mr. Fetterolf served as Vice
President and Publisher of Saunders College Publishing, a division of Harcourt
Brace College Publishers. From November 1988 to June 1993, Mr. Fetterolf served
as Social Science & Economics Publisher of the Education Group of McGraw-Hill
Publishing Company. Mr. Fetterolf holds a B.S. in Business Administration from
Pennsylvania State University.

     Joanne O'Rourke Hindman joined the Company as Vice President, Chief
Financial Officer, Secretary and Treasurer in February 1998. From 1997 to
February 1998, Ms. Hindman served as Senior Vice President of Operations and
Financial Officer of iVillage, a web-site publisher. From 1995 to 1997, she
served as the Chief Financial Officer and Treasurer of Tele-TV, a joint venture
formed by Bell Atlantic, NYNEX and Pacific Telesis. From 1983 to 1995, she
worked for the Washington Post Company, most recently from 1993 to 1995 as
General Manager of Newsweek Interactive while simultaneously serving as Vice
President of Finance for Newsweek Magazine, which position she held since 1989.
Prior to working for the Washington Post Company, she was an audit manager at
Price Waterhouse. Ms. Hindman holds a B.S. in Accounting from the University of
Massachusetts and is a Certified Public Accountant.

     Kamyar Kaviani joined the Company as Executive Vice President upon the
Company's acquisition of HTR in October 1997. Prior to such acquisition, Mr.
Kaviani co-founded HTR in 1987 and has served as its Chairman and Chief
Executive Officer since that time. Mr. Kaviani holds a B.A. in Economics from
the University of Maryland.

     Scott M. Kline joined the Company in September 1997 as an Executive Vice
President. Prior to joining the Company, Mr. Kline served as Group Vice
President of Jones Education Company from October 1996 to September 1997. From
November 1994 to August 1996 he served as a Vice President of Westcott
Communications, during which time he founded and managed Westcott's Executive
Education Network division. From 1989 to October 1994 he practiced law as an
associate with a law firm. Mr. Kline holds a B.A. in Political Science from Yale
and a J.D. from Harvard Law School.

                                       17
<PAGE>   18

                                    PART II

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

  (a) Price Range of Common Stock

     The Company's Common Stock has historically traded on the Nasdaq National
Market under the symbol "UOLP". The following sets forth the quarterly high and
low bid prices from November 26, 1996 (the date trading commenced) through
December 31, 1997 as reported by Nasdaq. These prices are based on quotations
between dealers, which do not reflect retail mark-up, mark-downs or commissions.

<TABLE>
<CAPTION>
                                                               HIGH     LOW
                                                              ------   ------
<S>                                                           <C>      <C>
1996
Fourth Quarter (from November 26, 1996).....................  $13.25   $12.50
1997
First Quarter...............................................  $15.25   $12.00
Second Quarter..............................................  $13.25   $10.00
Third Quarter...............................................  $26.25   $12.13
Fourth Quarter..............................................  $26.50   $12.50
</TABLE>

     Since the Company's IPO in late 1996, the public market for the Company's
Common Stock has been characterized by low and/or erratic trading volume, often
resulting in price volatility. There can be no assurance that there will be an
active public market for the Company's Common Stock in the future. The market
price of the Common Stock could be subject to significant fluctuations in
response to future announcements concerning the Company or its partners or
competitors, the introduction of new products or changes in product pricing
policies by the Company or its competitors, proprietary rights or other
litigation, changes in analysts' earning estimates, general conditions in the
online distribution market, developments in the financial markets and other
factors. In addition, the stock market has, from time to time, experienced
extreme price and volume fluctuations that have particularly affected the market
prices for technology companies and which have often been unrelated to the
operating performance of the affected companies. Broad market fluctuations of
this type may adversely affect the future market price of the Common Stock. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources."

  (b) Approximate Number of Equity Security Holders

     As of March 18, 1998, the number of record holders of the Company's Common
Stock was 130 and the Company believes that the number of beneficial owners was
approximately 650.

  (c) Dividends

     The Company has never paid a cash dividend on its Common Stock and
anticipates that for the foreseeable future any earnings will be retained for
use in its business and, accordingly, does not anticipate the payment of cash
dividends.

ITEM 6.  SELECTED FINANCIAL DATA.

     The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes thereto
included elsewhere herein. The consolidated statement of operations data set
forth below with respect to the years ended December 31, 1995, 1996 and 1997 and
the consolidated balance sheet data as of December 31, 1996 and 1997 are derived
from, and are referenced to, the audited consolidated financial statements of
the Company included elsewhere in this Annual Report on Form 10-K. The
consolidated statement of operations data set forth below with respect to the
years ended December 31, 1993 and 1994 and the consolidated balance sheet data
as of December 31, 1993, 1994 and 1995 are derived from financial statements not
included in this Annual Report on Form 10-K.

                                       18
<PAGE>   19

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                          --------------------------------------------------------
                                            1993        1994        1995        1996        1997
                                          --------    --------    --------    --------    --------
                                                   (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                       <C>         <C>         <C>         <C>         <C>
STATEMENT OF OPERATIONS DATA:
Online tuition revenues.................  $    14     $    14     $    56     $   119     $  1,662
Virtual campus software revenues........       --          --          --          --        2,718
Product sales revenues..................       --          --          --          --        2,330
Development revenues....................      274          82          76         399        1,631
Other service revenues..................       --         710         416         424          718
Instructor-led training revenues........       --          --          --          --        1,086
                                          -------     -------     -------     -------     --------
     Total net revenues.................      288         806         548         942       10,145
Cost of revenues........................       64         146          94         195        2,391
Sales and marketing.....................      130         296         933       1,593        4,439
Product development.....................      151         206         576       1,482        4,465
General and administrative..............      207         890         927       2,477        2,388
Depreciation and amortization...........        1         298         309         144          931
Acquired in-process research,
  development and content...............       --          --          --          --       11,100
Compensation expense in connection with
  the acquisition of HTR, Inc. .........       --          --          --          --          690
Reorganization and other non-recurring
  charges...............................       --          --          --          --          340
                                          -------     -------     -------     -------     --------
Loss from operations....................     (265)     (1,030)     (2,291)     (4,949)     (16,599)
Other income (expense)..................        6          (6)        126         304          125
Interest income (expense)...............     (155)       (260)        (75)          4          329
                                          -------     -------     -------     -------     --------
Loss before extraordinary gain or debt
  forgiveness...........................     (414)     (1,296)     (2,240)     (4,641)     (16,145)
Extraordinary gain on debt
  forgiveness...........................       --         609          --          --           --
                                          -------     -------     -------     -------     --------
Net loss................................  $  (414)    $  (687)    $(2,240)    $(4,641)    $(16,145)
                                          =======     =======     =======     =======     ========
Net loss per share:(1)
     Loss before extraordinary gain on
       debt forgiveness.................  $ (1.08)    $ (3.11)    $ (3.13)    $ (4.98)    $  (4.91)
     Extraordinary gain on debt
       forgiveness......................       --        1.46          --          --           --
                                          -------     -------     -------     -------     --------
     Net loss per share.................  $ (1.08)    $ (1.65)    $ (3.13)    $ (4.98)    $  (4.91)
Weighted average shares
  outstanding(1)........................      381         417         771         998        3,286
                                          =======     =======     =======     =======     ========
</TABLE>

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                          --------------------------------------------------------
                                            1993        1994        1995        1996        1997
                                          --------    --------    --------    --------    --------
                                                               (IN THOUSANDS)
<S>                                       <C>         <C>         <C>         <C>         <C>
BALANCE SHEET DATA:
Working capital (deficit)...............  $(2,724)    $(2,587)    $(1,402)    $14,833     $ (3,789)
Total assets............................      352         879         613      17,489       26,465
Long-term debt..........................       --          --          --          --        1,531
Total liabilities.......................    3,075       3,158       1,887       1,287       13,054
Accumulated deficit.....................   (3,807)     (4,503)     (6,742)    (11,383)     (27,528)
Total stockholders' equity (deficit)....   (2,722)     (2,279)     (1,274)     16,202       13,411
</TABLE>

---------------
(1) Computed on the basis described in Note 2 of Notes to UOL Consolidated
    Financial Statements.

                                       19
<PAGE>   20

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

                              UOL PUBLISHING, INC.

INTRODUCTION

     The following presentation of management's discussion and analysis of the
Company's consolidated financial condition and results of operation should be
read in conjunction with the Company's consolidated financial statements,
accompanying Notes thereto and other financial information appearing elsewhere
in this report.

OVERVIEW

     The Company believes that it is a leading publisher of high quality,
interactive and on-demand courseware for the corporate training and education
market. The Company offers its online courseware primarily through its
proprietary virtual campus product, or VCampus, an online courseware delivery
system and environment that facilitates development, management and
administration of training and education over the Internet and intranets.
Through its HTR, Teletutor and Ivy subsidiaries, the Company also offers
courseware through more traditional media, including on-site and classroom
training, diskette, CD-ROM and printed formats.

     The Company was formed in 1984 as IMSATT Corporation, a multimedia research
and development company. In 1991, the Company acquired from Control Data certain
rights to resell the CYBIS online courseware, which consisted primarily of
courses in language arts, mathematics, social studies, science, business and a
variety of technical subjects. In 1993, the Company modified its business focus
to capitalize on market opportunities for online education resulting from
technological advances relating to the Internet. Subsequently, the Company
raised additional financing and focused its development efforts on migrating its
technology to the Web in preparation for the launch of its first Web-based
course in November 1995. Under the current business model, UOL's revenues are
derived from six primary sources: online revenues; virtual campus software
revenues; product sales revenues; development revenues; instructor-led training
revenues; and other service revenues. Online revenues are generated primarily
from online tuition derived from business and academic customers. Virtual campus
software revenues are derived from the sale of online licenses of the Company's
VCampus product. Product sales revenues are derived from the sale of
computer-based training ("CBT") courses that are delivered through traditional
CBT format (e.g. CD-ROM). Development revenues consist primarily of fees paid to
the Company for developing and converting courseware. Instructor-led training
revenues are generated from on-site and classroom training fees. Other service
revenues consist primarily of monthly fees generated by the licensing and
maintenance of the CYBIS courseware under the Control Data subcontracts. While
prior to 1997 licensing and support revenues have represented a substantial
majority of the Company's revenues, the Company believes that online revenues
and product sales will become the primary sources of its revenues in the future.

     The Company plans to continue to enter into non-monetary exchanges with
third parties for the purpose of cost-effectively acquiring courseware while
simultaneously supporting the Company's strategy of expanding its VCampus
presence. Pursuant to these exchanges, the third party exchanges a non-monetary
asset (i.e., the online publishing rights with respect to certain courseware
content) in payment of some or all of the purchase price of a VCampus and
related development services. In many cases, the Company will also agree to pay
the third party royalties based on future online tuition revenues received by
the Company, if any, related to the acquired rights. In the event the negotiated
value of the rights acquired exceeds the purchase price of a VCampus and the
related development services, if any, provided by the Company, the Company pays
the third party such excess. Alternatively, in the event the negotiated value of
the rights acquired is less than the purchase price of a VCampus and the related
development services, if any, provided by the Company, the third party pays the
Company the difference. The Company deployed more than 25 of its VCampuses
pursuant to such exchanges in 1997.

                                       20
<PAGE>   21

ACQUISITIONS

     Since 1994, the Company has completed five acquisitions, consisting of the
CYBIS Division of Control Data Corporation, CTA, Ivy, Teletutor and HTR. The
Company intends to continue its acquisition activities when appropriate. Each of
these acquisitions was accounted for as a purchase, and accordingly, the
operating results of each acquired company are included in the Company's
financial statements from the effective date of each respective acquisition.

     In 1994, the Company acquired the CYBIS division of Control Data, together
with a perpetual non-exclusive license for the CYBIS courseware. As part of this
transaction, Control Data retained the hardware and proprietary mainframe
operating system used to deliver the CYBIS courseware and in other aspects of
Control Data's ongoing business, and the Company agreed to act as subcontractor
to Control Data to support CYBIS customers. Between 1994 and 1996, a significant
portion of the Company's revenues have been generated through the licensing and
support of the CYBIS courseware. Since 1994, the revenues from servicing the
CYBIS customer base have been declining due to budgetary constraints of
government agencies and the continued migration of CYBIS customers away from
mainframe applications. While the Company expects to continue to derive CYBIS
revenues for the next one to two years, the Company believes such revenues will
not be substantial compared to the Company's expected future revenues. The
Company believes that Web-based courseware developed from the CYBIS courseware,
to the extent not restricted by the terms of its license, may contribute to
revenues in the future.

     In August 1996, the Company acquired, by merger, CTA, a provider of
technology-based online training products and services to academic institutions,
corporations and governmental agencies, in exchange for 42,487 shares of the
Company's Common Stock. Immediately prior to the merger, CTA transferred a
building, a vehicle, certain equipment and certain notes payable to its sole
stockholder. In addition, the Company issued options to purchase an aggregate of
22,091 shares of Common Stock (of which options to purchase 5,096 shares were
fully vested at the time of the acquisition) to certain employees of CTA,
including its former stockholder. The Company has recorded goodwill and other
intangibles in the amount of approximately $780,000 in connection with the
acquisition of CTA and is amortizing such goodwill and other intangibles over a
three to ten year period beginning in 1996.

     In March 1997, the Company acquired Ivy, a Virginia corporation that
develops and distributes business and accounting software for the academic
education market, for $314,000 in cash and potential future payments not to
exceed approximately $862,000, which are based upon integration of operations,
conversion of software and operating results. The Company recorded approximately
$460,000 in goodwill and other intangibles related to this acquisition and is
amortizing such amount over ten years.

     In April 1997, the Company acquired Teletutor, an Illinois corporation that
develops, distributes and supports computer-based training courses for the data
and telecommunications industry. The terms of the transaction included a
$3,000,000 cash payment at closing and $200,000 to be paid in cash ratably on
the first, second and third anniversary dates of the acquisition. In conjunction
with this acquisition, the Company allocated the excess of the purchase price
over the fair market value of the acquired net assets of approximately
$2,000,000 to identifiable intangible assets, and $2,700,000 to acquired
in-process research, development and content.

     In October 1997, the Company acquired HTR, a Delaware corporation whose
strategy is to deliver a total solution for corporate IT requirements through
its suite of products and services which includes consulting, courseware
publishing and traditional classroom and on-site training, in exchange for
585,940 shares of Common Stock, options and warrants to purchase an additional
34,020 shares, the assumption of an aggregate of approximately $3,500,000 of HTR
debt and a combination of cash and short-term notes in the aggregate amount of
approximately $600,000. In connection with this acquisition, the Company
allocated the excess of the purchase price over the fair market value of the
acquired net assets of approximately $9,800,000 to identifiable intangible
assets, and $8,400,000 to acquired in-process research, development and content.

                                       21
<PAGE>   22

RESULTS OF OPERATIONS

                              UOL PUBLISHING, INC.

     The following table sets forth certain UOL Publishing, Inc. statement of
operations data as a percentage of total net revenues for the periods indicated:

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                         --------------------------------
                                                          1995         1996         1997
                                                         ------       ------       ------
<S>                                                      <C>          <C>          <C>
STATEMENT OF OPERATIONS DATA:
  Revenues:
     Online tuition revenues...........................    10.2%        12.6%        16.4%
     Virtual campus software revenues..................      --           --         26.8
     Product sales revenues............................      --           --         22.9
     Development and other revenues....................    13.9         42.4         16.1
     Instructor-led training revenues..................      --           --         10.7
     Other service revenues............................    75.9         45.0          7.1
                                                         ------       ------       ------
          Total net revenues...........................   100.0        100.0        100.0
  Costs and expenses:
     Cost of revenues..................................    17.1         20.7         23.6
     Sales and marketing...............................   170.3        169.0         43.7
     Product development...............................   105.3        157.3         44.0
     General and administrative........................   169.1        262.8         23.5
     Depreciation and amortization.....................    56.4         15.3          9.2
     Reorganization and other non-recurring charges....      --           --        119.6
                                                         ------       ------       ------
          Total costs and expenses.....................   518.2        625.1        263.6
                                                         ------       ------       ------
Loss from operations...................................  (418.2)      (525.1)      (163.6)
     Other income (expense):
     Other income......................................    23.0         32.3          1.2
     Interest income (expense).........................   (13.7)         0.4          3.2
                                                         ------       ------       ------
Net loss...............................................  (408.9)%     (492.4)%     (159.2)%
                                                         ======       ======       ======
</TABLE>

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

  Net Revenues

     Net revenues increased from $942,426 in 1996 to $10,144,500 in 1997, a
ten-fold increase, primarily due to an increase in virtual campus licensing and
tuition revenues and revenues generated by the Company's 1997 acquisitions.
Consolidated net revenues for 1997 include $566,751 and $1,568,956 of product
sales revenues from Ivy and Teletutor respectively. Moreover, consolidated
revenues include $167,322 in product sales revenues, $1,085,634 in
instructor-led training revenues, and $367,548 in consulting revenues from HTR.

  Cost of Revenues

     Cost of revenues increased from $194,730, or 20.7% of total net revenues,
in 1996 to $2,390,711, or 23.6% of total net revenues, in 1997. The increase was
primarily due to the inclusion of the results of operations of CTA, Ivy,
Teletutor and HTR in the 1997 period, and certain royalties to content providers
incurred under contracts entered into during the last two quarters of 1997. Cost
of revenues primarily consisted of instructor fees, course packages and other
costs directly associated with training and consulting revenues, certain
personnel costs directly related to certain CTA development contracts and
mainframe-based courseware

                                       22
<PAGE>   23

support, third party royalties, and amortization of capitalized software and
courseware development costs, as well as communication and personnel costs
related to online revenues. The Company believes that in the future, cost of
revenues will continue to increase in absolute dollars, but will decrease as a
percentage of total net revenues.

  Operating Expenses

     Sales and Marketing.  Sales and marketing expenses increased from
$1,592,668 in 1996 to $4,438,717 in 1997. Sales and marketing expenses decreased
as a percentage of total net revenues from 169.0% in 1996 to 43.7% in the
comparable period in 1997. Sales and marketing expenses consisted primarily of
costs related to personnel, sales commissions, travel, market research,
advertising and marketing materials. The increase in absolute dollars was
primarily due to increased staffing and marketing campaigns to secure contracts
and strategic partnerships, and the inclusion of the results of operations of
Ivy, Teletutor, and HTR. Specifically, during the latter part of 1996 and
throughout 1997, the Company significantly expanded its sales and marketing
organization in order to build an infrastructure to support the anticipated
revenue opportunities for online courseware. The Company expects sales and
marketing expense to increase substantially in the future as the Company
continues to expand its sales and marketing efforts.

     Product Development.  Product development expenses increased from
$1,482,179 in 1996 to $4,464,976 in 1997. Product and development expenses
decreased as a percentage of total net revenues from 157.3% in 1996 to 44.0% in
1997. The increase in absolute dollars was primarily attributable to the overall
staffing and other cost increases aimed at maintaining and enhancing the
Company's courseware library and VCampus software. The Company is incurring
significant expenses to convert traditional educational and training content to
online courseware. Contributing to the increase in product development costs in
1997 was the inclusion of the results of CTA and Teletutor. Product development
costs for 1997 are net of $1,990,000 of costs capitalized in accordance with the
Company's software capitalization and content development policy. No product
development costs were capitalized during 1996. The Company expects that product
development expenses will substantially increase in the future as the Company
continues to expand its courseware library.

     General and Administrative.  General and administrative expenses decreased
from $2,477,144 in 1996 to $2,387,172 in 1997 and decreased as a percentage of
total net revenues from 262.8% in 1996 to 23.5% in 1997. General and
administrative costs during 1996 included stock compensation expense of
$1,022,052, which was the amount by which the fair market value of the Common
Stock exceeded the exercise price of certain options as of the date the Board of
Directors granted such options or extended their exercise period. Also included
in 1996 expenses were certain one-time relocation, recruiting and acquisition
costs. General and administrative expenses generally consisted of personnel
costs, facilities and related costs, as well as legal, accounting and other
costs. Excluding the 1996 compensation expense and one-time relocation,
recruiting and acquisition costs, general and administrative expenses increased
in 1997 primarily due to increases related to the Company's growth and
additional operations due to acquisitions, and generally to cover increased
expenses associated with operating as a public company.

     Depreciation and Amortization.  Depreciation and amortization expenses
increased from $144,284 in 1996 to $931,143 in 1997, and decreased as a
percentage of total net revenues from 15.3% in 1996 to 9.2% in 1997. In August
1996, the Company recorded goodwill and other intangibles in connection with its
acquisition of CTA in the amount of approximately $780,000, which amount is
being amortized over a three- to ten-year period. In 1997, the Company recorded
goodwill and other intangibles of approximately $12 million in connection with
its acquisitions of Ivy, Teletutor and HTR. These amounts are being amortized
over periods ranging from four to twelve years. The increase in depreciation is
attributable to additional purchases of computer equipment and other assets to
support its product development, technical operations and personnel needs.

     Reorganization and Other Non-Recurring Charges.  During 1997, the Company
incurred certain non-recurring charges totaling $12,130,344, primarily related
to in-process research, development and content expense in connection with the
Teletutor and HTR acquisitions. Also included in non-recurring charges are
accrued compensation expense related to the HTR acquisition and certain
non-recurring costs.

                                       23
<PAGE>   24

     Interest and Other Income (Expense).  Interest income was $3,893 in 1996
and $328,800 in 1997. Interest income is derived primarily from investing funds
raised in the Company's private and public securities offerings during 1996.
Other income of $303,983 in 1996 was primarily due to the settlement of a note
payable to Control Data and certain trade obligations with a former vendor.
Other income of $125,000 in 1997 was derived from the sale of an investment in a
joint venture (an asset acquired in connection with the acquisition of HTR).

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

  Net Revenues

     Net revenues increased from $547,679 in 1995 to $942,426 in 1996, an
increase of $394,747 or 72.1%. In December 1996, the Company recorded $250,000
as development revenue in connection with the InternetU funding agreement.
Licensing and support revenues increased from $415,532 in 1995 to $424,244 in
1996, an increase of $8,712 or 2.1%. Online revenues increased from $55,995 in
1995 to $118,685 in 1996, an increase of $62,690 or 112.0%. Development revenues
increased from $76,152 in 1995 to $399,497 in 1996 an increase of $323,345 or
424.6%. Licensing and support revenues from CYBIS customers decreased from
$415,532 in 1995 to $362,743 in 1996. The decrease in CYBIS revenues was a
result of budgetary constraints of government agencies and the continued
migration of CYBIS customers away from mainframe applications. The CYBIS net
revenues have been declining in absolute terms since the Company's acquisition
of the CYBIS division of Control Data in 1994. CTA contributed $61,501 in
licensing and support revenues, $37,086 to online revenues and $81,970 to
development revenues for the year ended December 31, 1996.

  Cost of Revenues

     Cost of revenues increased from $93,630 in 1995 to $194,730 in 1996, an
increase of $101,100 or 108.0%. The majority of the increase in cost of revenues
is attributable to the increase in revenues and the inclusion in 1996 of the
results of CTA and represent 17.1% and 20.7% of total net revenues in 1995 and
1996, respectively. Cost of revenues consisted primarily of certain personnel
costs directly related to the Control Data subcontracts, administration fees
payable to Control Data, costs associated with the conversion and sale of CTA's
courseware and services, as well as communication costs related to online
revenues.

  Operating Expenses

     Sales and Marketing.  Sales and marketing expenses increased from $932,898
in 1995 to $1,592,668 in 1996, an increase of $659,770, or 70.7%. Sales and
marketing expense decreased as a percentage of net revenues from 170.3% in 1995
to 169.0% in the comparable period in 1996. Sales and marketing expense
consisted primarily of costs related to personnel, travel, advertising, and
conference and trade show attendance. The increase was primarily due to
increased staffing and marketing campaigns to secure contracts and strategic
partnerships. During the later part of 1996, the Company expanded its sales and
marketing organization in order to build an infrastructure to support the
anticipated revenue opportunities for online courseware. Sales and marketing
expenses decreased slightly in 1996 as a percentage of total net revenues and
consisted primarily of costs related to personnel, travel, advertising, and
conference and trade show attendance.

     Product Development.  Product development expenses increased from $576,470
in 1995 to $1,482,179 in 1996, an increase of $905,709, or 157.1%. Product and
development expenses also increased as a percentage of net revenues from 105.3%
in 1995 to 157.3% in 1996. Product development expenses consisted primarily of
costs associated with the design, programming, testing, documenting and support
of the Company's new and existing courseware and software. The increase was
primarily due to a major development effort aimed at migrating the Company's
then-existing courseware to courseware compatible with the Web. Through December
31, 1996, the Company expensed all of its product development costs.

     General and Administrative.  General and administrative expenses increased
from $926,345 in 1995 to $2,477,144 in 1996, an increase of $1,550,799, or
167.4%. General and administrative expenses increased as a percentage of total
net revenues from 169.1% in 1995 to 262.8% in 1996. This increase was
attributable primarily to compensation expense of $1,022,052 related to the
amount by which the fair market value of the Common Stock exceeded the exercise
price of certain options as of the date the Board granted such options or

                                       24
<PAGE>   25

extended their exercise period. Such compensation was expensed at the date of
Board approval because the options were fully vested at that time. General and
administrative costs also increased due to costs associated with additional
personnel, network operations, and legal and accounting services to support
anticipated growth of the Company.

     Depreciation and Amortization.  Depreciation and amortization expenses
decreased from $309,058 in 1995 to $144,284 in 1996, a decrease of $164,774, or
53.3%. Depreciation and amortization expenses also decreased as a percentage of
total net revenues from 56.4% in 1995 to 15.3% in 1996. Substantially all of the
$309,058 depreciation and amortization expenses recorded in the 1995 period was
attributable to goodwill amortization. On January 1,1994, the Company recorded
goodwill in the amount of $575,825 in connection with the CYBIS acquisition,
which goodwill was amortized over a period of two years ended December 31, 1995.
The Company has recorded additional goodwill and other intangibles in the amount
of approximately $705,000 in connection with the acquisition of CTA, which
amount is being amortized over a period ranging from three to ten years.

     Interest and Other Income (Expense).  Interest expense was $75,570 in 1995,
and interest income was $3,893 in 1996. Interest expense in 1995 resulted from
certain loans from officers and other affiliates. The decrease in interest
expense in 1996 was primarily due to the conversion of $326,082 of debt to
equity in the first quarter of 1995 as well as interest income earned by
investing the proceeds raised by the Company in its private and public stock
offerings. Other income was $126,651 in 1995 and $303,983 in 1996, with the
increase primarily due to the settlement of a note payable to Control Data and
certain trade obligations with a former vendor.

  HTR, INC.

     The following table sets forth certain HTR, Inc. statement of operations
data as a percentage of total net revenues for the periods indicated:

<TABLE>
<CAPTION>
                                                                 YEARS ENDED
                                                                  JUNE 30,
                                                              -----------------
                                                              1996        1997
STATEMENT OF OPERATIONS DATA:                                 -----       -----
<S>                                                           <C>         <C>
Revenues:
  Instructor-led training revenues..........................   86.4%       85.4%
  Onsite training revenues..................................   13.6        14.6
                                                              -----       -----
     Total net revenues.....................................  100.0       100.0
Costs and expenses:
  Cost of revenues..........................................   63.3        77.2
  General and administrative................................   13.1        21.9
  Sales and marketing.......................................   14.3        15.4
  Product development.......................................    1.0         4.1
  Depreciation and amortization.............................    1.1         1.2
                                                              -----       -----
     Total costs and expenses...............................   92.8       119.8
Income (loss) from operations...............................    7.2       (19.8)
Interest income (expense)...................................    0.9        (4.1)
                                                              -----       -----
Net income (loss)...........................................    6.3%      (23.9)%
                                                              =====       =====
</TABLE>

  Revenues

     Net revenues decreased from $13,643,267 for the year ended June 30, 1996 to
$12,062,670 for the year ended June 30, 1997.

     Instructor-led training revenues were $11,794,441 (86.4% of total net
revenues) for the year ended June 30, 1996 compared to $10,299,442 (85.4% of
total net revenues) for year ended June 30, 1997. Instructor-led training
revenues are generated primarily from the sale of instructor based courses at
offices nationwide and at a customer sites utilizing proprietary, customizable
courseware and vendor developed materials for the client/server market. Included
also in this revenue category are publishing revenues of HTR.

                                       25
<PAGE>   26

The publishing division develops content for proprietary titles primarily
through relationships with independent software vendors ("ISV's") and are
distributed through ISV authorized channels and HTR's training courses. In 1997,
HTR closed two offices which were unprofitable. Furthermore, HTR increased the
level of tuition discounts offered to students, in response to increased
competition in the industry overall. These circumstances were the primary
reasons for the decrease in classroom training revenues.

     Onsite training revenues were $1,763,228 (14.6% of total net revenues) for
the year ended June 30, 1997, compared to $1,848,826 (13.6% of total net
revenues) for the prior year.

  Cost of Revenues

     Cost of revenues increased from $8,640,041 for the year ended June 30, 1996
to $9,311,938 for the year ended June 30, 1997.

     Instructor-led training cost of revenues consists primarily of labor,
purchases of vendor developed course materials, travel, and miscellaneous
classroom and instructor costs. Theses costs increased from $7,856,088 for the
year ended June 30, 1996 to $8,690,120 for the year ended June 30, 1997. The
increase was primarily due to increased labor costs. HTR believes that in the
future, it will be able to shift from using vendor-developed course materials to
its own proprietary course materials, which should result in an overall decrease
in cost of revenues. Furthermore, HTR believes that by changing its labor
utilization model, a further decrease in its instructor-led training costs of
revenues will result.

     Onsite training cost of revenues consists primarily of personnel costs
associated with the onsite training engagements. Onsite training costs of
revenues decreased from $783,953 for the year ended June 30, 1996 to $621,818
for the year ended June 30, 1997.

  Operating Expenses

     Sales and Marketing.  Sales and marketing expenses decreased from
$1,945,765 for the year ended June 30, 1996 to $1,856,490 for the year ended
June 30, 1997. Sales and marketing expenses consisted primarily of sales
salaries and commission. HTR expects sales and marketing expenses to increase
substantially in the future as HTR continues to expand its sales and marketing
efforts.

     Product Development.  Product development expenses increased from $141,517
for the year ended June 30, 1996 to $498,209 for the year ended June 30, 1997
and consisted primarily of the start-up costs associated with the development of
content of the Publishing Division. No product development costs were
capitalized for either of the years ended June 30, 1996 or 1997. The Company
expects that product development expense will substantially increase in the
future as HTR continues to expand its courseware library.

     General and Administrative.  General and administrative expenses increased
from $1,784,674 for the year ended June 30, 1996 to $2,644,350 for the year
ended June 30, 1997. These costs for the year ended June 30, 1997 included
recording compensation expense of $516,839, the amount by which the fair market
value of the Common Stock exceeded the exercise price of certain options as of
the date HTR's board of directors granted such options or extended their
exercise period. Also included are the lease cancellation fees in the amount of
$188,144 related to the closing of two offices during that year. General and
administrative expenses consisted primarily of personnel costs, facilities and
related costs, as well as legal, accounting and other costs.

     Depreciation and Amortization.  Depreciation and amortization expense
decreased from $147,492 for the year ended June 30, 1996 to $146,578 for the
year ended June 30, 1997.

     Interest Income (Expense).  Interest expense for the year ended June 30,
1996 was $127,626, while interest expense for the year ended June 30, 1997 was
$490,105. This increase was primarily due to the interest expense incurred in
connection with the secured promissory note issued to a third party during
October 1996.

YEAR 2000

     The Company is aware of the issues associated with the Year 2000 as it
relates to information systems. The Year 2000 is not expected to have a material
impact on the Company's current information systems

                                       26
<PAGE>   27

because current software is either already "Year 2000" compliant or required
changes will be insignificant. As a result, the Company does not anticipate that
incremental expenditures to ensure that its information systems are Year 2000
compliant will be material to the Company's liquidity, financial position or
results of operations over the next few years. Such costs will be expensed as
they are incurred.

LIQUIDITY AND CAPITAL RESOURCES

     As of December 31, 1997, the Company had $2,705,490 in cash and cash
equivalents and a working capital deficit of $3,789,136. Since its inception,
the Company has financed its operating cash flow needs primarily through sales
of equity securities and, to a lesser extent, borrowings, primarily from
stockholders. The Company expects negative cash flow from operations to continue
for at least the next six to nine months and that it will require additional
equity or debt financing to meet its working capital requirement needs in the
near future. As such, the Company has initiated a private placement of some
combinations of debt, preferred stock and warrants to certain parties,
potentially including affiliates of the Company. This private placement, which
is targeted to generate funding of approximately $5 to $8 million, of which
approximately $5.2 million has been received by the Company as of March 30,
1998, is expected to be completed early in the second quarter of 1998. This
transaction could have a material adverse effect on the stockholders, including
dilution and further limiting the liquidity and increasing the price volatility
of the Company's Common Stock. The Company's future capital needs may be
significant, requiring the Company to obtain financing on less than favorable
terms or to curtail its operations, either of which could have a material
adverse effect on stockholders. The Company's future capital requirements will
depend on many factors, including, but not limited to acceptance of and demand
for its products and services, the types of arrangements that the Company may
enter into with customers and resellers, and the extent to which the Company
invests in new technology and research and development projects, and uses cash
for additional acquisitions.

     Cash utilized in operating activities was $5,775,809 in 1997. Use of cash
was primarily attributable to net losses and an increase in the level of
accounts receivable at December 31, 1997 due to increased revenues. The Company
normally requires its customers to pay for its products or services within 30 to
60 days of delivery. On occasion, the Company will offer its customers extended
payment terms not to exceed one year.

     Cash utilized in investing activities was $6,932,195 in 1997. The use of
cash for investing activities was primarily attributable to cash payments of
$3,300,000 in connection with the acquisitions of Teletutor, HTR and Ivy,
purchases of equipment, software and courseware development costs, and the
acquisition of online publishing rights. Cash utilized in financing activities
was $60,536 in 1997.

     In December 1997, the Company and its bank lender replaced its $100,000
secured lending arrangement with a new secured lending facility, which expires
in April 1999, providing for a line of credit in the amount of $3,000,000,
bearing interest at the LIBOR Market Index Rate plus 275 basis points. Under the
terms of this credit facility (the "Credit Facility"), the Company may borrow
the lesser of (i) $3,000,000 or (ii) a percentage of the Company's accounts
receivable based upon an agreed-upon schedule (borrowing base of $3,000,000 at
December 31, 1997). As of December 31, 1997, the Company had borrowed $500,000
under the Credit Facility, which the Company used to repay (i) all outstanding
indebtedness owed by HTR to Commerce Funding Corporation and (ii) Teletutor's
line of credit. Since December 31, 1997, the Company has borrowed an additional
$1,500,000 under the Credit Facility. Based upon its financial statements, as of
December 31, 1997, the Company was in violation of certain covenants related to
the Credit Facility. Effective March 27, 1998, the Company and its bank lender
negotiated and agreed upon revised covenants under the Credit Facility adjusting
the terms to more appropriate expectations of the Company's financial
performance. These new agreed-upon covenants are subject to the Company's
ability to raise at least $5,300,000 of cash equity capital no later than April
15, 1998 of which $5,200,000 was received by March 30, 1998. All amounts
currently due in excess of the $1,500,000 maximum borrowing capacity will be due
April 15, 1998, which would require the Company to repay $500,000 based on
current borrowings as of March 27, 1998. In connection therewith, the interest
rate under the Credit Facility was increased to the LIBOR Market Index Rate plus
375 basis points.

     In December 1997, the Company and its bank also entered into a secured
lending arrangement providing for a term loan of $3,000,000 bearing interest at
the LIBOR Market Index Rate plus 350 basis points, the

                                       27
<PAGE>   28

principal and interest under which are due and payable in April 1999. As of
December 31, 1997, the Company had borrowed the full amount under this facility,
which it used to repay the Sirrom note assumed by the Company in connection with
its acquisition of HTR. Both this lending arrangement and the Credit Facility
are collateralized by a senior security interest in all corporate assets. As a
result of the negotiations between the Company and the bank during March 1998,
the repayment terms on the term loan are as follows: $500,000 due on May 15,
1998, $1,000,000 due on July 15, 1998, and $1,500,000 due on November 15, 1998.
The new terms are subject to the Company raising at least $5,300,000 of cash
equity capital no later than April 15, 1998 (of which the Company has raised
$5,200,000 as of March 30, 1998) and complying with the revised terms and
conditions of the modification agreement. As a result of such contingency, all
bank debt has been reclassified to current.

     During March 1998, the Company plans to reduce its workforce and curtail
its discretionary spending. During 1998, should cash needs dictate, the Company
plans to implement additional workforce reductions as well as increased spending
cuts.

     As of December 31, 1997, the Company had net operating loss carryforwards
of approximately $25,757,000 for federal income tax purposes, which will expire
at various dates through 2012. The Company's ability to utilize all of its net
operating loss and credit carryforwards may be limited by changes in ownership.

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, which establishes standards for reporting the
components of comprehensive income and requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be included in a financial statement that is displayed with the same
prominence as other financial statements. Comprehensive income includes net loss
as well as certain non-owners items that are reported directly within a separate
component of stockholders' equity. The provisions of SFAS No. 130 are effective
beginning with 1998 financial statements. These disclosure requirements will not
have a material impact on the Company's consolidated financial position or
results of operations.

     The Company intends to adopt Statement of Financial Accounting Standards
No. 131, Disclosure about Segments of an Enterprise and Related Information
("SFAS No. 131"), in fiscal year 1998. SFAS No. 131 changes the way companies
report segment information and requires segments to be determined based on how
management measures performance and makes decisions about allocating resources.
The adoption of SFAS No. 131 is not expected to materially impact the Company's
financial position or results of operations.

     In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued AICPA Statement of
Position 97-2 ("SOP 97-2") "Software Revenue Recognition" which is required to
be adopted by the Company for all transactions entered into after January 1,
1998. SOP 97-2 provides guidance on recognizing revenue on software
transactions. SOP 97-2 will significantly impact the recognition of virtual
campus software revenues by requiring the Company to defer the revenues and
recognize them ratably over the period to which the VCampus license and services
relate. Had the Company adopted SOP 97-2 on January 1, 1997, the Company's total
net revenues would have been $7,487,000 instead of $10,144,500.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     See Index to Consolidated Financial Statements on page F-1.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

     Not applicable.

                                       28
<PAGE>   29

                                    PART III

     Certain information required by Part III is omitted from this report
because the Registrant will file a definitive proxy statement for its 1998
Annual Meeting of Stockholders (the "Proxy Statement") within 120 days after the
end of its fiscal year pursuant to Regulation 14A promulgated under the
Securities Exchange Act of 1934, as amended, and the information included
therein is incorporated herein by reference to the extent provided below.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The information required by Item 10 of Form 10-K concerning the
Registrant's executive officers is set forth under the heading "Executive
Officers" located at the end of Part I of this Form 10-K.

     The other information required by Item 10 of Form 10-K concerning the
Registrant's directors is incorporated by reference to the information under the
heading "Proposal No. 1 -- Election of Directors" and "Other
Information -- Section 16(a) Beneficial Ownership Reporting Compliance" in the
Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION.

     The information required by Item 11 of Form 10-K is incorporated by
reference to the information under the heading "Proposal No. 1 -- Election of
Directors -- Information Concerning the Board of Directors and Its Committees",
"Other Information -- Compensation of Executive Officers", "-- Compensation of
Directors", "-- Report of the Compensation Committee on Executive Compensation",
"-- Compensation Committee Interlocks and Insider Participation" and
"-- Performance Graph" in the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The information required by Item 12 of Form 10-K is incorporated by
reference to the information under the heading "Other Information -- Principal
Stockholders" in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The information required by Item 13 of Form 10-K is incorporated by
reference to the information under the heading "Other Information -- Certain
Transactions" in the Proxy Statement.

                                       29
<PAGE>   30

                                    PART IV

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

     (a) The following Financial Statements, Financial Statement Schedules and
         Exhibits are filed as part of this report:

          (1) Financial Statements.

              See Index to Consolidated Financial Statements on page F-1.

         (2) Financial Statement Schedules.

                  The following financial statement schedule is filed with this
             report: Schedule I -- Valuation and Qualifying Account and Reserve

                  All other financial statement schedules for which provision is
             made in Regulation S-X are omitted because they are not required
             under the related instructions, are inapplicable, or the required
             information is given in the financial statements, including the
             notes thereto and, therefore, have been omitted.

         (3) Exhibits.

<TABLE>
<CAPTION>
            EXHIBIT NO.                          DESCRIPTION
            -----------                          -----------
            <S>          <C>
             2.1(a)      Agreement and Plan of Merger, dated July 31, 1996, relating
                         to the acquisition of Cognitive Training Associates, Inc.
             2.2(b)      Stock Purchase Agreement, dated March 1, 1997, with Ivy and
                         its shareholders
             2.3(c)      Stock Purchase Agreement, dated April 30, 1997, relating to
                         the acquisition of Teletutor
             2.4(d)      Agreement and Plan of Merger, dated October 31, 1997,
                         relating to the acquisition of HTR
             3.1(a)      Amended and Restated Certificate of Incorporation, as
                         currently in effect
             3.2(a)      Amended and Restated Bylaws, as currently in effect
             4.1(a)      Form of Common Stock certificate
            10.1(a)      Investment Agreement, dated as of October 8, 1986, with
                         Intersouth Partners
            10.2(a)      Warrant Agreement, dated as of March 22, 1995, with Spencer
                         Trask Securities Incorporated and Forms of Warrant
                         Certificates
            10.3(a)      Form of Promissory Note
            10.4(a)      Registration Rights Agreement relating to Series A Preferred
                         Stock, as amended
            10.5(a)      Registration Rights Agreement, dated July 19, 1996, relating
                         to Series B Preferred Stock
            10.6(a)      Warrant, dated July 23, 1996, granted to Oppenheimer & Co.,
                         Inc.
            10.7(a)      Letter Agreement, dated as of September 12, 1996, with
                         Austin O. Furst and certain related entitles
            10.8(a)      Amended and Restated Stock Option Plan
            10.9(a)      1996 Stock Plan
            10.10(a)     Employment Agreement, dated July 1, 1996, with Narasimhan P.
                         Kannan
            10.11(a)     Employment Agreement, dated July 1, 1996, with Carl N. Tyson
            10.12(a)     Employment Agreement, dated July 31, 1996, with Michael L.
                         Brown
            10.13(a)     Employment Agreement, dated August 15, 1996, with Leonard P.
                         Kurtzman
            10.14(a)*    Agreement, dated August 14, 1995, as amended, with
                         Educational Services Institute
            10.15(a)     Form of Online Educational Services Distribution Agreement
            10.16(a)     Form of University Master Agreement for Online Education
                         Services
            10.17(a)     Form of Online Educational Services Agreement
</TABLE>

                                       30
<PAGE>   31

<TABLE>
<CAPTION>
            EXHIBIT NO.                          DESCRIPTION
            -----------                          -----------
            <S>          <C>
            10.18(a)     Form of Inner Circle Online Educational Services Development
                         and Distribution Agreement
            10.19(a)*    Agreement, dated April 15, 1996, with Autodesk, Inc.
            10.20(a)*    Project Financing and Development Agreement with InternetU,
                         Inc., as amended
            10.21(a)     Employment letter agreement, dated October 29, 1996, with W.
                         Braun Jones, Jr.
            10.22        Employment Agreement, dated January 1, 1997, as amended,
                         with Diana S. Farrell
            10.23        Employment Agreement, dated April 30, 1997, with James R.
                         Cooper
            10.24        Employment Agreement, dated January 1, 1997, with Michael W.
                         Anderson
            10.25        Employment Agreement, dated October 31, 1997, with Kamyar
                         Kaviani
            10.26        Employment Agreement, dated October 31, 1997, with Farzin
                         Arsanjani
            10.27        Employment Agreement, dated October 31, 1997, with Daniel J.
                         Callahan, IV
            10.28        Letter agreement, dated December 18, 1997, with Leonard P.
                         Kurtzman
            21.1         List of Subsidiaries
            23.1         Consent of Ernst & Young LLP, Independent Auditors
            27.1         Financial Data Schedule
</TABLE>

---------------
 * Confidential treatment requested.

(a) Incorporated by reference to the similarly numbered Exhibit to the
    Registrant's Registration Statement on Form S-1 (File No. 333-12135).

(b) Incorporated by reference to Exhibit No. 2.1 to the Registrant's Annual
    Report on Form 10-K for the year ended December 31, 1996.

(c) Incorporated by reference to the similarly numbered Exhibit to the
    Registrant's Current Report on Form 8-K dated May 14, 1997.

(d) Incorporated by reference to Exhibit No. 2.3 to the Registrant's Current
    Report on Form 8-K dated November 17, 1997.

(b) The Registrant filed a Current Report on Form 8-K dated November 17, 1997 as
    amended on January 16, 1998. No other reports on Form 8-K were filed during
    the fourth quarter of the fiscal year ended December 31, 1997.

                                       31
<PAGE>   32

                              UOL PUBLISHING, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

UOL PUBLISHING, INC.

<TABLE>
<S>                                                           <C>
Report of Ernst & Young LLP, Independent Auditors...........  F-2
Consolidated Balance Sheets as of December 31, 1996 and
  1997......................................................  F-3
Consolidated Statements of Operations for the Years Ended
  December 31, 1995, 1996 and 1997..........................  F-4
Consolidated Statements of Stockholders' Equity (Deficit)
  for the Years Ended December 31, 1995, 1996 and 1997......  F-5
Consolidated Statements of Cash Flows for the Years Ended
  December 31, 1995, 1996 and 1997..........................  F-6
Notes to Consolidated Financial Statements..................  F-7

HTR, INC.

Report of Ernst & Young LLP, Independent Auditors...........  F-25
Balance Sheets as of June 30, 1996 and 1997.................  F-26
Statements of Operations for the Years Ended June 30, 1996
  and 1997..................................................  F-27
Statements of Stockholders' Deficit for the Years Ended June
  30, 1996 and 1997.........................................  F-28
Statements of Cash Flows for the Years Ended June 30, 1996
  and 1997..................................................  F-29
Notes to Financial Statements...............................  F-30
</TABLE>

                                       F-1
<PAGE>   33

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Board of Directors
UOL Publishing, Inc.

     We have audited the accompanying consolidated balance sheets of UOL
Publishing, Inc. as of December 31, 1996 and 1997 and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the three years in the period ended December 31, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of UOL Publishing,
Inc. at December 31, 1996 and 1997, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.

                                                           /s/ ERNST & YOUNG LLP
Vienna, Virginia
February 27, 1998, except for Notes 9 and 17,
as to which the dates are March 27 and 30, 1998

                                       F-2
<PAGE>   34

                              UOL PUBLISHING, INC.

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                              ---------------------------
                                                                  1996           1997
                                                              ------------   ------------
<S>                                                           <C>            <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 15,474,030   $  2,705,490
  Accounts receivable, less allowance of $36,100 and
     $739,000 at December 31, 1996 and 1997, respectively...       412,095      4,413,170
  Loans receivable from related parties.....................       101,444        133,516
  Prepaid expenses and other current assets.................       132,128        481,516
                                                              ------------   ------------
Total current assets........................................    16,119,697      7,733,692
Property and equipment, net.................................       622,958      2,809,619
Capitalized software costs and courseware development costs,
  net.......................................................            --      2,354,159
Acquired online publishing rights, net......................            --        845,000
Other assets................................................        89,995        358,208
Goodwill and other intangible assets, net...................       656,503     12,364,554
                                                              ------------   ------------
Total assets................................................  $ 17,489,153   $ 26,465,232
                                                              ============   ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses.....................  $  1,259,166   $  6,398,488
  Notes payable -- current portion..........................            --      4,551,950
  Deferred revenues.........................................        28,000        572,390
                                                              ------------   ------------
Total current liabilities...................................     1,287,166     11,522,828

Notes payable, less current portion.........................            --      1,531,121

Stockholders' equity (deficit):
  Common Stock, $0.01 par value; 36,000,000 shares
     authorized; 3,186,167 and 3,785,210 shares issued and
     outstanding at December 31, 1996 and 1997,
     respectively...........................................        31,861         37,852
  Additional paid-in capital................................    27,553,128     40,901,196
  Accumulated deficit.......................................   (11,383,002)   (27,527,765)
                                                              ------------   ------------
Total stockholders' equity..................................    16,201,987     13,411,283
                                                              ============   ============
Total liabilities and stockholders' equity..................  $ 17,489,153   $ 26,465,232
                                                              ============   ============
</TABLE>

    The accompanying notes are an integral part of the financial statements.
                                       F-3
<PAGE>   35

                              UOL PUBLISHING, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                       ----------------------------------------
                                                          1995          1996           1997
                                                       -----------   -----------   ------------
<S>                                                    <C>           <C>           <C>
Revenues:
  Online tuition revenues............................  $    55,995   $   118,685   $  1,662,058
  Virtual campus software revenues...................           --            --      2,718,000
  Product sales revenues.............................           --            --      2,330,029
  Development and other revenues.....................       76,152       399,497      1,631,233
  Instructor led training revenues...................           --            --      1,085,634
  Other service revenues.............................      415,532       424,244        717,546
                                                       -----------   -----------   ------------
Net revenues.........................................      547,679       942,426     10,144,500
Costs and expenses:
  Cost of revenues...................................       93,630       194,730      2,390,711
  Sales and marketing................................      932,898     1,592,668      4,438,717
  Product development................................      576,470     1,482,179      4,464,976
  General and administrative.........................      926,345     2,477,144      2,387,172
  Depreciation and amortization......................      309,058       144,284        931,143
  Acquired in-process research, development and
     content.........................................           --            --     11,100,000
  Compensation expense in connection with the
     acquisition of HTR, Inc.........................           --            --        690,000
  Reorganization and other non-recurring charges.....           --            --        340,344
                                                       -----------   -----------   ------------
Total costs and expenses.............................    2,838,401     5,891,005     26,743,063
                                                       -----------   -----------   ------------
Loss from operations.................................   (2,290,722)   (4,948,579)   (16,598,563)
Other income (expense):
  Other income (expense).............................      126,651       303,983        125,000
  Interest income (expense)..........................      (75,570)        3,893        328,800
                                                       -----------   -----------   ------------
Net loss.............................................  $(2,239,641)  $(4,640,703)  $(16,144,763)
                                                       ===========   ===========   ============
Net loss per share...................................  $     (3.13)  $     (4.98)  $      (4.91)
                                                       ===========   ===========   ============
Net loss per share -- assuming dilution..............  $     (3.13)  $     (4.98)  $      (4.91)
                                                       ===========   ===========   ============
</TABLE>

    The accompanying notes are an integral part of the financial statements.
                                       F-4
<PAGE>   36

                              UOL PUBLISHING, INC.
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                 SERIES A
                                               CONVERTIBLE                                                              TOTAL
                                             PREFERRED STOCK        COMMON STOCK       ADDITIONAL                   STOCKHOLDERS'
                                            ------------------   -------------------     PAID-IN     ACCUMULATED       EQUITY
                                             SHARES    AMOUNT     SHARES     AMOUNT      CAPITAL       DEFICIT        (DEFICIT)
                                            --------   -------   ---------   -------   -----------   ------------   -------------
<S>                                         <C>        <C>       <C>         <C>       <C>           <C>            <C>
Balance at December 31, 1994..............        --   $   --      704,557   $7,046    $ 2,216,608   $(4,502,658)   $ (2,279,004)
  Conversion of debt to equity............     1,800       18       78,689      786        325,278            --         326,082
  Issuance of Series A convertible
    Preferred Stock.......................   379,535    3,795           --       --      2,728,639            --       2,732,434
  Issuance of compensatory stock and stock
    options...............................        --       --           --       --        185,800            --         185,800
  Net loss................................        --       --           --       --             --    (2,239,641)     (2,239,641)
                                            --------   -------   ---------   -------   -----------   ------------   ------------
Balance at December 31, 1995..............   381,335    3,813      783,246    7,832      5,456,325    (6,742,299)     (1,274,329)
  Issuance of Common Stock primarily in
    connection with the CTA Acquisition...        --       --       47,584      476        741,524            --         742,000
  Issuance of Series A convertible
    Preferred Stock.......................    21,625      217           --       --        412,583            --         412,800
  Issuance of compensatory stock options
    and warrants..........................        --       --           --       --      1,046,232            --       1,046,232
  Transactions in connection with
    Company's initial public offering:
    Issuance of Common Stock in connection
      with initial public offering........        --       --    1,430,000   14,300     15,822,328            --      15,836,628
    Conversion of Series A convertible
      Preferred Stock.....................  (402,960)  (4,030)     402,960    4,030             --            --              --
    Conversion of Series B redeemable
      convertible Preferred Stock.........        --       --      383,786    3,837      3,338,834            --       3,342,671
    Conversion of Preferred Stock
      dividends payable to shares of
      Common Stock........................        --       --       55,623      556           (556)           --              --
    Issuance of Common Stock in connection
      with exercise of warrants...........        --       --       67,980      680        599,312            --         599,992
    Conversion of debt to equity..........        --       --       14,988      150        136,546            --         136,696
  Net loss................................        --       --           --       --             --    (4,640,703)     (4,640,703)
                                            --------   -------   ---------   -------   -----------   ------------   ------------
Balance at December 31, 1996..............        --       --    3,186,167   31,861     27,553,128   (11,383,002)     16,201,987
  Issuance of Common Stock in connection
    with the HTR Acquisition..............        --       --      585,940    5,860     12,591,850            --      12,597,710
  Issuance of stock options and warrants
    in connection with the HTR
    Acquisition...........................        --       --           --       --        591,118            --         591,118
  Issuance of Common Stock in connection
    with exercise of options and exercise
    of warrants...........................        --       --       13,103      131         15,250            --          15,381
  Issuance of compensatory stock options
    and warrants..........................        --       --           --       --        149,850            --         149,850
  Net loss................................        --       --           --       --             --   (16,144,763)    (16,144,763)
                                            --------   -------   ---------   -------   -----------   ------------   ------------
Balance at December 31, 1997..............        --   $   --    3,785,210   $37,852   $40,901,196   $(27,527,765)  $(13,411,283)
                                            ========   =======   =========   =======   ===========   ============   ============
</TABLE>

    The accompanying notes are an integral part of the financial statements
                                       F-5
<PAGE>   37

                              UOL PUBLISHING, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                       ----------------------------------------
                                                          1995          1996           1997
                                                       -----------   -----------   ------------
<S>                                                    <C>           <C>           <C>
OPERATING ACTIVITIES
Net loss.............................................  $(2,239,641)  $(4,640,703)  $(16,144,763)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation.......................................       21,506        95,451        442,151
  Amortization.......................................      287,552        48,833        663,663
  Revenues in connection with non-monetary
     transactions....................................           --            --       (795,000)
  Acquired in-process research, development and
     content.........................................           --            --     11,100,000
  Stock option and stock warrant compensation
     expense.........................................      185,800     1,046,232        149,850
  Gain on debt forgiveness and other settlements.....      (30,303)     (100,000)            --
  Write-off of intangible assets.....................           --            --        237,344
  Interest expense related to notes payable..........           --            --         66,130
  Changes in operating assets and liabilities:
     Accounts receivable.............................      (62,242)     (216,020)    (2,345,382)
     Prepaid expenses and other current assets.......      137,487      (124,089)      (103,894)
     Other assets....................................           --            --       (168,042)
     Accounts payable and accrued expenses...........     (449,841)     (139,087)       926,450
     Deferred revenues...............................      (28,810)      (74,250)       195,684
                                                       -----------   -----------   ------------
Net cash used in operating activities................   (2,178,492)   (4,103,633)    (5,775,809)
INVESTING ACTIVITIES
Purchases of property and equipment..................     (129,168)     (463,773)    (1,412,537)
Acquired online publishing rights....................           --            --        (60,000)
Capitalized courseware development costs.............           --            --     (1,990,494)
Acquisitions of businesses, net of cash acquired.....           --            --     (3,106,294)
Additions to intangible assets.......................           --            --       (330,798)
Proceeds from loans receivable from related
  parties............................................       94,718       286,948             --
Advances under loans receivable from related
  parties............................................           --      (101,444)       (32,072)
                                                       -----------   -----------   ------------
Net cash used in investing activities................      (34,450)     (278,269)    (6,932,195)
FINANCING ACTIVITIES
Proceeds from issuance of Common Stock...............           --    16,437,738         15,381
Proceeds from issuance of Series A convertible
  Preferred Stock....................................    2,732,434       412,800             --
Proceeds from the issuance of Series B redeemable
  convertible Preferred Stock........................           --     3,042,671             --
Proceeds from loans payable to related parties.......      252,836       430,000             --
Proceeds from notes payable..........................           --       300,000      3,700,000
Repayments of loans payable to related parties.......     (480,353)     (585,300)            --
Repayments of notes payable..........................     (208,396)     (286,155)    (3,775,917)
                                                       -----------   -----------   ------------
Net cash provided by (used in) financing
  activities.........................................    2,296,521    19,751,754        (60,536)
Net increase (decrease) in cash and cash
  equivalents........................................       83,579    15,369,852    (12,768,540)
Cash and cash equivalents at the beginning of the
  year...............................................       20,599       104,178     15,474,030
                                                       -----------   -----------   ------------
Cash and cash equivalents at the end of the year.....  $   104,178   $15,474,030   $  2,705,490
                                                       ===========   ===========   ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid........................................  $   181,009   $   200,197   $    125,000
                                                       ===========   ===========   ============
</TABLE>

    The accompanying notes are an integral part of the financial statements
                                       F-6
<PAGE>   38

                              UOL PUBLISHING, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND NATURE OF OPERATIONS

     UOL Publishing, Inc. (the "Company") was incorporated in Virginia in 1984
and reincorporated in Delaware in 1985. The Company is a publisher of high
quality, interactive and on-demand courseware for the corporate training and
education market. Through certain of its subsidiaries, the Company also offers
courseware through more traditional media, including on-site and classroom
training, and diskette, CD-ROM and printed formats.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

USE OF ESTIMATES

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

CASH EQUIVALENTS

     Cash equivalents, which are stated at cost, consist of highly liquid
investments with original maturities of three months or less.

CAPITALIZED SOFTWARE COSTS

     During 1997, the Company capitalized certain software development costs.
Capitalization of software costs began upon the establishment of technological
feasibility, which management deemed to have occurred upon the completion of a
working model of the Company's Virtual Campus ("VCampus") product. The
establishment of technological feasibility and the ongoing assessment of
recoverability of capitalized software costs requires considerable judgment by
management with respect to certain external factors, including, but not limited
to, technological feasibility, anticipated future gross revenues, estimated
economic life and changes in software and hardware technology. Amortization of
such costs is based on the greater of (a) the ratio of current gross revenues to
the sum of current and anticipated gross revenues, or (b) the straight-line
method over the remaining economic life of the VCampus, estimated to be five
years. It is possible that those estimates of future gross revenues, the
remaining economic life of the products or both may be reduced as a result of
future events.

CAPITALIZED COURSEWARE DEVELOPMENT COSTS

     During 1997, the Company capitalized certain courseware development costs.
Capitalization of courseware development costs began upon the establishment of
technological feasibility, which management deemed to have occurred upon the
completion of a working model of the relevant courseware. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized courseware development costs requires considerable judgment by
management with respect to certain external factors, including, but not limited
to, technological feasibility, anticipated future gross revenues, estimated
economic life and changes in software and hardware technology. Amortization of
such costs is based on the greater of (a) the ratio of current gross revenues to
the sum of current and anticipated gross revenues, or (b) the straight-line
method over the remaining economic life of the product, typically two to three
years. It is

                                       F-7
<PAGE>   39
                              UOL PUBLISHING, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CAPITALIZED COURSEWARE DEVELOPMENT COSTS (CONTINUED)
possible that those estimates of future gross revenues, the remaining economic
life of the products or both may be reduced as a result of future events.

ACQUIRED ONLINE PUBLISHING RIGHTS

     During 1997, the Company acquired online publishing rights to certain
courseware. (Generally, the Company's acquisition of online publishing rights
has occurred in connection with non-monetary exchanges; See Note 2,
"Non-Monetary Transactions"). At the time of licensing to the Company, this
courseware was generally established in CD-ROM, diskette or printed formats. The
Company capitalizes the costs associated with acquiring this content and
amortizes them based on the greater of (a) the ratio of current gross revenues
to the sum of current and anticipated gross revenues, or (b) the straight-line
method over the remaining economic life of the product, typically two to three
years. Amortization begins when the course becomes available for sale online. It
is possible that those estimates of future gross revenues, the remaining
economic life of the products or both may be reduced as a result of future
events.

GOODWILL AND OTHER INTANGIBLE ASSETS

     Goodwill and other intangibles represent the unamortized excess of the cost
of acquiring subsidiary companies over the fair values of such companies' net
tangible assets at the dates of acquisition. Goodwill related to the Company's
acquisitions as described in Notes 6 and 7 are being amortized on a
straight-line basis over periods ranging from ten to twelve years. Other
intangibles, including contracts, content, trademarks, workforce, customer base
and others, are being amortized on a straight-line basis over periods ranging
from three to twelve years.

IMPAIRMENT OF LONG-LIVED ASSETS

     At each balance sheet date, management determines whether any property and
equipment or any other assets have been impaired based on the criteria
established in SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed of." The Company made no adjustments to the
carrying values of the assets during the years ended December 31, 1995 and 1996.
During 1997, the Company wrote off approximately $250,000 of the workforce
asset, which resulted from the Teletutor acquisition (See Note 6).

REVENUE RECOGNITION

     The Company derives its revenues from the following sources -- online
tuition revenues, virtual campus software revenues, product sales, development
and other revenues, instructor led training revenues, and other service
revenues.

     The Company recognizes online tuition revenues, virtual campus software
revenues and product sales revenues in accordance with Statement of Position
91-1, "Software Revenue Recognition" ("SOP 91-1"). For online tuition fees,
revenue is recognized at the time the student has accessed the selected course
and is contractually obligated to pay for the course or the drop/add period (for
academic partners) has expired. For online tuition fees purchased in bulk, the
Company recognizes the revenues when the courses purchased have been delivered
to the customer's VCampus, provided no significant obligations are remaining.
The Company recognizes revenues from a VCampus sale at the time a VCampus is
delivered to the customer or the reseller. For all VCampus sales, the fee is
fixed at the time of contract and there is no right of return. The Company
accrues the costs (which are insignificant) associated with the continued
support of the VCampus at the time the revenues are recognized. If the costs of
the continuing obligations of a VCampus sale are deemed to be
                                       F-8
<PAGE>   40
                              UOL PUBLISHING, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
significant, the Company defers a portion of the revenues associated with these
future services. Additionally, if extended payment terms have been granted to a
reseller, the revenue is deferred and recognized upon receipt of cash. The
Company recognizes revenues from product sales upon delivery of the product to
the customer, provided no significant obligations remain. The costs of remaining
Company obligations (which are insignificant) are accrued when the related
revenues are recognized.

     Development and other revenues earned under courseware conversion contracts
are recognized using the percentage-of-completion method. For these contracts,
revenues are recognized based on the ratio that total costs incurred to date
bear to the total estimated costs of the contract. Provisions for losses on
contracts are made in the period in which they are determined.

     Revenues for instructor led training and other services are recognized as
the services are delivered.

     In 1995, three customers individually represented 54%, 14% and 10% of net
revenues. In 1996, two customers individually represented 29% and 27% of net
revenues. In 1997, no individual customer represented more than 10% of net
revenues.

STOCK-BASED COMPENSATION

     In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, ("SFAS No. 123"). SFAS No. 123 allows companies to account for
stock-based compensation either under the new provisions of SFAS No. 123 or
under the provisions of Accounting Principles Bulletin No. 25, Accounting for
Stock Issued to Employees, ("APB No. 25"), but requires pro forma disclosures in
the footnotes to the consolidated financial statements as if the measurement
provisions of SFAS No. 123 had been adopted. The Company accounts for its stock-
based compensation in accordance with the intrinsic value method of APB No. 25.
As such, the adoption of SFAS No. 123 did not impact the Company's consolidated
financial condition or results of operations.

CONCENTRATION OF CREDIT RISK

     The Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. The Company maintains
reserves for credit losses, and such losses have been within management's
expectations.

NON-MONETARY TRANSACTIONS

     During 1997, the Company entered into several transactions with third
parties whereby the third party exchanged a non-monetary asset (such as the
online publishing rights with respect to certain courseware content) as payment
(or partial payment) for the purchase of a VCampus software product as well as
courseware development services. When the fair value of the non-monetary asset
transferred or the fair value of the asset received in the exchange is
determinable within reasonable limits, the Company records the fair value of the
asset received as acquired online publishing rights and amortizes the asset over
a two to three year period. The Company records revenues associated with the
Virtual Campus software when the software is delivered assuming no significant
obligations remain, records revenues associated with the courseware development
obligations when services have been performed and records revenues associated
with the opportunity for future royalties when the related tuition fees are
earned.

                                       F-9
<PAGE>   41
                              UOL PUBLISHING, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NON-MONETARY TRANSACTIONS (CONTINUED)
     As the Company believes non-monetary transactions to be a cost-effective
way for it to acquire valuable course content, the Company expects to continue
to expand its VCampus presence by utilizing these exchanges.

ROYALTIES

     The Company has a royalty arrangement with an entity that has provided
development funding, which royalties become due and payable by the Company upon
the completion and sale of these products.

     Royalties are also due and payable by the Company upon the sale of certain
courses to which the Company acquired the online publishing rights and upon the
sale of courses which a VCampus customer may have converted to an online format
and elected to distribute to all the Company's VCampus customers. Royalties due
range from 15% to 70% of the tuition fees related to that course.

     Royalties are classified as a cost of revenues and amounted to
approximately $315,000 during the year ended December 31, 1997, the only year in
which royalties were incurred.

ADVERTISING COSTS

     The Company expenses advertising costs as incurred. Advertising costs
amounted to approximately $132,000, $64,000 and $149,000 for the years ended
December 31, 1995, 1996, and 1997.

INCOME TAXES

The Company provides for income taxes in accordance with the liability method.

NET LOSS PER SHARE

     In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share ("SFAS No. 128").
SFAS No. 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. All net loss per
share amounts for all periods have been presented, and where appropriate,
restated to conform to the SFAS No. 128 requirements.

SUPPLEMENTAL INFORMATION OF NON-CASH INVESTING AND FINANCING ACTIVITIES

<TABLE>
<CAPTION>
                                                      YEAR ENDED
                                                   DECEMBER 31, 1997
                                                   -----------------
    <S>                                            <C>
    Fair value of assets acquired &
      acquired in-process research
      & development................                   $27,232,695
    Less: Cash paid................                     3,393,390
         Notes payable issued......                     2,308,590
         Stock issued..............                    13,184,870
                                                      -----------
         Liabilities assumed.......                   $ 8,345,845
                                                      ===========
</TABLE>

                                      F-10
<PAGE>   42
                              UOL PUBLISHING, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT PRONOUNCEMENTS

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income", which establishes standards for reporting the
components of comprehensive income and requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be included in a financial statement that is displayed with the same
prominence as other financial statements. Comprehensive income includes net loss
as well as certain non-owners items that are reported directly within a separate
component of stockholders' equity. The provisions of SFAS No. 130 are effective
beginning with 1998 financial statements. These disclosure requirements will not
have a material impact on the Company's consolidated financial position or
results of operations.

     The Company intends to adopt Statement of Financial Accounting Standards
No. 131, "Disclosure about Segments of an Enterprise and Related Information"
("SFAS No. 131"), in fiscal year 1998. SFAS No. 131 changes the way companies
report segment information and requires segments to be determined based on how
management measures performance and makes decisions about allocating resources.
The adoption of SFAS No. 131 is not expected to materially impact the Company's
financial position or results of operations.

     In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued AICPA Statement of
Position 97-2 ("SOP 97-2") "Software Revenue Recognition" which is required to
be adopted by the Company for all transactions entered into after January 1,
1998. SOP 97-2 provides guidance on recognizing revenue on software
transactions. SOP 97-2 will significantly impact the recognition of Virtual
Campus software revenues by requiring the Company to defer the revenues and
recognize them ratably over the period to which the VCampus license and services
relate. Had the Company adopted SOP 97-2 on January 1, 1997, the Company's
revenues would have been $7,487,000.

3. PROPERTY AND EQUIPMENT

Property and equipment, including leasehold improvements, are stated at cost.
Depreciation is calculated using the straight-line method over an estimated
useful life of three to seven years. Leasehold improvements are amortized over
the lesser of the related lease term or the useful life. Property and equipment
consisted of the following:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                1996         1997
                                                              ---------   ----------
<S>                                                           <C>         <C>
Equipment...................................................  $ 604,485   $2,284,640
Computer software...........................................    127,664      787,588
Leasehold improvements......................................     43,977       64,682
Furniture and fixtures......................................     79,166      388,932
                                                              ---------   ----------
                                                                855,292    3,525,842
Less accumulated depreciation...............................   (232,334)    (716,223)
                                                              ---------   ----------
Total.......................................................  $ 622,958   $2,809,619
                                                              =========   ==========
</TABLE>

                                      F-11
<PAGE>   43
                              UOL PUBLISHING, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. CAPITALIZED SOFTWARE AND COURSEWARE DEVELOPMENT COSTS

     Capitalized software and courseware development costs consisted of the
following as of December 31, 1997:

<TABLE>
<S>                                                           <C>
Capitalized software costs..................................  $1,617,584
Capitalized courseware development costs....................     865,768
                                                              ----------
                                                               2,483,352
Less accumulated amortization...............................    (129,193)
                                                              ----------
Total.......................................................  $2,354,159
                                                              ==========
</TABLE>

5. ACQUIRED ONLINE PUBLISHING RIGHTS

     Acquired online rights consisted of the following as of December 31, 1997:

<TABLE>
<S>                                                           <C>
Acquired online publishing rights...........................  $855,000
Less accumulated amortization...............................   (10,000)
                                                              --------
Total.......................................................  $845,000
                                                              ========
</TABLE>

     Approximately $795,000 of the acquired online publishing rights were
acquired through non-monetary transactions (See Note 2).

6. GOODWILL AND OTHER INTANGIBLE ASSETS

     Goodwill and other intangible assets were comprised of:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                1996        1997
                                                              --------   -----------
<S>                                                           <C>        <C>
Goodwill....................................................  $505,336   $ 9,057,863
Contracts...................................................   200,000       200,000
Developed content...........................................        --     1,529,574
Work force..................................................        --       500,000
Trademarks and names........................................        --     1,056,875
Customer base...............................................        --       456,875
Other.......................................................        --       100,000
                                                              --------   -----------
                                                               705,336    12,901,187
Less accumulated amortization...............................   (48,833)     (536,633)
                                                              --------   -----------
                                                              $656,503   $12,364,554
                                                              ========   ===========
</TABLE>

     In December 1997, the Company wrote off approximately $250,000 of the
employee workforce asset which resulted from the Teletutor acquisition. The
Company's management, in accordance with its impairment policy for long-lived
assets, determined that the employee workforce asset had been impaired as of
December 31, 1997 due to planned workforce reductions. As a result, the Company
wrote off the carrying amount of the asset. This amount is included in
reorganization and non-recurring expenses in the statements of operation.

                                      F-12
<PAGE>   44
                              UOL PUBLISHING, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. ACQUISITIONS

The following transactions were accounted for using the purchase method.
Accordingly, the purchase price was allocated to the assets acquired based on
their estimated fair values.

COGNITIVE TRAINING ASSOCIATES, INC.

     On August 1, 1996, the Company acquired by merger substantially all of the
assets and liabilities (with the exception of the building, vehicle, certain
equipment, and certain notes payable) of Cognitive Training Associates, Inc., a
Texas corporation ("CTA"), for 42,487 shares of the Company's Common Stock. In
conjunction with the acquisition, the Company recorded goodwill in the amount of
$505,336, which was subsequently adjusted to $579,312, and other intangible
assets (contracts and underlying modules) in the amount of $200,000.

     The Company also issued fully vested options to purchase 5,096 shares of
the Company's Common Stock, at an exercise price of $0.12 per share, to four
employees of CTA. Additionally, the Company granted an option to purchase 16,995
shares of the Company's Common Stock, at an exercise price of $21.18 per share,
to the former stockholder of CTA in conjunction with a two-year employment
agreement (see Note 10). Management subsequently repriced the option to $12.75
per share. Management believes that this new grant price approximated the fair
market value on the date of repricing. The option will vest over a two-year
period. Additionally, pursuant to the employment agreement, the former
stockholder of CTA was paid $150,000 by the Company upon successful integration
of CTA into the Company. The Company expensed this $150,000 during 1996. The
Company also agreed to lease the building owned by the former stockholder of CTA
for $5,000 per month or $60,000 annually (see Note 10).

IVY SOFTWARE, INC.

In March 1997, the Company acquired Ivy Software, Inc. ("Ivy"), a Virginia
corporation, that develops and distributes business and accounting software for
the academic education market for $314,000 in cash and potential future payments
not to exceed approximately $862,000, which are based upon integration of
operations, conversion of software and operating results. In connection with
this transaction, the President and sole shareholder of Ivy entered into a
three-year consulting agreement with the Company. The operating results of Ivy
are included in the Company's financial statements since the effective date of
the acquisition. In conjunction with the acquisition, the Company recorded
goodwill in the amount of $300,000, which was subsequently adjusted to $462,822
upon a scheduled payment to the former shareholder of Ivy.

COOPER & ASSOCIATES, INC. (D/B/A. TELETUTOR)

     In April 1997, the Company acquired Cooper & Associates, Inc., d/b/a
Teletutor ("Teletutor"), an Illinois corporation that develops, distributes and
supports computer-based training courses for the data and telecommunications
industry. The terms of the transaction included a $3,000,000 cash payment at
closing and $2,000,000 (which includes principal payments and interest) to be
paid in cash ratably ($666,667) on the first, second and third anniversary dates
of the acquisition. The operating results of Teletutor are included in the
Company's financial statements since the effective date of the acquisition. In
conjunction with this acquisition, the Company allocated the excess of the
purchase price over the fair market value of the acquired net assets as follows:
(i) $829,575 to developed content, $273,858 to work force, $456,875 to
trademarks and names, $456,875 to customer base and contracts and $5,138 to
goodwill and (ii) $2,700,000 to acquired in-process research, development and
content.

                                      F-13
<PAGE>   45
                              UOL PUBLISHING, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. ACQUISITIONS (CONTINUED)
HTR, INC.

     In October 1997, the Company acquired HTR, Inc. ("HTR"), a Delaware
corporation primarily engaged in the business of providing technical training,
publishing and consulting services for the information technology industry. UOL
acquired HTR for common stock, warrants and options totaling 620,000 shares in
exchange for all of the outstanding equity securities of HTR. In addition, UOL
will pay the former HTR stockholders $600,000 in a combination of cash and
short-term notes and has assumed approximately $3,500,000 of HTR debt, including
approximately $3,000,000 payable to Sirrom Capital Corporation. The executive
officers of HTR will receive bonuses granted in conjunction with the signing of
three-year employment agreements. In addition, UOL will create a stock option
pool of 180,000 shares of Common Stock and an incentive bonus pool with a
potential payout of up to approximately $3,300,000 for three years, contingent
upon the financial performance of HTR. The operating results of HTR are included
in the Company's financial statements since the effective date of the
acquisition. In conjunction with this acquisition, the Company allocated the
excess of the purchase price over the fair market value of the acquired net
assets as follows (i) $8,010,590 to goodwill, $700,000 to developed content,
$500,000 to work force, $600,000 to trademarks and names, and (ii) $8,400,000 to
acquired in-process research, development and content.

UNAUDITED PRO FORMA SELECTED INFORMATION

     The selected pro forma information for the year ended December 31, 1996
includes the operating results of CTA, HTR, Teletutor and Ivy as if the Company
completed these acquisitions on January 1, 1996. The selected pro forma
information for the year ended December 31, 1997 includes the operating results
of HTR, Teletutor and Ivy as if the Company completed these acquisitions on
January 1, 1997. The pro forma information does not purport to be indicative of
the results of operations that would have occurred had the transactions taken
place at the beginning of the periods presented or of future operating results.

<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                              ---------------------------
                                                                  1996           1997
                                                              ------------   ------------
<S>                                                           <C>            <C>
     Pro forma net revenues.................................  $ 18,526,000   $ 19,186,000
                                                              ============   ============
     Pro forma net loss.....................................  $(17,293,000)  $(21,719,000)
     Pro forma accrued dividends to preferred
       stockholders.........................................      (330,706)            --
                                                              ------------   ------------
     Pro forma net loss available to common stockholders....  $(17,623,706)  $(21,719,000)
                                                              ============   ============
     Pro forma net loss per share to common stockholders....  $     (10.96)  $      (5.74)
                                                              ============   ============
     Pro forma weighted average shares outstanding..........     1,608,682      3,785,210
                                                              ============   ============
</TABLE>

8. LOANS PAYABLE TO (RECEIVABLE FROM) RELATED PARTIES

     During 1995, outstanding principal and accrued interest totaling $216,900
and $12,182, respectively, as well as accounts payable totaling $97,000 to
various officers, directors and investors, were converted into 78,689 shares of
Common Stock and 1,800 shares of Series A convertible Preferred Stock. The
remaining accrued interest of $30,303 was forgiven and recognized as a gain. The
non-cash portion of this transaction has been excluded from the statements of
cash flows.

     At December 31, 1995, the Company owed $285,300 in 12% interest bearing
notes payable to various officers. During December 1996, the Company repaid
these notes payable and the related accrued interest of $31,664.

                                      F-14
<PAGE>   46
                              UOL PUBLISHING, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. LOANS PAYABLE TO (RECEIVABLE FROM) RELATED PARTIES (CONTINUED)
     Additionally, in March 1996, the Company issued a convertible promissory
note for $300,000 to an entity controlled by a stockholder. The note bore
interest at 10.5% per annum. In connection with an agreement executed by the
Company and the stockholder in September 1996, the stockholder exercised
warrants to purchase 67,980 shares of Common Stock, resulting in proceeds to the
Company of approximately $600,000 and the Company repaid the balance of the
$300,000 convertible note payable plus accrued interest of $23,560 to the entity
controlled by the stockholder. Additionally, the Company issued to the
stockholder warrants to purchase 15,687 shares of Common Stock at an exercise
price equal to the initial public offering ("IPO") price of $13.00 per share.

     In May 1996, the Company issued a convertible subordinated unsecured
promissory note for $130,000 to an officer of the Company. The note bore
interest at a rate of 10% per annum. In addition, the officer was issued
warrants to purchase 6,904 shares of the Company's Common Stock at an exercise
price of $18.83 per share. These warrants are exercisable for eight years. The
Company believes that any value associated with the warrants is immaterial. The
note payable was convertible to shares of Common Stock at a rate of $18.83 per
share, and the conversion price and the warrant exercise price are subject to
adjustment for certain events, such as stock splits, dividends on Common Stock
or sale of the Company's Common Stock or Preferred Stock at a price less than
the conversion price. Accordingly, the conversion and warrant exercise prices
were subsequently adjusted to $9.12 due to the anti-dilution provisions pursuant
to the agreement.

     In December 1996, the officer converted his outstanding note payable
balance plus accrued interest of $136,696 to 14,988 shares of Common Stock. In
addition, the number of shares of Common Stock underlying such officer's
warrant, was increased by 7,349 shares and the exercise price thereof reduced to
$9.12 per share, pursuant to certain anti-dilution rights previously granted.

     Loans receivable from the Company's officers and employees amounted to
$100,000 and $125,000 as of December 31, 1996 and 1997, respectively. The loans
are due during 1998. The Company accrues interest on the loans receivable at a
rate of prime less 1%. Interest income related to loans receivable amounted to
$14,347, $10,152, and $8,516 during the years ended December 31, 1995, 1996 and
1997, respectively.

9. NOTES PAYABLE

     At December 31, 1995, the Company owed $293,366 in a non-interest bearing
note payable. The note was discounted at a rate of 12% per annum. As of December
31, 1995, accrued interest on notes payable totaled $106,217. During 1996, the
Company repaid $299,583 as settlement of the note and accrued interest. The
remaining $100,000 was forgiven pursuant to a settlement agreement executed by
the Company and the other party. The Company included the gain of $100,000 as
other income in the statements of operations.

     In June 1996, the Company borrowed $300,000 from an investor in exchange
for a convertible promissory note. The note bore interest at a rate of 10% per
annum, and any unpaid principal and interest is convertible into shares of the
Company's Series B redeemable convertible Preferred Stock at a conversion rate
of $18.83 per share, subject to adjustments for certain events, such as the sale
of the Company's Common or Preferred Stock at a price less than the conversion
price. In July 1996, principal and accrued interest were converted into shares
of Series B redeemable convertible Preferred Stock (see Note 13).

     In connection with the Teletutor acquisition (see Note 7), the Company
entered into a promissory note with the stockholders of Teletutor whereby the
Company agreed to pay $2,000,000 due in three annual installments of $666,667
beginning on May 1, 1998. This note is non-interest bearing. The Company has
discounted this note at 5.5%. At December 31, 1997, the Company accrued $66,130
of interest expense related to this note.

                                      F-15
<PAGE>   47
                              UOL PUBLISHING, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. NOTES PAYABLE (CONTINUED)
     During 1996, Teletutor entered into a secured lending arrangement, which
expires in May 1998, with its bank in the aggregate principal amount of
$150,000. Amounts borrowed under this arrangement bear interest at the bank's
prime rate plus 2% and are collateralized by all business assets of Teletutor.
This line-of-credit facility requires monthly interest payments. As of December
31, 1997, there were no borrowings against this arrangement.

     In connection with the HTR acquisition, the Company assumed approximately
$3,633,000 of notes payable and accrued interest. In December 1997, the Company
repaid the principal and accrued interest on the notes payable, for total
payments amounting to $3,409,325.

     Also in connection with the HTR acquisition, the Company issued notes
payable to former stockholders of HTR totaling $509,968 and bearing simple
interest at an annual rate of 6%. The principal amount is due in two annual
installments payable on October 31, 1998 and October 31, 1999.

     The Company and its bank lender had entered into a secured lending
arrangement in the aggregate principal amount of $100,000. In December, the
Company and the bank canceled this lending arrangement.

     In December 1997, the Company and the bank entered into a secured lending
facility agreement, which provided for a line of credit in the amount of
$3,000,000 bearing interest at the LIBOR market Index rate plus 275 basis
points. Interest is payable monthly and principal is payable on April 30, 1999.
The Company may borrow the lesser of (i) $3,000,000 or (ii) a percentage of its
accounts receivable in accordance with an agreed upon schedule (borrowing base
of $3,000,000 at December 31, 1997.) As of December 31, 1997, the Company had
borrowed $500,000 of this line of credit balance and had an unused borrowing
capacity of $2,500,000.

     In December 1997, the Company and its bank also entered into a secured
lending facility agreement which provided for a term loan in the amount of
$3,000,000 bearing interest at the LIBOR Market Index Rate plus 350 basis
points. Interest is payable monthly and principal is payable on April 1, 1999.
As of December 31, 1997, the Company had borrowed the full amount on this
facility, which proceeds the Company used to repay certain of the notes payable
assumed in the HTR acquisition.

     As of December 31, 1997, the Company was in violation of certain covenants
related to this line of credit facility.

     Effective March 27, 1998, the Company and its bank lender negotiated and
agreed upon revised covenants under the line of credit facility adjusting the
terms to more appropriate expectations of the Company's financial performance.
These new agreed upon covenants are subject to the Company's ability to raise at
least $5,300,000 of cash equity capital no later than April 15, 1998 of which
$5,200,000 was received by March 30, 1998. Pursuant to such revised covenants,
the Company is limited to the current draw of the lesser of $1,500,000 or a
percentage of its accounts receivable in accordance with an agreed upon schedule
(borrowing base of $1,500,000 at March 27, 1998). All amounts currently due
above the $1,500,000 maximum borrowing capacity will be due by April 15, 1998,
which would require the Company to repay $500,000 based on current borrowings as
of March 27, 1998. The interest rate on the line of credit will be increased to
LIBOR plus 375 basis points. Additionally, the repayment terms on the term loan
shall be as follows: $500,000 due on May 15, 1998, $1,000,000 due on July 15,
1998, and $1,500,000 due on November 15, 1998. Certain events, which result in
proceeds to the Company, may accelerate the amounts paid to the Company for the
term loan. The interest rate on the term loan has been increased to LIBOR plus
375 basis points. As a result of revised terms, all bank debt has been
reclassified to current. The Company has also committed on a best efforts basis
to raise additional $2,700,000 in cash equity. The Chairman and President have
provided their personal guarantees until such time as the $3,000,000 term loan
has been paid and the Company has raised additional cash equity of at least
$2,700,000.

                                      F-16
<PAGE>   48
                              UOL PUBLISHING, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. NOTES PAYABLE (CONTINUED)
     Both of these last two facilities are collateralized by a senior security
interest in all corporate assets, including cash, accounts receivable, and fixed
assets.

     Notes payable at December 31, 1997 consisted of the following:

<TABLE>
<S>                                                           <C>
Note payable to a bank......................................  $3,000,000
Notes payable to former stockholders of Teletutor...........   1,864,752
Notes payable to former stockholders of HTR.................     509,968
Line of credit to a bank....................................     500,000
Other.......................................................     208,351
                                                              ----------
                                                               6,083,071
                                                              ----------
Current portion of notes payable............................   4,551,950
                                                              ----------
Notes payable, less current portion.........................  $1,531,121
                                                              ==========
</TABLE>

     Annual maturities of notes payable at December 31, 1997 are as follows:

<TABLE>
  <S>                       <C>
  1998....................  $4,551,950
  1999....................     853,953
  2000....................     677,168
                            ----------
                            $6,083,071
                            ==========
</TABLE>

10. COMMITMENTS

NETWORK SERVICES AGREEMENT

     During 1993, the Company entered into a three-year agreement with
CompuServe, Inc. ("CompuServe") whereby CompuServe was to provide network
services to the Company. The Company ceased making payments under the agreement
in 1993 due to dissatisfaction with the services provided by CompuServe.

     As a result, CompuServe asserted that the Company was liable for unpaid
fees and lost profits totaling $300,000 due to breach of contract. In October
1994, the Company reached a conditional settlement with CompuServe whereby the
Company was required to purchase approximately $98,000 of advertising services
from CompuServe. During 1996, the Company fully satisfied its commitment to
purchase such advertising services from CompuServe. In 1996, the Company
recognized a gain of $119,274 relating to the settlement of amounts owed by the
Company to CompuServe, which was for less than the amount the Company had
accrued; the gain is included in other income in the statements of operations.

LEASES

     The Company leases office space under noncancellable operating lease
agreements. The leases have various renewal options. Future minimum lease
payments may be periodically adjusted based on changes in the lessors' operating
charges. Additionally, the Company leases various office equipment under non-
cancelable operating leases. Rent expense for the years ended December 31, 1995,
1996 and 1997 was $98,761, $137,519, $437,756, respectively.

                                      F-17
<PAGE>   49
                              UOL PUBLISHING, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. COMMITMENTS -- (CONTINUED)
LEASES -- (CONTINUED)
     As of December 31, 1997, payments due under noncancellable operating leases
were as follows:

<TABLE>
  <S>                       <C>
  1998....................  $  735,546
  1999....................     497,446
  2000....................     372,430
  2001....................     104,900
                            ----------
                            $1,710,322
                            ==========
</TABLE>

EMPLOYMENT AGREEMENTS

     During 1996 and 1997, the Company executed employment agreements with
certain key executives under which the Company is required to pay the following
base salaries annually over the next three years:

<TABLE>
  <S>                       <C>
  1998....................  $  988,750
  1999....................     480,000
  2000....................     334,000
                            ----------
                            $1,802,750
                            ==========
</TABLE>

     In addition, the Company is required to pay certain performance incentives
limited to 50% of such base salaries.

11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

     Accounts payable and accrued expenses consisted of the following:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              -----------------------
                                                                 1996         1997
                                                              ----------   ----------
<S>                                                           <C>          <C>
Accounts payable and accrued expenses.......................  $  931,771   $5,435,498
Accrued payroll and payroll taxes...........................     230,000      602,323
Accrued vacation............................................      97,395      360,667
                                                              ----------   ----------
                                                              $1,259,166   $6,398,488
                                                              ==========   ==========
</TABLE>

     The Company accrued interest on the accrued payroll in arrears to the Chief
Executive Officer and three other officers of the Company at a rate of 5% per
annum. Interest expense related to the accrued payroll in arrears amounted to
$29,180, $36,182, and $0 during the years ended December 31, 1995, 1996 and
1997, respectively.

12. STOCKHOLDERS' EQUITY

EQUITY TRANSACTIONS

     During 1995, the Company issued 379,535 shares of Series A convertible
Preferred Stock for net proceeds of approximately $2,732,000 at a price of $8.83
per share.

     During 1996, the Company issued 5,097 shares of Common Stock as payment for
certain accounts payable amounting to $42,000. The shares were issued at a price
per share of $8.83. The non-cash portion of this transaction has been excluded
from the statements of cash flows. In addition, the Company issued

                                      F-18
<PAGE>   50
                              UOL PUBLISHING, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. STOCKHOLDERS' EQUITY (CONTINUED)
EQUITY TRANSACTIONS (CONTINUED)
42,487 shares of Common Stock in connection with the purchase of CTA which the
Company valued at the estimated fair market value of the Company's Common Stock
on the acquisition date (See Note 7).

     During 1996, the Company issued an aggregate of 20,534 shares of Series A
convertible Preferred Stock for net proceeds of approximately $413,000 at a
price of $21.18 per share. Additionally, the Company issued 1,091 shares of
Series A convertible Preferred Stock to holders of the Series A convertible
Preferred Stock to satisfy contractual anti-dilution provisions pursuant to
certain 1996 stock transactions.

     On July 19, 1996, the Company issued 185,877 shares of Series B redeemable
convertible Preferred Stock for total proceeds of $3,500,000, including
conversion of a $300,000 convertible promissory note (see Note 8).

     During 1996, the Board of Directors approved a 1-for-11.76812037 reverse
stock split of the Company's $0.01 par value Series A, Series B and Series B-1
Preferred Stock and Common Stock, which became effective on November 20, 1996.
All references in the accompanying financial statements to the number of shares
of Preferred Stock and Common Stock and per share amounts have been restated to
reflect the split.

     On December 2, 1996, the Company sold 1,430,000 shares of Common Stock in
its IPO for net proceeds of approximately $15,800,000. Simultaneously with the
IPO, the Company converted all outstanding shares of Series B redeemable
convertible Preferred Stock into shares of Common Stock on a 1-for-2.06 basis.
The Company also declared accrued dividends in arrears of 4,852 shares of Series
B redeemable convertible Preferred Stock to holders of Series B redeemable
convertible Preferred Stock, which were then converted to Common Stock on a
1-for-2.06 basis. The Company also converted all outstanding shares of Series A
convertible Preferred Stock into shares of Common Stock on a one-for-one basis,
and the Company declared accrued dividends in arrears of 45,628 shares of Series
A convertible Preferred Stock to holders of Series A convertible Preferred
Stock, which were then converted to Common Stock on the same basis as the Series
A conversion. The conversion of Preferred Stock to Common Stock is a non-cash
transaction and accordingly, has been excluded from the statements of cash
flows. Also, one of the Company's stockholders exercised warrants to purchase
67,980 shares of Common Stock and the Company subsequently repaid the $300,000
convertible note payable balance with the proceeds therefrom. Also, an officer
of the Company converted his $130,000 note payable into 14,988 shares of Common
Stock.

     On October 31, 1997, the Company issued 585,940 shares of Common Stock in
connection with the purchase of HTR (See Note 7). In addition, the Company
issued 34,020 of options and warrants in connection with the HTR acquisition
which options and warrants were valued at fair value using the Black-Scholes
pricing model ($591,118) and were accounted for as purchase price.

     As of December 31, 1995, 1996 and 1997, the Company owed dividends in
arrears of 13,083, 0 and 0 shares of Preferred Stock, respectively, which
represented a total value of $174,889, $330,706, and $0 accrued during the years
ended December 31, 1995, 1996 and 1997, respectively.

STOCK OPTION PLANS

     The Company has adopted a stock option plan (the "Original Plan") which
permits the Company to grant up to 288,916 options to employees, board members
and others who contribute materially to the success of the Company. In November
1996, the Company's Board of Directors decided not to grant any further options
under the Original Plan.

     During 1996, the Company's Board of Directors approved a new stock option
plan (the "1996 Plan"), which provided for the grant of 135,960 options which
was subsequently increased to 524,893 options. During

                                      F-19
<PAGE>   51
                              UOL PUBLISHING, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
1997, the Company's Board of Directors approved an additional increase of
1,000,000 options. These options are conditional upon the approval of
stockholders which management believes will occur at the annual stockholder
meeting in 1998. Stock options under the Original Plan and 1996 Plan are
generally granted at prices which the Company's Board of Directors believes
approximates the fair market value of its Common Stock at the date of grant.
Individual grants generally become exercisable ratably over a period of four to
five years from the date of grant. The contractual term of the options range
from three to ten years from the date of grant.

     The Company recorded a charge of $125,800 of expense related to variable
options whose exercise prices became fixed during 1995. During 1996, the
Company's Board of Directors extended the exercise period of 88,032 fully vested
options to August 31, 1999. This extension of exercise period created a new
measurement date for these options. As such, the Company recognized compensation
expense of $877,782 during 1996 for the difference between the deemed fair value
of the Company's Common Stock on the new measurement date and the grant price of
such options. Additionally, the Company recognized an expense of $144,270 during
1996 for options whose grant price at the grant date was below fair market
value. During 1997, the Company has granted certain options, whose grant is
contingent on stockholder approval. Since these options are considered variable,
the Company measured the difference between the grant price and fair market
value of the Company's Common Stock at December 31, 1997 and accordingly
recorded compensation expense of $75,000.

     Common stock option activity was as follows:

<TABLE>
<CAPTION>
                                                                   YEARS ENDED DECEMBER 31,
                                                --------------------------------------------------------------
                                                       1995                 1996                  1997
                                                ------------------   ------------------   --------------------
                                                          WEIGHTED             WEIGHTED               WEIGHTED
                                                          AVERAGE              AVERAGE                AVERAGE
                                                          EXERCISE             EXERCISE               EXERCISE
                                                SHARES     PRICE     SHARES     PRICE      SHARES      PRICE
                                                -------   --------   -------   --------   ---------   --------
<S>                                             <C>       <C>        <C>       <C>        <C>         <C>
Outstanding at the beginning of the year......   93,640    $2.80     100,438    $ 2.71      595,233    $10.23
  Granted.....................................   13,596     1.47     515,189     11.50      766,460     12.64
  Exercised...................................       --       --          --        --      (12,604)     1.29
  Canceled or expired.........................   (6,798)    1.47     (20,394)     5.30     (112,608)    11.61
                                                -------    -----     -------    ------    ---------    ------
Outstanding at the end of the year............  100,438    $2.71     595,233    $10.23    1,236,481     11.69
                                                =======    =====     =======    ======    =========    ======
Options exercisable at year-end...............   76,306    $3.11     185,408    $ 7.05      303,638    $ 8.76
                                                =======    =====     =======    ======    =========    ======
</TABLE>

     As of December 31, 1997, there were no options available for future grants.

                                      F-20
<PAGE>   52
                              UOL PUBLISHING, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
     The following table summarizes information about fixed-price stock options
outstanding at December 31, 1997:

<TABLE>
<CAPTION>
                                                           OPTIONS OUTSTANDING                 OPTIONS EXERCISABLE
                                                 ----------------------------------------   --------------------------
                                                     NUMBER         AVERAGE     WEIGHTED-       NUMBER       WEIGHTED-
                                                 OUTSTANDING AT    REMAINING     AVERAGE    EXERCISABLE AT    AVERAGE
                   RANGE OF                       DECEMBER 31,    CONTRACTUAL   EXERCISE     DECEMBER 31,    EXERCISE
                EXERCISE PRICES                       1997           LIFE         PRICE          1997          PRICE
                ---------------                  --------------   -----------   ---------   --------------   ---------
<S>                                              <C>              <C>           <C>         <C>              <C>
Less than $1.00................................       26,850          1.8        $ 0.83         26,850        $ 0.83
$ 1.01 - $ 3.00................................       39,252          7.2          1.82         34,720          1.86
$ 3.01 - $ 6.00................................       18,694          1.7          4.77         18,694          4.77
$ 6.01 - $ 9.00................................      144,280          2.9          8.83         95,332          8.83
$ 9.01 - $12.00................................      264,500          9.4         11.25             --            --
$12.01 - $15.00................................      653,005          9.2         12.97        128,042         12.82
$15.01 - $18.00................................       89,900          9.7         17.26             --            --
                                                   ---------          ---        ------        -------        ------
                                                   1,236,481          8.2        $11.69        303,638        $ 8.76
                                                   =========                     ======        =======        ======
</TABLE>

     Had compensation expense related to the stock option plans been determined
based on the fair value at the grant date for options granted during the years
ended December 31, 1995, 1996 and 1997 consistent with the provisions of SFAS
No. 123, the Company's net loss and net loss per share would have been as
follows:

<TABLE>
<CAPTION>
                                                       YEARS ENDED DECEMBER 31,
                                               ----------------------------------------
                                                  1995          1996           1997
                                               -----------   -----------   ------------
<S>                                            <C>           <C>           <C>
Net loss -- pro-forma........................  $(2,058,843)  $(4,617,938)  $(17,885,671)
                                               -----------   -----------   ------------
Net loss per share -- pro-forma..............  $     (2.07)  $     (3.86)  $      (5.44)
                                               ===========   ===========   ============
</TABLE>

     The effect of applying SFAS No. 123 on the years ended December 31, 1995,
1996, and 1997 pro forma net loss as stated above is not necessarily
representative of the effects on reported net loss for future years due to,
among other things, the vesting period of the stock options and the fair value
of additional stock options in future years.

     The fair value of each option grant is estimated on the date of grant using
the Minimum Value option-pricing fair value model with the following
weighted-average assumptions used for grants in 1995: dividend yield of 0%;
risk-free interest rate of 5.875%; and expected life of the option term of 3
years. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing fair value model with the following
weighted-average assumptions used for grants in 1996: dividend yield of 0%;
expected volatility of 43%; risk-free interest rate of 6.125%; and expected life
of the option term of 3.5 years. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing fair value
model with the following weighted-average assumptions used for grants in 1997:
dividend yield of 0%; expected volatility of 69%; risk-free interest rate of
6.5%; and expected life of the option term of 7 years. The weighted average fair
value of the options granted in 1995 with a stock price greater than the
exercise price is $5.37. The weighted average fair values of the options granted
in 1996 with a stock price equal to the exercise price and with a stock price
greater than the exercise price are $4.65 and $12.42, respectively. The weighted
average fair values of the options granted in 1997 with a stock price equal to
the exercise price and with a stock price greater than the exercise price, with
a stock price less than the exercise price are $9.85, $10.81 and $11.57,
respectively.

                                      F-21
<PAGE>   53
                              UOL PUBLISHING, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS

     The Company has also granted warrants to purchase Common Stock to various
investors, employees and outside vendors. Warrant activity was as follows:

<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                                           ---------------------------
                                                            1995      1996      1997
                                                           -------   -------   -------
<S>                                                        <C>       <C>       <C>
Outstanding at the beginning of the year.................  380,688   500,484   476,367
  Granted................................................  119,796    43,863    60,199
  Exercised..............................................       --   (67,980)   (1,198)
  Canceled or expired....................................       --        --        --
                                                           -------   -------   -------
Outstanding at the end of the year.......................  500,484   476,367   535,368
                                                           =======   =======   =======
</TABLE>

     Exercise prices on the outstanding warrants range from $2.60 to $21.18 per
share.

     Of the total warrants outstanding at December 31, 1997, 355,586 Common
Stock warrants were issued in connection with equity transactions and a research
and development agreement and 179,782 Common Stock warrants were issued in
connection with convertible related party debt and short-term debt. These
warrants were granted at prices which the Board of Directors of the Company
believes approximates fair value at the time of grant, and as such the Company
believes that any value allocable to the warrant is immaterial to the financial
statements. There are certain anti-dilution rights associated with these
warrants, which are effective upon the occurrence of certain events. In 1997,
the Company issued 21,960 warrants in connection with the HTR acquisition
exercisable at prices ranging from $1.73 to $20.50. The warrants expire between
December 31, 1998 and October 28, 2001. The Company recorded the fair value
associated with these warrants of $365,085 as part of the purchase price for
HTR. In 1997, the Company also issued warrants to purchase 38,239 shares of
Common Stock to InternetU in connection with a research and development
agreement (See Note 13).

     In connection with the Company's IPO, the exercise prices of warrants to
purchase 35,167 shares of Common Stock were reduced from $17.65 or $18.83 per
share to the IPO price, $13.00 per share, to satisfy certain anti-dilution
rights previously granted. The holders of these warrants have agreed to waive
further price-based anti-dilution rights, except with respect to issuances of
Common Stock below $8.83 per share.

RESERVE FOR ISSUANCE

     As of December 31, 1997, the Company had reserved 2,196,843 shares of
Common Stock issuable upon the exercise of outstanding options and warrants.

13. RESEARCH AND DEVELOPMENT AGREEMENT

     On April 15, 1996, the Company entered into an agreement with Autodesk,
Inc. ("Autodesk") to develop and maintain a campus-like graphical user interface
located on the Internet. The Company will be entitled to certain revenues
generated by the project and will pay 20% in royalties to Autodesk for the use
of certain trademark rights. Additionally, the Company will pay royalties to the
authors of the projects. During September, 1996 and as later amended, the
Company contracted with InternetU, Inc., ("InternetU"), a stockholder, to
provide the funding for the project. In exchange for $1,550,000, to be provided
in installments through September 30, 1997, corresponding to the achievement of
certain milestones, the Company agreed to grant InternetU Common Stock warrants
to purchase 73,172 shares of Common Stock at an exercise price of $13.00 per
share. In addition, InternetU will receive royalties on certain future revenues
generated by the project. The Company determined that the fair value of the
warrants was approximately $150,000 and will

                                      F-22
<PAGE>   54
                              UOL PUBLISHING, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. RESEARCH AND DEVELOPMENT AGREEMENT (CONTINUED)
RESERVE FOR ISSUANCE (CONTINUED)
recognize this amount as research and development expense. This agreement is
cancelable and should either party to the agreement fail to perform, no
additional cash or warrants are required to be paid or issued, or revenues
shared. In January 1997, the Company received payment of the first installment
pursuant to the agreement and accordingly, the Company recognized $250,000 as
revenue during 1996 since the payment was due during 1996 and the related work
to achieve the milestone was performed during 1996. Accordingly, the Company
recorded $24,180 as expense for the warrants to be issued to InternetU. In 1997,
the Company recognized an additional $560,000 of revenue related to the work
performed to achieve the milestones set as of March 31, 1997 and June 30, 1997.
The Company recognized $54,350 as expense for the warrants issued to InternetU
pursuant to the terms of the agreement.

14. RETIREMENT PLAN

     Teletutor had a 401(K) Retirement Savings Plan covering all employees who
meet defined eligibility requirements. Employee contributions to the Teletutor's
plan are made at predetermined rates elected by the employees. Additionally, the
employer may elect to match a portion of the employee contributions and may also
make a discretionary contribution to the plan. The Company did not make
discretionary contributions in 1997.

     HTR, Inc. maintains a tax deferred savings and retirement plan to provide
retirement benefits for all eligible employees. HTR's plan, which covers all
employees who have completed three months of service, stipulates that employees
may elect an amount between 1% and 15% of their total compensation to contribute
to the plan. Employee contributions are subject to Internal Revenue Service
limitations. All employees who have completed 1,000 hours of service during the
plan year are eligible to share in discretionary Company contributions.
Employees vest in employer contributions over four years. During the year ended
December 31, 1997, no contributions were made by the Company.

     During 1997, UOL Publishing, Inc. adopted a 401(K) Defined Contribution
Prototype Plan for all eligible employees. Effective July 1, 1997, all UOL
employees may elect an amount between 1% and 15% of their total compensation to
contribute to the plan. Employees who have completed 1,000 hours of service
during the plan year are eligible to share in discretionary Company
contributions. Additionally, the employer will match a portion of the employee
contributions. The Company elected a graduated vesting schedule in which
contributions fully vest over a period of four years. As of December 31, 1997,
the Company has not made any contributions.

                                      F-23
<PAGE>   55
                              UOL PUBLISHING, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15. INCOME TAXES

     Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and income tax purposes. Significant components of the Company's net deferred
tax assets were as follows:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                            --------------------------
                                                               1996           1997
                                                            -----------   ------------
<S>                                                         <C>           <C>
Net operating loss carryforwards..........................  $ 3,266,000   $ 10,411,000
Accrued payroll...........................................           --        358,000
Other.....................................................      214,000         28,000
                                                            -----------   ------------
Total deferred tax assets.................................    3,480,000     10,797,000
Valuation allowance.......................................   (3,480,000)   (10,797,000)
                                                            -----------   ------------
Net deferred tax assets...................................  $        --   $         --
                                                            ===========   ============
</TABLE>

     As of December 31, 1996 and 1997, the Company had net operating loss
carryforwards for federal income tax purposes of approximately $8,165,000 and
$25,757,000, respectively, which will expire at various dates through 2012. The
Company may have had changes in ownership which may impose limitations on its
ability to utilize net operating loss carryforwards under Section 382 of the
Internal Revenue Code.

16. NET LOSS PER SHARE

     The following table sets forth the computation of basic and diluted net
loss per share:

<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                       ----------------------------------------
                                                          1995          1996           1997
                                                       -----------   -----------   ------------
<S>                                                    <C>           <C>           <C>
Numerator:
  Net loss...........................................  $(2,239,641)  $(4,640,703)  $(16,144,763)
  Accrued dividends to preferred stockholders........     (174,889)     (330,706)            --
                                                       -----------   -----------   ------------
  Net loss available to common stockholders..........  $(2,414,530)  $(4,971,409)  $(16,144,763)
                                                       ===========   ===========   ============
Denominator:
  Denominator for basic earnings per
     share -- weighted-average shares................      771,171       997,958      3,286,281
                                                       ===========   ===========   ============
  Denominator for diluted earnings per
     share -- adjusted weighted-average shares.......      771,171       997,958      3,286,281
                                                       ===========   ===========   ============
Basic net loss per share.............................  $     (3.13)  $     (4.98)  $      (4.91)
                                                       ===========   ===========   ============
Diluted net loss per share...........................  $     (3.13)  $     (4.98)  $      (4.91)
                                                       ===========   ===========   ============
</TABLE>

17. MANAGEMENT'S PLANS

     The Company recognizes that they must generate additional capital in order
to continue operations and meet business development initiatives. The Company
has issued a private placement offering to raise approximately $6-8 million of
proceeds, of which $5.2 million has been received as of March 30, 1998. Should
the Company be unable to generate sufficient cash from operations or raise
sufficient funds from a private or public offering of its equity securities, the
Company's ability to fund operations and satisfy debt payments through fiscal
1998 will be dependent on the Company's implementation of a plan to
significantly reduce operating expenses (such as marketing, development costs
and costs of personnel and related benefits).

                                      F-24
<PAGE>   56

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Board of Directors
HTR, INC.

     We have audited the accompanying balance sheets of HTR, Inc. as of June 30,
1996 and 1997, and the related statements of operations, stockholders' deficit
and cash flows for each of the two years in the period ended June 30, 1997.
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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of HTR, Inc. at June 30, 1996
and 1997, and the results of its operations and its cash flows for each of the
two years in the period ended June 30, 1997 in conformity with generally
accepted accounting principles.

                                                           /s/ ERNST & YOUNG LLP

Vienna, Virginia
November 4, 1997

                                      F-25
<PAGE>   57

                                   HTR, INC.

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                       JUNE 30,
                                                              --------------------------
                                                                 1996           1997
                                                              -----------    -----------
<S>                                                           <C>            <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $   169,660    $   870,849
  Accounts receivable, less allowance of $150,000 at June
     30, 1996 and 1997, respectively........................    1,904,105        881,075
  Inventories, less allowance of $46,891 and $106,929 at
     June 30, 1996 and 1997, respectively...................      218,560        180,702
  Prepaid expenses and other current assets.................        8,773        118,270
                                                              -----------    -----------
Total current assets........................................    2,301,098      2,050,896
Property and equipment, net.................................      905,249        875,114
Other assets................................................      102,173         69,293
Debt issuance costs, net of accumulated amortization of
  $38,873 at June 30, 1997..................................           --        252,672
                                                              -----------    -----------
          Total assets......................................  $ 3,308,520    $ 3,247,975
                                                              ===========    ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
  Accounts payable and accrued expenses.....................  $ 1,348,564    $ 1,110,531
  Accrued compensation and benefits.........................      595,913        419,403
  Line of credit............................................           --        455,973
  Current portion of long-term debt.........................      428,361         48,868
  Current portion of capital lease obligations..............      237,204        198,857
  Deferred revenues.........................................      509,451        333,033
  Deferred rent.............................................      128,967         80,225
                                                              -----------    -----------
          Total current liabilities.........................    3,248,460      2,646,890
Long-term debt, less current portion........................           --      2,610,000
Capital lease obligations, less current portion.............      211,404         20,590
Commitments.................................................           --             --
Series A redeemable convertible Preferred Stock; $0.001 par
  value; 1,900,000 shares authorized; 1,724,953 shares
  issued and outstanding; liquidation preference of
  $1,144,927 at June 30, 1997...............................    1,080,120      1,144,927
Stockholders' deficit:
  Common Stock, $0.001 par value; 20,000,000 shares
     authorized; 10,819,801 and 11,469,801 shares issued and
     outstanding at June 30, 1996 and 1997, respectively....       10,820         11,470
  Additional paid-in capital................................      203,043      1,372,301
  Receivable from sale of Common Stock......................           --         (5,000)
  Unearned compensatory stock options.......................      (68,898)      (226,967)
  Accumulated deficit.......................................   (1,376,429)    (4,326,236)
                                                              -----------    -----------
          Total stockholders' deficit.......................   (1,231,464)    (3,174,432)
                                                              -----------    -----------
          Total liabilities and stockholders' deficit.......  $ 3,308,520    $ 3,247,975
                                                              ===========    ===========
</TABLE>

                            See accompanying notes.
                                      F-26
<PAGE>   58

                                   HTR, INC.

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                YEARS ENDED JUNE 30,
                                                              -------------------------
                                                                 1996          1997
                                                              -----------   -----------
<S>                                                           <C>           <C>
Revenues:
  Instructor-led training revenues..........................  $11,794,441   $10,299,442
  Onsite training revenues..................................    1,848,826     1,763,228
                                                              -----------   -----------
Net revenues................................................   13,643,267    12,062,670

Cost of revenues:
  Cost of training revenues.................................    7,856,088     8,690,120
  Cost of consulting revenues...............................      783,953       621,818
                                                              -----------   -----------
Total cost of revenues......................................    8,640,041     9,311,938

Costs and expenses:
  General and administrative................................    1,784,674     2,644,350
  Sales and marketing.......................................    1,945,765     1,856,490
  Product development.......................................      141,517       498,209
  Depreciation and amortization.............................      147,492       146,578
                                                              -----------   -----------
Total costs and expenses....................................    4,019,448     5,145,627
Income (loss) from operations...............................      983,778    (2,394,895)
Other income (expense):
  Interest income...........................................        1,602        61,999
  Interest expense..........................................     (129,228)     (552,104)
                                                              -----------   -----------
Net income (loss)...........................................  $   856,152   $(2,885,000)
                                                              ===========   ===========
</TABLE>

                            See accompanying notes.
                                      F-27
<PAGE>   59

                                   HTR, INC.

                      STATEMENTS OF STOCKHOLDERS' DEFICIT

<TABLE>
<CAPTION>
                                                                        RECEIVABLE       UNEARNED
                                       COMMON STOCK       ADDITIONAL   FROM SALE OF    COMPENSATORY                     TOTAL
                                   --------------------    PAID-IN        COMMON          STOCK       ACCUMULATED   STOCKHOLDERS'
                                     SHARES     AMOUNTS    CAPITAL         STOCK         OPTIONS        DEFICIT        DEFICIT
                                   ----------   -------   ----------   -------------   ------------   -----------   -------------
<S>                                <C>          <C>       <C>          <C>             <C>            <C>           <C>
Balance at June 30, 1995.........  10,784,051   $10,784   $  120,110     $(15,000)      $ (41,423)    $(2,232,581)   $(2,158,110)
  Issuance of common stock
    pursuant to exercise of stock
    options......................      35,750       36         3,539           --              --              --          3,575
  Issuance of compensatory stock
    options......................          --       --        79,394           --         (79,394)             --             --
  Amortization of unearned
    compensatory stock options...          --       --            --           --          51,919              --         51,919
  Payment of receivable from sale
    of common stock..............          --       --            --       15,000              --              --         15,000
  Net income.....................          --       --            --           --              --         856,152        856,152
                                   ----------   -------   ----------     --------       ---------     -----------    -----------
Balance at June 30, 1996.........  10,819,801   10,820       203,043           --         (68,898)     (1,376,429)    (1,231,464)
  Issuance of common stock
    pursuant to exercise of stock
    options......................     650,000      650        44,350           --              --              --         45,000
  Loan to stockholder to purchase
    common stock.................          --       --            --       (5,000)             --              --         (5,000)
  Issuance of compensatory stock
    options......................          --       --       674,908           --        (674,908)             --             --
  Amortization of unearned
    compensatory stock options...          --       --            --           --         516,839              --        516,839
  Issuance of common stock
    warrants in conjunction with
    note payable.................          --       --       450,000           --              --              --        450,000
  Declaration of dividends to
    holders Series A Preferred
    Stock........................          --       --            --           --              --         (64,807)       (64,807)
  Net loss.......................          --       --            --           --              --      (2,885,000)    (2,885,000)
                                   ----------   -------   ----------     --------       ---------     -----------    -----------
Balance at June 30, 1997.........  11,469,801   11,470     1,372,301       (5,000)       (226,967)     (4,326,236)    (3,174,432)
                                   ==========   =======   ==========     ========       =========     ===========    ===========
</TABLE>

                            See accompanying notes.
                                      F-28
<PAGE>   60

                                   HTR, INC.

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                               YEARS ENDED JUNE 30,
                                                              -----------------------
                                                                1996         1997
                                                              ---------   -----------
<S>                                                           <C>         <C>
OPERATING ACTIVITIES:
Net income (loss)...........................................  $ 856,152   $(2,885,000)
Adjustments to reconcile net income (loss) to net cash
  provided by (used in) operating activities:
  Depreciation and amortization.............................    315,153       355,772
  Issuance of compensatory stock options in lieu of payment
     for services...........................................         --        25,000
  Amortization of unearned compensatory stock options.......     51,919       516,839
  Interest expense associated with warrants issued in
     connection with note payable agreement.................         --        60,000
  Amortization of debt issuance costs.......................         --        38,873
  (Gain) loss on sale of property and equipment.............     (6,028)          988
  Changes in operating assets and liabilities:
     Accounts receivable....................................   (846,399)    1,023,030
     Inventories............................................     61,104        37,858
     Prepaid expenses and other current assets..............      4,236      (109,497)
     Other assets...........................................    (30,230)       32,880
     Accounts payable and accrued expenses..................    (99,218)     (238,033)
     Accrued compensation and benefits......................    213,671      (176,510)
     Deferred revenues......................................    309,678      (176,418)
     Deferred rent..........................................      7,215       (48,742)
                                                              ---------   -----------
Net cash provided by (used in) operating activities.........    837,253    (1,542,960)
                                                              ---------   -----------
INVESTING ACTIVITIES:
  Purchases of property and equipment.......................   (181,842)     (326,625)
  Proceeds from sale of property and equipment..............     15,000            --
                                                              ---------   -----------
Net cash used in investing activities.......................   (166,842)     (326,625)
                                                              ---------   -----------
FINANCING ACTIVITIES:
  Proceeds from notes payable...............................         --     2,550,000
  Proceeds allocated to warrants issued in connection with
     notes payable..........................................         --       450,000
  Principal payments of notes payable.......................    (58,560)           --
  Proceeds from notes payable -- related party..............    140,000         1,390
  Principal payments of notes payable -- related party......    (19,455)      (98,525)
  Debt issuance costs.......................................         --      (291,545)
  Principal payments on capital lease obligations...........   (259,919)     (229,161)
  Borrowings on line of credit..............................         --       770,331
  Repayments of line of credit..............................   (321,392)     (596,716)
  Payment of receivable from sale of Common Stock...........     15,000            --
  Proceeds from issuance of common stock pursuant to
     exercise of stock options..............................      3,575        15,000
                                                              ---------   -----------
Net cash (used in) provided by financing activities.........   (500,751)    2,570,774
                                                              ---------   -----------
Net increase (decrease) in cash and cash equivalents........    169,660       701,189
Cash and cash equivalents at beginning of the year..........         --       169,660
                                                              ---------   -----------
Cash and cash equivalents at end of the year................  $ 169,660   $   870,849
                                                              =========   ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Interest paid.............................................  $ 129,228   $   552,104
                                                              =========   ===========
  Income taxes paid.........................................  $      --   $    15,985
                                                              =========   ===========
</TABLE>

                            See accompanying notes.
                                      F-29
<PAGE>   61

                                   HTR, INC.

                         NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND NATURE OF OPERATIONS

     HTR, INC. (the "Company") was incorporated under the laws of the State of
Maryland in May 1987. In July 1994, the Company was reincorporated in the State
of Delaware. The Company is principally engaged in the business of providing
technical training, publishing, and consulting services to the client/server
segment of the computer industry in locations throughout the United States.

2. MANAGEMENT PLANS

     The Company, including UOL, recognize that they must generate additional
capital in order to continue operations and meet business development
initiatives. Should the Company and UOL (the "Combined Companies") be unable to
generate sufficient cash from operations or complete a private or public
offering of its equity securities, the Combined Companies' ability to fund
operations and satisfy debt payments through November 1998 will be dependent on
the Combined Companies' implementation of a plan to significantly reduce
operating expenses (such as marketing, development costs and costs of personnel
and related benefits).

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ACCOUNTING ESTIMATES

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

CASH AND CASH EQUIVALENTS

     The Company maintains cash balances which may exceed federally insured
limits. The Company does not believe that this results in any significant credit
risks.

     The Company considers all highly liquid investment instruments purchased
with a maturity of three months or less to be cash equivalents. On June 30,
1997, the Company purchased $1,101,652 of U.S. Government securities under
agreements to resell on July 1, 1997. Due to the short-term nature of the
agreements, the Company did not take possession of the securities which were
held by the Company's asset manager. The market value of the securities
approximated the carrying amount.

INVENTORIES

     Inventories consist of training documentation kits purchased from outside
vendors. The inventories are stated at the lower of cost or market, as
determined using the first-in, first-out ("FIFO") method.

PROPERTY AND EQUIPMENT

     Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over an estimated useful life of five to seven years.
Leasehold improvements are amortized over the lesser of the lease term or the
estimated useful life.

DEBT ISSUANCE COSTS

     The Company capitalized $291,545 of debt issuance costs, which were
incurred in connection with the Company's promissory note agreement (See Note
6). The debt issuance costs are being amortized to interest expense using the
effective interest method over the period the related debt is expected to be
outstanding (five years).

                                      F-30
<PAGE>   62
                                   HTR, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION

     Revenue is recognized for information technology training as the services
are rendered. Deferred revenue consists of fees paid in advance for services
which have not yet been rendered.

ADVERTISING COSTS

     The Company expenses advertising costs as incurred. Advertising costs
amounted to approximately $0 and $90,000 during the years ended June 30, 1996
and 1997, respectively.

PRODUCT DEVELOPMENT

     Through June 30, 1997, the Company expensed its product development costs
as incurred since realizability of capitalizing such costs had not been
established.

STOCK-BASED COMPENSATION

     In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS No. 123"). SFAS No. 123 allows companies to account for
stock-based compensation under either the new provisions of SFAS No. 123 or the
provisions of Accounting Principles Board No. 25, Accounting for Stock Issued to
Employees, ("APB 25"), but requires pro forma disclosures in the footnotes to
the financial statements as if the measurement provisions of SFAS No. 123 had
been adopted. The Company accounts for its stock-based compensation in
accordance with the provisions of APB No. 25.

INCOME TAXES

     The Company provides for income taxes in accordance with the liability
method.

RECENT AUTHORITATIVE PRONOUNCEMENTS

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 is effective for fiscal years
beginning after December 31, 1997. SFAS No. 130 establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general purpose financial statements. Comprehensive income is the total of
net income and all other nonowner changes in equity.

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 is effective for fiscal years beginning after December 15, 1997. SFAS No.
131 requires an enterprise to report certain additional financial and
descriptive information about its reportable operating segments.

     Management does not expect that the implementation of either SFAS No. 130
or No. 131 will have a material impact on the Company's financial position or
results of future operations.

                                      F-31
<PAGE>   63
                                   HTR, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. PROPERTY AND EQUIPMENT

     Property and equipment consisted of the following:

<TABLE>
<CAPTION>
                                                     JUNE 30,
                                             -------------------------
                                                1996          1997
                                             ----------    -----------
<S>                                          <C>           <C>
Equipment under capital leases.............  $1,181,810    $ 1,181,810
Equipment..................................     347,497        640,039
Leasehold improvements.....................     113,144        113,144
Furniture and fixtures.....................     202,313        211,085
                                             ----------    -----------
                                              1,844,764      2,146,078
Less accumulated depreciation and
  amortization.............................    (939,515)    (1,270,964)
                                             ----------    -----------
                                             $  905,249    $   875,114
                                             ==========    ===========
</TABLE>

5.  LINE OF CREDIT AND RECEIVABLES FINANCING LINE

     During fiscal 1996, the Company had a $1,000,000 line of credit with a bank
which matured on March 15, 1996. In March 1996, the line of credit expired and
the outstanding balance was converted to a term loan due on October 31, 1996,
with interest payable monthly at an annual rate of 10.25% (prime rate plus
2.5%). The term loan was guaranteed by the principal stockholders of the Company
and was secured by the Company's accounts receivable and inventory. At June 30,
1996, the outstanding balance was $282,358. During 1997, the outstanding balance
was repaid.

     On September 11, 1996, the Company entered into a Receivables Financing
Line with a third party. Under the Receivables Financing Line, the Company may
borrow funds not to exceed an aggregate borrowing level of the Company's
eligible accounts receivable less 25% of the Company's deferred revenue times
50%. Any borrowings under the agreement are due and payable on demand. Interest
is payable monthly at an annual rate of 20%. This debt is guaranteed by the
principal stockholders and is secured by the Company's accounts receivable and
inventory. As of June 30, 1997, outstanding borrowings totaled $455,973.

                                      F-32
<PAGE>   64
                                   HTR, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6.  LONG-TERM DEBT

     Long-term debt consisted of the following:

<TABLE>
<CAPTION>
                                                              JUNE 30,
                                                        ---------------------
                                                          1996        1997
                                                        --------   ----------
<S>                                                     <C>        <C>
Note payable to the Company's principal stockholders,
  bearing interest at an annual rate of 18% and 13.5%,
  respectively, and payable on demand.................  $106,003       33,868
Term note payable to a bank, due on October 31, 1996,
  with interest payable monthly at an annual rate
  payable of 10.25% (prime rate plus 2.5%). The note
  payable was guaranteed by the principal stockholders
  and was secured by the Company's accounts receivable
  and inventory. The note payable balance was repaid
  during 1997.........................................   282,358           --
Unsecured promissory note payable to a related party,
  bearing interest at an annual rate of 20% and
  payable on demand...................................    40,000       15,000
Secured promissory note to third party, due on October
  28, 2001, with interest payable monthly at an annual
  rate of 13.5%. The note payable is secured by all
  the assets of the Company and the pledge of stock by
  the principals. The third party was issued warrants
  to purchase the Company's Common Stock in
  conjunction with the promissory notes agreement.
  (See Note 9.).......................................        --    2,610,000
                                                        --------   ----------
                                                         428,361    2,658,868
Current portion of long-term debt.....................   428,361       48,868
                                                        --------   ----------
Long-term debt, less current portion..................  $     --   $2,610,000
                                                        ========   ==========
</TABLE>

     Annual maturities of long-term debt at June 30, 1997 were as follows:

<TABLE>
<S>                                                <C>
1998.............................................  $   48,868
1999.............................................          --
2000.............................................          --
2001.............................................          --
2002.............................................   2,610,000
                                                   ----------
                                                   $2,658,868
                                                   ==========
</TABLE>

7.  LEASE COMMITMENTS

OPERATING LEASES

     The Company leases various office space under noncancelable operating lease
agreements. One of the leases provides for a rent abatement during its initial
term. The minimum lease obligation is being expensed over the term of the lease
obligation on a straight-line basis, with expense in access of cash outlays
recorded as deferred rent. Certain of the Company's leases include scheduled
base rent increases over the term of the leases. The total minimum lease
obligation is being expensed on a straight-line basis over the term of the lease
with the expense in excess of cash outlays recorded as deferred rent. At June
30, 1996 and 1997, the deferred rent balance was $128,967 and $80,225,
respectively.

                                      F-33
<PAGE>   65
                                   HTR, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7.  LEASE COMMITMENTS -- (CONTINUED)
     Rent expense under these leases for the years ended June 30, 1996 and 1997,
amounted to approximately $823,000 and $934,000, respectively.

     As of June 30, 1997, payments due under noncancelable operating leases were
as follows:

<TABLE>
<S>                                                <C>
1998.............................................  $  687,253
1999.............................................     313,198
2000.............................................     200,432
2001.............................................     136,267
                                                   ----------
                                                   $1,337,150
                                                   ==========
</TABLE>

     Remaining lease payments for facilities vacated as a result of relocation
and consolidation were accrued in 1997. The amount, included in accrued
expenses, at June 30, 1997 is approximately $204,000.

CAPITAL LEASES

     The Company leases furniture and equipment under noncancelable agreements
that are accounted for as capital leases. The leases are payable in monthly
installments ranging from approximately $250 to $4,800. At June 30, 1996 and
1997, there was $1,181,810 of equipment held under capital leases. Accumulated
amortization of the equipment amounted to approximately $623,000 and $851,000 at
June 30, 1996 and 1997, respectively. Amortization expense related to capital
leases is classified as depreciation and amortization in the statements of
operations.

     Future minimum lease payments under capital leases are as follows as of
June 30, 1997:

<TABLE>
<S>                                                           <C>
1998........................................................  $214,058
1999........................................................    21,016
                                                              --------
                                                               235,074
Less amounts representing interest..........................    15,627
                                                              --------
                                                               219,447
Less current portion of capital lease obligations...........   198,857
                                                              --------
Capital lease obligations, less current portion.............  $ 20,590
                                                              ========
</TABLE>

                                      F-34
<PAGE>   66
                                   HTR, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. INCOME TAXES

     Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred tax assets were as follows:

<TABLE>
<CAPTION>
                                                             JUNE 30,
                                                     ------------------------
                                                       1996          1997
                                                     ---------    -----------
<S>                                                  <C>          <C>
Deferred tax assets:
  Net operating loss carryforwards.................  $ 335,000    $ 1,107,000
  Reserve for inventory obsolescence...............     18,000         42,000
  Allowance for doubtful accounts..................     59,000         59,000
  Deferred rent....................................     20,000         86,000
  Amortization of unearned compensatory stock
     options.......................................     20,000        222,000
  Accrued expenses.................................     53,000         91,000
                                                     ---------    -----------
Total deferred tax assets..........................    505,000      1,607,000
Deferred tax liabilities:
  Tax depreciation in excess of book
     depreciation..................................    (58,000)       (43,000)
  Other............................................     (1,000)        (9,000)
                                                     ---------    -----------
Total deferred tax liabilities.....................    (59,000)       (52,000)
                                                     ---------    -----------
Valuation allowance................................   (446,000)    (1,555,000)
                                                     ---------    -----------
Net deferred tax assets............................  $      --    $        --
                                                     =========    ===========
</TABLE>

     As of June 30, 1996 and 1997, the Company had approximately $860,000 and
$2,800,000, respectively, in tax net operating loss carryforwards which expire
at varying dates through 2011. These carryforwards may be significantly limited
under Section 382 of the Internal Revenue Service Code and the SRLY rules.

9. STOCKHOLDERS' DEFICIT

COMMON STOCK

     On March 29, 1994, the Company sold 500,000 shares of Common Stock later
converted to 588,037 shares of Common Stock to an officer of the Company for
approximately $15,000. At June 30, 1995, the cash payment had not been paid and
the related receivable is reflected as a receivable from sale of Common Stock in
the accompanying statements of stockholders' deficit. The purchase amount was
paid in full during 1996. The Company considered whether an expense should be
recorded for the difference between the purchase price and the fair market value
of the Common Stock on the date of purchase and the Company concluded that the
difference was immaterial to the financial statements.

STOCK OPTIONS

During 1994, the Company's Board of Directors adopted the 1994 Stock Plan (the
"Option Plan") under which 1,111,111 shares of Common Stock were reserved for
issuance upon exercise of granted options. The Option Plan provides for grants
of incentive stock options to key employees and non-qualified options to key
employees, directors and outside consultants. Options are granted at the fair
market value of the Company's Common Stock on the date of grant. The term of the
stock options granted under the Option Plan may not

                                      F-35
<PAGE>   67
                                   HTR, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9. STOCKHOLDERS' DEFICIT (CONTINUED)
STOCK OPTIONS (CONTINUED)
exceed ten years. The vesting period of the options is determined by the Board
of Directors and is generally five years. Additional information with respect to
stock option activity is summarized as follows:

<TABLE>
<CAPTION>
                                                          YEARS ENDED JUNE 30,
                                              --------------------------------------------
                                                      1996                   1997
                                              --------------------   ---------------------
                                                         WEIGHTED-               WEIGHTED-
                                                          AVERAGE                 AVERAGE
                                                         EXERCISE                EXERCISE
                                               SHARES      PRICE      SHARES       PRICE
                                              --------   ---------   ---------   ---------
<S>                                           <C>        <C>         <C>         <C>
Outstanding at the beginning of the year....   635,500     $0.10       527,600     $0.10
  Granted...................................   350,850      0.10     1,044,000      0.08
  Exercised.................................   (35,750)     0.10      (650,000)     0.07
  Canceled or expired.......................  (423,000)     0.10      (471,950)     0.10
                                              --------     -----     ---------     -----
Outstanding at the end of the year..........   527,600     $0.10       449,650     $0.10
                                              ========     =====     =========     =====
Options exercisable at year end.............    69,978     $0.09        70,718     $0.10
                                              ========     =====     =========     =====
</TABLE>

     The following table summarizes information about fixed-price stock options
outstanding at June 30, 1997:

<TABLE>
<CAPTION>
                                           OPTIONS OUTSTANDING                 OPTIONS EXERCISABLE
                                 ----------------------------------------   --------------------------
                                     NUMBER         AVERAGE     WEIGHTED-       NUMBER       WEIGHTED-
                                 OUTSTANDING AT    REMAINING     AVERAGE    EXERCISABLE AT    AVERAGE
           RANGE OF                 JUNE 30,      CONTRACTUAL   EXERCISE       JUNE 30,      EXERCISE
        EXERCISE PRICES               1997           LIFE         PRICE          1997          PRICE
        ---------------          --------------   -----------   ---------   --------------   ---------
<S>                              <C>              <C>           <C>         <C>              <C>
     $0.10.....................     449,650           9.2         $0.10         70,718         $0.10
</TABLE>

     As of June 30, 1997, there were no options available for future grants.

     The Company applies APB No. 25 in accounting for the stock option plan,
and, accordingly, recognizes compensation expense for the difference between the
deemed fair value of the underlying Common Stock and the grant price of the
option at the date of grant. During 1996 and 1997, the Company recognized
unearned compensatory stock options of $79,394 and $674,908, respectively, for
the difference between the option exercise price and the deemed fair value on
the date of grant of stock options. The Company is amortizing such amounts
ratably over the vesting period of the options, which is generally five years.
During the years ended June 30, 1996 and 1997, the Company recognized $51,919
and $451,305, respectively, of compensation expense related to Common Stock
options.

     During the year ended June 30, 1997, the Company granted 250,000 options to
purchase the Company's common stock to an outside consultant. The fair value of
these options was estimated on the grant date using the minimum value
option-pricing fair value model with the following weighted-average assumptions:
dividend yield of 0%; risk-free interest rate of 6.5%; and expected life of the
option term of 3 years. Based on this model, the fair value of the options was
estimated to be $.65 per share or $162,500. The Company will expense $162,500
ratably over the vesting period of the options, which is two years. During the
year ended June 30, 1997, the Company recognized $65,534 of compensation expense
related to these Common Stock options.

     During 1997, the Company adopted the disclosure-only provisions of SFAS No.
123. Accordingly, no compensation expense has been recognized for the fair value
of options granted during 1996 and 1997, other than as disclosed above. Had
compensation expense related to the Company's stock option plan been determined
based on the fair value at the grant date for options granted in 1996 and 1997
consistent with the provisions of SFAS No. 123, the Company's net income (loss)
would have been approximately $837,449 and
                                      F-36
<PAGE>   68
                                   HTR, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9. STOCKHOLDERS' DEFICIT (CONTINUED)
STOCK OPTIONS (CONTINUED)
$(2,891,372). The effect of applying SFAS No. 123 on 1996 and 1997 pro forma net
loss as stated above is not necessarily representative of the effects on
reported net loss for future years due to, among other things, the vesting
period of the stock options and the fair value of additional stock options in
future years.

     The fair value of each option grant is estimated on the date of grant using
the minimum value option-pricing fair value model with the following
weighted-average assumptions used for grants in 1996: dividend yield of 0%;
risk-free interest rate of 6.5%; and expected life of the option term of 3
years. The fair value of each option grant is estimated on the date of grant
using the minimum value option-pricing fair value model with the following
weighted-average assumptions used for grants in 1997: dividend yield of 0%;
risk-free interest rate of 6.5%; and expected life of the option term of 3
years. The weighted average fair value of the options granted in 1996 with a
stock price greater than the exercise price is $.62. The weighted average fair
value of the options granted in 1997 with a stock price greater than the
exercise price is $.74.

WARRANTS

     In connection with the promissory note payable (See Note 6), the Company
issued warrants to purchase 849,341 shares of Common Stock at a price of $.01
per share to the third party. The warrants expire on October 28, 2001. The
Company allocated $450,000 of the note payable proceeds to the warrants issued.
The $450,000 allocated to the warrants is being amortized to interest expense
using the effective interest method over the period (five years) the related
debt is expected to be outstanding. The effect of this allocation results in an
effective interest rate of 18%. During the year ended June 30, 1997, the Company
recognized additional interest expense of $60,000 related to this allocation.
Beginning in year four and provided the note payable balance has not been
repaid, the third party will be issued additional warrants at a rate of 1% per
year. The third party was granted an option to put the shares issuable pursuant
to the warrants back to the Company on October 28, 2001 at a repurchase price
equal to the then fair market value.

     In connection with this transaction, the Company issued 220,000 warrants to
purchase shares of Common Stock at a price of $.79 per share to a placement
agent. On the date of this transaction, the fair value of the warrants was
considered immaterial. The warrants expire on October 28, 2001. In addition, the
Company incurred, in connection with the note payable transaction, debt issuance
costs of $291,545, which will be amortized to expense over the term of the note
payable (five years).

10. PREFERRED STOCK

     In July 1994, the Company sold 1,724,953 shares of its Series A mandatory
redeemable, convertible, 9% noncumulative preferred stock (the "Preferred
Stock") to a group of investors at an aggregate cash price of $1,080,120, or
approximately $.63 share.

     Each share of Preferred Stock is convertible into one share of Common Stock
at the option of the holder. The Company has reserved 1,900,000 shares of Common
Stock for issuance upon conversion of the Preferred Stock. The conversion price
is subject to an adjustment formula that would prevent dilution in the event the
Company issues additional stock at a per share price that is less than $.63. The
Preferred Stock will automatically convert into shares of Common Stock upon the
consummation of a public stock offering if certain conditions are met. On a
liquidation or sale of the Company, including a merger or acquisition, proceeds
are to be distributed first to holders of the Preferred Stock in an amount equal
to their original investment with any remaining net proceeds to be distributed
to holders of Common and Preferred Stock on a pro rata basis. After five years,
the Preferred Stock is redeemable at its original purchase price at the option
of the holders of a majority of the Preferred Stock. The Company's Board of
Directors may, but it is not required to, declare a 9% dividend on the Preferred
Stock. Since the authority to declare dividends resides solely with
                                      F-37
<PAGE>   69
                                   HTR, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

10. PREFERRED STOCK (CONTINUED)
the Company, the carrying amount of the Preferred Stock has not been increased
to include the payout of dividends.

     The Preferred Stock contains certain protective provisions which require
that certain actions of the Company such as any changes to the capital structure
of the Company, merger or liquidation be approved by the holders of a majority
of the Preferred Stock. Each holder of Preferred Stock shall be entitled to the
number of votes equal to the convertible number of shares of Common Stock on all
matters except for the election of directors. The holders of the Preferred
Stock, voting together as a class, shall be entitled to elect one director. The
holders of Common Stock shall be entitled to elect four directors. In the event
that the number of directors is increased to a number greater than five, the
holders of the Preferred Stock shall be entitled to elect a number of directors
that represents at least 10% of the total directors.

     In conjunction with the sale of the Preferred Stock, two stockholders of
the Company, who together owned approximately 92% of the outstanding Common
Stock of the Company at June 30, 1996, agreed to subject 50% of their Common
Stock holdings to repurchase by the Company if they voluntarily terminated
employment within a three-year period. The repurchase price is equal to $10,000,
the price paid by the stockholders. This repurchase option expired in October
1997, in connection with the sale of 100% of the Company's outstanding stock
(See Note 12).

     During October 1996 and in conjunction with the promissory note payable
(See Notes 6 and 9), the Board of Directors declared a 9% dividend to be paid to
the holders of the Company's Series A Preferred Stock. The dividend began
accruing on the closing date of the promissory note payable and shall be paid on
December 31 of each calendar year, beginning on December 31, 1997.

11. RETIREMENT PLAN

     The Company maintains a tax deferred savings and retirement plan (the
"Plan") to provide retirement benefits for all eligible employees. The Plan,
which covers all employees who have completed three months of service,
stipulates that employees may elect an amount between 1% and 15% of their total
compensation to contribute to the Plan. Employee contributions are subject to
Internal Revenue Service limitations. All employees who have completed 1,000
hours of service during the plan year and are employed by the Company on the
last day of the plan year are eligible to share in discretionary Company
contributions. Employees vest in employer contributions over four years. During
the years ended June 30, 1996 and 1997, the contributions by the Company were
$23,787 and $5,211, respectively.

12. SUBSEQUENT EVENTS

     On September 29, 1997, the Board of Directors approved an amendment to
increase the number of shares available for issuance from 1,111,111 to 1,350,000
options.

     On October 31, 1997, the Company entered into an Agreement and Plan of
Merger with UOL Publishing, Inc. (UOL). In the transaction, UOL will issue
common stock, warrants and options totaling 620,000 shares in exchange for all
of the outstanding equity securities of HTR, Inc. In addition, UOL will pay the
stockholders of the Company $600,000 in a combination of cash and short-term
notes, and assume approximately $3,610,000 of the Company's debt.

                                      F-38
<PAGE>   70

                                   SIGNATURES

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

                                          UOL PUBLISHING, INC.

                                          By:   /s/ NARASIMHAN P. KANNAN
                                            ------------------------------------
                                                    Narasimhan P. Kannan
                                                  Chief Executive Officer

Date: March 30, 1998

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

<TABLE>
<CAPTION>
                     SIGNATURE                                  CAPACITY                  DATE
                     ---------                                  --------                  ----
<C>                                                   <S>                            <C>

             /s/ NARASIMHAN P. KANNAN                 Director and Chief Executive   March 30, 1998
---------------------------------------------------     Officer (Principal
               Narasimhan P. Kannan                     Executive Officer)

               /s/ JOANNE O. HINDMAN                  Chief Financial Officer        March 30, 1998
---------------------------------------------------     (Principal Financial and
                 Joanne O. Hindman                      Accounting Officer)

                 /s/ CARL N. TYSON                    Director                       March 30, 1998
---------------------------------------------------
                   Carl N. Tyson

               /s/ EDSON D. DECASTRO                  Director                       March 30, 1998
---------------------------------------------------
                 Edson D. DeCastro

              /s/ BARRY K. FINGERHUT                  Director                       March 30, 1998
---------------------------------------------------
                Barry K. Fingerhut

                /s/ KAMYAR KAVIANI                    Director                       March 30, 1998
---------------------------------------------------
                  Kamyar Kaviani

              /s/ WILLIAM E. KIMBERLY                 Director                       March 30, 1998
---------------------------------------------------
                William E. Kimberly

                                                      Director
---------------------------------------------------
               Steven M. H. Wallman
</TABLE>
<PAGE>   71

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Board of Directors
UOL Publishing, Inc.

We have audited the consolidated balance sheets of UOL Publishing, Inc. as of
December 31, 1996 and 1997 and for each of the three years in the period ended
December 31, 1997 and have issued our report thereon dated February 27, 1998,
except for Notes 9 and 17, as to which the dates are March 27 and 30, 1998
(included elsewhere in this Form 10-K). Our audits also included the financial
statement schedule listed in Item 14(d) of this Form 10-K. The schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.

Vienna, Virginia                                           /s/ Ernst & Young LLP
February 27, 1998, except for Notes 9 and
17, as to which the dates are
March 27 and 30, 1998
<PAGE>   72

           SCHEDULE I -- VALUATION AND QUALIFYING ACCOUNT AND RESERVE
                                 (IN THOUSANDS)

UOL PUBLISHING, INC.

<TABLE>
<CAPTION>
                                                    BALANCE AT
                                                   BEGINNING OF                             BALANCE AT
                 CLASSIFICATION                       PERIOD      ADDITIONS   DEDUCTIONS   END OF PERIOD
                 --------------                    ------------   ---------   ----------   -------------
<S>                                                <C>            <C>         <C>          <C>

Allowance for doubtful accounts:
Year ended December 31, 1995.....................      $--          $ 20         $--           $ 20
Year ended December 31, 1996.....................       20            16          --             36
Year ended December 31, 1997.....................       36           703*         --            739
</TABLE>

---------------
* Includes additions of $253,500 from purchase price adjustments resulting from
  the acquisitions of Ivy Software, Inc., Cooper & Associates, Inc. (d/b/a.
  Teletutor), and HTR, Inc.