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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC 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, 1998
 
                                      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: 0-25674
 
                       CBT GROUP PUBLIC LIMITED COMPANY
            (Exact name of registrant as specified in its charter)
 

      Republic of Ireland                                  None
(State or other jurisdiction of                      (I.R.S. Employer
incorporation or organization)                     Identification Number)
 
                             900 CHESAPEAKE DRIVE
                        REDWOOD CITY, CALIFORNIA 94063
                   (Address of principal executive offices)
 
      Registrant's telephone number, including area code: (650) 817-5900
 
          Securities registered pursuant to Section 12(b) of the Act:
 
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                                                             Name of each exchange
              Title of each class                             on which registered
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                      None                                            None
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  Securities registered pursuant to Section 12(g) of the Act:
 
                           Ordinary Shares IR9.375p
                              Subscription Rights
 
                               (Title of class)
 
  Indicate by check mark whether 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 of time that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No
 
  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
 
  The aggregate market value of the voting shares held by non-affiliates of
Registrant was $553,309,875 as of March 12, 1999 (excludes 221,292 shares
which may be deemed to be held by directors, officers and affiliates of
Registrant as of March 12, 1999).
 
  The number of Registrant's equivalent American Depositary Shares outstanding
as of March 12, 1999 was 44,486,082.
 
  Portions of Registrant's definitive proxy statement to be delivered to
shareholders in connection with Registrant's annual general meeting of
shareholders to be held on or about May 13, 1999 in Dublin, Ireland, are
incorporated by reference into Part III of this Form 10-K to the extent stated
herein. Except with respect to information specifically incorporated by
reference to this Form 10-K, the proxy statement is not deemed to be filed as
a part hereof.
 
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                                 CBT GROUP PLC
 
                 ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
                   FROM JANUARY 1, 1998 TO DECEMBER 31, 1998
 
                               TABLE OF CONTENTS
 
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PART I
Item 1:   Business..............................................................................   1
             Important note about forward looking statements....................................   1
             General............................................................................   1
             Recent Developments................................................................   2
             Industry Background................................................................   5
             The CBT Group Solution.............................................................   6
             CBT Group's Strategy...............................................................   7
             Products...........................................................................   8
             Research and Development...........................................................  10
             Development and Marketing Alliances................................................  11
             Customers..........................................................................  11
             Backlog............................................................................  12
             Intellectual Property and Licenses.................................................  12
             Competition........................................................................  12
             Sales and Marketing................................................................  13
             Employees..........................................................................  13
             Non U.S. Operations................................................................  14
Item 2.   Properties............................................................................  15
Item 3.   Legal Proceedings.....................................................................  15
Item 4.   Submission of Matters to a Vote of Security Holders...................................  15
 
PART II
Item 5.   Market for Registrants' Share Capital and Related Shareholder Matters.................  16
Item 6.   Selected Consolidated Financial Data..................................................  18
Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operation..  19
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk............................  34
Item 8.   Financial Statements and Supplementary Data...........................................  35
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..  61
 
PART III
Item 10.  Directors and Executive Officers of Registrant........................................  61
Item 11.  Executive Compensation................................................................  61
Item 12.  Security Ownership of Certain Beneficial Owners and Management........................  61
Item 13.  Certain Relationships and Related Transactions........................................  61
 
PART IV
Item 14.  Exhibits, Financial Statements Schedules and Reports on Form 8-K......................  61
          Signatures............................................................................  65
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                                    PART I
 
ITEM 1. BUSINESS
 
                IMPORTANT NOTE ABOUT FORWARD LOOKING STATEMENTS
 
  The following discussion contains forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Predictions of future
events are inherently uncertain. Actual events could differ materially from
those predicted in the forward looking statements as a result of the risks set
forth in the following discussion, and in particular, the risks discussed
below and in Part II, Item 7--Management's Discussion and Analysis of
Financial Condition and Results of Operations under the subheading "Additional
Risk Factors that Could Affect Operating Results."
 
General
 
  CBT Group PLC ("CBT Group," "CBT" or the "Company") is a leading provider of
interactive education software designed to meet the information technology
("IT") education and training needs of businesses and organizations worldwide.
The Company develops, publishes and markets a comprehensive library of 837
software titles at the end of 1998 covering a range of client/server,
mainframe, Internet and intranet technologies. CBT Group's products are used
by almost 2,000 of the world's leading corporations to train employees to
develop and apply mission-critical technologies in the workplace. CBT Group
works with leading software companies, including Cisco Systems, Inc.
("Cisco"), Informix Corporation ("Informix"), Lotus Development Corporation
("Lotus"), Marimba, Inc. ("Marimba"), Microsoft Corporation ("Microsoft"),
Netscape Communications Corporation ("Netscape"), Novell, Inc. ("Novell"),
Oracle Corporation ("Oracle"), SAP America, Inc. ("SAP"), Rational Software
("Rational"), Intel Corporation ("Intel"), Centra Software ("Centra"), Sybase,
Inc. ("Sybase") and the IBM-Netscape-Sun Microsystems, Inc. collaborative Java
education effort to develop and market vendor-specific training. CBT Group has
also formed the Internet Security Training Consortium with Check Point
Software Technologies, Inc. ("Check Point"), Cisco, IBM, Intel, the Javasoft
business unit of Sun Microsystems, Inc., Lotus, Netscape, Network Associates,
Inc. (formerly McAfee Associates, Inc.) ("Network Associates"), RSA Data
Security, Inc. ("RSA Data Security"), Security Dynamics Technologies, Inc.
("Security Dynamics"), the Hewlett Packard Company ("HP") and VeriSign, Inc.
("VeriSign") to address the Internet security training needs of enterprises
worldwide.
 
  CBT Group, a public limited company incorporated under the laws of the
Republic of Ireland, was initially formed to act as a holding company for
investment purposes and acquired a controlling interest in a number of
companies in a variety of business areas. In November 1990, the Company
acquired its U.S. subsidiary, CBT Systems USA, Ltd. (effective as of April 3,
1995, CBT Systems USA, Ltd. was merged with and into its parent, Thornton
Holdings, Ltd., which subsequently changed its name to CBT Systems USA, Ltd.)
("CBT USA").
 
  In September 1991, the Company acquired its Irish and U.K. subsidiaries,
including CBT Systems Limited ("CBT Ireland") and CBT Systems UK Limited ("CBT
UK") and sold or dissolved its other unrelated investment businesses. In
January 1994, the Company acquired CBT Systems Africa (Proprietary) Ltd. ("CBT
South Africa") for the purpose of establishing a direct sales presence in
Southern Africa. In August 1995, the Company incorporated CBT Finance Limited
("CBT Finance") under the laws of the Cayman Islands for the purpose of
investing certain of the Company's funds.
 
  In November 1995, the Company completed a merger with Personal Training
Systems ("PTS"), a provider of end-user and consumer interactive educational
software, for an aggregate of 424,228 of its Ordinary Shares. On May 31, 1996,
the Company acquired CLS Consult, Gesellschaft fur Beratung, Management und
Beteiligung mbH, a German limited liability company ("CLS"), and New
Technology Training Ltd., an Ontario, Canada corporation ("NTT"). CLS was a
developer and marketer of interactive education software for SAP client/server
applications, and NTT's primary business had been to act as CBT Group's
exclusive distributor in Canada. The Company issued a total of 291,728
Ordinary Shares to the former shareholders of CLS and NTT in connection with
the acquisitions. On February 28, 1997, the Company completed the acquisitions
of Applied Learning
 
                                       1
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Limited, a company organized under the laws of Tasmania, Australia ("ALA") and
CBT Systems Benelux B.V., a Netherlands limited liability company ("Benelux").
ALA was an Australian distributor of interactive education software and had
been CBT Group's exclusive distributor in Australia and New Zealand; and
Benelux had been the Company's exclusive distributor in the Netherlands,
Belgium, and Luxembourg. The Company issued the equivalent of 414,444 Ordinary
Shares to the former shareholders of ALA and Benelux in connection with the
acquisitions. On August 31, 1997, CBT Group completed the acquisition of Ben
Watson Associates Ltd., a New Brunswick, Canada corporation carrying on
business under the registered business name Scholars.com ("Scholars").
Scholars is a provider of online IT certification training. The Company issued
a total of 37,632 Ordinary Shares to the sole shareholder of Scholars in
connection with the acquisition. On December 1, 1997, the Company completed
the acquisition of CBT Systems Middle East Limited, a company organized under
the laws of the Commonwealth of the Bahamas ("MidEast"). MidEast had been the
Company's exclusive distributor in the Middle East and a non-exclusive
distributor in India. The Company issued a total of 258,000 Ordinary Shares to
the former shareholders of MidEast in connection with the acquisition. On May
29, 1998, the Company acquired The Forefront Group, Inc., a Delaware
corporation ("Forefront"), a Houston-based provider of high-quality, cost-
effective, computer-based training products and network utilities for
technical professionals. The Company issued 2,182,851 Ordinary Shares at the
date of acquisition to the former shareholders of Forefront pursuant to the
acquisition and assumed options, warrants, and other rights to acquire
Forefront common stock that could be exercised for approximately 1 million
Ordinary Shares.
 
  The acquisition of each of PTS, CLS, NTT, Benelux, ALA, Scholars, MidEast
and Forefront was accounted for as a "pooling of interests" in accordance with
U.S. generally accepted accounting principles. In compliance with such
principles, the Company's operating results have been restated to include the
results of PTS, CLS, NTT, Benelux, ALA, Scholars, MidEast and Forefront as if
the acquisitions had occurred at the beginning of the first period presented.
 
  Since September 1991, substantially all of the Company's revenues and
operating expenses have been attributable to developing and selling
interactive IT education and training software. Unless the context otherwise
requires, references to the "Company", "CBT" or to "CBT Group" are to CBT
Group PLC and its consolidated subsidiaries.
 
  The Company was incorporated in the Republic of Ireland on August 8, 1989.
The Company's registered office is located at Belfield Office Park,
Clonskeagh, Dublin 4, Ireland, and its telephone number at that address from
the United States is (011) 353-1-218 1000. The address of CBT USA is 900
Chesapeake Drive, Redwood City, California 94063, USA, and its telephone
number at that address is (650) 817-5900.
 
  For additional information about the Company's business, see the
consolidated financial statements and related notes thereto included herein.
 
Recent Developments
 
 Proposed acquisition of Knowledge Well Ltd. and Knowledge Well Group Ltd.
 
  On December 10, 1998 the Company announced that it had signed a definitive
agreement to acquire Knowledge Well Ltd. and Knowledge Well Group Ltd.
(collectively, "Knowledge Well"), providers of business, management and
professional education using interactive learning technologies. Knowledge
Well's software titles are delivered using advanced interactive learning
methodologies, while requiring that the student only have access to basic,
industry-standard computing platforms. Knowledge Well's strategy is to provide
a self-paced education and training solution allowing individuals to obtain
degrees and/or other credentials. This agreement has been amended and restated
on March 30, 1999 to reflect certain changes agreed upon on December 9, 1998
as a result of the decision to account for the acquisition under the purchase
method of accounting in accordance with U.S. generally accepted accounting
principles. The acquisition of Knowledge Well has been approved by an
Independent Committee of CBT Group's Board of Directors, in view of the fact
that certain members of the Board of Directors of CBT Group are shareholders
and/or former officers of
 
                                       2
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Knowledge Well, and by the shareholders of Knowledge Well. The acquisition is
subject to specified closing conditions, including approval by the
disinterested shareholders of CBT Group and the receipt of required regulatory
approvals. The acquisition has been structured as a stock-for-stock exchange,
in which a total of approximately 4.0 million CBT Group shares will be issued
in exchange for all outstanding shares of Knowledge Well. CBT Group will also
assume options to acquire Knowledge Well stock exercisable for an issuance of
up to approximately 0.8 million CBT Group shares.
 
  The successful combination of CBT Group and Knowledge Well, including the
successful operation of Knowledge Well as an autonomous subsidiary of CBT
Group, will require substantial effort from each company. The diversion of the
attention of management and any difficulties encountered in the transition
process could have an adverse impact on CBT Group's ability to realize the
full benefits of the acquisition. The successful combination of the two
companies will also require coordination of their research and development and
sales and marketing efforts. In addition, the process of combining the two
organizations could cause the interruption of, or loss of momentum in,
Knowledge Well's activities. There can be no assurance that CBT Group will be
able to retain Knowledge Well's technical, sales and marketing personnel, or
that it will realize any of the anticipated benefits of the acquisition.
 
 Management Changes
 
  On October 1, 1998, Mr. James J. Buckley, CBT's Chairman and Chief Executive
Officer and a member of the Board of Directors, and Mr. Richard Y. Okumoto,
CBT's Senior Vice President of Finance and Chief Financial Officer and also a
member of the Board of Directors, stepped down from their respective
positions. The decision was made jointly by the members of the Company's Board
of Directors, including Mr. Buckley and Mr. Okumoto. Upon resignation, the
Company entered into severance agreements and mutual releases with each of
Messrs. Buckley and Okumoto.
 
  Messrs. Buckley and Okumoto were replaced on an interim basis by a newly
formed management committee, consisting of members of the Company's Board of
Directors. The members of the management committee were Mr. William G. McCabe,
CBT's former Chairman and Chief Executive Officer, Mr. Gregory M. Priest,
CBT's former Vice President of Finance and Chief Financial Officer, and Mr.
John M. Grillos, a member of CBT's Board of Directors. Effective December 10,
1998, the Company appointed Mr. McCabe as Chairman of the Board, Mr. Priest as
President and Chief Executive Officer and Mr. Grillos as Executive Vice
President and Chief Operating Officer. Messrs. Priest and Grillos also remain
members of the Board of Directors.
 
  In December 1998, the Company also appointed Mr. William A. Beamish as
Executive Vice President, Product Strategy and Mr. Jeffrey N. Newton as
Executive Vice President, Global Channel Sales. Both of those individuals had
been executives of the Company and had left the employ of the Company earlier
in 1998. Also in December 1998, the Company promoted Mr. William B. Lewis to
Executive Vice President, Global Field Sales. Prior to the promotion, Mr.
Lewis was Vice President, North American Sales of the Company.
 
  The Company believes based in part on the levels of employee attrition that
it has experienced since the end of the third quarter of 1998, that its recent
management changes have helped to restore the confidence of its employees. The
Company had sequential revenue growth of approximately 20% in the fourth
quarter of 1998, as compared to the third quarter of 1998. The Company
believes that this improvement demonstrates an improved level of confidence in
the customer base. There can be no assurance, however, that there will not be
material problems in the Company's relations with its employees or customers
in the future.
 
  In connection with the proposed acquisition of Knowledge Well, the Company
will enter into Employment and Noncompetition Agreements with Messrs. McCabe,
Priest, Grillos, Beamish, Lewis and Newton prior to the closing of the
acquisition. In the event that the acquisition is not consummated for any
reason, some or all of the executives could choose not to execute the
agreements and to leave their full-time employment at CBT Group. This could
have a material adverse effect on CBT Group.
 
 
                                       3
<PAGE>
 
 Subscription Rights Declaration
 
  On October 4, 1998 the Company's Board of Directors adopted a Subscription
Rights Declaration, pursuant to which one Subscription Right (a "Right") was
granted for each outstanding ordinary share of the Company. Each Right
entitles the registered holder to purchase from the Company one ordinary share
at a price of $65.00 per ordinary share, subject to adjustment. The Rights are
not currently exercisable, but would be exercisable if certain events occurred
related to a person or group acquiring or attempting to acquire beneficially
15% or more of the outstanding ordinary shares. The Rights expire on October
4, 2008, unless cancelled or exchanged earlier by the Company. The Rights have
certain anti-takeover effects. The Rights will cause substantial dilution to a
person or group that attempts to acquire the Company without conditioning the
offer on cancellation of the Rights or on a substantial number of the Rights
being acquired. Accordingly, the existence of the Rights may deter acquirors
from making takeover proposals and tender offers. Takeover proposals and
tender offers typically result in an increase in the trading price of the
stock of the target company. However, the Rights are designed to provide
additional protection against abusive takeover tactics such as offers for all
shares at less than full value or at an inappropriate time (in terms of
maximizing long-term shareholder value), partial tender offers and selective
open-market purchases. The Rights are intended to enhance the power of the
Company's Board of Directors to protect shareholders and the Company if
efforts are made to gain control of the Company in a manner that is not in the
best interests of the Company and its shareholders. The Rights should not
interfere with any merger or other business combination approved by the Board
of Directors of the Company.
 
 Legal Proceedings
 
  Since the end of the third quarter of 1998, purported class action lawsuits
were filed in the United States District Court for the Northern District of
California and the Superior Court of California for the County of San Mateo
against CBT Group PLC, its American operating subsidiary, CBT Systems USA Ltd.
and certain of its former and current officers and directors alleging
violations of the federal securities laws. The complaints allege that the
defendants misrepresented and/or omitted to state material facts regarding
CBT's business and financial condition and prospects during the class periods
in order to artificially inflate and maintain the price of the Company's
American Depositary Shares ("ADSs"), and misrepresented and/or omitted to
state material facts in the registration statement and prospectus issued in
connection with the merger with The ForeFront Group, Inc., artificially
inflating the price of the Company's ADSs.
 
  The Company believes that these actions are without merit and intends to
vigorously defend itself against these claims. Although the outcome of these
actions cannot presently be determined, an adverse resolution of these matters
could have a material adverse effect on the Company's financial position and
results of operations.
 
  On October 29, 1998, a derivative complaint was filed in the Superior Court
of California for the County of San Mateo against several present and former
officers and directors of the Company alleging that these persons violated
various duties to the Company. The derivative complaint also names the Company
as a nominal defendant. The derivative complaint is predicated on the factual
allegations contained in the class action complaints discussed above. No
demand was previously made to the Company's Board of Directors or shareholders
concerning the allegations of the derivative complaint, which seeks an
unspecified amount of damages.
 
  During the period covered by this report, the previously disclosed possible
litigation involving the transfer of certain securities of Datacode
Electronics Ltd. was settled. All amounts paid in relation to the settlement
have been expensed.
 
 Acquisition of The ForeFront Group Inc.
 
  On May 29, 1998, the Company acquired The ForeFront Group, Inc., a Houston-
based provider of high-quality, cost-effective, computer-based training
products and network utilities for technical professionals. In the merger,
each share of ForeFront common stock was exchanged for 0.3137 ADSs, and the
Company assumed outstanding ForeFront stock options, warrants and other rights
to acquire ForeFront common stock. The
 
                                       4
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Company issued 2,182,851 Ordinary Shares at the date of acquisition to the
former shareholders of ForeFront and assumed options, warrants and other
rights to acquire ForeFront common stock that could be exercised for
approximately 1.0 million Ordinary Shares. The transaction has been accounted
for as a "pooling of interests" in accordance with U.S. generally accepted
accounting principles.
 
  The successful combination of CBT Group and ForeFront, including the
successful operation of ForeFront as an autonomous subsidiary of CBT Group,
has required and will continue to require substantial effort from each
company. The Company has experienced some difficulties in the integration of
ForeFront and CBT, in particular in connection with the integration of the two
companies' sales operations. These difficulties contributed to the Company's
failure to achieve its internal revenue expectations in the third quarter of
1998 and have continued to affect the Company since that time. These
difficulties could continue to have a negative effect on future results, which
could be material.
 
 Share Split
 
  On March 9, 1998 the Company effected a two-for-one split of its issued and
outstanding ADSs. Subsequent thereto, the Company's shareholders approved a
proposal at the Company's 1998 Annual General Meeting to subdivide each of the
Ordinary Shares of IR37.5p into four Ordinary Shares of IR9.375p each (the
"Ordinary Share Split"). As a consequence of the Ordinary Share Split,
effective May 22, 1998 each ADS represents and is exchangeable for one
Ordinary Share (the "Ratio Change"). Aside from the Ratio Change, the Ordinary
Share Split had no effect on the ADSs and had no effect on the number of ADSs
outstanding.
 
Industry Background
 
  Business organizations continue to be dependent upon computer systems in
order to remain competitive in their markets. This trend has resulted in
significant growth in IT education and training. According to International
Data Corporation ("IDC"), the 1997 global market for IT education and training
was approximately $16.7 billion compared to $11.0 billion in 1992. IDC has
stated that one of the most evident characteristics which define the IT
education and training market is that it is a market in transformation, where
the one primary constant appears to be growth. The transformation per IDC is
primarily due to expanding alternatives of how training can be delivered to
the customer, the widening number of service and product options coming to the
market and the evolving IT training value proposition being presented to the
customer. IDC has noted that there has been a number of identifiable trends
which have helped cause this market transformation, the most significant
being: (1) the shortage of IT skills as the worldwide demand is outstripping
the existing supply of IT professionals (2) a shift in the market towards
technology-based training due to corporations' growing time and budgetary
constraints, coupled with an expanding need to train people across a wide
number of geographic regions (3) global firms moving to use global suppliers
due to strategies which are worldwide in scope and implementation. These
trends are resulting in increased consolidation among suppliers in the market,
which changes the competitive nature of the market.
 
  Traditionally, organizations have primarily fulfilled their requirements for
IT education and training through instructor-led training from external
vendors or internal training departments. Instructor-led training, however,
has a number of limitations. Instructor-led training typically requires
employees to leave their desks for prolonged periods, often to attend classes
at off-site locations. Such training is also difficult to tailor to
individuals' training needs, cannot be easily reviewed and assessed by
Information Service ("IS") managers and may not offer a cost-effective
training solution. The limitations of instructor-led training, combined with
constrained IS budgets, larger numbers of employees requiring training and the
greater breadth of training needed per employee, have prompted organizations
to consider alternative training methodologies. IDC estimates that the
instructor-led training market share has experienced a decline over the last
several years, although the majority of training continues to be instructor
led.
 
  The proliferation of computers throughout organizations, the increasing
multimedia capabilities of computers and the emergence of a web infrastructure
in many companies are supporting the emergence of interactive IT education and
training software. According to IDC, the U.S. market for technology based IT
education and training, including multimedia software, distance learning and
electronic performance support
 
                                       5
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systems, was $1.5 billion in 1997, compared to $1.1 billion in 1996,
representing a 36% annual growth rate. The Company believes that as businesses
seek out alternative methods of training employees, there is a significant
market opportunity for software that can meet businesses' needs for
productive, flexible and cost-effective IT education and training.
 
  Although interactive IT education and training software programs have been
available for many years, they currently account for only a small portion of
the overall market for IT training. According to IDC, technology based IT
education and training in 1997 had a market share of 17.5% of the U.S. IT
education and training market, compared to 15.8% in 1996. The Company's future
success will depend upon, among other factors, the extent to which companies
continue to adopt interactive education and training programs. There can be no
assurance that the use of interactive education and training software programs
will become widespread or that the Company's products will achieve commercial
success.
 
The CBT Group Solution
 
  CBT Group's solutions include a comprehensive library of 837 interactive
software titles at the end of 1998 designed to meet business' and
organizations' IT education and training needs. CBT Group's courseware may be
used on networked and standalone PCs and may be deployed over intranets via
CBT Group's intranet deployment products, CBTWebTM and CBT CampusTM, and the
Internet via CBT Group's Internet deployment product, CBTWeb PlusTM. The
courseware titles are organized into curricula and are designed to cover
specific aspects of client/server, mainframe, Internet and intranet
technologies. Each curriculum provides comprehensive training in an area of
technology such as client/server concepts, operating systems, networking,
graphical user interfaces and database design. In addition, the Company has
developed web-based administration and management tools designed to allow IS
and human resource managers to track employee usage and performance of CBT
Group courseware. In addition, to its own tools, the Company offers a third-
party solution for LAN based administration.
 
  The Company has developed or is developing, both independently and through
development and marketing alliances, titles focused on vendor-specific
products including Microsoft Windows NT, Microsoft Windows 2000, Microsoft
Office 2000, Oracle Database Administrator 7.3 and 8.0 and Developer 2000,
SAP's R/3 3.0 and 4.x, Netscape Navigator, Javascript and LiveWire, IBM/Lotus
Notes, Informix Online Dynamic Server, Cisco Router Configuation curricula,
Novell NetWare, Sybase/Powersoft PowerBuilder, and Marimba Castanet. In
addition, CBT Group has developed courseware titles in conjunction with IBM,
Sun Microsystems and Netscape for the Java Education World Tour and has
developed or is developing generic titles for COBOL, Internet Security, C,
C++, UNIX, IT Core concepts, Project Management and Internetworking. CBT Group
has also formed the Internet Security Training Consortium with Check Point,
Cisco, IBM, Intel, the Javasoft business unit of Sun Microsystems, Inc.,
Lotus, Netscape, Network Associates, RSA Data Security, Security Dynamics, HP
and VeriSign to address the Internet security training needs of enterprises
worldwide.
 
  The Company and Asymetrix Corporation, a leading provider of online learning
solutions, entered into a strategic partnership to provide organizations with
a powerful and easy-to-use tool for creating their own customized computer-
based courseware. The companies have developed Toolbook II for CBT Ireland,
which incorporates the CBT user interface, navigation, and overall look and
feel with the power and flexibility of ToolBook II. This allows companies to
create their own new customized courseware with the same look and feel that
distinguishes CBT Group library of interactive education software. As with CBT
Group's standard courseware, content developed using ToolBook II for CBT
Ireland can be deployed over LANs, WANs, intranets, the Internet or on stand-
alone personal computers.
 
  The Company through its subsidiary, Scholars, also offers the services of
online mentors as a resource for students taking CBT Group courseware to help
them better learn the subjects covered by the courseware and/or pass vendor
certification exams. Scholars focuses on integrating Internet technologies
with proven learning methodologies to deliver Internet-based, certification-
level mentoring services to students worldwide. The company pairs certain
certification tracks covered by CBT Group's approved interactive courseware,
including Microsoft, Novell, Lotus Notes and Cisco, with a team of vendor-
certified mentors, known as Learning Advisors,
 
                                       6
<PAGE>
 
to provide flexible, self-paced study via the Internet. This learning model
extends the advantages of online learning by having Learning Advisors
available to students twenty four hours a day, seven days a week. This
methodology enables students to receive personalized assistance when they need
it through online chats, email, and newsgroups.
 
  The Company's solutions offer many advantages to both end-users and
administrators over traditional instructor-led training. CBT Group's
courseware allows employees to tailor training to their work schedules, begin
training at a level which is suitable to their needs, integrate training with
on-the-job practice, train in only those topics that are relevant to their
needs, and access training materials on an ongoing basis as reference tools.
CBT Group software is interactive, allowing users to practice and test skills
as they learn. The courseware also incorporates sophisticated graphics and
simulation technologies to demonstrate many of the concepts introduced.
 
  In addition, the Company's products are designed to allow administrators to
leverage their training budgets by tailoring training programs to their
organization's needs and tracking training usage and effectiveness.
Organizations that invest in the CBT Group solution can offer CBT Group's
training software across a network, corporate intranet or the Internet to all
employees. CBT Group licenses its courseware primarily through one, two or
three year license agreements. The customer, depending on the individual
contract agreement with CBT Group, over the license term is provided access to
CBT Group's library of titles and allowed to build tailored training solutions
to suit their requirements. Under these license agreements, customers are able
to exchange, generally on the anniversary of the agreement, their courses as
their internal training needs evolve or as technologies advance. In addition,
using the Company's administrative software, IS and human resource
administrators can design and monitor individualized training programs.
 
CBT Group's Strategy
 
  CBT Group has entered into alliances with Cisco, Informix, Intel, Lotus,
Microsoft, Netscape, Novell, Oracle, SAP, Marimba, Sybase, and the IBM/Sun
Microsystems/Netscape collaborative Java education effort to develop and
market product-specific training. In addition, CBT Group has developed
relationships with Checkpoint, Network Associates, RSA Data Security, Security
Dynamics, HP and VeriSign as a result of its formation of the Internet
Security Curriculum Consortium.
 
  The Company markets its software to Fortune 3000 companies, governmental
entities, institutions of higher education and other major U.S. and
international organizations primarily through a direct sales force. The
Company has increased sales to smaller corporate and government customers
through distributors and its telesales organization.
 
  The Company has almost 2,000 corporate and government customers worldwide,
including the following companies or their affiliates: Alcatel Business
Systems Corporation, American Management Systems, AT&T, The Bear Stearns
Companies, Inc., Bell Atlantic Corporation, Blue Cross Blue Shield Mutual of
Ohio, British Airways, Cambridge Technology Partners, Compaq Computer
Corporation, Computer Sciences Corporation, CTG, Dell Computer Corporation,
GTE Data Services, MCI Communications, Inc., Inc., Price Waterhouse Coopers
LLP, Reuters plc, Sprint Corporation, Tandem Computers, Unisys Corporation,
The University of California System, the United States Air Force and Wells
Fargo & Company.
 
  CBT Group's objective is to maintain and expand its market position through
the following strategies:
 
  Offer a Broad Library to its Customers. The Company offers its customers a
  broad product library consisting of 837 software titles at the end of 1998
  which it believes has created a competitive barrier to entry. As of
  December 31, 1998, CBT Group has also delivered a total of 142 titles in
  non english languages, including German, French, Spanish, Italian, Japanese
  and Portuguese and plans to deliver additional translated titles in 1999.
  (1) The Company's strategy is to continue to expand its product library
--------
(1) This statement is a forward-looking statement reflecting current
    expectations. The Company's actual future performance may not meet the
    Company's current expectations or its current plans may change. Investors
    are strongly encouraged to review the section entitled "Additional Risk
    Factors That Could Affect Operating Results" commencing on page 29 and
    discussions elsewhere in this Annual Report on Form 10-K of the factors
    that could affect future performance.
 
                                       7
<PAGE>
 
  to allow the Company to sign larger initial contracts and support
  incremental sales to its customer base over time. The Company plans to
  expand its interactive education offerings outside of the information
  technology arena. (1) For example, through the pending acquisition of
  Knowledge Well, the Company is establishing a position in the market for
  distance learning business degrees being developed by Knowledge Well in
  cooperation with Kansas State University.
 
  Leverage Proprietary Development Technologies and Processes. The Company
  has created a proprietary development engine and a streamlined development
  process to assist the Company in bringing its products to market in a
  relatively short time-frame and at a relatively low cost. In addition, the
  Company's technology generally supports a common product architecture,
  resulting in products that have a recognizable and consistent interface and
  are easier to support. The Company plans to continue investing significant
  resources in research and development to further enhance its underlying
  development engine and to continue to grow its product library. (1)
 
  Deepen Alliances with Key IT Vendors. The Company's strategy is to enter
  into development and marketing alliances with key IT vendors to produce and
  distribute vendor-specific authorized training programs. To date, the
  Company has entered into alliances with Check Point, Cisco, Informix,
  Intel, Lotus, Marimba, Microsoft, Netscape, Network Associates, Novell,
  Oracle, RSA Data Security, SAP, Security Dynamics, Sybase, VeriSign, the
  IBM/Sun Microsystems/Netscape collaborative Java education effort and HP.
  The Company believes these alliances provide a number of competitive
  advantages, including access to partners' product development plans, source
  material and distribution channels. The Company will seek to deepen these
  relationships where appropriate.
 
  Expand Channels of Distribution. The Company has primarily targeted Fortune
  3000 companies and other major U.S. and international organizations
  primarily through its direct sales force. During 1997, CBT Group began
  marketing its software to educational institutions and governmental
  agencies through a direct sales force. The Company's strategy is to expand
  its telesales organization and its channels of indirect sales in order to
  reach organizations which could not otherwise be effectively targeted by
  its direct sales force and to accelerate its market penetration worldwide.
  The Company's indirect sales channels are currently comprised of
  distributors, resellers and training organizations. The Company is also
  exploring strategies for electronic distribution through on-line services,
  the Internet and corporate intranets.
 
  Capitalize on Multimedia Technologies. The Company's current products
  include multimedia elements such as rich graphics, interactive text and
  simulations, and can be delivered over the Internet or a corporate intranet
  and on networked and standalone PCs. The Company's strategy is to enhance
  its products over time as its customers adopt enterprise-wide systems which
  have the capability to handle the requirements of more advanced multimedia
  elements such as sound, video and complex animation.
 
  Serve Emerging Internet/Intranet Market Opportunity. The Company believes
  that Internet technologies, including the Internet itself and the use of
  these technologies to create enterprise-wide intranets, is radically
  altering the way certain critical computing activities are performed. As
  the Internet and intranets emerge as a new computing platform, CBT Group
  believes that new education and training needs will emerge as well. The
  Company will seek to build upon its current activities in order to build a
  franchise around Internet and intranet education opportunities.
 
Products
 
  The Company's product library has grown from 44 titles at December 31, 1992
to 837 titles at December 31, 1998, encompassing over 3000 hours of IT
education and training. In general, CBT Group's courseware includes a
graphically sophisticated interface that leads students through the subject
software, simulating the technology
--------
(1) This statement is a forward-looking statement reflecting current
    expectations. The Company's actual future performance may not meet the
    Company's current expectations or its current plans may change. Investors
    are strongly encouraged to review the section entitled "Additional Risk
    Factors That Could Affect Operating Results" commencing on page 29 and
    discussions elsewhere in this Annual Report on Form 10-K of the factors
    that could affect future performance.
 
                                       8
<PAGE>
 
and requiring students to respond actively to the course. CBT Group
interactive training typically provides the user with anywhere from 4 to 8
hours of instruction per individual title. Students may also use the courses
to pre-test their capabilities in order to position themselves properly within
the course and to train only in relevant areas. At the end of the course,
students may take a test to measure accurately their mastery of the course
content. The results of this test may be viewed by a central administrator
using CBT Group's administrative program or exported to a standard database or
spreadsheet.
 
  CBT Group has developed its CBTCampus enterprise-wide network-based
administrative software program designed to allow a central administrator to
track the use of each course, track employee performance and create
specialized curricula for employees by granting access to selected courses.
 
  CBT Group licenses its products primarily through license agreements under
which customers may use the delivered products for a period of one, two or
three years. The license agreement format generally allows customers to
exchange courses on each anniversary date where the agreement is for more than
one year. In order to increase the number of titles or gain access to the
library at a time other than the specified dates, the customer may enter into
a new license agreement or upgrade the existing license agreement. Volume and
multi-year discounts encourage customers to expand license agreements as their
needs grow and as they become more familiar with the Company's product
library. The Company's pricing varies primarily based on the number of users,
the number of titles selected and the length of the contract.
 
  The Company's strategy is to develop comprehensive curricula, each of which
provides training in areas related to client/server, mainframe and Internet
and intranet technologies. The Company's courses are generally compatible with
the Wintel platform.
 
  In addition to its continued support of traditional LAN environments, CBT
Group has developed a number of products that address the emerging Internet
and corporate intranet markets. CBTWeb is an intranet deployment system which
allows users to download CBT Group courseware titles across an intranet.
Access to these titles is gained through a standard browser. CBTWeb enables
customers to access and manage CBT Group courses over an intranet via
internally managed web servers. Using CBTWeb, learners can choose to either
download CBT Group courseware or interact with it in real time over an
intranet using CBT Systems' LivePlayTM capability. The downloaded courseware
contains a utility to send the student records back to a central administrator
so that the student progress may be monitored. CBTWeb Plus is a turnkey
training solution that enables customers to benefit from Internet-based
deployment of CBT Group's entire library of titles without the need to install
server-side software on their own network. CBTWeb Plus is an externally hosted
version of CBTWeb that allows customers to have their CBT Group courseware
managed over the Internet from an external site. CBTWeb Plus is designed to
relieve customers of any network infrastructure or security issues, and
minimizes human resource requirements, while providing a high level of
deployment flexibility since each student receives CBT Group's training from
his or her preferred location.
 
  In July 1997, CBT Group released CBTCampus, CBT Group's training management
and deployment architecture. Coupled with CBT Group's library of titles,
CBTCampus provides CBT Group's customers with a solution for delivering
sophisticated interactive technology training wherever and however it's
needed, running over an intranet. CBTCampus features a university campus
metaphor as an easy-to-navigate student interface, which can be accessed
either as a Windows client application or a web browser plug-in. Behind this
intuitive interface is a suite of sophisticated technologies that creates an
integrated learning environment for students and administrators. The market
for IT education and training is rapidly evolving. New methods of delivering
interactive education software are being developed and offered in the
marketplace, including intranet and Internet deployment systems. Many of these
new delivery systems will involve new and different business models and
contracting mechanisms. In addition, multimedia and other product
functionality features are being added to the educational software.
Accordingly, CBT Group's future success will depend upon, among other factors,
the
 
                                       9
<PAGE>
 
extent to which CBT Group is able to develop and implement products that
address these emerging market requirements. There can be no assurance that CBT
Group will be successful in meeting changing market needs. Failure to develop
and implement products that address these emerging market requirements could
have a material adverse affect on CBT Group's business and results of
operations.
 
  Moreover, software products as complex as those offered by the Company may
contain undetected errors or fail when first introduced or upon release of new
versions of the Company's products. The Company has in the past experienced
problems in the introduction of software products, in particular the CBT
Campus deployment and management system. While the Company believes that the
critical problems have been addressed, the Company plans to introduce new
versions of the product to offer performance improvements and feature
enhancements. If the Company were to fail to introduce new versions of this
and other products, or to experience further problems in connection with the
introductions, the Company could suffer a material adverse effect on its
operating results. There can be no assurance that, despite testing by the
Company and by current and potential customers, errors will not be found in
new products after commencement of commercial shipments, resulting in a loss
of or delay in market acceptance.
 
  The subject matter of the Company's courseware is influenced by rapidly
changing technology, evolving industry standards, changes in customer needs
and frequent introductions of new products by software vendors. Accordingly,
the Company believes that its future success will depend in large part upon
its ability to meet these changes by enhancing its existing courses and
developing and introducing new courses on a timely basis. There can be no
assurance that the Company will be successful in addressing the changing needs
of the marketplace by developing and marketing new products or enhancing its
existing products on a timely basis. If the Company were unable, due to
resource, technological or other constraints, to anticipate and respond
adequately to changes in customers' software technology and preferences, the
Company's business and results of operations would be materially adversely
affected.
 
Research and Development
 
  CBT Group believes that the development of an effective training product
requires the convergence of source material, instructional design and computer
technology. The first step in developing a new training program is to obtain
content through subject matter experts, existing courses, including self-study
courses, and product reference materials, including product manuals. The CBT
Group development team then writes a script for the program which includes a
structure covering all of the relevant concepts, tasks to be completed,
interactive features and tests to measure achievement and to reinforce the
lesson. During the development of a script for a new program, the Company's
developers, working with animators, simulation programmers and graphic
designers, simultaneously plan and develop the course elements. These elements
are then integrated into a single program. The program is then tested to
ensure that each course delivers the desired education and training.
 
  The core of CBT Group's product development is its product development
engine -- an environment comprising CBT Group proprietary software and off-
the-shelf tools -- which has been optimized for the creation of interactive
education software programs. The Company believes that its product development
engine provides a competitive advantage by allowing the Company to create
modular courses, identify and change portions of a course without rewriting
the entire course and enhance the multimedia content of its courses more
quickly and efficiently. The Company's technology generally supports a common
product architecture, resulting in products that have a recognizable and
consistent interface and are easier to support. The Company's goal is to
continue to enhance its product development engine to meet the Company's
future development needs, including ensuring that its courseware is able to
incorporate a wide variety of multimedia elements.
 
  The Company performs substantially all of its research and development
activities and develops substantially all of its courses at its Dublin,
Ireland development facility. From time to time, the Company subcontracts
outside development services to develop portions of particular courses. All
products produced using these outside developers remain the sole property of
CBT Group. During 1996, 1997, and 1998 research and
 
                                      10
<PAGE>
 
development expenses totaled $14.5 million, $20.9 million and $25.8 million,
respectively. During 1998, the Company's research and development staff grew
from 272 to 337 employees. The Company intends to continue to make substantial
investments in research and development.
 
Development and Marketing Alliances
 
  The Company's strategy is to expand its position in the IT education and
training market by forming development and marketing alliances with leading IT
software vendors. CBT Group has entered into alliances with Cisco, Informix,
Intel, Lotus, Microsoft, Netscape, Novell, Oracle, SAP, Marimba, Sybase, and
the IBM/Sun Microsystems/Netscape collaborative Java education effort. CBT
Group has also formed the Internet Security Training Consortium with Check
Point, Cisco, IBM, Intel, the Javasoft business unit of Sun Microsystems,
Inc., Lotus, Netscape, Network Associates, RSA Data Security, Security
Dynamics, HP and VeriSign to address the Internet security training needs of
enterprises worldwide. The Company believes its development and marketing
alliances offer it a number of competitive advantages, including early access
to the vendor's software engineers and technical advisors for assistance in
developing courses on new products. With the approval of the development
partner, products developed under the relationship can be identified as
"authorized" by that software vendor, which the Company believes improves the
marketability of such courses. In addition, these alliances may result in
additional distribution channels for the Company, by allowing each party to
distribute courses to its respective customer base. In some of these
alliances, the software vendor has contributed financial resources toward the
development of specified courses. The Company has recognized the revenue from
such development payments on a percentage of completion basis as products are
produced or, where required in the contract, as the Company has met specified
milestones. The Company believes that these alliances also provide significant
benefits to the software vendors by allowing them to achieve additional market
penetration generated by increasing the base of trained users.
 
  The Company believes that an increasing proportion of its revenues in the
future may be attributable to products developed through its alliances. (1)
There can be no assurance that any of these parties will continue to cooperate
with the Company, that the Company will be able to develop successfully
courses for its development and marketing alliances in a timely fashion or at
all, or that the Company will be able to negotiate additional alliances in the
future on acceptable terms or at all. There can be no assurance that the
marketing efforts of the Company's partners will not disrupt the Company's
direct sales efforts. In addition, the Company's development and marketing
partners could pursue their existing or alternative training programs in
preference to and in competition with those being developed with the Company.
In the event that the Company is not able to maintain or expand its current
development and marketing alliances or enter into new development and
marketing alliances, the Company's operating results and financial condition
could be materially adversely affected. Furthermore, the Company is required
to pay royalties to its development and marketing partners on products
developed with them, which reduces the Company's gross margins. The Company
expects that cost of revenues may fluctuate from period to period in the
future based upon many factors, including the mix of titles licensed (between
titles developed exclusively by CBT Group and royalty-bearing titles developed
pursuant to development and marketing alliances) and the timing of expenses
associated with development and marketing alliances. In addition, the
collaborative nature of the development process under these alliances may
result in longer development times and less control over the timing of product
introductions than for courses developed solely by the Company.
 
Customers
 
  The Company primarily licenses its courses to Fortune 3000 companies and
other major U.S. and international organizations in a wide range of
industries, including manufacturing, transportation,
--------
(1)This statement is a forward-looking statement reflecting current
expectations. The Company's actual future performance, including that
attributable to its alliances, may not meet the Company's current
expectations. Investors are strongly encouraged to review the section entitled
"Additional Risk Factors That Could Affect Operating Results" commencing on
page 29 and discussions elsewhere in this Annual Report on Form 10-K of the
factors that could affect future performance.
 
                                      11
<PAGE>
 
telecommunications, utilities, banking, healthcare, securities, computers and
insurance. CBT Group also licenses its courseware to educational institutions
and governmental agencies. The Company markets its courseware through its
direct sales organization to almost 2,000 corporate customers worldwide. The
Company also distributes its courses through a number of resellers. No
customer accounted for more than 5% of revenues in 1998, although a single
customer can account for a significantly higher percentage of the Company's
quarterly revenues. Accordingly, failure to achieve a forecasted sale on
schedule can have (and did have in the third quarter of 1998) a material
adverse effect on quarterly operating results.
 
Backlog
 
  The Company generates a substantial portion of its revenue through multi-
year license agreements. The initial annual license fee is generally
recognized at the time of delivery of products. Subsequent annual license fees
are generally recognized on the anniversary date of such delivery, or if the
customer exchanges courses at the anniversary date, upon delivery of the
exchanged courses. Backlog at any given date represents the amount of all
license fees under current agreements which have not yet been recognized as
revenue. Although the Company's license agreements are generally
noncancellable by their terms, there can be no assurance that any customer
will fulfill the contractual obligations under its agreement. Cancellation,
reduction or delay in orders by or shipments to any of these customers could
have a material adverse effect on the Company's business and results of
operations.
 
  The amount and timing of the recognition of revenue associated with this
backlog can vary depending on the timing of future deliveries of products and
amendments to customers' license agreements. The Company had backlog of
approximately $60 million, $110 million and $144 million as of December 31,
1996, 1997 and 1998, respectively. Approximately 35% of the Company's backlog
as of December 31, 1998 was concentrated among fifteen customers, compared to
35% among seven customers as of December 31, 1997.
 
Intellectual Property and Licenses
 
  The Company regards its software as proprietary and relies primarily on a
combination of statutory and common law copyright, trademark and trade secret
laws, customer licensing agreements, employee and third-party nondisclosure
agreements and other methods to protect its proprietary rights. Despite these
precautions, it may be possible for a third-party to copy or otherwise obtain
and use the Company's courseware or technology without authorization, or to
develop similar courseware or technology independently. Furthermore, the laws
of certain countries in which the Company sells its products do not protect
the Company's software and intellectual property rights to the same extent as
do the laws of the United States. The Company generally does not include in
its software any mechanisms to prevent or inhibit unauthorized use, but
generally requires the execution of a license agreement which restricts
copying and use of the Company's products. If unauthorized copying or misuse
of the Company's products were to occur to any substantial degree, the
Company's business and results of operations could be materially adversely
affected. 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.
 
  There can be no assurance that third parties will not claim that the
Company's current or future products infringe on the proprietary rights of
others. The Company expects that software developers will increasingly be
subject to such claims as the number of products and competitors in the IT
education and training industry grows and the functionality of products in the
industry overlaps. Any such claim, with or without merit, could result in
costly litigation or might require the Company to enter into royalty or
licensing agreements. Such royalty or license agreements, if required, may not
be available on terms acceptable to the Company, or at all.
 
Competition
 
  The IT education and training market is highly fragmented and competitive,
and the Company expects this competition to increase. The Company expects that
because of the lack of significant barriers to entry into the IT
 
                                      12
<PAGE>
 
education and training market, new competitors may enter the market in the
future. In addition, larger companies are competing with the Company in the IT
education and training market through the acquisition of the Company's
competitors, and the Company expects this trend to continue. Such competitors
may also include publishing companies and vendors of application software,
including those vendors with whom the Company has formed development and
marketing alliances.
 
  The Company competes primarily with third-party suppliers of instructor-led
IT education and training and internal training departments and other
suppliers of IT education and training, including several other companies that
produce interactive software training. To a lesser extent, the Company also
competes with consultants, value-added resellers and network integrators.
Certain of these value-added resellers also market products competitive with
those of the Company. The Company expects that as organizations increase their
dependence on outside suppliers of training, the Company will face increasing
competition from these other suppliers as IT education and training managers
more frequently compare training products provided by outside suppliers.
 
  Many of the Company's current and potential competitors have substantially
greater financial, technical, sales, marketing and other resources, as well as
greater name recognition, than the Company. In addition, the IT education and
training market is characterized by significant price competition, and the
Company expects that it may face increasing price pressures from competitors
as IS managers demand more value for their training budgets. Accordingly,
there can be no assurance that the Company will be able to provide products
that compare favorably with new instructor-led techniques or other interactive
training software or that competitive pressures will not require the Company
to reduce its prices significantly.
 
Sales and Marketing
 
 Direct Sales and Marketing
 
  At December 31, 1998, the Company employed 387 direct sales and marketing
people worldwide, of which 239 were located in the United States. The
Company's telesales organization employed 214 people worldwide, of whom 176
were located in the United States, as of December 31, 1998. The Company plans
to continue to build the telesales organization in 1999. (1)
 
 Indirect Sales
 
  In order to accelerate worldwide market penetration, the Company is
broadening its sales strategy by expanding its indirect sales channels, which
include resellers, development partners, and industry catalogs circulated by
leading IT distributors. The indirect sales channels give the Company access
to a more diverse client base, which the Company believes cannot be targeted
cost-effectively through its direct sales force. At December 31, 1998, the
Company employed 22 indirect sales channel personnel.
 
  The Company's marketing partners also generally have the right to resell
products developed under their alliances with the Company.
 
Employees
 
  As of December 31, 1998, the Company had a total of 1,187 full-time
employees, of whom 623 were engaged in sales and marketing, 154 in management,
administration and finance 73 in fulfilment and learning advisors and 337 in
product development. On December 31, 1998, 556 employees were located in the
United States, 419 in the Republic of Ireland, 51 in the United Kingdom, 56 in
Canada, 65 in Australia, 16 in the Benelux and Scandinavian countries, 5 in
Germany, 8 in the Middle East and 11 in South Africa. None of the
--------
(1) This statement is a forward-looking statement reflecting current
expectations. The Company's actual future performance may not meet the
Company's current expectations or its current plans may change. Investors are
strongly encouraged to review the section entitled "Additional Risk Factors
That Could Affect Operating Results" commencing on page 29 and discussions
elsewhere in this Annual Report on Form 10-K of the factors that could affect
future performance.
 
                                      13
<PAGE>
 
Company's employees are subject to a collective bargaining agreement, and the
Company has not experienced any work stoppages. The Company believes that its
employee relations are good.
 
  On October 1, 1998, Mr. James J. Buckley, the Company's Chairman and Chief
Executive Officer, and Mr. Richard Y. Okumoto, the Company's Senior Vice
President of Finance and Chief Financial Officer, stepped down from their
respective positions. Messrs. Buckley and Okumoto were replaced on an interim
basis by a newly formed management committee. Effective December 10, 1998 the
Company appointed Mr. William G. McCabe as Chairman of the Board and Mr.
Gregory M. Priest as President and Chief Executive Officer.
 
  Both Mr. McCabe and Mr. Priest served on the interim management committee
that had managed the Company since October 1, 1998 and remain on the Board of
Directors. Failure to retain these and other executives, or the loss of
certain additional senior management personnel or other key employees, could
have a material adverse effect on the Company's business and future business
prospects.
 
  The Company's future success also depends on the continued service of its
key management, sales, product development and additional operational
personnel and on its ability to attract, motivate and retain highly qualified
employees. In addition, the Company depends on writers, programmers and
graphic artists, as well as third-party content providers. The Company expects
to continue to hire additional product development, sales and marketing, IS
and accounting staff. However, there can be no assurance that the Company will
be successful in attracting, retaining or motivating key personnel. In
particular, the Company's recent adverse operating results, stock price
performance and management changes could create uncertainties that could have
a material adverse effect on the Company's ability to attract and retain key
personnel. Although the Company has repriced all stock options (other than
stock options held by the Company's directors) in an effort to retain and
reincent employees, there can be no assurance that this strategy will be
successful, and in any event, it will have a dilutive effect on future
earnings per share. The inability to hire and retain qualified personnel or
the loss of the services of key personnel could have a material adverse effect
upon the Company's current business, new product development efforts and
future business prospects.
 
Non U.S. Operations
 
  In 1998, the Company's products were marketed in over 22 countries, and
sales outside the United States represented approximately 28%, 26% and 30% of
the Company's revenues in 1996, 1997 and 1998, respectively. The Company
expects that international operations will continue to account for a
significant portion of its revenues and intends to continue to expand its
operations outside of the United States. In addition, the Company's research
and development organization is located outside the United States. Operations
outside the United States are subject to inherent risks, including
fluctuations in exchange rates, difficulties or delays in developing and
supporting non-English language versions of the Company's products and
services, political and economic conditions in various jurisdictions,
unexpected changes in regulatory requirements, tariffs and other trade
barriers, difficulties in staffing and managing foreign subsidiary operations,
longer accounts receivable payment cycles and potentially adverse tax
consequences. There can be no assurance that such factors will not have a
material adverse effect on the Company's future operations outside of the
United States.
 
  The Company's consolidated financial statements are prepared in dollars,
although several of the Company's subsidiaries have functional currencies
other than the dollar, and a significant portion of the Company's revenues,
costs and assets are denominated in currencies other than their respective
functional currencies. Fluctuations in exchange rates may have a material
adverse affect on the Company's results of operations, particularly its
operating margins, and could also result in exchange losses. As a result of
currency fluctuations, the Company recognized net exchange gains of $4,000,
$112,000 and $516,000 in 1996, 1997 and 1998 respectively. During 1998 the
Company undertook hedging transactions against the Irish pound because the
Company has substantial expenses denominated in that currency. To date, the
Company has not sought to hedge the risks associated with fluctuations in the
exchange rates of other currencies against the U.S Dollar, but may undertake
such transactions in the future. There can be no assurance that any hedging
techniques implemented by the Company would be successful in eliminating or
reducing the effects of currency fluctuations.
 
 
                                      14
<PAGE>
 
  Certain of the Company's subsidiaries have significant operations and
generate significant taxable income in Ireland, and certain of the Company's
Irish subsidiaries are taxed at rates substantially lower than tax rates in
effect in the U.S. and in other countries in which the Company has operations.
If such subsidiaries were no longer to qualify for such tax rates or if the
tax laws were rescinded or changed, the Company's operating results could be
materially adversely affected. In addition, if tax authorities were to
challenge successfully the manner in which profits are recognized among the
Company's subsidiaries, the Company's taxes could increase, and its cash flow
and results of operations could be materially adversely affected.
 
ITEM 2. PROPERTIES
 
  The Company conducts its operations primarily out of its facilities in
Dublin, Ireland, Redwood City, California, Scottsdale, Arizona, and
Clearwater, Florida. In Dublin, Ireland, the Company currently occupies two
properties, one of which comprises approximately 60,000 square feet and houses
the Company's main product development center, and the other comprises
approximately 8,000 square feet containing the Company's fulfillment
operations, including compact disk burning, disk duplication, packaging and
delivery. The Company has not yet entered into a lease on the property
occupied by its main product development center in Dublin, Ireland. The
Company currently leases approximately 41,000 square feet at its United States
headquarters in Redwood City, California, 46,000 square feet in Scottsdale,
Arizona, 25,648 square feet in Menlo Park, California and 19,239 square feet
in Clearwater, Florida. The Company uses the Scottsdale facility to house its
channel organizations and a number of its U.S. telesales personnel.
 
  The Company also leases sales office space in a number of countries
including the United Kingdom, Australia, the Middle East, the Benelux
countries, Canada, Germany and South Africa and throughout the United States.
 
ITEM 3. LEGAL PROCEEDINGS
 
  Since the end of the third quarter of 1998, purported class action lawsuits
were filed in United States District Court for the Northern District of
California and the Superior Court of California for the County of San Mateo
against the Company, CBT USA and certain of the Company's former and current
officers and directors alleging violation of the federal securities laws. The
complaints allege that the defendants misrepresented and/or omitted to state
material facts regarding the Company's business and financial condition and
prospects during the class periods in order to artificially inflate and
maintain the price of the Company's ADSs, and misrepresented and/or omitted to
state material facts in the registration statement and prospectus issued in
connection with the merger with ForeFront, artificially inflating the price of
the Company's ADSs.
 
  The Company believes that these actions are without merit and intends to
vigorously defend itself against these claims. Although the outcome of these
actions cannot presently be determined, an adverse resolution of these matters
could have a material adverse effect on the Company's financial position and
results of operations.
 
  On October 29, 1998, a derivative complaint was filed in the Superior Court
of California for the County of San Mateo against several present and former
officers and directors of the Company alleging that these persons violated
various duties to the Company. The derivative complaint also names the Company
as a nominal defendant. The derivative complaint is predicated on the factual
allegations contained in the class action complaints discussed above. No
demand was previously made to the Company's Board of Directors or shareholders
concerning the allegations of the derivative complaint, which seeks an
unspecified amount of damages.
 
  During the period covered by this report, the previously disclosed possible
litigation involving the transfer of certain securities of Datacode
Electronics Ltd. was settled. All amounts paid in relation to the settlement
have been expensed.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  Not applicable.
 
                                      15
<PAGE>
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S SHARE CAPITAL AND RELATED SHAREHOLDER MATTERS
 
  The Company's ADSs have been quoted in the Nasdaq National Market under the
symbol CBTSY since the Company's initial public offering on April 13, 1995.
Prior to the initial public offering, there was no public market for the
Company's securities.
 
  The prices per ADS reflected in the table below represent the range of high
and low closing prices reported in the Nasdaq National Market for the periods
indicated and reflects both of the two-for-one splits of the Company's ADSs
effected on each of May 15, 1996 and March 9, 1998.
 
<TABLE>
<CAPTION>
Fiscal 1998                                                         High   Low
-----------                                                        ------ -----
<S>                                                                <C>    <C>
Fourth quarter ended December 31.................................. $18.19 $6.69
Third quarter ended September 30..................................  63.88  9.88
Second quarter ended June 30......................................  57.00 39.00
First quarter ended March 31......................................  52.25 33.88
</TABLE>
 
<TABLE>
<CAPTION>
Fiscal 1997                                                        High   Low
-----------                                                       ------ ------
<S>                                                               <C>    <C>
Fourth quarter ended December 31................................. $41.19 $30.25
Third quarter ended September 30.................................  40.13  28.63
Second quarter ended June 30.....................................  31.63  20.00
First quarter ended March 31.....................................  35.25  19.07
</TABLE>
 
  As of March 12, 1999, there were 16 holders of Ordinary Shares of record of
the Company.
 
 Dividends
 
  CBT Group has never declared or paid any dividends on its ordinary shares.
CBT Group currently intends to retain all future earnings to finance future
operations and therefore does not anticipate paying any dividends in the
foreseeable future. Moreover, under the Companies Acts of the Republic of
Ireland, dividends may only be paid out of the profits of the Company legally
available for distribution.
 
 Irish Stamp Duty
 
  Stamp duty, which is a tax on certain documents, is payable on all transfers
of ordinary shares in companies registered in Ireland wherever the instrument
of transfer may be executed. In the case of a transfer on sale, stamp duty
will be charged at the rate of IR(Pounds)1 for every IR(Pounds)100 (or part
thereof) of the amount or value of the consideration (i.e., purchase price).
Where the consideration for the sale is expressed in a currency other than
Irish pounds, the duty will be charged on the Irish pound equivalent
calculated at the rate of exchange prevailing on the date of the transfer. In
the case of a transfer by way of gift (subject to certain exceptions) or for
considerations less than the market value of the shares transferred, stamp
duty will be charged at the above rate on such market value.
 
  A transfer or issue of ordinary shares for deposit under the Deposit
Agreement (between CBT Group, The Bank of New York, as Depositary, and the
registered holders and the owners of a beneficial interest in book-entry ADRs)
in return for ADRs will be similarly chargeable with stamp duty as will a
transfer of ordinary shares from the Depositary or the Custodian upon
surrender of an ADR for the purpose of the withdrawal of the underlying
ordinary shares in accordance with the terms of the Deposit Agreement.
 
  The Irish Revenue Commissioners have issued a ruling to the Company that
transfers of ADRs issued in respect of the Company's shares will not be
chargeable with Irish stamp duty for so long as the ADSs are dealt in and
quoted on the Nasdaq National Market. It has been confirmed in Section 207,
Finance Act 1992 that transfers of ADRs will be exempt from stamp duty where
the ADRs are dealt with in a recognized stock exchange. The Nasdaq National
Market is regarded by the Irish authorities as a recognized stock exchange.
 
                                      16
<PAGE>
 
  The person accountable for payment of stamp duty is the transferee or, in
the case of a transfer by way of gift or for a consideration less than the
market value, both parties to the transfer. Stamp duty is normally payable
within 30 days after the date of execution of the transfer. Late payment of
stamp duty will result in liability to interest, penalties and fines.
 
 Volatility of Stock Price
 
  The Company's initial public offering of the ADSs (the "IPO") was completed
in April 1995, and there can be no assurance that a viable public market for
the ADSs will be sustained. The market price of the ADSs has fluctuated
significantly since the IPO. The Company believes that factors such as
announcements of developments related to the Company's or its competitors'
business, announcements of new products or enhancements by the Company or its
competitors, sales of the ADSs into the public market, developments in the
Company's relationships with its customers, partners and distributors,
shortfalls or changes in revenues, gross margins, earnings or losses or other
financial results from public market expectations, regulatory developments,
fluctuations in results of operations and general conditions in the Company's
market or the markets served by the Company's customers or the economy could
cause the price of the ADSs to fluctuate, perhaps substantially. For example,
the Company's revenue for the quarter ended September 30, 1998 did not
increase at a rate comparable to prior quarters. As a direct result, the
trading price of the Company's ADSs decreased rapidly and significantly,
having an extreme adverse effect on the value of an investment in the
Company's securities.
 
  In addition, in recent years the stock market in general, and the market for
shares of technology stocks in particular, have experienced extreme price
fluctuations, which have often been unrelated to the operating performance of
affected companies. There can be no assurance that the market price of the
ADSs will not continue to experience significant fluctuations in the future,
including fluctuations that are unrelated to the Company's performance.
 
                                      17
<PAGE>
 
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
 
  The following selected consolidated financial data for each of the five
years in the period ended December 31, 1998 and at December 31, 1998, 1997,
1996, 1995 and 1994 should be read in conjunction with the consolidated
financial statements and related notes thereto in "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The results of
operations for each of the three years in the period ended December 31, 1998
and the balance sheets as at December 31, 1998 and 1997 are derived from the
audited consolidated financial statements of the Company, which have been
prepared in accordance with U.S. generally accepted accounting principles
("U.S. GAAP"). The data at December 31, 1994, 1995 and 1996 and for the years
ended December 1994 and 1995 is derived from audited consolidated financial
statements of the Company prepared in accordance with U.S. GAAP not included
herein. The consolidated statements of operations data for any particular
period are not necessarily indicative of the results of operations for any
future period, including the Company's fiscal year ending December 31, 1999.
 
<TABLE>
<CAPTION>
                                         Years ended December 31,
                                 ---------------------------------------------
                                  1994     1995     1996      1997      1998
                                 -------  -------  -------  --------  --------
                                   (In thousands, except per share data)
<S>                              <C>      <C>      <C>      <C>       <C>
Statement of Operations Data:
Revenues.......................  $39,189  $55,395  $87,364  $137,047  $162,232
Cost of revenues...............    9,482   12,505   15,445    22,502    25,137
                                 -------  -------  -------  --------  --------
Gross profit...................   29,707   42,890   71,919   114,545   137,095
Operating expenses
  Research and development.....    4,351    7,485   14,502    20,878    25,832
  Sales and marketing..........   17,372   23,528   39,288    59,160    75,395
  General and administrative...    4,097    5,484    9,075    11,601    15,893
  Amortization of acquired
   intangibles.................      604      --       --        --        --
  Acquired research and
   development.................      --       --     2,799     4,097       --
  Costs of acquisitions........      --       198    2,155     1,534     5,505
                                 -------  -------  -------  --------  --------
    Total operating expenses...   26,424   36,695   67,819    97,270   122,625
                                 -------  -------  -------  --------  --------
Income from operations.........    3,283    6,195    4,100    17,275    14,470
Other income (expense), net....     (503)     806    2,825     4,710     4,734
                                 -------  -------  -------  --------  --------
Income before provision for
 income taxes..................    2,780    7,001    6,925    21,985    19,204
Provision for income taxes.....   (1,038)  (1,424)  (2,419)   (3,916)   (2,666)
                                 -------  -------  -------  --------  --------
Net income.....................  $ 1,742  $ 5,577  $ 4,506  $ 18,069  $ 16,538
                                 =======  =======  =======  ========  ========
Net income per share--Diluted..  $  0.06  $  0.15  $  0.11  $   0.41  $   0.36
                                 =======  =======  =======  ========  ========
Shares used in computing net
 income per share amounts......   31,079   36,610   42,012    44,128    45,979
                                 =======  =======  =======  ========  ========
<CAPTION>
                                               December 31,
                                 ---------------------------------------------
                                  1994     1995     1996      1997      1998
                                 -------  -------  -------  --------  --------
<S>                              <C>      <C>      <C>      <C>       <C>
Balance Sheet Data:
Cash, cash equivalents and
 short-term investments........  $ 5,190  $53,365  $54,023  $ 71,543  $102,034
Working capital................   (1,544)  56,034   52,055    84,018   116,841
Total assets...................   20,140   82,716   96,662   141,329   190,244
Long-term debt, excluding
 current portion...............      787      787      --        --        --
Redeemable convertible
 preferred shares..............    4,736      --       --        --        --
Shareholders' equity
 (deficit).....................   (5,247)  59,085   68,248   107,679   154,801
</TABLE>
 
 
                                      18
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS
 
  The following discussion should be read in conjunction with the consolidated
financial statements and related notes thereto contained in Item 8 of this
Annual Report on Form 10-K, which have been restated to reflect the
acquisition of The ForeFront Group, Inc. ("ForeFront"), a Delaware
corporation.
 
Important Note About Forward Looking Statements
 
  In addition to historical statements, this Annual Report on Form 10-K
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Words such as "anticipates", "expects", "intends",
"plans", "believes", "seeks", "estimates" and similar expressions identify
such forward looking statements. These forward looking statements are not
guarantees of future performance and are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
expressed or forecasted. Actual results may vary because of factors such as
product ship schedules, life cycles, terms and conditions, product mix,
competitive products and pricing, customer demand, technological shifts,
litigation and other issues discussed elsewhere in this Annual Report filed on
Form 10-K. These forward-looking statements reflect management's opinions only
as of the date hereof, and the Company assumes no obligation unless required
by law to revise or publicly release the results of any revision to these
forward-looking statements. Risks and uncertainties include, but are not
limited to, those discussed in the section entitled "Additional Risk Factors
That Could Affect Operating Results." The following discussion and analysis
should be read in conjunction with, and is qualified by, the consolidated
financial statements, including the notes thereto, and selected consolidated
financial data included elsewhere in this Annual Report. Historical results
are not necessarily indicative of trends in operating results for any future
period.
 
Overview
 
  CBT Group PLC ("CBT Group," "CBT" or the "Company") is a leading provider of
interactive education software designed to meet the information technology
("IT") education and training needs of businesses and organizations worldwide.
The Company develops, publishes and markets a comprehensive library of over
837 software titles covering a range of client/server, mainframe, Internet and
intranet technologies. CBT Group's products are used by almost 2,000 of the
world's leading corporations to train employees to develop and apply mission-
critical technologies in the workplace. CBT Group works with leading software
companies, including Cisco Systems, Inc. ("Cisco"), Informix Corporation
("Informix"), Lotus Development Corporation ("Lotus"), Marimba, Inc.
("Marimba"), Microsoft Corporation ("Microsoft"), Netscape Communications
Corporation ("Netscape"), Novell, Inc. ("Novell"), Oracle Corporation
("Oracle"), SAP America, Inc. ("SAP"), Rational Software ("Rational"), Intel
Corporation ("Intel"), Centra Software ("Centra"), Sybase, Inc. ("Sybase") and
the IBM-Netscape-Sun Microsystems, collaborative Java education effort to
develop and market vendor-specific training. CBT Group has also formed the
Internet Security Training Consortium with Check Point Software Technologies,
Inc. ("Check Point"), Cisco, IBM, Intel, the Javasoft business unit of Sun
Microsystems, Inc., Lotus, Netscape, Network Associates, Inc. (formerly McAfee
Associates, Inc.) ("Network Associates"), RSA Data Security, Inc. ("RSA Data
Security"), Security Dynamics Technologies, Inc. ("Security Dynamics"), the
Hewlett Packard Company ("HP") and VeriSign, Inc. ("VeriSign") to address the
Internet security training needs of enterprises worldwide.
 
  Beginning in fiscal 1998, the Company adopted Statement of Position 97-2
"Software Revenue Recognition" as amended by Statement of Position 98-4. The
effect of adoption did not have a material impact on the Company's results of
operations. The Company derives its revenues primarily pursuant to license
agreements under which customers license usage of delivered products for a
period of one, two or three years. On each anniversary date during the term of
multi-year license agreements, customers are generally allowed to exchange any
or all of the licensed products for an equivalent number of alternative
products within the CBT Group library. The first year license fee is generally
recognized as revenue at the time of delivery of all products, provided the
Company's fees are fixed or determinable and collections of accounts
receivable are probable. Subsequent annual license fees are recognized on each
anniversary date, provided the Company's fees are fixed
 
                                      19
<PAGE>
 
or determinable and collections of accounts receivable are probable. The cost
of satisfying any Post Contract Support ("PCS") is accrued at the time revenue
is recognized, as PCS fees are included in the annual license fee, the
estimated cost of providing PCS during the agreements is insignificant and
unspecified upgrades or enhancements offered have been and are expected to be
minimal and infrequent. For multi-element agreements Vendor Specific Objective
Evidence exists to allocate the total fee to the undelivered elements of the
agreement. In addition, the Company derives revenues from sales of its
products, which is recognized upon shipment, net of allowances for estimated
future returns and for excess quantities in distribution channels, provided
the Company's fees are fixed or determinable and collections of accounts
receivable are probable.
 
  In recent years, the Company has entered into several development and
marketing alliances with key vendors of client/server software under which the
Company develops titles for training on specific products. Under certain of
its development and marketing alliances, the Company's partners have agreed to
fund certain product development costs. The Company recognizes such funding as
revenues on a percentage of completion basis, and the costs associated with
such revenues are reflected as cost of revenues. These agreements have the
effect of shifting expenses associated with developing certain new products
from research and development to cost of revenues. The Company expects that
cost of revenues may fluctuate from period to period in the future based upon
many factors, including, but not limited to, the timing of expenses associated
with development and marketing alliances. The Company does not expect funding
from development partners to contribute significantly to revenues in future
years.
 
Recent Developments
 
  On December 10, 1998 the Company announced that it had signed a definitive
agreement to acquire Knowledge Well Ltd. and Knowledge Well Group Ltd.
(collectively, "Knowledge Well"), providers of business, management and
professional education using interactive learning technologies. Knowledge
Well's software titles are delivered using advanced interactive learning
methodologies, while requiring that the student only have access to basic,
industry-standard computing platforms. Knowledge Well's strategy is to provide
a self-paced education and training solution allowing individuals to obtain
degrees and/or other credentials. This ageement has been amended and restated
on March 30, 1999, to reflect certain changes agreed upon December 9, 1998 as
a result of the decision to account for the acquisition under the purchase
method of accounting in accordance with U.S. generally accepted accounting
principles. The acquisition of Knowledge Well has been approved by an
Independent Committee of CBT Group's Board of Directors, in view of the fact
that certain members of the Board of Directors of CBT Group are shareholders
and/or former officers of Knowledge Well, and by the shareholders of Knowledge
Well. The acquisition is subject to specified closing conditions, including
approval by the disinterested shareholders of CBT Group and the receipt of
required regulatory approvals. The acquisition has been structured as a stock-
for-stock exchange, in which a total of approximately 4.0 million CBT Group
shares will be issued in exchange for all outstanding shares of Knowledge
Well. CBT Group will also assume options to acquire Knowledge Well stock
exercisable for an issuance of up to approximately 0.8 million CBT Group
shares.
 
  The successful combination of CBT Group and Knowledge Well, including the
successful operation of Knowledge Well as an autonomous subsidiary of CBT
Group, will require substantial effort from each company. The diversion of the
attention of management and any difficulties encountered in the transition
process could have an adverse impact on CBT Group's ability to realize the
full benefits of the acquisition. The successful combination of the two
companies will also require coordination of their research and development and
sales and marketing efforts. In addition, the process of combining the two
organizations could cause the interruption of, or loss of momentum in,
Knowledge Well's activities. There can be no assurance that CBT Group will be
able to retain Knowledge Well's technical, sales and customer support
personnel, or that it will realize any of the anticipated benefits of the
acquisition.
 
  The acquisition of Knowledge Well will result in an increase of the
Company's research and development, general and administrative and other
expenses as a result of combining the operations of the Company and Knowledge
Well. The acquisition may also increase the Company's revenue to the extent
Knowledge Well's products generate incremental revenue.
 
                                      20
<PAGE>
 
  The Company estimates that the negotiation and implementation of the
acquisition will result in aggregate pre-tax expenses of approximately $2.2
million, primarily relating to costs associated with combining the companies
and the fees of attorneys, accountants and the financial advisor to the
Company's Independent Committee. Although the Company does not believe that
the costs will significantly exceed the aforementioned amount, there can be no
assurance that the Company's estimate is correct or that unanticipated
contingencies that will substantially increase the costs of combining the
operations of the Company and Knowledge Well will not occur. In addition, the
Company intends to account for the acquisition of Knowledge Well under the
purchase method of accounting in accordance with generally accepted accounting
principles. Under this method of accounting, the purchase price will be
allocated to assets acquired and liabilities assumed based on their estimated
fair values at the time of the closing of the acquisition. The Company intends
to record a non-cash expense of approximately $5.4 million with respect to the
write-off of in-process research and development acquired. In any event, the
Company anticipates that costs associated with the acquisition of Knowledge
Well and the write-off of acquired in-process research and development and
goodwill amortization will negatively impact results of operations in the
quarter in which the acquisition closes. In addition, the amortization of
acquired intangible assets will negatively impact results of operations in
future quarters.(2)
 
Annual Results of Operations
 
  The following table sets forth certain consolidated statement of operations
data as a percentage of revenues for the three years in the period ended
December 31, 1998:
<TABLE>
<CAPTION>
                                                                Years Ended
                                                                December 31,
                                                               ----------------
                                                               1996  1997  1998
                                                               ----  ----  ----
<S>                                                            <C>   <C>   <C>
Revenues......................................................  100%  100%  100%
Cost of revenues.............................................. 17.7  16.4  15.5
                                                               ----  ----  ----
Gross profit.................................................. 82.3  83.6  84.5
Operating Expenses
  Research and development.................................... 16.6  15.2  15.9
  Sales and marketing......................................... 45.0  43.2  46.5
  General and administrative.................................. 10.3   8.5   9.8
  Acquired research and development...........................  3.2   3.0    --
  Costs of acquisitions.......................................  2.5   1.1   3.4
                                                               ----  ----  ----
    Total operating expenses.................................. 77.6  71.0  75.6
                                                               ----  ----  ----
Income from operations........................................  4.7  12.6   8.9
Other income, net.............................................  3.2   3.4   2.9
                                                               ----  ----  ----
Income before provision for income taxes......................  7.9  16.0  11.8
Provision for income taxes.................................... (2.7) (2.8) (1.6)
                                                               ----  ----  ----
Net income....................................................  5.2% 13.2% 10.2%
                                                               ====  ====  ====
</TABLE>
--------
(2) This paragraph consists of forward-looking statements reflecting current
expectations. The amount of the expense to be recorded with respect to the
write-off of acquired in-process research and development is based on a
current intention, and the amount actually recorded may be reduced. If such
amount is reduced, the effect on the results of operations for the quarter in
which the acquisition closes will be correspondingly reduced, and the effect
of the amortization of acquired intangible assets on results of operations in
future quarters will be correspondingly increased. In addition, the Company's
actual future performance may not meet the Company's current expectations.
Investors are strongly encouraged to review the section entitled "Additional
Risk Factors That Could Affect Operating Results" commencing on page 29 and
discussions elsewhere in this Annual Report on Form 10-K of the factors that
could affect future performance.
 
                                      21
<PAGE>
 
 Revenues
 
  Revenues increased from $87.4 million in 1996 to $137.0 million in 1997 and
to $162.2 million in 1998, increases of 57% and 18% in 1997 and 1998 compared
to the corresponding prior years of 1996 and 1997 respectively. The increases
in revenues during these periods were primarily attributable to an increase in
the number of available courses, customer contract renewals and upgrades and
expanded marketing and distribution efforts. During the three month periods
ended September 30, 1998 and December 31, 1998, the Company experienced a
slowdown in the historical quarterly revenue growth rate due in part to a
decline in contract renewals and upgrades and significant new contracts were
also impacted by the uncertainty surrounding the volatility of the Company's
stock price during the final weeks of September 1998. In addition some
contracts that were signed in the six month period ending December 31, 1998
generated less revenue than had historically been the case. Also, the
Company's "Channel" businesses, including the corporate telesales operations,
did not perform as well as had been anticipated. There can be no assurance
that the issues that adversely affected revenues in the third and fourth
quarters of 1998 will not continue to negatively affect the Company's revenues
in the future.
 
  Revenues in the United States increased from $63.1 million (or 72% of
revenues) in 1996 to $101.1 million (or 74% of revenues) in 1997 and to $113.6
million (or 70% of revenues) in 1998. The increases in 1997 and 1998 were
primarily the result of significant increases in the number of sales and
related personnel employed in the United States, an increase in the number of
available courses and an expansion of the Company's customer base. While
revenues in the United States increased significantly in absolute terms over
these periods, the Company's sales and marketing expenses and general and
administrative expenses in the United States also increased rapidly as the
Company hired and expanded its staff to support the U.S. sales growth.
 
  Revenues in the United Kingdom were $9.8 million (or 11% of revenues) in
1996, $11.3 million (or 8% of revenues) in 1997, and $17.4 million (or 11% of
revenues) in 1998, respectively. Revenues in Ireland were $0.8 million (or 1%
of revenues) in 1996, $1.5 million (or 1% of revenues) in 1997 and $3.2
million (or 2% of revenues) in 1998, respectively.
 
  Revenues from countries outside the United States, United Kingdom and
Ireland (principally from Australia, Europe (other than Ireland and the United
Kingdom), Canada, South Africa and MidEast in 1997) were $13.7 million (or 16%
of revenues) in 1996, $23.1 million (or 17% of revenues) in 1997, and $28.1
million (or 17% of revenues) in 1998, respectively. Because a significant
portion of the Company's business is conducted outside the United States, the
Company is subject to numerous risks of doing business in other countries,
including risks related to currency fluctuations.
 
  No customer accounted for more than 5% of revenues in 1996, 1997 or 1998,
although a single customer can account for a significantly higher percentage
of the Company's quarterly revenues. Accordingly, failure to achieve a
forecasted sale on schedule can have (and did have in the third quarter of
1998) a material adverse effect on quarterly operating results. Approximately
35% of the Company's backlog at December 31, 1998 was concentrated among 15
customers, compared to 35% among seven customers at December 31, 1997. Backlog
at any given date represents the amount of all license fees under current
agreements, which have not yet been recognized as revenues. Although the
Company's license agreements are noncancellable by their terms, there can be
no assurance that any customer will fulfill the contractual obligations under
its agreement. Cancellation, reduction or delay in orders by or shipments to
any of these or other customers could have a material adverse effect on the
Company's business and results of operations.
 
 Cost of Revenues
 
  Cost of revenues includes the cost of materials (such as compact discs,
diskettes, packaging and documentation), royalties to third parties, the
portion of development costs associated with funded development projects and
fulfillment costs.
 
  Gross margins increased from 82.3% in 1996 to 83.6% in 1997 and to 84.5% in
1998. Gross margins have been increasing as a result of the inclusion in the
earlier periods of royalty payments by acquired companies to third party
providers, which were higher than the average royalty payments paid by CBT
Group. Products
 
                                      22
<PAGE>
 
previously provided by such acquired companies are being replaced by CBT Group
product. The Company expects that cost of revenues may fluctuate from period
to period in the future based upon many factors, including the mix of titles
licensed (between titles developed exclusively by CBT Group and royalty-
bearing titles developed pursuant to development and marketing alliances) and
the timing of expenses associated with development and marketing alliances.
 
 Research and Development Expenses
 
  Research and development expenses consist primarily of salaries and
benefits, related overhead costs, travel expenses and fees paid to outside
consultants. Research and development expenses increased in absolute terms
from $14.5 million (or 16.6% of revenues) in 1996 to $20.9 million (or 15.2%
of revenues) in 1997 and to $25.8 million (or 15.9% of revenues) in 1998,
principally as a result of an increase in research and development personnel
employed to expand and enhance the Company's library of software products. The
Company delivered 279 new titles during 1998, which brought the Company's
library of titles to 837, representing a 50% increase over the number of
titles at the end of fiscal 1997. The increase in fiscal 1998 is attributable
to the expansion of the Company's Dublin development center, partially offset
by a reduction in the research and development expenses at ForeFront following
the merger in May 1998. The decrease in 1997 in the research and development
expenses as a percentage of revenues was a result of the reorganization of
ForeFront's research and development facility for Internet content management
products in April 1997 compared to 1996 when ForeFront made significant
investments in research and development efforts relating to Internet content
management products. In addition, approximately $803,000, $442,000 and
$596,000 of development expenses incurred in connection with development and
marketing alliances were charged to cost of revenues in 1996, 1997 and 1998,
respectively. The Company believes that significant investment in research and
development is required to remain competitive in the IT education and training
market, and the Company therefore expects research and development expenses to
continue to increase in future periods. (1)
 
  Software development costs are accounted for in accordance with the
Financial Accounting Standards Board Statement No. 86, under which the Company
is required to capitalize software development costs after technological
feasibility has been established. To date, development costs after
establishment of technological feasibility have been immaterial, and all
software development costs have been expensed as incurred.
 
 Sales and Marketing Expenses
 
  Sales and marketing expenses consist primarily of salaries and commissions,
travel expenses, advertising and promotional expenses and related overhead
costs. These expenses increased in absolute terms from $39.3 million (or 45.0%
of revenues) in 1996 to $59.2 million (or 43.2% of revenues) in 1997 and to
$75.4 million (or 46.5% of revenues) in 1998. The increases in sales and
marketing expenses are primarily attributable to an increase in the number of
sales and marketing personnel to accommodate the expected growth in operation
in the United States and to a lesser extent outside the United States.
Commission costs have also increased in absolute terms along with the
increases in revenues during these periods. In 1997 and 1998, the Company
increased significantly advertising and promotional expenses to market the
Company's expanded library of titles. The increase in sales and marketing
expenses as a percentage of revenues was negatively impacted by the less than
expected sequential revenue growth for the third and fourth quarters of 1998.
The Company expects to increase sales and marketing expenses in the future to
support expansion of its sales and marketing efforts. (1)
--------
 
(1) This statement is a forward-looking statement reflecting current
expectations. The Company's actual future performance may not meet the
Company's current expectations or its current plans may change. Investors are
strongly encouraged to review the section entitled "Additional Risk Factors
That Could Affect Operating Results" commencing on page 29 and discussions
elsewhere in this Annual Report on Form 10-K of the factors that could affect
future performance.
 
                                      23
<PAGE>
 
 General and Administrative Expenses
 
  General and administrative expenses consist primarily of salaries and
benefits, travel expenses, legal, accounting and consulting fees and related
overhead costs for administrative officers and support personnel. General and
administrative expenses increased in absolute terms from $9.1 million (or
10.3% of revenues) in 1996 to $11.6 million (or 8.5% of revenues) in 1997 and
to $15.9 million (or 9.8% of revenues) in 1998. The increases were primarily
due to increased staffing and infrastructure to support expanding operations.
The increase in general and administrative expenses as a percentage of
revenues in 1998 was due to the increase in staffing and infrastructure to
facilitate revenue growth, which was less than that which was anticipated. The
decrease as a percentage of revenues from 1996 to 1997 was due principally to
more rapid increases in revenues than in associated expenses during 1997. The
Company anticipates that general and administrative expenses will increase in
future periods due to increases in staffing and infrastructure. (1)
 
 Acquired Research and Development
 
  Acquired research and development expenses increased from $2.8 million (or
3.2% of revenues) in 1996 to $4.1 million (or 3.0% of revenues) in 1997 and
decreased to nil in 1998. The acquired research and development was incurred
by the acquisitions by ForeFront of Blue Squirrel Inc. in 1996, Lan
Professional Corporation and BookMaker Corporation in 1997. These amounts are
included in the Company's results under the pooling method of accounting rules
in accordance with the U.S. GAAP.
 
 Costs of Acquisitions
 
  Costs of acquisitions decreased from $2.2 million (or 2.5% of revenues) in
1996 to $1.5 million (or 1.1% of revenues) in 1997 and increased to $5.5
million (or 3.4% of revenues) in 1998. The acquisition expenses incurred in
1996 were due to the acquisitions of CLS and NTT by the Company and the
acquisition of Blue Squirrel, Inc. by ForeFront. The acquisition expenses
incurred in 1997 were due to the acquisitions of ALA, Benelux, Scholars and
Mid-East by the Company and the acquisitions of BookMaker Corporation, All
Micro, Inc. and Lan Professional Corporation by ForeFront. The acquisition
expenses incurred in 1998 related to the acquisition of ForeFront, accounted
for as a pooling of interests. These expenses consisted primarily of
professional fees, such as investment banking, legal and accounting, severance
costs, closure of offices, goodwill and other intangibles written off
following the closure of certain business segments and other related costs in
connection with the acquisitions. The Company may incur additional acquisition
expenses in the future should it undertake additional acquisitions.
 
 Other Income, Net
 
  Other income, net, comprises interest income, interest expense, gain or loss
on sale of assets and foreign currency exchange gains and losses. The Company
recognized other income, net, of approximately $2.8 million, $4.7 million and
$4.7 million in 1996, 1997 and 1998, respectively.
 
  Included in other income, net in 1997 is a one-time gain on the sale by
ForeFront of Internet printing technology of $1.9 million. Excluding this one
time gain on sale of assets in 1997, the increase in other income, net was due
principally to an increase of $1.5 million in interest income in 1998 as
compared to 1997. This increase in interest income resulted from interest on
increased cashflows from financing and operations. In addition, the Company
recognized net exchange gains of $4,000, $112,000 and $516,000 in 1996, 1997
and 1998 respectively.
--------
(1) This statement is a forward-looking statement reflecting current
expectations. The Company's actual future performance may not meet the
Company's current expectations or its current plans may change. Investors are
strongly encouraged to review the section entitled "Additional Risk Factors
That Could Affect Operating Results" commencing on page 29 and discussions
elsewhere in this Annual Report on Form 10-K of the factors that could affect
future performance.
 
                                      24
<PAGE>
 
  The Company's consolidated financial statements are prepared in dollars,
although several of the Company's subsidiaries have functional currencies
other than the dollar, and a significant portion of the Company's and its
subsidiaries' revenues, costs and assets are denominated in currencies other
than their respective functional currencies. The Company has significant
subsidiaries in the United Kingdom, Australia, the Netherlands, Canada and
Germany whose functional currencies are their local currencies and the
majority of whose sales and operating expenses other than cost of goods sold
are denominated in their respective local
currencies. In addition, the Company's Irish subsidiaries, whose functional
currency is the U.S. dollar, incur substantial operating expenses denominated
in Irish pounds. Fluctuations in exchange rates may have a material adverse
effect on the Company's results of operations, particularly its operating
margins, and could result in exchange losses. The impact of future exchange
rate fluctuations on the Company's results of operations cannot be accurately
predicted.
 
  The Company's subsidiaries in the United Kingdom, the Netherlands,
Australia, and Canada whose functional currencies are their local currencies,
had unhedged liabilities denominated in U.S. dollars payable to CBT Ireland at
December 31, 1998 of $11.3 million, $3.2 million, $2.7 million and $2.6
million respectively.
 
  During 1998, the Company undertook hedging transactions against the Irish
pound because the Company has substantial expenses denominated in that
currency. To date, the Company has not sought to hedge the risks associated
with fluctuations in the exchange rates of other currencies against the U.S
Dollar, but may undertake such transactions in the future. There can be no
assurance that any hedging techniques implemented by the Company would be
successful in eliminating or reducing the effects of currency fluctuations.
 
  Other income, net may fluctuate in future periods as a result of movements
in cash, cash equivalents and short-term investments balances, interest rates,
foreign currency exchange rates and asset disposals.
 
 Provision for Income Taxes
 
  CBT Group PLC operates as a holding company with operating subsidiaries in
several countries, and each subsidiary is taxed based on the laws of the
jurisdiction in which it operates. Because taxes are incurred at the
subsidiary level, and one subsidiary's tax losses cannot be used to offset the
taxable income of subsidiaries in other tax jurisdictions, the Company's
consolidated effective tax rate may increase to the extent that the Company
reports tax losses in some subsidiaries and taxable income in others.
 
  The Company has significant operations and generates a majority of its
taxable income in the Republic of Ireland, and certain of the Company's Irish
operating subsidiaries are taxed at rates substantially lower than tax rates
in effect in the United States and other countries in which the Company has
operations. One Irish subsidiary currently qualifies for a 10% tax rate and
another Irish subsidiary is income tax exempt. If such subsidiaries were no
longer to qualify for such tax rates or if the tax laws were rescinded or
changed, the Company's operating results could be materially adversely
affected. The standard rate of Irish corporation tax on both trading and non-
trading income presently (from January 1, 1999) is 28%. The 10% incentive rate
referred to above applies in respect of income derived from certain activities
carried out in the Republic of Ireland. The incentive rate will continue up to
December 31, 2010. Commencing January 1, 2003, it has been confirmed by the
Government of Ireland in an announcement by the Irish Minister for Finance on
December 2, 1998, the corporation tax rate is expected to be 12.5% on trading
income and 25% on non-trading income. Moreover, because the Company incurs
income tax in several countries, an increase in the profitability of the
Company in one or more of these countries could result in a higher overall tax
rate. In addition, if tax authorities were to challenge successfully the
manner in which profits are recognized among the Company's subsidiaries, the
Company's taxes could increase and its cash flow and net income could be
materially adversely affected.
 
  The Company's provision for income taxes was $2.4 million, $3.9 million and
$2.7 million for each of 1996, 1997 and 1998, respectively.
 
  The effective tax rate for the Company was 34.9%, 17.8% and 13.9% in 1996,
1997 and 1998, respectively. The movement in the effective tax rate was
principally the result of losses incurred by pooled entities in both
 
                                      25
<PAGE>
 
1996 and 1997, which were not available to offset taxable income earned in the
same or other jurisdictions pre or post the merger. In particular, ForeFront
had losses of $7.3 million in 1996 and $4.1 million in 1997, which could not
be offset, thus resulting in an increased overall tax rate for those years.
 
Quarterly Results of Operations
 
  The following table sets forth certain unaudited statement of operations
data for each of the Company's last eight quarters. This unaudited quarterly
financial information has been prepared on a basis consistent with the annual
information presented elsewhere in this Annual Report and, in management's
opinion, reflects all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the information presented. The
operating results for any quarter are not necessarily indicative of results
for any future period.
 
<TABLE>
<CAPTION>
                                                  Quarters Ended
                          ----------------------------------------------------------------------
                                    June     Sept                       June     Sept
                          Mar 31,    30,      30,    Dec 31,  Mar 31,    30,      30,    Dec 31,
                           1997     1997     1997     1997     1998     1998     1998     1998
                          -------  -------  -------  -------  -------  -------  -------  -------
<S>                       <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>
Revenues................  $26,727  $29,755  $35,136  $45,429  $39,929  $44,852  $35,182  $42,269
Cost of revenues........    4,683    5,173    5,657    6,989    5,944    6,697    5,998    6,498
                          -------  -------  -------  -------  -------  -------  -------  -------
Gross profit............   22,044   24,582   29,479   38,440   33,985   38,155   29,184   35,771
Operating expenses
  Research and
   development..........    4,431    4,731    5,105    6,611    6,390    6,604    5,762    7,076
  Sales and marketing...   12,827   13,415   14,680   18,238   16,868   18,622   17,684   22,221
  General and
   administrative.......    2,349    3,616    2,624    3,012    3,214    3,594    4,179    4,906
  Acquired research and
   development..........      --       447    3,650      --       --       --       --       --
  Costs of
   acquisitions.........      926      --       242      366      --     5,505      --       --
                          -------  -------  -------  -------  -------  -------  -------  -------
    Total operating
     expenses...........   20,533   22,209   26,301   28,227   26,472   34,325   27,625   34,203
                          -------  -------  -------  -------  -------  -------  -------  -------
Income from operations..    1,511    2,373    3,178   10,213    7,513    3,830    1,559    1,568
Other income, net.......      554      665    2,599      892      967      936    1,786    1,045
                          -------  -------  -------  -------  -------  -------  -------  -------
Income before provision
 for income taxes.......    2,065    3,038    5,777   11,105    8,480    4,766    3,345    2,613
Provision for income
 taxes..................     (517)    (817)  (1,043)  (1,539)  (1,138)    (667)    (468)    (393)
                          -------  -------  -------  -------  -------  -------  -------  -------
Net income..............    1,548    2,221    4,734    9,566    7,342    4,099    2,877    2,220
                          =======  =======  =======  =======  =======  =======  =======  =======
Basic net income per
 share(1)...............  $  0.04  $  0.06  $  0.12  $  0.23  $  0.17  $  0.09  $  0.07  $  0.05
                          =======  =======  =======  =======  =======  =======  =======  =======
Diluted net income per
 share(1)...............  $  0.04  $  0.05  $  0.11  $  0.21  $  0.16  $  0.09  $  0.06  $  0.05
                          =======  =======  =======  =======  =======  =======  =======  =======
</TABLE>
--------
(1) Basic and diluted Net income per share gives effect to the two-for-one
    split of Registrant's ADSs effected in March 1998 and the ordinary share
    split in May 1998. Prior periods have been restated to give effect to such
    split.
 
                                      26
<PAGE>
 
 The following table sets forth, as a percentage of revenues, certain line
items in the Company's statement of operations for the periods indicated.
<TABLE>
<CAPTION>
                                                   Quarters Ended
                          ---------------------------------------------------------------------
                          Mar 31,  June 30, Sept 30  Dec 31,  Mar 31, June 30, Sept 30  Dec 31,
                           1997      1997    1997     1997     1998     1998    1998     1998
                          -------  -------- -------  -------  ------- -------- -------  -------
<S>                       <C>      <C>      <C>      <C>      <C>     <C>      <C>      <C>
Revenues................    100%      100%    100%     100%     100%     100%    100%     100%
Cost of revenues........   17.5      17.4    16.1     15.4     14.9     14.9    17.0     15.4
                           ----      ----    ----     ----     ----     ----    ----     ----
Gross profit............   82.5      82.6    83.9     84.6     85.1     85.1    83.0     84.6
Operating expenses
  Research and
   development..........   16.6      15.9    14.5     14.6     16.0     14.7    16.4     16.7
  Sales and marketing...   48.0      45.1    41.8     40.1     42.3     41.6    50.3     52.6
  General and
   administrative.......    8.8      12.1     7.5      6.6      8.0      8.0    11.9     11.6
  Acquired research and
   development..........    --        1.5    10.4      --       --       --      --       --
  Costs of
   acquisitions.........    3.5       --      0.7      0.8      --      12.3     --       --
                           ----      ----    ----     ----     ----     ----    ----     ----
    Total operating
     expenses...........   76.9      74.6    74.9     62.1     66.3     76.6    78.6     80.9
                           ----      ----    ----     ----     ----     ----    ----     ----
Income from operations..    5.6       8.0     9.0     22.5     18.8      8.5     4.4      3.7
Other income, net.......    2.1       2.2     7.4      1.9      2.4      2.1     5.1      2.5
                           ----      ----    ----     ----     ----     ----    ----     ----
Income before provision
 for income taxes.......    7.7      10.2    16.4     24.4     21.2     10.6     9.5      6.2
Provision for income
 taxes..................   (1.9)     (2.7)   (2.9)    (3.3)    (2.8)    (1.5)   (1.3)    (1.0)
                           ----      ----    ----     ----     ----     ----    ----     ----
Net income..............    5.8 %     7.5 %  13.5 %   21.1 %   18.4      9.1 %   8.2 %    5.2 %
                           ====      ====    ====     ====     ====     ====    ====     ====
</TABLE>
 
  The Company's growth in revenues over the last eight quarters has been
primarily attributable to an increase in the number of available courses in
the Company's library, an increase in the number of customers and increases in
sales to existing customers, as well as the Company's expanded marketing and
distribution efforts in the United States, and to a lesser extent, countries
outside the United States. During the three month periods ended September 30,
1998 and December 31, 1998, the Company experienced a slowdown in the
historical quarterly revenue growth rate due in part to a decline in contract
renewals and upgrades and significant new contracts were also impacted by the
uncertainty surrounding the volatility of the Company's stock price during the
final weeks of September, 1998. In addition some contracts that were signed in
the six month period ending December 31, 1998 generated less revenue than had
historically been the case. Also, the Company's "Channel" businesses,
including the corporate telesales operations, did not perform as well as had
been anticipated. There can be no assurance that the issues that adversely
affected revenues in the third and fourth quarters of 1998 will not continue
to negatively affect the Company's revenues in the future.
 
  In 1998, the Company experienced a slowdown in the historical quarterly
revenue growth rate for the quarters ended September 30, and December 31,
1998. The Company's revenues historically have been highest in the fourth
quarter of each year. There can be no assurance that the issues that adversely
affected revenues in the third and fourth quarters of 1998 will not continue
to negatively affect the Company's net income in the future.
 
  During 1998, the Company hired a number of employees, particularly sales and
marketing personnel, which resulted in an increase in sales and marketing
expenses for the year. The Company also added a significant number of
employees to research and development. As a result of these increases, as well
as continued hiring in other departments, the Company expects operating
expenses in future periods to be significantly higher than in prior periods.
 
                                      27
<PAGE>
 
  The Company anticipates that it will continue this hiring in the first half
of 1999, which will reduce operating margins, particularly in the first and
second quarters. (2)
 
  Liquidity and Capital Resources
 
  Cash, cash equivalents and short-term investments were $54.0 million, $71.5
million and $102.0 million as of December 31, 1996, 1997 and 1998,
respectively. Working capital was $52.0 million, $84.0 million and $116.8
million as of December 31, 1996, 1997 and 1998 respectively.
 
  The increases in cash, cash equivalents, short term investments and working
capital in 1997 and 1998 were due principally to net income and the proceeds
from the exercise of options, which were offset by investments in property and
equipment to support the Company's expanded operations.
 
  Net cash provided by operating activities decreased from $6.2 million in
1996 to $4.1 million in 1997 and increased to $13.5 million in 1998. The
decrease in net cash provided by operating activities in 1997 was primarily
due to an increase in accounts receivable in 1997. At December 31, 1997
accounts receivable had increased by $19.2 million as compared with the
accounts receivable balance at December 31, 1996. This increase was due
primarily to the revenue earned in the quarter ended December 31, 1997 of
$45.4 million as compared to revenue of $27.8 million for the quarter ended
December 31, 1996. The increase in net cash provided by operating activities
in 1998 was primarily attributable to a significantly lower increase in
accounts receivable than in 1997. The accounts receivable balance at December
31, 1998 increased by $3.6 million from that at December 31, 1997. The
significantly lower increase in accounts receivable compared to the increase
in 1997, can be attributed to the revenue generated in the quarter ended
December 31, 1998 of $42.3 million compared to $45.4 in the corresponding
quarter of 1997. The increase in accounts receivable balance is primarily a
function of the revenue earned in the preceeding quarter and the timing of
payments in respect of receivables. Accounts receivable write-offs in an
accounting year to date have not been material and have been within the
amounts reserved.
 
  Capital expenditures were approximately $7.4 million in 1996, $5.4 million
in 1997 and $12.6 million in 1998. The increases in 1998 were primarily
attributable to expenditures relating to computer equipment and infrastructure
as a result of investments in the Companys' information systems and capital
expenditures on new corporate headquarters in Redwood City, California, a new
facility in Scottsdale, Arizona and the new research and development
facilities in Dublin, Ireland. The Company expects that its capital
expenditure will increase in 1999, primarily as a result of continuing
investments in its information systems and expenditures on the new research
and development facility. (1)
 
  The Company believes that its existing cash, cash equivalents and short-term
investments and cash to be generated from operations will be sufficient to
meet its expected working capital and capital expenditure requirements for at
least the next twelve months. (3) The Company may from time to time consider
the acquisition of complementary businesses, products or technologies, which
may require additional financing.
--------
(1) This statement is a forward-looking statement reflecting current
    expectations. The Company's actual future performance may not meet the
    Company's current expectations or its current plans may change. Investors
    are strongly encouraged to review the section entitled "Additional Risk
    Factors That Could Affect Operating Results" commencing on page 29 and
    discussions elsewhere in this Annual Report on Form 10-K of the factors
    that could affect future performance.
 
(2) This paragraph consists of forward-looking statements reflecting current
    expectations. The Company's actual future performance may not meet the
    Company's current expectations or its current plans may change. Investors
    are strongly encouraged to review the section entitled "Additional Risk
    Factors That Could Affect Operating Results" commencing on page 29 and
    discussions elsewhere in this Annual Report on Form 10-K of the factors
    that could affect future performance.
 
(3) This is a forward-looking statement, and actual results may differ
    materially depending on a variety of factors, including variable operating
    results or presently unexpected uses of cash such as mergers and
    acquisitions.
 
                                      28
<PAGE>
 
 Recent Accounting Pronouncements
 
  In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use". The SOP requires
the capitalization of certain costs incurred after the date of adoption in
connection with developing or obtaining software for internal use once certain
criteria are met. The Company adopted SOP 98-1 in fiscal 1998.
 
  In February 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No.132, "Employers' Disclosures About Pensions and Other Post-Retirement
Benefits." This statement revises employers' disclosures about pensions and
other post-retirement benefit plans. It does not, however, change the
measurement of recognition of those plans. This statement standardizes the
disclosure requirements for pensions and other post-retirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures. Restatement of disclosures for
earlier periods is required. The Company has implemented the provisions of
SFAS 132 in 1998 for its defined contribution plan.
 
  In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activity" ("SFAS 133") which is required to be adopted in years beginning
after June 15, 1999. The Company has yet to determine its date of adoption.
The Statement will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges of underlying
transactions must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the
hedged assets, liabilities or firm commitments through earnings or recognized
in other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. Management has not yet determined what the
effect of SFAS 133 will be on the Company's consolidated financial position,
results of operations or cash flows.
 
  In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions" and
addresses software revenue recognition as it applies to certain multiple-
element arrangements. SOP 98-9 also amends SOP 98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2" through fiscal years beginning on
or before March 15, 1999. All other provisions of SOP 98-9 are effective for
transactions entered into in fiscal years beginning after March 15, 1999.
 
Additional Risk Factors that Could Affect Operating Results
 
  In addition to the other factors identified in this Annual Report, the
following risk factors could materially and adversely affect the Company's
future operating results, and could cause actual events to differ materially
from those predicted in the Company's forward looking statements relating to
its business.
 
 Fluctuations in Operating Results
 
  The Company has in the past experienced fluctuations in its quarterly
operating results and anticipates that such fluctuations will continue and
could intensify in the future. Fluctuations in operating results may result in
volatility in the price of the Company's ADSs. For example, the Company's
revenue for the quarter ended September 30, 1998 did not increase at a rate
comparable to prior quarters. As a direct result, the trading price of the
Company's ADSs decreased rapidly and significantly, having an extreme adverse
effect on the value of an investment in the Company's securities.
 
  Although the Company was profitable in each of the last ten quarters, there
can be no assurance that such profitability will continue in the future or
that the levels of profitability will not vary significantly among quarterly
periods. The Company's operating results may fluctuate as a result of many
factors, including size and
 
                                      29
<PAGE>
 
timing of orders and shipments, mix of sales between products developed solely
by the Company and products developed through development and marketing
alliances, royalty rates, the announcement, introduction and acceptance of new
products, product enhancements and technologies by the Company and its
competitors, mix of sales between the Company's field sales force, its other
direct sales channels and its indirect sales channels, competitive conditions
in the industry, loss of significant customers, delays in availability of
existing or new products, spending patterns of the Company's customers,
litigation costs and expenses, currency fluctuations and general economic
conditions.
 
  The Company's expense levels are based in significant part on its
expectations regarding future revenues and are fixed to a large extent in the
short term. Accordingly, the Company may be unable to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall. Any
significant revenue shortfall would therefore have a material adverse effect
on the Company's results of operations. This risk materialized in the third
and fourth quarters of 1998, where profit was dramatically negatively affected
by a shortfall in revenues as against management's expectations.
 
 Dependence on Key Personnel
 
  On October 1, 1998, Mr. James J. Buckley, the Company's Chairman and Chief
Executive Officer, and Mr. Richard Y. Okumoto, the Company's Senior Vice
President of Finance and Chief Financial Officer, stepped down from their
respective positions. Messrs. Buckley and Okumoto were replaced on an interim
basis by a newly formed management committee. Effective December 10, 1998 the
Company appointed Mr. William G. McCabe as Chairman of the Board and Mr.
Gregory M. Priest as President and Chief Executive Officer. Both Mr. McCabe
and Mr. Priest served on the interim management committee that had managed the
Company since October 1, 1998 and remain on the Board of Directors. Failure to
retain these and other executives, or the loss of certain additional senior
management personnel or other key employees, could have a material adverse
effect on the Company's business and future business prospects.
 
  The Company's future success also depends on the continued service of its
key sales, product development and additional operational personnel and on its
ability to attract, motivate and retain highly qualified employees. In
addition, the Company depends on writers, programmers and graphic artists, as
well as third-party content providers. The Company expects to continue to hire
additional product development, sales and marketing, IS and accounting staff.
However, there can be no assurance that the Company will be successful in
attracting, retaining or motivating key personnel. In particular, the
Company's recent adverse operating results, stock price performance and
management changes could create uncertainties that could have a material
adverse effect on the Company's ability to attract and retain key personnel.
Although the Company has repriced all stock options (other than stock options
held by the Company's directors) in an effort to retain and reincent
employees, there can be no assurance that this strategy will be successful,
and in any event, it will have a dilutive effect on future earnings per share.
The inability to hire and retain qualified personnel or the loss of the
services of key personnel could have a material adverse effect upon the
Company's current business, new product development efforts and future
business prospects.
 
 Competition
 
  The IT education and training market is highly fragmented and competitive,
and the Company expects this competition to increase. The Company expects that
because of the lack of significant barriers to entry into this market, new
competitors may enter the market in the future. In addition, larger companies
are competing with the Company in the IT education and training market, in
part through the acquisition of the Company's competitors, and the Company
expects this trend to continue. Such competitors may also include publishing
companies and vendors of application software, including those vendors with
whom the Company has formed development and marketing alliances.
 
  The Company competes primarily with third-party suppliers of instructor-led
IT education and training and internal training departments and with other
suppliers of IT education and training, including several other
 
                                      30
<PAGE>
 
companies that produce interactive software training. To a lesser extent, the
Company also competes with consultants, value-added resellers and network
integrators. Certain of these value-added resellers also market products
competitive with those of the Company. The Company expects that as
organizations increase their dependence on outside suppliers of training, the
Company will face increasing competition from these other suppliers as IT
education and training managers more frequently compare training products
provided by outside suppliers.
 
  Many of the Company's current and potential competitors have substantially
greater financial, technical, sales, marketing and other resources, as well as
greater name recognition, than the Company. In addition, the IT education and
training market is characterized by significant price competition, and the
Company expects that it will face increasing price pressures from competitors
as IS managers demand more value for their training budgets. Accordingly,
there can be no assurance that the Company will be able to provide products
that compare favorably with new instructor-led techniques or other interactive
training software or that competitive pressures will not require the Company
to reduce its prices significantly.
 
 Developing Market
 
  The market for IT education and training is rapidly evolving. New methods of
delivering interactive education software are being developed and offered in
the marketplace, including intranet and internet deployment and management
systems. Many of these new delivery and training management systems will
involve new and different business models and contracting mechanisms. In
addition, multimedia and other product functionality features are being added
to the educational software. Accordingly, CBT's future success will depend
upon, among other factors, the extent to which CBT is able to develop and
implement products which address these emerging market requirements. There can
be no assurance that CBT will be successful in meeting changing market needs.
 
 Seasonality
 
  The software industry generally, and the Company in particular, are subject
to seasonal revenue fluctuations, based in part on customers' annual budgetary
cycles and in part on the annual nature of sales quotas. These seasonal trends
have in the past caused, and in the future are expected to continue to cause,
revenues in the first quarter of a year to be less, perhaps substantially so,
than revenues for the immediately preceding fourth quarter. In addition, the
Company has in past years added significant headcount in the sales and
marketing and research and development functions in the first quarter, and to
a lesser extent, the second quarter. Because these headcount additions do not
immediately contribute significant revenues, the Company's operating margins
in the earlier part of the year tend to be significantly lower than in the
later parts of the year. Because of the issues affecting the Company's third
and fourth quarter results, which will continue to negatively affect the
Company for at least the next several quarters, the reduction in operating
margins is expected to continue for at least the next several quarters. Many
software companies also experience a seasonal downturn in demand during the
summer months. There can be no assurance that these or other seasonal trends
will not have a material adverse effect on the Company's results of
operations.
 
 Economic Conditions
 
  The revenue growth and profitability of the Company's business depends on
the overall demand for computer software and services as well as new
developments within the IT industry. The demand for computer software and
services is dependent on general economic and business conditions. Thus, a
weakening of the global economy could result in decreased revenues or
decelerating growth rates.
 
                                      31
<PAGE>
 
 Management of Expanding Operations and Acquisitions
 
  The Company has recently experienced rapid expansion of its operations,
which has placed, and is expected to continue to place, significant demands on
the Company's administrative, operational and financial personnel and systems.
The Company's future operating results will substantially depend on the
ability of its officers and key employees to manage changing business
conditions and to implement and improve its operational, financial control and
reporting systems. In particular, the Company requires significant improvement
in its order entry and fulfillment and management information systems in order
to support its expanded operations. If the Company is unable to respond to and
manage changing business conditions, its business and results of operations
could be materially adversely affected.
 
  As a result of the consummation of a number of acquisitions the Company's
operating expenses have increased. There can be no assurance that the
integration of these businesses can be successfully completed in a timely
fashion, or at all, or that the revenues from the acquired businesses will be
sufficient to support the costs associated with those businesses, without
adversely affecting the Company's operating margins. Any failure to
successfully complete the integration in a timely fashion or to generate
sufficient revenues from the acquired businesses could have a material adverse
effect on the Company's business and results of operations.
 
  On May 29, 1998, the Company acquired The ForeFront Group, Inc., a Houston
based provider of high quality, cost-effective, computer-based training
products and network utilities for technical professionals. The successful
combination of CBT and ForeFront, including the operation of ForeFront as an
autonomous subsidiary of CBT, has required and will continue to require
substantial effort from each company. The Company has experienced some
difficulties in the integration of ForeFront and CBT, in particular in
connection with the integration of the two companies' sales operations. These
difficulties contributed to the company's failure to achieve its internal
revenue expectations in the third quarter of 1998 and have continued to affect
the Company since that time. These difficulties could continue to have a
negative effect on future results, which could be material.
 
  In addition to the pending acquisition of Knowledge Well, the Company
regularly evaluates acquisition opportunities and is likely to make
acquisitions in the future. Future acquisitions by the Company could result in
potentially dilutive issuances of equity securities, the incurrence of debt
and contingent liabilities and amortization expenses related to goodwill and
other intangible assets, which could materially adversely affect the Company's
results of operations. Product and technology acquisitions entail numerous
risks, including difficulties in the assimilation of acquired operations,
technologies and products, diversion of management's attention to other
business concerns, risks of entering markets in which the Company has no or
limited prior experience and the potential loss of key employees of acquired
companies. The Company's management has had limited experience in assimilating
acquired organizations and products into the Company's operations. No
assurance can be given as to the ability of the Company to integrate
successfully any operations, personnel or products that have been acquired or
that might be acquired in the future, and the failure of the Company to do so
could have a material adverse effect on the Company's results of operations.
 
 Risk of Increasing Taxes
 
  Certain of the Company's subsidiaries have significant operations and
generate significant taxable income in Ireland, and certain of the Company's
Irish subsidiaries are taxed at rates substantially lower than tax rates in
effect in the United States and in other countries in which the Company has
operations. The extent of the tax benefit could vary from period to period,
and there can be no assurance that the Company's tax situation will not
change.
 
 Euro Currency
 
  The participating members of the European Union adopted the Euro as the
common legal currency on January 1, 1999. On that same date they established
the fixed conversion rates between the existing sovereign
 
                                      32
<PAGE>
 
currencies and the Euro. The Company's research and development operation, as
well as a number of sales operations, are based in Europe. The Company does
not believe that the Euro Conversion will have a material impact on its
business and financial condition. However the Company is unable to determine
with certainty if the Euro conversion will have a material adverse impact on
the Company's business and financial condition.
 
 Year 2000
 
  In the past, many information technology products were designed with two
digit year codes that are unable to determine the correct century for a
particular year. As a result, these hardware and software products may not
function or may give incorrect results in and beyond the year 1999. This
problem has been generally referred to as the "Year 2000" problem.
 
  The Company has established a Year 2000 Task Force in its Dublin Development
Centre (the "Dublin Task Force") and a Year 2000 Task Force in its corporate
headquarters in Redwood City, California (the "US Task Force") to together
identify and resolve Year 2000 issues. The Dublin Task Force is testing the
Year 2000 readiness of CBT's current software products and making appropriate
modifications to ensure that CBT's software will function appropriately in
1999, the Year 2000, and throughout the next century. The Dublin Task Force is
also testing the Company's internal systems in Ireland. The US Task Force is
coordinating testing and preparation of the Company' internal systems
throughout the world that are material to CBT's operations. The Company has
defined "Year 2000 Ready" to mean that neither performance nor functionality
of the hardware or software product will be negatively affected by four digit
dates prior to, during, and after the Year 2000 in a material manner provided
that all other products (whether hardware or software) used in or in
combination with the product properly exchange data with it.
 
  The Company is utilizing internal resources to identify, test and as
necessary correct or reprogram its products and services for Year 2000
Readiness. The Company has tested almost all of its current products that are
generally available and has determined that all such products are Year 2000
Ready, except for certain older products that the Company does not plan to
make Year 2000 Ready and for which there is presently relatively small demand
(such as DOS based products). The Company has not specifically tested software
obtained from third parties, which is incorporated in CBT's products, but
plans to seek assurances from these third parties that their software is Year
2000 Ready. Despite the Company's testing or assurances from third party
software providers, there can be no assurances that the Company's products do
not contain undetected errors or defects associated with Year 2000 date
functions which may result in delay or loss of revenue, diversion of
development resources, damage to the Company's reputation, costs for third
party damage claims, or increased service costs any of which could impair the
Company's finances or business prospects.
 
  The Company is utilizing internal resources to identify, correct, replace or
reprogram, and test its internal systems, including both information
technology ("IT") and non-IT systems. The Company has not yet determined
whether any external resources will be required. The Company's Year 2000
internal readiness program primarily covers: taking inventory of hardware,
software and embedded systems, creating action plans to address known risks
associated with such systems, contacting vendors for assurances that their
systems are or shall be timely Year 2000 Ready, and contingency planning. The
Company has initiated an assessment of its material internal IT systems and
its non-IT systems. There can be no assurance that the Company's internal
systems or the systems of other companies on which the Company's systems rely
will be timely Year 2000 Ready and that such failure to achieve Year 2000
Readiness will not have a material adverse effect on the Company's systems.
 
  The Company has thus far funded its Year 2000 Readiness plan from operating
cash flows and in the past has not separately accounted for these costs. These
costs have principally been the related payroll costs for personnel in the
development and information systems group. The Company estimates that costs
incurred through December 31, 1998 in connection with the Year 2000 Readiness
program have not been material to the Company. In connection with the
Company's internal system Year 2000 readiness plan, the Company will incur
additional costs which may be material for internal and possibly external
administrative personnel to manage the
 
                                      33
<PAGE>
 
project, and for new (or upgrades to) internal use software, hardware and
related engineering costs. Although the Company expects to implement
successfully the systems and programming changes necessary to adequately
address issues confronting the Company raised by the Year 2000 problem, there
can be no assurance, however, that problems will not arise with respect to
Year 2000 Readiness that the Company fails to identify or address timely. The
Company's inability to timely implement such changes could have a material
adverse effect on future results of operations.
 
  Some commentators have stated that a significant amount of litigation will
arise out of Year 2000 Readiness issues, and the Company is aware of lawsuits
against other software vendors. In addition, the Company could be affected by
Year 2000 litigation against its software development partners. Because of the
unprecedented nature of such litigation and unknown impact of the Year 2000
problem, it is uncertain to what extent the Company may be affected by such
litigation.
 
  The Company presently has only minimal information concerning the Year 2000
Readiness status of its customers. If the Company's current or future
customers fail to achieve Year 2000 Readiness or if they divert or delay
technology expenditures to focus on or in connection with preparing their
business for the Year 2000, capital expenditure, software investment and
training budgets may be delayed or spent on remediation efforts rather than
information technology training. Such a delay in software investment or
diversion of software investment or training funds could reduce the demand for
the Company's products both (a) directly, if current and potential customers
allocate less funds to information technology training, and (b) indirectly, by
delaying the purchase and implementation of new systems. This could adversely
affect the Company's future revenues, although the impact is not known at this
time.
 
  The Company has facilities, operations, and customers located throughout the
world. Some commentators have reported that some countries, and organizations
within those countries, are not acting intensively to remediate their Year
2000 issues. To the extent that the businesses and governments in countries
where the Company does business do not work intensively at remediation of
their Year 2000 issues, the Company may suffer significant interruptions or
delays in its operations and business. This could have a material adverse
effect on the Company's future results of operations.
 
  The Company is also subject to external forces that might affect industry
and commerce generally, such as Year 2000 Readiness failures at utility,
transportation, telecommunication, and Internet provider companies and related
service interruptions. In addition, because the Company has facilities,
operations, and customers located throughout the world, the Company's
operations and financial results may be impacted more severely than those of
other businesses by the failure of its internal network or by the temporary
loss of telecommunication systems or the Internet generally.
 
  The Company has not yet developed a contingency plan to address situations
that may result if it is unable to achieve Year 2000 Readiness of its critical
operations. The cost of developing or implementing such a plan may itself be
material.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
  The Company did not directly or benefically own any market risk sensitive
instruments at the end of fiscal 1998 or fiscal 1997.
 
                                      34
<PAGE>
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                       CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                         Page
                                                                        Number
                                                                        ------
<S>                                                                     <C>
Report of Ernst & Young, Independent Auditors..........................    36
Consolidated Balance Sheets............................................    37
Consolidated Statements of Operations..................................    38
Consolidated Statements of Changes in Shareholders' Equity and
 Comprehensive Income.................................................. 39-41
Consolidated Statements of Cash Flows..................................    42
Notes to Consolidated Financial Statements............................. 43-59
</TABLE>
 
                                       35
<PAGE>
 
                 REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
 
The Board of Directors and Shareholders.
 
CBT Group PLC
 
  We have audited the accompanying consolidated balance sheets of CBT Group
PLC as of December 31, 1997 and 1998 and the related consolidated statements
of operations, changes in shareholders' equity and comprehensive income, and
cash flows for each of the three years in the period ended December 31, 1998.
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 did not audit the financial statements of The
Forefront Group, Inc., a company acquired by the Company in a business
combination accounted for as a pooling-of-interests as described in note 4 to
the consolidated financial statements, which statements reflect total assets
of $10,008,111 as of December 31, 1997, and total revenues of $13,798,466 and
$18,407,770 for the years ended December 31, 1996 and 1997, respectively.
Those statements were audited by other auditors whose report has been
furnished to us and our opinion, insofar as it relates to data included for
The Forefront Group, Inc., is based solely on the report of the other
auditors.
 
  We conducted our audits in accordance with United States 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, and the report
of other auditors, provide a reasonable basis for our opinion.
 
  In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of CBT Group PLC at December 31,
1997 and 1998, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with United States generally accepted accounting principles.
 
                                              /s/ Ernst & Young
                                              _________________________________
 
                                              ERNST & YOUNG
 
Dublin, Ireland
Date: January 19, 1999
 
                                      36
<PAGE>
 
                                 CBT GROUP PLC
 
                          CONSOLIDATED BALANCE SHEETS
                             (dollars in thousands)
 
<TABLE>
<CAPTION>
                                                              At December 31
                                                             ------------------
                                                               1997      1998
                                                             --------  --------
<S>                                                          <C>       <C>
                          ASSETS
Current assets
Cash and cash equivalents..................................  $ 35,505  $ 65,648
Short term investments.....................................    36,038    36,386
Accounts receivable, net...................................    40,031    43,508
Inventories................................................       615       247
Deferred tax assets, net...................................       140       253
Prepaid expenses...........................................     4,198     5,777
                                                             --------  --------
  Total current assets.....................................   116,527   151,819
Intangible assets..........................................     5,956     4,237
Property and equipment, net................................    10,207    17,636
Investments................................................       200       550
Deferred tax assets, net...................................       342       --
Other assets...............................................     8,097    16,002
                                                             --------  --------
  Total assets.............................................  $141,329  $190,244
                                                             ========  ========
           LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Borrowings under bank overdraft facility and overdrafts....        13       --
Accounts payable...........................................     4,820     5,161
Accrued payroll and related expenses.......................     6,411     6,790
Other accrued liabilities..................................    16,715    20,023
Deferred revenues..........................................     4,550     3,004
                                                             --------  --------
  Total current liabilities................................    32,509    34,978
Non Current Liabilities
Minority equity interest...................................       622       383
Other liabilities..........................................       519        82
                                                             --------  --------
  Total non current liabilities............................     1,141       465
Shareholders' equity
Ordinary shares, IR9.375p par value: 120,000,000 shares
authorized at December 31, 1997 and 1998; issued and
outstanding 41,763,452 and 41,706,273 at December 31, 1997
and 44,412,808 and 44,387,039 shares at December 31, 1998..     6,369     6,725
Additional paid-in capital.................................    97,870   127,869
Accumulated profit.........................................     2,986    19,293
Capital redemption.........................................       --        231
Deferred compensation......................................      (112)      --
Other comprehensive income.................................       568       685
Treasury stock, 25,769 shares at cost......................        (2)       (2)
                                                             --------  --------
Total shareholders' equity.................................   107,679   154,801
                                                             --------  --------
  Total liabilities and shareholders' equity...............  $141,329  $190,244
                                                             ========  ========
</TABLE>
 
                            (see accompanying notes)
 
                                       37
<PAGE>
 
                                 CBT GROUP PLC
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                (dollars in thousands, except per share amounts)
 
<TABLE>
<CAPTION>
                                                    Years ended December 31,
                                                    ---------------------------
                                                     1996      1997      1998
                                                    -------  --------  --------
<S>                                                 <C>      <C>       <C>
Revenues........................................... $87,364  $137,047  $162,232
Cost of revenues...................................  15,445    22,502    25,137
                                                    -------  --------  --------
Gross profit.......................................  71,919   114,545   137,095
Operating expenses:
  Research and development.........................  14,502    20,878    25,832
  Sales and marketing..............................  39,288    59,160    75,395
  General and administrative.......................   9,075    11,601    15,893
  Acquired research and development................   2,799     4,097       --
  Costs of acquisitions............................   2,155     1,534     5,505
                                                    -------  --------  --------
    Total operating expenses.......................  67,819    97,270   122,625
                                                    -------  --------  --------
Income from operations.............................   4,100    17,275    14,470
Interest income, net...............................   2,821     2,729     4,218
Gain on sale of assets.............................     --      1,869       --
Net exchange gain..................................       4       112       516
                                                    -------  --------  --------
Income before provision for income taxes...........   6,925    21,985    19,204
Provision for income taxes.........................  (2,419)   (3,916)   (2,666)
                                                    -------  --------  --------
Net Income......................................... $ 4,506  $ 18,069  $ 16,538
                                                    =======  ========  ========
Net income per share--Basic........................ $  0.12  $   0.45  $   0.38
                                                    =======  ========  ========
Net income per share--Diluted...................... $  0.11  $   0.41  $   0.36
                                                    =======  ========  ========
</TABLE>
 
 
                            (see accompanying notes)
 
                                       38
<PAGE>
 
                                 CBT GROUP PLC
 
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
                                    INCOME
                            (dollars in thousands)
 
<TABLE>
<CAPTION>
                           Additional Accumulated                          Receivable      Other                  Total
                  Ordinary  paid-in      profit    Capital     Deferred       from     comprehensive Treasury shareholders'
                   shares   capital    (deficit)  redemption compensation shareholders    income      stock      equity
                  -------- ---------- ----------- ---------- ------------ ------------ ------------- -------- -------------
<S>               <C>      <C>        <C>         <C>        <C>          <C>          <C>           <C>      <C>
Balance at
 December 31,
 1995...........   $5,530   $72,412    $(18,196)    $ --        $(586)       $(190)        $   1      $  (2)     $58,969
Issuance of
 37,632 ordinary
 shares as a
 result of
 pooling
 Scholars.com...        5        (5)        --        --          --           --            --         --           --
Issuance of
 39,212 ordinary
 shares as a
 result of the
 acquisition of
 Blue Squirrel..        6       392         --        --          --           --            --         --           398
Issuance of
 70,124 ordinary
 shares as a
 result of the
 acquisition of
 BookMaker......       10     2,405         --        --          --           --            --         --         2,415
Issuance of
 1,572,456
 ordinary shares
 as a result of
 option
 exercises and
 139,580 from
 employee
 purchase plan..      257     2,459         --        --          --           --            --         --         2,716
 Amortization of
 deferred
 compensation...      --        (16)        --        --          217          --            --         --           201
Received from
 shareholders...      --        --          --        --          --           190           --         --           190
Distributions to
 stockholders...      --        --       (1,505)      --          --           --            --         --        (1,505)
Comprehensive
 Income:
Net income......      --        --        4,506       --          --           --            --         --         4,506
Translation
 adjustment.....      --        --          --        --          --           --            358        --           358
                                                                                                                 -------
Comprehensive
 Income.........                                                                                                   4,864
                   ------   -------    --------     -----       -----        -----         -----      -----      -------
Balance at
 December 31,
 1996...........   $5,808   $77,647    $(15,195)    $ --        $(369)       $ --          $ 359      $  (2)     $68,248
</TABLE>
 
                           (see accompanying notes)
 
                                       39
<PAGE>
 
                                 CBT GROUP PLC
 
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
                                    INCOME
                            (dollars in thousands)
 
<TABLE>
<CAPTION>
                           Additional Accumulated                          Receivable      Other                  Total
                  Ordinary  paid-in     profit     Capital     Deferred       from     comprehensive Treasury shareholders'
                   shares   capital    (deficit)  redemption compensation shareholders    income      stock      equity
                  -------- ---------- ----------- ---------- ------------ ------------ ------------- -------- -------------
<S>               <C>      <C>        <C>         <C>        <C>          <C>          <C>           <C>      <C>
Balance at
 December 31,
 1996...........   $5,808   $77,647    $(15,195)    $ --        $ (369)      $ --          $ 359      $  (2)    $ 68,248
Issuance of
 258,000
 ordinary shares
 as a result of
 pooling
 MidEast........       37       370         --        --           --          --            --         --           407
Issuance of
 3,229,864
 ordinary shares
 as a result of
 option
 exercises and
 91,492 from
 employee share
 purchase plan..      522    16,438         --        --           --          --            --         --        16,960
Issuance of
 7,791 ordinary
 shares as a
 result of the
 acquisition of
 BookMaker......        2       214         --        --           --          --            --         --           216
Issuance of
 ordinary shares
 as a result of
 the acquisition
 of Lantec......      --      2,552         --        --           --          --            --         --         2,552
Taxation credit
 as a result of
 disqualifying
 dispositions...      --        825         --        --           --          --            --         --           825
Amortization of
 deferred
 compensation...      --       (176)        --        --           257         --            --         --            81
Adjustment to
 record the
 overlap in
 accounting for
 ALA's net loss
 from January 1,
 1997 to June
 30, 1997.......      --        --          112       --           --          --            --         --           112
Comprehensive
 Income:
Net income......      --        --       18,069       --           --          --            --         --        18,069
Translation
 adjustment.....      --        --          --        --           --          --            209        --           209
                                                                                                                --------
Comprehensive
 Income.........      --        --          --        --           --          --            --         --        18,278
                   ------   -------    --------     -----       ------       -----         -----      -----     --------
Balance at
 December 31,
 1997...........   $6,369   $97,870    $  2,986     $ --        $(112)       $ --          $ 568      $ (2)     $107,679
</TABLE>
 
                           (see accompanying notes)
 
                                       40
<PAGE>
 
                                 CBT GROUP PLC
 
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
                                    INCOME
                            (dollars in thousands)
 
<TABLE>
<CAPTION>
                          Additional Accumulated                          Receivable      Other                  Total
                 Ordinary  paid-in     profit     Capital     Deferred       from     comprehensive Treasury shareholders'
                  shares   capital    (deficit)  redemption compensation shareholders    income      stock      equity
                 -------- ---------- ----------- ---------- ------------ ------------ ------------- -------- -------------
<S>              <C>      <C>        <C>         <C>        <C>          <C>          <C>           <C>      <C>
Balance at
 December 31,
 1997...........  $6,369   $ 97,870    $ 2,986     $ --        $(112)       $ --          $ 568      $  (2)    $107,679
Issuance of
 2,314,200
 ordinary shares
 as a result of
 option
 exercises,
 194,734 from
 employee share
 purchase plan
 and 7,016 from
 the exercise of
 warrants.......     334     29,493        --        --          --           --            --         --        29,827
Release of
 31,410 Escrow
 shares in
 respect of
 BookMaker
 acquisition....       4        303        --        --          --           --            --         --           307
Issue of
 exchangable
 shares in
 respect of
 LanTec
 acquisition....      18        (18)       --        --          --           --            --         --           --
Amortization of
 deferred
 compensation...     --         --         --        --          112          --            --         --           112
Capital
 redemption
 reserve........     --         --        (231)      231         --           --            --         --           --
Tax credit on
 disqualifying
 dispositions...     --         221        --        --          --           --            --         --           221
Comprehensive
 Income:
Net income......     --         --      16,538       --          --           --            --         --        16,538
Translation
 adjustment.....     --         --         --        --          --           --            117        --           117
                                                                                                               --------
Comprehensive
 Income.........                                                                                                 16,655
                  ------   --------    -------     -----       -----        -----         -----      -----     --------
Balance at
 December 31,
 1998...........  $6,725   $127,869    $19,293     $ 231       $ --         $ --          $ 685      $  (2)    $154,801
                  ======   ========    =======     =====       =====        =====         =====      =====     ========
</TABLE>
 
                           (see accompanying notes)
 
                                       41
<PAGE>
 
                                 CBT GROUP PLC
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                            ( dollars in thousands)
 
Increase (decrease) in cash and cash equivalents
 
<TABLE>
<CAPTION>
                                                     Years ended December
                                                              31,
                                                    -------------------------
                                                     1996     1997     1998
                                                    -------  -------  -------
<S>                                                 <C>      <C>      <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................................... $ 4,506  $18,069  $16,538
Adjustments to reconcile net income to net cash
 provided by operating activities:
Depreciation and amortization......................   2,437    3,582    6,689
Non cash acquired research and development.........   2,799    4,097      --
Taxation credit from disqualifying dispositions....     --       825      221
(Gain)/ loss on disposal of assets.................     --    (1,869)     318
Overlap in accounting for ALA net loss, excluding
 depreciation......................................     --       (67)     --
Accrued interest on short-term investments.........     221     (465)     241
Changes in operating assets and liabilities:
Accounts receivable................................  (5,910) (19,199)  (3,636)
Inventories........................................    (116)       2      367
Deferred tax assets................................    (132)      49      215
Prepaid expenses and other assets..................  (4,260)  (5,375)  (9,527)
Accounts payable...................................   1,822      168      406
Accrued payroll and related expenses and other
 accrued liabilities...............................   2,780    7,175    3,118
Deferred revenue...................................   2,096   (2,855)  (1,485)
                                                    -------  -------  -------
Net cash provided by operating activities..........   6,243    4,137   13,465
                                                    -------  -------  -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of intangible assets.....................     --    (5,297)     --
Purchases of property and equipment................  (7,378)  (5,410) (12,634)
Payments to acquire short-term investments.........  (1,334)  (2,291) (93,673)
Payments to acquire Blue Squirrel, LanTec..........    (128)  (1,803)     --
Proceeds from acquisition of BookMaker.............      77      --       --
Proceeds from short-term investments...............  12,998    3,500   93,085
Proceeds from investments..........................     --     4,997      --
Proceeds from sale of assets.......................     --     1,869      --
Payments to acquire investments....................  (4,997)    (200)    (350)
                                                    -------  -------  -------
Net cash used in investing activities..............    (762)  (4,635) (13,572)
                                                    -------  -------  -------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of notes payable.........................     (79)     --       --
Repayments under bank overdraft facility...........  (1,381)    (140)     (13)
Repayments of bank loan............................    (742)     --       --
Payment of receivables from shareholders...........     190      --       --
Proceeds from issuance of preferred shares in
 subsidiary........................................     --       606      --
Proceeds from issuance of ordinary shares, net.....   2,716   17,367   30,124
Dividend distributions.............................  (1,505)     --       --
                                                    -------  -------  -------
Net cash provided (used) by financing activities...    (801)  17,833   30,111
                                                    -------  -------  -------
Effect of exchange rate changes on cash and cash
 equivalents.......................................    (135)     929      139
                                                    -------  -------  -------
Net increase in cash and cash equivalents..........   4,545   18,264   30,143
Cash and cash equivalents at beginning of period...  12,696   17,241   35,505
                                                    -------  -------  -------
Cash and cash equivalents at end of period......... $17,241  $35,505  $65,648
                                                    =======  =======  =======
Supplemental disclosure of cash flow information:
Interest paid...................................... $   108  $    43  $    30
Taxes paid......................................... $   847  $   994  $ 2,283
</TABLE>
 
                            (see accompanying notes)
 
                                       42
<PAGE>
 
                                 CBT GROUP PLC
 
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
1. Organization and Summary of Significant Accounting Policies
 
 Organization
 
  CBT Group PLC is organized as a public limited company under the laws of the
Republic of Ireland. CBT Group PLC and its subsidiaries (collectively, the
"Company" or "CBT") develops and markets interactive information technology
("IT") education and training software. The principal market for the Company's
products comprises major U.S. national and multinational organizations.
 
 Basis of Presentation and Principles of Consolidation
 
  The consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States and include the
Company and its subsidiaries in the United States, United Kingdom, Ireland,
South Africa, Canada, Germany, Australia, the Netherlands, Sweden, Norway,
Denmark, the Commonwealth of the Bahamas and Grand Cayman after eliminating
all material inter-company accounts and transactions. All acquisitions have
been accounted for under the purchase accounting method, except for the
mergers with Personal Training Systems ("PTS"), CBT Systems Canada Limited (
formerly known as New Technology Training Limited ) ("NTT"), CLS Consult
Gessellschaft fur Beratung, Management und Beteiligung mbH ("CLS"), CBT
Systems Benelux B.V. ("Benelux"), Applied Learning Limited ("ALA"), Ben Watson
& Associates Limited ("Scholars.com"), CBT Systems Middle East Limited
("MidEast"), and The ForeFront Group, Inc ("ForeFront"), which have been
included in the consolidated financial statements under the pooling of
interests method (see note 4).
 
 Use of Estimates
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
 
 Translation of Financial Statements of Foreign Entities
 
  The reporting currency for the Company is the U.S. dollar ("dollar"). The
functional currency of the Company's subsidiaries in the United States, United
Kingdom, Republic of South Africa, Canada, Germany, Australia, the
Netherlands, Sweden, Norway and Denmark are the currencies of those countries.
The functional currency of the Company's subsidiaries in Ireland, the
Commonwealth of the Bahamas and Grand Cayman is the dollar.
 
  Balance sheet amounts are translated to the dollar from the local functional
currency at year-end exchange rates, while statements of operations amounts in
local functional currency are translated using average exchange rates.
Translation gains or losses are recorded in other comprehensive income.
Currency gains or losses on transactions denominated in a currency other than
an entity's functional currency are recorded in the results of the operations.
The Company has not undertaken hedging transactions to cover its currency
exposures.
 
 Revenue Recognition
 
  Beginning in fiscal 1998, the Company adopted Statement of Position 97-2
"Software Revenue Recognition" as amended by Statement of Position 98-4. The
effect of adoption did not have a material impact on the Company's results of
operations.
 
  The Company derives its revenues primarily pursuant to license agreements
under which customers license usage of delivered products for a period of one,
two or three years. On each anniversary date during the term of
 
                                      43
<PAGE>
 
                                 CBT GROUP PLC
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
1. Organization and Summary of Significant Accounting Policies (continued)
 
multiyear license agreements, customers are allowed to exchange any or all of
the licensed products for an equivalent number of alternative products within
the CBT library. The first year license fee is generally recognized as revenue
at the time of delivery of all products, provided the Company's fees are fixed
or determinable and collections of accounts receivable are probable.
Subsequent annual license fees are recognized on each anniversary date,
provided the Company's fees are fixed or determinable and collections of
accounts receivable are probable. The cost of satisfying any Post Contract
Support ("PCS") is accrued at the time revenue is recognized as PCS fees are
included in the annual license fee, the estimated cost of providing PCS during
the agreements is insignificant and unspecified upgrades or enhancements
offered have been and are expected to be minimal and infrequent. For multi-
element agreements Vendor Specific Objective Evidence exists to allocate the
total fee to the undelivered elements of the agreement. In addition, the
Company derives revenues from sales of its products, which is recognized upon
shipment, net of allowances for estimated future returns and for excess
quantities in distribution channels, provided the Company's fees are fixed or
determinable and collections of accounts receivable are probable.
 
  Revenues from product development arrangements are generally recognized on a
percentage of completion basis as milestones are completed or products
produced under the arrangement.
 
  Revenues from license agreements providing product exchange rights other
than annually during the term of the agreement are deferred and recognized
ratably over the contract period. Such amounts, together with unearned
development and license revenues, are recorded as deferred revenues in the
consolidated financial statements.
 
 Cost of Revenues
 
   Cost of revenues include materials (such as diskettes, compact discs,
packaging and documentation), royalties paid to third parties, the portion of
development costs associated with product co-development arrangements,
fulfillment costs and the amortization of the cost of purchased products.
Approximately $803,000, $442,000 and $596,000 of development expenses incurred
in connection with development and marketing alliances were charged to cost of
revenues in 1996, 1997 and 1998, respectively.
 
 Inventories
 
  Inventories are stated at the lower of cost (first in, first out) or net
realizable value and consist principally of compact discs, diskettes and
manuals. Net realizable value is the estimated selling price less all
applicable selling costs.
 
 Research and Development
 
  Research and development expenditures are generally charged to operations as
incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
requires capitalization of certain software development costs subsequent to
the establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion
of a working model. Development costs incurred by the Company between
completion of the working model and the point at which the product is ready
for general release have been insignificant. Through December 31, 1998, all
research and development costs have been expensed as incurred.
 
 Intangible Fixed Assets
 
  In December 1997 the Company and Street Technologies, Inc. ("Street") a
developer of technology to "stream" multimedia and other large data files to
permit real-time delivery over local and wide area networks,
 
                                      44
<PAGE>
 
                                 CBT GROUP PLC
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
1. Organization and Summary of Significant Accounting Policies (continued)
 
corporate intranets and the Internet, entered into an agreement pursuant to
which Street granted to the Company a perpetual license to its software in
return for a once off payment of $5,297,000. As part of the agreement the
Company disposed of its investment in Street for $4,997,000, which was the
cost of its original investment. The Company commenced amortizing this asset,
using the straight line method, over a period of five years on January 1,
1998. Also included in intangible assets are goodwill and other intangibles
relating to the acquisition of Lantec (see note 4). These intangibles were
amortized in full at December 31, 1998. Accumulated amortization at December
31, 1997 and 1998 was $13,000 and $1,732,000 respectively.
 
 Property and Equipment
 
  Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over estimated useful lives of two to
five years. Leasehold improvements are amortized over the lesser of the term
of the lease or the estimated useful life of the asset.
 
 Net Income Per Share
 
  On March 9, 1998 the Company effected a two-for-one split of its issued and
outstanding ADSs. Subsequent thereto, the Company's shareholders approved a
proposal at the Company's 1998 Annual General Meeting to subdivide each of the
Ordinary Shares of IR37.5p into four Ordinary Shares of IR9.375p (the
"Ordinary Share Split"). As a consequence of the Ordinary Share Split,
effective May 22, 1998 each ADS represents and is exchangeable for one
Ordinary Share (the "Ratio Change"). Aside from the Ratio Change, the Ordinary
Share Split had no effect on the ADSs and had no effect on the number of ADSs
outstanding.
 
  Basic net income per share is calculated using the weighted average number
of ordinary shares of the Company outstanding during the period including the
issuance of Company ordinary shares as a result of pooling of interests (see
note 4), at the beginning of the earliest period presented or subsequent date
of incorporation of the pooled entity as applicable. Diluted net income per
share is similarly calculated using the combined weighted average number of
ordinary and dilutive potential ordinary shares, (as determined using the
treasury stock method), such as shares issuable pursuant to the exercise of
options outstanding, of the Company including the issuance of Company ordinary
and dilutive potential ordinary shares as a result of pooling of interests.
 
 Defined Contribution Plan
 
  The Company sponsors and contributes to a defined contribution plan for
certain employees and directors. Contribution amounts by the Company are
determined by management and allocated to employees on a pro rata basis based
on the employees' contribution. The Company contributed approximately
$232,000, $270,000 and $350,000 to the Plan in the years ended December 31,
1996, 1997 and 1998, respectively.
 
 Stock Based Compensation
 
  Statement of Financial Accounting Standards No. 123, "Accounting for Stock -
Based Compensation" encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value.
The Company has chosen to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25. "Accounting for Stock Issued to Employees" ("APB25"), and
related interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock. This cost is deferred and charged to expense ratably over the
vesting period, generally four years. Where shares are issued at less than the
deemed value for accounting
 
                                      45
<PAGE>
 
                                 CBT GROUP PLC
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
1. Organization and Summary of Significant Accounting Policies (continued)
 
purposes, the excess of the deemed value for accounting purposes over the
amount the employee must pay to acquire the shares is charged to expense as
stock compensation and credited to additional paid-in capital in the period of
transfer. The Company has recognized compensation expense of $201,050, $81,100
and $112,000 for the years ended December 31, 1996, 1997 and 1998,
respectively.
 
 Advertising Costs
 
  Costs incurred for producing and communicating advertising are expensed when
incurred. Advertising expenses amounted to $3.6 million, $9.3 million and
$11.4 million for the years ended December 31, 1996, 1997 and 1998
respectively.
 
 Gain on sale of assets
 
  In September 1997, ForeFront sold certain of its Internet printing
technologies under development to Hewlett-Packard Company and licensed
additional technologies to be used in connection with ongoing development
efforts of Hewlett-Packard, and recorded an one-time gain of $1.87 million
(net of closing costs). The sale proceeds consisted entirely of cash which was
received by the Company in September 1997.
 
 Government Grants
 
  Applications for payment under the grant agreement are made on a quarterly
basis. The application is matched with the relevant expenditure for the period
and, once approved by the grant authority, the grant is recognized and offset
against the relevant expense in the statement of operations.
 
  Employment Grants are payable in two equal annual installments. The first
installment is due when the employee is made permanent and the second on the
anniversary thereof. Rent grants are payable quarterly equal to 40% of the
rent of the Company's Irish premises, subject to a maximum amount. Management
development grants are payable quarterly for 50% of the eligible costs of
employing five members of management, subject to a maximum amount.
 
 Concentration of Credit Risk
 
  Financial instruments that potentially subject the Company to concentration
of credit risk consists principally of cash investments and trade receivables.
The Company invests its excess cash in deposits with major banks, in U.S.
Treasury and U.S. agency obligations and in debt securities of corporations
with strong credit ratings. The Company performs periodic evaluations of the
relative credit standing of all the financial institutions dealt with by the
Company, and considers the related credit risk to be minimal.
 
  The principal market for the Company's products comprises major U.S.
national and multi-national organizations. The Company performs ongoing credit
evaluations of its customers and maintains reserves for potential credit
losses. To date such losses have been within management's expectations. The
Company had an allowance for doubtful accounts of $1,219,500 and $1,142,800 at
December 31, 1997 and 1998, respectively. The Company generally requires no
collateral from its customers.
 
 Accounting for Income Taxes
 
  The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes",
which uses the liability method to calculate deferred income taxes.
 
                                      46
<PAGE>
 
                                 CBT GROUP PLC
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
1. Organization and Summary of Significant Accounting Policies (continued)
 
 Cash, Cash Equivalents and Short-Term Investments
 
  Cash and cash equivalents consist of cash on deposit with banks, money
market instruments, and certificates of deposit with maturities of 90 days or
less when acquired.
 
  Short-term investments at December 31, 1997 and 1998 comprise debt
securities issued by the U.S. Treasury, U.S. agency obligations and debt
securities of corporations with strong credit ratings with a maturity of less
than six months but greater than three months at the date of acquisition by
the Company. These are included at cost plus accrued interest, which
approximates the fair market value of the securities. At December 31, 1997 and
1998 $36,038,000 and $36,386,000 respectively (inclusive of accrued interest
of $713,000 and $472,000 respectively) was held in short-term investments. The
Company classifies available for sale securities as short-term investments.
 
 Other Assets
 
  Other assets at December 31, 1997 and 1998 consist primarily of deferred
sales commissions. Deferred sales commissions are charged to expense when the
related revenue is recognized.
 
2. Net Income Per Share
 
  The following table sets forth the computation of basic and diluted net
income per share:
 
<TABLE>
<CAPTION>
                                                         1996    1997    1998
                                                        ------- ------- -------
                                                        (dollars in thousands,
                                                           except per share
                                                               amounts)
<S>                                                     <C>     <C>     <C>
Numerator:
  Numerator for basic and diluted net income per
   share--income available to common shareholders...... $ 4,506 $18,069 $16,538
                                                        ======= ======= =======
Denominator:
  Denominator for basic net income per share--weighted
   average shares......................................  37,276  40,292  43,630
  Effect of dilutive securities:
  Employee stock options...............................   4,736   3,836   2,349
                                                        ------- ------- -------
  Denominator for diluted net income per share--
   adjusted weighted average shares and assumed
   conversion..........................................  42,012  44,128  45,979
                                                        ======= ======= =======
Basic net income per share............................. $  0.12 $  0.45 $  0.38
                                                        ======= ======= =======
Diluted net income per share........................... $  0.11 $  0.41 $  0.36
                                                        ======= ======= =======
</TABLE>
 
3. Comprehensive Income
 
  As of January 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No.130 ("SFAS 130"), "Reporting Comprehensive Income", which
established new rules for the reporting and display of comprehensive income
and its components; however, adoption in 1998 had no impact on the Company's
net income or shareholders' equity. SFAS 130 requires foreign currency
translation adjustments, which prior to adoption were reported separately in
stockholders' equity, to be included in other comprehensive income. Prior year
financial statements have been reclassified to conform to the requirements of
SFAS 130.
 
                                      47
<PAGE>
 
                                 CBT GROUP PLC
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
4. Acquisitions and Mergers
 
  On May 31, 1996, a merger occurred between the Company and CLS, a
distributor of multimedia training and education software based in Germany,
under which the Company issued 145,604 ordinary shares for all the outstanding
stock of CLS. On the same date a merger occurred between the Company and NTT,
the Company's Canadian distributor, under which the Company issued 146,124
ordinary shares for all the outstanding stock of NTT.
 
  On February 28, 1997, a merger occurred between the Company and ALA, a
distributor of multimedia training and education software based in Australia,
under which the Company issued 343,084 ordinary shares for all the outstanding
stock of ALA. On the same date a merger occurred between the Company and
Benelux, the Company's Benelux distributor, under which the Company issued
71,360 ordinary shares for all the outstanding stock of Benelux.
 
  On August 31, 1997, a merger occurred between the Company and Scholars.com,
a provider of online mentoring, under which the Company issued 37,632 ordinary
shares for all the outstanding stock of Scholars.com.
 
  On December 1, 1997, a merger occurred between the Company and MidEast, the
Company's Middle Eastern distributor, under which the Company issued 258,000
ordinary shares for all the outstanding stock of MidEast. On May 28, 1998, a
merger occurred between the Company and ForeFront, under which the Company
issued 2,182,851 ordinary shares for all outstanding stock of ForeFront. The
financial results of the Company, CLS, NTT, ALA, Benelux, Scholars.com,
MidEast and ForeFront have been accounted for using the "pooling-of-interests"
method. The "pooling-of-interests" method gives effect to the mergers as if
they had occurred at the beginning of the earliest period presented or
subsequent date of incorporation of the pooled entity as applicable. The
consolidated financial statements as presented are based on the Company's
historical consolidated financial statements and CLS's, NTT's ALA's,
Benelux's, Scholars.com's, MidEast's and ForeFront's historical financial
statements.
 
  The consolidated financial information for the year ended December 31, 1997
and 1998 includes the results of the Company and CLS, NTT, ALA, Benelux,
Scholars.com, MidEast (from the date of its incorporation) and ForeFront for
these periods and the assets and liabilities of the Company and CLS, NTT, ALA,
Benelux, Scholars.com, MidEast and ForeFront as at December 31, 1997 and 1998,
respectively. The comparative figures for the year ended December 31, 1996
comprise the results of the Company and CLS, NTT, Benelux, Scholars.com and
ForeFront for that period combined with the results of ALA for the year ended
June 30, 1997. ALA and Benelux, in the two month period ended February 28,
1997 had net revenues of $1,094,315 and $374,390 respectively. Net income in
that period was $123,642 and $21,190, respectively.
 
  Scholars. com, in the eight month period ended August 31, 1997 had net
revenues of $1,293,518. Net income in that period was $111,418.
 
  MidEast was established in April 1997 and in the period to December 1, 1997
had net revenues of $225,171. The net loss in the period was $532,046.
 
  ForeFront in the six month period ended June 30, 1998 had net revenues of
$12.1 million. The net loss for the six month period ended June 30, 1998 was
$3.1 million.
 
  ALA's results of operations for the six month period ended June 30, 1997
which reflected net revenues of $2,991,712, expenses of $3,104,193 and a net
loss of $112,481 have been duplicated in the accompanying 1997 Financial
Statements to conform operating results to the Company's fiscal year end. The
duplicate periods have been adjusted by including the net loss as an increase
to the Company's accumulated profit as of December 31,1997.
 
                                      48
<PAGE>
 
                                 CBT GROUP PLC
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
4. Acquisitions and Mergers (continued)
 
  The results of the operations for the enterprise acquired in 1998 and the
combined amounts presented in the consolidated financial statements are
summarized below (dollars in thousands):
<TABLE>
<CAPTION>
                                                    Years Ended December 31,
                                                    ---------------------------
                                                     1996      1997      1998
                                                    -------  --------  --------
<S>                                                 <C>      <C>       <C>
Revenues:
  CBT Group PLC.................................... $73,566  $118,639  $139,919
  ForeFront........................................  13,798    18,408    22,313
                                                    -------  --------  --------
    Combined....................................... $87,364  $137,047  $162,232
                                                    =======  ========  ========
Net income:
  CBT Group PLC.................................... $11,839  $ 22,197  $ 21,891
  ForeFront........................................  (7,333)   (4,128)   (5,353)
                                                    -------  --------  --------
    Combined....................................... $ 4,506  $ 18,069  $ 16,538
                                                    =======  ========  ========
</TABLE>
 
 ForeFront Acquisitions
 
  On March 8, 1996 ForeFront acquired Blue Squirrel, Inc., for a consideration
comprising 39,212 equivalent CBT ordinary shares and $100,000 in cash to
retire debt assumed by ForeFront. On June 12, 1996, ForeFront acquired
BookMaker Corporation, and issued 81,968 equivalent CBT ordinary shares. On
July 22, 1996, a merger occurred between ForeFront and AllMicro Inc. under
which the stockholders of AllMicro received 331,315 equivalent CBT ordinary
shares. On September 29, 1997, ForeFront acquired Lan Professional, Inc.
"LanTec", in exchange for $1.8 million and 174,860 equivalent CBT ordinary
shares, which are issuable upon exchange of an equivalent number of
Exchangeable Shares of LanTec retained by the LanTec shareholders at closing.
The acquisitions of Blue Squirrel, Inc., BookMaker Corporation and LanTec have
been accounted for under the "purchase method" and accordingly, the operating
results are included in the operating results since the date of acquisition.
The merger with AllMicro has been accounted for using the "pooling of
interests" method.
 
5. Property and Equipment
 
  Property and equipment, at cost, consist of the following:
 
<TABLE>
<CAPTION>
                                                                 1997    1998
                                                                ------- -------
                                                                  (dollars in
                                                                  thousands)
<S>                                                             <C>     <C>
Office and computer equipment.................................. $13,993 $22,781
Furniture, fixtures and others.................................   3,547   6,431
                                                                ------- -------
Total property and equipment...................................  17,540  29,212
Accumulated depreciation.......................................   7,333  11,576
                                                                ------- -------
Property and equipment, net.................................... $10,207 $17,636
                                                                ======= =======
</TABLE>
 
  Depreciation of property and equipment amounted to $2,236,503, $3,488,104
and $4,858,399 for the years ended December 31, 1996, 1997 and 1998,
respectively.
 
                                      49
<PAGE>
 
                                 CBT GROUP PLC
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
6. Other Accrued Liabilities
 
  Other accrued liabilities consist of the following at December 31 (dollars
in thousands):
 
<TABLE>
<CAPTION>
                                                                 1997    1998
                                                                ------- -------
<S>                                                             <C>     <C>
Royalties...................................................... $ 3,305 $ 4,756
Income and other taxes payable.................................   6,484   7,363
Other..........................................................   6,926   7,904
                                                                ------- -------
                                                                $16,715 $20,023
                                                                ======= =======
</TABLE>
 
7. Operating Lease Commitments
 
  The Company leases various facilities, automobiles and equipment under non-
cancellable operating lease arrangements. The major facilities leases are for
terms of 2 to 5 years, (except for CBT Systems Limited's new premises which
has a non-cancellable lease term of 11 years) and generally provide renewal
options for terms of up to 3 additional years. Rent expense under all
operating leases was approximately $2,245,000, $2,694,000 and $3,696,000 in
1996, 1997 and 1998, respectively. Future minimum lease payments under these
non-cancellable operating leases as of December 31, 1998 are as follows
(dollars in thousands):
 
<TABLE>
            <S>                                   <C>
            1999................................. $ 5,018
            2000.................................   4,644
            2001.................................   4,161
            2002.................................   3,722
            2003.................................   2,700
            Thereafter...........................   3,755
                                                  -------
              Total minimum lease payments....... $24,000
                                                  =======
</TABLE>
 
8. Contingencies
 
  During 1998, the previously disclosed litigation involving the transfer of
certain securities of Datacode Electronics Ltd. was settled. All amounts paid
in relation to the settlement have been expensed.
 
  Since the end of the third quarter of 1998 purported class action lawsuits
were filed in the United States District Court for the Northern District of
California, the United States District Court for the Southern District of New
York and the Superior Court of California for the County of San Mateo against
CBT Group PLC, its American operating subsidiary, CBT Systems USA Ltd. and
certain of its former and current officers and directors alleging violations
of the federal securities laws. The complaints allege that the defendants
misrepresented and/or omitted to state material facts regarding CBT's business
and financial condition and prospects during the class periods in order to
artificially inflate and maintain the price of the Company's ADSs, and
misrepresented and/or omitted to state material facts in the registration
statement and prospectus issued in connection with the merger with The
ForeFront Group, Inc., artificially inflating the price of the Company's ADSs.
 
  The Company believes that these actions are without merit and intends to
vigorously defend itself against these claims. Although the outcome of these
actions cannot presently be determined, an adverse resolution of these matters
could have a material adverse effect on the Company's financial position and
results of operations.
 
                                      50
<PAGE>
 
                                 CBT GROUP PLC
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
8. Contingencies (continued)
 
  On October 29, 1998, a derivative complaint was filed in the Superior Court
of California for the County of San Mateo against several present and former
officers and directors of the Company alleging that these persons violated
various duties to the Company. The derivative complaint also names the Company
as a nominal defendant. The derivative complaint is predicated on the factual
allegations contained in the class action complaints discussed above. No
demand was previously made to the Company's Board of Directors or shareholders
concerning the allegations of the derivative complaint, which seeks an
unspecified amount of damages.
 
  In addition, certain other claims and litigation have arisen against the
Company in the ordinary course of its business. The Company believes that all
such claims and lawsuits against the Company are without merit, and the
Company intends to vigorously contest such disputes. In the opinion of
management, the outcome of such disputes will not have a material effect on
its financial position, results of operations or liquidity, as reported in
these financial statements.
 
  Depending on the amount and timing of any unfavorable resolution of these
matters, it is possible that the Company's future results of operations or
cash flows could be materially affected in a particular period.
 
9. Shareholders' Equity
 
  Dividends may only be declared and paid out of profits available for
distribution determined in accordance with accounting principles generally
accepted in Ireland and applicable Irish Company Law. Any dividends, if and
when declared, will be declared and paid in dollars.
 
  In 1995, the Company issued warrants to purchase 11,699 ordinary shares to
holders of previously outstanding preferred stock. Warrants to purchase 15,173
ordinary shares were also issued to the holders of previously outstanding
senior convertible notes. The warrants to purchase ordinary shares at $8.99
per share have a five-year term.
 
 Share Option Plans
 
  The Company has elected to follow Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its stock options because, as discussed
below, the alternative fair value accounting provided for under FASB Statement
No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"), requires
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options generally equals the market price of the
underlying stock on the date of grant, no compensation expense is generally
recognized.
 
  However, for certain options granted by ForeFront in August and September
1995, ForeFront recognized deferred compensation for the excess of the deemed
value for accounting purposes of the common stock on the date the options were
granted ($8.99 per share) over the $3.60 exercise price of such options.
Aggregate deferred compensation of $726,375 resulted from the issuance of
these options, and compensation expense is recognized ratably over the vesting
period of each option, generally four years. ForeFront recognized $201,050,
$81,100 and $112,000 of this amount as compensation expense for the years
ended December 31, 1996, 1997 and 1998, respectively.
 
  The Company has six share option plans, the 1990 Share Option Scheme (the
"1990 Plan"), the 1994 Share Option Plan (the "1994 Plan"), the Supplemental
Share Option Scheme (the "1996 Plan"), the 1992 ForeFront
 
                                      51
<PAGE>
 
                                 CBT GROUP PLC
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
9. Shareholders' Equity (continued)
 
Stock Option Plan (the "FF92 Plan"), the 1996 ForeFront Non-Qualified Stock
Option Plan (the "FF96 Plan") and the 1996 ForeFront Non-Employee Directors'
Stock Option Plan (the "FF Directors' 1996 Plan"), (collectively the "Plans")
 
  Under the 1990 Plan, options to acquire ordinary shares in the Company may
be granted to any director or employee of the Company. Under the 1994 Plan,
all employees and directors of the Company and any independent contractor who
performs services for the Company are eligible to receive grants of non
statutory options ("NSO"). Employees are also eligible to receive grants of
incentive share options ("ISO") which are intended to qualify under section
422 of the United States Internal Revenue Code of 1986, as amended. Under the
1996 Plan all employees, with the exception of directors and executive
officers, are eligible to receive grants of NSO's. Under the FF92 Plan, non-
qualified and/or incentive options to acquire shares of common stock in
ForeFront were granted to any employee or director of ForeFront. Under the FF
96 Plan, non-qualified options to acquire shares of common stock in ForeFront
were granted to employees and directors of ForeFront. Under the FF Directors'
1996 Plan, non-employee directors were eligible to receive grants of options
to acquire common stock of ForeFront upon election to the Board of Directors
and each subsequent year thereafter.
 
  As of December 31, 1998, 4,700,000, 7,243,004, 4,500,000 (which includes an
increase in the number of shares reserved for issuance under the 1994 Plan and
1996 Plan respectively of 1,000,000, authorized by a resolution passed at the
Annual General Meeting of the Company on April 28, 1998 and 3,500,000
respectively), 470,550, 627,400 and 47,055 ordinary shares have been reserved
for issuance under the 1990 Plan, the 1994 Plan, 1996 Plan, FF92 Plan, FF96
Plan and FF Directors' 1996 Plan, respectively. The Plans are administered by
the Stock Option Committee (the "Committee").
 
  The terms of the options granted are generally determined by the Committee.
The exercise price of options granted under the 1990 Plan and ISO's granted
under the 1994 Plan cannot be less than the fair market value of ordinary
shares on the date of grant. In the case of ISO's granted to holders of more
than 10% of the voting power of the Company the exercise price cannot be less
than 110% of such fair market value. Under the 1994 Plan, the exercise price
of NSO's is set by the Committee at its discretion. The term of an option
under the 1994, 1996, FF92, FF96 Plans cannot exceed ten years and, generally,
the terms of an option under the 1990 Plan and FF Directors' 1996 Plan cannot
exceed ten years. The term of an ISO granted to a holder of more than 10% of
the voting power of the Company cannot exceed five years. An option may not be
exercised unless the option holder is at the date of exercise, or within three
months of the date of exercise has been, a director, employee or contractor of
the Company. There are certain exceptions for exercises following retirement
or death. Options under the Plans generally expire not later than 90 days
following termination of employment or service or six months following an
optionees' death or disability.
 
  In the event that options under the Plans terminate or expire without having
been exercised in full, the shares subject to those options are available for
additional option grants. Vesting periods of the options are determined by the
Committee and are currently for periods of up to four years. Under the 1990,
1994, 1996, FF92, FF96 and FF Directors 1996 Plans, options to purchase
103,410, 434,689, 135,312, 39,829, 126,267 and 7,842 shares respectively were
exercisable as of December 31, 1998. As of December 31, 1998, 2,412,906
options are available for grant under the plans.
 
  In November 1996, the Compensation Committee of the ForeFront Board of
Directors approved the repricing of substantially all of ForeFront's
oustanding options held by the existing employees to the then current fair
market value in order to incentivize the Company's employees. In October 1998,
the Compensation Committee of the Board of Directors approved the repricing of
all of the Company's outstanding options held by the existing employees,
except for director stock options, to the then current market value of $6.9375
per share
 
                                      52
<PAGE>
 
                                 CBT GROUP PLC
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
9. Shareholders' Equity (continued)
 
(the closing price on the date of such repricing) in an effort to retain and
reincent employees. Under the terms of the repricing, the repriced options
maintain the same vesting and expiration terms.
 
  Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996, 1997 and 1998; risk-free interest rates of approximately
6%, 6%, and 5% respectively; dividend yields of 0%; volatility factors of the
expected market price of the Company's ordinary shares of .37, .45 and 1.26
respectively; and a weighted-average expected life of the option of five
years.
 
  The Black-Scholes option model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in the management's
opinion, the existing models do not provide a reliable single measure of the
fair value of its stock options.
 
  For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.
 
  Pro forma net income/(loss) for the years ended December 31, 1996, 1997 and
1998 was $(2.2) million, $9.2 million and $(5.4) million respectively. Pro
forma basic net income/(loss) per share was $(0.06), $0.23 and $(0.12) for the
years ended December 31, 1996, 1997 and 1998, respectively. Pro forma diluted
net income/(loss) per share was $(0.05), $0.21 and $(0.12) for the years ended
December 31, 1996, 1997 and 1998, respectively. Because options vest over
several years and additional grants are expected, the effects of these
hypothetical calculations are not likely to be representative of similar
future calculations.
 
  A summary of the Company's stock option activity, and related information
for the years ended December 31, 1996, 1997 and 1998 follows:
 
<TABLE>
<CAPTION>
                                                  Options Outstanding
                                        ----------------------------------------
                                                                     Weighted
                                        Number of     Price per      Average
                                          Shares        Share     Exercise Price
                                        ----------  ------------- --------------
<S>                                     <C>         <C>           <C>
Balance at December 31, 1995...........  5,066,796  $ 0.15--11.28     $ 2.54
  Granted in 1996......................  4,067,404  $11.31--29.00     $15.82
  Exercised in 1996.................... (1,572,456) $ 0.15--27.50     $ 1.00
  Cancelled in 1996....................   (631,864) $ 0.51--27.50     $15.32
                                        ----------  -------------     ------
Balance at December 31, 1996...........  6,929,880  $ 0.15--29.00     $ 9.52
  Granted in 1997......................  1,899,275  $20.25--34.75     $21.68
  Exercised in 1997.................... (3,223,948) $ 0.15--28.56     $ 4.73
  Cancelled in 1997....................   (343,651) $ 2.68--25.63     $13.53
                                        ----------  -------------     ------
Balance at December 31, 1997...........  5,261,556  $ 0.40--34.75     $16.64
  Granted in 1998......................  9,203,529  $ 6.69--57.37     $32.87
  Exercised in 1998.................... (2,196,200) $ 0.40--31.28     $12.52
  Cancelled in 1998.................... (4,354,017) $ 0.15--57.37     $25.61
                                        ----------  -------------     ------
Balance at December 31, 1998...........  7,914,868  $ 1.41--36.00     $ 9.52
                                        ----------  -------------     ------
</TABLE>
 
  The previously described repricing of the Company's stock options in October
1998 is included in the above summary within the amounts cancelled and granted
in 1998.
 
                                      53
<PAGE>
 
                                 CBT GROUP PLC
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
9. Shareholders' Equity (continued)
 
<TABLE>
<CAPTION>
               Options Outstanding At December 31, 1998        Options Exercisable
          -------------------------------------------------- ------------------------
Range of                Weighted Average                     Number
Exercise    Shares    Remaining Contractual Weighted Average   of    Weighted Average
 Prices   Outstanding         Life           Exercise Price  Shares   Exercise Price
--------  ----------- --------------------- ---------------- ------  ----------------
<S>       <C>         <C>                   <C>              <C>     <C>
$
  1.41--
  6.69       104,616          6.19               $ 3.52       44,853      $ 2.70
$
  6.94--
  6.94     3,065,067          8.48               $ 6.94      492,187      $ 6.94
$
  9.76--
  9.94     4,136,137          9.94               $ 9.94        3,137      $ 9.76
$
 11.00--
 25.63       497,186          7.59               $17.55      297,310      $18.67
$
 27.49--
 36.00       111,862          8.88               $35.04        9,862      $28.66
--------   ---------          ----               ------      -------      ------
$
  1.41--
 36.00     7,914,868          9.16               $ 9.52      847,349      $11.09
--------   ---------          ----               ------      -------      ------
</TABLE>
 
  At December 31, 1996 and 1997 there were 2,964,960 and 1,623,866 options
exercisable, respectively, at a weighted average exercise price of $3.84 and
$11.89 respectively. The weighted average fair value of options granted during
the years ended December 31, 1996, 1997 and 1998 was $9.00, $11.61 and $15.13,
respectively.
 
<TABLE>
<CAPTION>
                                                   Options Outstanding
                                           -------------------------------------
                                           Number of  Price per Weighted Average
                                            Shares      Share    Exercise Price
                                           ---------  --------- ----------------
<S>                                        <C>        <C>       <C>
Other Options
Granted in 1994...........................  186,664     $0.40        $0.40
Exercised in 1996.........................  (26,664)    $0.40        $0.40
Cancelled in 1996.........................  (52,000)    $0.40        $0.40
Exercised in 1998......................... (108,000)    $0.40        $0.40
                                           --------     -----        -----
Balance at December 31, 1998..............      --        --           --
                                           --------     -----        -----
</TABLE>
 
  In November 1996, the Company granted to Forbairt, in conjunction with their
approval of an employment grant, a rent reduction grant and a management
development grant, an option to purchase 10,000 ordinary shares with an
exercise price equal to the fair market value at the date of grant. The option
was exercised in July 1998.
 
                                      54
<PAGE>
 
                                 CBT GROUP PLC
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
10. Income Taxes
 
  Income before provision for income taxes consists of the following:
 
<TABLE>
<CAPTION>
                                                           December 31,
                                                      -------------------------
                                                       1996     1997     1998
                                                      -------  -------  -------
                                                      (dollars in thousands)
<S>                                                   <C>      <C>      <C>
Ireland.............................................. $12,264  $22,579  $23,872
Rest of world........................................  (5,339)    (594)  (4,668)
                                                      -------  -------  -------
  Total.............................................. $ 6,925  $21,985  $19,204
                                                      =======  =======  =======
</TABLE>
 
  The provision for income taxes consists of the following:
 
<TABLE>
<S>                                                        <C>    <C>    <C>
Current................................................... $2,161 $3,916 $2,666
Deferred..................................................    258    --     --
                                                           ------ ------ ------
  Total provision for income tax.......................... $2,419 $3,916 $2,666
                                                           ====== ====== ======
</TABLE>
 
  The current provision for 1998 relates predominantly to provision for income
taxes in Ireland
 
  The provision for income taxes differs from the amount computed by applying
the statutory income tax rate to income before taxes. The sources and tax
effects of the difference are as follows:
 
<TABLE>
<CAPTION>
                                                          December 31,
                                                     -------------------------
                                                      1996     1997     1998
                                                     -------  -------  -------
                                                     (dollars in thousands)
<S>                                                  <C>      <C>      <C>
Income taxes computed at the Irish statutory income
 tax rate of 38% for 1996, 36.5% for 1997 and 32%
 for 1998........................................... $ 2,632  $ 8,025  $ 6,145
Income from Irish manufacturing operations taxed at
 lower rates........................................  (3,815)  (7,143)  (6,318)
Income subject to higher rate of tax................   1,099    1,780      474
Operating losses not utilized.......................   3,703    1,598    2,475
Operating losses utilized...........................    (554)    (876)    (348)
Intangible asset amortization and other non-
 deductible expenses................................    (461)     662    1,155
Change in valuation allowance.......................     586      657       --
Profits arising not subject to tax..................    (771)    (787)    (917)
                                                     -------  -------  -------
                                                     $ 2,419  $ 3,916  $ 2,666
                                                     =======  =======  =======
</TABLE>
 
<TABLE>
<CAPTION>
       EPS for tax holiday
       -------------------
       <S>                                                     <C>   <C>   <C>
       Basic.................................................. $0.10 $0.18 $0.14
                                                               ===== ===== =====
       Diluted................................................ $0.09 $0.16 $0.14
                                                               ===== ===== =====
</TABLE>
 
                                       55
<PAGE>
 
                                 CBT GROUP PLC
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
10. Income Taxes (continued)
 
  Deferred 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 deferred taxes consist of the following:
 
<TABLE>
<CAPTION>
                                                               December 31,
                                                             ------------------
                                                               1997      1998
                                                             --------  --------
                                                                (dollars in
                                                                thousands)
Deferred tax assets
-------------------
<S>                                                          <C>       <C>
Net operating loss carry forwards........................... $ 17,349  $ 25,200
Research and Development tax credit carry forwards..........      171       307
Non Compete.................................................      --         71
                                                             --------  --------
Allowance for returns, deferred revenue, depreciation.......      493       --
                                                             --------  --------
                                                               18,013    25,578
Valuation allowance.........................................  (17,531)  (25,325)
                                                             --------  --------
Net deferred tax assets..................................... $    482  $    253
                                                             ========  ========
</TABLE>
 
  At January 1, 1997 the valuation allowance was $5,213,381.
 
  At December 31, 1998, the Company had net operating loss carry forwards in
its UK subsidiary of approximately $661,000. The utilization of these net
operating loss carry forwards is limited to the future profitable operations
of the Company in the UK tax jurisdiction where such carry forwards arose.
These losses carry forward indefinitely.
 
  At December 31, 1998, the Company has a net operating loss carry forward of
approximately $72.0 million for U.S. federal income tax purposes which will
expire in the tax years 2007 through 2012 if not previously utilized.
Utilization of the U.S. net operating loss carry forward may be subject to an
annual limitation due to the change in ownership rules provided by the
Internal Revenue Code of 1986. This limitation and other restrictions provided
by the Internal Revenue Code of 1986 may reduce the net operating loss carry
forward such that it would not be available to offset future taxable income of
the U.S. subsidiary.
 
  At December 31, 1998, approximately $69.0 million of the net operating loss
carry forwards in the United States result from disqualifying dispositions.
The tax value of the disqualifying dispositions has not been recognized in the
tax reconciliation note as it is not expected that it will reverse. At
December 31, 1998, $25.2 million of the valuation allowance related to such
disqualifying dispositions.
 
11. Segment, Geographic and Customer Information
 
  On January 1, 1998 the Company adopted Statement of Financial Accounting
Standard No. 131 "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). The new rules establish revised standards for
public companies relating to the reporting of financial information about
operating segments. The adoption of SFAS 131 did not have a material effect on
the Company's primary consolidated financial statements but did affect the
Company's segment information disclosures.
 
 Segment Information
 
  Upon adoption of SFAS 131, the Company has presented financial information
for its three reportable operating segments: Americas, Europe Middle East Asia
("EMEA") and Ireland. The Americas and EMEA segments are sales operations and
Ireland is the Company's Research and Development operation.
 
  The Company and its subsidiaries operate in one industry segment, the
development and marketing of interactive education and training software.
Operations outside of Ireland consist principally of sales and marketing.
 
                                      56
<PAGE>
 
                                 CBT GROUP PLC
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
11. Segment, Geographic and Customer Information (continued)
 
  The Company's Chief Operating Decision Maker ("CODM"), the Company's
President and CEO allocates resources and evaluates performance based on a
measure of segment profit or loss from operations. The accounting policies of
the reportable segments are the same as described in the summary of
significant accounting policies. The Company's CODM does not view segment
results below operating profit (loss), therefore, net interest income, other
income and the provision for income taxes are not broken out by segment below.
The Company does not account for nor report to the CODM its assets or capital
expenditures by segment, thus asset information is not provided on a segment
basis.
 
  A summary of the segment financial information reported to the CODM is as
follows:
 
<TABLE>
<CAPTION>
                                      Year Ended December 31, 1998
                              ------------------------------------------------
                                                           All    Consolidated
                              Americas   EMEA    Ireland  Other      Total
                              --------  -------  ------- -------  ------------
                                         (dollars in thousands)
<S>                           <C>       <C>      <C>     <C>      <C>
Revenues--External........... $121,382  $27,262  $ 6,293 $ 7,295    $162,232
Inter segment Revenues.......      --       --    69,994     --       69,994
Depreciation and
 Amortization................    3,285      502    2,745     157       6,689
Segment Operating Income.....   (7,728)  (1,108)  26,231  (2,925)     14,470
</TABLE>
 
<TABLE>
<CAPTION>
                                      Year Ended December 31, 1997
                              ------------------------------------------------
                                                           All    Consolidated
                              Americas   EMEA    Ireland  Other      Total
                              --------  -------  ------- -------  ------------
                                         (dollars in thousands)
<S>                           <C>       <C>      <C>     <C>      <C>
Revenues--External........... $108,865  $20,676  $ 1,079 $ 6,427    $137,047
Inter segment Revenues.......      --       --    57,708     --       57,708
Depreciation and
 Amortization................    1,641      385    1,150     406       3,582
Segment Operating Income.....   (4,393)    (439)  24,653  (2,546)     17,275
</TABLE>
 
<TABLE>
<CAPTION>
                                      Year Ended December 31, 1996
                              ------------------------------------------------
                                                           All    Consolidated
                              Americas   EMEA    Ireland  Other      Total
                              --------  -------  ------- -------  ------------
                                         (dollars in thousands)
<S>                           <C>       <C>      <C>     <C>      <C>
Revenues--External........... $67,210   $12,809  $   774 $ 6,571    $87,364
Inter segment Revenues.......     --        --    31,732     --      31,732
Depreciation and
 Amortization................   1,223       274      595     345      2,437
Segment Operating Income.....  (6,319)     (544)  14,000  (3,037)     4,100
</TABLE>
 
  Revenues from external customers, based on the location of the customer, are
categorized by geographical areas as follows:
 
<TABLE>
<CAPTION>
                                                       Years Ended December 31,
                                                       -------------------------
                                                        1996     1997     1998
                                                       ------- -------- --------
                                                        (dollars in thousands)
<S>                                                    <C>     <C>      <C>
Revenues
Ireland............................................... $   774 $  1,463 $  3,210
United States.........................................  63,111  101,141  113,552
United Kingdom........................................   9,771   11,296   17,411
Other countries.......................................  13,708   23,147   28,059
                                                       ------- -------- --------
  Total............................................... $87,364 $137,047 $162,232
                                                       ------- -------- --------
</TABLE>
 
                                      57
<PAGE>
 
                                 CBT GROUP PLC
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
11. Segment, Geographic and Customer Information (continued)
 
  Long-Lived assets are those assets that can be directly associated with a
particular geographic area. These assets are categorized by geographical areas
as follows:
 
<TABLE>
<CAPTION>
                                                                  December 31,
                                                                 ---------------
                                                                  1997    1998
                                                                 ------- -------
                                                                   (dollars in
                                                                   thousands)
<S>                                                              <C>     <C>
Long-Lived Assets
Ireland......................................................... $ 8,567 $ 7,753
United States...................................................  12,931  25,800
Other countries.................................................   2,962   4,872
                                                                 ------- -------
  Total......................................................... $24,460 $38,425
                                                                 ======= =======
</TABLE>
 
  The Company regards its products and services, IT Training, as homogenous
products and services.
 
12. Government Grants
 
  Under agreements between the Company and Forbairt, the Company has offset
against related salary and rent expense amounts of $598,000, $1,021,000 and
$1,040,000 in the years ended December 31, 1996, 1997 and 1998, respectively.
Under the terms of the agreement between the Company and Forbairt, these
grants may be revoked in certain circumstances, principally failure to
maintain the related jobs for a period of five years from the payment of the
first installment of the related grant. The Company has complied with the
terms of the grant agreements through December 31, 1998.
 
13. Related Party Transactions
 
 Ownership of CBT Technology
 
  Approximately 9% of the outstanding share capital of CBT (Technology)
Limited ("CBT T"), one of the Company's Irish subsidiaries, representing a
special non-voting class, is owned by Stargazer Productions ("Stargazer"), an
unlimited company which is wholly-owned by certain key employees of CBT Group
PLC. All of the voting securities of CBT T are owned by CBT Group PLC and,
except for the securities owned by CBT Group PLC and Stargazer, there are no
other outstanding securities of CBT T. CBT T has in the past and may in the
future declare and pay dividends to Stargazer, and Stargazer may pay dividends
to its shareholders out of such amounts. Except for the fact that Stargazer is
wholly owned by certain key employees of CBT Group PLC, there is no
relationship between the Group and Stargazer.
 
 Loan to Director
 
  In February 1996, Mr. Priest, a director, President and Chief Executive
Officer of the Company, received an interest free loan from the Group in the
amount of US$125,000 repayable in four equal annual installments. At December
31, 1997 and 1998 the balance outstanding on this loan was $93,750 and nil,
respectively.
 
 ForeFront
 
  In May 1997, ForeFront issued a letter of credit for $75,000 to its landlord
secured by a certificate of deposit maturing in August 1998 for the benefit of
an unrelated corporation (which is owned in part by a stockholder of
ForeFront), in exchange for the corporation assuming the balance of the lease
for ForeFront's former office space in Houston, Texas. The letter of credit
expired in June 1998. ForeFront also executed a note receivable totaling
$54,078 and maturing June 1, 2001 from this unrelated corporation for its
purchase of certain furniture and equipment of ForeFront.
 
  Receivables also include $45,000 loaned to two officers of ForeFront. The
notes are due March 31, 2000, are unsecured and bear interest at 6.1%.
 
                                      58
<PAGE>
 
                                 CBT GROUP PLC
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
14. Recent Development
 
  On December 10, 1998 the Company announced that it had signed a definitive
agreement to acquire Knowledge Well Ltd. and Knowledge Well Group Ltd.
(collectively, "Knowledge Well"), providers of business, management and
professional education using interactive learning technologies. Knowledge
Well's software titles are delivered using advanced interactive learning
methodologies, while requiring that the student only have access to basic,
industry-standard computing platforms. Knowledge Well's strategy is to provide
a self-paced education and training solution allowing individuals to obtain
degrees and/or other credentials. This agreement has been amended and restated
on March 30, 1999 to reflect certain changes agreed upon on December 9, 1998
as a result of the decision to account for the acquisition under the purchase
method of accounting in accordance with U.S. generally accepted accounting
principles. The acquisition of Knowledge Well has been approved by an
Independent Committee of CBT's Board of Directors, in view of the fact that
certain members of the Board of Directors of CBT are shareholders and/or
former officers of Knowledge Well, and by the shareholders of Knowledge Well.
The acquisition is subject to specified closing conditions, including approval
by the disinterested shareholders of CBT and the receipt of required
regulatory approvals. The acquisition has been structured as a stock-for-stock
exchange, in which a total of approximately 4.0 million CBT shares will be
issued in exchange for all outstanding shares of Knowledge Well. CBT will
assume options to acquire Knowledge Well stock exercisable for an issuance of
approximately 0.8 million CBT Shares.
 
15. Effects of Recent Accounting Pronouncements
 
  In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use". The SOP requires
the capitalization of certain costs incurred after the date of adoption in
connection with developing or obtaining software for internal use once certain
criteria are met. The Company adopted SOP 98-1 in fiscal 1998.
 
  In February 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No.132, "Employers' Disclosures About Pensions and Other Post-Retirement
Benefits." This statement revises employers' disclosures about pensions and
other post-retirement benefit plans. It does not, however, change the
measurement of recognition of those plans. This statement standardizes the
disclosure requirements for pensions and other post-retirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures. Restatement of disclosures for
earlier periods is required. The Company has implemented the provisions of
SFAS 132 in 1998 for its defined contribution plan.
 
  In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activity" ("SFAS 133") which is required to be adopted in years beginning
after June 15, 1999. The Company has yet to determine its date of adoption.
The Statement will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges of underlying
transactions must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the
hedged assets, liabilities or firm commitments through earnings or recognized
in other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. Management has not yet determined what the
effect of SFAS 133 will be on the Company's consolidated financial position,
results of operations or cash flows.
 
  In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions" and
addresses software revenue recognition as it applies to certain multiple-
element arrangements. SOP 98-9 also amends SOP 98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2" through fiscal years beginning on
or before March 15, 1999. All other provisions of SOP 98-9 are effective for
transactions entered into in fiscal years beginning after March 15, 1999.
 
                                      59
<PAGE>
 
                                 ERNST & YOUNG
 
                 REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
 
The Board of Directors and Shareholders,
CBT Group PLC
 
  We have audited the consolidated balance sheets of CBT Group PLC as of
December 31, 1997 and 1998 and the related consolidated statements of
operations, changes in shareholders' equity and comprehensive income and cash
flows for each of the three years in the period ended December 31, 1998, and
have issued our report thereon dated January 19, 1999. Our audits also
included the financial statement schedule of the Company listed in Item 14(a).
This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. We did not audit
the financial statements of The Forefront Group, Inc., a company acquired by
the Company in a business combination accounted for as a pooling of interests
as described in note 4 to the consolidated financial statements, which
statements reflect total assets of $10,008,111 as of December 31, 1997, and
total revenues of $13,798,466 and $18,407,770 for the years ended December 31,
1996 and 1997, respectively. We have been furnished with the report of other
auditors with respect to Schedule II of The Forefront Group, Inc.
 
  In our opinion, based on our audits and the report of other auditors, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
 
                                          /s/ Ernst & Young
                                          _____________________
                                          ERNST & YOUNG
 
Dublin, Ireland
Date: January 19, 1999
 
                                      60
<PAGE>
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
     FINANCIAL DISCLOSURE
 
Not applicable.
 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
 
  The Company's definitive Proxy Statement will be filed with the Securities
and Exchange Commission in connection with the solicitation of proxies for the
Company's Annual General Meeting to be held on or about May 13, 1999 (the
"Proxy Statement"). Information required by this item is incorporated by
reference from the information contained in the Proxy Statement under the
captions "Election of Directors" and "Executive Compensation and Other
Matters."
 
ITEM 11. EXECUTIVE COMPENSATION
 
  The information required by this item will be contained in the Proxy
Statement under the caption "Executive Compensation" and is incorporated
herein by reference.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  The information required by this item will be contained in the Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners
and Management" and is incorporated herein by reference.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  The information required by this item will be contained in the Proxy
Statement under the caption "Certain Transactions" and is incorporated herein
by reference.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
(a) Documents filed as a part of this Form 10-K.
 
(1)Financial Statements. The following CBT Group PLC
 
  Consolidated Financial Statements Prepared in Accordance with US GAAP are
  incorporated herein by reference to Item 8 of this Form 10-K.
 
  Consolidated Balance Sheets--December 31, 1997 and 1998.
 
  Consolidated Statements of Operations--December 31, 1996, 1997 and 1998.
 
  Consolidated Statements of Changes in Shareholders' Equity and
  Comprehensive Income. -
 
  Consolidated Statements of Cash Flows--December 31, 1996, 1997, and 1998.
 
  Notes to Consolidated Financial Statements.
 
  Report of Independent Auditors.
 
(2) Financial Statement Schedule. The following financial statement schedule
    of CBT Group PLC for the fiscal years ended December 31, 1996, 1997 and
    1998 is filed as part of this Form 10-K and should be read in conjunction
    with the Company's Consolidated Financial Statements included in Item 8 of
    this Form 10-K.
 
                                      61
<PAGE>
 
<TABLE>
<CAPTION>
 Schedule                                Page #
 --------                                ------
 <C> <S>                                 <C>
 II  Valuation and Qualifying Accounts    S-1
</TABLE>
 
  Schedules not listed above have been omitted because they are not
  applicable or are not required or the information required to be set forth
  therein is included in the Consolidated Financial Statements or Notes
  thereto.
 
(3) Exhibits. See Exhibit Index at page 65-67 of this Form 10-K.
 
(b) Reports on Form 8-K.
 
  The Company filed a report on Form 8-K dated October 1, 1998 with the
  Securities and Exchange Commission attaching a press release announcing
  high level management changes, preliminary third quarter financial results,
  and the Board's decision to a adopt a shareholders' rights plan.
 
  The Company filed a report on Form 8-K dated October 4, 1998 with the
  Securities and Exchange Commission describing the Board's adoption of a
  Subscription Rights Declaration.
 
  The Company filed a report on Form 8-K dated December 10, 1998 with the
  Securities and Exchange Commission attaching a press release announcing the
  Company's definitive agreement to acquire Knowledge Well and the
  appointment of the Company's executive management team.
 
(d) Exhibits.
 
                                 EXHIBIT INDEX
 
<TABLE>
 <C>  <S>
 2.1  Amended and Restated Agreement and Plan of Reorganization dated November
      29, 1995 among the Company, CBT Acquisition Subsidiary, a Delaware
      corporation, and Personal Training Systems, Inc., a California
      corporation. (Incorporated by reference to exhibit 2.1 to the Company's
      Current Report on Form 8-K dated December 13, 1995).
 2.2  Implementation Deed dated as of November 26, 1996, as amended, among the
      Company, Applied Learning Limited and Arie Baalbergen, James Josephson,
      Geoffrey Bransbury and Brian Hacker (including schedules thereto)
      (Incorporated by reference to exhibit 2.1 to the Company's Current Report
      on Form 8-K dated March 14, 1997).
 2.3  Agreement and Plan of Reorganization, dated as of March 16, 1998, among
      the Company, Rockets Acquisition Corp. and The Forefront Group, Inc.
      (Incorporated by reference to exhibit 2.1 to the Company's Registration
      Statement on Form S-4 filed with the Securities and Exchange Commission
      on April 27, 1998 (File No. 333-51159)).
 2.4* Share Purchase Agreement dated as of November 30, 1998, as amended and
      restated March 30, 1999, among the Company, Knowledge Well Limited
      ("KWL"), Knowledge Well Group Limited ("KWGL") and the shareholders of
      KWL and KWGL.
 3.1  Memorandum of Association of the Company as amended on March 24, 1992,
      March 31, 1995 and April 28, 1998 (Incorporated by reference to exhibit
      3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter
      ended June 30, 1998 as filed with the Securities and Exchange Commission
      on August 14, 1998).
 3.2  Articles of Association of the Company as amended on July 6, 1995, and
      April 28, 1998, (Incorporated by reference to exhibit 3.2 to the
      Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June
      30, 1998 as filed with the Securities and Exchange Commission on August
      14, 1998).
 4.1  Specimen certificate representing the ordinary shares (Incorporated by
      reference to exhibit 4.1 to the Company's Registration Statement on Form
      F-1 declared effective with the Securities and Exchange Commission on
      April 13, 1995 (File No. 33-89904)).
</TABLE>
 
                                      62
<PAGE>
 
<TABLE>
 <C>    <S>
 4.2    Amended and Restated Deposit Agreement (including the form of American
        Depositary Receipt), dated as of April 13, 1995 as amended and restated
        as of May 22, 1998, among the Company, The Bank of New York, as
        Depositary, and each Owner and Beneficial Owner from time to time of
        American Depositary Receipts issued thereunder (Incorporated by
        reference to [Exhibit (a) to Post-Effective Amendment No. 1 to the
        Company's Registration Statement on Form F-6
        (File No. 333-8380] ).
 4.3    Amended and Restated Restricted Deposit Agreement (including the form
        of American Depositary Receipt), dated as of November 30, 1995 and
        amended and restated as of May 22, 1998, among the Company, The Bank of
        New York, as Depositary, and each Owner and Beneficial Owner from time
        to time of American Depositary Receipts issued thereunder (Incorporated
        by reference to exhibit 4.2 to the Company's Quarterly Report on Form
        10-Q for the fiscal quarter ended June 30, 1998 as filed with the
        Securities and Exchange Commission on August 13, 1998).
 4.4    Declaration of Subscription Rights dated as of October 4, 1998
        (Incorporated by reference to exhibit 4.1 to the Company's Report on
        Form 8-A filed with the Securities and Exchange Commission on October
        5, 1998).
 10.1** 1990 Share Option Scheme (Incorporated by reference to exhibit 10.1 to
        the Company's Registration Statement on Form F-1 declared effective
        with the Securities and Exchange Commission on
         April 13, 1995 (File No. 33-89904)).
 10.2** 1994 Share Option Plan (Incorporated be reference to exhibit 10.2 to
        the Company's Registration Statement on Form F-1 declared effective
        with the Securities and Exchange Commission on
        April 13, 1995 (File No. 33-89904)).
 10.3** 1995 Employee Share Purchase Plan (Incorporated by reference to exhibit
        10.3 to the Company's Registration Statement on Form F-1 declared
        effective with the Securities and Exchange Commission on April 13, 1995
        (File No. 33-89904)).
 10.4** Form of Indemnification Agreement between CBT Systems USA, Ltd.
        (formerly, Thornton Holdings, Ltd.) and its directors and officers
        dated as of April, 1995 (Incorporated by reference to exhibit 10.5 to
        the Company's Registration Statement on Form F-1 declared effective
        with the Securities and Exchange Commission on April 13, 1995 (File No.
        33-89904)).
 10.5   Supplemental Agreement among Hoskyns, the Company and CBT Systems
        Limited dated as of
        March 31, 1995 (Incorporated by reference to exhibit 10.9 to the
        Company's Registration Statement on Form F-1 declared effective with
        the Securities and Exchange Commission on April 13, 1995
        (File No. 33-89904)).
 10.6   Share Purchase Agreement between CBT Systems Limited and the Company
        dated as of
        March 31, 1995 (Incorporated by reference to exhibit 10.10 to the
        Company's Registration Statement on Form F-1 declared effective with
        the Securities and Exchange Commission on April 13, 1995
        (File No. 33-89904)).
 10.7   Distribution and License Agreement between the Company and CBT Systems
        Limited dated as of March 14, 1995 (including form of Amendment No. 1)
        (Incorporated by reference to exhibit 10.11 to the Company's
        Registration Statement on Form F-1 declared effective with the
        Securities and Exchange Commission on April 13, 1995 (File No. 33-
        89904).
 10.8   License Agreement dated June 7, 1994 between CBT (Technology) Limited
        and CBT Systems Limited (Incorporated by reference to exhibit 10.20 to
        the Company's Registration Statement on Form F-1 declared effective
        with the Securities and Exchange Commission on April 13, 1995
        (File No. 33-89904).
 10.9   Cost Sharing Agreement dated January 4, 1994 between CBT (Technology)
        Limited and CBT Systems Limited (Incorporated by reference to exhibit
        10.21 to the Company's Registration Statement on Form F-1 declared
        effective with the Securities and Exchange Commission on April 13, 1995
        (File No. 33-89904).
</TABLE>
 
 
                                       63
<PAGE>
 
<TABLE>
 <C>     <S>
 10.10** Agreement between the Company and Patrick J. McDonagh dated April 9,
         1995 (Incorporated by reference to exhibit 10.22 to the Company's
         Registration Statement on Form F-1 declared effective with the
         Securities and Exchange Commission on April 13, 1995 (File No. 33-
         89904).
 10.11** Personal Training Systems, Inc. 1991 Stock Plan (Incorporated be
         reference to exhibit 4.1 to the Company's Registration Statement on
         Form S-8 filed with the Securities and Exchange Commission on January
         21, 1996 (File No. 333-504).
 10.13** 1996 Supplemental Stock Plan (Incorporated by reference to exhibit
         10.16 to the Company's Annual Report on Form 10-K for the fiscal year
         ended December 31, 1996 as filed with the Securities and Exchange
         Commission on March 30, 1997 (File No. 0-25674)).
 10.14** Letter Agreement between CBT Systems USA, Ltd. and William B. Lewis
         (Incorporated by reference to exhibit 10.18 to the Company's Annual
         Report on Form 10-K for the fiscal year ended December 31, 1996 as
         filed with the Securities and Exchange Commission on March 30, 1997
         (File No. 0-25674)).
 10.15   Applied Learning Limited Executive Option Plan (Incorporated by
         reference to exhibit 4.1 to the Company's Registration Statement on
         Form S-8 filed with the Securities and Exchange Commission on April
         16, 1997 (File No. 333-25245).
 10.16** Agreement dated November 21, 1997 between CBT Systems Limited and
         Clarion Worldwide Limited (Incorporated by reference to exhibit 10.21
         to Registrant's Annual Report on Form 10-K for the fiscal year ended
         December 31, 1997 as filed with the Securities and Exchange Commission
         on March 18, 1998 (File No. 0-25674)).
 10.17   Lease Agreement dated April 6, 1998 between CBT Systems USA, Ltd. and
         the Company, as tenants, and Seaport Centre Associates, LLC, as
         landlord, for the facility located at 900 Chesapeake Drive, Redwood
         City, California 94063 (Incorporated by reference to exhibit 10.1 to
         the Company's Quarterly Report on Form 10-Q for the fiscal quarter
         ended September 30, 1998 as filed with the Securities and Exchange
         Commission on November 11, 1998).
 10.18   Consulting Agreement dated January 30, 1998 between CBT Systems USA,
         Ltd. and Gregory M. Priest (Incorporated by reference to exhibit 10.1
         to the Company's Quarterly Report on Form 10-Q for the fiscal quarter
         ended March 31, 1998 as filed with the Securities and Exchange
         Commission on May 13, 1998).
 10.20   Agreement and Mutual Release dated June 3, 1998 between the Company.
         and Jeffrey N. Newton (Incorporated by reference to exhibit 10.1 to
         the Company's Quarterly Report on Form 10-Q for the fiscal quarter
         ended June 30, 1998 as filed with the Securities and Exchange
         Commission on August 13, 1998).
 10.21*  Agreement and Mutual Release dated February 11, 1998 between the
         Company and William A. Beamish.
 21.1*   List of Significant Subsidiaries.
 23.1*   Consent of Ernst & Young, Independent Auditors.
 23.2*   Consent of Arthur Andersen, Independent Auditors.
 24.1    Power of Attorney (see page 65).
 27.1*   Financial Data Schedule.
</TABLE>
 
--------
*Filed Herewith
** Denotes management or compensatory plan or arrangement required to be filed
   by Registrant pursuant to Item 14(c) of this report on Form 10-K.
 
                                       64
<PAGE>
 
                                  SIGNATURES
 
  Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Company has duly caused this Form 10-K Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 30th day of
March, 1999.
 
                                          CBT Group Public Limited Company
 
                                                 By /s/ Gregory M. Priest
                                          _____________________________________
                                                     Gregory M. Priest
                                               President and Chief Executive
                                                          Officer
 
                               POWER OF ATTORNEY
 
  KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Gregory M. Priest and Patrick E. Murphy jointly
and severally, his attorneys-in-fact, each with full power of substitution,
for him in any and all capacities, to sign any amendments to this Form 10-K,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue thereof.
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
 
 
<TABLE>
<CAPTION>
             Signature                             Title                       Date
             ---------                             -----                       ----
 
 
<S>                                  <C>                                <C>
       /s/ William G. McCabe         Chairman of the Board                March 30, 1999
____________________________________
         William G. McCabe
 
 
 
       /s/ Gregory M. Priest         President, Chief Executive Officer   March 30, 1999
____________________________________ and Director (Principal Executive
         Gregory M. Priest           Officer)
 
 
        /s/ John M. Grillos          Executive Vice President,            March 30, 1999
____________________________________ Chief Operating Officer and
          John M. Grillos            Director
 
 
         /s/ John P. Hayes           Vice President, Finance and          March 30, 1999
____________________________________ Director (Principal Accounting
           John P. Hayes             Officer)
</TABLE>
 
                                      65
<PAGE>
 
 
 
 
<TABLE>
<S>                                  <C>                           <C>
       /s/ Patrick E. Murphy         Vice President, Finance         March 30, 1999
____________________________________ (Principal Financial
         Patrick E. Murphy           Officer)
 
 
 
       /s/ James S. Krzywicki        Director                        March 30, 1999
____________________________________
         James S. Krzywicki
 
 
      /s/ Patrick J. McDonagh        Director                        March 30, 1999
____________________________________
        Patrick J. McDonagh
</TABLE>
 
                                       66
<PAGE>
 
                       VALUATION AND QUALIFYING ACCOUNTS
 
                  Years Ended December 31, 1996, 1997 and 1998
                             (dollars in thousands)
 
<TABLE>
<CAPTION>
                         Balance at Charged to Charged to            Balance at
                         Beginning  Costs and    Other                 End of
                          of Year    Accounts   Accounts  Deductions    Year
                         ---------- ---------- ---------- ---------- ----------
<S>                      <C>        <C>        <C>        <C>        <C>
Year ended December 31,
 1996
Deducted from asset
 accounts
Allowance for doubtful
 accounts...............     550       177        --         --          727
                           =====       ===        ===        ===       =====
Year ended December 31,
 1997
Deducted from asset
 accounts
Allowance for doubtful
 accounts...............     727       580        --          87       1,220
                           =====       ===        ===        ===       =====
Year ended December 31,
 1998
Deducted from asset
 accounts
Allowance for doubtful
 accounts...............   1,220       400        --         477       1,143
                           =====       ===        ===        ===       =====
</TABLE>
 
                                      S-1