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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, 2000

                                       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

                       SMARTFORCE 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 IDENTIFICATION NUMBER)
  INCORPORATION OR ORGANIZATION)

                              900 CHESAPEAKE DRIVE
                         REDWOOD CITY, CALIFORNIA 94063
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

                                 (650) 817-5900
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

 TITLE OF EACH CLASS                   NAME OF EACH EXCHANGE ON WHICH REGISTERED
        None                                             None

          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. [X]
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    The aggregate market value of the voting shares held by non-affiliates of
Registrant was $1.4 billion as of March 23, 2001 (excludes 953,002 shares
which may be deemed to be held by directors, officers and affiliates of
Registrant as of March 23, 2001).

    The number of Registrant's equivalent American Depositary Shares, or ADSs,
outstanding as of March 23, 2001 was 52,542,730.

    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 in June, 2001 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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                                 SMARTFORCE PLC

                 ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
                    FROM JANUARY 1, 2000 TO DECEMBER 31, 2000

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>

<S>                                                                                        <C>
PART I

  Item 1.  Business...................................................................       4
           --Important Note About Forward-Looking Statements..........................       4
           --General..................................................................       4
           --Industry Background......................................................       4
           --The SmartForce e-Learning Solution.......................................       5
           --Strategy.................................................................       7
           --Products and Services....................................................       8
           --Strategic Alliances......................................................      11
           --Customers................................................................      12
           --Research and Development.................................................      12
           --Intellectual Property and Licenses.......................................      13
           --Competition..............................................................      13
           --Sales and Marketing......................................................      14
           --Employees................................................................      14
Item 2.    Properties.................................................................      14
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.......................................      17
Item 7.    Management's Discussion and Analysis of Financial Condition and Results of
           Operations.................................................................      18
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk.................      36
Item 8.    Financial Statements and Supplementary Data................................      38
Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial
           Disclosure.................................................................      63

PART III

Item 10.   Directors and Executive Officers of Registrant.............................      63
Item 11.   Executive Compensation.....................................................      63
Item 12.   Security Ownership of Certain Beneficial Owners and Management.............      63
Item 13.   Certain Relationships and Related Transactions.............................      63

PART IV

Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K............      64
           Signatures.................................................................      69
</TABLE>

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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

    We provide comprehensive integrated e-Learning solutions that help
businesses support their critical strategic business initiatives and deploy
knowledge globally across their extended enterprise of employees, customers,
suppliers, distributors and other business partners. Our hosted, scalable
e-Learning platform, e3, is an integrated, object based e-Learning architecture
that enables us to build e-Learning solutions precisely targeted to an
enterprise's specific business requirements. The e3 platform combines a learning
management system with access to a comprehensive offering of learning events and
resources comprising over 4,000 hours of e-Learning content, as well as 2,500
hours of localized content, online SmartSeminars(TM), 24x7 SmartMentoring(TM),
SmartSimulations, e-Testing, articles, peer-to-peer collaboration and online
workshops. The object-based architecture of our platform, together with a set of
content authoring and publication tools, allows us to deliver customized
e-Learning solutions to help organizations meet their corporate objectives and
train their employees and business partners quickly, effectively and
efficiently. Our e-Learning solutions also provide individuals access to
dynamic, continuously updated learning events so they can personalize their
e-Learning environment to meet their specific educational and career objectives.
In addition, we provide tracking, assessment and feedback tools which help users
better understand their educational progress and managers track and assess the
effectiveness of their training initiatives.

    Our learning environment covers a wide variety of business topics, including
e-Business, business skills, interpersonal skills, information technology, or
IT, customer relationship management and project management. We develop our
content in collaboration with leading e-Business, business and technology
providers, including Ariba, BroadVision, Provant, Microsoft, Cisco, Informix,
Intel, Lotus, Netscape, Novell, Oracle, Rational Software, SAP and jCert, a
collaboraton between BEA Systems, Hewlett Packard, IBM, Oracle, Sun
Microsystems, Sybase and iPlanet E-Commerce solutions. As of December 31, 2000,
we had over 2,500 corporate customers, including AT&T, British Airways, Compaq,
CSC, Dell, Deloitte & Touche, E-Trade, United States Air Force, Lucent
Technologies, MCI WorldCom, Bank of America, PricewaterhouseCoopers, Reuters,
Sprint and Unisys.

    We were incorporated in the Republic of Ireland on August 8, 1989. Our
registered office is located at Belfield Office Park, Clonskeagh, Dublin 4,
Ireland, and our telephone number at that address from the United States is
(011) 353-1-2181000. The address of SmartForce USA is 900 Chesapeake Drive,
Redwood City, California 94063, USA, and our telephone number at that address is
(650) 817-5900.

    For additional information about our business, see the consolidated
financial statements and related notes thereto included herein. Financial
information about our operating segments can be found in note 11 to the
financial statements.

INDUSTRY BACKGROUND

     Businesses face an increasingly challenging environment characterized by
rapid technological advancements changes in business models, increased
globalization and escalating competitive forces. A principal source of
competitive advantage in this changing environment is the depth, breadth and
timeliness of the knowledge and skills possessed by a business' entire
workforce. Businesses must develop strategies to continually innovate and
distribute knowledge rapidly and effectively throughout their global
organizations as well as throughout their extended enterprise of customers,
suppliers, distributors and other business partners. To effectively compete,
organizations

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must seek innovative ways to collaborate across borders and languages and train
their employees throughout the extended enterprise in less time and less money
than ever before. As employee training has become an integral component of
business strategy, organizations have increased their spending on learning in
the enterprise.

    The emergence of the Internet as a medium for commerce has dramatically
accelerated these trends, requiring companies to continually reinvent themselves
to respond to the rapidly changing marketplace. By providing organizations with
the means to innovate and transform their traditional business processes and
models, the Internet has prompted organizations to re-educate their workforce to
successfully compete in this increasingly complex working environment. As the
speed of technological change continues to increase, the life-span of the
knowledge and skills of employees continues to shrink and companies find it even
more critical to develop quick, efficient and effective means to continually
keep their employees' skills current and assist them in developing new skills.
The Internet has also provided the need and the means to integrate members of a
company's extended enterprise into its business model. By educating the extended
enterprise, businesses can more effectively reduce the time-to-market of new
products and services, improve the productivity of sales channels and reduce
customer support costs, which can enhance their competitive advantage.

    Traditionally, organizations have attempted to address their learning needs
through investments in instructor-led training from external vendors or internal
training departments. Instructor-led training, however, can be costly,
time-consuming and a logistical challenge, typically requiring employees to
leave their workplaces for prolonged periods, often to attend classes at
off-site locations. Such training is also difficult to customize to the
organizational needs of a specific company or to tailor to the training needs of
a particular individual. Moreover, traditional instructor-led training cannot be
easily reviewed and assessed by management and is difficult to update on a
regular basis. Furthermore, as many companies continue to expand their
operations globally, they often find it difficult to deploy and deliver
consistent and timely instructor-led training throughout the organization and
its extended enterprise.

    In response to the historical shortcomings of instructor-led training
programs, companies are spending increased amounts on technology-based training.
First generation technology-based training products such as interactive
courseware delivered through corporate networks or the Internet address many of
the shortcomings of instructor-led training. However, the rapid growth and
development of the Internet creates opportunities for providers to build upon
the benefits of these methods to design and deliver new and more powerful
customizable learning offerings. The Internet allows for the creation of an
application infrastructure that enables businesses to customize and personalize
the learning process, effectively assess skill levels and manage learning
outcomes and connect learners in real-time with online experts. Additionally,
the Internet provides a more effective medium for deploying and delivering
content to widely dispersed operations and the extended enterprise and improves
the means of product and user support. Moreover, the Internet allows companies
to outsource their learning infrastructure allowing them to focus on their core
competencies.

    A number of providers are using the Internet as a delivery mechanism for
courseware. However, these products fail to leverage the power of the Internet
to transform the training process. As a result, there is a significant
opportunity for integrated e-Learning solutions that combine a comprehensive
body of instructional content and an advanced learning management system with an
array of content authoring and publication tools to provide an enabling
infrastructure for learning throughout the extended enterprise.


THE SMARTFORCE E-LEARNING SOLUTION

    We provide businesses with fully hosted e-Learning solutions that help
gain a competitive advantage by training their employees and partners more
quickly, efficiently and effectively.

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Key elements of the SmartForce e-Learning solution are:

        INTEGRATED E-LEARNING PLATFORM. The SmartForce e-Learning platform is
    the underlying infrastructure for our e-Learning solutions. Our platform is
    based on e3, an integrated, object based application architecture, enabling
    us to build e-Learning solutions precisely targeted to an enterprise's
    strategic business initiatives and requirements. Incorporating emerging
    Internet technologies, our platform includes a content management system
    which allows us to deliver our extensive body of e-Learning content in the
    form of learning objects that can be combined into learning paths that are
    customized for each organization and personalized for the individual
    learner. e3 is also an open architecture incorporating industry standards,
    enabling customers to integrate internally created and third party content.
    The platform also features a learning management system that allows
    customers to track and manage e-learning content at the object level.


        COMPREHENSIVE BUSINESS CONTENT. Our learning environment offers a broad
    range of learning objects on a variety of business topics, including
    e-Business, information technology, business skills, customer relationship
    management and project management. We develop our learning objects in
    collaboration with leading business, e-Business and technology providers,
    including Provant, Ariba, BroadVision, Microsoft, Cisco, Informix, Intel,
    Lotus, Netscape, Novell, Oracle, Rational Software, and SAP. Our offerings
    include over 4,000 hours of e-Learning content, online SmartSeminars(TM),
    24x7 SmartMentoring(TM) in English, German, Spanish and Italian,
    SmartSimulations, e-Testing, articles, online workshops and other
    peer-to-peer collaborative events. Our platform allows our learning objects
    to be assembled into personalized learning paths to meet specific
    educational objectives.

        E-LEARNING TOOLS. We provide a variety of e-Learning tools that allow
    our customers to customize the e-Learning environment to meet their specific
    needs, to assess the educational progress of learners and to generate
    reports to monitor training effectiveness. Our content authoring and
    publication tools enable customers to create their own learning objects and
    integrate them into our learning environment. Our e-Testing and Fast Track
    assessment tools help learners avoid unnecessary and duplicative training
    and give them the ability to effectively assess skill levels and manage
    learning outcomes to meet their specific educational objectives. Our
    reporting tools allow managers to generate a broad range of customized
    reports to track the effectiveness of training programs.

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STRATEGY

    Our objective is to be the leading provider of comprehensive, integrated
e-Learning solutions to businesses and their extended enterprises. Key elements
of our strategy include:

        EXPAND OUR E-LEARNING PLATFORM. We intend to continue to expand our
    e-Learning platform in order to provide a more comprehensive solution which
    can be tailored to meet our customers specific requirements. We expect to
    continue to add functionality to our e3 application architecture and our
    learning management system to further enhance the effectiveness of the
    learning experience. We intend to continue to research and invest in new
    technology initiatives to expand the capabilities of our e-Learning
    platform.

        CONTINUE TO OFFER A BROAD RANGE OF E-LEARNING CONTENT. We expect to
    continually expand the number and types of e-Learning offerings in order to
    provide the most comprehensive, global and educationally-rich solutions
    available. For example, we plan to leverage our streamlined development
    process engine to aggressively expand our comprehensive body of
    e-Learning content. We also expect to continue investing in localization of
    content to further enhance our existing global e-Learning offerings.

        DEVELOP AND EXPAND ALLIANCES WITH CONTENT PARTNERS. We intend to
    continue to enter into development and marketing alliances with key
    business, e-Business, vertical market and technology vendors to produce and
    market vendor-specific authorized training programs. We believe these
    alliances provide a number of competitive advantages, including access to
    partners' product development plans, source material, and distribution
    channels as well as significantly accelerating our introduction of new
    content offerings. We intend to expand our existing relationships and to
    enter into relationships with new content partners, including leaders in
    emerging Internet technologies, vertical markets and providers of business
    skills material. For example, we entered into alliances with Provant,
    BroadVision, KeepSmart, jCert and Ariba in 2000 which further enhanced the
    breath of our e-Learning offerings for our existing customers as well as
    creating access to a new category of customers.

        DEVELOP ADDITIONAL E-LEARNING PLATFORM PARTNERSHIPS. We plan to expand
    and strengthen our partnerships with companies to provide SmartForce
    e-Learning as the platform for their e-Learning initiatives. For example, we
    recently entered into an agreement with Yahoo! Inc. to provide the
    underlying e-Learning infrastructure for Corporate Yahoo!. Our e-Learning
    solutions will be a core application made available to enterprises that
    deploy the Corporate Yahoo! Portal allowing Corporate Yahoo! customers to
    support enterprise e-Learning initiatives. We also recently entered a
    strategic alliance with Deloitte Consulting to position SmartForce
    e-Learning as a core platform for Deloitte Consulting's e-Learning
    consultancy practice. We believe that these relationships provide us with
    significant opportunity to target new markets and expand the reach of our
    e-Learning solutions.

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        EXPAND CHANNELS OF DISTRIBUTION AND INTERNATIONAL PRESENCE. We have
    primarily targeted Fortune 3000 companies and other major U.S. and
    international organizations through our direct sales force. We intend to
    expand our indirect sales channels and telesales efforts to target companies
    beyond the Fortune 3000 and to accelerate our market penetration worldwide.
    For example in 2000 we entered into distribution agreements with
    distribution partners in Hong Kong, Italy, Malaysia, Latin America and Spain
    which we believe will expand the presence of SmartForce e-Learning in the
    global marketplace.

PRODUCTS AND SERVICES

    SMARTFORCE E-LEARNING SOLUTIONS

    SmartForce e-Learning Solutions consist of a fully hosted, integrated
e-Learning platform, a learning management system, a large body of learning
objects, a suite of publication, custom content, assessment and management
tools and a range of related services. Our solutions are designed to scale
from a single learner to a worldwide organization and to support organizations
in their critical business initiatives.

    We license our solutions primarily through e-Learning rental agreements
under which customers receive access to our solutions for one or more years. Our
pricing varies based on the quantity of e-Learning content and other learning
events selected, the number of users, the length of the contract and the degree
of professional services selected. Volume and multi-year discounts encourage
customers to expand e-Learning rental agreements as their needs grow and as they
become more familiar with our offerings.

        SmartForce e-Learning Platform

    Our e-Learning platform features a content management system for the
delivery of instructional content and a learning management system that allows
customers to manage all aspects of their training programs. Our e-Learning
platform is based on an integrated object based e-Learning application
architecture, called e3, through which all e-Learning content is broken down
into individual objects, each covering a single, discrete learning objective. A
learning object can be based on any e-Learning medium for example a lesson, a
seminar, a role play

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     simulation or lab. We use our learning object framework to provide
     flexible, comprehensive, and integrated e-Learning solutions tailored
     precisely to enterprise and learner needs.

     Our content management system employs mass customization technology, which
allows us to customize the environment for each corporate customer and to
personalize the learning experience for each learner based on the learner's
interests, career objectives and job profile. Corporate customers can customize
the environment by selecting from our wide selection of learning options and by
integrating their own content into our environment. Through the use of
Macromedia's Dreamweaver and other content authoring and publication tools,
our customers can create their own learning events which incorporate their own
courseware and other proprietary material. This allows customers to create
learning paths that address their specific needs and which provide each
individual learner with a personalized view into the environment.

     Our platform also includes an advanced learning management system to
deploy, administer, track and manage everything from e-learning objects to
organization skills competency inventory to any custom content created in
compliance with industry standards and instructor-led training. Our learning
management system assists managers track and assess the effectiveness of their
training initiatives as well as a variety of assessment and feedback tools to
help users better understand their educational progress.

     We also offer Internet-based tools that allow our customers to track,
monitor, and analyze each learner's progress through the assigned learning path.
Managers can use these tools to measure the effectiveness of learning programs
and evaluate the return on learning investments.

     Our platform is deployed through an Internet infrastructure that integrates
the Internet technologies from HP(TM), Exodus(TM), USi(TM) Oracle(TM),
Microsoft(TM) and BroadVision(TM).

     SmartForce e-Learning Environment

     Our hosted learning environment includes a variety of integrated learning
events and objects, including over 4,000 hours of e-Learning content, access to
SmartMentoring, online SmartSeminars, online workshops and labs, virtual
classrooms and other peer-to-peer collaboration offerings. Our environment
leverages emerging technologies to create e-Learning events that combine the
benefits of traditional learning with the flexibility and immediacy of the
Internet.

     We offer over 4,000 hours of e-Learning content segmented into over 20,000
learning objects, covering a variety of business education topics, including
e-Business, business skills, interpersonal skills, IT, customer relationship
management and project management. In general, our learning objects combine
text, graphics, animation, audio, questions and exercises to create a rich,
highly interactive learning experience for the user. All of our learning objects
have been designed to take advantage of the capabilities of our e-Learning
platform including online interaction with mentors, and interaction with other
students in chat rooms and discussion boards, as well as links to supplementary
resources.

     Our content is organized into learning paths and are designed to cover
specific aspects of e-Business, business and IT. An e-Learning path is a
collection of learning objects arranged together to achieve a specific
instructional purpose. Each learning path provides comprehensive training in an
area of business and technology such as e-Business, interpersonal skills, sales
and marketing, application software, operating systems, networking, graphical
user interfaces and database design and Internet technologies. Our business and
interpersonal skills offerings are organized into competencies and are designed
to address a number of business interests such as management, sales, marketing
and finance.

     We provide localized e-Learning content in a number of languages, which
further enhances our position in the learning marketplace as a global e-Learning
company. As of December 31, 2000, we had e-Learning content in 10 languages
other than English, which include German, French, Spanish, Portuguese, Japanese,
Italian, Greek, Dutch, Korean and Finnish.

     SmartMentoring.  We also offer the services of online mentors as a resource
for learners to help them more effectively grasp the materials covered by
lessons and to pass vendor certification exams. SmartMentoring focuses on
integrating Internet technologies with proven learning methodologies to deliver
Internet-based, certification-level mentoring services to students worldwide.
SmartMentoring provides access to a team of vendor-certified mentors, known as
learning advisors, who are available twenty-four hours a day, seven days a week.
This methodology enables students to receive real time personalized assistance
when they need it through online chats and threaded discussions, email, lab
exercises, and newsgroups. The learning advisors proactively guide the student's
e-Learning experience, keep in regular contact with students providing practical
questions and exercises aimed at motivating the student to achieve their
learning goals. The company pairs certain certification tracks covered by
approved courseware, including Microsoft, Novell, Lotus Notes and Cisco, with a
team of learning advisors, to provide flexible, self-paced study over the
Internet.

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    SmartSeminars. Our SmartSeminars are web-based expert-led learning events
that bring together streamed audio and video, graphics and animation, and
interactive collaborative learning features to create a rich learning
environment and present learners with current information on key business,
e-Business, information technology and related topics. SmartSeminars incorporate
an interview with an independent expert in a chosen field. The interview is
delivered using streaming technologies and may be accompanied by a slide
presentation or other graphics and animation. SmartSeminars also include a real
time question and answer session, allowing participants to discuss in real time
the topics covered in the presentation.

    We host SmartSeminars on our Web site and broadcast them as real time
events. Following the live broadcast, each SmartSeminar is archived on our Web
site for future viewing.

    Other Collaborative Events. We offer our customers access to a variety of
collaboration options, including virtual classrooms, online workshops, online
labs, user forums, expert-led forums, chat rooms and threaded discussions.
Collaboration facilitates the learning process by offering real-time human
interaction, a personalized learning experience and situation specific advice.
These dynamic learning options reinforce formal instruction through peer-to-peer
interaction.

    Assessment Tools. We offer two assessment tools to our customers: FastTrack
Assessment and FastTrack Test Prep. FastTrack Assessment is a proficiency test,
which profiles the learners' progress, enabling them to skip the areas of
training which are not required based on their progress to date. FastTrack Test
Prep simulates a certification exam environment, where the learner is given
challenging, scenario based questions to answer within a time frame. On
completion of the FastTrack Test Prep the learner can check their score, access
detailed explanations and see how questions relate to exam objectives.

      Professional Services

    We also offer comprehensive services to our customers to assist them in the
implementation of our e-Learning platform and to allow them to further customize
their e-Learning solution. Services include e-Learning consulting, development
and implementation of competency-based learning models, platform customization,
custom content creation, the creation of blended curricula of e-Learning and
traditional learning, custom report design, enterprise systems integration and
Web site development.

    OTHER PRODUCTS

    Historically, our customers have deployed our content using a variety of
technologies, primarily using local and wide area networks and corporate
intranets. We have developed a number of products that address these delivery
methods, including CBTWeb(TM), CBTWeb Plus(TM) and CBT Campus(TM).

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    CBTWeb is an intranet deployment system which allows users to download
SmartForce courseware titles across an intranet. Access to these titles is
gained through a standard browser. CBTWeb enables customers to access and manage
SmartForce courses over an intranet via internally managed Web servers. Using
CBTWeb, learners can choose to either download SmartForce courseware or interact
with it in real time over an intranet using CBT Systems' LivePlay(TM)
capability. CBTWeb Plus is a turnkey training solution that enables customers to
benefit from Internet-based deployment of SmartForce'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 SmartForce courseware managed over the Internet from an external site.

    In 1997 we released CBT Campus, an enterprise training management and
deployment architecture. Coupled with our library of titles, CBT Campus provides
our customers with a solution for delivering interactive technology training
wherever and however its needed, running over an intranet. CBT Campus 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.

STRATEGIC ALLIANCES

    We have entered into, and will continue to expand, our relationships with
leading content partners, vendors of software products and e-Learning partners
in the markets of e-Business, business, interpersonal and professional skills,
vertical education and training and IT.

        DEVELOPMENT AND MARKETING ALLIANCES. We have entered into alliances with
    Ariba, BroadVision, Provant, KeepSmart, Cisco, Informix, Intel, Lotus,
    Microsoft, Netscape, Novell, Oracle, SAP and the jCert consortium a
    collaboration between BEA Systems, Hewlett Packard, IBM, Oracle, Sun
    Microsystems, Sybase and iPlanet E-Commerce solution. We formed the Internet
    Security Training Consortium to develop and market training content which
    addresses the Internet security training needs of enterprises worldwide with
    leading technology companies including Check Point, Cisco, IBM, Intel, the
    Javasoft business unit of Sun Microsystems, Lotus, Netscape, Network
    Associates, RSA Security, Security Dynamics, Hewlett-Packard and VeriSign.
    Through our acquisition of Knowledge Well, we have a strategic agreement
    with Kansas State University to develop long distance business degree
    programs and also business courses for credit at the university.
    Additionally, we believe our development alliances offer a number of
    competitive advantages, which may include early access to business content
    and partners pre-released products as well as software engineers and
    technical advisors for assistance in developing our e-Learning solutions.
    With the approval of the development partner, products developed under the
    relationship can be identified as authorized by that content partner, which
    we believe improves the marketability of such courses. In addition, these
    alliances may result in additional distribution channels for us 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. We believe that these alliances
    also provide significant benefits to the content partner by allowing them to
    achieve additional market penetration generated by increasing the base of
    trained users. These relationships enable us to offer business, IT and other
    content and technologies to our customers, which we may not otherwise have
    access to and allows us to offer to our customers the most comprehensive and
    advanced e-Learning solutions available.

        E-LEARNING PARTNERS. We have entered into e-Learning partnerships with
    Dell, Microsoft and Yahoo! Inc. In 1999, we developed an online university,
    called EducateU, using our e-Learning platform which we host for both Dell
    customers and visitors to Dell Web sites. Through our relationship with
    Microsoft we offer a dedicated e-Learning Web site exclusively for Microsoft
    certified professionals. Through our partnership with Yahoo! Inc. our
    e-Learning solutions will be a core application made available to
    enterprises that deploy the Corporate Yahoo! Portal allowing Corporate
    Yahoo! customers to support enterprise e-Learning initiatives.

        OTHER RELATIONSHIPS. We entered into other strategic relationships to
    further enhance our students learning experience. We have entered into
    relationships with WebEx and Mentor Technologies to add significant
    knowledge sharing capabilities to our e-Learning platform through such
    offerings as virtual classrooms, workshops and online Cisco labs. During
    2000, we formed a partnership with Capella University to provide content for
    Capella University's undergraduate information technology courses and degree
    program by integrating our e-Learning solutions with Capella University's
    online, instructor led curriculum.

                                       11
<PAGE>   12
CUSTOMERS

    We primarily license our e-Learning solutions to Fortune 3000 companies and
other major U.S. and international organizations in a wide range of industries,
including manufacturing, technology, transportation, telecommunications,
utilities, healthcare and financial services. We also license our e-Learning
solutions to educational institutions and governmental agencies. Our solutions
are marketed through our direct sales organization to over 2,500 corporate
customers worldwide. In addition, through our destination Web site,
mysmartforce.com, our resellers and our telesales force, we market our
e-Learning solutions directly to individuals.

    No customer accounted for more than 5% of revenues in 2000, although a
single customer can account for a significantly higher percentage of our
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 backlog, which could similarly effect quarterly operating results.

RESEARCH AND DEVELOPMENT

    We believe that the development of an effective training product requires
the convergence of source material, instructional design and computer
technology. In developing a new learning event, we first obtain content through
our content partners and other subject matter experts, existing courses and
product reference materials. Our development team then writes a script for the
learning event which includes a structure covering all of the relevant concepts,
tasks to be completed, and interactive features of the learning event as well as
tests which allow the user to measure his or her achievement and reinforce the
lesson. When we develop a script for a new learning event, our developers,
working with animators, simulation programmers and graphic designers,
simultaneously plan and develop the various elements, which are then integrated
into a learning event. After the integration process, we test the learning event
to ensure that it has the capability to deliver the desired level of education
and training.

    The core element of our e-Learning solution development process is our
streamlined development process engine. This engine is an environment comprised
of our own proprietary software together with off-the-shelf tools, which we have
optimized to allow us to create our interactive education learning events. We
believe that our product development engine provides us with a significant
competitive advantage by allowing us to quickly and efficiently create and
continually update modular learning events and enhance, on an ongoing basis, the
multimedia content of

                                       12
<PAGE>   13

such learning events. Our e-Learning offerings generally have a common format
and therefore have a recognizable and consistent interface which makes them
easier to support. Our research and development goal is to further enhance our
product development engine so as to facilitate the continual evolution of our
offerings and ensure that our educational programs are able to incorporate a
wide variety of multimedia elements.

    We perform substantially all of our research and development activities at
our product development center in Dublin, Ireland. From time to time, we
subcontract third party services to develop portions of particular learning
events. All products produced using such services remain our sole property. Our
research and development expenses totaled $25.8 million in 1998, $31.7 million
in 1999 and $42.1 million in 2000. During 2000, our research and development
staff grew from 428 to 520 employees. We intend to continue to make substantial
investments in research and development.


INTELLECTUAL PROPERTY AND LICENSES

    We regard our technology as proprietary, and we rely primarily on a
combination of copyright, trademark and trade secret laws, customer licensing
agreements, employee and third-party nondisclosure agreements and other methods
to protect our proprietary rights. Despite these precautions, it may be possible
for a third party to copy or otherwise obtain and use our e-Learning content and
technology without our authorization, or to independently develop e-Learning
content and technology. Furthermore, the laws of certain countries in which we
sell our products do not protect our intellectual property rights to the same
extent as do the laws of the United States. Although we generally do not include
in our e-Learning offerings any mechanisms to prevent or inhibit unauthorized
use, we do require our customers to execute a license agreement which contains
restrictions on the copying and use of our products. However, our means of
protecting our proprietary rights may not be adequate. Alternatively, our
competitors could independently develop technology similar to ours without
infringing our proprietary rights. If our products or other elements of our
intellectual property were copied or otherwise misappropriated, our business and
operations could be significantly adversely affected.

    There has been a substantial amount of litigation in software and Internet
industries regarding intellectual property rights. Third parties could in the
future claim that our current or future products infringe on the proprietary
rights of others. Any claims, with or without merit, could be time-consuming,
resulting in costly litigation or product shipment delays or could require us to
enter into royalty or licensing agreements. If such royalty or licensing
agreements were required, they may not be available on terms acceptable to us,
or at all, which could seriously harm our business.


COMPETITION

    The market for business education training solutions is highly competitive,
constantly evolving and subject to rapidly emerging technologies. The market is
highly fragmented with no single competitor accounting for a dominant market
share. We compete primarily with e-Learning companies, computer-based training
companies, instructor-led training vendors and education platform providers. In
addition to increased competition from new companies entering into the market,
established companies are entering into the e-Learning market through
acquisitions of smaller companies, which directly compete with us. We expect the
e-Learning market to become increasingly competitive due to the lack of
significant barriers to entry. We may also face competition from publishing
companies and vendors of application software, including those vendors with whom
we have formed development and marketing alliances.

    Our primary source of direct competition comes from third-party suppliers of
instructor-led IT, business, management and professional skills education and
training as well as other suppliers of computer-based training and e-Learning
solutions. We also face indirect competition from the internal training
departments of our potential customers and have to overcome potential customers'
reluctance to move away from existing training systems and processes. We also
compete to a lesser extent with consultants, value-added resellers and network
integrators all of which market products which compete with ours.

                                       13
<PAGE>   14

    We believe that the principal competitive factors affecting our market place
are the depth, breadth and variety of content, the ability to offer complete
learning solutions, an installed customer base, the size and experience of the
sales force offering the solutions, product quality, product functionality and
cost-effectiveness of the solutions.

    Although we believe that our e-Learning solutions currently compete
favorably with respect to these factors, our market is relatively new and is
evolving rapidly. We may not be able to maintain our competitive position
against current and potential competitors, especially those with significantly
greater financial, technical, sales, marketing and other resources. Many of our
current and potential competitors also have greater name recognition than we do.
We believe our success will depend on our ability to expand our e-Learning
offerings, adopt new technologies and continue to offer the most extensive and
educationally rich e-Learning solutions available in our industry. However, we
may be unable to provide products that compare favorably with new instructor-led
techniques or the e-Learning offerings of our competitors. Competitive pressures
may also force us to reduce the prices of our products significantly.

SALES AND MARKETING

    In 2000, our products were marketed in over 40 countries. We market and sell
our products and services through direct and indirect channel sales forces
which, as of December 31, 2000, consisted of 523 people worldwide, of which 303
were located in the United States. Our sales offices are located in the United
States, the United Kingdom, Australia, the Middle East, the Benelux and
Scandinavian countries, Canada, New Zealand, France, Germany, Singapore and
South Africa. We also engage in selling efforts through our telesales
organization which, as of December 31, 2000, employed 301 people worldwide, of
which 261 were located in the United States. In order to accelerate our
worldwide market penetration, we are broadening our sales strategy by expanding
our indirect sales channels. Our indirect sales channels give us access to a
more diverse client base, which we otherwise would not be able to reach in a
cost-effective manner through our direct sales force. Our development and
marketing partners also generally have the right to resell products developed
under their alliances with us.

EMPLOYEES

    As of December 31, 2000, we employed 1,684 people. Of these employees, 824
were engaged in sales and marketing, 164 in management, administration and
finance, 176 in fulfillment and learning advisory positions and 520 in product
development. As of December 31, 2000, 763 employees were located in the United
States, 545 in the Republic of Ireland, 187 in Canada, 61 in the United Kingdom,
61 in Australia, 24 in the Benelux and Scandinavian countries, 12 in South
Africa, 9 in New Zealand, 7 in the Middle East, 4 in Germany, 4 in France and 7
in Singapore. None of our employees are subject to a collective bargaining
agreement and we have not experienced any work stoppages. We believe that our
employee relations are good.

    Our future success will depend in large part on the continued service of our
key management, sales, product development and operational personnel and on our
ability to attract, motivate and retain highly qualified employees. We also
depend on writers, programmers and graphic artists. We expect to continue to
hire additional product development, sales and marketing, information services
and accounting staff.

ITEM 2.   PROPERTIES

    We conduct our operations primarily out of facilities located in Dublin,
Ireland; Fredericton, Canada; Redwood City, California; Scottsdale, Arizona; and
Clearwater, Florida. In Dublin, we currently occupy four properties, one of
which comprises approximately 60,000 square feet and houses our product
development center, another which comprises approximately 19,500 square feet
which is occupied by our product development and fulfillment operations. We have
not yet entered into a lease for the property occupied by our main product
development center in Dublin. We currently lease approximately 50,000 square
feet in Fredericton 41,000 square feet at our United States headquarters in
Redwood City, 46,000 square feet in Scottsdale, and 19,239 square feet in
Clearwater. We use our Fredericton facility to house our

                                       14
<PAGE>   15

mentoring operations and professional services personnel. We use our Clearwater
facility to house our direct telesales operation. We use our Scottsdale facility
to house our channel organizations and a number of our professional services
personnel. We also lease sales office space in a number of other countries
including the United Kingdom, Australia, New Zealand, the Middle East, the
Benelux and Scandinavian countries, Canada, France, Germany, Singapore and South
Africa.

    We believe that our existing facilities are generally in good condition and
are adequate to meet our current requirements.

ITEM 3.   LEGAL PROCEEDINGS

    Since the end of the third quarter of 1998, several purported class action
lawsuits have been 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 us, one of our subsidiaries, SmartForce USA and certain of our
former and current officers and directors alleging violation of the federal
securities laws. It has been alleged in these lawsuits that we misrepresented or
omitted to state material facts regarding our business and financial condition
and prospects in order to artificially inflate and maintain the price of our
ADSs, and misrepresented or omitted to state material facts in our registration
statement and prospectus issued in connection with our merger with ForeFront,
which also is alleged to have artificially inflated the price of our ADSs.

    We believe that these actions are without merit and intend to vigorously
defend ourselves against them. Although we cannot presently determine the
outcome of these actions, an adverse resolution of these matters could
significantly negatively impact our financial position and results of
operations.

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

    Not applicable.

                                       15
<PAGE>   16

                                     PART II

ITEM 5.   MARKET FOR REGISTRANT'S SHARE CAPITAL AND RELATED SHAREHOLDER
          MATTERS

Our ADSs are traded in the Nasdaq National Market under the symbol SMTF. Our
ADSs had been quoted in the Nasdaq National Market since our initial public
offering on April 13, 1995. Prior to the initial public offering, there was no
public market for our 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.

<TABLE>
<CAPTION>

FISCAL 2000                                                                    HIGH      LOW
-----------                                                                   ------    ------
<S>                           <C>                                             <C>       <C>
Fourth quarter ended December 31..........................................    $57.25    $26.45
Third quarter ended September 30..........................................     55.38     42.63
Second quarter ended June 30..............................................     54.00     29.88
First quarter ended March 31..............................................     60.88     28.25

FISCAL 1999                                                                    HIGH      LOW
-----------                                                                   ------    ------
Fourth quarter ended December 31..........................................    $35.13    $16.38
Third quarter ended September 30..........................................     30.06     16.44
Second quarter ended June 30..............................................     18.06      8.94
First quarter ended March 31..............................................     19.13     11.44
</TABLE>


    As of February 28, 2000, we had 14 holders of ordinary shares of record.

DIVIDENDS

    We have never declared or paid any dividends on our ordinary shares. We
currently intend to retain all future earnings to finance future operations and
therefore do not anticipate paying any dividends in the foreseeable future.
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. There are no material
restrictions on the distribution of income or retained earnings by our
consolidated group companies. Any dividends, if and when declared, will be
declared and paid in United States dollars.

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 IRPound 1 for every IRPounds 100 (or part thereof) of the
amount or value of the 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 us, The Bank of New York, as Depositary, and the registered
holders and the owners of a beneficial interest in book-entry American
Depositary Receipts, or 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 under the Deposit Agreement 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.

    We received a ruling from the Irish Revenue Commissioners that transfers of
ADRs issued in respect of our shares will not be chargeable with Irish stamp
duty for so long as the ADSs are dealt in and quoted

                                       16
<PAGE>   17

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.

    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.


ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

    The following selected consolidated financial data for each of the five
years in the period ended December 31, 2000 and at December 31, 2000, 1999,
1998, 1997 and 1996 should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements and their related notes included elsewhere in
this Annual Report on Form 10-K. The results of operations for each of the three
years in the period ended December 31, 2000 and the balance sheets as at
December 31, 2000 and 1999 are derived from our audited consolidated financial
statements included herein, which have been prepared in accordance with U.S.
generally accepted accounting principles, or U.S. GAAP. The data at December 31,
1996, 1997 and 1998 and for the years ended December 31, 1996 and 1997 is
derived from our audited consolidated financial statements 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 our fiscal year ending
December 31, 2001.
<TABLE>
<CAPTION>


                                                                                  YEARS ENDED DECEMBER 31,
                                                            --------------------------------------------------------------------
                                                              1996           1997           1998           1999           2000
                                                            --------      ---------      ---------      ---------      ---------
                                                                           (In thousands, except per share data)
<S>                                                         <C>           <C>            <C>            <C>            <C>
STATEMENT OF OPERATIONS DATA:
Revenues ..............................................     $ 87,364      $ 137,047      $ 162,232      $ 197,754      $ 168,197
Cost of revenues ......................................       15,445         22,502         25,137         29,675         27,452
                                                            --------      ---------      ---------      ---------      ---------
Gross profit ..........................................       71,919        114,545        137,095        168,079        140,745
Operating expenses:
    Research and development ..........................       14,502         20,878         25,832         31,713         42,085
    Sales and marketing ...............................       39,288         59,160         75,395         93,841        105,618
    General and administrative ........................        9,075         11,601         15,893         17,042         19,703
    Amortization of acquired intangibles ..............           --             --             --          3,441          8,603
    Acquired research and development .................        2,799          4,097             --          5,900             --
    Costs of acquisitions .............................        2,155          1,534          5,505             --             --
                                                            --------      ---------      ---------      ---------      ---------
       Total operating expenses .......................       67,819         97,270        122,625        151,937        176,009
                                                            --------      ---------      ---------      ---------      ---------
Income/(Loss) from operations .........................        4,100         17,275         14,470         16,142        (35,264)
Other income, net .....................................        2,825          4,710          4,734          3,192          4,372
                                                            --------      ---------      ---------      ---------      ---------
Income/(Loss) before (provision)/benefit for
   income taxes .......................................        6,925         21,985         19,204         19,334        (30,892)
(Provision)/Benefit for income taxes ..................       (2,419)        (3,916)        (2,666)        (3,708)         2,229
                                                            --------      ---------      ---------      ---------      ---------
Net income/(loss) .....................................     $  4,506      $  18,069      $  16,538      $  15,626      $ (28,663)
                                                            ========      =========      =========      =========      =========
Net income/(loss) per share:
      Basic ...........................................     $   0.12      $    0.45      $    0.38      $    0.33      $   (0.56)
                                                            ========      =========      =========      =========      =========
      Diluted .........................................     $   0.11      $    0.41      $    0.36      $    0.30      $   (0.56)
                                                            ========      =========      =========      =========      =========
</TABLE>


<TABLE>
<CAPTION>

                                                                                AS OF DECEMBER 31,
                                                            ------------------------------------------------------------
BALANCE SHEET DATA:                                           1996         1997         1998         1999         2000
                                                            --------     --------     --------     --------     --------
<S>                                                         <C>         <C>          <C>          <C>          <C>
Cash, cash equivalents and short-term investments .....     $ 54,023    $ 71,543     $102,034     $108,173     $107,957
Working capital .......................................       52,055      84,018      116,841      134,121      112,382
Total assets ..........................................       96,662     141,329      190,244      289,717      334,783
Shareholders' equity ..................................       68,248     107,679      154,801      242,723      245,638
</TABLE>

                                       17
<PAGE>   18

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.

OVERVIEW

    We provide comprehensive, integrated e-Learning solutions that help
businesses deploy knowledge across their extended enterprise of employees,
customers, suppliers, distributors and other business partners. Our hosted
e-Learning platform provides access to a comprehensive offering of learning
events and resources. Our platform allows organizations to customize their
e-Learning environment to meet their corporate objectives and to train their
employees and business partners quickly, efficiently and effectively. Our
e-Learning solutions also provide individuals access to dynamic, continuously
updated learning events so they can personalize their e-Learning environment to
meet their specific educational and career objectives. Our platform also
includes a learning management system to help managers track and assess the
effectiveness of their training initiatives as well as a variety of assessment
and feedback tools to help users better understand their educational progress.

    Prior to 2000, we derived our revenues primarily under a software license
model pursuant to license agreements under which customers license usage of
delivered software products for a period of one, two or three years. On each
anniversary date during the term of multi-year license agreements, customers
have been generally allowed to exchange any or all of the licensed products for
an equivalent number of alternative products within our library. The first year
license fee has historically been generally recognized as revenue at the time of
delivery of all products, provided a signed contract or other persuasive
evidence of an arrangement exists, our fees are fixed or determinable and
collections of accounts receivable are probable. Subsequent annual license fees
under the software license model are recognized on each anniversary date,
provided a signed contract or other persuasive evidence of an arrangement
exists, our fees are fixed or determinable and collections of accounts
receivable are probable. 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.

    During 2000 we migrated the majority of our business from the software
license model to an e-Learning rental model, under which we rent to our
customers access to our learning environment for a certain period of time, such
as one, two or three years. Under the e-Learning rental model, revenue derived
from e-Learning rental agreements is generally deferred and recognized ratably
over the term of the relevant agreement, rather than annually in advance as was
the case under the historical software license model, provided a signed contract
or other persuasive evidence of an arrangement exists, our fees are fixed or
determinable and collections of accounts receivable are probable.

    The cost of satisfying any post contract support, or 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 where vendor specific
objective evidence exists to allocate the total fee among the various elements
of the agreement each element is recognized as appropriate. Where no such vendor
specific objective evidence exists revenue is recognized ratably over the life
of the agreement.

    In addition, we derive revenues from sales of our products, which are
recognized upon shipment, net of allowances for estimated future returns and for
excess quantities in distribution channels, provided

                                       18
<PAGE>   19

persuasive evidence of an arrangement exists, our fees are fixed or determinable
and collections of accounts receivable are probable.

    The migration of the majority of our business to the e-Learning model
resulted in the deferral of a significant portion of our revenues from year 2000
into 2001, and, accordingly, a decrease in reported revenues in year 2000
compared to year 1999 as well as a decrease in reported revenues for each
quarter during year 2000 as compared to that which would be expected if all
revenues were recognized under the software license model. As a result, year
over year comparisons between our operating results for each reporting period in
2000 and each reporting period in 1999, including comparisons of revenue and
operating expenses as a percentage of revenues, will not necessarily be
meaningful measures of our financial performance during 2000.

    In addition, we have made and intend to continue to make significant
investments in our e-Learning infrastructure and in building the SmartForce
brand. In particular, we have significantly increased and anticipate that we
will continue to significantly increase (i) our research and development
expenses and capital expenditures to build out our e-Learning infrastructure and
(ii) our sales and marketing expenses to build the SmartForce brand and market
presence. As a result of the deferral of revenue under e-Learning agreements and
these incremental expenses, we recorded a net loss in 2000.

    Our e-Learning agreements may have other accounting and operating model
consequences that are materially different from our software licensing
structure. For example, in the second quarter of 1999, we entered into an
agreement with a major customer to provide an outsourced virtual university for
technical education. Under the contract, the customer has licensed educational
software from us, and has also contracted for professional services, management
fees, on-line mentoring services and certain other items. In addition, the
agreement provides for the reselling by us of third parties' instructor-led
training to the customer. Revenues from the non-software licenses component of
this agreement, which represent a substantial majority of the firmly contracted
amount with the customer and all of the potential incremental revenues over the
firmly contracted amount, will generally be recognized as services are
performed, which will have the effect of deferring revenue. Since that time, an
increasing number of customers, including most of our largest customers, have
purchased a variety of different products and services from us, with different
revenue recognition and operating model profiles. We expect to continue to
experience increasing numbers of customers who fit this profile in the
future.(1)

    Moreover, the gross margins associated with the non-software license and
non-rental components (and in particular the resale of third-party
instructor-led training) are expected to be substantially lower than the gross
margins typically associated with our software license agreements. (2)

    In recent years, we have entered into several content development and
marketing alliances with key vendors of technology software under which we
develop e-Learning content for training on specific products. Under certain of
our development and marketing alliances, our partners have agreed to fund
certain product development costs. We recognize 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. We expect that cost of revenues may fluctuate
from period to period in the future based upon many factors. We do not expect
funding from development partners to contribute significantly to revenues in
future years.

    The financial results of certain companies, which we previously acquired,
have been accounted for using the "pooling-of-interests" method of accounting in
accordance with U.S. GAAP. In compliance with these principles, our operating
results for 1996 and 1997 have been restated to include the results of such
companies as if such acquisitions had occurred at the beginning of the first
period presented.





(1) This paragraph consists of forward-looking statements reflecting our current
expectations. Our actual future performance may differ materially from our
current expectations. You 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 our current
expectations. Our actual future performance may differ materially from our
current expectations. You 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.

                                       19
<PAGE>   20

RESULTS OF OPERATIONS

    The following table sets forth certain consolidated statement of operations
data as a percentage of revenues for the three years ended December 31, 2000:

<TABLE>
<CAPTION>

                                                                          YEARS ENDED DECEMBER 31,
                                                                      --------------------------------
                                                                       1998         1999         2000
                                                                      ------       ------       ------
<S>                                                                   <C>          <C>          <C>
Revenues ........................................................      100.0%       100.0%       100.0%
Cost of revenues ................................................       15.5         15.0         16.3
                                                                      ------       ------       ------
Gross profit ....................................................       84.5         85.0         83.7
Operating Expenses
       Research and development .................................       15.9         16.0         25.0
       Sales and marketing ......................................       46.5         47.5         62.8
       General and administrative ...............................        9.8          8.6         11.7
       Amortization of acquired intangibles .....................         --          1.7          5.1
       Acquired research and development ........................         --          3.0           --
       Costs of acquisitions ....................................        3.4           --           --
                                                                      ------       ------       ------
              Total operating expenses ..........................       75.6         76.8        104.6
                                                                      ------       ------       ------
Income/(Loss) from operations ...................................        8.9          8.2        (20.9)
Other income, net ...............................................        2.9          1.6          2.6
                                                                      ------       ------       ------
Income/(Loss) before (provision)/benefit for income taxes .......       11.8          9.8        (18.3)
(Provision)/Benefit for income taxes ............................       (1.6)        (1.9)         1.3
                                                                      ------       ------       ------
Net income/(loss) ...............................................       10.2%         7.9%       (17.0)%
                                                                      ======       ======       ======

</TABLE>


    REVENUES

    Revenues increased from $162.2 million in 1998 to $197.8 million in 1999 and
decreased to $168.2 million in 2000.

    The increase in revenue in 1999 from 1998 was primarily attributable to the
reversal in the decline of contract renewals and upgrades, experienced in the
latter period of 1998 as compared to previous periods, and the increase in
contract value attributable to an increase in the number of available courses,
customer contract renewals and upgrades and expanded marketing and distribution
efforts in 1999. During the three month periods ended September 30, 1998 and
December 31, 1998, we experienced a slowdown in the historical quarterly revenue
growth rate due in part to a decline in contract renewals and upgrades and the
failure to sign new contracts during the three month period ended September 30,
1998.

    Revenues decreased in 2000 from 1999 as a result of the rapid customer
adoption in the twelve months ended December 31, 2000 of our e-Learning
solutions, for which revenue is generally recognized ratably over the term of
the customer agreement and deferred into future periods. Revenues in 1999 and
earlier years were generated from licenses of software under our historical
model, under which revenue is recognized annually in advance on the anniversary
date of a contract. Because of the introduction of SmartForce e-Learning we do
not believe that the year over year revenue comparison between the years 2000
and 1999 is indicative of the growth of our business during the year ended
December 31, 2000. We believe that the growth in our backlog, discussed below,
is a more meaningful measure of the growth of our business during 2000.

    Revenues in the United States increased from $113.6 million (or 70% of
revenues) in 1998 to $139.7 million (or 71% of revenues) in 1999 and decreased
to $111.4 million (or 66% of revenues) in 2000.

    The increase in revenue in the United States in 1999 compared to 1998 was
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 our customer base. While revenues in the United
States increased significantly in absolute terms in 1999, our sales and
marketing expenses and general and administrative expenses in the United States
also increased rapidly as we hired and expanded

                                       20
<PAGE>   21

our staff to support the United States sales growth. The decrease in revenue in
the United States in 2000 compared to 1999 is primarily attributable to the
rapid customer adoption of SmartForce e-Learning by customers in the United
States corporate market.

    Revenues in the United Kingdom were $17.4 million (or 11% of revenues) in
1998, $23.8 million (or 12% of revenues) in 1999, and $22.6 million (or 13% of
revenues) in 2000. Revenues in Ireland were $3.2 million (or 2% of revenues) in
1998, $3.1 million (or 1% of revenues) in 1999 and $3.3 million (or 2% of
revenues) in 2000.

    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 Middle East) were $28.0 million (or 17% of
revenues) in 1998, $31.2 million (or 16% of revenues) in 1999, and $30.9 million
(or 19% of revenues) in 2000.

    The increase in international percentage of revenue in 2000 compared to 1999
was due primarily to a more rapid adoption of e-Learning in the United States
corporate market compared to the International corporate market, resulting in
the deferral of a greater proportion of the United States revenue compared to
international revenue.

    Because a significant portion of our business is conducted outside the
United States, we are 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 1998, 1999 or 2000,
although a single customer can account for a higher percentage of our 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.

    We generate a substantial portion of our revenue through multi-year rental
and license agreements, and our backlog represents, at any point in time, the
amount of all license fees under current agreements which we have not yet
recognized as revenue. The amount and timing of the recognition of revenue
associated with backlog will vary depending on the timing of future deliveries
of products and amendments to customers' license and rental agreements.

    Our backlog increased from approximately $190 million as of December 31,
1999 to $357 million as of December 31, 2000, an increase of 88%. This increase
in backlog was attributable to the customer adoption of SmartForce e-Learning,
increases in contract value, customer contract renewals and upgrades as well as
our marketing and distribution efforts in 2000.

    Although our license agreements are non-cancelable by their terms, customers
may not fulfill the contractual obligations under our agreements. Cancellation,
reduction or delay in orders by or shipments to any of these or other customers
could have a material adverse effect on our business and results of operations.

    COST OF REVENUES

    Cost of revenues includes the cost of materials (such as packaging and
documentation), royalties to third parties, the portion of development costs
associated with funded development projects, hosting, the cost of providing
professional services, fulfillment and shipping and handling costs and the
amortization of the cost of purchased products.

    Gross margins increased from 84.5% in 1998 to 85.0% in 1999 and decreased to
83.7% in 2000. The decrease in gross margin in 2000 compared to 1999 resulted
primarily from a change in our revenue mix between content and services. In
2000, we incurred additional costs in respect of services provided to our
customers in respect of platform and content customization. Revenue generated
from services did not exceed 10% of our net revenues in any year reported.

                                       21
<PAGE>   22

    We expect that cost of revenues may fluctuate from period to period in the
future based upon many factors, including the rate at which we continue to
migrate our customers to our e-Learning solutions, the revenue mix (including
between software, services and partner's products) and the timing of expenses
associated with development and marketing alliances. (3)

    OPERATING EXPENSES

    Operating Expenses increased from $122.6 million (or 75.6% of revenues) in
1998 to $151.9 million (or 76.8% of revenues) in 1999 to $176.0 million (or
104.6% of revenues) in 2000.

    Operating expenses in 1999 increased over 1998 due to the growth of the
business in 1999 over 1998 as well as additional costs in 1999 as a result of
the acquisition of Knowledge Well including the amortization of acquired
intangibles of $3.4 million, the write-off of in process research and
development of $5.9 million and also costs associated with the launch of
SmartForce e-Learning of $4.5 million.

    Operating expenses in 2000 increased over 1999 as a result of the growth in
our business and our ongoing investments in our e-Learning solutions and the
SmartForce brand. In addition, the rapid adoption of our e-Learning solutions in
the twelve months ended December 31, 2000, resulted in the deferral of revenues
into future periods and consequently a significant increase in operating
expenses as a percentage of revenues in 2000 compared to 1999.

    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 $25.8
million (or 15.9% of revenues) in 1998 to $31.7 million (or 16.0% of revenues)
in 1999 and to $42.1 million (or 25.0% of revenues) in 2000.

    The increase in research and development in 1999 compared to 1998 is
primarily the result of hiring of additional research and development personnel,
the acquisition of Knowledge Well and the expansion of our Dublin development
center, which were required to expand and enhance our library of software
products and also to develop the e-Learning infrastructure.

    The increase in research and development expenses in 2000 compared to 1999
is due primarily to the hiring of additional research and development personnel,
the continued investment in our e-Learning solutions and the development of our
e3 application architecture, all of which are required to further develop and
expand our e-Learning offerings and our e-Learning infrastructure.

    We believe that significant investment in research and development is
required to remain competitive in the e-Learning market. We therefore expect to
continue to invest in the ongoing development of our e-Learning solutions. (4)

    Software development costs are accounted for in accordance with the
Financial Accounting Standards Board Statement No. 86, under which we are
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.






(3) This paragraph consists of forward-looking statements reflecting our current
expectations. Our actual future performance may differ materially from our
current expectations. You 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.

(4) This paragraph consists of forward-looking statements reflecting our current
expectations. Our actual future performance may differ materially from our
current expectations. You 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.

                                       22
<PAGE>   23


    SALES AND MARKETING EXPENSES

    Sales and marketing expenses consist primarily of salaries and commissions,
travel expenses, advertising and promotional expenses and related overhead
costs.

    Sales and marketing expenses increased from $75.4 million (or 46.5% of
revenues) in 1998 to $93.8 million (or 47.5% of revenues) in 1999 and to $105.6
million (or 62.8% of revenues) in 2000.

    The increase in sales and marketing expenses in 1999 compared to 1998 was
primarily attributable to an increase in the number of sales and marketing
personnel in 1999 to accommodate the growth in sales in the United States and to
a lesser extent outside the United States and also to increased marketing and
advertising expenditure in the fourth quarter of 1999 to launch SmartForce
e-Learning and to build the SmartForce brand. The increase in sales and
marketing expenses in 2000 compared to 1999, in absolute dollars, was primarily
attributable to increases in the number of sales and marketing personnel to
accommodate the growth in sales, and increases in advertising and promotional
expenses to build the SmartForce brand. These increases were partially offset by
the deferral of a portion of commission costs in 2000 as a result of the
deferral of revenue following the migration to the e-Learning model, as
discussed above.

    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 from $15.9 million (or 9.8% of
revenues) in 1998 to $17.0 million (or 8.6% of revenues) in 1999 and to $19.7
million (or 11.7% of revenues) in 2000.

    In 1999, general and administrative costs increased slightly over 1998 as a
result of management's decision to maintain the cost base from that established
during 1998. As a percentage of revenues, general and administrative expenses
declined as a result of the improved revenue performance in 1999 over 1998. In
2000, general and administrative costs increased slightly in absolute dollars
over 1999 as a result of our expanding operations.

    AMORTIZATION OF ACQUIRED INTANGIBLES

    Amortization of acquired intangibles increased from $3.4 million (or 1.7% of
revenues) in 1999 to $8.6 million (or 5.1% of revenues) in 2000.

    In June 1999 we acquired Knowledge Well which resulted in the amortization
of the related goodwill and other acquired intangibles of approximately $3.4
million. Amortization of acquired intangibles increased in 2000 compared to 1999
primarily as a result of twelve months amortization of goodwill and acquired
intangibles from the Knowledge Well acquisition and the additional amortization
of intangibles following the acquisitions of AES and Learning Productions in
2000.

    ACQUIRED RESEARCH AND DEVELOPMENT

    The acquired in-process research and development of $5.9 million expensed in
1999 represented our estimate of the fair value of those specifically identified
Knowledge Well research and development projects for which technological
feasibility had not been established and for which alternative future uses did
not exist.


                                       23
<PAGE>   24

    COSTS OF ACQUISITIONS

    Acquisition costs consist 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 acquisition expenses of $5.5 million incurred in 1998 related to the
acquisition of ForeFront, accounted for as a pooling of interest in accordance
with U.S. GAAP. In 1999 and 2000, the non-recurring costs estimated in respect
of the acquisition of Knowledge Well, AES and Learning Productions were
capitalized under the purchase method of accounting in accordance with U.S. GAAP
and are being amortized over 10 years. We may incur additional acquisition
expenses in the future should we undertake additional acquisitions. (5)

    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.

    We recognized other income, net, of approximately $4.7 million in 1998, $3.2
million in 1999 and $4.4 million in 2000.

    The decrease in other income, net, in 1999 as compared to 1998 was due
principally to net exchange losses of $856,000 as compared to net exchange gains
of $516,000 in 1998. The net exchange loss in 1999 was primarily attributable to
the weakening of the Euro against the U.S. dollar. The increase in other income,
net, in 2000 was primarily due to the increase of interest income from $4.0
million in 1999 to $5.6 million in 2000 due primarily to increases in U.S.
interest rates in 2000 offset by an increase in exchange losses from $856,000 in
1999 to $1,218,000 in 2000, as a result of further weakening of the Euro and
other currencies against the U.S. dollar during 2000.

    Our consolidated financial statements are prepared in dollars, although
several of our subsidiaries have functional currencies other than the dollar,
and a significant portion of our revenues, costs and assets and those of our
subsidiaries are denominated in currencies other than their respective
functional currencies. We have significant subsidiaries in the United Kingdom,
Australia, the Netherlands and Canada 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, our 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 our results of
operations, particularly our operating margins, and could result in exchange
losses, as it has done in the years ended December 31, 1999 and 2000. The impact
of future exchange rate fluctuations on our results of operations cannot be
accurately predicted.

    Our subsidiaries in the United Kingdom, Canada, the Netherlands and
Australia, whose functional currencies are their local currencies, had unhedged
liabilities denominated in U.S. dollars payable to SmartForce Ireland at
December 31, 2000 of $10 million, $7.9 million, $5.5 million and $3.2 million.
During the twelve months ended December 31, 1999 and 2000, we undertook hedging
transactions against the Irish pound because we have substantial expenses
denominated in that currency. To date, we have 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. Any hedging
techniques implemented by us may not 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 investment balances, interest rates,
foreign currency exchange rates, asset and investment disposals and write downs.





(5) This paragraph consists of forward-looking statements reflecting our current
expectations. Our actual future performance may differ materially from our
current expectations. You 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>   25


    PROVISION FOR INCOME TAXES

    We operate 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, our consolidated effective tax rate may
increase to the extent that we report tax losses in some subsidiaries and
taxable income in others.


    We have significant operations and generate a majority of our taxable income
in the Republic of Ireland, and certain of our Irish operating subsidiaries are
taxed at rates substantially lower than tax rates in effect in the United States
and other countries in which we have operations. Two Irish subsidiaries
currently qualify 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, our operating results could be
materially adversely affected. Moreover, because we incur income tax in several
countries, an increase in our profitability 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 our
subsidiaries, our taxes could increase and our cash flow and net income could be
materially adversely affected.

    Our effective tax rate, pre amortization of acquired intangibles and
acquired research and development, was 13.9%, 12.9% and 10% in 1998, 1999 and
2000. Our provision for income taxes was $2.7 million in 1998 and $3.7 million
in 1999. We recorded a tax benefit of $2.2 million in 2000, at an effective tax
rate of 10%, before amortization of acquired intangibles, as a result of the
loss for the year, which will be recognized for tax purposes by one of our Irish
subsidiaries. This Irish subsidiary is taxed at 10%.

                                       25
<PAGE>   26

QUARTERLY RESULTS OF OPERATIONS

    The following table sets forth certain unaudited statement of operations
data for each of our 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. You should read this information
in conjunction with our audited consolidated financial statements and related
notes appearing elsewhere in this annual report on Form 10-K. The operating
results for any quarter are not necessarily indicative of results for any future
period.

<TABLE>
<CAPTION>

                                                                              QUARTERS ENDED
                                           ----------------------------------------------------------------------------------------
                                           MAR. 31,   JUNE 30,   SEPT. 30,  DEC. 31,    MAR. 31,    JUNE 30,    SEPT. 30,   DEC. 31,
                                           --------   --------   --------   --------    --------   --------    --------    --------
                                             1999       1999       1999       1999        2000       2000        2000        2000
                                           --------   --------   --------   --------    --------   --------    --------    --------
                                                                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<S>                                        <C>        <C>        <C>        <C>         <C>        <C>         <C>         <C>
Revenues ...............................   $ 40,197   $ 47,247   $ 50,188   $ 60,122    $ 28,534   $ 36,393    $ 45,572    $ 57,699
Cost of revenues .......................      6,330      7,528      7,436      8,381       4,667      5,921       7,456       9,409
                                           --------   --------   --------   --------    --------   --------    --------    --------
Gross profit ...........................     33,867     39,719     42,752     51,741      23,867     30,472      38,116      48,290
Operating expenses
    Research and development ...........      7,387      7,554      8,915      7,857       8,500     10,347      11,189      12,049
    Sales and marketing ................     20,973     21,642     22,246     24,447      23,193     24,813      26,423      31,189
    SmartForce launch ..................         --         --         --      4,533          --         --          --
    General and administrative .........      4,478      4,461      4,033      4,070       4,464      4,841       4,954       5,444
    Amortization of acquired
       Intangibles .....................         --        157      1,567      1,717       1,717      2,240       2,323       2,323
    Acquired research and
       Development .....................         --      5,900         --         --          --         --          --          --
                                           --------   --------   --------   --------    --------   --------    --------    --------
       Total operating expenses ........     32,838     39,714     36,761     42,624      37,874     42,241      44,889      51,005
                                           --------   --------   --------   --------    --------   --------    --------    --------
Income/(Loss) from operations ..........      1,029          5      5,991      9,117     (14,007)   (11,769)     (6,773)     (2,715)
Other income, net ......................        533        633      1,216        810       1,154      1,037       1,069       1,112
                                           --------   --------   --------   --------    --------   --------    --------    --------
Income/(Loss) before (provision)/
benefit for income taxes ...............      1,562        638      7,207      9,927     (12,853)   (10,732)     (5,704)     (1,603)
(Provision)/Benefit for income taxes ...       (234)    (1,004)    (1,081)    (1,389)      1,114        849         338         (72)
                                           --------   --------   --------   --------    --------   --------    --------    --------
Net income/(loss) ......................   $  1,328   $   (366)  $  6,126   $  8,538    $(11,739)  $ (9,883)   $ (5,366)   $ (1,675)
                                           ========   ========   ========   ========    ========   ========    ========    ========

Net income/(loss) per share--Basic .....   $   0.03   $  (0.01)  $   0.13   $   0.17    $  (0.23)  $  (0.19)   $  (0.10)   $  (0.03)
                                           ========   ========   ========   ========    ========   ========    ========    ========
Net income/(loss) per share--Diluted ...   $   0.03   $  (0.01)  $   0.11   $   0.15    $  (0.23)  $  (0.19)   $  (0.10)   $  (0.03)
                                           ========   ========   ========   ========    ========   ========    ========    ========
</TABLE>

                                       26
<PAGE>   27

   The following table sets forth, as a percentage of revenues, certain line
items in our 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,
                                             -------    -------    -------    -------    -------    -------    -------    -------
                                               1999       1999       1999       1999       2000       2000       2000       2000
                                             -------    -------    -------    -------    -------    -------    -------    -------
<S>                                          <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Revenues ..................................    100.0%     100.0%     100.0%     100.0%     100.0%     100.0%     100.0%     100.0%
Cost of revenues ..........................     15.7       15.9       14.8       13.9       16.4       16.3       16.4       16.3
                                             -------    -------    -------    -------    -------    -------    -------    -------
Gross profit ..............................     84.3       84.1       85.2       86.1       83.6       83.7       83.6       83.7
Operating expenses
       Research and development ...........     18.4       16.0       17.8       13.1       29.8       28.4       24.6       20.9
       Sales and marketing ................     52.2       45.8       44.3       40.7       81.3       68.2       58.0       54.1
       SmartForce launch ..................       --         --         --        7.5         --         --         --         --
       General and administrative .........     11.1        9.5        8.0        6.8       15.6       13.3       10.9        9.4
       Amortization of acquired
          Intangibles .....................       --        0.3        3.1        2.8        6.0        6.2        5.1        4.0
       Acquired research and
          Development .....................       --       12.5         --        --         --         --         --         --
              Total operating expenses ....     81.7       84.1       73.2       70.9      132.7      116.1       98.5       88.4
                                             -------    -------    -------    -------    -------    -------    -------    -------
Income/(Loss) from operations .............      2.6        0.0       12.0       15.2      (49.1)     (32.3)     (14.9)      (4.7)
Other income, net .........................      1.3        1.3        2.4        1.3        4.0        2.8        2.3        1.9
                                             -------    -------    -------    -------    -------    -------    -------    -------
Income/(Loss) before (provision)
 / benefit for income taxes ...............      3.9        1.3       14.4       16.5      (45.0)     (29.5)     (12.5)      (2.8)
(Provision)/Benefit for income taxes ......     (0.6)      (2.1)      (2.2)      (2.3)       3.9        2.3        0.7       (0.1)
                                             -------    -------    -------    -------    -------    -------    -------    -------
Net income/(loss) .........................      3.3%      (0.8)%     12.2%      14.2%     (41.1)%    (27.2)%    (11.8)%     (2.9)%
                                             =======    =======    =======    =======    =======    =======    =======    =======
</TABLE>

    Our quarterly results for 2000 reflect the migration of our business to the
e-Learning model. As discussed above, because of the deferral of revenues under
the e-Learning model and the rapid customer adoption of our e-Learning
solutions, revenues for each quarter during 2000 were lower than the
corresponding quarter in 1999. In addition, we increased our research and
development and sales and marketing in order to build out and market our
e-Learning solutions. As a result, we incurred a net loss for each quarter
during 2000, although during the fourth quarter we recorded a profit before
amortization of acquired intangibles.


LIQUIDITY AND CAPITAL RESOURCES

    Cash, cash equivalents and short-term investments were $102.0 million as of
December 31, 1998, $108.2 million as of December 31, 1999 and $107.9 million as
of December 31, 2000. Working capital was $116.8 million as of December 31,
1998, $134.1 million as of December 31, 1999 and $112.4 million as of December
31, 2000.

    The increases in cash, cash equivalents, short term investments and working
capital in 1999 was due principally to operating cash inflows and the proceeds
from the exercise of options, which were offset by investments in property and
equipment to support our expanded operations. The decrease in cash, cash
equivalents, short term investments and working capital in 2000 was due
primarily to increased cash outflows from investing activities, in particular
payments to acquire AES and Learning Productions and investments in Capella
Education and Docent.

    CASH FLOWS FROM OPERATING ACTIVITIES. Net cash provided by operating
activities decreased from $13.5 million in 1998 to $11.6 million in 1999 and
decreased to $9.0 million in 2000. The decrease in net cash provided by
operating activities in 1999 was primarily attributable to a significantly
higher increase in accounts receivable than in 1998. The increase in accounts
receivable balance is primarily a function of the revenue earned in the
preceding 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

                                       27
<PAGE>   28

amounts reserved. The decrease in net cash provided by operating activities in
2000 compared to 1999 was primarily due to net losses of $28.7 million in 2000
compared to net income of $15.6 million in 1999 offset by increased depreciation
and amortization charges and increased deferred revenue in 2000 compared to
1999. Despite the losses in 2000 we generated an operating cash inflow of $9.0
million. This was due primarily to an increase in deferred revenue of $39.3
million, an increased depreciation and amortization charge of $9.3 million and a
decrease in accrued payroll and related expenses and other accrued liabilities
of $4.4 million. Deferred revenue increased from 1999 to 2000 as a result of the
rapid adoption of our e-Learning solutions as previously discussed.

    CASH FLOWS FROM INVESTING ACTIVITIES. Cash outflows from investing
activities increased from $13.6 million in 1998 to $20.4 million in 1999 and to
$29.3 million in 2000. Our principal use of cash for investing activities
include expenditures on computer equipment and infrastructure due to investments
in our information systems and our e-Learning infrastructure and increases in
short-term investments. The increase in cash outflows from investing activities
from 1998 to 1999 was primarily attributable to increases in capital expenditure
and to payments, net of cash acquired, on the acquisition of Knowledge Well in
1999. The increase in cash outflow from investing activities from 1999 to 2000
was primarily due to payments, net of cash acquired, on the acquisition of
Learning Productions and AES, increased short-term investments and minority
equity investments in Capella Education and Docent in 2000.

    CASH FLOWS FROM FINANCING ACTIVITIES. Net cash provided by financing
activities decreased from $30.1 million in 1998 to $13.2 million in 1999 and
increased to $16.0 million in 2000. In 1999, the decrease in the proceeds from
the issue of ordinary shares is primarily attributable to reduced employee stock
option exercises following the substantial decline in our stock price during the
period September to December 1998. The increase in cash flow from financing
activities in 2000 is primarily attributable to employee stock options
exercises. We believe that the granting of stock options is essential in
attracting and retaining key employees who are critical to our success. There
can be no assurance that employee stock activity will continue to generate
substantial funds in the future.

    We believe that our existing cash, cash equivalents and short-term
investments and cash to be generated from operations will be sufficient to meet
our expected working capital and capital expenditure requirements for at least
the next twelve months.(6) We may from time to time consider the acquisition of
complementary businesses, products or technologies, which may require additional
financing or pursue other strategic capital raising.

RECENT ACCOUNTING PRONOUNCEMENTS

        The Financial Accounting Standards Board issued Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("Statement 133")
in June 1998. Statement 133, which requires all derivative instruments to be
recognized as either assets or liabilities on the balance sheet at their fair
value, provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. As amended, this statement is
effective for fiscal years beginning after June 15, 2000. We will apply the new
rules prospectively to transactions beginning in the first quarter of 2001.
Based on current circumstances, we believe the application of the new rules will
not have a material impact on our consolidated financial statements.

    In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 regarding recognition, presentation and disclosure
of revenues. We believe that SAB No. 101 does not have any material effect on
our accounting practices or financial results.






(6) This statement 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>   29

    In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation," an interpretation of APB Opinion No. 25. FIN 44 clarifies
the application of APB 25 for certain issues, including the definition of an
employee, the treatment of acceleration of stock options and the accounting
treatment for options assumed in business combinations. FIN 44 became effective
on July 1, 2000, but it is applicable for certain transactions dating back to
December 1998. We believe that the adoption of FIN 44 will not have a material
impact on our financial condition or results of operations.



           ADDITIONAL RISK FACTORS THAT COULD AFFECT OPERATING RESULTS

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 on Form 10-K for the fiscal year ended
December 31, 2000. These forward-looking statements reflect management's
opinions only as of the date hereof, and we assume 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." Other risks and uncertainties are disclosed in our
SEC filings. Historical results are not necessarily indicative of trends in
operating results for any future period.

    In addition to the other factors identified in this Annual Report on Form
10-K, the following risk factors could materially and adversely affect our
future operating results and could cause actual events to differ materially from
those predicted in our forward looking statements relating to our business.
These risk factors should be carefully considered in evaluating SmartForce and
its business because such factors currently have a significant impact on
SmartForce's business, operating results and financial condition.

OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY. THIS LIMITS YOUR
ABILITY TO EVALUATE OUR HISTORICAL FINANCIAL RESULTS AND INCREASES THE
LIKELIHOOD THAT OUR RESULTS WILL FALL BELOW MARKET ANALYSTS' EXPECTATIONS, WHICH
COULD CAUSE THE PRICE OF OUR ADSS TO DROP RAPIDLY AND SEVERELY.

    We have in the past experienced fluctuations in our quarterly operating
results and anticipate that these fluctuations will continue and could intensify
in the future. As a result, we believe that our quarterly revenue, expenses and
operating results are likely to vary significantly in the future. Thus, it is
likely that in some future quarters our results of operations will be below the
expectations of public market analysts and investors, which could have a severe
adverse effect on the price of our ADSs. For example, our 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 our ADSs decreased rapidly
and significantly, having an extreme adverse effect on the value of an
investment in our securities.

    Our operating results have historically fluctuated, and may in the future
continue to fluctuate, as a result of factors, which include:

-   the size and timing of new and renewal agreements

-   the rate at which we continue to migrate our customers to our e-Learning
    solutions

                                       29
<PAGE>   30


-   the number and size of outsourced virtual university agreements or other
    agreements providing for professional services or the resale of
    instructor-led training

-   the mix of revenue between content, e-Learning platform, services and
    partner's products

-   royalty rates

-   the announcement, introduction and acceptance of new products, product
    enhancements and technologies by us and our competitors

-   the mix of sales between our field sales force, our other direct sales
    channels and our telesales sales channels

-   the impact of any unanticipated decline in net revenues in any particular
    quarter as compared to the relatively fixed nature of our expense levels in
    the short term

-   general conditions in our market or the markets served by our customers in
    the U.S. and or the International economy

-   competitive conditions in the industry

-   the loss of significant customers

-   delays in availability of existing or new products

-   the spending patterns of our customers

-   litigation costs and expenses

-   currency fluctuations

-   the length of sales cycles

WE HAVE RECENTLY INTRODUCED FULLY INTEGRATED, INTERNET-BASED LEARNING SOLUTIONS,
AN AREA IN WHICH WE HAVE LIMITED EXPERIENCE.

    In the fourth quarter of 1999 we introduced SmartForce e-Learning, a hosted
Internet-based learning solution. While the results of our efforts to migrate
our business to the e-Learning model during 2000 exceeded our expectations, we
have relatively limited experience with these solutions, which makes our
historical results of limited value in predicting the potential success of this
initiative. The ultimate success of this initiative will depend on our ability
to build-out and maintain our e-Learning infrastructure, to market and sell the
new e-Learning solutions to existing and prospective customers, to create a
significant subscriber base for our e-Learning destination Web site, to host,
operate and manage our destination site, and to attract and retain key
management and technical personnel.

    We may not be successful in these efforts and the economic terms of any
arrangements that might be expected may not be as favorable as the traditional
licensing agreements. We believe that a lack of success in this regard could
have a material negative effect on us. Moreover, to the extent that we are
successful in our efforts to enter into e-Learning agreements with our
customers, those arrangements are expected to have accounting and operating
model consequences that would also be materially different from the consequences
of our traditional software licensing model.

OUR OPERATING RESULTS ARE SUBJECT TO SEASONAL FLUCTUATIONS WHICH MAY ADVERSELY
IMPACT OUR BUSINESS.

    Our operating results are subject to seasonal 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 revenues in the first
quarter of a year to be less, perhaps substantially so, than revenues for the
immediately preceding fourth quarter. We expect that these seasonal trends will
continue to adversely affect our revenues. In addition, we have 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, our operating margins in the earlier part of the year tend
to be significantly lower than in the later parts of the year. In addition, many
technology companies also experience a seasonal downturn in demand during the
summer months. These seasonal trends may have a material adverse effect on our
results of operations.

                                       30
<PAGE>   31

WE RELY ON STRATEGIC ALLIANCES THAT MAY NOT CONTINUE IN THE FUTURE.

    We have developed strategic alliances to develop and market many of our
products, and we believe that an increasing proportion of our future revenues
may be attributable to products developed and marketed through these and other
future alliances. However, these relationships are not exclusive and we may be
unable to continue to develop future products through these alliances in a
timely fashion or may be unable to negotiate additional alliances in the future
on acceptable terms or at all.

    The marketing efforts of our partners may also disrupt our direct sales
efforts. Our development and marketing partners could pursue their existing or
alternative training programs in preference to and in competition with those
being developed by us. In the event that we are unable to maintain or expand our
current development and marketing alliances or enter into new development and
marketing alliances, our operating results and financial condition could be
materially adversely affected. Furthermore, we are required to pay royalties to
our development and marketing partners on products developed with them, which
reduces our gross margins. We expect that cost of revenues may fluctuate from
period to period in the future based upon many factors, including the revenue
mix (between content, e-Learning platform, services and partner's products) 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 e-Learning offerings developed solely
by us. Our strategic alliance partners may from time to time renegotiate the
terms of our agreement with them and could result in changes to the royalty
arrangements, which could adversely effect our results of operations.


OUR SUCCESS DEPENDS ON OUR ABILITY TO MEET THE NEEDS OF THE RAPIDLY CHANGING
MARKET.

    The market for interactive education and training is influenced by rapidly
changing technology, evolving industry standards, changes in customer
requirements and preferences and frequent introductions of new products and
services embodying new technologies. New methods of providing interactive
education in a technology-based format are being developed and offered in the
marketplace, including intranet and Internet offerings. Many of these new
offerings 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, our future success will depend upon
the extent to which we are able to develop and implement products which address
these emerging market requirements on a cost effective and timely basis. Product
development is risky because it is difficult to foresee developments in
technology, coordinate technical personnel and identify and eliminate design
flaws. Any significant delay in releasing new products could have a material
adverse effect on the ultimate success of our products and could reduce sales of
predecessor products. We may not be able to introduce new products on a timely
basis. In addition, new products introduced by us may fail to achieve a
significant degree of market acceptance or, once accepted, may fail to sustain
viability in the market for any significant period. If we are unsuccessful in
addressing the changing needs of the marketplace due to resource, technological
or other constraints, or in anticipating and responding adequately to changes in
customers' software technology and preferences, our business and results of
operations would be materially adversely affected.


IF WE ARE UNABLE TO BUILD THE SMARTFORCE BRAND, WE MAY BE UNABLE TO GROW OUR
BUSINESS.

    We believe that establishing and maintaining the SmartForce brand will be
critical to the success of our e-Learning strategy and that the importance of
brand recognition will increase due to the growing number of education-oriented
Internet sites. Successful promotion and marketing of the SmartForce brand will
depend on providing compelling educational content, community and commerce, and
we intend to significantly increase our marketing and branding expenditures in
our effort to increase our brand awareness. If our brand building strategy is
unsuccessful, these expenses may never be recovered, and our business could be
materially harmed.

                                       31
<PAGE>   32


THE SUCCESS OF OUR E-LEARNING STRATEGY DEPENDS ON THE RELIABILITY AND CONSISTENT
PERFORMANCE OF OUR INFORMATION SYSTEMS AND INTERNET INFRASTRUCTURE.

    The success of our e-Learning strategy is highly dependent on the consistent
performance of our information systems and Internet infrastructure. If our Web
site fails for any reason or if we exercise any unscheduled down times, even for
only a short period of time, our business and reputation would be materially
harmed. We rely on third parties for proper functioning of our computer
infrastructure, delivery of our e-Learning application and the performance of
our destination site. Our systems and operations could be damaged or interrupted
by fire, flood, power loss, telecommunications failure, break-ins, earthquake
and similar events. Any system failures could adversely affect customer usage of
our solutions and user traffic results in any future quarters, which could
adversely affect our revenues and operating results and harm our reputation with
corporate customers, subscribers and commerce partners. A key element of our
strategy is to generate a high volume of traffic to the Web site and create a
significant subscriber base. Accordingly, the satisfactory performance,
reliability and availability of our Web site and computer infrastructure is
critical to our reputation and ability to attract and retain corporate
customers, subscribers and commerce partners. We cannot accurately project the
rate or timing of any increases in traffic to our Web site and, therefore, the
integration and timing of any upgrades or enhancements required to facilitate
any significant traffic increase to the Web site are uncertain. The failure to
expand and upgrade the Web site or any system error, failure or extended down
time could materially harm our business, reputation, financial condition or
results of operations.

    Our facilities in the State of California, including our corporate
headquarters and other critical business operations, are currently subject to
electrical blackouts as a consequence of a shortage of available power. In the
event these blackouts continue to increase in severity, they could disrupt the
operations of our affected facilities and our business could be seriously
harmed. In addition, in connection with the shortage of available power, prices
for electricity have risen dramatically, and will likely to continue to increase
in the foreseeable future. Such price changes will increase our operating costs,
which could adversely impact our profitability.

THE INTERNET-BASED LEARNING MARKET IS A DEVELOPING MARKET, AND OUR BUSINESS WILL
SUFFER IF E-LEARNING IS NOT WIDELY ACCEPTED.

    The market for Internet-based enterprise learning is a new and emerging
market. Corporate training and education has historically been conducted
primarily through classroom instruction and has traditionally been performed by
a company's internal personnel. Many companies have invested heavily in their
current training solutions. Although technology-based training applications have
been available for several years, they currently account for only a small
portion of the overall training market.

Accordingly, our future success will depend upon the extent to which companies
adopt technology based solutions and use the Internet in connection with their
training activities, and the extent to which companies utilize the services or
purchase products of third-party providers. Many companies that have already
invested substantial resources in traditional methods of corporate training may
be reluctant to adopt a new strategy that may compete with their existing
investments. Even if companies implement technology-based training or Internet
learning solutions, they may still choose to design, develop, deliver or manage
all or part of their education and training internally. If technology based
learning and the use of the Internet for learning does not become widespread, or
if companies do not use the products and services of third parties to develop,
deliver or manage their training needs, then our products and services, may not
achieve commercial success.

WE MAY FAIL TO INTEGRATE ADEQUATELY ACQUIRED PRODUCTS, TECHNOLOGIES AND
BUSINESSES.

    As a result of the consummation of a number of acquisitions our operating
expenses have increased. The integration of these businesses may not be
successfully completed in a timely fashion, or at all. Further, the revenues
from the acquired businesses may not be sufficient to support the costs
associated with those businesses, without adversely affecting our operating
margins. Any failure to successfully

                                       32
<PAGE>   33

complete the integration in a timely fashion or to generate sufficient revenues
from the acquired businesses could have a material adverse effect on our
business and results of operations.

    In March 2000 we acquired the net assets of AES, providers of e-Testing
solutions and services, and in April 2000 we acquired Learning Productions, a
developer of web-based role-play business simulations. Difficulties in combining
the companies, products and technologies could have an adverse impact on our
ability to fully benefit from its existing and future investment in this
business and on the future prospects for the business, management and
professional education software products.

    We regularly evaluate acquisition opportunities and are likely to make
acquisitions in the future that would provide additional product or service
offerings, additional industry expertise or an expanded geographic presence. We
may be unable to locate attractive opportunities or acquire any that we locate
on attractive terms. Future acquisitions 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 our 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 we have no or limited prior experience and the
potential loss of key employees of acquired companies. We may be unable to
integrate successfully any operations, personnel or products that have been
acquired or that might be acquired in the future and our failure to do so could
have a material adverse effect on our results of operations.

RAPID EXPANSION OF OUR OPERATIONS COULD STRAIN OUR PERSONNEL AND SYSTEMS.

    We have recently experienced rapid expansion of our operations, which has
placed, and is expected to continue to place, significant demands on our
executive, administrative, operational and financial personnel and systems. Our
future operating results will substantially depend on the ability of our
officers and key employees to manage changing business conditions and to
implement and improve our operational, financial control and reporting systems.
In particular, we require significant improvement in our order entry,
fulfillment and management information systems in order to support our expanded
operations. If we are unable to respond to and manage changing business
conditions, our business and results of operations could be materially adversely
affected.

OUR EXPENSE LEVELS ARE FIXED IN THE SHORT TERM AND WE MAY BE UNABLE TO ADJUST
SPENDING TO COMPENSATE FOR UNEXPECTED REVENUE SHORTFALLS.

    Our expense levels are based in significant part on our expectations
regarding future revenues and are fixed to a large extent in the short term.
Accordingly, we 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 our results of
operations. This risk materialized in the third quarter of 1998, where profit
was dramatically negatively affected by a shortfall in revenues as against
management's expectations.

WE DEPEND ON A FEW KEY PERSONNEL TO MANAGE AND OPERATE US.

    Our success is largely dependent on the personal efforts and abilities of
our senior management. Failure to retain these executives, or the loss of
certain additional senior management personnel or other key employees, could
have a material adverse effect on our business and future prospects.

    We are also dependent on the continued service of our key sales, content
development and operational personnel and on our ability to attract, motivate
and retain highly qualified employees. In addition, we depend on writers,
programmers, Web designers and graphic artists. We expect to continue to hire
additional content development, programmers, sales and marketing, information
systems and accounting staff. However, we may be unsuccessful in attracting,
retaining or motivating key personnel. The inability to hire and retain
qualified personnel or the loss of the services of key personnel could have a
material adverse effect upon our current business, new product development
efforts and future business prospects.

                                       33
<PAGE>   34

INCREASED COMPETITION MAY RESULT IN DECREASED DEMAND FOR OUR PRODUCTS AND
SERVICES, WHICH MAY RESULT IN REDUCED REVENUES AND GROSS MARGINS AND LOSS OF
MARKET SHARE.

    The market for business education training solutions is highly fragmented
and competitive, and we expect this competition to increase. We expect that
because of the lack of significant barriers to entry into this market, new
competitors may enter the market in the future. In addition to increased
competition from new companies entering into the market, established companies
are entering into the market through acquisitions of smaller companies, which
directly compete with us, and we expect this trend to continue. We expect the
market to become increasingly competitive due to the lack of significant
barriers to entry. We may also face competition from publishing companies and
vendors of application software, including those vendors with whom we have
formed development and marketing alliances.

    Our primary source of direct competition comes from third-party suppliers of
instructor-led information technology, business, management and professional
skills education and training as well as suppliers of computer-based training
and e-Learning solutions. We also face indirect competition from internal
education and training departments of our potential customers. We also compete
to a lesser extent with consultants, value-added resellers and network
integrators. Certain of these value-added resellers also market products
competitive with ours. We expect that as organizations increase their dependence
on outside suppliers of training, we will face increasing competition from these
other suppliers as education and training managers more frequently compare
training products provided by outside suppliers.

    Growing competition may result in reduced revenue and gross margins and loss
of market share, any one of which have a material adverse effect on our
business. Many of our current and potential competitors have substantially
greater financial, technical, sales, marketing and other resources, as well as
greater name price competition, and we expect that we will face increasing price
pressures from competitors as managers demand more value for their training
budgets. Accordingly, we may be unable to provide e-Learning solutions that
compare favorably with new instructor-led techniques, other interactive training
software or new e-Learning solutions or competitive pressures may require us to
reduce our prices significantly.

OUR BUSINESS IS SUBJECT TO CURRENCY FLUCTUATIONS THAT CAN ADVERSELY AFFECT OUR
OPERATING RESULTS.

    Due to our multinational operations, our business is subject to fluctuations
based upon changes in the exchange rates between the currencies in which we
collect revenues or pay expenses. In particular, the value of the U.S. dollar
against the Euro and related currencies impacts our operating results. Our
expenses are not necessarily incurred in the currency in which revenue is
generated, and, as a result, we are required from time to time to convert
currencies to meet our obligations. These currency conversions are subject to
exchange rate fluctuations, and changes to the value of the Euro, pound sterling
and other currencies relative to the U.S. dollar could adversely affect our
business and results of operations.

OUR CORPORATE TAX RATE MAY INCREASE, WHICH COULD ADVERSELY IMPACT OUR CASH FLOW,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

    We have significant operations and generate a majority of our taxable income
in the Republic of Ireland, and some of our Irish operating subsidiaries are
taxed at rates substantially lower than tax rates in effect in the United States
and other countries in which we have operations. If our Irish subsidiaries were
no longer to qualify for these lower tax rates or if the applicable tax laws
were rescinded or changed, our operating results could be materially adversely
affected. Moreover, because we incur income tax in several countries, an
increase in our profitability in one or more of these countries could result in
a higher overall tax rate. In addition, if U.S. or other foreign tax authorities
were to change applicable tax laws or successfully challenge the manner in which
our subsidiaries' profits are currently recognized, our taxes could increase,
and our business, cash flow, financial condition and results of operations could
be materially adversely affected.

                                       34
<PAGE>   35

WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY RIGHTS. UNAUTHORIZED USE OF OUR
TECHNOLOGY MAY RESULT IN DEVELOPMENT OF PRODUCTS OR SERVICES, WHICH COMPETE WITH
OURS.

    Our success depends on our ability to protect our rights in our intellectual
property and trade secrets. We rely upon a combination of copyright, trademark
and trade secret laws and customer license agreements, and other methods to
protect our proprietary rights. We also enter into confidentiality agreements
with our employees, consultants and third parties to seek to limit and protect
the distribution of our proprietary information regarding this technology.
However, we have not signed protective agreements in every case. Unauthorized
parties may copy aspects of our products, services or technology or obtain and
use information that we regard as proprietary. Other parties may breach
confidentiality agreements and other protective contracts we have executed. We
may not become aware of, or have adequate remedies in the event of, a breach.
Litigation may be necessary in the future to enforce our intellectual property
rights, to protect trade secrets or to determine the validity and scope of the
proprietary rights of others. This litigation could result in substantial costs
and diversion of management and technical resources.

SOME MAY CLAIM THAT WE INFRINGE THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH COULD
RESULT IN COSTLY LITIGATION OR REQUIRE US TO REENGINEER OR CEASE SALES OF OUR
PRODUCTS OR SERVICES.

    Third parties could in the future claim that our current or future products
infringe their intellectual property rights. Any claim, with or without merit,
could result in costly litigation or require us to reengineer or cease sales of
our products or services, any of which could have a material adverse effect on
our business. Infringement claims could also result in an injunction in the use
of our products or require us to enter into royalty or licensing agreements.
Licensing agreements, if required, may not be available on terms acceptable to
us or at all.

WE ARE SUBJECT TO A PENDING LEGAL PROCEEDING AND MAY BECOME SUBJECT TO
ADDITIONAL PROCEEDINGS AND ADVERSE DETERMINATIONS IN THESE PROCEEDINGS COULD
HARM OUR BUSINESS.

    We may be from time to time involved in various lawsuits and legal
proceedings, which arise in the ordinary course of business. An adverse
resolution of these matters could significantly negatively impact our financial
position and results of operations.

OUR NON-U.S. OPERATIONS ARE SUBJECT TO RISKS WHICH COULD NEGATIVELY IMPACT OUR
FUTURE OPERATING RESULTS.

    We expect that international operations will continue to account for a
significant portion of our revenues, and intend to continue to expand our
operations outside of the United States. Operations outside of the United States
are subject to inherent risks, including difficulties or delays in developing
and supporting non-English language versions of our products and services,
political and economic conditions in various jurisdictions, in staffing and
managing foreign subsidiary operations, longer account receivable payment cycles
and potential adverse tax consequences. Any of these factors could have a
material adverse effect on our future operations outside of the United States,
which could negatively impact our future operating results.

BECAUSE MANY USERS OF OUR E-LEARNING SOLUTIONS ACCESS THEM OVER THE INTERNET,
FACTORS ADVERSELY AFFECTING THE USE OF THE INTERNET COULD HARM OUR BUSINESS.

    Many of our users access our e-Learning solutions over the Internet. Any
factors that adversely affect Internet usage could disrupt the ability of those
users to access our e-Learning solutions, which would adversely effect customer
satisfaction and therefore our business. Factors which could disrupt Internet
usage include slow access to download times, security concerns, network problems
or service disruptions that prevent users from accessing an Internet server and
delays in, or disputes concerning, the development of industry wide Internet
standards and protocols.

DEMAND FOR OUR PRODUCTS AND SERVICES MAY BE ESPECIALLY SUSCEPTIBLE TO ADVERSE
ECONOMIC CONDITIONS.

                                       35
<PAGE>   36

    Our business and financial performance may be damaged by adverse financial
conditions affecting our target customers or by a general weakening of the
economy. Some companies may not view training products and services as critical
to the success of their businesses. If these companies experience disappointing
operating results, whether as a result of adverse economic conditions,
competitive issues or other factors, they may decrease or forego education and
training expenditures before limiting their other expenditures.

THE MARKET PRICE FOR OUR ADSs MAY FLUCTUATE AND MAY NOT BE SUSTAINABLE.

    Our initial public offering of our ADSs was completed in April 1995. There
can be no assurance that a viable public market for our ADSs will be sustained.
The market price of our ADSs has fluctuated significantly since our initial
public offering and is likely to continue to be volatile. We believe that
factors, such as the following, could cause the price of our ADSs to fluctuate,
perhaps substantially:

    -   announcements of developments related to ourselves or our competitors'
        business

    -   announcements of new products or enhancements by ourselves or our
        competitors

    -   sales of our ADSs into the public market

    -   developments in our relationships with our customers, partners and
        distributors

    -   shortfalls or changes in revenues, gross margins, earnings or losses or
        other financial results which differ from public market expectations

    -   changes in the public market expectation of our performance or industry
        performance

    -   changes in market valuations of competitors

    -   regulatory developments

    -   additions or departures of key personnel

    -   fluctuations in results of operations and

    -   general conditions in our market or the markets served by our customers
        or in the U.S. and or the International economy.

    In addition, in recent years the stock market in general, and the market for
shares of technology stocks in particular, has experienced extreme price and
volume fluctuations, which have often been unrelated to the operating
performance of affected companies. The market price of our ADSs may continue to
experience significant fluctuations in the future, including fluctuations that
are unrelated to our performance.

    To succeed we must continue to expand our content offerings, upgrade our
technology and distinguish our solution. We may not be able to do successfully.
Any failure by us to anticipate or respond adequately to changes in technology
and customer preferences or any significant delays in content development or
implementation could impact our ability to capture market share.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

    Our exposure to market risk for changes in interest rates relate primarily
to our investment portfolio. We do not use any derivative financial instruments
in our investment portfolio. The primary objective of our investment activities
is to preserve capital while maximizing yields without significantly increasing
risk. We achieve this by investing our 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. Due to the nature of our investments,
we believe that there is no material risk exposure. At December 31, 2000, the
average maturity of the Company's investment securities noted below was 5
months. Cash balances in foreign currencies overseas are operating balances and
are only invested in short-term deposits of local operating banks. All
investments are carried at market value, which approximates cost.

    The table below presents the principal amount and related weighted average
interest rates for our investment portfolio. Our short-term investments are all
in fixed rate instruments. The principal amounts approximate fair value at
December 31, 2000.

                                       36
<PAGE>   37

    TABLE OF CASH AND SHORT-TERM INVESTMENTS:

<TABLE>
<CAPTION>

                                                                                    AVERAGE
                                                                        PRINCIPAL   INTEREST
    DECEMBER 31, 2000                                                    AMOUNT       RATE
    -----------------                                                    ------       ----
    (DOLLARS IN THOUSANDS)

<S>                                                                     <C>         <C>
    Cash and cash equivalents.......................................... $ 65,412       6.0%
    Short term investments.............................................   42,545       6.5%
                                                                        --------
    Total cash and short-term investment securities.................... $107,957
                                                                        ========
</TABLE>

FOREIGN CURRENCY RISK

    Due to our multinational operations, our business is subject to fluctuations
based upon changes in the exchange rates between the currencies in which we
collect revenues or pay expenses and the U.S. dollar Our expenses are not
necessarily incurred in the currency in which revenue is generated, and, as a
result, we are required from time to time to convert currencies to meet our
obligations. These currency conversions are subject to exchange rate
fluctuations, in particular changes to the value of the Euro and pound sterling
relative to the U.S. dollar, which could adversely affect our business and the
results of operations.

    During the twelve months ended December 31, 2000, we entered into forward
currency exchange contracts to hedge identified expenses denominated in Irish
pounds.

    At December 31, 2000 we had forward exchange contracts of $60 million
outstanding. All contracts at December 31, 2000 expire at various times
throughout 2001 and 2002. Our hedging policy is designed to reduce the impact
of foreign currency exchange movements between the Irish pound and U.S. Dollar
by hedging identifiable Irish pound denominated firm commitments. Our
accounting policies for these instruments are based on our designation of such
instruments as hedging transactions. We do not use forward currency
exchange contracts for speculative trading purposes.



                                       37
<PAGE>   38

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>

                                                                                           PAGE
                                                                                          NUMBER
<S>                                                                                       <C>
CONSOLIDATED FINANCIAL STATEMENTS

Report of Ernst & Young, Independent Auditors............................................   39

Consolidated Balance Sheets..............................................................   40

Consolidated Statements of Operations....................................................   41

Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income......   42

Consolidated Statements of Cash Flows....................................................   43

Notes to Consolidated Financial Statements...............................................   44
</TABLE>

                                       38
<PAGE>   39

                  REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS

The Board of Directors and Shareholders.
SmartForce PLC

    We have audited the accompanying consolidated balance sheets of SmartForce
PLC as of December 31, 1999 and 2000 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, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

    We conducted our audits in accordance with 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 provide a reasonable basis for our
opinion.

    In our opinion, based on our audits, the financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of SmartForce PLC at December 31, 1999 and 2000, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000 in conformity with United States generally
accepted accounting principles.


/S/   ERNST & YOUNG

ERNST & YOUNG


Dublin, Ireland
Date: January 18, 2001

                                       39
<PAGE>   40

                                 SMARTFORCE PLC

                           CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>

                                                                            AT DECEMBER 31,
                                                                         ---------------------
                                                                           1999        2000
                                                                         ---------   ---------
                                ASSETS
<S>                                                                      <C>         <C>
Current assets
    Cash and cash equivalents .........................................  $  69,260   $  65,412
    Short term investments ............................................     38,913      42,545
    Accounts receivable, net ..........................................     62,035      76,458
    Inventories .......................................................        188         369
    Recoverable and deferred tax assets, net ..........................        192       2,517
    Prepaid expenses ..................................................      9,935      12,467
                                                                         ---------   ---------
        Total current assets ..........................................    180,523     199,768
Intangible assets .....................................................     59,155      73,194
Property and equipment, net ...........................................     26,111      29,388
Investments ...........................................................        850       3,616
Other assets ..........................................................     23,078      28,817
                                                                         ---------   ---------
        Total assets ..................................................  $ 289,717   $ 334,783
                                                                         =========   =========

                 LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
    Accounts payable ..................................................  $   5,368   $   6,961
    Accrued payroll and related expenses ..............................      6,680       9,926
    Other accrued liabilities .........................................     28,213      22,118
    Deferred revenues .................................................      6,141      48,381
                                                                         ---------   ---------
        Total current liabilities .....................................     46,402      87,386
Non Current Liabilities
    Minority equity interest ..........................................        383         307
    Other liabilities .................................................        209       1,452
                                                                         ---------   ---------
        Total non current liabilities .................................        592       1,759
Shareholders' equity
    Ordinary shares, IR9.375p par value: 120,000,000 shares
         authorized at December 31, 1999 and 2000; issued and
         outstanding 50,035,087 and 50,009,318  at December 31, 1999
         and 51,970,046 and 51,944,277 shares at
         December 31, 2000, respectively ..............................      7,432       7,656
    Additional paid-in capital ........................................    200,547     232,640
    Accumulated profit ................................................     34,919       6,191
    Capital redemption ................................................        231         296
    Other comprehensive income ........................................       (404)     (1,143)
    Treasury stock, 25,769 shares at cost .............................         (2)         (2)
                                                                         ---------   ---------
        Total shareholders' equity ....................................    242,723     245,638
                                                                         ---------   ---------
            Total liabilities and shareholders' equity ................  $ 289,717   $ 334,783
                                                                         =========   =========
</TABLE>



                            (see accompanying notes)

                                       40
<PAGE>   41


                                 SMARTFORCE PLC

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>


                                                                      YEARS ENDED DECEMBER 31,
                                                             -----------------------------------------
                                                               1998            1999            2000
                                                             ---------       ---------       ---------
<S>                                                          <C>             <C>             <C>
Revenues ..............................................      $ 162,232       $ 197,754       $ 168,197
Cost of revenues ......................................         25,137          29,675          27,452
                                                             ---------       ---------       ---------
       Gross profit ...................................        137,095         168,079         140,745
Operating expenses:
       Research and development .......................         25,832          31,713          42,085
       Sales and marketing ............................         75,395          93,841         105,618
       General and administrative .....................         15,893          17,042          19,703
       Amortization of acquired intangibles ...........             --           3,441           8,603
       Acquired research and development ..............             --           5,900              --
       Costs of acquisitions ..........................          5,505              --              --
                                                             ---------       ---------       ---------
              Total operating expenses ................        122,625         151,937         176,009
                                                             ---------       ---------       ---------
Income/(Loss) from operations .........................         14,470          16,142         (35,264)
Interest income, net ..................................          4,218           4,048           5,590
Net exchange gain/(loss) ..............................            516            (856)         (1,218)
                                                             ---------       ---------       ---------
Income/(Loss) before provision/benefit for
income taxes ..........................................         19,204          19,334         (30,892)
(Provision)/Benefit for income taxes ..................         (2,666)         (3,708)          2,229
                                                             ---------       ---------       ---------
Net Income/(Loss) .....................................      $  16,538       $  15,626       $ (28,663)
                                                             =========       =========       =========
Net Income/(Loss) per share--Basic ....................      $    0.38       $    0.33       $   (0.56)
                                                             =========       =========       =========
Net Income/(Loss) per share--Diluted ..................      $    0.36       $    0.30       $   (0.56)
                                                             =========       =========       =========
</TABLE>

                            (see accompanying notes)


                                       41
<PAGE>   42
                                 SMARTFORCE PLC

         CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND
                              COMPREHENSIVE INCOME
                             (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>

                                                                                 ADDITIONAL
                                                                                 ----------
                                                                ORDINARY            PAID-IN         ACCUMULATED          CAPITAL
                                                             -------------      -------------      -------------      -------------
                                                                 SHARES            CAPITAL             PROFIT           REDEMPTION
                                                             -------------      -------------      -------------      -------------
<S>                                                          <C>               <C>                 <C>                <C>
Balance at December 31, 1997 ...........................             6,369             97,870              2,986                 --
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                 --                 --
Release of 31,410 Escrow shares in respect of
   BookMaker acquisition ...............................                 4                303                 --                 --
Issue of exchangeable shares in respect of
   LanTec acquisition ..................................                18                (18)                --                 --
Amortization of deferred compensation ..................                --                 --                 --                 --
Capital redemption reserve .............................                --                 --               (231)               231
Tax credit on disqualifying dispositions ...............                --                221                 --                 --
Comprehensive Income:
   Net income ..........................................                --                 --             16,538                 --
   Translation adjustment ..............................                --                 --                 --                 --

Comprehensive Income ...................................
                                                             -------------      -------------      -------------      -------------
Balance at December 31, 1998 ...........................             6,725            127,869             19,293                231
Issuance of 772,980 ordinary shares as a
   Result of option exercises, 420,996 from
   Employee share purchase plan and 11,956
   From the exercise of warrants .......................               155             13,057                 --                 --
Issue of 4,374,896 ordinary shares in respect
   of the Knowledge Well acquisition ...................               547             59,626                 --                 --
Issue of exchangeable shares in respect of the
   LanTec acquisition ..................................                 5                 (5)                --                 --
Comprehensive Income:
   Net income ..........................................                --                 --             15,626                 --
   Translation adjustment ..............................                --                 --                 --                 --

Comprehensive Income ...................................
                                                             -------------      -------------      -------------      -------------
Balance at December 31, 1999 ...........................             7,432            200,547             34,919                231
Issuance of  1,319,857 ordinary shares as a
   Result of option exercises, 262,665 from
   Employee share purchase plan and 24,343 from the
exercise of warrants ...................................               191             15,854                 --                 --
Issue of  103,128 ordinary shares in respect
   of the acquisition of the net assets of AES .........                12              5,138                 --                 --
Issue of 224,916 ordinary shares in respect
   of the acquisition of Learning Productions ..........                21             11,101                 --                 --
Capital redemption reserve .............................                --                 --                (65)                65
Comprehensive Loss:
   Net loss ............................................                --                 --            (28,663)                --
   Translation adjustment ..............................                --                 --                 --                 --

Comprehensive Loss .....................................
                                                             -------------      -------------      -------------      -------------
Balance at December 31, 2000 ...........................     $       7,656      $     232,640      $       6,191      $         296
                                                             =============      =============      =============      =============


<CAPTION>


                                                                                   OTHER                                 TOTAL
                                                                                   -----                                 -----
                                                                DEFERRED       COMPREHENSIVE        TREASURY         SHAREHOLDERS'
                                                             -------------     -------------      -------------      -------------
                                                              COMPENSATION     INCOME/(LOSS)          STOCK             EQUITY
                                                             -------------     -------------      -------------      -------------
Balance at December 31, 1997 ...........................              (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 .......................                --                --                 --             29,827
Release of 31,410 Escrow shares in respect of
   BookMaker acquisition ...............................                --                --                 --                307
Issue of exchangeable shares in respect of
   LanTec acquisition ..................................                --                --                 --                 --
Amortization of deferred compensation ..................               112                --                 --                112
Capital redemption reserve .............................                --                --                 --                 --
Tax credit on disqualifying dispositions ...............                --                --                 --                221
Comprehensive Income:
   Net income ..........................................                --                --                 --             16,538
   Translation adjustment ..............................                --               117                 --                117

Comprehensive Income ...................................                                                                    16,655
                                                             -------------     -------------      -------------      -------------
Balance at December 31, 1998 ...........................                --               685                 (2)           154,801
Issuance of 772,980 ordinary shares as a
   Result of option exercises, 420,996 from
   Employee share purchase plan and 11,956
   From the exercise of warrants .......................                --                --                 --             13,212
Issue of 4,374,896 ordinary shares in respect
   of the Knowledge Well acquisition ...................                --                --                 --             60,173
Issue of exchangeable shares in respect of the
   LanTec acquisition ..................................                --                --                 --                 --
Comprehensive Income:
   Net income ..........................................                --                --                 --             15,626
   Translation adjustment ..............................                --            (1,089)                --             (1,089)

Comprehensive Income ...................................                                                                    14,537
                                                             -------------     -------------      -------------      -------------
Balance at December 31, 1999 ...........................                --              (404)                (2)           242,723
Issuance of  1,319,857 ordinary shares as a
   Result of option exercises, 262,665 from
   Employee share purchase plan and 24,343 from the
exercise of warrants ...................................                --                --                 --             16,045
Issue of  103,128 ordinary shares in respect
   of the acquisition of the net assets of AES .........                --                --                 --              5,150
Issue of 224,916 ordinary shares in respect
   of the acquisition of Learning Productions ..........                --                --                 --             11,122
Capital redemption reserve .............................                --                --                 --                 --
Comprehensive Loss:
   Net loss ............................................                --                --                 --            (28,663)
   Translation adjustment ..............................                --              (739)                --               (739)

Comprehensive Loss .....................................                                                                   (29,402)
                                                             -------------     -------------      -------------      -------------
Balance at December 31, 2000 ...........................     $          --     $      (1,143)     $          (2)     $     245,638
                                                             =============     =============      =============      =============
</TABLE>


                            (see accompanying notes)

                                       42
<PAGE>   43

                                 SMARTFORCE PLC

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                                                  YEARS ENDED DECEMBER 31,
                                                                                          -------------------------------------
                                                                                            1998          1999           2000
                                                                                          --------      --------      ---------
<S>                                                                                       <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income/(loss) ...............................................................     $ 16,538      $ 15,626      $ (28,663)
    Adjustments to reconcile net income/(loss) to net cash provided by operating
       activities:
       Depreciation and amortization ................................................        6,689        12,145         21,446
       Non cash acquired research and development ...................................           --         5,900             --
       Taxation credit from disqualifying dispositions ..............................          221            --             --
       Loss on disposal of assets ...................................................          318           547            682
       Accrued interest on short-term investments ...................................          241          (253)           122
       Changes in operating assets and liabilities:
          Accounts receivable .......................................................       (3,636)      (18,501)       (15,705)
          Inventories ...............................................................          367            60           (181)
          Recoverable and deferred tax assets, net ..................................          215            67         (2,336)
          Prepaid expenses and other assets .........................................       (9,527)      (11,281)        (8,516)
          Accounts payable ..........................................................          406        (1,222)         1,710
          Accrued payroll and related expenses and other accrued liabilities ........        3,118         5,454         (1,868)
          Deferred revenue ..........................................................       (1,485)        3,083         42,346
                                                                                          --------      --------      ---------
              Net cash provided by operating activities .............................       13,465        11,625          9,037
                                                                                          --------      --------      ---------
CASH FLOWS FROM INVESTING ACTIVITIES
    Purchases of property and equipment .............................................      (12,634)      (16,121)       (15,914)
    Payments to acquire short-term investments ......................................      (93,673)      (84,981)      (144,544)
    Payments to acquire Knowledge Well, Dunloe, Learning Productions and
      net assets of AES, net of cash acquired .......................................           --        (1,687)        (6,893)
    Proceeds from sale of short-term investments ....................................       93,085        82,707        140,791
    Payments to acquire investments .................................................         (350)         (300)        (2,766)
                                                                                          --------      --------      ---------
              Net cash used in investing activities .................................      (13,572)      (20,382)       (29,326)
                                                                                          --------      --------      ---------
CASH FLOWS FROM FINANCING ACTIVITIES
    Repayments under bank overdraft facility ........................................          (13)           --             --
    Proceeds from issuance of ordinary shares, net ..................................       30,124        13,212         16,046
                                                                                          --------      --------      ---------
              Net cash provided by financing activities .............................       30,111        13,212         16,046
                                                                                          --------      --------      ---------
    Effect of exchange rate changes on cash and cash equivalents ....................          139          (843)           395
                                                                                          --------      --------      ---------
              Net increase/(decrease) in cash and cash equivalents ..................       30,143         3,612         (3,848)
    Cash and cash equivalents at beginning of period ................................       35,505        65,648         69,260
                                                                                          --------      --------      ---------
    Cash and cash equivalents at end of period ......................................     $ 65,648      $ 69,260      $  65,412
                                                                                          ========      ========      =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    Interest paid ...................................................................     $     30      $     18      $      99
    Taxes paid ......................................................................     $  2,283      $  1,716      $   1,870
</TABLE>


                            (see accompanying notes)

                                       43

<PAGE>   44




                                 SMARTFORCE PLC

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

    SmartForce PLC is organized as a public limited company under the laws of
the Republic of Ireland. SmartForce PLC and its subsidiaries (collectively, the
"Company" or "SmartForce") provides e-Learning solutions to businesses and
individuals worldwide. The principal market for the Company's e-Learning
solutions 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 ("US GAAP") and
include the Company and its subsidiaries in the United States, United Kingdom,
Ireland, South Africa, Canada, Germany, Australia, the Netherlands, Sweden,
Norway, Denmark, France, Singapore, 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 merger with The ForeFront Group, Inc ("ForeFront") and
earlier mergers which have been included in the consolidated financial
statements under the pooling of interests method (see note 3).

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, Denmark, France and Singapore are the currencies of those
countries. The functional currency of the Company's subsidiaries in Ireland, the
Commonwealth of the Bahamas and the 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.

Foreign Currency Exchange Contracts

    A gain or loss on a forward contract that is intended to hedge an
identifiable foreign currency firm commitment is deferred and included in the
measurement of the related foreign currency transaction.

                                       44
<PAGE>   45

                                 SMARTFORCE PLC

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Revenue Recognition

    The Company recognizes revenue primarily from software licenses. The Company
recognizes a majority of its business pursuant to e-Learning rental agreements
under which customers rent access to the Company's learning environment for a
period of time, such as one, two or three years. Revenue from e-Learning rental
agreements is generally deferred and recognized ratably over the term of the
agreement provided a signed contract or other persuasive evidence of an
arrangement exists, the Company's fees are fixed or determinable and collections
of accounts receivable are probable.

    The Company also recognizes revenue pursuant to legacy software license
agreements under which customers license usage of delivered products for a
period of time, such as one, two or three years. On each anniversary date during
the term of multi-year license agreements, customers have been generally allowed
to exchange any or all of the licensed products for an equivalent number of
alternative products within the SmartForce library. The first year license fee
is generally recognized as revenue at the time of delivery of all products,
provided a signed contract or other persuasive evidence of an arrangement
exists, 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 a signed contract or other persuasive evidence of an
arrangement exists, the Company's fees are fixed or determinable and collections
of accounts receivable are probable. 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.

    The Company has entered into agreements with customers to rent access to the
Company's learning environment and to provide certain professional services,
management fees and or the resale of third parties' instructor-led training to
the customer. Revenues from the non-rental component of these agreements, will
generally be recognized as services are performed provided a signed contract or
other persuasive evidence of an arrangement exists, 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 various elements of the
agreement.

    In addition, the Company derives revenues from sales of its products, which
are recognized upon shipment, net of allowances for estimated future returns and
for excess quantities in distribution channels, provided persuasive evidence of
an arrangement exists, the Company's fees are fixed or determinable and
collections of accounts receivable are probable. Where no such vendor specific
objective evidence exists revenue is recognized ratable over the life of the
agreement.

    Revenues from product development arrangements are generally recognized on a
percentage of completion basis as milestones are completed or as products are
produced under the arrangement.

                                       45
<PAGE>   46

                                 SMARTFORCE PLC

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Cost of Revenues

Cost of revenues include materials (such as packaging and documentation),
royalties paid to third parties, the portion of development costs associated
with product co-development arrangements, cost of providing professional
services, fulfillment and shipping and handling costs and the amortization of
the cost of purchased products. Approximately $596,000, $285,600 and $470,000 of
development expenses incurred in connection with development and marketing
alliances were charged to cost of revenues in 1998, 1999 and 2000, respectively.

Inventories

    Inventories are stated at the lower of cost (first in, first out) or net
realizable value and consist principally of compact discs 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, 2000, all such research
and development costs have been expensed as incurred.

    In 1999, the Company adopted SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". SOP 98-1 requires the
capitalization of certain costs relating to software acquired, developed or
modified solely to meet the Company's internal requirements and for which there
are no substantive plans to market the software. Costs incurred during the
application development stage of the project, are capitalized and amortized over
the useful economic life of the internal use software.

Goodwill and Intangible Fixed Assets

    Goodwill and other intangible assets acquired in purchase transactions are
stated at cost less accumulated amortization. Amortization is recorded on a
straight-line method over the estimated useful lives of the assets of generally
between 4 and 10 years. Other intangible assets acquired in purchase
transactions consist of purchased technology, the Kansas State University
license and assembled workforces. (see note 4)

Impairment of Long-Lived Assets

    Where events or changes in circumstances indicate the carrying amount of
long-lived assets may not be recoverable the Company recognizes such an
impairment when the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets. Impairment, if any, will
result in the carrying value of the long-lived asset being reduced by the amount
by which the fair value, as determined by the undiscounted cash flows, exceeds
the carrying amount of the asset. No impairment losses were incurred in the
periods presented.

                                       46
<PAGE>   47

                                 SMARTFORCE PLC

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 American Depositary Shares ("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 3), at the beginning of the earliest period presented. Diluted net income
per share is 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 $350,000,
$419,000 and $255,688 to the Plan in the years ended December 31, 1998, 1999 and
2000, respectively.

Stock Based Compensation

    The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"), and related interpretations, and complies
with the disclosure requirements of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). 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.

Advertising Costs

    Costs incurred for producing and communicating advertising are expensed when
incurred. Advertising expenses amounted to $11.4 million, $14.7 million and
$19.1 million for the years ended December 31, 1998, 1999 and 2000,
respectively.

                                       47
<PAGE>   48

                                 SMARTFORCE PLC

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Government Grants

    Government grants are recorded in the accounts when there is reasonable
assurance that the Company has complied with, and will continue to comply with,
all conditions necessary to obtain the grants.

    The Company has entered into agreements with government agencies to employ
additional personnel. Conditions are attached to these grant agreements. Once
the Company has complied with these conditions, and the grant application has
been approved by the grant authority, the grant is recognized and offset against
the relevant expense in the statement of operations.

Concentration of Credit Risk

    Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash, cash equivalents, short-term
investments and trade receivables. The Company invests its excess cash in
deposits with major banks and in U.S. Treasury and U.S. agency obligations and
in debt securities of corporations with strong credit ratings, which are
included in short term investments. The Company performs periodic evaluations of
the relative credit standing of 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 $2,623,675 and $2,538,933 at December 31,
1999 and 2000, respectively. The Company generally requires no collateral from
its customers.

Fair Values of Financial Instruments

    The carrying amount of cash, cash equivalents, short-term investments,
accounts receivable and accounts payable reported in the balance sheet
approximates the fair value of these financial instruments.

Comprehensive Income

    Other comprehensive income consists solely of foreign currency translation
adjustments.

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. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax laws and rates which will be in effect when the
differences are expected to reverse.

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 three months
or less when acquired.


                                       48
<PAGE>   49

                                 SMARTFORCE PLC

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Cash, Cash Equivalents and Short-Term Investments (continued)

    Short-term investments at December 31, 1999 and 2000 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, 1999 and 2000,
$38,913,000 and $42,545,000 respectively (inclusive of accrued interest of
$725,000 and $603,224 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, 1999 and 2000 consist primarily of deferred sales
commissions. Deferred sales commissions are charged to expense when the related
revenue is recognized.

Newly Issued Accounting Standards

    The Financial Accounting Standards Board issued Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("Statement 133")
in June 1998. Statement 133, which requires all derivative instruments to be
recognized as either assets or liabilities on the balance sheet at their fair
value, provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. As amended, this statement is
effective for fiscal years beginning after June 15, 2000. The Company will apply
the new rules prospectively to transactions beginning in the first quarter of
2001. Based on current circumstances, the Company believes the application of
the new rules will not have a material impact on the consolidated financial
statements of the Company.

2.   NET INCOME/(LOSS) PER SHARE

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


<TABLE>
<CAPTION>

                                                                                     1998         1999         2000
                                                                                   --------     --------     --------
                                                                                   (DOLLARS IN THOUSANDS, EXCEPT PER
                                                                                             SHARE AMOUNTS)
<S>                                                                                <C>          <C>          <C>
Numerator:
       Numerator for basic and diluted net income/(loss) per share--
           Income/(Loss) available to common shareholders ....................     $ 16,538     $ 15,626     $(28,663)
                                                                                   ========     ========     ========
Denominator:
       Denominator for basic net income/(loss) per share--
              -weighted average shares .......................................       43,630       47,145       51,111
       Effect of dilutive securities:
              Employee stock options and warrants ............................        2,349        4,653           --
                                                                                   --------     --------     --------
       Denominator for diluted net income/(loss) per share ...................       45,979       51,798       51,111
                                                                                   ========     ========     ========
Basic net income/(loss) per share ............................................     $   0.38     $   0.33     $  (0.56)
                                                                                   ========     ========     ========
Diluted net income/(loss) per share ..........................................     $   0.36     $   0.30     $  (0.56)
                                                                                   ========     ========     ========
</TABLE>


The effect of employee share options and warrants have not been included in the
computation of the diluted net loss per share for 2000 as to do so would have
been anti dilutive. The weighted average number of options and warrants
outstanding for the year ended December 31, 2000 was 8,751,504.

                                       49
<PAGE>   50

                                 SMARTFORCE PLC

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

3.   ACQUISITIONS AND MERGERS

    On May 28, 1998, a merger occurred between the Company and ForeFront, under
which the Company issued 2,182,851 ordinary shares for all the outstanding stock
of ForeFront. The financial results of the Company and ForeFront have been
accounted for using the "pooling-of-interests" method. The
"pooling-of-interests" method gives effect to the merger as if it had occurred
at the beginning of the earliest period presented. The consolidated financial
statements as presented are based on the Company's and ForeFront's historical
consolidated financial statements. 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.

        On June 18, 1999, the Company acquired a majority shareholding in
Knowledge Well Group Limited and Knowledge Well Limited (collectively "Knowledge
Well"), a provider of business, management and professional education using
interactive learning technologies. The Company acquired the remaining
shareholding on August 23, 1999. The Company issued 4,374,896 ordinary shares in
exchange for all of the outstanding shares of Knowledge Well. The Company also
assumed options to acquire Knowledge Well stock exercisable for an issuance of
up to approximately 0.4 million ordinary shares. Under GAAP, which require stock
appreciation of the Company in connection with the announcement of the Knowledge
Well transaction to be considered in calculating the purchase price, the
purchase price of Knowledge Well was approximately $62.7 million.

    On July 1, 1999, the Company acquired the remaining 50% shareholding in
Dunloe for $100,000, a provider of training software, in which the Company
already held a 50% holding.

    On March 2, 2000, the Company acquired the net assets of Advanced
Educational Systems ("AES"), providers of secure e-Testing solutions and
services to organizations to support their internal certification and compliance
procedures. The consideration for AES in respect of the assets of AES comprised
of 103,128 ordinary shares and $1.6 million in cash. Intangible assets of
approximately $7.3 million were recorded as a result of the acquisition of AES.

    On April 10, 2000, the Company acquired Learning Productions LLC ("Learning
Productions"), a developer of advanced, web-based role-play business
simulations. The consideration for the outstanding securities of Learning
Productions consists of 224,916 ordinary shares and $4.8 million in cash.
Intangible assets of approximately $16.4 million were recorded as a result of
the acquisition.

    The acquisitions of Knowledge Well, Dunloe, AES and Learning Productions
have been accounted for under the purchase method of accounting. The
consolidated financial statements for each of the years ended December 31, 1998,
1999 and 2000 include the results of the Company and ForeFront and the assets
and liabilities of the Company and ForeFront as at December 31, 1999 and 2000,
respectively. The consolidated financial statements for the year ended December
31, 1999 and 2000 include the results of Knowledge Well from June 18, 1999, of
Dunloe from July 1, 1999, of AES from March 2, 2000 and of Learning Productions
from April 28, 2000, the assets and liabilities of Knowledge Well and Dunloe
as at December 31, 1999 and 2000 and of AES and Learning Productions as at
December 31, 2000.

    The following pro forma information combines the consolidated results of
operations of the Company with those of Knowledge Well and Learning Productions
as if the acquisitions had occurred at the beginning of the year of its
acquisition and at the beginning of the immediately preceding year. The pro
forma results give effect to certain purchase accounting adjustments, including
additional amortization expense from goodwill and other identifiable intangible
assets, related income tax effects and the issuance of additional shares in
connection with the acquisitions.

                                       50
<PAGE>   51

                                 SMARTFORCE PLC

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

3.  ACQUISITIONS AND MERGERS (CONTINUED)

    The Pro Forma Results of Operations are as follows (dollars in thousands,
except per share amounts):

<TABLE>
<CAPTION>

                                                  YEARS ENDED DECEMBER 31,
                                                  ------------------------
                                            1998            1999            2000
                                        -----------     -----------     -----------
<S>                                     <C>             <C>             <C>
Revenues ..........................     $   162,280     $   199,177     $   169,082
                                        ===========     ===========     ===========
Net Income/(Loss) .................     $     5,249     $    10,380     $   (29,719)
                                        ===========     ===========     ===========
Net Income/(Loss) per share:
Basic .............................     $      0.11     $      0.20     $     (0.58)
                                        ===========     ===========     ===========

Diluted ...........................     $      0.10     $      0.18     $     (0.58)
                                        ===========     ===========     ===========
</TABLE>



    The non cash effect of purchase acquisitions during the years ended December
31, 1999 and 2000 in the consolidated statement of cashflows on changes in
operating assets and liabilities was as follows (dollars in thousands):

<TABLE>
<CAPTION>

                                                     1999         2000
                                                   -------      -------
<S>                                                <C>          <C>
Accounts receivable ..........................     $   184      $    51
Prepaid expenses .............................          45          176
Accounts payable .............................      (1,389)         (53)
Accrued payroll and related expenses .........          --         (108)
Other accrued liabilities ....................      (2,789)      (1,070)
                                                   -------      -------
                                                   $(3,949)     $(1,004)
                                                   =======      =======
</TABLE>



4.  INTANGIBLE ASSETS

    Intangible assets consist of the following:

<TABLE>
<CAPTION>

                                                         1999        2000
                                                      -----------  ---------
                                                      (DOLLARS IN THOUSANDS)
<S>                                                     <C>         <C>
Goodwill ..........................................     $23,960     $23,960
Kansas State University license ...................      26,000      26,000
Other identifiable intangibles ....................      14,749      38,450
                                                        -------     -------
       Total intangible assets ....................      64,709      88,410
Accumulated amortization ..........................       5,554      15,216
                                                        -------     -------
Intangible assets, net ............................     $59,155     $73,194
                                                        =======     =======
</TABLE>


    Other identifiable intangibles include core developed technology acquired as
a result of the acquisitions of Knowledge Well, AES and Learning Productions and
a perpetual software license acquired from Street Technologies, Inc. in return
for a once off payment of $5,297,000 in December 1997.

    Amortization of intangible assets amounted to $1,719,000, $4,494,674 and
$9,661,701 for the years ended December 31, 1998, 1999 and 2000, respectively.

                                       51
<PAGE>   52

                                 SMARTFORCE PLC

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

5.  PROPERTY AND EQUIPMENT

    Property and equipment, at cost, consist of the following:

<TABLE>
<CAPTION>

                                                     1999        2000
                                                   ---------   ---------
                                                   (DOLLARS IN THOUSANDS)
<S>                                                 <C>         <C>
Office and computer equipment .................     $32,235     $42,765
Furniture, fixtures and others ................      12,914      16,727
                                                    -------     -------
    Total property and equipment ..............      45,149      59,492
Accumulated depreciation ......................      19,038      30,104
                                                    -------     -------
          Property and equipment, net .........     $26,111     $29,388
                                                    =======     =======
</TABLE>


    Depreciation of property and equipment amounted to $4,858,399, $7,650,347
and $11,784,657 for the years ended December 31, 1998, 1999 and 2000,
respectively.

6.   OTHER ACCRUED LIABILITIES

    Other accrued liabilities consist of the following at December 31 (dollars
in thousands):

<TABLE>
<CAPTION>

                                               1999        2000
                                             -------     -------
<S>                                          <C>         <C>
Royalties ..............................     $ 8,805     $ 3,740
Income and other taxes payable .........       8,456       6,536
Other ..................................      10,952      11,842
                                             -------     -------
                                             $28,213     $22,118
                                             =======     =======
</TABLE>


7.   OPERATING LEASE COMMITMENTS

    The Company leases various facilities, automobiles and equipment under
non-cancelable operating lease arrangements. The major facilities leases are for
terms of 2 to 5 years, and generally provide renewal options for terms of up to
3 additional years. Rent expense under all operating leases was approximately
$3,696,000, $6,042,558 and $6,461,045 in 1998, 1999 and 2000, respectively.
Future minimum lease payments under these non-cancelable operating leases as of
December 31, 2000 are as follows (dollars in thousands):

<TABLE>
<CAPTION>

<S>                                     <C>
2001 ..............................     $ 6,596
2002 ..............................       5,964
2003 ..............................       4,920
2004 ..............................       4,139
2005 ..............................       3,216
Thereafter ........................       7,129
                                        -------
Total minimum lease payments            $31,964
                                        =======
</TABLE>


8.   CONTINGENCIES

    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
SmartForce PLC, its American operating subsidiary, SmartForce USA Limited 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

                                       52
<PAGE>   53

                                 SMARTFORCE PLC

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

8.   CONTINGENCIES (CONTINUED)

material facts regarding SmartForce'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.

    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. There are no material
restrictions on the distribution of income or retained earnings by the
consolidated group companies of SmartForce PLC. Any dividends, if and when
declared, will be declared and paid in dollars.

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. 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 $112,000 of this amount as
compensation expense for the year ended December 31, 1998. At December 31, 1999
and 2000, the aggregate deferred compensation was $nil.

    The Company has eight share option plans, the 1990 Share Option Scheme (the
"1990 Plan"), the 1994 Share Option Plan (the "1994 Plan"), the 1996
Supplemental Stock Plan (the "1996 Plan"), the ForeFront Group Inc.

                                       53
<PAGE>   54

                                 SMARTFORCE PLC

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

9.  SHAREHOLDERS' EQUITY (CONTINUED)

Amended and Restated 1992 Stock Option Plan (the "FF92 Plan"), the 1996
ForeFront Group Inc. Non-Qualified Stock Option Plan (the "FF96 Plan"), the
ForeFront Group Inc. 1996 Non-Employee Directors' Stock Option Plan (the "FF
Directors' 1996 Plan"), the Knowledge Well Limited 1998 Share Option Plan (the
"KWL Plan") and the Knowledge Well Group 1998 Limited Share Option Plan (the
"KWGL 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, NSO's and ISO's were
granted to any employee or director of ForeFront. Under the FF96 Plan, NSO's
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 upon election to the Board of Directors and each subsequent
year thereafter. Under the KWL Plan and KWGL Plan, employees and directors and
any independent contractor who performs services for Knowledge Well Limited
("KWL") and Knowledge Well Group ("KWGL") are eligible to receive grants of
NSO's. Employees of KWL and KWGL are also eligible to receive grants of ISO's
which are intended to qualify under section 422 of the United States Internal
Revenue Code of 1986, as amended.

    As of December 31, 2000, 4,700,000, 11,743,004, 7,500,000 (which includes an
increase in the number of shares reserved for issuance of 2,500,000 under the
1994 Plan, authorized by a resolution passed at the Annual General Meeting of
the Company on June 29, 2000 and 800,000 under the 1996 Plan), 470,550, 627,400,
47,055, 654,800 and 654,800 ordinary shares have been reserved for issuance
under the 1990 Plan, the 1994 Plan, 1996 Plan, FF92 Plan, FF96 Plan, FF
Directors' 1996 Plan, KWL Plan and KWGL 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, KWL and KWGL 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, KWL and KWGL Plans, options to purchase 278,769,
5,514,750, 1,843,205, 4,579, 14,467, 394,926 and 6,859 shares respectively were
exercisable as of December 31, 2000. As of December 31, 2000, 4,256,920 options
are available for grant under the plans.

                                       54
<PAGE>   55

                                 SMARTFORCE PLC

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

9.    SHAREHOLDERS' EQUITY (CONTINUED)

    In November 1996, the Compensation Committee of the ForeFront Board of
Directors approved the repricing of substantially all of ForeFront's outstanding
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
(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 1998, 1999 and 2000; risk-free interest rates of approximately
5%, 6%, and 6.5% respectively; dividend yields of 0%; volatility factors of the
expected market price of the Company's ordinary shares of 1.26, 0.68 and 0.96
respectively; and a weighted-average expected life of the option of five years.

    The Black-Scholes option pricing 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 loss for the years ended December 31, 1998, 1999 and 2000 was
$5.4 million, $15.3 million and $76.0 million, respectively. Pro forma basic net
loss per share was $0.12, $0.32 and $1.49 for the years ended December 31, 1998,
1999 and 2000, respectively. Pro forma diluted net loss per share was $0.12,
$0.32 and $1.49 for the years ended December 31, 1998, 1999 and 2000,
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.

                                       55
<PAGE>   56
                                 SMARTFORCE PLC

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

9.  SHAREHOLDERS' EQUITY (CONTINUED)

    A summary of the Company's stock option activity, and related information
for the years ended December 31, 1998, 1999 and 2000 follows:

<TABLE>
<CAPTION>

                                                              OPTIONS OUTSTANDING
                                             -----------------------------------------------------
                                                                                      WEIGHTED
                                              NUMBER OF                               AVERAGE
                                                SHARES         PRICE PER SHARE      EXERCISE PRICE
                                                ------         ---------------      --------------
<S>                                           <C>              <C>                  <C>
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
Granted in 1999 .......................        5,971,644         $8.94--29.94         $  18.84
Assumed on acquisition ................          461,632          $3.05--9.16         $   6.96
Exercised in 1999 .....................         (772,980)        $1.41--20.25         $  10.92
Cancelled in 1999 .....................         (369,426)        $2.68--30.28         $   8.31
                                              ----------
Balance at December 31, 1999 ..........       13,205,738         $1.41--36.00         $  13.52
Granted in 2000 .......................        1,321,677        $31.00--44.94         $  35.50
Exercised in 2000 .....................       (1,319,857)        $3.05--29.19         $   8.20
Cancelled in 2000 .....................         (609,106)        $3.05--17.00         $   9.84
                                              ----------
Balance at December 31, 2000 ..........       12,598,452         $1.41--44.94         $  16.31
                                              ==========
</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.

<TABLE>
<CAPTION>


                           OPTIONS OUTSTANDING AT DECEMBER 31, 2000               OPTIONS EXERCISABLE
                           -----------------------------------------              -------------------
                                               WEIGHTED
                                                AVERAGE       WEIGHTED                         WEIGHTED
                                               REMAINING      AVERAGE                          AVERAGE
   RANGE OF                   SHARES          CONTRACTUAL     EXERCISE        NUMBER OF        EXERCISE
EXERCISE PRICES            OUTSTANDING            LIFE         PRICE           SHARES           PRICE
---------------            -----------            ----         -----           ------           -----
<S>                        <C>                <C>             <C>            <C>               <C>
$ 1.41-- 1.41                    8,880               3.52      $  1.41              8,880      $  1.41
$ 3.05-- 6.94                1,567,176               6.49      $  6.76          1,191,212      $  6.75
$ 7.25-- 7.25                  327,230               7.17      $  7.25            327,230      $  7.25
$ 8.94-- 9.94                3,508,101               7.94      $  9.94          2,607,821      $  9.94
$10.19--16.44                3,937,494               8.39      $ 16.23          3,222,086      $ 16.24
$16.50--24.00                  198,183               7.36      $ 19.28            121,616      $ 19.83
$24.44--24.44                1,650,434               8.92      $ 24.44            412,535      $ 24.44
$26.50--43.12                1,306,454               9.05      $ 34.70            160,175      $ 33.69
$43.25--44.44                   44,500               9.52      $ 44.13              6,000      $ 44.44
$44.94--44.94                   50,000               9.76      $ 44.94                 --      $  0.00
                           -----------                                      -------------
$ 1.41--44.94               12,598,452               8.12      $ 16.31          8,057,555      $ 13.47
                           ===========                                      =============
</TABLE>


      At December 31, 1999 and 2000 there were 3,493,840 and 8,057,555 options
exercisable, respectively, at a weighted average exercise price of $10.45 and
$13.47, respectively. The weighted average fair value of options granted during
the years ended December 31, 1998, 1999 and 2000 was $15.13, $11.58 and $27.02
respectively.

                                       56
<PAGE>   57

                                 SMARTFORCE PLC

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

10. INCOME TAXES

Income/(Loss) before provision/(benefit) for income taxes consists of the
following:

<TABLE>
<CAPTION>

                                                                                     DECEMBER 31,
                                                                         --------------------------------------
                                                                           1998           1999           2000
                                                                         --------       --------       --------
                                                                                 (DOLLARS IN THOUSANDS)

       <S>                                                               <C>            <C>            <C>
       Ireland ....................................................      $ 23,872       $ 25,948       $(29,402)
       Rest of world ..............................................        (4,668)        (6,614)        (1,490)
                                                                         --------       --------       --------
       Total ......................................................      $ 19,204       $ 19,334       $(30,892)
                                                                         ========       ========       ========
</TABLE>

The provision/(benefit) for income taxes consists of the following:

<TABLE>
<CAPTION>

       <S>                                                               <C>            <C>            <C>
       Current ....................................................      $  2,666       $  3,708       $ (1,742)
       Deferred ...................................................            --             --           (487)
                                                                         --------       --------       --------
              Total provision/(benefit) for income tax ............      $  2,666       $  3,708       $ (2,229)
                                                                         ========       ========       ========
</TABLE>


       The deferred benefit for 2000 relates predominantly to tax losses
incurred in Ireland.

       The provision/(benefit) for income taxes differs from the amount computed
by applying the statutory income tax rate to income/(loss) before taxes. The
sources and tax effects of the difference are as follows:

<TABLE>
<CAPTION>
                                                                                             DECEMBER 31,
                                                                                 ------------------------------------
                                                                                   1998          1999          2000
                                                                                 --------      --------      --------
                                                                                         (DOLLARS IN THOUSANDS)
<S>                                                                              <C>           <C>           <C>
Income taxes computed at the Irish statutory income tax rate
    of  32% for 1998, 28% for 1999 and 24% for 2000 .......................      $  6,145      $  5,413      $ (7,415)
Income/(Loss) from Irish manufacturing operations taxed at lower rates ....        (6,318)       (6,300)        4,364
Income/(Loss) subject to higher rate of tax ...............................           474             8          (376)
Operating losses not utilized .............................................         2,475         1,150         2,261
Operating losses utilized .................................................          (348)         (894)       (1,574)
Intangible asset amortization and other non-deductible expenses ...........         1,155         4,300         3,534
Profits arising not subject to tax ........................................          (917)           31        (3,023)
                                                                                 --------      --------      --------
                                                                                 $  2,666      $  3,708      $ (2,229)
                                                                                 ========      ========      ========
EPS for Tax Holiday
       Basic ..............................................................      $   0.14      $   0.13      $  (0.09)
                                                                                 ========      ========      ========
       Diluted ............................................................      $   0.14      $   0.12      $  (0.09)
                                                                                 ========      ========      ========
</TABLE>


    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,
                                                                        -----------------------
                                                                          1999           2000
                                                                        --------       --------
                                                                         (DOLLARS IN THOUSANDS)
<S>                                                                     <C>            <C>
Deferred tax assets
       Net operating loss carry forwards .........................      $ 33,272       $ 36,477
       Research and Development tax credit carry forwards ........           340            340
                                                                          33,612         36,817
                                                                        --------       --------
Valuation allowance ..............................................       (33,420)       (34,300)
                                                                        --------       --------
Net deferred tax assets ..........................................      $    192       $  2,517
                                                                        ========       ========
</TABLE>

                                       57


<PAGE>   58

                                 SMARTFORCE PLC

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

10. INCOME TAXES (CONTINUED)

    At December 31, 2000, the Company has a net operating loss carry forward of
approximately $90.6 million for U.S. federal income tax purposes which will
expire in the tax years 2007 through 2018 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, 2000, approximately $82.8 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,
2000, $29.9 million of the valuation allowance related to disqualifying
dispositions.

11.   SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION

Segment Information

    The Company presents 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.

    The Company's products are developed in Ireland and sold to the Company's
distribution subsidiaries in other geographic segments. These inter segment
revenues are determined on arms length bases pursuant to which a fair profit is
earned by the Irish development subsidiary and which is designed to comply with
the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax
Administrators. All such inter segment revenues and costs of revenues are
eliminated on consolidation.

    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/(benefit) 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.

                                       58
<PAGE>   59
                                 SMARTFORCE PLC

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

11. SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION (CONTINUED)

    A summary of the segment financial information reported to the CODM is as
follows:

<TABLE>
<CAPTION>

                                                                      YEAR ENDED DECEMBER 31, 2000
                                              ---------------------------------------------------------------------------
                                                                                                             CONSOLIDATED
                                              AMERICAS          EMEA           IRELAND        ALL OTHER         TOTAL
                                                                       (DOLLARS IN THOUSANDS)
<S>                                           <C>             <C>             <C>             <C>             <C>
Revenues--External .....................      $ 136,150       $  21,959       $   3,090       $   6,998       $ 168,197
Inter Segment Revenues .................             --              --          74,715              --          74,715
Depreciation and Amortization ..........         14,645             334           5,698             769          21,446
Segment Operating Loss .................         (2,548)         (2,597)        (20,902)         (9,217)        (35,264)
</TABLE>



<TABLE>
<CAPTION>

                                                                   YEAR ENDED DECEMBER 31, 1999
                                              --------------------------------------------------------------------------
                                                                                                            CONSOLIDATED
                                              AMERICAS          EMEA           IRELAND        ALL OTHER         TOTAL
                                              --------          ----           -------        ---------         -----
                                                                       (DOLLARS IN THOUSANDS)

<S>                                           <C>             <C>             <C>             <C>             <C>
Revenues--External .....................      $ 162,559       $  24,841       $   2,878       $   7,476       $ 197,754
Inter Segment Revenues .................             --              --          97,362              --          97,362
Depreciation and Amortization ..........          4,855             389           3,087           3,814          12,145
Segment Operating Income/(Loss) ........          1,286          (2,768)         29,442         (11,818)         16,142
</TABLE>


<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31, 1998
                                              ---------------------------------------------------------------------------
                                                                                                             CONSOLIDATED
                                              AMERICAS          EMEA           IRELAND        ALL 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/(Loss) ........         (7,728)         (1,108)         26,231          (2,925)         14,470
</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,
                               ------------------------------------
                                 1998          1999          2000
                               --------      --------      --------
                                       (DOLLARS IN THOUSANDS)
<S>                            <C>           <C>           <C>
Revenues
Ireland .................      $  3,210      $  3,072      $  3,290
United States ...........       113,552       139,652       111,361
United Kingdom ..........        17,411        23,813        22,616
Other countries .........        28,059        31,217        30,930
                               --------      --------      --------
             Total ......      $162,232      $197,754      $168,197
                               ========      ========      ========
</TABLE>

                                       59
<PAGE>   60


                                 SMARTFORCE 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,
                                      ----------------------
                                        1999          2000
                                      --------      --------
                                      (DOLLARS IN THOUSANDS)
<S>                                   <C>           <C>
Long-Lived Assets
       Ireland .................      $ 67,531      $ 65,267
       United States ...........        35,671        52,975
       Other countries .........         5,992        16,773
                                      --------      --------
Total ..........................      $109,194      $135,015
                                      ========      ========
</TABLE>

    The Company regards its products and services, e-Learning solutions, as
homogenous products and services. No single customer represented 10% or more of
SmartForce's total net revenue in any period presented.

12. GOVERNMENT GRANTS

    Under agreements between the Company and Government grant agencies, the
Company has recorded $1,040,000, $1,033,422 and $436,298 as a reduction in
related salary and rent expenses in the years ended December 31, 1998, 1999 and
2000, respectively. Under the terms of the grant agreements, these grants may be
revoked and become repayable in certain circumstances, principally failure to
maintain the related jobs for periods ranging from three to five years from the
date of commencement of the relevant employment. The Company has complied with
the terms of the agreements through December 31, 2000 and does not anticipate
any repayment.

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 SmartForce
PLC.

    All of the voting securities of CBT T are owned by SmartForce PLC and,
except for the securities owned by SmartForce 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 SmartForce PLC, there is no
relationship between SmartForce PLC and Stargazer.

Knowledge Well Acquisition

    During 1999 the Company acquired Knowledge Well in a share for share
exchange (see note 3). A number of the Company's directors and officers were
shareholders and had controlling interest in Knowledge Well prior to its
acquisition by the Company.

                                       60
<PAGE>   61

                                 SMARTFORCE PLC

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

13. RELATED PARTY TRANSACTIONS (CONTINUED)

Loan to Director

    On August 20, 1999, a director of the Company, received a loan from the
Company in the amount of US$450,000 repayable in four equal annual installments.
Interest accrues on the principal amount of this loan at the rate of 5.96% to be
paid annually. At December 31, 1999 and 2000, the balance outstanding on this
loan, inclusive of accrued interest, was $460,000 and $347,420, 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.

                                       61
<PAGE>   62

REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS

The Board of Directors and Shareholders,
SmartForce PLC

    We have audited the consolidated balance sheets of SmartForce PLC as of
December 31, 1999 and 2000 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, 2000, and
have issued our report thereon dated January 18, 2001. 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.

    In our opinion, based on our audits, 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 18, 2001

                                       62
<PAGE>   63

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

    Our definitive Proxy Statement will be filed with the Securities and
Exchange Commission in connection with the solicitation of proxies for our
Annual General Meeting to be held in June, 2001. 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.

                                       63
<PAGE>   64


                                           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 SmartForce PLC

            Consolidated Financial Statements Prepared in Accordance with U.S.
        GAAP are incorporated herein by reference to Item 8 of this Form 10-K.

            Consolidated Balance Sheets--December 31, 1999 and 2000.

            Consolidated Statements of Operations--December 31, 1998, 1999 and
        2000.

            Consolidated Statements of Changes in Shareholders' Equity and
        Comprehensive Income.

            Consolidated Statements of Cash Flows--December 31, 1998, 1999, and
        2000.

            Notes to Consolidated Financial Statements.

            Report of Independent Auditors.

        (2) Financial Statement Schedule. The following financial statement
        schedule of SmartForce PLC for the fiscal years ended December 31, 1998,
        1999 and 2000 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.

         SCHEDULE                                                     PAGE #
         --------                                                     ------
         II              Valuation and Qualifying Accounts               S-1

               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 immediately following the signature
        page.

    (b) Reports on Form 8-K.

        We did not file a report on Form 8-K during the three months ended
     December 31, 2000.

                                       64
<PAGE>   65

                                   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 28th day of
March, 2001.

                                  SMARTFORCE PUBLIC LIMITED COMPANY

                                  /s/   GREGORY M. PRIEST
                                  --------------------------------------------
                                  Gregory M. Priest
                                  Chairman of the Board, 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 David C. Drummond 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/   GREGORY M. PRIEST               Chairman of the Board, President,   March 28, 2001
------------------------------        Chief Executive Officer (Principal
Gregory M. Priest                     Executive Officer)


/s/   DAVID C. DRUMMOND               Executive Vice President,           March 28, 2001
------------------------------        Finance and Chief Financial Officer
David C. Drummond                     (Principal Financial and Accounting
                                       Officer)


/s/   JOHN M. GRILLOS                 Director                            March 28, 2001
------------------------------
John M. Grillos


/s/  PATRICK J. MCDONAGH              Director                            March 28, 2001
------------------------------
Patrick J. McDonagh

/s/  RONALD C. CONWAY                 Director                            March 28, 2001
------------------------------
Ronald  C. Conway

/s/   JAMES S. KRZYWICKI              Director                            March 28, 2001
------------------------------
James S. Krzywicki
</TABLE>

                                       65
<PAGE>   66
                        VALUATION AND QUALIFYING ACCOUNTS

                  YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000

<TABLE>
<CAPTION>


                                                BALANCE AT     CHARGED TO         CHARGED                           BALANCE
                                                BEGINNING       COSTS AND        TO OTHER                            AT END
                                                 OF YEAR         ACCOUNTS         ACCOUNTS        DEDUCTIONS         OF YEAR
                                               -----------      -----------      -----------      -----------      -----------
                                                                            (dollars in thousands)
<S>                                            <C>              <C>              <C>              <C>              <C>
Year ended December 31, 1998

Deducted from asset accounts ............
Allowance for doubtful accounts .........            1,220              400               --              477            1,143

Year ended December 31, 1999

Deducted from asset accounts ............
Allowance for doubtful accounts .........            1,143            1,481               --               --            2,624

Year ended December 31, 2000

Deducted from asset accounts ............
Allowance for doubtful accounts .........            2,624               --               --               85            2,539
</TABLE>


                                      S-1


<PAGE>   67
                                        EXHIBIT INDEX

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 (Incorporated by reference to exhibit 2.1 to the Company's
         Current Report on Form 8-K dated June 18, 1999 (File No. 0-25674).

2.5      Agreement and Plan of Reorganization, dated April 10, 2000, by and
         among the company, Learning Productions Acquisition Corp., Learning
         Productions, LLC, Steve Goodman and Scott Mitchell (Incorporated by
         reference to exhibit 2.1 to the Company's Registration Statement on
         Form S-3 declared effective with the Securities and Exchange Commission
         on May 31, 2000 (File No. 333-38240)).

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)).

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

<PAGE>   68

         (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).

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).

<PAGE>   69


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).

10.19    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).

10.20    Agreement and Mutual Release dated February 11, 1998 between the
         Company and William A. Beamish. (Incorporated by reference to exhibit
         10.21 to the Company's Annual Report on Form 10-K for the fiscal year
         ended December 31, 1998 as filed with the Securities and Exchange
         Commission on March 30, 1999 (File No. 0-25674)).

10.21**  Employment Agreement effective as of June 18, 1999 between CBT Group
         PLC, CBT Systems USA, Ltd. and William G. McCabe. In addition to this
         employment agreement, Mr. McCabe provides certain other services to the
         Company under a consulting agreement between CBT Systems Ltd. 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)). (Incorporated by reference to
         exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
         quarter ended September 30, 1999 as filed with the Securities and
         Exchange Commission on November 12, 1999 (File No. 0-25674)).

10.22**  Employment Agreement effective as of June 18, 1999 between CBT Group
         PLC, CBT Systems USA, Ltd. and Gregory M. Priest. (Incorporated by
         reference to exhibit 10.2 to the Company's

<PAGE>   70


         Quarterly Report on Form 10-Q for the quarter ended September 30, 1999
         as filed with the Securities and Exchange Commission on November 12,
         1999 (File No. 0-25674)).

10.23**  Employment Agreement effective as of June 18, 1999 between CBT Group
         PLC, CBT Systems USA, Ltd. and William A. Beamish. In addition to this
         employment agreement, Mr. Beamish provides certain other services to
         the Company under a consulting agreement between CBT Systems Ltd. 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)). (Incorporated by reference to
         exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the
         quarter ended September 30, 1999 as filed with the Securities and
         Exchange Commission on November 12, 1999 (File No. 0-25674)).

10.24**  Employment Agreement effective as of June 18, 1999 between CBT Group
         PLC, CBT Systems USA, Ltd. and William B. Lewis. (Incorporated by
         reference to exhibit 10.4 to the Company's Quarterly Report on Form
         10-Q for the quarter ended September 30, 1999 as filed with the
         Securities and Exchange Commission on November 12, 1999 (File No.
         0-25674)).

10.25**  Employment Agreement effective as of June 18, 1999 between CBT Group
         PLC, CBT Systems USA, Ltd. and Jeffrey N. Newton. (Incorporated by
         reference to exhibit 10.5 to the Company's Quarterly Report on Form
         10-Q for the quarter ended September 30, 1999 as filed with the
         Securities and Exchange Commission on November 12, 1999 (File No.
         0-25674)).

22.1*    List of Significant Subsidiaries.

23.1*    Consent of Ernst & Young, Independent Auditors.

24.1     Power of Attorney (see page 65).

----------
*   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.