<PAGE>
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC  20549
(Mark One)
                                   FORM 10-K

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

     For the fiscal year ended December 31, 1997

                                       or

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

     For the transition period from ______________ to __________________.

Commission File Number:  0-25674

                        CBT GROUP PUBLIC LIMITED COMPANY
             (Exact name of registrant as specified in its charter)

       REPUBLIC OF IRELAND                          NONE
(State or other jurisdiction of               (I.R.S. Employer
incorporation or organization)               Identification Number)

                             1005 HAMILTON COURT 
                         MENLO PARK, CALIFORNIA 94025 
                   (Address of principal executive offices)

Registrant's telephone number, including area code     (650) 614-5900

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

                                                 Name of each exchange 
         Title of each class                      on which registered
         -------------------                     ---------------------
               None.                                     None.

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

                            Ordinary Shares IR37.5p
                               (Title of class)

Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period of time that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.        Yes  X  No____
                                               -        

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

The aggregate market value of the voting shares held by non-affiliates of
Registrant was $1,953,125,184 as of March 10, 1998 (excludes 224,726 shares
which may be deemed to be held by directors, officers and affiliates of
Registrant as of March 10, 1998).

The number of Registrant's equivalent American Depositary Shares outstanding as
of March 10, 1998 was 40,443,532.

Portions of Registrant's definitive proxy statement to be delivered to
shareholders in connection with Registrant's annual general meeting of
shareholders to be held on or about April 28, 1998 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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                                     PART I

ITEM 1.  BUSINESS

IMPORTANT NOTE ABOUT FORWARD LOOKING STATEMENTS

The following discussion contains forward looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended.  Predictions of future events are
inherently uncertain. Actual events could differ materially from those predicted
in the forward looking statements as a result of the risks set forth in the
following discussion, and in particular, the risks discussed below and in Part
II, Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations under the subheading "Additional Risk Factors that Could
Affect Operating Results."

GENERAL

CBT Group PLC ("CBT Group" or the "Company") is a leading provider of
interactive education software designed to meet the information technology
("IT") education and training needs of businesses and organizations worldwide.
The Company develops, publishes and markets a comprehensive library of 558
software titles at the end of 1997 covering a range of client/server, mainframe,
Internet and intranet technologies. CBT Group's products are used by 1,576 of
the world's leading corporations to train employees to develop and apply
mission-critical technologies in the workplace. CBT Group works with leading
software companies, including Cisco Systems, Inc. ("Cisco"), Informix
Corporation ("Informix"), Lotus Development Corporation ("Lotus"), Marimba, Inc.
("Marimba"), Microsoft Corporation ("Microsoft"), Netscape Communications
Corporation ("Netscape"), Novell, Inc. ("Novell"), Oracle Corporation
("Oracle"), SAP America, Inc. ("SAP"), Sybase, Inc. ("Sybase") and the IBM-
Netscape-Sun Microsystems, Inc. collaborative Java education effort to develop
and market vendor-specific training. CBT Group has also formed the Internet
Security Training Consortium with Check Point Software Technologies, Inc.
("Check Point"), Cisco, IBM, Intel Corporation, the Javasoft business unit of
Sun Microsystems, Inc., Lotus, Netscape, Network Associates, Inc. (formerly
McAfee Associates, Inc.) ("Network Associates"), RSA Data Security, Inc. ("RSA
Data Security"), Security Dynamics Technologies, Inc. ("Security Dynamics"), and
VeriSign, Inc. ("VeriSign") to address the Internet security training needs of
enterprises worldwide.

CBT Group, a public limited company incorporated under the laws of the Republic
of Ireland, was initially formed to act as a holding company for investment
purposes and acquired a controlling interest in a number of companies in a
variety of business areas.  In November 1990, the Company acquired its U.S.
subsidiary, CBT Systems USA, Ltd. (effective as of April 3, 1995 CBT Systems
USA, Ltd. was merged with and into its parent, Thornton Holdings, Ltd., which
subsequently changed its name to CBT Systems USA, Ltd.) ("CBT USA").

In September 1991, the Company acquired its Irish and U.K. subsidiaries,
including CBT Systems Limited ("CBT Ireland") and CBT Systems UK Limited ("CBT
UK") and sold or dissolved its other unrelated investment businesses.  In
January 1994, the Company acquired CBT Systems Africa (Proprietary) Ltd. ("CBT
South Africa") for the purpose of establishing a direct sales presence in
Southern Africa.  In August 1995, the Company incorporated CBT Finance Limited
("CBT Finance") under the laws of Grand Cayman for the purpose of investing
certain of the Company's funds.

In November 1995, the Company completed a merger with Personal Training Systems
("PTS"), a provider of end-user and consumer interactive educational software,
for an aggregate of 424,228 of its American Depositary Shares ("ADSs"). On May
31, 1996, the Company acquired CLS Consult, Gesellschaft fur Beratung,
Management und Beteiligung mbH ("CLS"), a German limited liability company, and
New Technology Training Ltd., an Ontario, Canada corporation ("NTT"). CLS is a
developer and marketer of interactive education software for SAP client/server
applications, and NTT's primary business had been to 

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act as CBT Group's exclusive distributor in Canada. The Company issued a total
of 72,932 Ordinary Shares to the former shareholders of CLS and NTT in
connection with the acquisitions. On February 28, 1997, the Company completed
the acquisitions of Applied Learning Limited, a company organized under the laws
of Tasmania, Australia ("ALA") and CBT Systems Benelux B.V., a Netherlands
limited liability company ("Benelux"). ALA was an Australian distributor of
interactive education software and had been CBT Group's exclusive distributor in
Australia and New Zealand; and Benelux had been the Company's exclusive
distributor in the Netherlands, Belgium, and Luxembourg. The Company issued the
equivalent of 103,611 Ordinary Shares to the former shareholders of ALA and
Benelux in connection with the acquisitions. On August 31, 1997, CBT Group
completed the acquisition of Ben Watson Associates Ltd., a New Brunswick, Canada
corporation carrying on business under the registered business name Scholars.com
("Scholars"). Scholars is a provider of online IT certification training. The
Company issued a total of 9,408 Ordinary Shares to the sole shareholder of
Scholars in connection with the acquisition. On December 1, 1997, the Company
completed the acquisition of CBT Systems Middle East Limited, a company
organized under the laws of the Commonwealth of the Bahamas ("MidEast"). MidEast
had been the Company's exclusive distributor in the Middle East and a non-
exclusive distributor in India. The Company issued a total of 64,500 ordinary
shares to the former shareholders of MidEast in connection with the acquisition.

The acquisition of each of Scholars, ALA, Benelux, PTS, CLS, NTT and MidEast was
accounted for as a "pooling of interests" in accordance with U.S. generally
accepted accounting principles. In compliance with such principles, the
Company's operating results have been restated to include the results of
Scholars, ALA, Benelux, PTS, CLS, NTT and MidEast as if the acquisitions had
occurred at the beginning of the first period presented.

Since September 1991, substantially all of the Company's revenues and operating
expenses have been attributable to developing and selling interactive IT
education and training software.  Unless the context otherwise requires,
references to the "Company" or to "CBT Group" are to CBT Group PLC and its
consolidated subsidiaries.

The Company was incorporated in the Republic of Ireland on August 8, 1989. The
Company's registered office is located at Beech Hill, Clonskeagh, Dublin 4,
Ireland, and its telephone number at that address from the United States is
(011) 353-1-283-0077. The address of CBT USA is 1005 Hamilton Court, Menlo Park,
California 94025 and its telephone number at that address is (650) 614-5900.

For additional information about the Company's business, see the consolidated
financial statements and related notes thereto included herein.

RECENT DEVELOPMENTS

On March 16, 1998, the Company entered into a definitive agreement to acquire
The ForeFront Group, Inc., a Houston-based provider of high-quality, cost-
effective, computer-based training products and network utilities for technical
professionals ("ForeFront"). In the merger, each share of ForeFront common stock
will be exchanged for 0.3137 ADSs, and the Company will assume outstanding
ForeFront stock options, warrants and other rights to acquire ForeFront common
stock. As a result of the merger, the Company will issue approximately 2.1
million ADSs and assume options, warrants and other rights that may be converted
into up to approximately 1.1 million ADSs. The transaction is intended to be tax
free to shareholders and is intended to be accounted for as a pooling of
interests. Consummation of the transaction is subject to expiration or
termination of the applicable Hart-Scott-Rodino waiting period, approval of the
merger by ForeFront stockholders and other customary closing conditions. The
merger is expected to be completed during the second quarter of 1998.
Consummation of the transaction is subject to a number of risk factors,
including those discussed below and under "Additional Risk Factors that Could
Affect Operating Results."

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The successful combination of CBT Group and ForeFront, including the successful
operation of ForeFront as an autonomous subsidiary of CBT Group, will require
substantial effort from each company. The diversion of the attention of
management and any difficulties encountered in the transition process could have
an adverse impact on CBT Group's ability to realize the full benefits of the
merger. The successful combination of the two companies will also require
coordination of their research and development and sales and marketing efforts.
In addition, the process of combining the two organizations could cause the
interruption of, or loss of momentum in, ForeFront's activities. There can be no
assurance that CBT Group will be able to retain ForeFront's key management,
technical, sales and customer support personnel, or that it will realize any of
the anticipated benefits of the merger.

Certain of ForeFront's existing customers or strategic partners may view
themselves as competitors of CBT Group's, and therefore determine that the
merger is competitively disadvantageous to them.  As a consequence, Forefront's
relationships with these customers or strategic partners could be adversely
affected by the merger, which could adversely affect the ability of CBT Group to
continue relationships with such customers after the merger.

On March 9, 1998, the Company effected a two-for-one split of its issued and
outstanding ADSs whereby each issued and outstanding ADS is now represented by
one-fourth of one ordinary share and each issued and outstanding ordinary share
that is deposited with The Bank of New York, as Depositary, is represented by
four ADSs.  Unless stated otherwise herein, all references to the Company's ADSs
are on a post-split basis.

In December 1996, CBT Group and Street Technologies, Inc. ("Street
Technologies"), a developer of technology to "stream" multimedia and other large
data files to permit real-time delivery over local and wide area networks,
corporate intranets and the Internet, entered into an agreement pursuant to
which the companies would work together to deploy CBT Group's interactive
education software over corporate intranets and the Internet.  As part of the
agreement, CBT Group acquired a 12.5% ownership interest in Street Technologies
and Street Technologies agreed that its license will be exclusive to CBT Group
within a defined group of companies.  In December 1997, CBT Group exchanged its
12.5% ownership interest in Street Technologies and  $300,000 in cash, for a
perpetual license of Street Technologies' deployment tools.

INDUSTRY BACKGROUND

Business organizations continue to be dependent upon computer systems in order
to remain competitive in their markets. This trend has resulted in significant
growth in IT education and training.  According to International Data
Corporation ("IDC"), the 1996 worldwide and U.S. markets for IT education and
training were approximately $16.4 billion and $8.0 billion, respectively,
compared to $11.0 billion and $4.4 billion, respectively, in 1992.  According to
IDC, the factors driving these markets include (i) the shift by organizations
from legacy mainframe systems to new client/server technologies, driving
corporate information services ("IS") groups to seek additional IT education and
training; (ii) business requirements that IS staff be certified in certain
technologies in order to assure performance and productivity; (iii) corporate
downsizing, resulting in increased training requirements for employees who
perform multiple job tasks that require knowledge of varied software
applications and technologies; (iv) the proliferation of computers and networks
throughout all levels of organizations, increasing the number of employees who
need training in client/server and Internet/intranet technologies; and (v) the
continuous introduction and evolution of client/server and Internet/intranet
technologies, contributing to the need for continuing education.

Traditionally, organizations have primarily fulfilled their requirements for IT
education and training through instructor-led training from external vendors or
internal training departments. Instructor-led training, however, has a number of
limitations. Instructor-led training typically requires employees to leave their
desks for prolonged periods, often to attend classes at off-site locations. Such
training is also difficult to tailor to individuals' training needs, cannot be
easily reviewed and assessed by IS managers and may not 

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offer a cost-effective training solution. The limitations of instructor-led
training, combined with constrained IS budgets, larger numbers of employees
requiring training and the greater breadth of training needed per employee, have
prompted organizations to consider alternative training methodologies. IDC
estimates that the instructor-led training market will see a decline in share
from 79% in 1996 to 62.5% in 2001. IDC also estimates that the technology-based 
training will experience a 1996 - 2001 compounded annual growth rate of 30%
versus 7.3% growth for instructor-led training.

The proliferation of computers throughout organizations and the increasing
multimedia capabilities of computers are supporting the emergence of interactive
IT education and training software. According to IDC, the U.S. market for
interactive IT education and training software, including multimedia software
and electronic performance support systems, was $928 million in 1996, compared
to $749 million in 1995, representing a 24% compounded annual growth rate year
over year. The Company believes that as businesses seek out alternative methods
of training employees, there is a significant market opportunity for software
that can meet businesses' needs for productive, flexible and cost-effective IT
education and training.

Although interactive IT education and training software programs have been
available for many years, they currently account for only a small portion of the
overall market for IT training.  Accordingly, the Company's future success will
depend upon, among other factors, the extent to which companies continue to
adopt interactive education and training programs.  There can be no assurance
that the use of interactive education and training software programs will become
widespread or that the Company's products will achieve commercial success.

THE CBT GROUP SOLUTION

CBT Group's solutions include a comprehensive library of 558 interactive
software titles at the end of 1997 designed to meet business' and organizations'
IT education and training needs. CBT Group's courseware may be used on networked
and standalone PCs and may be deployed over intranets via CBT Group's intranet
deployment product, CBTWeb, and the Internet via CBT Group's Internet deployment
product, CBTWeb Plus.  The courseware titles are organized into curricula and
are designed to cover specific aspects of client/server, mainframe, Internet and
intranet technologies. Each curriculum provides comprehensive training in an
area of technology such as client/server concepts, operating systems,
networking, graphical user interfaces and database design. In addition, the
Company has developed network-based administration and assessment tools designed
to allow IS and human resource managers to track employee usage and performance
of CBT Group courseware.

The Company has developed or is developing, both independently and through
development and marketing alliances, titles focused on vendor-specific products
including Microsoft Windows NT, Oracle Database Administrator 7.3 and 8.0 and
Developer 2000, SAP's R/3 3.0, Netscape Navigator, Javascript and LiveWire,
IBM/Lotus Notes, Informix Online Dynamic Server, Cisco Router Configuation
curricula, Novell NetWare, Sybase/Powersoft PowerBuilder, and Marimba Castanet.
In addition, CBT Group has developed courseware titles in conjunction with IBM,
Sun Microsystems and Netscape for the Java Education World Tour and has
developed or is developing titles for COBOL on MVS, AIX, OS/390 and the Internet
Security Courseware Consortium, which titles will include Concept, Platform, Web
Server, and Security Technology curricula.

In September 1997, the Company and Asymetrix Corporation, a leading provider of
online learning solutions, entered into a strategic partnership to provide
organizations with a powerful and easy-to-use tool for creating their own
customized computer-based courseware. The companies are developing Toolbook II
for CBT Group, which will incorporate the CBT Group user interface, navigation,
and overall look and feel with the power and flexibility of ToolBook II. This
will allow companies to create their own new customized courseware with the same
look and feel that distinguishes CBT Group library of interactive education
software. As with CBT Group's standard courseware, content developed using
ToolBook II for CBT Group will be deployable over LANs, WANs, intranets, or on
stand-alone personal computers.

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Also in September 1997, CBT Group announced that it had acquired Scholars.com, a
pioneering leader in Internet-based training, offering the services of online
mentors as a resource for students taking CBT Group courseware to help them pass
vendor certification exams. Scholars focuses on integrating Internet
technologies with proven learning methodologies to deliver Internet-based,
certification-level mentoring services to students worldwide. The company pairs
CBT Group's Microsoft and Novell approved interactive courseware with a team of
vendor-certified mentors, known as Learning Advisors, to provide flexible, self-
paced study via the Internet. This learning model extends the advantages of
online learning by having Learning Advisors available to students twelve hours a
day, seven days a week. This methodology enables students to receive
personalized assistance as they need it through online chats, email, and
newsgroups.

The Company's solutions offer many advantages to both end-users and
administrators over traditional instructor-led training.  CBT Group's courseware
allows employees to tailor training to their work schedules, begin training at a
level which is suitable to their needs, integrate training with on-the-job
practice, train in only those topics that are relevant to their needs, and
access training materials on an ongoing basis as reference tools.  CBT Group
software is interactive, allowing users to practice and test skills as they
learn.  The courseware also incorporates sophisticated graphics and simulation
technologies to demonstrate many of the concepts introduced.

In addition, the Company's products are designed to allow administrators to
leverage their training budgets by tailoring training programs to their
organization's needs and tracking training usage and effectiveness.
Organizations that invest in the CBT Group solution can offer CBT Group's
training software across a network, corporate intranet or the Internet to all
employees.  CBT Group licenses its courseware primarily through one, two or
three year license agreements that provide access to its library of titles,
which allows customers to build tailored training solutions.  Under these
license agreements, customers are able to exchange and update their courses on
an annual basis as their internal training needs evolve or as technologies
advance.  In addition, using the Company's administrative software, IS and human
resource administrators can design and monitor training programs for each
employee.

CBT GROUP'S STRATEGY

CBT Group has entered into alliances with Check Point, Cisco, Informix, Lotus,
Marimba, Microsoft, Netscape, Network Associates, Novell, Oracle, RSA Data
Security, SAP, Security Dynamics, Sybase, VeriSign and the IBM/Sun
Microsystems/Netscape collaborative Java education effort to develop and market
product-specific training.  In addition, CBT Group has developed relationships
with Checkpoint Software Technologies, Inc., Network Associates, Inc., RSA Data
Security, Inc., Security Dynamics Technologies, Inc. and VeriSign, Inc. as a
result of its formation of the Internet Security Curriculum Consortium.

The Company markets its software to Fortune 3000 companies and other major U.S.
and international organizations primarily through a direct sales force.  The
Company has increased sales to smaller corporate customers through distributors
and its telesales organization.

As of December 31, 1997, the Company had approximately 1,576 corporate customers
worldwide, including the following companies or their affiliates: Alcatel
Business Systems Corporation, American Management Systems, AT&T, The Bear
Stearns Companies, Inc., Bell Atlantic Corporation, Blue Cross Blue Shield
Mutual of Ohio, British Airways, Cambridge Technology Partners, Compaq Computer
Corporation, Computer Sciences Corporation, CTG, Dell Computer Corporation,
Electronic Data Systems Corporation, GTE Data Services, International Business
Machines Corporation, MCI Communications, Inc., MedPartners, Inc., Price
Waterhouse LLP, Reuters plc, Sprint Corporation, Tandem Computers, Unisys
Corporation, The University of California System, the United States Air Force
and Wells Fargo & Company.

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CBT Group's objective is to maintain and expand its market position through the
following strategies:

  Offer a Broad Library to its Customers. The Company offers its customers a
  broad product library of 558 software titles at the end of 1997 which it
  believes has created a competitive barrier to entry. In 1997, CBT Group also
  delivered 120 titles in German and French, and plans to deliver more
  translated titles in Japanese, Spanish, Portuguese and other languages. The
  Company's strategy is to continue to expand its product library to allow the
  Company to sign larger initial contracts and support incremental sales to its
  customer base over time.

  Leverage Proprietary Development Technologies and Processes.  The Company has
  created a proprietary development engine and a streamlined development process
  to assist the Company in bringing its products to market in a relatively short
  time-frame and at a relatively low cost.  In addition, the Company's
  technology generally supports a common product architecture, resulting in
  products which have a recognizable and consistent interface and are easier to
  support.  The Company plans to continue investing significant resources in
  research and development to further enhance its underlying development engine
  and to accelerate the growth of its product library.

  Build Alliances with Key IT Vendors. The Company's strategy is to enter into
  development and marketing alliances with key IT vendors to produce and
  distribute vendor-specific authorized training programs. To date, the Company
  has entered into alliances with Check Point, Cisco, Informix, Lotus, Marimba,
  Microsoft, Netscape, Network Associates, Novell, Oracle, RSA Data Security,
  SAP, Security Dynamics, Sybase, VeriSign and the IBM/Sun Microsystems/Netscape
  collaborative Java education effort. The Company believes these alliances
  provide a  number of competitive advantages, including access to partners'
  product development plans, source material and distribution channels.

  Expand Channels of Distribution.  The Company has primarily targeted Fortune
  3000 companies and other major U.S. and international organizations primarily
  through its direct sales force. During 1997, CBT Group began marketing its
  software to educational institutions and governmental agencies through a
  direct sales force.  The Company's strategy is to expand its telesales
  organization and its channels of indirect sales in order to reach
  organizations which could not otherwise be effectively targeted by its direct
  sales force and to accelerate its market penetration worldwide.  The Company's
  indirect sales channels are currently comprised of distributors, resellers and
  training organizations.  Over the long term, the Company intends to continue
  to explore electronic distribution through on-line services, the Internet and
  corporate intranets.

  Capitalize on Multimedia Technologies. The Company's current products include
  multimedia elements such as rich graphics, interactive text and simulations,
  and can be delivered on networked and standalone PCs.  The Company's strategy
  is to enhance its products over time as its customers adopt enterprise-wide
  systems which have the capability to handle the requirements of more advanced
  multimedia elements such as sound, video and complex animation.  In this
  regard, the Company has entered into a licensing and development relationship
  with Street Technologies  pursuant to which CBT Group will have the ability to
  deliver such rich data types over the Internet, corporate intranets and LANs.

  Serve Emerging Internet/Intranet Market Opportunity.  The Company believes
  that Internet technologies, including the Internet itself and the use of these
  technologies to create enterprise-wide intranets, is radically altering the
  way certain critical computing activities are performed.  As the Internet and
  intranets emerge as one computing platform, CBT Group believes that new
  education and training needs will emerge as well.  The Company will seek to
  build upon its current activities in order to build a franchise around
  Internet and intranet education opportunities.

PRODUCTS

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The Company's product library has grown from 44 titles at December 31, 1992 to
558 titles at December 31, 1997, encompassing over 2,200 hours of IT education
and training. In general, CBT Group's courseware includes a graphically
sophisticated interface that leads students through the subject software,
simulating the technology and requiring students to respond actively to the
course. CBT Group interactive training typically provides the user with anywhere
from 4 to 8 hours of instruction per individual title. Students may also use the
courses to pre-test their capabilities in order to position themselves properly
within the course and to train only in relevant areas. At the end of the course,
students may take a test to measure accurately their mastery of the course
content. The results of this test may be viewed by a central administrator using
CBT Group's administrative program or exported to a standard database or
spreadsheet.

CBT Group has developed an enterprise-wide network-based administrative software
program designed to allow a central administrator to audit the use of each
course, track employee performance and create specialized curricula for
employees by granting access to selected courses.

CBT Group licenses its products primarily through license agreements under which
customers may use the delivered products for a period of one, two or three
years.  The license agreement format allows customers to exchange courses on
each anniversary date where the agreement is for more than one year.  In order
to increase the number of titles or gain access to the library at a time other
than the specified dates, the customer may enter into a new license agreement or
upgrade the existing license agreement. Volume and multi-year discounts
encourage customers to expand license agreements as their needs grow and as they
become more familiar with the Company's product library.  The Company's pricing
varies primarily based on the number of users, the number of titles selected and
the length of the contract.

The Company's strategy is to develop comprehensive curricula, each of which
provides training in areas related to client/server, mainframe and Internet and
intranet technologies.  The Company's courses are generally compatible with
Windows-based desktop PCs and netBIOS LANs, and most of the Company's recently
developed courses are based on native Windows implementations.  All of the
Company's courses are available for delivery on floppy disk or PC CD-ROM for
installation on servers or standalone workstations.

In addition to its continued support of traditional LAN environments, CBT Group
has developed a number of products which address the emerging Internet and
corporate markets.  CBTWeb is an intranet deployment system which allows users
to download CBT Group courseware titles across an intranet. Access to these
titles is gained through a standard browser. CBTWeb enables customers to access
and manage CBT Group courses over an intranet via internally managed web
servers.  Using CBTWeb, learners can choose to either download CBT Group
courseware or interact with it in real time over an intranet using CBT Systems'
LivePlay capability. The downloaded courseware contains a utility to send the
student records back to a central administrator so that the student progress may
be monitored. CBTWeb Plus is a turnkey training solution that enables customers
to benefit from Internet-based deployment of CBT Group's entire library of
titles without the need to install server-side software on their own network.
CBTWeb Plus is an externally hosted version of CBTWeb that allows customers to
have their CBT Group courseware managed over the Internet from an external site.
CBTWeb Plus is designed to relieve customers of any network infrastructure or
security issues, and minimizes human resource requirements, while providing the
highest level of deployment flexibility since each student receives CBT Group's
training from his or her preferred location. Additionally, training
administrators and IS managers are assured that students receive the most up-to-
date curricula since the CBTWeb Plus servers are maintained by CBT Group and are
continuously updated with the latest courseware at the Company's centralized
courseware Development Center in Dublin, Ireland.

In July 1997, CBT Group announced the release of CBTCampus, CBT Group's next-
generation training management and deployment architecture. Coupled with CBT
Group's library of titles, CBTCampus provides CBT Group's customers with a
modular, fully integrated, and extensible solution for delivering sophisticated
interactive technology training wherever and however it's needed, whether
running over an 

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intranet or across a local area network. CBTCampus features a university campus
metaphor as an easy-to-navigate student interface, which can be accessed either
as a Windows client application or a web browser plug-in. Behind this intuitive
interface is a suite of sophisticated technologies that creates a seamless
integrated learning environment for students and administrators. CBTCampus was
designed to give high-performance results across a full range of environments.
It provides powerful deployment flexibility regardless of an organization's mix
of networked systems, and will enable students to access courses seamlessly over
an intranet or the Internet, over a LAN, or on their stand-alone desktop or
laptop computers.

The market for IT education and training is rapidly evolving.  New methods of
delivering interactive education software are being developed and offered in the
marketplace, including intranet and Internet deployment systems.  Many of these
new delivery systems will involve new and different business models and
contracting mechanisms.  In addition, multimedia and other product functionality
features are being added to the educational software.  Accordingly, CBT Group's
future success will depend upon, among other factors, the extent to which CBT
Group is able to develop and implement products which address  these emerging
market requirements. There can be no assurance that CBT Group will be successful
in meeting changing market needs. Failure to develop and implement products
which address these emerging market requirements could have a material adverse
affect on CBT Group's business and results of operations.

Moreover, software products as complex as those offered by the Company may
contain undetected errors or fail when first introduced or upon release of new
versions of the Company's products.  There can be no assurance that, despite
testing by the Company and by current and potential customers, errors will not
be found in new products after commencement of commercial shipments, resulting
in a loss of or delay in market acceptance.

The subject matter of the Company's courseware is influenced by rapidly changing
technology, evolving industry standards, changes in customer needs and frequent
introductions of new products by software vendors.  Accordingly, the Company
believes that its future success will depend in large part upon its ability to
meet these changes by enhancing its existing courses and developing and
introducing new courses on a timely basis.  There can be no assurance that the
Company will be successful in addressing the changing needs of the marketplace
by developing and marketing new products or enhancing its existing products on a
timely basis.  If the Company were unable, due to resource, technological or
other constraints, to anticipate and respond adequately to changes in customers'
software technology and preferences, the Company's business and results of
operations would be materially adversely affected.

RESEARCH AND DEVELOPMENT

CBT Group believes that the development of an effective training product
requires the convergence of source material, instructional design and computer
technology. The first step in developing a new training program is to obtain
content through subject matter experts, existing courses, including self-study
courses, and product reference materials, including product manuals. The CBT
Group development team then writes a script for the program which includes a
structure covering all of the relevant concepts, tasks to be completed,
interactive features and tests to measure achievement and to reinforce the
lesson. During the development of a script for a new program, the Company's
developers, working with animators, simulation programmers and graphic
designers, simultaneously plan and develop the course elements. These elements
are then integrated into a single program. The program is then tested to ensure
that each course delivers the desired education and training.

The core of CBT Group's product development is its product development engine--
an environment comprising CBT Group proprietary software and off-the-shelf
tools--which has been optimized for the creation of interactive software
training programs. The Company believes that its product development engine
provides a competitive advantage by allowing the Company to create modular
courses, identify and change portions of a course without rewriting the entire
course, port courses more easily across operating 

                                       9
<PAGE>
 
systems and enhance the multimedia content of its courses more quickly and
efficiently. The Company's technology generally supports a common product
architecture, resulting in products that have a recognizable and consistent
interface and are easier to support. The Company's goal is to continue to
enhance its product development engine to meet the Company's future development
needs, including ensuring that its courseware is able to incorporate a wide
variety of multimedia elements.

The Company performs substantially all of its research and development
activities and develops substantially all of its courses at its Dublin, Ireland
development facility. From time to time, the Company subcontracts outside
development services to develop portions of particular courses. In addition, all
products produced using these outside developers remain the sole property of CBT
Group. During 1995, 1996 and 1997, research and development expenses totaled
approximately $6.6 million, $11.5 million and $19.1 million, respectively.
During 1997, the Company's research and development staff grew from 221 to 272
employees. The Company intends to continue to make substantial investments in
research and development.

DEVELOPMENT AND MARKETING ALLIANCES

The Company's strategy is to expand its position in the IT education and
training market by forming development and marketing alliances with leading IT
software vendors.  To date, the Company has formed alliances with Check Point,
Cisco, Informix, Lotus, Marimba, Microsoft, Netscape, Network Associates,
Novell, Oracle, RSA Data Security, SAP, Security Dynamics, Sybase, VeriSign and
the IBM/Sun Microsystems/Netscape collaborative Java education effort.  The
Company believes its development and marketing alliances offer it a number of
competitive advantages, including early access to the vendor's software
engineers and technical advisors for assistance in developing courses on new
products.  With the approval of the development partner, products developed
under the relationship can be identified as "authorized" by that software
vendor, which the Company believes improves the marketability of such courses.
In addition, these alliances may result in additional distribution channels for
the Company, by allowing each party to distribute courses to its respective
customer base.  In some of these alliances, the software vendor has contributed
financial resources toward the development of specified courses.  The Company
has recognized the revenue from such development payments on a percentage of
completion basis as products are produced or, where required in the contract, as
the Company has met specified milestones. The Company believes that these
alliances also provide significant benefits to the software vendors by allowing
them to achieve additional market penetration generated by increasing the base
of trained users.

The Company believes that an increasing proportion of its revenues in the future
may be attributable to products developed through its alliances.  There can be
no assurance that any of these parties will continue to cooperate with the
Company, that the Company will be able to develop successfully courses for its
development and marketing alliances in a timely fashion or at all, or that the
Company will be able to negotiate additional alliances in the future on
acceptable terms or at all.  There can be no assurance that the marketing
efforts of the Company's partners will not disrupt the Company's direct sales
efforts.  In addition, the Company's development and marketing partners could
pursue their existing or alternative training programs in preference to and in
competition with those being developed with the Company.  In the event that the
Company is not able to maintain or expand its current development and marketing
alliances or enter into new development and marketing alliances, the Company's
operating results and financial condition could be materially adversely
affected.  Furthermore, the Company is required to pay royalties to its
development and marketing partners on products developed with them, which
reduces the Company's gross margins.  The Company expects that cost of revenues
may fluctuate from period to period in the future based upon many factors,
including the mix of titles licensed (between titles developed exclusively by
CBT Group and royalty-bearing titles developed pursuant to development and
marketing alliances) and the timing of expenses associated with development and
marketing alliances.  In addition, the collaborative nature of the development
process under these alliances may result in longer development times and less
control over the timing of product introductions than for courses developed
solely by the Company.

                                       10
<PAGE>
 
CUSTOMERS

The Company primarily licenses its courses to Fortune 3000 companies and other
major U.S. and international organizations in a wide range of industries,
including manufacturing, transportation, telecommunications, utilities, banking,
healthcare, securities, computers and insurance.  CBT Group also licenses its
courseware to educational institutions and governmental agencies.  The Company
markets its courseware through its direct sales organization to approximately
1,576 corporate customers worldwide and through its telesales organization to
approximately 2,174 customers worldwide.  The Company also distributes its
courses through a number of resellers.  No customer accounted for more than 5%
of revenues in 1997.

BACKLOG

The Company generates a substantial portion of its revenue through multi-year
license agreements. The initial annual license fee is generally recognized at
the time of delivery of products.  Subsequent annual license fees are recognized
on the anniversary date of such delivery, or if the customer exchanges  courses
at the anniversary date, upon delivery of the exchanged courses. Backlog at any
given date represents the amount of all license fees under current agreements
which have not yet been recognized as revenue. Although the Company's license
agreements are noncancellable by their terms, there can be no assurance that any
customer will fulfill the contractual obligations under its agreement.
Cancellation, reduction or delay in orders by or shipments to any of these
customers could have a material adverse effect on the Company's business and
results of operations.

The amount and timing of the recognition of revenue associated with this backlog
can vary depending on the timing of future deliveries of products and amendments
to customers' license agreements. The Company had backlog of approximately $27.1
million, $60.3 million and $110 million as of December 31, 1995, 1996 and 1997,
respectively. Approximately 35% of the Company's backlog as of December 31, 1997
was concentrated among seven customers.

INTELLECTUAL PROPERTY AND LICENSES

The Company regards its software as proprietary and relies primarily on a
combination of statutory and common law copyright, trademark and trade secret
laws, customer licensing agreements, employee and third-party nondisclosure
agreements and other methods to protect its proprietary rights.  Despite these
precautions, it may be possible for a third-party to copy or otherwise obtain
and use the Company's courseware or technology without authorization, or to
develop similar courseware or technology independently.  Furthermore, the laws
of certain countries in which the Company sells its products do not protect the
Company's software and intellectual property rights to the same extent as do the
laws of the United States.  The Company generally does not include in its
software any mechanisms to prevent or inhibit unauthorized use, but generally
requires the execution of a license agreement which restricts copying and use of
the Company's products.  If unauthorized copying or misuse of the Company's
products were to occur to any substantial degree, the Company's business and
results of operations could be materially adversely affected.  There can be no
assurance that the Company's means of protecting its proprietary rights will be
adequate or that the Company's competitors will not independently develop
similar technology.

There can be no assurance that third parties will not claim that the Company's
current or future products infringe on the proprietary rights of others.  The
Company expects that software developers will increasingly be subject to such
claims as the number of products and competitors in the IT education and
training industry grows and the functionality of products in the industry
overlaps.  Any such claim, with or without merit, could result in costly
litigation or might require the Company to enter into royalty or licensing
agreements. Such royalty or license agreements, if required, may not be
available on terms acceptable to the Company, or at all.

                                       11
<PAGE>
 
COMPETITION

The IT education and training market is highly fragmented and competitive, and
the Company expects this competition to increase. The Company expects that
because of the lack of significant barriers to entry into the IT education and
training market, new competitors may enter the market in the future. In
addition, larger companies are competing with the Company in the IT education
and training market through the acquisition of the Company's competitors, and
the Company expects this trend to continue. Such competitors may also include
publishing companies and vendors of application software, including those
vendors with whom the Company has formed development and marketing alliances.

The Company competes primarily with third-party suppliers of instructor-led IT
education and training and internal training departments.  To a lesser extent,
the Company also competes with other suppliers of IT education and training,
including several other companies that produce interactive software training,
consultants, value-added resellers and network integrators.  Certain of these
value-added resellers also market products competitive with those of the
Company.  The Company expects that as organizations increase their dependence on
outside suppliers of training, the Company will face increasing competition from
these other suppliers as IT education and training managers more frequently
compare training products provided by outside suppliers.

Many of the Company's current and potential competitors have substantially
greater financial, technical, sales, marketing and other resources, as well as
greater name recognition, than the Company.  In addition, the IT education and
training market is characterized by significant price competition, and the
Company expects that it will face increasing price pressures from competitors as
IS managers demand more value for their training budgets.  Accordingly, there
can be no assurance that the Company will be able to provide products that
compare favorably with new instructor-led techniques or other interactive
training software or that competitive pressures will not require the Company to
reduce its prices significantly.

SALES, MARKETING AND CUSTOMER SUPPORT

Direct Sales and Support

At December 31, 1997, the Company employed 286 direct sales and support people
worldwide, of which 151 were located in the United States. The Company's
telesales organization, which the Company established in December 1995 to focus
on sales of CBT Group courseware to smaller corporate customers and end-users as
well as to work with CBT Group's alliance partners' channel efforts, employed 48
people worldwide, of which 39 were located in the United States, at December 31,
1997.  The Company plans to continue to build the telesales organization in
1998.

Indirect Sales

In order to accelerate worldwide market penetration, the Company is broadening
its sales strategy by expanding its indirect sales channels, which include
resellers, development partners, and industry catalogs circulated by leading IT
distributors.  The indirect sales channels give the Company access to a more
diverse client base which the Company believes cannot be targeted cost-
effectively through its direct sales force.

The Company's marketing partners also generally have the right to resell
products developed under their alliances with the Company.

EMPLOYEES

As of December 31, 1997, the Company had a total of 702 full-time employees, of
whom 334 were engaged in sales, marketing and customer support, 96 in
management, administration and finance and 272 in product development.  On
December 31, 1997, 242 employees were located in the United States, 276 in 

                                       12
<PAGE>
 
the Republic of Ireland, 48 in the United Kingdom, 28 in Germany, 35 in Canada,
49 in Australia, 13 in the Benelux countries, 6 in the Middle East and 10 in
South Africa. None of the Company's employees is subject to a collective
bargaining agreement, and the Company has not experienced any work stoppages.
The Company believes that its employee relations are good.

The Company's future success depends, in large part, on the continued service of
its key management, sales, product development and operational personnel and on
its ability to attract, motivate and retain highly qualified employees,
including management personnel. In particular, the loss of certain senior
management personnel or other key employees could have a material adverse effect
on the Company's business. In addition, the Company depends on writers,
programmers and graphic artists, as well as third-party content providers. The
Company expects to continue to hire additional product development, sales and
marketing, IS and accounting staff. However, there can be no assurance that the
Company will be successful in attracting, retaining or motivating key personnel.
The inability to hire and retain qualified personnel or the loss of the services
of key personnel could have a material adverse effect upon the Company's current
business, new product development efforts and future business prospects.

FOREIGN OPERATIONS

In 1997, the Company's products were marketed in over 20 countries, and sales
outside the United States represented approximately 40%, 33% and 30% of the
Company's revenues in 1995, 1996 and 1997, respectively.  The Company expects
that international operations will continue to account for a significant portion
of its revenues and intends to continue to expand its operations outside of the
United States.  In addition, the Company's research and development organization
is located outside the United States.  Operations outside the United States are
subject to inherent risks, including fluctuations in exchange rates,
difficulties or delays in developing and supporting non-English language
versions of the Company's products, political and economic conditions in various
jurisdictions, unexpected changes in regulatory requirements, tariffs and other
trade barriers, difficulties in staffing and managing foreign subsidiary
operations, longer accounts receivable payment cycles and potentially adverse
tax consequences.  There can be no assurance that such factors will not have a
material adverse effect on the Company's future operations outside of the United
States.

The Company's consolidated financial statements are prepared in dollars, while
several of the Company's subsidiaries have functional currencies other than the
dollar, and a significant portion of the Company's revenues, costs and assets
are denominated in currencies other than their respective functional currencies.
Fluctuations in exchange rates may have a material adverse affect on the
Company's results of operations, particularly its operating margins, and could
also result in exchange losses.  As a result of currency fluctuations, the
Company recognized exchange loss of $161,000 in 1995, and exchange gains of
$4,000 and $112,000 in 1996 and 1997, respectively.  The impact of future
exchange rate fluctuations on the Company's results of operations cannot be
accurately predicted.  To date, the Company has not sought to hedge the risks
associated with fluctuations in exchange rates, but may undertake such
transactions in the future.  There can be no assurance that any hedging
techniques implemented by the Company will be successful or that the Company's
results of operations will not be materially adversely affected by exchange rate
fluctuations.

Certain of the Company's subsidiaries have significant operations and generate
significant taxable income in Ireland, and certain of the Company's Irish
subsidiaries are taxed at rates substantially lower than tax rates in effect in
the U.S. and in other countries in which the Company has operations. If such
subsidiaries were no longer to qualify for such tax rates or if the tax laws
were rescinded or changed, the Company's operating results could be materially
adversely affected. In addition, if tax authorities were to challenge
successfully the manner in which profits are recognized among the Company's
subsidiaries, the Company's taxes could increase, and its cash flow and results
of operations could be materially adversely affected.

                                       13
<PAGE>
 
ITEM 2.  PROPERTIES

The Company conducts its operations primarily out of its facilities in Menlo
Park, California, and Dublin, Ireland. The Company currently leases
approximately 25,000 square feet at its United States headquarters. In Dublin,
Ireland, the Company currently leases two properties, one of which comprises
approximately 25,000 square feet and houses the Company's main product
development center, and the other comprises approximately 8,000 square feet
containing the Company's fulfillment operations, including disk duplication,
packaging and delivery. The Company has also entered into a lease for
approximately 25,000 square feet in Scottsdale, Arizona. This will serve as a
second site for the Company's growing telesales organization as well as serve as
the United States location for Scholars.

The Company also leases sales office space in a number of countries including
the United Kingdom, Australia, the Middle East, the Benelux countries, Canada,
Germany and South Africa and throughout the United States.

ITEM 3.  LEGAL PROCEEDINGS

In April 1990, Patrick J. McDonagh, a director of the Company, transferred
certain securities of Datacode Electronics Ltd. ("Datacode") to the Company.
Certain other shareholders of Datacode have alleged that the transfer had the
effect of depriving them of certain benefits and have claimed that they are
owed 21,126 of the Company's ordinary shares. On September 14, 1995, a
complaint was filed with the High Court of Ireland against the Company and
certain of its then officers and former officers. The Company believes that the
plaintiff's allegations are entirely without merit and intends to contest the
complaint vigorously.

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

  Not applicable.

                                       14
<PAGE>
 
                                    PART II

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

The Company's ADSs have been quoted in the Nasdaq National Market under the
symbol CBTSY since the Company's initial public offering on April 13, 1995.
Prior to the initial public offering, there was no public market for the
Company's securities.

The prices per ADS reflected in the table below represent the range of high and
low closing prices reported in the Nasdaq National Market for the periods
indicated and reflects both of the two-for-one splits of the Company's ADSs
effected on each of May 15, 1996 and March 9, 1998.

<TABLE>
<CAPTION>

     Fiscal 1997                                                                      High            Low
     -----------                                                                      ----            ---
     <S>                                                                            <C>              <C>
     Fourth quarter ended December 31                                                $41.19          $30.25
     Third quarter ended September 30                                                 40.13           28.63
     Second quarter ended June 30                                                     31.63           20.00
     First quarter ended March 31                                                     35.25           19.07
     Fiscal 1996                                                                      High            Low
     -----------                                                                      ----            ---
     Fourth quarter ended December 31                                                $29.38          $22.38
     Third quarter ended September 30                                                 27.13           19.63
     Second quarter ended June 30                                                     25.13           17.00
     First quarter ended March 31                                                     18.38           10.75
</TABLE>

As of March 10, 1998, there were approximately 24 holders of ordinary shares of
record of the Company.

Dividends

CBT Group has never declared or paid any dividends on its ordinary shares.  CBT
Group currently intends to retain all future earnings to finance future
operations and therefore does not anticipate paying any dividends in the
foreseeable future. Moreover, under the Companies Acts of the Republic of
Ireland, dividends may only be paid out of the profits of the Company legally
available for distribution.

Irish Stamp Duty

Stamp duty, which is a tax on certain documents, is payable on all transfers of
ordinary shares in companies registered in Ireland wherever the instrument of
transfer may be executed.  In the case of a transfer on sale, stamp duty will be
charged at the rate of IR(Pounds)1 for every IR(Pounds)100 (or part thereof) of
the amount or value of the consideration (i.e., purchase price). Where the
consideration for the sale is expressed in a currency other than Irish pounds,
the duty will be charged on the Irish pound equivalent calculated at the rate of
exchange prevailing on the date of the transfer. In the case of a transfer by
way of gift (subject to certain exceptions) or for considerations less than the
market value of the shares transferred, stamp duty will be charged at the above
rate on such market value.

A transfer or issue of ordinary shares for deposit under the Deposit Agreement
(between CBT Group, The Bank of New York, as Depositary, and the registered
holders and the owners of a beneficial interest in book-entry ADRs) in return
for ADRs will be similarly chargeable with stamp duty as will a transfer of
ordinary shares from the Depositary or the Custodian upon surrender of an ADR
for the purpose of the withdrawal of the underlying ordinary shares in
accordance with the terms of the Deposit Agreement.

The Irish Revenue Commissioners have issued a ruling to the Company that
transfers of ADRs issued in respect of the Company's shares will not be
chargeable with Irish stamp duty for so long as the ADSs are dealt in and quoted
on the Nasdaq National Market.  It has been confirmed in Section 207, Finance
Act 1992 that transfers of ADRs will be exempt from stamp duty where the ADRs
are dealt with in a 

                                       15
<PAGE>
 
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.

Volatility of Stock Price

The Company's initial public offering of the ADSs (the "IPO") was completed in
April 1995, and there can be no assurance that a viable public market for the
ADSs will be sustained.  The market price of the ADSs has fluctuated
significantly since the IPO.  The Company believes that factors such as
announcements of developments related to the Company's or its competitors'
business, announcements of new products or enhancements by the Company or its
competitors, sales of the ADSs into the public market, developments in the
Company's relationships with its customers, partners and distributors,
shortfalls or changes in revenues, gross margins, earnings or losses or other
financial results from public market expectations, regulatory developments,
fluctuations in results of operations and general conditions in the Company's
market or the markets served by the Company's customers or the economy could
cause the price of the ADSs to fluctuate, perhaps substantially.  In addition,
in recent years the stock market in general, and the market for shares of small
capitalization and technology stocks in particular, have experienced extreme
price fluctuations, which have often been unrelated to the operating performance
of affected companies.  Many companies in the software industry, including the
Company, have recently experienced historic highs in the market price of their
equity securities.  There can be no assurance that the market price of the ADSs
will not decline substantially from such historic highs, or otherwise continue
to experience significant fluctuations in the future, including fluctuations
that are unrelated to the Company's performance.

ITEM 6.   SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data for each of the five years in
the period ended December 31, 1997 and at December 31, 1997, 1996, 1995, 1994
and 1993 relates to the Company's continuing information technology ("IT")
education and training business and should be read in conjunction with the
consolidated financial statements and related notes thereto in "Management's
Discussion and Analysis of Financial Condition and Results of Operations."  The
results of operations for each of the three years in the period ended December
31, 1997 and the balance sheets as at December 31, 1997 and 1996 are derived
from the consolidated financial statements of the Company, which have been
prepared in accordance with U.S. generally accepted accounting principles ("U.S.
GAAP") and audited by Ernst & Young, independent auditors.  The data at December
31, 1993, 1994 and 1995 and for the years ended December 1993 and 1994 is
derived from audited consolidated financial statements of the Company prepared
in accordance with U.S. GAAP not included herein.  The consolidated statements
of operations data for any particular period are not necessarily indicative of
the results of operations for any future period, including the Company's fiscal
year ending December 31, 1998.

                                       16
<PAGE>
 
<TABLE>
<CAPTION>
                                                                            Years ended December 31,
                                                            --------------------------------------------------------
(In thousands, except per share data)                          1993       1994       1995        1996       1997
                                                             --------   --------   ---------   --------   ---------
<S>                                                          <C>        <C>        <C>         <C>        <C>
Statement of Operations Data:

Revenues                                                     $22,735    $34,500    $ 49,342    $73,566    $118,639
Cost of revenues                                               5,198      8,424      11,288     12,770      19,475
                                                             -------    -------    --------    -------    --------
Gross profit                                                  17,537     26,076      38,054     60,796      99,164
Operating Expenses
  Research and development                                     3,148      3,603       6,597     11,481      19,068
  Sales and marketing                                         10,085     14,856     20, 282     30,382      47,035
  General and administrative                                   2,329      2,854       4,325      6,379       8,012
  Amortization of acquired intangibles                           558        604          --         --          --
  Costs of acquisitions                                           --         --         198        596       1,534
                                                             -------    -------    --------    -------    --------
    Total operating expenses                                  16,120     21,917      31,402     48,838      75,649
                                                             -------    -------    --------    -------    --------
Income from operations                                         1,417      4,159       6,652     11,958      23,515
Other income (expense), net                                     (224)      (539)        801      2,300       2,598
                                                             -------    -------    --------    -------    --------
Income before provision for income taxes                       1,193      3,620       7,453     14,258      26,113
Provision for income taxes                                      (737)    (1,038)     (1,424)    (2,419)     (3,916)
                                                             -------    -------    --------    -------    --------
Net income                                                       456      2,582       6,029     11,839      22,197
                                                             =======    =======    ========    =======    ========
Net income  per equivalent ADS - Diluted                       $0.02      $0.07       $0.17      $0.30       $0.53
                                                             =======    =======    ========    =======    ========
ADSs used in computing per equivalent ADS amounts             22,452     29,944      35,366     39,912      41,708
                                                             =======    =======    ========    =======    ========
<CAPTION> 
                                                                                 December 31,
                                                          --------------------------------------------------------
                                                                1993       1994        1995       1996        1997
                                                             -------    -------    --------    -------    --------
<S>                                                          <C>        <C>        <C>         <C>        <C>
Balance Sheet Data:
Cash and short-term investments                              $ 3,558    $ 4,656    $ 47,863    $47,819    $ 64,915
Working capital                                               (2,720)    (1,798)     43,459     46,248      79,142
Total assets                                                  13,162     19,149      68,722     87,028     131,321
Long-term debt, excluding current portion                      2,257        787         787         --          --
Redeemable convertible preferred shares                        2,666      4,736          --         --          --
Shareholders' equity (deficit)                                (4,562)    (5,724)     46,299     61,231     100,979
</TABLE>

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 Form
10-K, which have been restated to reflect the acquisitions of Applied Learning
Limited ("ALA"), an Australian limited liability company, CBT Benelux B.V.
("Benelux"), a Dutch limited liability company, Ben Watson and Associates
Limited ("Scholars.com"), a New Brunswick, Canada corporation and CBT Systems
Middle East Limited ("MidEast") a Commonwealth of the Bahamas limited liability
company.

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 under the
caption "Additional Risk Factors that Could Affect Operating Results."

                                       17
<PAGE>
 
Overview

CBT ("CBT Group" or the "Company") is a leading provider of interactive software
generally designed to meet businesses' information technology ("IT") education
and training needs.  The Company develops, publishes and markets a broad library
of over 558 software titles focused on client/server, Internet and corporate
intranet technologies and delivered on networked and standalone PCs and over
corporate intranets.

The Company derives revenues primarily from license agreements under which
customers license the Company's titles for periods of one, two or three years.
The license agreement format generally allows the customer to exchange titles
for other titles in the Company's library on an annual basis if the agreement is
for more than one year.  The initial annual license fee is generally recognized
as revenue at the time of delivery of products, and subsequent annual license
fees are generally recognized on the anniversary of each delivery date.
Although the Company's license agreements are noncancellable by their terms,
there can be no assurance that any customer will fulfill the contractual
obligations under its agreement.  Cancellation, reduction or delay in orders by
or shipments to any of these customers could have a material adverse effect on
the Company's business and results of operations.  In addition, the Company
derives revenues from sales of its courses, primarily through its direct sales
and telesales organizations and resellers.

In recent years, the Company has entered into several development and marketing
alliances with key vendors of client/server, internet/intranet and enterprise
software, under which the Company develops titles for training on specific
products.  Under certain of its development and marketing alliances, the
Company's partners have agreed to fund certain product development costs.  The
Company recognizes such funding as revenues on a percentage of completion basis,
and the costs associated with such revenues are reflected as cost of revenues.
These agreements have the effect of shifting expenses associated with developing
certain new products from research and development to cost of revenues.  The
Company expects that cost of revenues may fluctuate from period to period in the
future based upon many factors, including, but not limited to, the timing of
expenses associated with development and marketing alliances. The Company does
not expect funding from development partners to contribute significantly to
revenues in future years.

Recent Developments

On March 16, 1998, the Company entered into a definitive agreement to acquire
The ForeFront Group, Inc., a Houston-based provider of high-quality, cost-
effective, computer-based training products and network utilities for technical
professionals ("ForeFront").  In the merger, each share of ForeFront common
stock will be exchanged for 0.3137 ADSs, and the Company will assume outstanding
ForeFront stock options, warrants and other rights to acquire ForeFront common
stock.  As a result of the merger, the Company will issue approximately 2.1
million ADSs and assume options, warrants and other rights that may be converted
into up to approximately 1.1 million ADSs.  The transaction is intended to be
tax free to shareholders and is intended to be accounted for as a pooling of
interests.  Consummation of the transaction is subject to expiration or
termination of the applicable Hart-Scott-Rodino waiting period, approval of the
merger by ForeFront stockholders and other customary closing conditions.  The
merger is expected to be completed during the second quarter of 1998.
Consummation of the transaction is subject to a number of risk factors,
including those discussed below and under "Additional Risk Factors that Could
Affect Operating Results."

On March 9, 1998, the Company effected a two-for-one split of its issued and
outstanding ADSs whereby each issued and outstanding ADS is now represented by
one-fourth of one ordinary share and each issued and outstanding ordinary share
that is deposited with The Bank of New York, as Depositary, is represented by
four ADSs.  Unless stated otherwise herein, all references to the Company's ADSs
are on a post-split basis.

The successful combination of CBT Group and ForeFront, including the successful
operation of ForeFront as an autonomous subsidiary of CBT Group, will require
substantial effort from each company.  The diversion of the attention of
management and any difficulties encountered in the transition process could 

                                       18
<PAGE>
 
have an adverse impact on CBT Group's ability to realize the full benefits of
the merger. The successful combination of the two companies will also require
coordination of their research and development and sales and marketing efforts.
In addition, the process of combining the two organizations could cause the
interruption of, or loss of momentum in, ForeFront's activities. There can be no
assurance that CBT Group will be able to retain ForeFront's key management,
technical, sales and customer support personnel, or that it will realize any of
the anticipated benefits of the merger. 

Certain of ForeFront's existing customers or strategic partners may view
themselves as competitors of CBT Group's, and therefore determine that the
merger is competitively disadvantageous to them. As a consequence, Forefront's
relationships with these customers or strategic partners could be adversely
affected by the merger, which could adversely affect the ability of CBT Group to
continue relationships with such customers after the merger.

In December 1996, CBT Group and Street Technologies, Inc. ("Street
Technologies"), a developer of technology to "stream" multimedia and other large
data files to permit real-time delivery over local and wide area networks,
corporate intranets and the Internet, entered into an agreement pursuant to
which the companies would work together to deploy CBT Group's interactive
education software over corporate intranets and the Internet.  As part of the
agreement, CBT Group acquired a 12.5% ownership interest in Street Technologies
and Street Technologies agreed that its license will be exclusive to CBT Group
within a defined group of companies.  In December 1997 CBT Group exchanged its
12.5% ownership interest in Street Technologies, and  $300,000 in cash, for a
perpetual license of Street Technologies' deployment tools.

Annual Results of Operations

The following table sets forth certain consolidated statement of operations data
as a percentage of revenues for the three years in the period ended December 31,
1997:
<TABLE>
<CAPTION>
                                                                        Years Ended December 31,
                                                          ----------------------------------------------------
                                                               1995              1996               1997
                                                          --------------   ----------------   ----------------
<S>                                                       <C>              <C>                <C>
Revenues                                                            100%               100%               100%
Cost of revenues                                                   22.9               17.4               16.4
                                                                   ----               ----               ----
Gross profit                                                       77.1               82.6               83.6
Operating Expenses
  Research and development                                         13.4               15.6               16.1
  Sales and marketing                                              41.1               41.3               39.6
  General and administrative                                        8.7                8.7                6.8
  Costs of acquisitions                                             0.4                0.8                1.3
                                                                   ----               ----               ----
    Total operating expenses                                       63.6               66.4               63.8
                                                                   ----               ----               ----
Income from operations                                             13.5               16.2               19.8
Other income, net                                                   1.6                3.1                2.2
                                                                   ----               ----               ----
Income before provision for income taxes                           15.1               19.3               22.0
Provision for income taxes                                         (2.9)              (3.2)              (3.3)
                                                                   ----               ----               ----
Net income                                                         12.2%              16.1%              18.7%
                                                                   ====               ====               ====
</TABLE>
Revenues

Revenues increased from $49.3 million in 1995 to $73.6 million in 1996 and to
$118.6 million in 1997. The increases in revenues during these periods were
primarily attributable to an increase in the number of available courses, strong
customer contract renewals and upgrades and expanded marketing and distribution
efforts.  Approximately 0.8%, 0.8% and 0.4% of revenues in 1995, 1996 and 1997,

                                       19
<PAGE>
 
respectively, were attributable to development revenues derived from agreements
with the Company's development partners.  The Company does not expect funding
from development partners to contribute significantly to revenues in future
years.

Revenues in the United States increased from $29.4 million (or 60% of revenues)
in 1995 to $49.3 million (or 67% of revenues) in 1996 and to $83.6 million (or
71% of revenues) in 1997.  The increases in 1996 and 1997 were primarily the
result of significant increases in the number of sales and related personnel
employed in the United States, an increase in the number of available courses
and an expansion of the Company's customer base.  While revenues in the United
States increased significantly in absolute terms over these periods, the
Company's sales and marketing expenses and general and administrative expenses
in the United States also increased rapidly as the Company hired and expanded
its staff to support the U.S. sales growth.

Revenues in Europe were $9.0 million (or 18% of revenues) in 1995, $14.3 million
(or 19% of revenues) in 1996, and $20.3 million (or 17% of revenues) in 1997,
respectively.  Revenues from outside the United States and Europe (principally
from Australia, Canada, South Africa and MidEast in 1997) were $10.9 million (or
22% of revenues) in 1995, $10.0 million (or 14% of revenues) in 1996, and $14.7
million (or 12% of revenues) in 1997, respectively.  Because a significant
portion of the Company's business is conducted outside the United States, the
Company is subject to numerous risks of doing business in other countries,
including risks related to currency fluctuations.

No customer accounted for more than 5% of revenues in 1995, 1996 or 1997.
However, approximately 35% of the Company's backlog at December 31, 1997 was
concentrated among seven customers, compared to 35% among nine customers at
December 31, 1996.  Backlog at any given date represents the amount of all
license fees under current agreements which have not yet been recognized as
revenues.  Although the Company's license agreements are noncancellable by their
terms, there can be no assurance that any customer will fulfill the contractual
obligations under its agreement.  Cancellation, reduction or delay in orders by
or shipments to any of these or other customers could have a material adverse
effect on the Company's business and results of operations.

Cost of Revenues

Cost of revenues includes the cost of materials (such as CD-ROMs, diskettes,
packaging and documentation), royalties to third parties, the portion of
development costs associated with funded development projects and fulfillment
costs.

Gross margins increased from 77.1% in 1995 to 82.6% in 1996 and to 83.6% in
1997.  The increase in gross margins in 1996 and  1997 is primarily due to the
inclusion in cost of revenues for 1995 of certain costs CLS Consult GmbH, the
Company's German subsidiary,  had incurred in developing its SAP interactive
training software.  CLS, which was in an earlier stage of development in 1995,
outsourced a substantial portion of its product development to third parties,
and the associated expenses had been included in cost of revenues for 1995.
During 1996 and 1997, these activities were conducted at CLS, and no royalties
were therefore payable.  Accordingly, these expenses are included in research
and development expenses for 1996 and 1997.  The inclusion of these development
costs in cost of revenues had the corresponding effect of reducing research and
development expenses in 1995.

The inclusion of ALA also impacted gross margins in 1995 and 1996.  Gross
margins were lower in 1997 principally as a result of royalty payments to third
party providers which were higher than the average royalty payments paid by CBT
Group.  In 1997, the previously outsourced products for resale were replaced by
CBT Group product.

The Company expects that cost of revenues may fluctuate from period to period in
the future based upon many factors, including the mix of titles licensed
(between titles developed exclusively by CBT Group and royalty-bearing titles
developed pursuant to development and marketing alliances) and the timing of
expenses associated with development and marketing alliances.

                                       20
<PAGE>
 
Research and Development Expenses

Research and development expenses consist primarily of salaries and benefits,
occupancy expenses, fees paid to outside consultants and travel expenses.
Research and development expenses increased in absolute terms and as a
percentage of revenues from $6.6 million (or 13.4% of revenues) in 1995 to $11.5
million (or 15.6% of revenues) in 1996 and to $19.1 million (or 16.1% of
revenues) in 1997, principally as a result of an increase in research and
development personnel employed to expand and enhance the Company's library of
software products.  In addition, approximately $245,000, $803,000 and $442,000
of development expenses incurred in connection with development and marketing
alliances were charged to cost of revenues in 1995, 1996 and 1997, respectively.
The Company believes that significant investment in research and development is
required to remain competitive in the IT education and training market, and the
Company therefore expects research and development expenses to continue to
increase in future periods.

Software development costs are accounted for in accordance with the Financial
Accounting Standards Board Statement No. 86, under which the Company is required
to capitalize software development costs after technological feasibility has
been established.  To date, development costs after establishment of
technological feasibility have been immaterial, and all software development
costs have been expensed as incurred.

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of salaries and commissions,
occupancy expenses and advertising, promotional expenses and travel expenses.
These expenses increased in absolute terms from $20.3 million (or 41.1% of
revenues) in 1995 to $30.4 million (or 41.3% of revenues) in 1996 and to $47.0
million (or 39.6% of revenues) in 1997.  The increase in absolute terms of sales
and marketing expenses is primarily attributable to an increase in the number of
sales and sales support personnel.  Commission costs have also increased in
absolute terms along with the increases in revenues during these periods.  The
Company also increased significantly advertising and promotional expenses in
each of 1996 and 1997.  The decrease in sales and marketing expenses as a
percentage of revenues from 1996 to 1997  was principally due to more rapid
increases in revenues than in associated expenses.  The Company expects to
increase sales and marketing expenses in the future to support expansion of its
sales and marketing efforts.

General and Administrative Expenses

General and administrative expenses increased in absolute terms from $4.3
million (or 8.7% of revenues) in 1995 to $6.4 million (or 8.7% of revenues) in
1996 and to $8.0 million (or 6.8% of revenues) in 1997.  The increases in
absolute terms were primarily due to increased staffing to support expanding
operations.  The decrease as a percentage of revenues from 1996 to 1997 was
principally due to more rapid increases in revenues than in associated expenses.
The Company anticipates that general and administrative expenses will increase
in future periods due to increases in staffing and infrastructure.

Other Income, Net

Other income, net, comprises interest expense, interest income and exchange
gains and losses.  The Company recognized other income, net, of approximately $1
million, $2.3 million and $2.5 million  in 1995, 1996 and 1997, respectively.
The increases in other income in 1996 and 1997  were primarily the result of
interest received on proceeds deposited from the Company's initial and secondary
public offerings in 1995.  In addition, the Company recognized an exchange loss
of $161,000 in 1995, and exchange gains of $4,000 and $112,000 in 1996 and 1997,
respectively.

The Company's consolidated financial statements are prepared in dollars,
although several of the Company's subsidiaries have functional currencies other
than the dollar, and a significant portion of the Company's and its
subsidiaries' revenues, costs and assets are denominated in currencies other
than their respective functional currencies.  Fluctuations in exchange rates may
have a material adverse effect on the Company's results of operations,
particularly its operating margins, and could result in exchange losses.  The
impact of future exchange rate fluctuations on the Company's results of
operations cannot be accurately predicted.  To date, the Company has not sought
to hedge the risks associated with fluctuations 

                                       21
<PAGE>
 
in the exchange rate, but may undertake such transactions in the future. There
can be no assurance that any hedging techniques implemented by the Company would
be successful in eliminating or reducing the effects of currency fluctuations.

Provision for Income Taxes

CBT Group PLC operates as a holding company with operating subsidiaries in
several countries, and each subsidiary is taxed based on the laws of the
jurisdiction in which it operates.  Because taxes are incurred at the subsidiary
level, and one subsidiary's tax losses cannot be used to offset the taxable
income of subsidiaries in other tax jurisdictions, the Company's consolidated
effective tax rate may increase to the extent that the Company reports tax
losses in some subsidiaries and taxable income in others.

The Company has significant operations and generates a majority of its taxable
income in the Republic of Ireland, and certain of the Company's Irish operating
subsidiaries are taxed at rates substantially lower than tax rates in effect in
the United States and other countries in which the Company has operations.  One
Irish subsidiary currently qualifies for a 10% tax rate and another Irish
subsidiary is income tax exempt.  If such subsidiaries were no longer to qualify
for such tax rates or if the tax laws were rescinded or changed, the Company's
operating results could be materially adversely affected.  The standard rate of
Irish corporation tax on both trading and non-trading income presently (from
January 1, 1998) is 32%.  The 10% incentive rate referred to above applies in
respect of income derived from certain activities carried out in the Republic of
Ireland.  The incentive rate will continue up to December 31, 2010. From January
1, 2006 it has been confirmed by the Government of Ireland in an announcement by
the Irish Minister for Finance on December 3, 1997 that the corporation tax rate
will be 12.5% on trading income and 25% on non-trading income.  Moreover,
because the Company incurs income tax in several countries, an increase in the
profitability of the Company in one or more of these countries could result in a
higher overall tax rate.  In addition, if tax authorities were to challenge
successfully the manner in which profits are recognized among the Company's
subsidiaries, the Company's taxes could increase and its cash flow and net
income could be materially adversely affected.

The Company's provision for income taxes was $1.4 million, $2.4 million and $3.9
million for each of 1995, 1996 and 1997, respectively.

The effective tax rate for the Company was 19.1%, 17.0% and 15.0% in 1995, 1996
and 1997, respectively.  The decrease in the effective tax rate from 1995 to
1996 and to 1997 was principally the result of losses incurred by pooled
entities in both 1995 and 1996 which were not available to offset taxable income
earned in other jurisdictions.

                                       22
<PAGE>
 
Quarterly Results of Operations

The following table sets forth certain unaudited statement of operations data
for each of the Company's last eight quarters.  This unaudited quarterly
financial information has been prepared on a basis consistent with the annual
information presented elsewhere in this Annual Report and, in management's
opinion, reflects all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the information presented.  The operating
results for any quarter are not necessarily indicative of results for any future
period.

<TABLE>
<CAPTION>
                                                                                 Quarters Ended
                                          -----------------------------------------------------------------------------------------
                                             Mar 31,    June 30,    Sept 30    Dec 31,    Mar 31,    June 30,    Sept 30    Dec 31,
                                               1996       1996        1996       1996       1997       1997        1997       1997
                                          -----------------------------------------------------------------------------------------
<S>                                          <C>        <C>         <C>        <C>        <C>        <C>         <C>        <C>
Revenues                                     $15,000     $16,370    $18,755    $23,441    $22,575     $25,589    $30,412    $40,063
Cost of revenues                               2,659       2,889      3,160      4,062      3,798       4,351      4,862      6,464
                                             -------     -------    -------    -------    -------     -------    -------    -------
Gross profit                                  12,341      13,481     15,595     19,379     18,777      21,238     25,550     33,599
Operating expenses                      
  Research and development                     2,319       2,596      2,914      3,652      3,743       4,227      4,941      6,157
  Sales and marketing                          6,854       7,136      7,756      8,636      9,435      10,336     12,094     15,170
  General and administrative                   1,264       1,708      1,374      2,033      1,707       1,837      2,005      2,463
  Costs of acquisitions                           --         596         --         --        926          --        242        366
                                             -------     -------    -------    -------    -------     -------    -------    -------
    Total operating expenses                  10,437      12,036     12,044     14,321     15,811      16,400     19,282     24,156
                                             -------     -------    -------    -------    -------     -------    -------    -------
Income from operations                         1,904       1,445      3,551      5,058      2,966       4,838      6,268      9,443
Other income, net                                520         549        567        664        488         606        680        824
                                             -------     -------    -------    -------    -------     -------    -------    -------
Income before provision for income taxes       2,424       1,994      4,118      5,722      3,454       5,444      6,948     10,267
Provision for income taxes                      (402)       (382)      (645)      (990)      (518)       (817)    (1,042)    (1,539)

                                             -------     -------    -------    -------    -------     -------    -------    -------
Net income                                     2,022       1,612      3,473      4,732      2,936       4,627      5,906      8,728
                                             =======     =======    =======    =======    =======     =======    =======    =======
Diluted net income per equivalent ADS(1)       $0.05       $0.04      $0.09      $0.12      $0.07       $0.11      $0.14      $0.21
                                             =======     =======    =======    =======    =======     =======    =======    =======
</TABLE>
___________________________________________________

(1) Diluted net income per equivalent ADS gives effect to the two-for-one share
    split of the Company's ADSs effected in May 1996 and the two-for-one share
    split of the Company's ADSs effected in March 1998. Diluted net income per
    ordinary share was $0.21, $0.16, $0.35 and $0.47 for the quarters ended
    March 31, 1996, June 30, 1996, September 30, 1996 and December 31, 1996,
    respectively, and  $0.29, $0.45, $0.56 and $0.82 for the quarters ended
    March 31, 1997, June 30, 1997, September 30, 1997 and December 31, 1997,
    respectively.

                                       23
<PAGE>
 
The following table sets forth, as a percentage of revenues, certain line items
in the Company's statement of operations for the periods indicated.
<TABLE>
<CAPTION>
                                                                               Quarters Ended
                                        -----------------------------------------------------------------------------------------
                                           Mar 31,    June 30,    Sept 30    Dec 31,    Mar 31,    June 30,    Sept 30    Dec 31,
                                             1996       1996        1996       1996       1997       1997        1997       1997
                                        -----------------------------------------------------------------------------------------
<S>                                        <C>        <C>         <C>        <C>        <C>        <C>         <C>        <C>
Revenues                                       100%        100%       100%       100%       100%        100%       100%       100%
Cost of revenues                              17.7        17.7       16.9       17.3       16.8        17.0       16.0       16.1
                                              ----        ----       ----       ----       ----        ----       ----       ----
Gross profit                                  82.3        82.3       83.1       82.7       83.2        83.0       84.0       83.9
Operating expenses                           
  Research and development                    15.5        15.9       15.5       15.6       16.6        16.5       16.2       15.4
  Sales and marketing                         45.7        43.6       41.4       36.8       41.8        40.4       39.8       37.9
  General and administrative                   8.4        10.4        7.3        8.7        7.6         7.2        6.6        6.2
  Costs of acquisitions                         --         3.6         --         --        4.1          --        0.8        0.9
                                              ----        ----       ----       ----       ----        ----       ----       ----
    Total operating expenses                  69.6        73.5       64.2       61.1       70.1        64.1       63.4       60.4
                                              ----        ----       ----       ----       ----        ----       ----       ----
Income from operations                        12.7         8.8       18.9       21.6       13.1        18.9       20.6       23.5
Other income, net                              3.5         3.4        3.0        2.8        2.2         2.4        2.2        2.1
                                              ----        ----       ----       ----       ----        ----       ----       ----
Income before provision for income taxes      16.2        12.2       21.9       24.4       15.3        21.3       22.8       25.6
Provision for income taxes                    (2.7)       (2.4)      (3.4)      (4.2)      (2.3)       (3.2)      (3.4)      (3.8)
                                              ----        ----       ----       ----       ----        ----       ----       ----
Net income                                    13.5%        9.8%      18.5%      20.2%      13.0%       18.1%      19.4%      21.8%
                                              ====        ====       ====       ====       ====        ====       ====       ====
</TABLE>

The Company's growth in revenues over the last eight quarters has been primarily
attributable to an increase in the number of available courses in the Company's
library, an increase in the number of customers and increases in sales to
existing customers, as well as the Company's expanded marketing and distribution
efforts in the United States, and to a lesser extent, the United Kingdom.  The
Company's revenues historically have been highest in the fourth quarter of each
year.  Sales in the fourth quarter represented 32% and 34% of total revenues in
1996 and 1997, respectively.  Sales in the fourth quarter increased more rapidly
than expenses and, accordingly, net income in the fourth quarter of 1996 and
1997 represented approximately 40% and 39%, respectively, of total net income
for such years.  There can be no assurance that the Company will continue to
experience significant increases in revenues and profitability in the fourth
quarter of future years.  Any failure to do so would have a material adverse
effect on the Company's operating results for the year as a whole.

In each quarter of 1996, gross margins were lower than the comparable quarter in
1997 principally as a result of the inclusion in cost of revenues on a quarterly
basis of certain costs which ALA had incurred in outsourcing product for resale.
In 1997, the previously outsourced products for resale were replaced by CBT
Group product and the corresponding cost of revenues was lower.

During 1997, the Company hired a number of employees, particularly sales and
marketing personnel, which resulted in an increase in sales and marketing
expenses for the year.  The Company also added a significant number of research
and development personnel.  As a result of these increases, as well as continued
hiring in other departments, the Company expects operating expenses in future
periods to be significantly higher than in prior periods.  The Company
anticipates that it will continue this hiring in the first half of 1998, which
will reduce operating margins, particularly in the first and second quarters.

Liquidity and Capital Resources

Cash and short-term investments were $47.9 million, $47.8 million and $64.9
million in 1995, 1996 and 1997, respectively. The decrease from 1995 to 1996 was
due to the Company's investment in Street Technologies and a significant
increase in purchases of property and equipment which was partially offset by an
increase in cash provided by operating activities and from the issuance of
ordinary shares.  The 

                                       24
<PAGE>
 
increase from 1996 to 1997 was from the exercise of options and by cash provided
by operating activities which was offset by purchases of property, equipment and
fixtures.

Net cash provided by operating activities increased from $4.5 million in 1995
to $11.0 million in 1996 and decreased to $4.6 million in 1997. The increased
cash flow from operations in 1996 was primarily attributable to net income of
$11.8 million in 1996. The decrease in net cash provided by operating
activities in 1997 was primarily due to a significant increase in accounts
receivable in 1997.

Capital expenditures were approximately $1.9 million in 1995, $6.4 million in
1996 and $5.3 million in 1997.  Although the Company currently has no material
capital commitments, it expects that it will continue to spend more in 1998,
primarily as a result of setting up new facilities and to continuing to upgrade
the capabilities of its computer equipment as well as improvements to its
information systems.

Cash requirements are expected to continue to increase in order to fund: (i)
personnel and salary costs, (ii) research and development costs, (iii)
investment in additional equipment and facilities and (iv) working capital
requirements.

The Company believes that its existing cash and short-term investments will be
sufficient to meet its cash requirements for at least the next twelve months.
The Company may from time to time consider the acquisition of complementary
businesses, products or technologies, which may require additional financing.
The foregoing statement regarding the Company's expectations for continued
liquidity 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.

Effects of Recent Accounting Pronouncements

In February 1997, The Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share", and Statement  No. 129, "Disclosure of Information
about Capital Structure", which have been adopted in the Company's year ended
December 31, 1997.  See Note 2 of Notes to the Consolidated Financial Statements
for the effect of Statement No. 128.  The introduction of Statement No. 129 had
no impact on the Company in 1997.

Additional Risk Factors that Could Affect Operating Results

In addition to the other factors identified in this Annual Report, the following
risk factors could materially and adversely affect the Company's future
operating results, and could cause actual events to differ materially from those
predicted in the Company's forward looking statements relating to its business.

Fluctuations in Operating Results.  The Company has in the past experienced
fluctuations in its quarterly operating results and anticipates that such
fluctuations will continue and could intensify in the future.  Fluctuations in
operating results may result in volatility in the price of the Company's ADSs.
Although the Company was profitable in each of the last twelve quarters, there
can be no assurance that such profitability will continue in the future or that
the levels of profitability will not vary significantly among quarterly periods.
The Company's operating results may fluctuate as a result of many factors,
including timing and effect of mergers and acquisitions, size and timing of
orders and shipments, mix of sales between products developed solely by the
Company and products developed through development and marketing alliances,
royalty rates, the announcement, introduction and acceptance of new products,
product enhancements and technologies by the Company and its competitors, mix of
sales between the Company's field sales force, its other direct sales channels
and its indirect sales channels, competitive conditions in the industry, loss of
significant customers, delays in availability of existing or new products,
spending patterns of the Company's customers, currency fluctuations and general
economic conditions.

The Company's expense levels are based in significant part on its expectations
regarding future revenues and are fixed to a large extent in the short term.
Accordingly, the Company may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall.  Any significant revenue
shortfall would therefore have a material adverse effect on the Company's
results of operations.  In addition, the Company hired additional employees in
1997 and in early 1998.  This increase in employee expense could have a negative
impact on the Company's operating margins during 1998.

                                       25
<PAGE>
 
Foreign Currency Impact.  With more than a quarter of the Company's revenues
outside the United States, sales were negatively impacted in 1997 due to the
continued strength of the U.S. dollar against other major currencies. At current
exchange rates, the Company anticipates quarter to quarter comparisons could
continue to be negatively affected by currency adjustments through fiscal 1998.

Competition.  The IT education and training market is highly fragmented and
competitive, and the Company expects this competition to increase.  The Company
expects that because of the lack of significant barriers to entry into this
market, new competitors may enter the market in the future.  In addition, larger
companies are competing with the Company in the IT education and training market
through the acquisition of the Company's competitors, and the Company expects
this trend to continue.  Such competitors may also include publishing companies
and vendors of application software, including those vendors with whom the
Company has formed development and marketing alliances.

The Company competes primarily with third-party suppliers of instructor-led IT
education and training and internal training departments and with other
suppliers of IT education and training, including several other companies that
produce interactive software training.  To a lesser extent, the Company also
competes with consultants, value-added resellers and network integrators.
Certain of these value-added resellers also market products competitive with
those of the Company.  The Company expects that as organizations increase their
dependence on outside suppliers of training, the Company will face increasing
competition from these other suppliers as IT education and training managers
more frequently compare training products provided by outside suppliers.

Many of the Company's current and potential competitors have substantially
greater financial, technical, sales, marketing and other resources, as well as
greater name recognition, than the Company.  In addition, the IT education and
training market is characterized by significant price competition, and the
Company expects that it will face increasing price pressures from competitors as
IS managers demand more value for their training budgets.  Accordingly, there
can be no assurance that the Company will be able to provide products that
compare favorably with new instructor-led techniques or other interactive
training software or that competitive pressures will not require the Company to
reduce its prices significantly.

Developing Market. The market for IT education and training is rapidly evolving.
New methods of delivering interactive education software are being developed and
offered in the marketplace, including intranet and Internet deployment systems.
Many of these new delivery systems will involve new and different business
models and contracting mechanisms.  In addition, multimedia and other product
functionality features are being added to the educational software.
Accordingly, CBT Group's future success will depend upon, among other factors,
the extent to which CBT Group is able to develop and implement products which
address these emerging market requirements.  There can be no assurance that CBT
Group will be successful in meeting changing market needs.  In particular, CBT
Group has announced its next generation education deployment and management
system, CBT Campus.  If CBT Campus were to fail to secure market acceptance,
sales of CBT Group courseware, and CBT Group's operating results, could be
materially adversely affected.

Seasonality.  The software industry generally, and the Company in particular,
are subject to seasonal revenue fluctuations, based in part on customers' annual
budgetary cycles and in part on the annual nature of sales quotas.  These
seasonal trends have in the past caused, and in the future could cause, revenues
in the first quarter of a year to be less, perhaps substantially so, than
revenues for the immediately preceding fourth quarter.  In addition, the Company
has in past years (as well as in 1998) added significant headcount in the sales
and marketing and research and development functions in the first quarter, and
to a lesser extent, the second quarter.  Because these headcount additions do
not immediately contribute significant revenues, the Company's operating margins
in the earlier part of the year tend to be significantly lower than in the later
parts of the year. It is expected that this factor will affect CBT Group's
operating margins in the first and second quarters of 1998, and to some extent
the third quarter.  Many software companies also experience a seasonal downturn
in demand during the summer months.  There can be no assurance that these or
other seasonal trends will not have a material adverse effect on the Company's
results of operations.

                                       26
<PAGE>
 
Management of Expanding Operations and Acquisitions. The Company has recently
experienced rapid expansion of its operations, which has placed, and is expected
to continue to place, significant demands on the Company's administrative,
operational and financial personnel and systems. The Company's future operating
results will substantially depend on the ability of its officers and key
employees to manage changing business conditions and to implement and improve
its operational, financial control and reporting systems. If the Company is
unable to respond to and manage changing business conditions, its business and
results of operations could be materially adversely affected.

As a result of the consummation of the acquisitions of Personal Training
Systems, Inc. ("PTS") in late 1995, CLS and NTT in May 1996, ALA and Benelux on
February 28, 1997, Scholars.com in August 1997 and MidEast on December 1, 1997
the Company's operating expenses have increased.  In addition, if the ForeFront
merger is consummated, the Company expects that operating expenses will increase
as a result of such transaction.  There can be no assurance that the integration
of these businesses can be successfully completed in a timely fashion, or at
all, or that the revenues from the acquired businesses will be sufficient to
support the costs associated with those businesses, without adversely affecting
the Company's operating margins.  Any failure to successfully complete the
integration in a timely fashion or to generate sufficient revenues from the
acquired businesses could have a material adverse effect on the Company's
business and results of operations.

The Company regularly evaluates acquisition opportunities and is likely to make
acquisitions in the future.  Future acquisitions by the Company could result in
potentially dilutive issuances of equity securities, the incurrence of debt and
contingent liabilities and amortization expenses related to goodwill and other
intangible assets, which could materially adversely affect the Company's results
of operations.  Product and technology acquisitions entail numerous risks,
including difficulties in the assimilation of acquired operations, technologies
and products, diversion of management's attention to other business concerns,
risks of entering markets in which the Company has no or limited prior
experience and potential loss of key employees of acquired companies.  The
Company's management has had limited experience in assimilating acquired
organizations and products into the Company's operations.  No assurance can be
given as to the ability of the Company to integrate successfully any operations,
personnel or products that have been acquired or that might be acquired in the
future, and the failure of the Company to do so could have a material adverse
effect on the Company's results of operations.

Dependence on Key Personnel. The Company's future success depends, in large
part, on the continued service of its key management, sales, product development
and operational personnel and on its ability to attract, motivate and retain
highly qualified employees, including management personnel.  In particular, the
loss of certain senior management personnel or other key employees could have a
material adverse effect on the Company's business.  In addition, the Company
depends on writers, programmers and graphic artists, as well as third-party
content providers.  The Company expects to continue to hire additional product
development, sales and marketing, information services and accounting staff.
However, there can be no assurance that the Company will be successful 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 the Company's current business, new product
development efforts and future business prospects.

Risk of Increasing Taxes.  Certain of the Company's subsidiaries have
significant operations and generate significant taxable income in Ireland, and
certain of the Company's Irish subsidiaries are taxed at rates substantially
lower than tax rates in effect in the United States and in other countries in
which the Company has operations.  The extent of the tax benefit could vary from
period to period, and there can be no assurance that the Company's tax situation
will not change.

Year 2000 Risk.  The Company is aware of the issues associated with the
programming code in existing computer systems as the millennium (year 2000)
approaches. The "Year 2000" issue is pervasive and complex, as virtually every
computer operation will be affected in the same way by the rollover of the two
digit year value to 00.  The issue is whether computer systems will properly
recognize date sensitive information when the year changes to 2000.  Systems
that do not properly recognize such information could generate erroneous data or
cause a system to fail.

                                       27
<PAGE>
 
The Company is assessing both the internal readiness of its computer systems and
the compliance of its software sold to customers for handling the year 2000. The
Company expects to implement successfully the systems and programming changes
necessary to address year 2000 issues, and does not believe that the cost of
such actions will have a material effect on the Company's results of operations
or financial condition. There can be no assurance, however, that there will not
be a delay in, or increased costs associated with, the implementation of such
changes, and the Company's inability to implement such changes could have an
adverse effect on future results of operations. With the exception of CBT 
Group's DOS-based courseware and its Wintracs administrative tracking tool, the
Company is satisfied that the software it supplies to its customers is year
2000 compliant and it is not dependent on its customers implementing the
systems and programming changes necessary to handle the year 2000.

The Company is utilizing both internal and external resources to identify,
correct or reprogram, and test the systems for year 2000 compliance. It is
anticipated that all reprogramming, except for CBT Group products which will no
longer be available beginning December 31, 1999, will be complete by June 30, 
1999, allowing adequate time for testing. This process includes getting
confirmations from the Company's primary vendors that plans are being
developed or are already in place to address processing transactions in the
year 2000. However, there can be no assurance that the systems of other
companies on which the Company's systems rely also will be timely converted or
that any such failure to convert by another company would not have an adverse
effect on the Company's systems.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
                                                                                                  Page
                                                                                                 Number
                                                                                                 ------
<S>                                                                                           <C>
Consolidated Financial Statements
---------------------------------
Report of Ernst & Young, Chartered Accountants                                                     29
Consolidated Balance Sheets                                                                        30
Consolidated Statements of Operations                                                              31
Consolidated Statements of Changes in Redeemable Convertible Preferred Shares and                 
 Shareholders' Equity (Deficit)                                                                  32-34
Consolidated Statements of Cash Flows                                                              35
Notes to Consolidated Financial Statements                                                       36-53
</TABLE>

                                       28
<PAGE>
 
Ernst & Young 
Chartered Accountants

REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS

The Board of Directors and Shareholders,
CBT Group PLC


We have audited the accompanying consolidated balance sheets of CBT Group PLC as
of December 31, 1996 and 1997 and the related consolidated statements of
operations, changes in redeemable convertible preferred shares and shareholders'
equity (deficit), and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with 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
CBT Group PLC at December 31, 1996 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 in conformity with United States generally accepted accounting
principles.


/s/ Ernst & Young
ERNST & YOUNG
Chartered Accountants
Dublin, Ireland
Date:  January 20, 1998

                                       29
<PAGE>
 
                                 CBT GROUP PLC
                          CONSOLIDATED BALANCE SHEETS
                             (dollars in thousands)

<TABLE>
<CAPTION>
At December 31                                                                 1996               1997
--------------                                                                 ----               ---- 
<S>                                                                          <C>                  <C>
ASSETS
Current assets
Cash                                                                           $11,037          $ 28,877
Short term investments                                                          36,782            36,038
Accounts receivable, net                                                        19,951            38,985
Inventories                                                                        319               446
Deferred tax assets, net                                                           140               140
Prepaid expenses                                                                 3,553             3,857
                                                                               -------          --------
Total current assets                                                            71,782           108,343
Intangible assets                                                                    -             5,297
Property and equipment, net                                                      6,983             9,140
Investments                                                                      4,997               200
Deferred tax assets, net                                                           391               342
Other assets                                                                     2,875             7,999
                                                                               -------          --------
Total  assets                                                                  $87,028          $131,321
                                                                               =======          ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Borrowings under bank overdraft facility and overdrafts                            153                13
Accounts payable                                                                 3,770             4,107
Accrued payroll and related expenses                                             3,297             5,786
Other accrued liabilities                                                       11,401            15,450
Deferred revenues                                                                6,913             3,845
                                                                               -------          --------
 
Total current liabilities                                                       25,534            29,201
Non Current Liabilities
Minority equity interest                                                            16               622
Other liabilities                                                                  247               519
                                                                               -------          --------
Total non current liabilities                                                      263             1,141
Shareholders' equity
Ordinary shares, IR37.5p par value: 30,000,000 shares authorized
 at December 31, 1996 and 1997; issued and outstanding: 9,043,943
 at  December 31, 1996 and 9,910,664 shares at December 31, 1997                 5,516             6,058
Additional paid-in capital                                                      58,282            74,958
Accumulated profit (deficit)                                                    (2,926)           19,383
Cumulative translation adjustment                                                  359               580
                                                                               -------          --------
Total shareholders' equity                                                      61,231           100,979
                                                                               -------          --------
Total liabilities and shareholders' equity                                     $87,028          $131,321
                                                                               =======          ========
</TABLE>
                            (see accompanying notes)

                                       30
<PAGE>
 
                                 CBT GROUP PLC
                     Consolidated Statements of Operations
               (dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
Years ended December 31                                                1995                  1996                  1997
-----------------------                                                -----                 ----                  ----
<S>                                                                  <C>                   <C>                   <C>
Revenues                                                               $49,342               $73,566              $118,639
Cost of revenues                                                        11,288                12,770                19,475
                                                                       -------               -------              --------
Gross profit                                                            38,054                60,796                99,164
Operating expenses:
 Research and development                                                6,597                11,481                19,068
 Sales and marketing                                                    20,282                30,382                47,035
 General and administrative                                              4,325                 6,379                 8,012
 Costs of acquisitions                                                     198                   596                 1,534
                                                                       -------               -------              --------
   Total operating expenses                                             31,402                48,838                75,649
                                                                       -------               -------              --------
Income from operations                                                   6,652                11,958                23,515
Interest income, net                                                       962                 2,296                 2,486
Net exchange gain (loss)                                                  (161)                    4                   112
                                                                       -------               -------              --------
Income before provision for income taxes                                 7,453                14,258                26,113
Provision for income taxes                                              (1,424)               (2,419)               (3,916)
                                                                       -------               -------              --------
Net income                                                             $ 6,029               $11,839              $ 22,197
                                                                       =======               =======              ========
 
Net income per share -Basic                                            $  0.80               $  1.34              $   2.32
                                                                       =======               =======              ========
 
Net income per share - Diluted                                         $  0.68               $  1.19              $   2.13
                                                                       =======               =======              ========
 
Net income per equivalent ADS - Basic                                  $  0.20               $  0.33              $   0.58
                                                                       =======               =======              ========
 
Net income per equivalent ADS - Diluted                                $  0.17               $  0.30              $   0.53
                                                                       =======               =======              ========
</TABLE>

                            (see accompanying notes)

                                       31
<PAGE>
 
CBT GROUP PLC
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED SHARES
AND SHAREHOLDERS' EQUITY (DEFICIT)
(dollars in thousands)


<TABLE>
<CAPTION>
                                                                               SHAREHOLDERS' EQUITY (DEFICIT)
                                                                               -----------------------------
                                     Redeemable                          Accumulated
                                    convertible             Additional      profit       Receivable    Cumulative       Total
                                     preferred   Ordinary    paid-in        ------          from       translation    shaeholders'
                                       shares     shares     capital       (deficit)     shareholders  adjustment   equity (deficit)
                                       ------     ------     -------        -------      ------------  ----------   ----------------
<S>                                 <C>          <C>         <C>           <C>           <C>            <C>          <C>
Balance at December 31, 1994         $ 4,736      $3,678     $12,150        $(20,725)       $(396)        $(89)         $(5,382)

Issuance of 1,150,000 ordinary
 shares under initial public
 offering, net of issuance
 costs of $5,197                          --         702      12,501              --           --           --           13,203

Redemption of Series A redeemable
 convertible preferred shares         (2,666)        241       2,425              --           --           --            2,666

Discount on redemption of Series A
 redeemable convertible preferred
 shares                                   --          --       1,316              --           --           --            1,316

Cancellation of converted
 Series A ordinary shares                 --        (241)     (2,425)             --           --           --           (2,666)

Conversion of Series B redeemable
 convertible preferred shares         (2,070)        355       1,715              --           --           --            2,070

Issuance of 700,000 ordinary shares
 under secondary public offering,
 net of issuance costs of $2,913          --         408      27,654              --           --           --           28,062

Issuance of 170,598 ordinary shares
 as a result of option  exercises,
 net of issuance costs of $58             --         105         531              --           --           --              636

Issuance of 17,480 ordinary shares
 as a result of pooling Benelux           --          10          11              --           --           --               21

Received from shareholders                --          --          --              --          217           --              217

Translation adjustment                    --          --          --              --           --           90               90

Exchange adjustment                       --          --          --              --          (11)          --              (11)

Adjustment to record the overlap
 in accounting for Personal Training
 Systems' net income from January 1,
 1995 to June 30, 1995                    --          --          --             (69)          --           --              (69)

Net income                                --          --          --           6,029           --           --            6,029
                                     --------     -------    --------       ---------       ------        -----         --------
Balance at December 31, 1995         $    --      $5,258     $55,878        $(14,765)       $(190)        $  1          $46,182
</TABLE>

                            (see accompanying notes)

                                       32
<PAGE>
 
CBT GROUP PLC
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED SHARES
AND SHAREHOLDERS' EQUITY (DEFICIT)
(dollars in thousands)

<TABLE>
<CAPTION>
                                                                   SHAREHOLDERS' EQUITY (DEFICIT)                        
                                                                   -----------------------------                               
                             Redeemable                                                                                        
                             convertible              Additional                        Receivable     Cumulative        Total 
                              preferred    Ordinary     paid-in       Accumulated          from        translation   shareholders'
                               shares       shares      capital     profit (deficit)   shareholders    adjustment   equity (deficit)
                             -----------   --------   -----------   ----------------   -------------   -----------  ---------------
<S>                          <C>           <C>        <C>           <C>                <C>             <C>          <C>   
Balance at December 31, 1995        $ --      $5,258      $55,878       $(14,765)             $(190)       $  1          $46,182 
                                                                                                                                 
Issuance of 9,408 ordinary                                                                                                       
 shares as a result of                                                                                                           
 pooling Scholars.com                 --           5           (5)            --                 --          --               -- 
                                                                                                                                 
                                                                                                                                 
Issuance of 387,045                                                                                                              
 ordinary shares as a                                                                                                            
 result of option exercises                                                                                                       
 and 34,895 from employee                                                                                                           
 share purchase plan                  --         253        2,409             --                 --          --            2,662  
                                                                                                                                  
Received from shareholders            --          --           --             --                190          --              190  
                                                                                                                                  
Translation adjustment                --          --           --             --                 --         358              358  
                                                                                                                                  
Net income                            --          --           --         11,839                 --          --           11,839  
                                    ----      ------      --------      --------              -----        ----          -------  
Balance December 31, 1996           $ --      $5,516      $58,282       $ (2,926)             $  --        $359          $61,231   
</TABLE>                               

                            (see accompanying notes)

                                       33
<PAGE>
 
CBT GROUP PLC
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED
SHARES AND SHAREHOLDERS' EQUITY (DEFICIT)
(dollars in thousands)


<TABLE>
<CAPTION>
                                                                 SHAREHOLDERS' EQUITY (DEFICIT)
                                                                 ------------------------------
                              Redeemable
                             convertible              Additional                       Receivable    Cumulative         Total      
                              preferred    Ordinary    paid-in       Accumulated          from       translation    shareholders'
                               shares       shares     capital     profit (deficit)   shareholders   adjustment    equity (deficit) 
                             -----------   --------   ----------   ----------------   ------------   -----------   ----------------
<S>                          <C>           <C>        <C>          <C>                <C>            <C>           <C>
Balance at December 31, 
 1996                               $ --     $5,516      $58,282           $(2,926)           $ --          $359           $ 61,231
 
Issuance of 64,500
 ordinary shares as a
 result of pooling MidEast            --         37          370                --              --            --                407
 
Issuance of 779,348 ordinary
 shares as a result of
 option exercises and 22,873
 from employee share purchase
 plan                                 --        505       15,481                --              --            --             15,986
 
Taxation credit as a result
 of disqualifying
 dispositions                         --         --          825                --              --            --                825
 
Translation adjustment                --         --           --                --              --           221                221
 
Adjustment to record the
 overlap in accounting for
 ALA's net loss from
 January 1, 1997 to June 30,
 1997                                 --         --           --               112              --            --                112
 
Net income                            --         --           --            22,197              --            --             22,197
                              -----------    ------      -------           -------    ------------   -----------           --------
Balance at December 31, 1997         $ --    $6,058      $74,958           $19,383            $ --          $580           $100,979
                              ===========    ======      =======           =======    ============   ===========           ========
</TABLE>

                            (see accompanying notes)

                                       34
<PAGE>
 
<TABLE>
<CAPTION>
                                                        CBT GROUP PLC
                                            Consolidated Statements of Cash Flows
                                                   (dollars in thousands)

Increase (decrease) in cash
                                                                                         Years ended December 31,
                                                                                1995               1996                 1997
                                                                                ----               ----                 ---- 
<S>                                                                         <C>                 <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                                                  $  6,029            $11,839             $ 22,197
Adjustments to reconcile net income to net cash provided by
 operating activities:
Depreciation and amortization                                                    874              1,882                3,122
Taxation credit from disqualifying dispositions                                   --                 --                  825
Overlap in accounting for ALA net loss, excluding depreciation                    --                 --                  (67)
Overlap in accounting for PTS' net income, excluding depreciation               (108)                --
Accrued interest on short-term investments                                      (469)               221                 (465)
Changes in operating assets and liabilities:
Accounts receivable                                                           (6,218)            (4,753)             (19,546)
Inventories                                                                      185                 45                 (170)
Deferred tax assets                                                              (64)              (132)                  49
Prepaid expenses and other assets                                               (777)            (3,732)              (5,501)
Accounts payable                                                               1,070              1,013                  185
Accrued payroll and related expenses and other accrued                         2,726              2,780                7,175
 liabilities
Deferred revenue                                                               1,234              1,865               (3,195)
                                                                            --------            -------             --------
Net cash provided by  operating activities                                     4,482             11,028                4,609
                                                                            --------            -------             --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of intangible assets                                                    --                 --               (5,297)
Purchases of property and equipment                                           (1,894)            (6,369)              (5,279)
Payments to acquire short -term investments                                  (40,200)            (1,334)              (2,291)
Proceeds from short-term investments                                              --              5,000                3,500
Proceeds from investments                                                         --                 --                4,997
Payment to acquire investment                                                     --             (4,997)                (200)
                                                                            --------            -------             --------
Net cash used in investing activities                                        (42,094)            (7,700)              (4,570)
                                                                            --------            -------             --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of notes payable                                                     (1,325)               (79)                  --
Redemption of Series A shares                                                 (1,350)                --                   --
Proceeds (repayments) under bank overdraft facility                              671             (1,381)                (140)
Repayments of  bank loan                                                          --               (742)                  --
Payment of receivables from shareholders                                         217                190                   --
Proceeds from issuance of preferred shares in subsidiary                          --                 --                  606
Proceeds from issuance of ordinary shares, net                                41,901              2,662               16,393
                                                                            --------            -------             --------
Net cash provided by financing activities                                     40,114                650               16,859
                                                                            --------            -------             --------
Effect of exchange rate changes on cash                                           74               (135)                 942
                                                                            --------            -------             --------
Net increase in cash                                                           2,576              3,843               17,840
Cash at beginning of period                                                    4,618              7,194               11,037
                                                                            --------            -------             --------
Cash at end of period                                                       $  7,194            $11,037             $ 28,877
                                                                            ========            =======             ========
Supplemental disclosure of cash flow information:
Interest paid                                                               $     84            $   108             $     43
Taxes paid                                                                  $  1,098            $   847             $    994
</TABLE>
                           (see accompanying notes)

                                       35
<PAGE>
 
CBT Group PLC
Notes to the Consolidated Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

CBT Group PLC is organized as a public limited company under the laws of the
Republic of Ireland.  CBT Group PLC and its wholly owned subsidiaries
(collectively, the "Company" or "CBT") develops and markets interactive
information technology ("IT") education and training software.  The principal
market for the Company's products comprises major U.S. national and
multinational organizations.

Basis of Presentation and Principles of Consolidation

The consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States and include the Company and
its wholly owned subsidiaries in the United States, United Kingdom, Ireland,
South Africa, Canada, Germany, Australia, Netherlands, Sweden, the Commonwealth
of the Bahamas and Grand Cayman after eliminating all material inter-company
accounts and transactions.  All acquisitions have been accounted for under the
purchase accounting method, except for the mergers with Personal Training
Systems ("PTS"),  CBT Systems Canada Limited (formerly known as New Technology
Training Limited) ("NTT"), CLS Consult Gessellschaft fur Beratung, Management
und Beteiligung mbH ("CLS"), CBT Systems Benelux B.V. ("Benelux"), Applied
Learning Limited  ("ALA"),  Ben Watson & Associates Limited ("Scholars.com") and
CBT Systems Middle East Limited ("MidEast") 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
and Sweden are the currencies of those countries.  The functional currency of
the Company's subsidiaries in Ireland, the Commonwealth of the Bahamas and Grand
Cayman is the dollar.

Balance sheet amounts are translated to the dollar from the local functional
currency at year-end exchange rates, while statements of operations amounts in
local functional currency are translated using average exchange rates.
Translation gains or losses are recorded in a separate component of
shareholders' equity.  Currency gains or losses on transactions denominated in a
currency other than an entity's functional currency are recorded in the results
of the operations.  The Company has not undertaken hedging transactions to cover
its currency exposures.

Revenue Recognition

The Company derives its revenues primarily pursuant to license agreements under
which customers license usage of delivered products for a period of one, two or
three years.  On each anniversary date during the term of multiyear license
agreements, customers are allowed to exchange any or all of the licensed
products for an equivalent amount of new products.  The first year license fee
is generally recognized as revenue at the time of delivery of all products,
provided there are no significant vendor obligations remaining. Subsequent
annual license fees are recognized on each anniversary date, provided there are
no remaining significant vendor obligations.  The cost of satisfying any
insignificant vendor obligations is accrued at the time revenue is recognized.
In addition, the Company derives revenues from sales of its products, primarily
through resellers.

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

                                       36
<PAGE>
 
CBT Group PLC
Notes to the Consolidated Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenues from license agreements providing product exchange rights other than
annually during the term of the agreement are deferred and recognized ratably
over the contract period.  Such amounts, together with unearned development and
license revenues, are recorded as deferred revenues in the consolidated
financial statements.

Cost of Revenues

Cost of revenues include materials (such as diskettes, packaging and
documentation), royalties paid to third parties, the portion of development
costs associated with product co-development arrangements, fulfillment costs and
the amortization of the cost of purchased products.  Approximately $245,000,
$803,000 and $442,000 of development expenses incurred in connection with
development and marketing alliances were charged to cost of revenues in 1995,
1996 and 1997, respectively.

Inventories

Inventories are stated at the lower of cost (first in, first out) or net
realizable value and consist principally of compact discs, diskettes and
manuals.  Net realizable value is the estimated selling price less all
applicable selling costs.

Research and Development

Research and development expenditures are generally charged to operations as
incurred.  Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
requires capitalization of certain software development costs subsequent to the
establishment of technological feasibility.  Based on the Company's product
development process, technological feasibility is established upon completion of
a working model.  Development costs incurred by the Company between completion
of the working model and the point at which the product is ready for general
release have been insignificant.  Through December 31, 1997, all research and
development costs have been expensed as incurred.

Intangible Fixed Assets

In December 1997 the Company and Street Technologies, Inc. ("Street") a
developer of technology to "stream" multimedia and other large data files to
permit real-time delivery over local and wide area networks, corporate intranets
and the Internet, entered into an agreement pursuant to which Street granted to
the Company a perpetual license to its software in  return for a once off
payment of $5,297,000. As part of the agreement the Company  disposed of its
investment in Street for $4,997,000, which was the cost of its original
investment.  The Company will commence to amortize this asset, using the
straight line method, over a period of five years commencing January 1, 1998.

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.  Major classes of property and equipment are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
                                                     1996           1997                            
                                                     ----           ----                                               
<S>                                                <C>             <C>                                                 
  Office and computer equipment                    $ 8,450        $12,624                                              
  Furniture, fixtures and others                     2,749          3,171                                              
                                                   -------        -------                                              
  Total property and equipment                      11,199         15,795                                              
  Accumulated depreciation                           4,216          6,655                                              
                                                   -------        -------                                              
  Property and equipment, net                      $ 6,983        $ 9,140                                              
                                                   =======        =======                                               
</TABLE>

Depreciation of property and equipment amounted to $874,000, $1,882,000, and
$3,122,000 for the years ended December 31, 1995, 1996 and 1997, respectively.

                                       37
<PAGE>
 
CBT Group PLC
Notes to the Consolidated Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Net Income Per Share

In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 128 (SFAS 128), "Earnings per Share," which is
effective for the Company's fiscal 1997 year.  Under SFAS 128, the Company will
present two net income per share  amounts.  Basic net income per share is
computed using the weighted average number of ordinary shares outstanding during
the period.  Diluted net income per share will include additional dilution from
potential ordinary shares, such as incremental ordinary shares issuable upon
conversion of the Series A and Series B redeemable convertible preferred shares
and shares issuable pursuant to the exercise of options outstanding (using the
treasury stock method).  All prior period net income per share amounts have been
restated to conform with SFAS 128.

On January 20, 1998 the Company announced that its Board of Directors had
authorized a two-for-one split of the company's American Depositary Shares. Each
Ordinary Share is now represented by four (previously two) American Depositary
Shares ("ADSs") which are the Company's securities that are publicly traded. Net
income per Ordinary Share is therefore, within rounding, four times net income
per equivalent ADS.

Basic net income per equivalent ADS is therefore calculated using four times the
weighted average number of ordinary shares outstanding during the period.
Diluted net income per equivalent ADS is similarly calculated using four times
the weighted average number of ordinary and dilutive ordinary equivalent shares
outstanding during the period.  All other period net income per equivalent ADS
amounts have been restated to give effect to the ADS split.

Basic net income per share is calculated using the combined weighted average
number of ordinary  shares of the Company including the issuance of 106,057
shares of Company ordinary shares in exchange for all of the stock of PTS, the
issuance of 36,401 shares of Company ordinary shares in exchange for all the
stock of CLS, the issuance of 36,531 shares of Company ordinary shares in
exchange for all the stock of NTT, the issuance of 85,771 shares of Company
ordinary shares in exchange for all the stock of ALA, the issuance of 17,840
shares of Company ordinary shares in exchange for all the stock of Benelux, the
issuance of 9,408 shares of Company ordinary shares in exchange for all the
stock of Scholars.com and the issuance of 64,500 shares of Company ordinary
shares in exchange for all the stock of MidEast at the beginning of the earliest
period presented or subsequent date of incorporation of the pooled entity as
applicable.

Diluted net income per share is similarly calculated using the combined weighted
average number of ordinary and dilutive ordinary equivalent shares of the
Company including the issuance of Company ordinary shares as a result of pooling
of interests above.

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 $164,000,
$232,000 and $270,000 to the Plan in the years ended December 31, 1995, 1996 and
1997, respectively.

Stock Based Compensation

Statement of Financial Accounting Standards No. 123, "Accounting for Stock -
Based Compensation" encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value.
The Company has chosen to continue to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion No.
25,

                                       38

<PAGE>
 
CBT Group PLC
Notes to the Consolidated Financial Statements

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

"Accounting for Stock Issued to Employees" ("APB25"), and related
interpretations.  Accordingly, compensation cost for stock options is measured
as the excess, if any, of the quoted market price of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the stock.
Under APB25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.

Advertising Costs

Costs incurred for producing and communicating advertising are expensed when
incurred.  Advertising expenses amounted to $729,000, $1.3 million and $5.1
million for the years ended December 31, 1995, 1996 and 1997 respectively.

Research and Development Grants

Research and development grants are credited to the income statement and offset
against the related expense.

Concentration of Credit Risk

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 $588,000 and $900,000 at December 31, 1996
and 1997, respectively.  The Company generally requires no collateral from its
customers.

The Company maintains its cash with various financial institutions.  At December
31, 1996 and 1997 $36,782,000 and $36,038,000 respectively (inclusive of accrued
interest of $248,000 and $713,000 respectively) was held in debt securities
issued by the U.S. Treasury, under the management of a single financial
institution.  In addition, at December 31, 1996 and 1997, $927,000 and $213,000
respectively in cash was held with this institution. The Company also maintains
deposits with another financial institution.  Cash balance held with this
institution at December 31, 1996 and 1997 was $nil and  $11.1 million
respectively.  The Company performs periodic evaluations of the relative credit
standing of all the financial institutions dealt with by the Company, and
considers the related credit risk to be minimal.

Accounting for Income Taxes

The Company uses the liability method in accounting for 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 rates and laws which will be in effect
when the differences are expected to reverse.

Short-Term Investments

Short-term investments at December 31, 1996 and 1997 comprise debt securities
issued by the U.S. Treasury with a maturity of six months or less 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.  The Company
classifies available for sale securities as short-term investments.

Other Assets

Other assets at December 31, 1996 and 1997 consist primarily of deferred sales
commissions.  Deferred sales commissions are charged to expense when the related
revenue is recognized.

                                       39
<PAGE>
 
CBT GROUP PLC
Notes to the Consolidated Financial Statements

2. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share:
<TABLE>
<CAPTION>
 
                                                               1995      1996      1997
-----------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
<S>                                                           <C>       <C>       <C> 
Numerator:
          Numerator for basic and diluted
            net income per share - income
            available to common shareholders                  $ 6,029   $11,839   $22,197
                                                              =======   =======   =======
 
Denominator:
          Denominator for basic net income
            per share - weighted average shares                 7,518     8,848     9,560
          Effect of dilutive securities:
            Employee stock options                              1,059     1,130       867
            Equivalent shares attributable to redeemable
            convertible preferred shares                          265         -         -
                                                              -------   -------   -------
          Dilutive potential common shares                      1,324     1,130       867
            Denominator for diluted net income
            per share - adjusted weighted average
            shares and assumed conversion                       8,842     9,978    10,427
                                                              =======   =======   =======
 
Basic net income per share                                    $  0.80   $  1.34   $  2.32
                                                              =======   =======   =======
Diluted net income per share                                  $  0.68   $  1.19   $  2.13
                                                              =======   =======   =======
 
ADS's used in computing net income per equivalent        
ADS - Basic                                                   30,070    35,391    38,240
                                                              =======   =======   ======= 
ADS's used in computing net income per equivalent
ADS - Diluted                                                  35,366    39,912    41,708
                                                              =======   =======   =======
 
</TABLE>

                                       40
<PAGE>
 
CBT Group PLC
Notes to the Consolidated Financial Statements

3. ACQUISITIONS AND MERGERS

On November 30, 1995, a merger occurred between the Company and PTS under which
the Company issued 106,057 ordinary shares in exchange for all the outstanding
stock of PTS.

On May 31, 1996, a merger occurred between the Company and CLS, a distributor of
multimedia training and education software based in Germany, under which the
Company issued 36,401 ordinary shares for all the outstanding stock of CLS.  On
the same date a merger occurred between the Company and NTT, the Company's
Canadian distributor, under which the Company issued 36,531 ordinary shares for
all the outstanding stock of NTT.

On February 28, 1997, a merger occurred between the Company and ALA, a
distributor of multimedia training and education software based in Australia,
under which the Company issued 85,771 ordinary shares for all the outstanding
stock of ALA.  On the same date a merger occurred between the Company and
Benelux, the Company's Benelux distributor, under which the Company issued
17,840 ordinary shares  for all the outstanding stock of Benelux.

On August 31, 1997, a merger occurred between the Company and  Scholars.com, a
provider of online mentoring, under which the Company issued 9,408 ordinary
shares for all the outstanding stock of Scholars.com.

On December 1, 1997, a merger occurred between the Company and MidEast, the
Company's Middle Eastern distributor, under which the Company issued 64,500
ordinary shares for all the outstanding stock of MidEast. The financial results
of the Company, PTS, CLS, NTT, ALA, Benelux, Scholars.com and MidEast have been
accounted for using the "pooling-of-interests" method.  The "pooling-of-
interests" method gives effect to the mergers as if they had occurred at the
beginning of the earliest period presented or subsequent date of incorporation
of the pooled entity as applicable.  The consolidated financial statements as
presented are based on the Company's historical consolidated financial
statements and PTS's, CLS's, NTT's ALA's, Benelux's, Scholars.com's and
MidEast's historical financial statements.

The consolidated financial information for the year ended December 31, 1997
includes the results of the Company and PTS, CLS, NTT, ALA, Benelux,
Scholars.com, and MidEast (from the date of its incorporation), for the period
January 1 to December 31, 1997 and the assets and liabilities of the Company and
PTS, CLS, NTT, ALA, Benelux, Scholars.com, and MidEast as at December 31, 1997.
The comparative figures for the year ended December 31, 1996 comprise the
results of the Company and PTS, CLS, NTT, Benelux and Scholars.com for that
period combined with the results of ALA for the year ended June 30, 1997 and the
assets and liabilities of the Company and PTS, CLS NTT, Benelux, and
Scholars.com as at December 31, 1996 combined with the assets and liabilities of
ALA as at June 30, 1997.  The comparative figures for the year ended December
31, 1995  comprise the results of the Company and PTS, CLS, NTT, and Benelux
(from the date of its incorporation) for that period combined with the results
of ALA for the year ended June 30, 1996.

ALA and Benelux, in the two month period ended February 28, 1997 had net
revenues of $1,094,315 and $374,390 respectively.  Net income in that period was
$123,642 and $21,190, respectively.

Scholars. com, in the eight month period ended August 31, 1997 had net revenues
of $1,293,518.  Net income in that period was $111,418.

MidEast was established in April 1997 and in the period to December 1, 1997 had
net revenues of  $225,171. The net loss in the period was $532,046.

PTS's results of operations for the six month period ended June 30, 1995, which
reflected net revenues of $1,470,000, expenses of $1,385,000 and net income of
$69,000, have been duplicated in the accompanying  1995 Financial Statements to
conform operating results to the Company's fiscal year end.  The duplicate
periods have been adjusted by including the net income as a decrease to the
Company's accumulated deficit as of December 31,1995.

                                       41
<PAGE>
 
CBT Group PLC
Notes to the Consolidated Financial Statements

3. ACQUISITIONS AND MERGERS (continued)

ALA's results of operations for the six month period ended June 30, 1997 which
reflected net revenues of $2,991,712, expenses of $3,104,193 and a net loss of
$112,481 have been duplicated in the accompanying  1997 Financial Statements to
conform operating results to the Company's fiscal year end.  The duplicate
periods have been adjusted by including the net loss as an increase to the
Company's accumulated profit as of December 31,1997.

The results of the operations for the enterprises acquired in 1997 and the
combined amounts presented in the consolidated financial statements are
summarized below (dollars in thousands):
<TABLE>
<CAPTION>
                                                        Years Ended December 31,
                                                        ------------------------
                                              1995                   1996                   1997
                                              ----                   ----                   ----
<S>                                        <C>                     <C>                   <C>
Revenues:
CBT Group PLC                              $40,192                 $66,324               $105,239
Pooled entities                              9,179                   7,817                 14,299
Intercompany Sales                             (29)                   (575)                  (899)
                                           -------                 -------               --------
Combined                                   $49,342                 $73,566               $118,639 
                                           =======                 =======               ========
Net income:
CBT Group PLC                              $ 5,574                 $12,573               $ 22,489  
Pooled entities                                455                    (734)                  (292) 
                                           -------                 -------               --------  
Combined                                   $ 6,029                 $11,839               $ 22,197  
                                           =======                 =======               ========  
</TABLE>

4. BANK OVERDRAFT FACILITY AND OVERDRAFTS

The Company has a bank overdraft facility with AIB Bank PLC.  This facility is
renewable on an annual basis at the bank's discretion.  Under the facility the
Company may incur overdrafts with the bank up to IR195,000 (approximately
$278,000 at December 31, 1997), with a variable interest rate based on the
Dublin Inter-Bank Overnight Rate ("DIBOR") plus five percent (10.4 percent at
December 31, 1997).  This facility is collateralized by the assets of CBT
Systems Limited, a wholly owned subsidiary of CBT Group PLC.  The Company's UK
subsidiary also has an arrangement with its bank which allows the subsidiary to
maintain funds in a deposit account and to have the bank transfer the funds as
necessary to pay checks written against a checking account with the same bank.
At December 31, 1996 and 1997 the subsidiary had written no checks in excess of
the balance in the checking account.

PTS had available a $400,000 line of credit which expired on January 12, 1996.
The line bore interest at the bank's prime rate plus 2%.  No amount was drawn
against this line of credit during 1996.

5. OTHER ACCRUED LIABILITIES

Other accrued liabilities consist of the following at December 31 (dollars in
thousands):
<TABLE>
<CAPTION>
                                                   1996                                  1997
                                                   ----                                  ----
<S>                                                <C>                                   <C>
Royalties                                       $ 2,912                               $ 3,305
Income and other taxes payable                    3,237                                 6,467
Other                                             5,252                                 5,678
                                                -------                               -------
                                                $11,401                               $15,450
                                                =======                               =======
</TABLE>

                                       42
<PAGE>
 
CBT Group PLC
Notes to the Consolidated Financial Statements

6. OPERATING LEASE COMMITMENTS

The Company leases various facilities, automobiles and equipment under non-
cancellable operating lease arrangements.  The major facilities leases are for
terms of 2 to 5 years, (except for CBT Systems Limited's new premises which has
a non-cancellable lease term of 11 years) and generally provide renewal options
for terms of up to 3 additional years.  Rent expense under all operating leases
was approximately $1,405,000, $2,012,000 and $2,199,000 in 1995, 1996 and 1997,
respectively.  Future minimum lease payments under these non-cancellable
operating leases as of December 31, 1997, are as follows (dollars in thousands):
<TABLE>
<S>                                <C>                    <C>   
                                   1998                  $ 3,164
                                   1999                    2,807
                                   2000                    2,639
                                   2001                    1,685
                                   2002                    1,469
                                Thereafter                 3,527
                                                         -------
                        Total minimum lease payments     $15,291
                                                         =======
</TABLE>

7. CONTINGENCIES

In May 1995, the Company was made aware of the following matter.  During 1990,
the Company acquired an interest in Datacode Electronics Limited ("Datacode").
Certain of the remaining shareholders in Datacode have alleged that the
acquisition by the Company had the effect of depriving them of certain benefits
and have claimed 21,126 of the Company's ordinary shares in compensation and
have initiated legal action against the Company.  The Company believes that the
action taken against the Company with respect to this matter is without merit
and intends to defend  the action vigorously.

A major shareholder in the Company at the time of the acquisition and from whom
the Company acquired its interest in Datacode has agreed to indemnify the
Company against all losses arising from any action against the Company.

In addition, certain claims and litigation have arisen against the Company in
the ordinary course of its business.  The Company believes that all 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.

8. NOTES PAYABLE TO SHAREHOLDERS

In conjunction with the acquisition of certain of its wholly owned subsidiaries
in 1991, the Company assumed non-interest bearing liabilities of certain of the
subsidiaries due to the subsidiaries' former parent.  The original terms of the
liability provided for monthly repayments commencing in 1992.  The repayment
terms were altered in July 1993.  In October 1994, the liability totaled
approximately $1,450,000.  At that time, the Company renegotiated the terms of
the liability into a non-interest bearing note payable under which payments of
approximately $250,000 were made during the remainder of 1994 and the balance of
$1,226,000 was repaid in four quarterly installments of approximately $306,000
beginning on March 31, 1995 through December 31, 1995.

                                       43
<PAGE>
 
CBT Group PLC
Notes to the Consolidated Financial Statements

9. REDEEMABLE CONVERTIBLE PREFERRED SHARES AND SHAREHOLDERS' EQUITY

Prior to 1995, the Company's authorized share capital was divided into three
classes of shares, Series A and Series B redeemable convertible preferred
shares and ordinary shares, each with a par value of IR37.5p.

Dividends may only be declared and paid out of profits available for
distribution determined in accordance with accounting principles generally
accepted in Ireland and applicable Irish Company Law.  Any dividends, if and
when declared, will be declared and paid in dollars.  No reserves are available
for distribution as dividends at December 31, 1997.

Redeemable convertible preferred shares

In November 1994, CBT Systems Limited, a subsidiary of the Company, agreed to
repurchase the Series A redeemable convertible preferred shares ("Series A
shares") for a consideration contingent on the date of repurchase.

At March 31, 1995, CBT Systems Limited exercised its right to purchase the
Series A shares for $1.35 million.  The purchase of the shares was paid for from
the proceeds of the initial public offering. The converted Series A shares were
subsequently converted to treasury shares and cancelled in April 1995.

The Series B redeemable convertible preferred shares ("Series B shares")
automatically converted into ordinary shares on a one-for-one basis, on the
closing of the initial public offering on April 21, 1995.

Share Option Plans

The Company has elected to follow Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its stock options because, as discussed below,
the alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" ("Statement 123"), requires use of
option valuation models that were not developed for use in valuing employee
stock options.  Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.

The Company has three share option plans, the 1990 Share Option Scheme (the
"1990 Plan"), the 1994 Share Option Plan (the "1994 Plan") and the Supplemental
Share Option Scheme (the "1996 Plan"), (collectively the "Plans").

Under the 1990 Plan, options to acquire ordinary shares in the Company may be
granted to any director or employee of the Company.  Under the 1994 Plan, all
employees and directors of the Company and any independent contractor who
performs services for the Company are eligible to receive grants of non
statutory options ("NSO").  Employees are also eligible to receive grants of
incentive share options ("ISO") which are intended to qualify under section 422
of the United States Internal Revenue Code of 1986, as amended.  Under the 1996
Plan all employees, with the exception of directors and executive officers, are
eligible to receive grants of NSO's.  As of December 31, 1997, approximately
1,175,000, 1,560,751 (which includes an increase in the number of shares
reserved for issuance of 464,905, authorized by a resolution passed at the
Annual General Meeting of the Company on June 17, 1997) and 250,000 ordinary
shares have been reserved for issuance under the 1990 Plan, the 1994 Plan and
1996 Plan, respectively.  The Plans are administered by the Stock Option
Committee (the "Committee").

The terms of the options granted are generally determined by the Committee.  The
exercise price of options granted under the 1990 Plan and ISO's granted under
the 1994 Plan cannot be less than the fair market value of ordinary shares on
the date of grant.  In the case of ISO's granted to holders of more than 10% of
the voting power of the Company the exercise price cannot be less than 110% of
such fair market value.  Under the 1994 Plan, the exercise price of NSO's is set
by the Committee at its discretion.  The term of an option under the 1994 and
1996 Plans cannot exceed ten years and, generally, the terms of an option under
the 1990 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,

                                       44
<PAGE>
 
CBT Group PLC
Notes to the Consolidated Financial Statements

9. REDEEMABLE CONVERTIBLE PREFERRED SHARES AND SHAREHOLDERS' EQUITY (continued)

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 and 1996 Plans, options to purchase approximately 122,746, 154,929 and
1,276 shares respectively were exercisable as of December 31, 1997.  As of
December 31, 1997, 611,146 options are available for grant under the plans.

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 1995, 1996 and
1997, respectively; risk-free interest rates of  approximately 6%; dividend
yields of 0%; volatility factors of the expected market price of the Company's
ordinary shares of .39,.37 and .45  respectively; and a weighted-average
expected life of the option of five years.

The Black-Scholes option model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable.  In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility.  Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in the management's opinion, the
existing models do not  provide a reliable single measure of the fair value of
its stock options.

For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.

Pro forma net income for the years ended December 31, 1995, 1996 and 1997 was
$5.1, $5.9 million and $14.7 million, respectively.  Pro forma basic net income
per share was $0.68, $0.67 and $1.54 for the years ended December 31, 1995, 1996
and 1997, respectively.  Pro forma diluted net income per share was $0.58, $0.60
and $1.41 for the years ended December 31, 1995, 1996 and 1997, 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.

                                       45
<PAGE>
 
CBT Group PLC
Notes to the Consolidated Financial Statements

9. REDEEMABLE CONVERTIBLE PREFERRED SHARES AND SHAREHOLDERS' EQUITY (continued)

A summary of the Company's stock option activity, and related information for
the years ended December 31, 1995, 1996 and 1997 follows:
<TABLE>
<CAPTION>
                                                                  Options Outstanding

                                                                          Price               Weighted Average      
                                         Number of Shares               per Share              Exercise Price       
                                         ----------------               ---------              --------------            
  <S>                                        <C>                     <C>                           <C>          
  Balance at December 31, 1994               922,932                 $ 0.58  -  5.63               $ 1.55       
  Granted in 1995                            397,537                 $16.00  - 45.13               $22.72       
  Exercised in 1995                         (131,066)                $ 0.58 -   3.37               $ 0.59       
  Cancelled in 1995                           (1,373)                $          3.37               $ 3.37       
                                           ---------                 ---------------               ------       
  Balance at December 31, 1995             1,188,030                 $0.58 -   45.13               $ 8.68       
  Granted in 1996                            764,999                 $45.25 - 116.00               $61.45       
  Exercised in 1996                         (387,045)                $ 0.58 - 110.00               $ 3.90       
  Cancelled in 1996                          (24,525)                $ 2.02 - 110.00               $24.61       
                                           ---------                 ---------------               ------       
  Balance at December 31, 1996             1,541,459                 $ 0.58 - 116.00               $35.81       
  Granted in 1997                            370,604                 $81.00 - 139.00               $95.00       
  Exercised in 1997                         (779,348)                $ 0.58 - 114.25               $18.34       
  Cancelled in 1997                          (35,448)                $10.71 - 102.50               $51.16       
                                           ---------                 ---------------               ------       
                                                                                                                
  Balance at December 31, 1997             1,097,267                 $ 1.58 - 139.00               $67.95       
                                           ---------                 ---------------               ------       
</TABLE>

                                       46
<PAGE>
 
CBT Group PLC
Notes to the Consolidated Financial Statements

9. REDEEMABLE CONVERTIBLE PREFERRED SHARES AND SHAREHOLDERS' EQUITY (continued)
<TABLE>
<CAPTION>
                                         Options Outstanding
                                         At December 31, 1997                                 Options Exercisable
                  ---------------------------------------------------------------------------------------------------------
                                           Weighted Average
Range of Exercise       Shares             Remaining         Weighted Average                          Weighted Average
     Prices           Outstanding        Contractual Life      Exercise Price      Number of Shares      Exercise Price
-----------------     -----------        ------------------  ----------------      ----------------    ----------------
<S>                   <C>                  <C>                  <C>                  <C>                  <C>
 $1.58 -  3.37             1,707               6.49              $  1.67                 1,707              $  1.72
 $5.63 - 10.71            16,849               6.46              $  5.68                 3,456              $  5.80
$16.00 - 16.00            95,431               7.28              $ 16.00                63,183              $ 16.00
$45.13 - 45.13            40,003               7.84              $ 45.13                 1,669              $ 45.13
$45.25 - 53.25           264,585               8.04              $ 45.31               134,477              $ 45.28
$68.00 - 77.00            91,120               8.30              $ 68.87                18,497              $ 68.99
$78.50 - 78.50           207,500               8.56              $ 78.50                50,885              $ 78.50
$81.00 - 91.50           261,747               5.40              $ 81.20                 1,932              $ 85.18
$102.50-110.00             9,875               9.05              $103.22                 1,895              $103.30
$116.00-139.00           108,450               9.64              $131.38                 1,250              $116.00
--------------         ---------               ----              -------               -------              -------
$1.58 - 139.00         1,097,267               7.60              $ 67.95               278,951              $ 46.52
--------------         ---------               ----              -------               -------              -------
</TABLE>

At December 31, 1995 and 1996 there were 648,541 and 678,997 options
exercisable, respectively, at a weighted average exercise price of $1.22 and
$12.51 respectively.  The weighted average fair value of options granted during
the years ended December 31, 1995, 1996 and 1997 was $9.84, $25.97 and $43.45,
respectively.

<TABLE>
<CAPTION>
Other Options                                                       Options Outstanding
                                                                                             Weighted Average Exercise
                                       Number of Shares               Share Price                      Price
                                       ----------------               -----------                      -----
<S>                                    <C>                            <C>                            <C>
Granted in 1994                             46,666                       $1.58                         $1.58
Exercised in 1996                           (6,666)                      $1.58                         $1.58
Cancelled in 1996                          (13,000)                      $1.58                         $1.58
                                           -------                       -----                         -----
Balance at December 31, 1997                27,000                       $1.58                         $1.58
                                           -------                       -----                         -----
</TABLE>
In November 1996, the Company granted to Forbairt, in conjunction with their
approval of an employment grant, a rent reduction grant and a management
development grant, an option to purchase 2,500 ordinary shares with an exercise
price equal to the fair market value at the time of exercise. The option expires
at December 31, 1998.

                                       47
<PAGE>
 
CBT Group PLC
Notes to the Consolidated Financial Statements
10. INCOME TAXES

Income before provision for income taxes consists of the following:
<TABLE>
<CAPTION>
                                                                      December 31                                 
                                                                     ------------                                         
(dollars in thousands)                                   1995             1996            1997                    
                                                         ----             ----            ----                             
<S>                                                     <C>             <C>             <C>                                
Ireland                                                 $6,308          $12,264         $22,517                            
Rest of world                                            1,145            1,994           3,596                            
                                                        ------          -------         -------                            
Total                                                   $7,453          $14,258         $26,113                            
                                                        ======          =======         =======                            
</TABLE>

The provision for income taxes consists of the following:
        
        
<TABLE> 
<S>                                                     <C>              <C>             <C>                               
Current                                                 $1,486           $2,161          $3,916                            
Deferred                                                   (62)             258              --                           
                                                        ------           ------          ------                            
Total provision for income tax                          $1,424           $2,419          $3,916                            
                                                        ======           ======          ======                             
</TABLE>

The current provision for 1997 relates predominantly to provision for income
taxes in Ireland and includes an adjustment at the beginning of the year to
valuation allowance of $402,000.

The provision for income taxes differs from the amount computed by applying the
statutory income tax rate to income before taxes.  The sources and tax effects
of the difference are as follows:
<TABLE>
<CAPTION>
                                                                              December 31,                             
                                                                              -----------                                    
                                                                1995              1996            1997               
                                                                ----              ----            ----                       
<S>                                                           <C>               <C>             <C>                          
(dollars in thousands)                                                                                                       
Income taxes computed at the Irish statutory income           $ 2,869           $ 5,418         $ 9,531                      
 tax rate of 38.5% for 1995, 38% for 1996, and 36.5%                                                                         
 for 1997                                                                                                                    
Income from Irish manufacturing operations taxed at                                                                          
 lower rates                                                   (1,804)           (3,815)         (7,143)                     
Income subject to higher rate of tax                              542             1,099           1,780                      
Operating losses not utilized                                     129             1,261             347                      
Operating losses utilized                                        (136)             (554)           (876)                     
Intangible asset amortization and other                            53              (461)            662                      
 non-deductible expenses                                                                                                     
Change in valuation allowance                                       -               242             402                      
Profits arising not subject to tax                               (229)             (771)           (787)                     
                                                              -------           -------         -------                      
                                                              $ 1,424           $ 2,419         $ 3,916                      
                                                              =======           =======         =======                       
</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:

                                       48
<PAGE>
 
CBT Group PLC
Notes to the Consolidated Financial Statements

10. INCOME TAXES (continued)
<TABLE>
<CAPTION>
                                                 December 31,
                                             1996          1997
                                             ----          ----
<S>                                          <C>           <C>
(dollars in thousands)
Deferred tax assets
Net operating loss carry forwards            $ 3,568       $ 15,151
Valuation allowance                           (3,037)       (14,669)
                                             -------       --------
Net deferred tax assets                      $   531       $    482
                                             =======       ========
</TABLE>

At January 1, 1996 the valuation allowance was $750,000.

At December 31, 1997, the Company had net operating loss carry forwards in its
UK subsidiary of approximately $1,266,000.  The utilization of these net
operating loss carry forwards is limited to the future profitable operations of
the Company in the UK tax jurisdiction where such carry forwards arose.  These
losses carry forward indefinitely.

At December 31, 1997, the Company has a net operating loss carry forward of
approximately $37 million for U.S. federal income tax purposes which will expire
in the tax years 2010 through 2012 if not previously utilized.  Utilization of
the U.S. net operating loss carry forward may be subject to an annual limitation
due to the change in ownership rules provided by the Internal Revenue Code of
1986.  This limitation and other restrictions provided by the Internal Revenue
Code of 1986 may reduce the net operating loss carry forward such that it would
not be available to offset future taxable income of the U.S. subsidiary.

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, 1997, $13.7 million of the valuation allowance
related to such disqualifying dispositions.  As noted in the tax reconciliation
note the valuation allowance has increased by $402,000 in respect of other net
operating loss carry forwards.

11. INDUSTRY AND GEOGRAPHIC INFORMATION

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.
Transfers between geographic areas are accounted for at amounts which are
generally above costs. Such transfers are eliminated in the consolidated
financial statements. Identifiable assets are those assets that can be directly
associated with a particular geographic area. The following is a summary of
operations within geographic areas:
<TABLE>
<CAPTION>
                                                     December 31,
                                                     -----------
                                              1995       1996         1997
                                              ----       ----         ----
<S>                                        <C>        <C>          <C>
(dollars in thousands)
Revenue from unaffiliated customers
Ireland                                    $     8     $   774     $  1,079
Europe, excluding Ireland                    9,051      13,557       19,218
United States                               29,380      49,312       83,572
Australia                                    9,112       6,757        7,897
Other                                        1,791       3,166        6,873
                                           -------     -------     --------
Total revenue                              $49,342     $73,566     $118,639
                                           =======     =======     ========
</TABLE>

                                       49
<PAGE>
 
CBT Group PLC
Notes to the Consolidated Financial Statements

11. INDUSTRY AND GEOGRAPHIC INFORMATION (continued)
<TABLE>
<CAPTION>
                                                                   December 31,

                                                     1995             1996             1997
                                                     ----             ----             ----
<S>                                                  <C>              <C>              <C>
(dollars in thousands)
Transfers between geographic areas (eliminated on
 consolidation)
Ireland                                               $18,018         $ 31,732        $  57,708
Europe, excluding Ireland                                  29              120              940
United States                                             450               --              529
Australia                                                  --               --               --
Other                                                      --               --               --
                                                      -------         --------        ---------
Total transfers                                       $18,497         $ 31,852        $  59,177
                                                      =======         ========        =========
Income from operations
Ireland                                               $ 6,373         $ 12,266        $  22,419
Europe, excluding Ireland                              (1,093)          (1,066)            (144)
United States                                             328            1,068            1,793
Australia                                               1,000             (116)            (312)
Other                                                      44             (194)            (241)
                                                      -------         --------        ---------
Income from operations                                $ 6,652         $ 11,958        $  23,515
                                                      =======         ========        =========
Identifiable assets
Ireland                                                               $ 88,130        $ 127,786
Europe, excluding Ireland                                                7,689           13,189
United States                                                           28,648           53,709
Australia                                                                2,627            2,959
Grand Cayman                                                            42,709           50,860
Other                                                                    1,999            5,165
Eliminations                                                           (84,774)        (122,347)
                                                                      --------        ---------
                                                                      $ 87,028        $ 131,321
                                                                      ========        =========
</TABLE>

12. GOVERNMENT GRANTS


Under agreements between the Company and Forbairt, the Company has offset
against related salary and rent expense amounts of $nil, $598,000 and $1,021,000
in the years ended December 31, 1995, 1996 and 1997, respectively.  Under the
terms of the agreement between the Company and Forbairt, these grants may be
revoked in certain circumstances, principally failure to maintain the related
jobs for a period of five years from the payment of the first installment of the
related grant.  The Company has complied with the terms of the grant agreements
through December 31, 1997.


13. RELATED PARTY TRANSACTION


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 officers and key employees of the Group.  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.

                                       50
<PAGE>
 
CBT Group PLC
Notes to the Consolidated Financial Statements

13. RELATED PARTY TRANSACTIONS (continued)

Loan to Director

In February 1996, Mr. Priest, a director of the Company and former Vice
President, Finance and Chief Financial Officer of the Company, received an
interest free loan from the Group in the amount of US$125,000 repayable in four
equal  annual installments.  At December 31, 1996 and 1997 the balance
outstanding on this loan was $125,000 and $93,750, respectively.

14. SUBSEQUENT EVENTS

New Research and Development Facility

On January 6,1998, the Company signed a twenty-five year lease, with a ten year
break clause, for new premises, in Dublin, at an annual rent of $1.4 million.

15.  EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS

In 1997, The American Institute of Certified Public Accountants issued Statement
of Position 97 -2 ("SOP 97-2"), "Software Revenue Recognition".  The  Company
has considered  SOP 97-2 and concluded that it has no material effect on the
Company's current  revenue recognition policy.


In June 1997 the Financial Accounting Standards Board  issued Statement of
Financial Accounting Standard  No. 131 (SFAS 131) "Disclosures about Segments of
an Enterprise and Related Information."  Companies are required to adopt SFAS
131 for fiscal years beginning after December 15, 1997.  The Company is not
required to disclose this segment information until its 1998 annual report, at
which time it will restate prior year's segment disclosures to conform with SFAS
131 segment presentation.  The Company has not completed its review of SFAS 131,
but anticipates that the adoption of this statement will not have a fundamental
effect on the Company's reported segments.


16.  EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT - UNAUDITED

On March 16, 1998, the Company entered into a definitive agreement to acquire
The ForeFront Group, Inc., a Houston-based provider of high-quality, cost-
effective, computer-based training products and network utilities for technical
professionals ("ForeFront").  In the merger, each share of ForeFront common
stock will be exchanged for 0.3137 ADSs, and the Company will assume outstanding
ForeFront stock options, warrants and other rights to acquire ForeFront common
stock.  As a result of the merger, the Company will issue approximately 2.1
million ADSs and assume options, warrants and other rights that may be converted
into up to approximately 1.1 million ADSs.  The transaction is intended to be
tax free to shareholders and is intended to be accounted for as a pooling of
interests.  Consummation of the transaction is subject to expiration or
termination of the applicable Hart-Scott-Rodino waiting period, approval of the
merger by ForeFront stockholders and other customary closing conditions.  The
merger is expected to be completed during the second quarter of 1998.

                                       51
<PAGE>
 
CBT Group PLC
Notes to the Consolidated Financial Statements

16.  EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT - UNAUDITED - CONTINUED

     SELECTED PRO FORMA CONSOLIDATED

<TABLE> 
<CAPTION> 
                                                 Year Ended
                                              December 31, 1997
                                              -----------------
     <S>                                      <C> 
     Revenue                                  $137.0 million
                                              ==============
     Net income                               $18.1 million
                                              =============
     Net income per share - Basic             $1.80
                                              =====
     Net income per share - Diluted           $1.64
                                              =====

</TABLE> 
                                       52
<PAGE>
 
ERNST & YOUNG
Chartered Accountants

REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS

The Board of Directors and Shareholders,
CBT Group PLC

We have audited the consolidated balance sheets of CBT Group PLC as of December
31, 1996 and 1997 and the related consolidated statements of operations, changes
in redeemable convertible preferred shares and shareholders' equity (deficit),
and cash flows for each of the three years in the period ended December 31,
1997, and have issued our report thereon dated January 20, 1998. 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
Chartered Accountants



Dublin, Ireland
Date:  January 20, 1998

                                       53
<PAGE>
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

Not applicable.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

The Company's definitive Proxy Statement will be filed with the Securities and
Exchange Commission in connection with the solicitation of proxies for the
Company's Annual General Meeting to be held on or about April 28, 1998 (the
"Proxy Statement").  Information required by this item is incorporated by
reference from the information contained in the Proxy Statement under the
captions "Election of Directors" and "Executive Compensation and Other Matters."

ITEM 11.  EXECUTIVE COMPENSATION

The information required by this item will be contained in the Proxy Statement
under the caption "Executive Compensation" and is incorporated herein by
reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item will be contained in the Proxy Statement
under the caption "Security Ownership of Certain Beneficial Owners and
Management" and is incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item will be contained in the Proxy Statement
under the caption "Certain Transactions" and is incorporated herein by
reference.

                                       54
<PAGE>
 
                                    PART IV

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

(a)  Documents filed as a part of this Form 10-K.

     (1) Financial Statements.  The following CBT Group PLC
         --------------------                              

           Consolidated Financial Statements Prepared in Accordance with US GAAP
           are incorporated herein by reference to Item 8 of this Form 10-K.
           Consolidated Balance Sheets - December 31, 1996 and 1997.
           Consolidated Statements of Operations - December 31, 1995, 1996 and
           1997.

           Consolidated Statements of Changes in Redeemable Convertible
           Preferred Shares and Shareholders' Equity (Deficit). Consolidated
           Statements of Cash Flows - December 31, 1995, 1996 and 1997.

           Notes to Consolidated Financial Statements.
           Report of Chartered Accountants.

     (2) Financial Statement Schedule.  The following financial statement
         ----------------------------                                    
         schedule of CBT Group PLC for the fiscal years ended December 31,
         1995, 1996 and 1997 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 at page 56-57 of this Form 10-K.
         --------                                                     

(b)  Reports on Form 8-K.

     The Company filed a report on Form 8-K on December 12, 1997 with the
     Securities and Exchange Commission on December 12, 1997 reporting under
     Item 9 Registrant's acquisition of MidEast on December 1, 1997.

                                       55
<PAGE>
 
(d)  Exhibits.

                                 EXHIBIT INDEX

2.1(1) Amended and Restated Agreement and Plan of Reorganization dated November
       29, 1995 among Registrant, CBT Acquisition Subsidiary, a Delaware
       corporation, and Personal Training Systems, Inc., a California
       corporation.

2.2(8) Implementation Deed dated as of November 26, 1996, as amended, by and
       among Registrant, Applied Learning Limited and Arie Baalbergen, James
       Josephson, Geoffrey Bransbury and Brian Hacker (including schedules
       thereto).

2.3(9) Share Purchase Agreement dated August 31, 1997 between CBT Group PLC, Ben
       Watson Associates, Ltd. and Ben Watson.

2.4(10)Share Purchase Agreement dated December 1, 1997 between CBT Group PLC,
       CBT Systems Middle East Limited, Hamilton Brothers Ltd., and John Todd.

3.1(2) Memorandum and Articles of Association of CBT Group PLC.

4.1(2) Specimen certificate representing the ordinary shares.

4.2(5) Amended and Restated Deposit Agreement (including the form of American
       Depositary Receipt), dated as of April 13, 1995 and amended and restated
       as of April 11, 1996 and March 9, 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.

4.3(5) 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 April 11, 1996 and March 9, 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.

10.1(2)* 1990 Share Option Scheme.

10.2(11)*1994 Share Option Plan.

10.3(2)* 1995 Employee Share Purchase Plan.

10.4(2)* Form of Indemnification Agreement between Thornton Holdings, Ltd. and
        its directors and officers dated as of April, 1995.

10.5(2)  Supplemental Agreement among Hoskyns, CBT Group PLC and CBT Systems
       Limited dated as of March 31, 1995.

10.6(2) Share Purchase Agreement between CBT Systems Limited and CBT Group
        PLC dated as of March 31, 1995.

10.7(2) Distribution and License Agreement between CBT Group PLC and CBT
        Systems Limited dated as of March 14, 1995 (including form of Amendment
        No. 1).

10.8(2) License Agreement dated June 7, 1994 between CBT (Technology) Limited
        and CBT Systems Limited.

10.9(2) Cost Sharing Agreement dated January 4, 1994 between CBT (Technology)
        Limited and CBT Systems Limited.

10.10(2)* Agreement between CBT Group PLC and Patrick McDonagh dated April 9,
          1995.

10.11(3)* Personal Training Systems, Inc. 1991 Stock Plan.

                                       56
<PAGE>
 
10.12(4)  Lease Agreement dated March 8, 1995 between CBT Systems USA, Ltd.
          and Lincoln Menlo VIII Limited Partnership for the facility located
          at 1005 Hamilton Court , Menlo Park, California 94025.

10.13(4)  Lease Agreement dated November 17, 1995 between Yellowknife Limited,
          CBT Systems Limited and CBT Group PLC with respect to the lease of
          Block 4/5, Phase 2, Beech Hill Office Campus, Dublin, Ireland.

10.14(6)* Employment Agreement effective as of January 2, 1996 between CBT
          Group PLC, CBT Systems USA, Ltd. and Gregory M. Priest.

10.15(7)*  Letter Agreement effective as of September 3, 1996 between CBT Group
          PLC, CBT Systems USA, Ltd. and James J. Buckley.

10.16(11)*  1996 Supplemental Stock Plan.

10.17(12)*  Letter Agreement between CBT Systems USA, Ltd. and Jeffrey N.
            Newton.

10.18(12)*  Letter Agreement between CBT Systems USA, Ltd. and William B. Lewis.

10.19(11)  Applied Learning Limited Executive Option Plan.

10.20  Lease Agreement dated December 31, 1997 between CBT Systems USA, Ltd. and
       SEOC I Limited Partnership, an Arizona limited partnership, with respect
       to the facility located at 16100 North Greenway/Hayden Loop, Suite 800,
       Scottsdale, Arizona 85260.

10.21* Agreement dated November 21, 1997 between CBT Systems Limited and Clarion
       Worldwide Limited.

22.1   List of Significant Subsidiaries.

23.1   Consent of Ernst & Young, Chartered Accountants.

24.1   Power of Attorney (see page 59).

27.1   Financial Data Schedule.
------------
   *   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.


(1) Incorporated by reference to exhibit included in Registrant's Report on Form
    8-K filed with the Securities and Exchange Commission on December 13, 1995.

(2) Incorporated by reference to exhibit included in Registrant's Registration
    Statement on Form F-1 (File No. 33-89904) declared effective with the
    Securities and Exchange Commission on April 13, 1995.

(3) Incorporated be reference to exhibit included in Registrant's Registration
    Statement on Form S-8 (File No. 333-504) filed with the Securities and
    Exchange Commission on January 21, 1996.

(4) Incorporated by reference to exhibit included in Registrant's Annual Report
    on Form 10-K for the fiscal year ended December 31, 1995 as filed with the
    Securities and Exchange Commission on March 30, 1996.

(5) Incorporated by reference to exhibit included in Registrant's Registration
    Statement on Form F-6 (File No. 333-8380) filed with the Securities and
    Exchange Commission on February 27, 1998.

(6) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
    the period ended June 30, 1996 as filed with the Securities and Exchange
    Commission on August 14, 1996.

(7) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
    the period ended September 30, 1996 as filed with the Securities and
    Exchange Commission on November 14, 1996.

                                       57
<PAGE>
 
(8) Incorporated by reference to exhibit included in Registrant's Current Report
    on Form 8-K as filed with the Securities and Exchange Commission on March
    14, 1997.

(9) Incorporated by reference to exhibit included in Registrant's Registration
    Statement on Form S-3 filed with the Securities and Exchange Commission on
    September 18, 1997.

(10)Incorporated by reference to exhibit included  in Registrant's Registration
    Statement on Form S-3 filed with the Securities and Exchange Commission on
    December 22, 1997.

(11)Incorporated be reference to exhibit included in Registrant's Registration
    Statement on Form S-8 (File No. 333-25245) filed with the Securities and
    Exchange Commission on April 16, 1997.

(12)Incorporated by reference to exhibit included in Registrant'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.

                                       58
<PAGE>
 
                                   SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Company has duly caused this Form 10-K Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 20th day of
March, 1998.


                                CBT GROUP PUBLIC LIMITED COMPANY


                                /s/ James J. Buckley
                                ______________________
                                James J. Buckley,
                                President and Chief Executive Officer


                               POWER OF ATTORNEY


KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James J. Buckley and Richard Y. Okumoto 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
conforming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue thereof.


Pursuant to the requirements of the Securities Exchange Act of 1934, this Form
10-K has been signed below by the following persons on behalf of the Company and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
 
SIGNATURE                              TITLE                        DATE
---------                              -----                        ----
<S>                      <C>                                   <C>
 
/s/ William G. McCabe
_____________________    Chairman of the Board                 March 20, 1998
William G. McCabe
 
/s/ James J. Buckley
_____________________    President, Chief Executive Officer    March 20, 1998
James J. Buckley         and Director (Principal Executive
                         Officer)

/s/ Richard Y. Okumoto
_____________________    Vice President, Finance and Chief     March 20, 1998
Richard Y. Okumoto       Financial Officer
                         (Principal Financial Officer)
 
/s/ John P. Hayes
_____________________    Group Financial Accountant and        March 20, 1998
John P. Hayes            and Director (Principal Accounting
                         Officer)
 
/s/ Gregory M. Priest
_____________________    Director                              March 20, 1998
Gregory M. Priest
 

/s/ John M. Grillos
_____________________    Director                              March 20, 1998
John M. Grillos
 
/s/ Patrick J. McDonagh
_____________________    Director                              March 20, 1998
Patrick J. McDonagh
</TABLE>

                                       59
<PAGE>
 
                       VALUATION AND QUALIFYING ACCOUNTS

                  Years Ended December 31, 1995, 1996 and 1997

                             (dollars in thousands)



<TABLE>
<CAPTION>
                                      Balance at     Charged to     Charged to
                                      Beginning       Costs and        Other                           Balance at
                                       of Year        Accounts       Accounts        Deductions        End of Year
Year ended December 31, 1995
 
<S>                                  <C>            <C>             <C>           <C>                 <C>
Deducted from asset accounts
Allowance for doubtful accounts           593             (122)            --                  79             550
                                          ===             ====             ==                  ==             ===
                                              
 
Year ended December 31, 1996
 
Deducted from asset accounts
Allowance for doubtful accounts           550               38             --                  --             588
                                          ===               ==             ==                  ==             ===
                                              
 
 
Year ended December 31, 1997
 
Deducted from asset accounts
Allowance for doubtful accounts            588              312             --                  --             900       
                                           ===              ===             --                  ==             ===
</TABLE>

                                       60